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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________________________________________________________________
FORM 10-Q
_________________________________________________________________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
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
  GWLOGOA18.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)
_____________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Class A Common Stock
GWR
New York Stock Exchange
 (NYSE)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes        No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).        Yes        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
 

 
Accelerated filer
 
Non-accelerated filer
 



 
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      
  Yes       No
Shares of common stock outstanding as of the close of business on August 1, 2019 :
Class
 
Number of Shares Outstanding
Class A Common Stock
 
56,592,802
Class B Common Stock
 
376,392
 



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: the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement with affiliates of Brookfield Infrastructure and GIC; the inability to complete the proposed merger due to the failure to obtain stockholder approval for the proposed merger or the failure to satisfy other conditions to completion of the proposed merger, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transaction; risks related to disruption of management’s attention from G&W's ongoing business operations due to the transaction; the effect of the proposed merger on G&W's ability to retain and hire key personnel or maintain relationships with its customers, operating results and business generally; the risk that the proposed merger will not be consummated in a timely manner; exceeding the expected costs of the merger; risks related to the operation of our railroads; severe weather conditions and other natural occurrences, which 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; implementation of restructuring plans; economic, political and industry conditions, including employee strikes or work stoppages; retention and contract continuation; our ability to attract and retain skilled workers; 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, collectability and 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 other risks 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 2018 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 JUNE 30, 2019 and DECEMBER 31, 2018 (Unaudited)
(dollars in thousands, except per share and share amounts)
 
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
82,383

 
$
90,387

Accounts receivable, net
444,168

 
426,305

Materials and supplies
55,321

 
56,716

Prepaid expenses and other
40,074

 
54,185

Total current assets
621,946

 
627,593

PROPERTY AND EQUIPMENT, net
4,669,704

 
4,613,014

GOODWILL
1,114,478

 
1,115,849

INTANGIBLE ASSETS, net
1,401,971

 
1,430,197

DEFERRED INCOME TAX ASSETS, net
5,376

 
4,616

OTHER ASSETS
550,714

 
77,192

Total assets
$
8,364,189

 
$
7,868,461

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
57,289

 
$
28,303

Accounts payable
269,644

 
288,070

Accrued expenses
246,188

 
165,280

Total current liabilities
573,121

 
481,653

LONG-TERM DEBT, less current portion
2,281,191

 
2,425,235

DEFERRED INCOME TAX LIABILITIES, net
889,197

 
877,721

DEFERRED ITEMS - grants from outside parties
335,485

 
326,520

OTHER LONG-TERM LIABILITIES
594,293

 
127,280

COMMITMENTS AND CONTINGENCIES


 


EQUITY:
 
 
 
Class A Common Stock, $0.01 par value, one vote per share; 180,000,000 shares authorized at June 30, 2019 and December 31, 2018; 75,584,503 and 75,240,513 shares issued and 56,581,921 and 56,349,327 shares outstanding (net of 19,002,582 and 18,891,186 shares in treasury) on June 30, 2019 and December 31, 2018, respectively
756

 
752

Class B Common Stock, $0.01 par value, ten votes per share; 30,000,000 shares authorized at June 30, 2019 and December 31, 2018; 376,392 and 517,138 shares issued and outstanding on June 30, 2019 and December 31, 2018, respectively
4

 
5

Additional paid-in capital
1,797,794

 
1,785,005

Retained earnings
2,571,251

 
2,482,252

Accumulated other comprehensive loss
(173,797
)
 
(146,456
)
Treasury stock, at cost
(708,482
)
 
(699,852
)
Total Genesee & Wyoming Inc. stockholders' equity
3,487,526

 
3,421,706

Noncontrolling interest
203,376

 
208,346

Total equity
3,690,902

 
3,630,052

Total liabilities and equity
$
8,364,189

 
$
7,868,461

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 SIX MONTHS ENDED JUNE 30, 2019 and 2018 (Unaudited)
(in thousands, except per share amounts)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
OPERATING REVENUES
$
571,480

 
$
594,990

 
$
1,129,569

 
$
1,169,651

OPERATING EXPENSES:
 
 
 
 
 
 
 
Labor and benefits
179,943

 
179,838

 
364,251

 
363,554

Equipment rents
32,010

 
34,802

 
64,243

 
68,889

Purchased services
54,034

 
61,045

 
105,282

 
125,147

Depreciation and amortization
62,517

 
65,745

 
125,143

 
131,735

Diesel fuel used in train operations
41,504

 
45,623

 
86,141

 
91,774

Electricity used in train operations
2,226

 
2,044

 
4,550

 
4,278

Casualties and insurance
11,839

 
12,984

 
23,211

 
22,950

Materials
31,294

 
32,376

 
62,514

 
64,845

Trackage rights
21,727

 
23,303

 
43,367

 
44,281

Net loss/(gain) on sale and impairment of assets
980

 
(823
)
 
(510
)
 
(1,859
)
Restructuring and related costs
7,561

 
9,362

 
15,195

 
9,645

Other expenses, net
31,645

 
25,566

 
62,272

 
54,374

Total operating expenses
477,280

 
491,865

 
955,659

 
979,613

OPERATING INCOME
94,200

 
103,125

 
173,910

 
190,038

Interest income
824

 
584

 
1,371

 
1,082

Interest expense
(27,399
)
 
(28,940
)
 
(55,009
)
 
(54,176
)
Other income/(loss), net
2,614

 
288

 
3,033

 
(1,752
)
Income before income taxes
70,239

 
75,057

 
123,305

 
135,192

Provision for income taxes
(18,866
)
 
(26,446
)
 
(33,126
)
 
(10,556
)
Net income
$
51,373

 
$
48,611

 
$
90,179

 
$
124,636

Less: Net (loss)/income attributable to noncontrolling interest
(68
)
 
4,443

 
32

 
5,370

Net income attributable to Genesee & Wyoming Inc.

$
51,441

 
$
44,168

 
$
90,147

 
$
119,266

Basic earnings per common share attributable to Genesee & Wyoming Inc. common stockholders:
$
0.91

 
$
0.74

 
$
1.60

 
$
1.96

Weighted average shares – Basic
56,536

 
59,996

 
56,433

 
60,946

Diluted earnings per common share attributable to Genesee & Wyoming Inc. common stockholders:
$
0.90

 
$
0.73

 
$
1.58

 
$
1.93

Weighted average shares – Diluted
57,272

 
60,879

 
57,182

 
61,841

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 SIX MONTHS ENDED JUNE 30, 2019 and 2018 (Unaudited)
(dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
NET INCOME
$
51,373

 
$
48,611

 
$
90,179

 
$
124,636

OTHER COMPREHENSIVE INCOME/(LOSS):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(2,191
)
 
(48,923
)
 
4,828

 
(49,541
)
Net unrealized (loss)/gain on qualifying hedges, net of tax benefit/(provision) of $6,484, ($879), $10,710 and ($3,029), respectively
(21,525
)
 
2,701

 
(34,499
)
 
9,603

Changes in pension and other postretirement benefits, net of tax (provision)/benefit of ($7), ($14), $82 and ($28), respectively
62

 
43

 
(154
)
 
86

Other comprehensive loss
(23,654
)
 
(46,179
)
 
(29,825
)
 
(39,852
)
COMPREHENSIVE INCOME
$
27,719

 
$
2,432

 
$
60,354

 
$
84,784

Less: Comprehensive loss attributable to noncontrolling interest
(3,370
)
 
(4,225
)
 
(2,452
)
 
(7,316
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO GENESEE & WYOMING INC.
$
31,089

 
$
6,657

 
$
62,806

 
$
92,100

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



6


GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 and 2018 (Unaudited)
(dollars in thousands)
 
 
G&W Stockholders
 
 
 
 
 
 
Class A
Common Stock
 
Class B
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss)/Income
 
Treasury
Stock
 
Non-controlling Interest
 
Total
Equity
BALANCE, December 31, 2018
 
$
752

 
$
5

 
$
1,785,005

 
$
2,482,252

 
$
(146,456
)
 
$
(699,852
)
 
$
208,346

 
3,630,052

Net income
 

 

 

 
38,706

 

 

 
100

 
38,806

Other comprehensive (loss)/income
 

 

 

 

 
(6,989
)
 

 
818

 
(6,171
)
Conversion of 100,000 shares Class B Common Stock to Class A Common Stock
 
1

 
(1
)
 

 

 

 

 

 

Value of stock issued for stock-based compensation - 164,732 shares Class A Common Stock
 
2

 

 
2,069

 

 

 

 

 
2,071

Compensation cost related to stock-based compensation
 

 

 
3,884

 

 

 

 

 
3,884

Value of treasury stock repurchased - 111,289 shares
 

 

 

 

 

 
(8,630
)
 

 
(8,630
)
Other
 

 

 
(832
)
 
(1,104
)
 

 

 
(796
)
 
(2,732
)
BALANCE, March 31, 2019
 
$
755

 
$
4

 
$
1,790,126

 
$
2,519,854

 
$
(153,445
)
 
$
(708,482
)
 
$
208,468

 
$
3,657,280

Net income/(loss)
 

 

 

 
51,441

 

 

 
(68
)
 
51,373

Other comprehensive loss
 

 

 

 

 
(20,352
)
 

 
(3,302
)
 
(23,654
)
Conversion of 40,746 shares Class B Common Stock to Class A Common Stock
 

 

 

 

 

 

 

 

Value of stock issued for stock-based compensation - 38,512 shares Class A Common Stock
 
1

 

 
2,095

 

 

 

 

 
2,096

Compensation cost related to stock-based compensation
 

 

 
4,227

 

 

 

 

 
4,227

Other (including treasury stock repurchased - 107 shares)
 

 

 
1,346

 
(44
)
 

 

 
(1,722
)
 
(420
)
BALANCE, June 30, 2019
 
$
756

 
$
4

 
$
1,797,794

 
$
2,571,251

 
$
(173,797
)
 
$
(708,482
)
 
$
203,376

 
$
3,690,902

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

7


GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2019 and 2018 (Unaudited)
(dollars in thousands) (continued)
 
 
G&W Stockholders
 
Non-controlling Interest
 
Total
Equity
 
 
Class A
Common Stock
 
Class B
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss)/Income
 
Treasury
Stock
 
 
BALANCE, December 31, 2017
 
$
748

 
$
7

 
$
1,757,332

 
$
2,234,864

 
$
(105,534
)
 
$
(236,951
)
 
$
245,626

 
$
3,896,092

Net income
 

 

 

 
75,098

 

 

 
927

 
76,025

Other comprehensive income/(loss)
 

 

 

 

 
10,345

 

 
(4,018
)
 
6,327

Value of stock issued for stock-based compensation - 115,897 shares Class A Common Stock
 
1

 

 
1,049

 

 

 

 

 
1,050

Compensation cost related to stock-based compensation
 

 

 
4,056

 

 

 

 

 
4,056

Value of treasury stock repurchased - 832,232 shares
 

 

 

 

 

 
(60,175
)
 

 
(60,175
)
Amounts reclassified from accumulated other comprehensive loss to retained earnings related to the United States Tax Cuts and Jobs Act
 

 

 

 
2,970

 
(2,970
)
 

 

 

Other
 

 

 

 

 

 

 
1

 
1

BALANCE, March 31, 2018
 
$
749

 
$
7

 
$
1,762,437

 
$
2,312,932

 
$
(98,159
)
 
$
(297,126
)
 
$
242,536

 
$
3,923,376

Net income
 

 

 

 
44,168

 

 

 
4,443

 
48,611

Other comprehensive loss
 

 

 

 

 
(37,511
)
 

 
(8,668
)
 
(46,179
)
Conversion of 30,000 shares Class B Common Stock to Class A Common Stock
 

 

 

 

 

 

 

 

Value of stock issued for stock-based compensation - 42,102 shares Class A Common Stock
 
1

 

 
1,856

 

 

 

 

 
1,857

Compensation cost related to stock-based compensation
 

 

 
4,515

 

 

 

 

 
4,515

Value of treasury stock repurchased - 1,873,170 shares
 

 

 

 

 

 
(134,952
)
 

 
(134,952
)
Distribution to noncontrolling interest
 

 

 

 

 

 

 
(14,898
)
 
(14,898
)
Other
 

 

 

 

 

 

 
48

 
48

BALANCE, June 30, 2018
 
$
750

 
$
7

 
$
1,768,808

 
$
2,357,100

 
$
(135,670
)
 
$
(432,078
)
 
$
223,461

 
$
3,782,378

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




8


GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2019 and 2018 (Unaudited)
(dollars in thousands)
 
Six Months Ended
 
June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
90,179

 
$
124,636

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
125,143

 
131,735

Stock-based compensation
8,100

 
8,601

Deferred income taxes
22,534

 
(11,489
)
Insurance proceeds received
1,600

 

Net gain on sale and impairment of assets
(510
)
 
(1,859
)
Changes in assets and liabilities which provided/(used) cash:
 
 
 
Accounts receivable, net
(4,930
)
 
(46,519
)
Materials and supplies
1,278

 
2,460

Prepaid expenses and other
(7,121
)
 
(7,587
)
Accounts payable and accrued expenses
(18,673
)
 
20,665

Other assets and liabilities, net
5,521

 
10,684

Net cash provided by operating activities
223,121

 
231,327

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(144,740
)
 
(133,328
)
Grant proceeds from outside parties
14,881

 
12,901

Proceeds from settlement of derivative transactions
45,360

 

Proceeds from sale of business

 
7,927

Insurance proceeds for replacement of assets
1,597

 
1,866

Proceeds from disposition of property and equipment
4,176

 
2,795

Contributions to joint venture
(2,700
)
 
(2,921
)
Net cash used in investing activities
(81,426
)
 
(110,760
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on revolving line-of-credit, long-term debt and finance lease obligations
(319,338
)
 
(706,965
)
Proceeds from revolving line-of-credit and long-term debt
178,726

 
795,241

Debt amendment/issuance costs

 
(5,303
)
Purchase of additional shares in Freightliner Australia
(4,696
)
 

Common share repurchases
(4,796
)
 
(192,324
)
Distribution to noncontrolling interest

 
(14,898
)
Installment payments on Freightliner deferred consideration
(2,522
)
 
(6,255
)
Other financing related activities, net
(253
)
 
(893
)
Net cash used in financing activities
(152,879
)
 
(131,397
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
3,180

 
60

DECREASE IN CASH AND CASH EQUIVALENTS
(8,004
)
 
(10,770
)
CASH AND CASH EQUIVALENTS, beginning of period
90,387

 
80,472

CASH AND CASH EQUIVALENTS, end of period
$
82,383

 
$
69,702

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

9

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



1 . PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
The interim consolidated financial statements presented herein include the accounts of Genesee & Wyoming Inc. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. These interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and are unaudited. They do not contain all disclosures which would be required in a full set of financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, the unaudited financial statements for the three and six months ended June 30, 2019 and 2018 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 2018 was derived from the audited financial statements in the Company's 2018 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, 2018 included in the Company's 2018 Annual Report on Form 10-K.
During the process of preparing the Form 10-K for the year ended December 31, 2018, the Company determined that there was an error in and revised its statement of cash flows for the six months ended June 30, 2018, which resulted in the following offsetting adjustments: an increase of $33 million in principal payments on revolving line-of-credit, long-term debt and capital lease obligations, representing cash outflows from financing activities, and an increase of $33 million in proceeds from revolving line-of-credit and long-term debt, representing cash inflows from financing activities. There was no effect on any other section of the Company's statement of cash flows, and this revision had no impact on the Company's consolidated balance sheet as of December 31, 2018 or the Company's consolidated statements of operations or comprehensive income for the three and six months ended June 30, 2018. The Company does not consider this revision material to any previously issued consolidated financial statements.
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 and divestitures, changing economic conditions, fluctuations in commodity prices, competitive forces, changes in foreign currency exchange rates, rail network issues and congestion, the ability to attract and retain skilled workers, 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
Canada Lease Expirations: Two of the Company's short line railroad leases in Canada (Goderich-Exeter Railway (GEXR) and Southern Ontario Railway (SORR)) expired at the end of 2018. The Company's results for the three and six months ended June 30, 2018 included $5.6 million and $11.1 million , respectively, of revenues from these leased railroads. The Company's results included no material operating income from these leased railroads for the three and six months ended June 30, 2018.

10

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


U.K./European Operations
U.K. Operations Optimization: In May 2018, the Company began a program to restructure and further optimize its operations in the U.K., which it intends to complete by 2020. The program includes the rationalization of the locomotive and railcar fleet, management restructuring (following the U.K. consultative process) and technology investments to upgrade systems to enhance productivity and service quality.
Restructuring and related costs associated with the optimization are expected to be approximately $37 million (at an exchange rate of $1.30 for one British pound) and are comprised of the following (dollars in thousands):
 
Three Months Ended
June 30, 2019
 
Six Months Ended June 30, 2019
 
Total Costs Incurred Through
June 30, 2019
 
Estimated Total Restructuring and Related Costs
Rationalization of locomotive and railcar fleet
$

 
$

 
$
6,301

 
$
9,000

Management restructuring (a)
5,058

 
9,141

 
13,781

 
16,000

Productivity and automation investments
1,725

 
3,138

 
7,181

 
12,000

Total
$
6,783

 
$
12,279

 
$
27,263

 
$
37,000

(a)
Subject to requisite U.K. consultative process.
Changes in restructuring and related liabilities for the U.K. Operations Optimization program for the six months ended June 30, 2019 was as follows (dollars in thousands):
 
Rationalization of Locomotive and Railcar Fleet
 
Management Restructuring
 
Productivity and Automation Investments
 
Total
Restructuring and related liabilities as of December 31, 2018
$
4,094

 
$
982

 
$

 
$
5,076

Restructuring and related costs incurred

 
9,141

 
3,138

 
12,279

Cash payments
(610
)
 
(6,691
)
 
(3,138
)
 
(10,439
)
Non-cash settlements

 

 

 

Restructuring and related liabilities as of June 30, 2019
$
3,484

 
$
3,432

 
$

 
$
6,916


Continental Europe Intermodal Business: On June 5, 2018, the Company sold its Continental Europe intermodal business, ERS Railways B.V. (ERS), for gross cash proceeds of €11.2 million (or $13.1 million at the exchange rate on June 5, 2018) or €6.8 million (or $7.9 million at the exchange rate on June 5, 2018) net of €4.4 million (or $5.2 million at the exchange rate on June 5, 2018) of cash on hand that transferred to the buyer. The Company's results for the three and six months ended June 30, 2018 included $9.4 million and $24.1 million , respectively, of revenues from ERS. The Company's results for the three and six months ended June 30, 2018 included no material operating income from ERS.

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Table of Contents             GENESEE & WYOMING INC. AND SUBSIDIARIES
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 six months ended June 30, 2019 and 2018 (in thousands, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Numerators:
 
 
 
 
 
 
 
Net income attributable to Genesee & Wyoming Inc.
$
51,441

 
$
44,168

 
$
90,147

 
$
119,266

Denominators:
 
 
 
 
 
 
 
Weighted average Class A common shares outstanding – Basic
56,536

 
59,996

 
56,433

 
60,946

Weighted average Class B common shares outstanding
405

 
673

 
452

 
687

Dilutive effect of employee stock-based awards
331

 
210

 
297

 
208

Weighted average shares – Diluted
57,272

 
60,879

 
57,182

 
61,841

Earnings per common share attributable to Genesee & Wyoming Inc. common stockholders:
 
 
 
 
 
 
 
Basic earnings per common share
$
0.91

 
$
0.74

 
$
1.60

 
$
1.96

Diluted earnings per common share
$
0.90

 
$
0.73

 
$
1.58

 
$
1.93


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
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Antidilutive shares
257

 
1,130

 
566

 
1,043



Share Repurchase
In October 2018, the Company completed its $300 million share repurchase program that had been approved in 2015, and the Company's Board of Directors authorized a new $500 million share repurchase program of Class A Common Stock, subject to certain limitations under the Company's credit facility. The table below presents information regarding shares repurchased by the Company under the share repurchase programs during the three and six months ended June 30, 2019 and 2018 (in thousands, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Class A Common Stock repurchased

 
1,873

 
65

 
2,666

Average price paid per share of Class A Common Stock repurchased
$

 
$
72.04

 
$
73.94

 
$
72.14


Repurchased shares are recorded in treasury stock, at cost, which includes any applicable commissions and fees. As of June 30, 2019 , the remaining amount authorized for repurchase under the $500 million share repurchase program was $335.0 million . In light of the Company's entry into the merger agreement with affiliates of Brookfield Infrastructure and GIC, future share repurchases under the repurchase program have been suspended. See Note 15 , Subsequent Events , for additional information regarding the merger agreement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


4 . ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following as of June 30, 2019 and December 31, 2018 (dollars in thousands):
 
June 30,
2019
 
December 31,
2018
Accounts receivable – trade
$
406,770

 
$
397,255

Accounts receivable – grants from outside parties
18,748

 
19,376

Accounts receivable – insurance and other third-party claims
31,707

 
19,729

Total accounts receivable
457,225

 
436,360

Less: Allowance for doubtful accounts
(13,057
)
 
(10,055
)
Accounts receivable, net
$
444,168

 
$
426,305


The timing of revenue recognition, billings and cash collections result in trade accounts receivable, contract assets and contract liabilities. The Company’s contract assets and liabilities are typically short-term in nature, with terms settled within a 12-month period. The Company had no material contract assets or contract liabilities recorded on the consolidated balance sheet as of June 30, 2019 or December 31, 2018 .
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 $14.9 million and $12.9 million for the six months ended June 30, 2019 and 2018 , respectively, from such grant programs. The proceeds were presented as cash inflows from investing activities within the statement of cash flows for each of the applicable periods. The Company records additions to property and equipment for its grant-funded projects and defers the amount of the grants. The amortization of deferred grants is a non-cash offset to depreciation expense over the useful lives of the related assets.
The following table sets forth the offset to depreciation expense from the amortization of deferred grants recorded by the Company during the three and six months ended June 30, 2019 and 2018 (dollars in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Amortization of deferred grants
$
3,315

 
$
3,136

 
$
6,823

 
$
5,603


Insurance and Third-Party Claims
The increase in the balance of the accounts receivable from insurance and other third-party claims for the six months ended June 30, 2019 was primarily related to the anticipated insurance recovery associated with a personal injury that occurred in the U.K. in 2019. The receivable and the associated claim liability were recorded on the balance sheet as of June 30, 2019 .
The Company recently completed its annual property insurance renewal, which takes effect on August 1, 2019. Effective with this renewal, the Company's property policies will have various self-insured retentions, which vary based on the type and location of the incident, up to $10.0 million .
5 . LEASES:
On January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2016-02, Leases (the New Standard), and all related amendments, which supersedes the previous lease guidance, using the transition method with the election not to adjust comparative periods. The New Standard requires lessees to recognize leases on their balance sheet as a right-of-use (ROU) asset with a corresponding lease liability. The adoption resulted in the recognition of ROU assets included in other assets and lease liabilities included in accrued expenses and other long-term liabilities of approximately $495 million in the Company's consolidated balance sheet, each as a result of the new requirement to recognize operating leases. No material cumulative-effect adjustment was recognized in retained earnings, and the adoption did not materially impact operating results, liquidity or the Company's debt-covenant compliance under these agreements. The Company continues to recognize its capital leases on the balance sheet but these leases are now referred to as "finance" leases, as required by the New Standard.

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


The Company enters into leases for railcars, locomotives and other equipment as well as real property. These leases may contain variable payments that vary with rate or index changes or include payment of a per car fee or per mile fee to use the track under variable lease contracts. The Company may receive rent holidays and other incentives provided by the lessor on lease agreements. On occasion, the Company subleases assets to other parties.
As of January 1, 2019, the Company adopted a number of practical expedients and exemptions included in the New Standard, which were intended to reduce the cost and complexity of complying with the transition requirements. The Company chose the following practical expedients and exemptions in setting its accounting policy elections for transition to:
1.
Not recognize an asset and liability for leases of all asset classes with a term of 12 months or less;
2.
Carry forward the historical lease classification and not reassess its existing contracts to determine whether the arrangements contained a lease or whether initial direct costs qualified for capitalization;
3.
Not separate lease and non-lease components; and
4.
Carry forward its current accounting treatment for land easements on existing agreements.
Lease contracts may include one or more renewal options, with renewal terms from one to fifty years or more. Leases may also include options to terminate the arrangement or options to purchase the underlying leased property. The exercise of lease options are generally at the discretion of the Company's management team. The Company determines the expected term of a lease and includes options that are reasonably certain to be exercised in the calculation of its ROU assets and lease liabilities.
The determination of whether a contract contains a lease, as well as the analysis regarding the allocation of consideration in a contract between lease and non-lease components, is performed on a case by case basis and considers the nature and interdependency of the individual assets in the arrangement. The Company generally accounts for lease assets as a single component as the assets in most agreements are highly interrelated and dependent upon each other to fulfill the arrangement.
As the implicit rate is not readily determinable in most of the Company's lease agreements, the Company uses its estimated secured incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
The following table summarizes the Company's leased assets and lease liabilities recorded in the consolidated balance sheet as of June 30, 2019 (dollars in thousands):
 
Balance Sheet Location
 
June 30,
2019
Leased right-of-use assets:
 
 
 
Operating leased assets
Other assets
 
$
494,803

Finance leased assets, net
Property and equipment, net (a)
 
90,716

Total leased assets
 
 
$
585,519

Lease liabilities:
 
 
 
Current
 
 
 
Operating lease liabilities
Accrued expenses
 
$
65,004

Finance lease liabilities
Current portion of long-term debt
 
11,477

Non-current
 
 
 
Operating lease liabilities
Other long-term liabilities
 
428,087

Finance lease liabilities
Long-term debt, less current portion
 
72,500

Total lease liabilities
 
 
$
577,068

(a)
Net of $29.2 million of accumulated amortization as of June 30, 2019 , which was recognized in depreciation and amortization expense within the Company's consolidated statement of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


The following table summarizes the components of lease expense for the three and six months ended June 30, 2019 (dollars in thousands):
 
Location of Amount Recognized in Earnings
 
Three Months Ended
 
Six Months
Ended
 
 
June 30, 2019
 
June 30, 2019
Finance leases:
 
 
 
 
 
Amortization of right-of-use assets
Depreciation and amortization
 
$
1,888

 
$
3,761

Interest on lease liability
Interest expense
 
847

 
1,673

Total finance lease cost
 
 
$
2,735

 
$
5,434

Operating leases:
 
 
 
 
 
Operating lease cost
Equipment rents/Trackage rights
 
$
22,533

 
$
44,684

Short-term lease cost
Equipment rents/Trackage rights
 
2,566

 
4,993

Variable lease cost
Equipment rents/Trackage rights
 
2,995

 
4,907

Sublease income (gross basis)
Operating revenues
 
(1,527
)
 
(2,250
)
Total operating lease cost
 
 
$
26,567

 
$
52,334

Total lease cost
 
 
$
29,302

 
$
57,768


The maturities of lease liabilities under the New Standard based on the Company's reasonably certain holding period for each lease were as follows as of June 30, 2019 (dollars in thousands):
 
Finance Leases
 
Operating Leases
Maturity of lease liabilities:
 
 
 
2019 (remainder)
$
7,789

 
$
45,446

2020
19,586

 
74,453

2021
10,807

 
64,080

2022
15,097

 
52,091

2023
10,862

 
43,242

Thereafter
35,671

 
564,700

Total lease payments
99,812

 
844,012

Less: Imputed interest
15,835

 
350,921

Total lease liabilities
$
83,977

 
$
493,091


The following is a summary of future minimum lease payments based on the minimum non-cancelable lease term as required under previous guidance for capital and operating leases as of December 31, 2018 (dollars in thousands):
 
Capital
 
Operating
2019
$
11,405

 
$
82,191

2020
17,261

 
63,062

2021
8,668

 
54,305

2022
9,625

 
44,739

2023
10,780

 
35,919

Thereafter
13,988

 
383,739

Total minimum payments
$
71,727

 
$
663,955



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


The following table presents supplemental cash flow and other information for the Company's leases as of and for the six months ended June 30, 2019 (dollars in thousands):
 
Six Months Ended
 
June 30, 2019
Cash flow information:
 
Cash paid for operating leases included in operating activities
$
45,571

Cash paid for finance leases included in operating activities
$
1,387

Cash paid for finance leases included in financing activities
$
4,688

 
 
Weighted average remaining lease term (in years):
 
Operating leases
26.5

Finance leases
8.2

 
 
Weighted average discount rate:
 
Operating leases
3.8
%
Finance leases
4.4
%
 
 
New leases:
 
Right-of-use assets obtained in exchange for operating lease liabilities
$
31,445

Right-of-use assets obtained in exchange for finance lease liabilities
$
27,335


6 . DERIVATIVE FINANCIAL INSTRUMENTS:
The Company actively monitors its exposure to interest rate and foreign currency exchange rate risks and uses derivative financial instruments to manage the impact of risks associated with underlying interest rate and foreign exchange rate exposures. The Company's use of these derivative financial instruments may result in short-term gains or losses and increased earnings volatility. The instruments held by the Company are recorded in the consolidated balance sheets at fair value in prepaid expenses and other, other assets, accrued expenses or other long-term liabilities.
The Company may designate derivatives as a hedge of a forecasted transaction or a hedge of the variability of the cash flows to be received or paid in the future related to a recognized asset or liability (cash flow hedge). The portion of the changes in the fair value of the derivative used as a cash flow hedge that is offset by changes in the expected cash flows related to a recognized asset or liability is recorded in other comprehensive income/(loss) (OCI). Amounts recorded in OCI may be realized and reported in the consolidated statements of operations on the same line item as the hedged item in the event the hedged item is settled, did not or is no longer expected to occur or if the hedging relationship is no longer effective.
The Company may designate fair value hedges to mitigate foreign currency exchange rates on non-functional currency assets or liabilities. The Company uses the mark-to-market approach to remeasure the hedged item and the hedging instrument. The changes in the fair value of the hedged item is included in other income/(loss), net and are offset by changes in the fair value of the hedging instrument which are reported in the same income statement line item.
In addition, the Company may designate net investment hedges to reduce the impact of the variability of foreign currency exchange rates on its net investments in certain non-U.S. operations using cross-currency swaps. The Company measures the effectiveness of the hedge by offsetting the changes in the fair value of the cross-currency swap and the hedged asset or liability. Gains and losses on the after-tax effective portion of the net investment hedge are reported in currency translation adjustments where they remain until the investment is liquidated. The Company records the portion of the gain or loss on the hedging instrument that exceeds the gain or loss of the hedged item as an offset to the tax impact recognized during the period.
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 instrument ceases to be a highly effective hedge of the underlying transaction, 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. Gains and losses on any excluded components of derivatives designated as hedges are recorded in OCI and amortized to other income/(loss), net over the life of the hedge.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


From time to time, the Company may enter into certain derivative instruments that may not be designated as hedges for accounting purposes. 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.
The following table summarizes the fair value of the Company's derivative instruments recorded in the consolidated balance sheets as of June 30, 2019 and December 31, 2018 (dollars in thousands):
 
 
 
Fair Value
 
Balance Sheet Location
 
June 30,
2019
 
December 31, 2018
Asset Derivatives:
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
British pound forward contracts
Prepaid expenses and other
 
$
3,055

 
$

British pound forward contracts
Other assets
 

 
26,011

Total derivatives designated as hedges
 
 
$
3,055

 
$
26,011

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

 
$
19,684

Total derivatives not designated as hedges
 
 
$

 
$
19,684

 
 
 
 
 
 
Liability Derivatives:
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
Interest rate swap agreements
Accrued expenses
 
$
6,774

 
$
1,954

British pound forward contracts
Accrued expenses
 
14

 

Interest rate swap agreements
Other long-term liabilities
 
53,446

 
12,441

British pound forward contracts
Other long-term liabilities
 

 
59

Derivative designated as a net investment hedge:
 
 
 
 
 
Cross-currency swap contract
Other long-term liabilities
 
807

 

Derivative designated as a fair value hedge:
 
 
 
 
 
Cross-currency swap contract
Other long-term liabilities
 
2,387

 

Total derivatives designated as hedges
 
 
$
63,428

 
$
14,454



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


The following table shows the effective portion of net changes in the fair value of the Company's derivative instruments designated as hedges recognized in OCI, net of tax for the three and six months ended June 30, 2019 and 2018 (dollars in thousands):
 
 
Total Derivatives Designated as Hedges OCI Activity, Net of Tax
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
Derivatives Designated as Hedges:
 
 
 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
(21,299
)
 
$
2,687

 
$
(34,705
)
 
$
9,580

Foreign currency forward contracts
 

 
288

 

 
288

British pound forward contracts, net (a)
 
1,026

 
(274
)
 
1,458

 
(265
)
 
 
$
(20,273
)
 
$
2,701

 
$
(33,247
)
 
$
9,603

Net Investment Hedge:
 
 
 
 
 
 
 
 
Cross-currency swap contract
 
$
(822
)
 
$

 
$
(822
)
 
$

 
 
 
 
 
 
 
 
 
Fair Value Hedge:
 
 
 
 
 
 
 
 
Cross-currency swap contract
 
$
(430
)
 
$

 
$
(430
)
 
$

 
 
 
 
 
 
 
 
 
Total derivatives designated as hedges
 
$
(21,525
)
 
$
2,701

 
$
(34,499
)
 
$
9,603

(a)
The three and six months ended June 30, 2019 represented a net gain of $16.7 million and $19.5 million , respectively, for the mark-to-market of the U.K. intercompany loan, partially offset by a net loss of $15.6 million and $18.0 million , respectively, for the mark-to-market of the British pound forward contracts.
The three and six months ended June 30, 2018 represented a net loss of $9.2 million and $3.7 million , respectively, for the mark-to-market of the U.K. intercompany loan, partially offset by a net gain of $9.0 million and $3.5 million , respectively, for the mark-to-market of the British Pound forward contracts.
The following table shows the effect of the Company's derivative instruments not designated as hedges for the three and six months ended June 30, 2019 and 2018 in the consolidated statements of operations (dollars in thousands):
 
 
 
 
Amount Recognized in Earnings
 
 
Location of Amount Recognized in Earnings
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
 
 
 
2019
 
2018
 
2019
 
2018
Derivatives Not Designated as Hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swap agreements, net (a)
 
Other income/(loss), net
 
$
715

 
$
272

 
$
(1,770
)
 
$
(2,490
)
(a)
The three months ended June 30, 2019 represented a net gain of $7.1 million for the mark-to-market of the swaps, partially offset by a net loss of $6.4 million for the mark-to-market of the GRail Intercompany Loan. The six months ended June 30, 2019 represented a net loss of $1.4 million for the mark-to-market of the GRail Intercompany Loan and a net loss of $0.3 million for the mark-to-market of the swaps. This derivative was settled in June 2019, and the Company received cash proceeds of €17.0 million (or $19.3 million at the exchange rate on June 30, 2019).
The three months ended June 30, 2018 represented a net gain of $3.0 million for the mark-to-market of the GRail Intercompany Loan, partially offset by a net loss of $2.8 million for the mark-to-market of the swaps. The six months ended June 30, 2018 represented a net loss of $5.1 million for the mark-to-market of the GRail Intercompany Loan, partially offset by a net gain of $2.6 million for the mark-to-market of the swaps.

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


The following table shows the cash flow impacts from the Company's derivatives that settled during the six months ended June 30, 2019 (dollars in thousands):
 
Six Months Ended
 
June 30, 2019
Derivatives designated as hedges:
 
British pound forward contracts
$
26,088

 
 
Derivatives not designated as hedges:
 
Cross-currency swap contract
19,272

Total cash received from settlement of derivative transactions, investing activities
$
45,360


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. Interest payments accrued each reporting period for these interest rate swaps are recognized in interest expense.
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):
Effective Date
 
Expiration Date
 
Notional Amount
 
Pay Fixed Rate
 
Receive Variable Rate
12/1/2016
 
12/1/2021
 
A$
517,500

 
2.44%
 
AUD-BBR
8/31/2018
 
8/31/2021 - 8/31/2048
 
$
500,000

 
2.70% - 2.87%
 
1-month LIBOR

During the three and six months ended June 30, 2019 , $1.0 million and $1.5 million , respectively, of net losses associated with the Company's interest rate swaps were realized and recorded as interest expense in the consolidated statements of operations. During the three and six months ended June 30, 2018 , $0.2 million and $0.7 million , respectively, of net losses associated with the Company's interest rate swaps were realized and recorded as interest expense in the consolidated statements of operations. Based on the Company's fair value assumptions as of June 30, 2019 , it expects to realize $7.0 million of net losses that are reported in accumulated other comprehensive loss (AOCL) into earnings within the next 12 months. See Note 11 , Accumulated Other Comprehensive Loss , for additional information regarding the Company's derivatives designated as hedges.
Foreign Currency Exchange Rate Risk
As of June 30, 2019 , the Company's foreign subsidiaries had $1.0 billion of third-party debt, including finance 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 related to non-functional currency denominated intercompany debt, foreign currency forward contracts or cross-currency swaps may be entered into for periods consistent with the underlying debt. In cases where foreign currency forward contracts or cross-currency swaps do not qualify for hedge accounting, the gains or losses from changes in the fair value are recognized in current period earnings within other income/(loss), net.

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


In 2015, the Company, in conjunction with the acquisition of Freightliner Group Limited (Freightliner) in the U.K., transferred cash 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). To mitigate the foreign currency exchange rate risk related to the outstanding balance of this loan, the Company entered into British pound forward contracts, which were accounted for as cash flow hedges. During the six months ended June 30, 2019 , the Company settled certain of its British pound forward contracts, which had notional amounts totaling £120.0 million with a settlement date of March 31, 2020 and exchange rates ranging from 1.50 to 1.51 GBP to USD. Upon settlement, the Company received cash proceeds of $26.1 million .
As of June 30, 2019 , the Company's outstanding British pound forward contracts had a notional amount of £32.6 million with a settlement date of March 31, 2020 and exchange rates ranging from 1.28 to 1.57 GBP to USD. During the three and six months ended June 30, 2019 , $0.5 million and $0.7 million , respectively, of net gains were recorded as interest income in the consolidated statements of operations. During the three and six months ended June 30, 2018 , $0.2 million and $0.3 million , respectively, of net gains were recorded as interest expense in the consolidated statements of operations. Based on the Company's fair value assumptions as of June 30, 2019 , it expects to realize $0.3 million of net gains that are reported in AOCL into earnings within the next 12 months. See Note 11 , Accumulated Other Comprehensive Loss , for additional information regarding the Company's derivatives designated as hedges.
In 2016, in conjunction with an acquisition in Australia, the Company's subsidiaries, G&W Australia Holdings LP (GWAHLP) and 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. 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. These agreements did 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 were recorded over the life of the agreements, which expired on June 30, 2019 . Upon settlement of the agreements, the Company received cash proceeds of €17.0 million (or $19.3 million at the exchange rate on June 30, 2019).
In June 2019, the Company entered into two new cross-currency swap agreements designated as fair value hedges of the non-functional currency GRail intercompany loan. In addition, the Company entered into a cross-currency swap in June 2019 that was designated as a net investment hedge of the GWBV investment. During the three and six months ended June 30, 2019 , the Company recognized a gain of less than $0.1 million of foreign currency translation adjustment within OCI and a loss of less than $0.1 million within other income/(loss), net in the consolidated statement of operations related to amortization of excluded components of its net investment hedge. Based on the Company's assumptions as of June 30, 2019 , its net investment hedge and fair value hedge, which each terminate on June 30, 2021 , are expected to realize $0.4 million and $0.2 million , respectively, of net losses that are currently reported in AOCL into earnings within the next 12 months. See Note 11 , Accumulated Other Comprehensive Loss , for additional information regarding the Company's derivatives designated as hedges.

20

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


7 . FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the Company's financial instruments carried at fair value using Level 2 inputs as of June 30, 2019 and December 31, 2018 (dollars in thousands):
 
June 30,
2019
 
December 31,
2018
Financial instruments carried at fair value using Level 2 inputs:
 
 
 
Financial assets carried at fair value:
 
 
 
British pound forward contracts
$
3,055

 
$
26,011

Cross-currency swap contracts

 
19,684

Total financial assets carried at fair value
$
3,055

 
$
45,695

Financial liabilities carried at fair value:
 
 
 
Interest rate swap agreements
$
60,220

 
$
14,395

British pound forward contracts
14

 
59

Cross-currency swap contract - net investment hedge
807

 

Cross-currency swap contract - fair value hedge
2,387

 

Total financial liabilities carried at fair value
$
63,428

 
$
14,454


Financial Instruments Carried at Fair Value: Derivative instruments are recorded on the consolidated balance sheets as either assets or liabilities measured at fair value. As more fully described in Note 6 , Derivative Financial Instruments , 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 derivative financial instruments based on Level 2 valuation inputs, including fixed interest rates, LIBOR, British pound LIBOR, BBR and EURIBOR implied forward interest rates and the remaining time to maturity.
The following table presents the carrying value, net of debt issuance costs and fair value using Level 2 inputs of the Company's financial instruments carried at historical cost as of June 30, 2019 and December 31, 2018 (dollars in thousands):
 
 
June 30, 2019
 
December 31, 2018
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial liabilities carried at historical cost:
 
 
 
 
 
 
 
 
United States term loan
 
$
1,296,549

 
$
1,294,634

 
$
1,295,672

 
$
1,296,079

U.K. term loan
 
314,078

 
317,394

 
315,524

 
319,556

Australian credit agreement
 
441,768

 
447,511

 
450,252

 
457,978

Australia subordinated shareholder loan from Macquarie Infrastructure and Real Assets
 
166,962

 
164,153

 
167,796

 
166,974

Revolving credit facility
 
32,707

 
36,150

 
160,033

 
163,662

Other debt
 
2,438

 
2,424

 
2,356

 
2,352

Total
 
$
2,254,502

 
$
2,262,266

 
$
2,391,633

 
$
2,406,601


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.
8 . U.K. PENSION PLAN:
Through its Freightliner subsidiary, the Company has a defined benefit pension plan for Freightliner's eligible 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 participating members, 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.

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


The following tables summarize the components of the Pension Program related to the net benefit costs recognized in labor and benefits and other income/(loss), net in the Company's consolidated statements of operations for the three and six months ended June 30, 2019 and 2018 (dollars in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
Operating expense:
 
 
 
 
 
 
 
 
Service cost (a)
$
3,397

 
$
3,770

 
$
6,837

 
$
7,625

Nonoperating income, net:
 
 
 
 
 
 
 
 
Interest cost
2,336

 
2,488

 
4,702

 
5,033

 
Expected return on plan assets
(4,336
)
 
(4,775
)
 
(8,727
)
 
(9,659
)
 
Amortization of prior year service cost
44

 

 
88

 

 
Total nonoperating income, net (b)
(1,956
)
 
(2,287
)
 
(3,937
)
 
(4,626
)
Net periodic benefit cost
$
1,441

 
$
1,483

 
$
2,900

 
$
2,999

(a) Included in labor and benefits within the Company’s consolidated statements of operations.
(b) Included in other income/(loss), net within the Company’s consolidated statements of operations.
During the six months ended June 30, 2019 , the Company contributed £3.1 million (or $4.1 million at the exchange rate when the payments were made) to fund the Pension Program. The Company expects to contribute £3.8 million (or $4.9 million at the June 30, 2019 exchange rate) to the Pension Program for the remainder of 2019 . 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. 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.
9 . INCOME TAXES:
The Company's provision for income taxes for the three months ended June 30, 2019 was $18.9 million , compared with $26.4 million for the three months ended June 30, 2018 . The Company's provision for income taxes for the six months ended June 30, 2019 was $33.1 million compared with $10.6 million for the six months ended June 30, 2018 . Based on developments during the three and six months ended June 30, 2018 , the Company recorded a reserve for uncertain tax positions of $4.8 million related to tax deductions on intercompany financing arrangements in the U.K., of which $0.7 million related to the three months ended June 30, 2018, $0.4 million related to the three months ended March 31, 2018 and $3.7 million related to the period from March 25, 2015, the date of the Freightliner acquisition when the arrangements were established, through December 31, 2017. The provision for income taxes for the six months ended June 30, 2018 also included an income tax benefit of $31.6 million associated with the retroactive extension of the United States Short Line Tax Credit for fiscal year 2017, which was enacted in February 2018.
The Company's effective income tax rate for the three and six months ended June 30, 2019 was 26.9% . Excluding the prior period portion of the reserve for uncertain tax positions, the Company's effective income tax rate for the three months ended June 30, 2018 was 29.8% . Excluding the benefit from the retroactive extension and the prior period portion of the reserve for uncertain tax positions, the Company's effective income tax rate for the six months ended June 30, 2018 was 28.5% .
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 was subsequently extended a series of times with the last extension enacted in February 2018. The February 2018 extension provided a retroactive credit, solely for fiscal year 2017. Legislation is currently pending that seeks to make the United States Short Line Tax Credit permanent for fiscal year 2018 and beyond.

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


10 . COMMITMENTS AND CONTINGENCIES:
From time to time, the Company is a defendant in certain lawsuits and a party to certain arbitrations 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. Management believes there are adequate provisions in the financial statements for any probable liabilities that may result from disposition of the pending lawsuits and arbitrations. 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. In May 2018, the EPA notified the AGR of a maximum civil payment of up to $14.1 million , based on the amount of oil allegedly discharged and other relevant factors considered under the applicable regulation. The Company's evaluation of its defenses, settlement options and insurance coverage is ongoing. Although the cleanup associated with this derailment is substantially complete, the civil penalty associated with the contamination is subject to further discussion and potential litigation.
11 . ACCUMULATED OTHER COMPREHENSIVE LOSS:
The following tables set forth the components of AOCL 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 Hedges
 
Accumulated Other Comprehensive Loss
Balance, December 31, 2018
$
(144,503
)
 
$
11,120

 
$
(13,073
)
 
$
(146,456
)
Other comprehensive income/(loss) before reclassifications
5,835

 

 
(31,995
)
 
(26,160
)
Amounts reclassified from accumulated other comprehensive loss, net of tax benefit of $82 and $233, respectively

 
(154
)
(a)
(1,027
)
(b)
(1,181
)
Current period change
5,835

 
(154
)
 
(33,022
)
 
(27,341
)
Balance, June 30, 2019
$
(138,668
)
 
$
10,966

 
$
(46,095
)
 
$
(173,797
)
 
Foreign Currency Translation Adjustment
 
Defined Benefit Plans
 
Net Unrealized Gain/(Loss) on Hedges
 
Accumulated Other Comprehensive Loss
Balance, December 31, 2017
$
(74,617
)
 
$
(19,601
)
 
$
(11,316
)
 
$
(105,534
)
Other comprehensive income before reclassifications
(36,698
)
 

 
9,736

 
(26,962
)
Amounts reclassified from accumulated other comprehensive loss, net of tax (provision)/benefit of ($28) and $115, respectively

 
86

(a)
(290
)
(b)
(204
)
Current period change
(36,698
)
 
86

 
9,446

 
(27,166
)
Amounts reclassified from accumulated other comprehensive loss to retained earnings related to the United States Tax Cuts and Jobs Act

 
(132
)
 
(2,838
)
 
(2,970
)
Balance, June 30, 2018
$
(111,315
)
 
$
(19,647
)
 
$
(4,708
)
 
$
(135,670
)

(a)
Net (losses)/gains realized were recorded in labor and benefits on the consolidated statements of operations.
(b)
For the six months ended June 30, 2019 , $0.5 million and $0.5 million of net losses were recorded in interest expense and other income/(loss), net, respectively, within the consolidated statements of operations. For the six months ended June 30, 2018 , net losses realized were recorded in interest expense on the consolidated statements of operations. See Note 6 , Derivative Financial Instruments .

23

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


Comprehensive Loss Attributable to Noncontrolling Interest
The following table sets forth comprehensive loss attributable to noncontrolling interest for the three and six months ended June 30, 2019 and 2018 (dollars in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Net (loss)/income attributable to noncontrolling interest
$
(68
)
 
$
4,443

 
$
32

 
$
5,370

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(2,594
)
 
(8,825
)
 
(1,007
)
 
(12,843
)
Net unrealized (loss)/gain on qualifying cash flow hedges, net of tax benefit/(provision) of $303, ($67), $633 and ($67), respectively
(708
)
 
157

 
(1,477
)
 
157

Comprehensive loss attributable to noncontrolling interest
$
(3,370
)
 
$
(4,225
)
 
$
(2,452
)
 
$
(7,316
)

12 . SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
As of June 30, 2019 and 2018 , the Company had outstanding accounts receivable from outside parties for the funding of capital expenditures of $18.7 million and $10.9 million , respectively. As of June 30, 2019 and 2018 , the Company also had $22.3 million and $9.2 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. See Note 5 , Leases , for ROU assets obtained during the reporting period in exchange for lease liabilities.
13 . SEGMENT INFORMATION:
The Company presents the financial results of its eight operating regions as three reportable segments: North American Operations, Australian Operations and U.K./European Operations. During the three months ended March 31, 2019, the Company's Central Region railroads were consolidated into the Company's Midwest and Southern regions. The Company's remaining six North American regions are aggregated into one segment as a result of having similar economic and operating characteristics. 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 Australian business underwent a transformational change on December 1, 2016, with the acquisition of
Glencore Rail (NSW) Pty Limited (GRail) and the formation of a partnership with Macquarie Infrastructure and Real Assets (MIRA) (the Australia Partnership), which the Company controls through its 51.1% interest. The GRail acquisition significantly expanded the Company's operations in New South Wales. In conjunction with the GRail acquisition, the Company issued a 48.9% equity stake in its Australian subsidiary, GWAHLP, to MIRA. The Company retained a 51.1% controlling interest in GWAHLP and continues to consolidate 100% of its Australian Operations in the Company's financial statements and reports a noncontrolling interest for MIRA's 48.9% equity ownership. As a result, (1) 100% of the assets and liabilities of the Company's Australian Operations, after the elimination of intercompany balances, were included in the Company's consolidated balance sheets as of June 30, 2019 and December 31, 2018 , with MIRA's 48.9% noncontrolling interest reflected in the equity section, (2) the Company's operating revenues and operating income for the three months ended June 30, 2019 and 2018 included 100% of the Australian Operations, while net income attributable to G&W reflected the Company's 51.1% ownership position in the Australian Operations and (3) 100% of the cash flows of the Australian Operations, after the elimination of intercompany items, were included in the Company's consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 . Accordingly, any payments between the Company's Australian Operations and its other businesses are eliminated in consolidation, while the Company's cash flows reflect 100% of any cash flows between the Australian Operations and MIRA.
In accordance with the Company's Australian Partnership agreement with MIRA, the cash and cash equivalents of the Company's Australian Operations can be used to make payments in the ordinary course of business, to pay down debt of the Australia Partnership and to make distributions to the partners in proportion to their investments. No such distributions were made during the six months ended June 30, 2019 . During the six months ended June 30, 2018 , the Australia Partnership made an A$40.0 million distribution, of which A$20.4 million (or $15.6 million at the exchange rate on June 5, 2018) and A$19.6 million (or $14.9 million at the exchange rate on June 5, 2018) were distributed to the Company and MIRA, respectively.

24

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


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 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 OCI. 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. As a result, any appreciation or depreciation of these currencies against the United States dollar will impact the Company's results of operations.
The following table reflects the balance sheet exchange rates used to translate each foreign entity's respective local currency balance sheet into United States dollars as of June 30, 2019 and December 31, 2018 :
 
 
 
 
 
June 30,
2019
 
December 31,
2018
United States dollar per Australian dollar
 
 
 
 
$
0.70

 
$
0.70

United States dollar per British pound
 
 
 
 
$
1.27

 
$
1.28

United States dollar per Canadian dollar
 
 
 
 
$
0.76

 
$
0.73

United States dollar per Euro
 
 
 
 
$
1.14

 
$
1.15

The following table reflects the average exchange rates used to translate each foreign entity's respective local currency results of operations into United States dollars for the three and six months ended June 30, 2019 and 2018 :
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
United States dollar per Australian dollar
$
0.70

 
$
0.76

 
$
0.71

 
$
0.77

United States dollar per British pound
$
1.29

 
$
1.36

 
$
1.29

 
$
1.38

United States dollar per Canadian dollar
$
0.75

 
$
0.77

 
$
0.75

 
$
0.78

United States dollar per Euro
$
1.12

 
$
1.19

 
$
1.13

 
$
1.21



25

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


The following tables set forth select financial data for the Company's reportable segments, including operating revenues by commodity group, for the three and six months ended June 30, 2019 and 2018 (dollars in thousands):
 
Three Months Ended
 
June 30, 2019
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
Freight revenues by commodity group:
 
 
 
 
 
 
 
Agricultural Products
$
32,846

 
$
2,999

 
$
512

 
$
36,357

Autos & Auto Parts
6,084

 

 

 
6,084

Chemicals & Plastics
39,813

 

 

 
39,813

Coal & Coke
18,563

 
28,965

 
896

 
48,424

Food & Kindred Products
8,801

 

 

 
8,801

Intermodal
523

 
15,459

 
58,297

 
74,279

Lumber & Forest Products
23,519

 

 

 
23,519

Metallic Ores
2,865

 
7,523

 

 
10,388

Metals
29,055

 

 

 
29,055

Minerals & Stone
38,597

 
1,817

 
21,155

 
61,569

Petroleum Products
17,053

 
160

 
717

 
17,930

Pulp & Paper
28,013

 

 

 
28,013

Waste
7,964

 

 

 
7,964

Other
5,485

 

 

 
5,485

Total freight revenues
259,181

 
56,923

 
81,577

 
397,681

Freight-related revenues
66,135

 
8,036

 
68,225

 
142,396

All other revenues
16,531

 
1,572

 
13,300

 
31,403

Total operating revenues
$
341,847

 
$
66,531

 
$
163,102

 
$
571,480

Operating income/(loss)
$
84,261

 
$
11,655

 
$
(1,716
)
 
$
94,200

Depreciation and amortization
$
38,738

 
$
14,192

 
$
9,587

 
$
62,517

Interest expense, net
$
11,872

 
$
11,800

 
$
2,903

 
$
26,575

Provision for/(benefit from) income taxes
$
18,140

 
$
(44
)
 
$
770

 
$
18,866

Cash expenditures for additions to property & equipment, net of grants from outside parties
$
52,649

 
$
9,103

 
$
6,814

 
$
68,566



26

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


 
Three Months Ended
 
June 30, 2018
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
Freight revenues by commodity group:
 
 
 
 
 
 
 
Agricultural Products
$
29,693

 
$
6,006

 
$
785

 
$
36,484

Autos & Auto Parts
5,806

 

 

 
5,806

Chemicals & Plastics
38,972

 

 

 
38,972

Coal & Coke
19,087

 
32,570

 
2,687

 
54,344

Food & Kindred Products
8,476

 

 

 
8,476

Intermodal
380

 
17,102

 
66,483

 
83,965

Lumber & Forest Products
23,810

 

 

 
23,810

Metallic Ores
3,670

 
8,125

 

 
11,795

Metals
32,493

 

 

 
32,493

Minerals & Stone
38,034

 
2,087

 
22,326

 
62,447

Petroleum Products
16,151

 
185

 
8

 
16,344

Pulp & Paper
29,514

 

 

 
29,514

Waste
7,339

 

 

 
7,339

Other
6,443

 

 

 
6,443

Total freight revenues
259,868

 
66,075

 
92,289

 
418,232

Freight-related revenues
63,467

 
11,515

 
67,420

 
142,402

All other revenues
16,222

 
1,439

 
16,695

 
34,356

Total operating revenues
$
339,557

 
$
79,029

 
$
176,404

 
$
594,990

Operating income/(loss)
$
80,274

 
$
25,896

 
$
(3,045
)
 
$
103,125

Depreciation and amortization
$
41,247

 
$
15,288

 
$
9,210

 
$
65,745

Interest expense, net
$
11,778

 
$
12,893

 
$
3,685

 
$
28,356

Provision for income taxes
$
20,091

 
$
3,901

 
$
2,454

 
$
26,446

Cash expenditures for additions to property & equipment, net of grants from outside parties
$
48,924

 
$
14,489

 
$
4,726

 
$
68,139



27

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


 
Six Months Ended
 
June 30, 2019
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
Freight revenues by commodity group:
 
 
 
 
 
 
 
Agricultural Products
$
64,809

 
$
6,053

 
$
1,248

 
$
72,110

Autos & Auto Parts
11,566

 

 

 
11,566

Chemicals & Plastics
76,986

 

 

 
76,986

Coal & Coke
37,753

 
58,136

 
5,589

 
101,478

Food & Kindred Products
17,204

 

 

 
17,204

Intermodal
978

 
29,259

 
117,502

 
147,739

Lumber & Forest Products
45,376

 

 

 
45,376

Metallic Ores
5,658

 
15,141

 

 
20,799

Metals
58,917

 

 

 
58,917

Minerals & Stone
70,407

 
3,855

 
37,037

 
111,299

Petroleum Products
37,752

 
298

 
1,408

 
39,458

Pulp & Paper
58,292

 

 

 
58,292

Waste
14,826

 

 

 
14,826

Other
10,420

 

 

 
10,420

Total freight revenues
510,944

 
112,742

 
162,784

 
786,470

Freight-related revenues
130,611

 
15,891

 
132,156

 
278,658

All other revenues
32,738

 
3,005

 
28,698

 
64,441

Total operating revenues
$
674,293

 
$
131,638

 
$
323,638

 
$
1,129,569

Operating income/(loss)
$
153,576

 
$
24,158

 
$
(3,824
)
 
$
173,910

Depreciation and amortization
$
77,169

 
$
28,603

 
$
19,371

 
$
125,143

Interest expense, net
$
24,273

 
$
23,923

 
$
5,442

 
$
53,638

Provision for income taxes
$
32,227

 
$
70

 
$
829

 
$
33,126

Cash expenditures for additions to property & equipment, net of grants from outside parties
$
100,720

 
$
11,952

 
$
17,187

 
$
129,859


28

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


 
Six Months Ended
 
June 30, 2018
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
Freight revenues by commodity group:
 
 
 
 
 
 
 
Agricultural Products
$
61,065

 
$
11,489

 
$
2,020

 
$
74,574

Autos & Auto Parts
11,173

 

 

 
11,173

Chemicals & Plastics
75,189

 

 

 
75,189

Coal & Coke
39,032

 
64,149

 
6,163

 
109,344

Food & Kindred Products
16,826

 

 

 
16,826

Intermodal
689

 
33,075

 
133,804

 
167,568

Lumber & Forest Products
46,249

 

 

 
46,249

Metallic Ores
7,243

 
15,856

 

 
23,099

Metals
60,887

 

 

 
60,887

Minerals & Stone
68,552

 
4,181

 
41,505

 
114,238

Petroleum Products
34,634

 
336

 
8

 
34,978

Pulp & Paper
58,385

 

 

 
58,385

Waste
13,227

 

 

 
13,227

Other
12,134

 

 

 
12,134

Total freight revenues
505,285

 
129,086

 
183,500

 
817,871

Freight-related revenues
127,299

 
22,078

 
134,222

 
283,599

All other revenues
32,603

 
2,699

 
32,879

 
68,181

Total operating revenues
$
665,187

 
$
153,863

 
$
350,601

 
$
1,169,651

Operating income/(loss)
$
153,434

 
$
41,872

 
$
(5,268
)
 
$
190,038

Depreciation and amortization
$
81,878

 
$
31,295

 
$
18,562

 
$
131,735

Interest expense, net
$
20,233

 
$
26,134

 
$
6,727

 
$
53,094

Provision for income taxes
$
606

 
$
4,722

 
$
5,228

 
$
10,556

Cash expenditures for additions to property & equipment, net of grants from outside parties
$
87,487

 
$
19,751

 
$
13,189

 
$
120,427

The following tables set forth select balance sheet data for the Company's reportable segments as of June 30, 2019 and December 31, 2018 (dollars in thousands):  
 
June 30, 2019
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Cash and cash equivalents
$
23,624

 
$
41,325

 
$
17,434

 
$
82,383

Property and equipment, net
$
3,727,668

 
$
601,130

 
$
340,906

 
$
4,669,704


 
December 31, 2018
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Cash and cash equivalents
$
33,996

 
$
26,902

 
$
29,489

 
$
90,387

Property and equipment, net
$
3,679,279

 
$
609,450

 
$
324,285

 
$
4,613,014



29

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


14 . RECENTLY ISSUED ACCOUNTING STANDARDS:
Accounting Standards Not Yet Effective
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Measurement of Credit Losses on Financial Instruments , which requires assessment of credit losses on an expected model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts. The amendment 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 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 August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure for Fair Value Measurement . The amendments modify the disclosure requirements for fair value measurements in FASB Accounting Standards Codification (ASC) 820 based on revisions to the FASB Concepts Statement, Conceptual Framework for Financial Reporting (Concepts Statement), and cost/benefit considerations. 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 disclosure requirements.
In August 2018, the FASB issued ASU 2018-14, Compensation–Retirement Benefits–Defined Benefit Plans–General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments modify the disclosure requirements for employers that sponsor defined benefit pension plans or other postretirement benefit plans to make disclosure requirements more consistent with the revisions to the Concepts Statement. The amendments will become effective for the Company beginning January 1, 2021. Early adoption is permitted on a retrospective basis to all periods presented. The Company is still evaluating the potential impact of this guidance on its disclosure requirements.
15 . SUBSEQUENT EVENTS:
Proposed Merger
On July 1, 2019, the Company, together with Brookfield Infrastructure, GIC and Brookfield Infrastructure's institutional partners, announced an agreement pursuant to which affiliates of Brookfield Infrastructure and GIC will acquire G&W for a transaction price of $112.00 per share of common stock valued at approximately $8.4 billion including debt (the Merger). The proposed Merger is expected to close by year end 2019 or early 2020 and is subject to customary closing conditions and regulatory approvals, including approval by the Company's stockholders, described in more detail below.
The Merger will be effected pursuant to the Agreement and Plan of Merger (the Merger Agreement), by and among the Company, DJP XX, LLC, a Delaware limited liability company (Parent), and MKM XXII Corp., a Delaware corporation and a wholly owned subsidiary of Parent (Merger Sub), Merger Sub will be merged with and into G&W with G&W surviving the Merger as a wholly-owned subsidiary of Parent. The proposed Merger will result in G&W becoming a privately held company.
Completion of the proposed Merger is subject to various closing conditions, including, among others, (i) the adoption of the Merger Agreement by holders of 66 2/3% of the voting power of the outstanding shares of G&W’s common stock, (ii) the absence of any law, injunction or other order that prohibits the consummation of the Merger, (iii) the approval or authorization of, or exemption by, the Surface Transportation Board (or approval of the use of a voting trust structure), (iv) receipt of other antitrust and regulatory approvals, including approval of the Committee on Foreign Investment in the United States, and (v) other customary closing conditions, including the accuracy of each party’s representations and warranties and each party’s compliance with its covenants and agreements contained in the Merger Agreement (subject in the case of this clause (v) to certain materiality qualifiers).

30

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


Divestiture of 51.1% Interest in G&W Australia Holdings LP(GWAHLP)
Under the Merger Agreement (as described in more detail above), the Company agreed to use reasonable best efforts to assist and cooperate with Parent in Parent’s efforts to consummate any planned divestiture by Parent of G&W's interests in GWAHLP, the holding company for all of the Company's Australian businesses, to a third party (the GWA Divestiture), provided that (1) such cooperation would not unreasonably interfere with the Company's business or operations and (2) the Company would not be required to take any action that would subject it to actual or potential liability, to bear any cost or expense or to pay any fee or make any other payment or agree to provide any indemnity in connection with the GWA Divestiture prior to the effective time of the Merger. Following the execution of the Merger Agreement, Parent requested that G&W cause certain of its subsidiaries to enter into a Definitive Interest Sale Agreement for the GWA Divestiture (the GWA Divestiture Agreement), and, on August 4, 2019, G&W's board of directors and the governing bodies of such subsidiaries approved the GWA Divestiture Agreement and such subsidiaries entered into the GWA Divestiture Agreement.
Under the GWA Divestiture Agreement, certain entities affiliated with MIRA that currently own 48.9% of GWAHLP will acquire, directly or indirectly, the remaining interests in GWAHLP from certain subsidiaries of G&W in exchange for A$627.4 million , subject to adjustment. The GWA Divestiture is subject to customary closing conditions, including the satisfaction of the closing conditions set forth in the Merger Agreement. Neither the Company nor any of its subsidiaries will have any liability under the GWA Divestiture Agreement prior to the consummation of the Merger. The GWA Divestiture Agreement may be terminated under certain circumstances, including by any party thereto if the transactions contemplated by the GWA Divestiture Agreement have not been consummated on or before July 1, 2020.
The consideration to be received by the subsidiaries of the Company that are parties to the GWA Divestiture Agreement will not be distributed to any of the Company’s stockholders prior to consummation of the Merger, and the sole consideration that the Company's stockholders will receive in the Merger is $112.00 in cash per share of G&W common stock on the terms and conditions set forth in the Merger Agreement.
The consummation of the GWA Divestiture is not a condition to the closing of the Merger or any of Parent’s other obligations under the Merger Agreement.

31


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 and related notes set forth in this Quarterly Report on Form 10-Q and our 2018 Annual Report on Form 10-K. Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP).
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 and divestitures, changing economic conditions, commodity prices, competitive forces, changes in foreign currency exchange rates, rail network issues and congestion, the ability to attract and retain skilled workers, 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 and divestitures).
Overview
We own or lease 120 freight railroads worldwide that are organized in eight operating regions with approximately 8,000 employees and 3,000 customers. The financial results of our eight operating regions are reported in the following three distinct segments:
Our North American Operations segment includes six regions (Coastal, Midwest, Northeast, Southern, Western and Canada) that serve 41 U.S. states and four Canadian provinces and include 114 short line and regional freight railroads with more than 13,000 track-miles.
Our Australian Operations segment serves New South Wales, the Northern Territory and South Australia and operates the 1,400 -mile Tarcoola-to-Darwin rail line. Since December 1, 2016, the Australia Region has been 51.1% owned by us and 48.9% owned by a consortium of funds and clients managed by Macquarie Infrastructure and Real Assets (MIRA).
Our U.K./European Operations segment is led by Freightliner Group Limited (Freightliner), the United Kingdom's (U.K.) largest rail maritime intermodal operator and 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. As more fully described in Note 13 , Segment Information , to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report, the results of operations of the foreign entities are maintained in the respective local currency 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 our results of operations.

32


Subsequent Events
Proposed Merger
On July 1, 2019, G&W, together with Brookfield Infrastructure, GIC and Brookfield Infrastructure's institutional partners, announced an agreement pursuant to which affiliates of Brookfield Infrastructure and GIC will acquire G&W for a transaction price of $112 per share of common stock valued at approximately $8.4 billion including debt (the Merger). The proposed Merger is expected to close by year-end 2019 or early 2020 and is subject to customary closing conditions and regulatory approvals, including approval by our stockholders, described in more detail below.
The Merger will be effected pursuant to the Agreement and Plan of Merger (the Merger Agreement), by and among the Company, DJP XX, LLC, a Delaware limited liability company (Parent), and MKM XXII Corp., a Delaware corporation and a wholly owned subsidiary of Parent (Merger Sub), Merger Sub will be merged with and into G&W with G&W surviving the Merger as a wholly-owned subsidiary of Parent. The proposed Merger will result in G&W becoming a privately held company.
Completion of the proposed Merger is subject to various closing conditions, including, among others, (i) the adoption of the Merger Agreement by holders of 66 2/3% of the voting power of the outstanding shares of G&W’s common stock, (ii) the absence of any law, injunction or other order that prohibits the consummation of the Merger, (iii) the approval or authorization of, or exemption by, the Surface Transportation Board (or approval of the use of a voting trust structure), (iv) receipt of other antitrust and regulatory approvals, including approval of the Committee on Foreign Investment in the United States, and (v) other customary closing conditions, including the accuracy of each party’s representations and warranties and each party’s compliance with its covenants and agreements contained in the Merger Agreement (subject in the case of this clause (v) to certain materiality qualifiers).
Divestiture of 51.1% Interest in G&W Australia Holdings LP(GWAHLP)
Under the Merger Agreement (as described in more detail above), we agreed to use reasonable best efforts to assist and cooperate with Parent in Parent’s efforts to consummate any planned divestiture by Parent of our interests in GWAHLP, the holding company for all of our Australian businesses, to a third party (the GWA Divestiture), provided that (1) such cooperation would not unreasonably interfere with our business or operations and (2) we would not be required to take any action that would subject us to actual or potential liability, to bear any cost or expense or to pay any fee or make any other payment or agree to provide any indemnity in connection with the GWA Divestiture prior to the effective time of the Merger. Following the execution of the Merger Agreement, Parent requested that we cause certain of our subsidiaries to enter into a Definitive Interest Sale Agreement for the GWA Divestiture (the GWA Divestiture Agreement), and, on August 4, 2019, our board of directors and the governing bodies of such subsidiaries approved the GWA Divestiture Agreement and such subsidiaries entered into the GWA Divestiture Agreement.
Under the GWA Divestiture Agreement, certain entities affiliated with MIRA that currently own 48.9% of GWAHLP will acquire, directly or indirectly, the remaining interests in GWAHLP from certain subsidiaries of G&W in exchange for A$627.4 million , subject to adjustment. The GWA Divestiture is subject to customary closing conditions, including the satisfaction of the closing conditions set forth in the Merger Agreement. Neither G&W nor any of its subsidiaries will have any liability under the GWA Divestiture Agreement prior to the consummation of the Merger. The GWA Divestiture Agreement may be terminated under certain circumstances, including by any party thereto if the transactions contemplated by the GWA Divestiture Agreement have not been consummated on or before July 1, 2020.
The consideration to be received by our subsidiaries that are parties to the GWA Divestiture Agreement will not be distributed to any of our stockholders prior to consummation of the Merger, and the sole consideration that our stockholders will receive in the Merger is $112.00 in cash per share of G&W common stock on the terms and conditions set forth in the Merger Agreement.
The consummation of the GWA Divestiture is not a condition to the closing of the Merger or any of Parent's other obligations under the Merger Agreement.
Overview of Three-Month Results
Consolidated Results
Our operating revenues decreased $23.5 million , or 4.0% , to $571.5 million for the three months ended June 30, 2019 , compared with $595.0 million for the three months ended June 30, 2018 . Operating income for the three months ended June 30, 2019 was $94.2 million , compared with $103.1 million for the three months ended June 30, 2018 , a decrease of $8.9 million , or 8.7% . Our operating ratio, defined as operating expenses divided by operating revenues, was 83.5% for the three months ended June 30, 2019 , compared with 82.7% for the three months ended June 30, 2018 .

33


Net income attributable to G&W for the three months ended June 30, 2019 was $51.4 million , compared with $44.2 million for the three months ended June 30, 2018 . Our diluted earnings per common share (EPS) for the three months ended June 30, 2019 were $0.90 with 57.3 million  weighted average shares outstanding, compared with diluted EPS of $0.73 with 60.9 million weighted average shares outstanding for the three months ended June 30, 2018 .
Our provision for income taxes for the three months ended June 30, 2019 was $18.9 million compared with $26.4 million for the three months ended June 30, 2018 . Our effective income tax rate for the three months ended June 30, 2019 was 26.9% . Based on developments during the three months ended June 30, 2018, we recorded a reserve for uncertain tax positions of $4.8 million related to tax deductions on intercompany financing arrangements in the U.K., of which $0.7 million related to the three months ended June 30, 2018, $0.4 million related to the three months ended March 31, 2018 and $3.7 million related to the period from March 25, 2015, the date of the Freightliner acquisition when the arrangements were established, through December 31, 2017. The reserve for uncertain tax positions was included in our provision for income taxes for the three months ended June 30, 2018 . Excluding the prior period portion of the reserve for uncertain tax positions, our effective income tax rate for the three months ended June 30, 2018 was 29.8% .
Items Affecting Comparability
Our results for the three months ended June 30, 2019 and 2018 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 June 30, 2019
 
 
 
 
 
 
Corporate development and related costs
 
$
(2.4
)
 
$
(1.7
)
 
$
(0.03
)
Restructuring and related costs
 
$
(7.6
)
 
$
(6.0
)
 
$
(0.10
)
Net loss on sale and impairment of certain assets in North America
 
$
(1.0
)
 
$
(0.8
)
 
$
(0.01
)
Australia enterprise bargaining agreement amendment
 
$
(2.6
)
 
$
(0.9
)
 
$
(0.02
)
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
 
 
 
 
 
Corporate development and related costs
 
$
(0.4
)
 
$
(0.3
)
 
$

Restructuring and related costs
 
$
(9.4
)
 
$
(7.6
)
 
$
(0.12
)
Loss on sale of ERS
 
$
(1.4
)
 
$
(1.4
)
 
$
(0.02
)
Gain on settlement
 
$
6.3

 
$
2.3

 
$
0.04

Credit facility refinancing-related costs
 
$
(2.7
)
 
$
(2.0
)
 
$
(0.03
)
Prior period portion of tax adjustment
 
$

 
$
(4.1
)
 
$
(0.07
)
For the three months ended June 30, 2019 , our results included restructuring and related costs of $7.6 million , primarily associated with our optimization activities in the U.K., $2.6 million of expense associated with amending an enterprise bargaining agreement in Australia, corporate development and related costs of $2.4 million and a $1.0 million net loss on the sale and impairment of assets in North America resulting from the impairment of assets associated with the expiration of a lease of a rail line in the southeastern United States, partially offset by a gain on the sale of land in the northeastern United States.
For the three months ended June 30, 2018 , our results included restructuring and related costs of $9.4 million , primarily associated with our optimization activities in the U.K., credit facility refinancing-related costs of $2.7 million , a $1.4 million loss on the sale of our Continental Europe intermodal business, ERS Railways B.V. (ERS), and a gain on settlement of $6.3 million from the recovery of pre-petition claims associated with Arrium Limited's voluntary administration (bankruptcy) in the second quarter of 2016. The three months ended June 30, 2018 also included a $4.1 million income tax expense associated with uncertain tax deductions on intercompany financing arrangements in the U.K. previously recorded from March 25, 2015, the date of the Freightliner acquisition when the arrangements were established, through March 31, 2018.

34


Results by Segment
North America
Operating revenues from our North American Operations increased $2.3 million , or 0.7% , to $341.8 million for the three months ended June 30, 2019 , compared with $339.6 million for the three months ended June 30, 2018 . Excluding $5.6 million of revenues in 2018 from two leased railroads in Canada that we ceased operating at the end of 2018, and a $0.8 million decrease due to the impact of foreign currency depreciation, North American existing operations revenues increased $8.7 million , or 2.6% , primarily due to increases in freight and freight-related revenues.
Total traffic from our North American Operations decreased 23,458 carloads, or 5.5% , to 406,895 carloads for the three months ended June 30, 2019 , compared with the three months ended June 30, 2018 . Excluding traffic from the two railroad leases in Canada that expired at the end of 2018, existing operations traffic decreased 14,779 carloads, or 3.5% . The decrease in traffic from existing operations included decreases of 11,206 carloads of coal and coke traffic, 4,221 carloads of metals traffic, 3,734 carloads of pulp and paper traffic, 2,307 carloads of lumber and forest products traffic and 1,683 carloads of other commodity traffic, partially offset by increases of 5,418 carloads of agricultural products traffic and 1,015 carloads of chemicals and plastics traffic. All remaining traffic increased by a net 1,939 carloads.
Operating income from our North American Operations was $84.3 million for the three months ended June 30, 2019 , compared with $80.3 million for the three months ended June 30, 2018 . Operating income for the three months ended June 30, 2019 included corporate development and related costs of $2.3 million , a $1.0 million net loss on the sale and impairment of certain assets in the United States and restructuring and related costs of $0.6 million . Operating income for the three months ended June 30, 2018 included credit facility refinancing-related costs of $0.4 million and corporate development and related costs of $0.3 million . The operating ratio was 75.4% for the three months ended June 30, 2019 , compared with 76.4% for the three months ended June 30, 2018 .
Australia
Operating revenues from our Australian Operations decreased $12.5 million , or 15.8% , to $66.5 million for the three months ended June 30, 2019 , compared with $79.0 million for the three months ended June 30, 2018 . Excluding a $5.9 million decrease due to the impact of foreign currency depreciation , Australian Operations operating revenues decreased $6.6 million , or 9.0% , primarily due to decreases in drought impacted agricultural products freight and freight-related revenues.
Total traffic from our Australian Operations decreased 13,570 carloads, or 9.2% , to 134,395 carloads for the three months ended June 30, 2019 , compared with the three months ended June 30, 2018 . The traffic decrease was primarily due to decreases of 9,951 carloads of agricultural products traffic and 2,100 carloads of minerals and stone traffic. All remaining traffic decreased by a net 1,519 carloads.
Operating income from our Australian Operations was $11.7 million for the three months ended June 30, 2019 , compared with $25.9 million for the three months ended June 30, 2018 . The operating income for the three months ended June 30, 2019 was negatively impacted by $1.9 million from foreign currency depreciation, a $2.6 million decrease in grain volumes due to drought conditions in South Australia and New South Wales as well as $2.6 million of expense associated with amending an enterprise bargaining agreement . The operating income for the three months ended June 30, 2018 included a gain on settlement of $6.3 million from the recovery of pre-petition claims associated with Arrium Limited's voluntary administration (bankruptcy) in the second quarter of 2016. The operating ratio for our Australian Operations was 82.5% for the three months ended June 30, 2019 , compared with an operating ratio of 67.2% for the three months ended June 30, 2018 .
U.K./Europe
Operating revenues from our U.K./European Operations decreased $13.3 million , or 7.5% , to $163.1 million for the three months ended June 30, 2019 , compared with $176.4 million for the three months ended June 30, 2018 . Excluding $8.7 million of revenues for 2018 from our Continental Europe intermodal business, ERS Railways B.V. (ERS), which was sold in June 2018, and a $10.0 million decrease due to the impact of foreign currency depreciation , U.K./European existing operations revenues increased $5.4 million , or 3.4% , primarily due to increases in freight-related revenues in the U.K. and Poland.
Total traffic from our U.K./European Operations decreased 30,980 carloads, or 12.1% , to 225,065 carloads for the three months ended June 30, 2019 , compared with 256,045 carloads for the three months ended June 30, 2018 . Excluding traffic from our divested ERS operations for 2018, existing operations traffic decreased 10,157 carloads, or 4.3%. The decrease in traffic from existing operations was primarily due to a decrease of 7,269 carloads of intermodal traffic, 3,805 carloads of minerals and stone traffic and 2,383 carloads of coal and coke traffic, partially offset by an increase of 3,514 carloads of petroleum products traffic. All remaining traffic decreased by a net 214 carloads.

35


Operating loss from our U.K./European Operations was $1.7 million for the three months ended June 30, 2019 , compared with an operating loss of $3.0 million for the three months ended June 30, 2018 . The operating loss for the three months ended June 30, 2019 included $6.8 million of restructuring and related costs primarily driven by our optimization activities in the U.K. The operating loss for the three months ended June 30, 2018 included $9.4 million of restructuring and related costs. The operating ratio was 101.1% for the three months ended June 30, 2019 , compared with 101.7% for the three months ended June 30, 2018 .
Overview of Six -Month Results
Our operating revenues decreased $40.1 million , or 3.4% , to $1,129.6 million for the six months ended June 30, 2019 , compared with $1,169.7 million for the six months ended June 30, 2018 . Operating income for the six months ended June 30, 2019 was $173.9 million , compared with $190.0 million for the six months ended June 30, 2018 , a decrease of $16.1 million , or 8.5% . Our operating ratio was 84.6% for the six months ended June 30, 2019 , compared with 83.8% for the six months ended June 30, 2018 .
Net income for the six months ended June 30, 2019 was $90.2 million , compared with net income of $124.6 million for the six months ended June 30, 2018 . Our diluted EPS for the six months ended June 30, 2019 was $1.58 with 57.2 million weighted average shares outstanding, compared with diluted EPS of $1.93 with 61.8 million weighted average shares outstanding for the six months ended June 30, 2018 .
Our provision for income taxes for the six months ended June 30, 2019 was $33.1 million compared with $10.6 million for the six months ended June 30, 2018 . Our effective income tax rate for the six months ended June 30, 2019 was 26.9% . Our results for the six months ended June 30, 2018 included an income tax benefit of $31.6 million associated with the retroactive extension of the United States Short Line Tax Credit for fiscal year 2017, which was enacted in February 2018. Based on developments during the six months ended June 30, 2018 , we recorded a reserve for uncertain tax positions of $4.8 million related to tax deductions on intercompany financing arrangements in the U.K., of which $3.7 million related to the period from March 25, 2015, the date of the Freightliner acquisition when the arrangements were established, through December 31, 2017. Excluding the benefit from the retroactive extension and the prior period portion of the reserve for uncertain tax positions, our effective income tax rate for the six months ended June 30, 2018 was 28.5% .
During the six months ended June 30, 2019 , we generated $223.1 million in cash flows from operating activities. During the same period, we purchased $144.7 million of property and equipment, including $7.3 million for new business investments, partially offset by $14.9 million in cash received from government grants and other outside parties for capital spending. We also paid $140.6 million in cash from the net decrease in outstanding debt and received cash of $45.4 million from the settlement of derivative transactions.
During the six months ended June 30, 2018 , we generated $231.3 million in cash flows from operating activities. During the same period, we purchased $133.3 million of property and equipment, including $22.7 million for new business investments, partially offset by $12.9 million in cash received from government grants and other outside parties for capital spending. We also repurchased 2.7 million shares of our Class A common stock for $192.3 million and received $88.3 million in cash from the net increase in outstanding debt. In addition, Genesee & Wyoming Australia (GWA) made a distribution of $14.9 million to its noncontrolling interest holders.

36


Items Affecting Comparability
Our results for the six months ended June 30, 2019 and 2018 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
Six Months Ended June 30, 2019
 
 
 
 
 
 
Restructuring and related costs
 
$
(15.2
)
 
$
(11.5
)
 
$
(0.20
)
Corporate development and related costs
 
$
(2.9
)
 
$
(2.0
)
 
$
(0.04
)
Net loss on sale and impairment of certain assets in North America
 
$
(1.0
)
 
$
(0.8
)
 
$
(0.01
)
Australia enterprise bargaining agreement amendment
 
$
(2.6
)
 
$
(0.9
)
 
$
(0.02
)
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
 
 
 
 
Corporate development and related costs
 
$
(0.5
)
 
$
(0.4
)
 
$
(0.01
)
Restructuring costs
 
$
(9.6
)
 
$
(7.8
)
 
$
(0.13
)
Loss on sale of ERS
 
$
(1.4
)
 
$
(1.4
)
 
$
(0.02
)
Gain on settlement
 
$
6.3

 
$
2.3

 
$
0.04

Credit facility refinancing-related costs
 
$
(2.7
)
 
$
(2.0
)
 
$
(0.03
)
2017 Short Line Tax Credit
 
$

 
$
31.6

 
$
0.51

Prior period portion of tax adjustment
 
$

 
$
(3.7
)
 
$
(0.06
)

37


Changes in Operations
North American Operations
Canada Lease Expirations: Two of our short line railroad leases in Canada (Goderich-Exeter Railway (GEXR) and Southern Ontario Railway (SORR)) expired at the end of 2018. Our results for the three and six months ended June 30, 2018 included $5.6 million and $11.1 million , respectively, of revenues from these leased railroads. Our results included no material operating income from these leased railroads for the three and six months ended June 30, 2018.
U.K./European Operations
U.K. Operations Optimization: In May 2018, we began a program to restructure and further optimize our operations in the U.K., which we intend to complete by 2020. The program includes the rationalization of the locomotive and railcar fleet, management restructuring (following the U.K. consultative process) and technology investments to upgrade systems to enhance productivity and service quality.
We recorded restructuring and related costs associated with the optimization of $6.8 million and $12.3 million for the three and six months ended June 30, 2019 , respectively. Restructuring and related costs of $9.4 million and $9.6 million were recorded associated with the optimization for the three and six months ended June 30, 2018 , respectively. For additional information regarding the optimization of our U.K. operations, 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: On June 5, 2018, we sold our Continental Europe intermodal business, ERS, for gross cash proceeds of €11.2 million (or $13.1 million at the exchange rate on June 5, 2018) or €6.8 million (or $7.9 million at the exchange rate on June 5, 2018) net of €4.4 million (or $5.2 million at the exchange rate on June 5, 2018) of cash on hand that transferred to the buyer. Our results for the three and six months ended June 30, 2018 included $9.4 million and $24.1 million of revenues, respectively, from ERS. Our results for the three and six months ended June 30, 2018 included no material operating income from ERS.
Three Months Ended June 30, 2019 Compared with Three Months Ended June 30, 2018
Consolidated Operating Results
Operating Revenues
The following table sets forth our total operating revenues and carloads for the three months ended June 30, 2019 and 2018 . The table below also reflects the calculation of our existing operations by subtracting the 2018 revenues and carloads of the divested operations of ERS and the leased railroads in Canada that we ceased operating at the end of 2018, from our total operations for the three months ended June 30, 2018 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease) in Total Operations
 
Increase/(Decrease) in Existing Operations
 
Currency Impact on 2018 Total Operations*
 
Currency Impact on 2018 Existing Operations*
 
2019
 
2018
 
 
 
 
 
 
Total Operations
 
Divested Operations
 
Existing Operations
 
Amount
 
%
 
Amount
 
%
 
 
Freight revenues
$
397,681

 
$
418,232

 
$
10,407

 
$
407,825

 
$
(20,551
)
 
(4.9
)%
 
$
(10,144
)
 
(2.5
)%
 
$
(10,885
)
 
$
(10,286
)
Freight-related revenues
142,396

 
142,402

 
4,152

 
138,250

 
(6
)
 
 %
 
4,146

 
3.0
 %
 
(4,876
)
 
(4,646
)
All other revenues
31,403

 
34,356

 
432

 
33,924

 
(2,953
)
 
(8.6
)%
 
(2,521
)
 
(7.4
)%
 
(1,143
)
 
(1,128
)
Total operating revenues
$
571,480

 
$
594,990

 
$
14,991

 
$
579,999

 
$
(23,510
)
 
(4.0
)%
 
$
(8,519
)
 
(1.5
)%
 
$
(16,904
)
 
$
(16,060
)
Carloads
766,355

 
834,363

 
29,502

 
804,861

 
(68,008
)
 
(8.2
)%
 
(38,506
)
 
(4.8
)%
 
 
 
 
* Currency impact was calculated by comparing the 2018 results translated from local currency to United States dollars using 2019 exchange rates to the 2018 results in United States dollars as reported.

38


Operating Expenses
Total operating expenses for the three months ended June 30, 2019 decreased $14.6 million , or 3.0% , to $477.3 million , compared with $491.9 million for the three months ended June 30, 2018 . The decrease consisted of $14.2 million from divested operations and $0.4 million from existing operations. Excluding a $14.3 million benefit from the net depreciation of foreign currencies relative to the United States dollar, operating expenses from existing operations increased $13.9 million , or 3.0% . The increase from existing operations included increases of $5.9 million in other expense, $5.8 million in labor and benefits expense, $3.9 million in purchased services expense, $2.1 million in depreciation and amortization expense and $1.7 million in net gain on the sale and impairment of assets, partially offset by decreases of $1.9 million in the cost of diesel fuel used in train operations, $1.3 million in restructuring and related costs and $1.1 million in equipment rents expense.
The following table sets forth our total operating expenses for the three months ended June 30, 2019 and 2018 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Currency
Impact
 
2018 Constant Currency*
 
Increase/(Decrease)Constant Currency*
 
2019
 
2018
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
Labor and benefits
$
179,943

 
31.4
%
 
$
179,838

 
30.2
 %
 
$
105

 
$
(4,637
)
 
$
175,201

 
$
4,742

Equipment rents
32,010

 
5.6
%
 
34,802

 
5.9
 %
 
(2,792
)
 
(1,263
)
 
33,539

 
(1,529
)
Purchased services
54,034

 
9.5
%
 
61,045

 
10.3
 %
 
(7,011
)
 
(2,875
)
 
58,170

 
(4,136
)
Depreciation and amortization
62,517

 
10.9
%
 
65,745

 
11.0
 %
 
(3,228
)
 
(1,889
)
 
63,856

 
(1,339
)
Diesel fuel used in train operations
41,504

 
7.3
%
 
45,623

 
7.7
 %
 
(4,119
)
 
(1,513
)
 
44,110

 
(2,606
)
Electricity used in train operations
2,226

 
0.4
%
 
2,044

 
0.3
 %
 
182

 
(113
)
 
1,931

 
295

Casualties and insurance
11,839

 
2.1
%
 
12,984

 
2.2
 %
 
(1,145
)
 
(206
)
 
12,778

 
(939
)
Materials
31,294

 
5.5
%
 
32,376

 
5.4
 %
 
(1,082
)
 
(1,185
)
 
31,191

 
103

Trackage rights
21,727

 
3.8
%
 
23,303

 
3.9
 %
 
(1,576
)
 
(775
)
 
22,528

 
(801
)
Net gain on sale and impairment of assets
980

 
0.2
%
 
(823
)
 
(0.1
)%
 
1,803

 
(14
)
 
(837
)
 
1,817

Restructuring and related costs
7,561

 
1.3
%
 
9,362

 
1.6
 %
 
(1,801
)
 
(481
)
 
8,881

 
(1,320
)
Other expenses, net
31,645

 
5.5
%
 
25,566

 
4.3
 %
 
6,079

 
(78
)
 
25,488

 
6,157

Total operating expenses
$
477,280

 
83.5
%
 
$
491,865

 
82.7
 %
 
$
(14,585
)
 
$
(15,029
)
 
$
476,836

 
$
444

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Operating Income/Operating Ratio
Operating income was $94.2 million for the three months ended June 30, 2019 , compared with $103.1 million for the three months ended June 30, 2018 . Operating income for the three months ended June 30, 2019 included restructuring and related costs of $7.6 million , primarily driven by our optimization activities in the U.K., $2.6 million of expense associated with amending an enterprise bargaining agreement in Australia, corporate development and related costs of $2.4 million and a $1.0 million net loss on the sale and impairment of certain assets in North America. Operating income for the three months ended June 30, 2018 included restructuring and related costs of $9.4 million and corporate development and related costs of $0.4 million . Our operating ratio was 83.5% for the three months ended June 30, 2019 , compared with 82.7% for the three months ended June 30, 2018 .
Interest Expense
Interest expense was $27.4 million for the three months ended June 30, 2019 , compared with $28.9 million for the three months ended June 30, 2018 . The decrease in interest expense for the three months ended June 30, 2019 was primarily driven by the write-off of deferred financing fees associated with our credit facility refinancing in June 2018.

39


Provision for Income Taxes
Our provision for income taxes for the three months ended June 30, 2019 was $18.9 million compared with $26.4 million for the three months ended June 30, 2018 . Our effective income tax rate for the three months ended June 30, 2019 was 26.9% . Based on developments during the three months ended June 30, 2018, we recorded a reserve for uncertain tax positions of $4.8 million related to tax deductions on intercompany financing arrangements in the U.K., of which $0.7 million related to the three months ended June 30, 2018, $0.4 million related to the three months ended March 31, 2018 and $3.7 million related to the period from March 25, 2015, the date of the Freightliner acquisition when the arrangements were established, through December 31, 2017. The reserve for uncertain tax positions was included in our provision for income taxes for the three months ended June 30, 2018 . Excluding the prior period portion of the reserve for uncertain tax positions, our effective income tax rate for the three months ended June 30, 2018 was 29.8% . For additional information regarding income taxes, see Note 9 , 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 three months ended June 30, 2019 was $51.4 million , compared with $44.2 million for the three months ended June 30, 2018 . Our basic EPS were $0.91 with 56.5 million weighted average shares outstanding for the three months ended June 30, 2019 , compared with basic EPS of $0.74 with 60.0 million weighted average shares outstanding for the three months ended June 30, 2018 . Our diluted EPS for the three months ended June 30, 2019 were $0.90 with 57.3 million weighted average shares outstanding, compared with diluted EPS of $0.73 with 60.9 million weighted average shares outstanding for the three months ended June 30, 2018 . Our results for the three months ended June 30, 2019 and 2018 included certain items affecting comparability between the periods as previously presented in the "Overview—Overview of Three-Month Results—Items Affecting Comparability."
Net Loss/Income Attributable to Noncontrolling Interest
We own a 51.1% controlling interest in our Australian Operations. As such, we include 100% of the revenues and expenses from our Australian Operations within our consolidated financial statements and report a noncontrolling interest for MIRA’s 48.9% equity ownership. Net loss attributable to noncontrolling interest for the three months ended June 30, 2019 was $0.1 million , compared with net income attributable to noncontrolling interest of $4.4 million for three months ended June 30, 2018 .
Operating Results by Segment
Our various rail operations are organized into eight operating regions. We present our financial information as three reportable segments: North American Operations, Australian Operations and U.K./European Operations. Our six North American regions are aggregated into one segment as a result of having similar economic and operating characteristics. Each of our segments generates the following three categories of revenues from external customers: freight revenues, freight-related revenues and all other revenues.
North American Operations
Operating Revenues
The following table sets forth our North American Operations total operating revenues and carloads for the three months ended June 30, 2019 and 2018 . The table also reflects the calculation of our existing operations by subtracting the 2018 revenues and carloads from the Canadian leases that expired at the end of 2018 from our total operations for the three months ended June 30, 2018 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease) in Total Operations
 
Increase/(Decrease) in Existing Operations
 
Currency Impact on 2018 Total Operations*
 
Currency Impact on 2018 Existing Operations*
 
2019
 
2018
 
 
 
 
 
 
Total Operations
 
Divested Operations
 
Existing Operations
 
Amount
 
%
 
Amount
 
%
 
 
Freight revenues
$
259,181

 
$
259,868

 
$
3,733

 
$
256,135

 
$
(687
)
 
(0.3
)%
 
$
3,046

 
1.2
 %
 
$
(645
)
 
$
(518
)
Freight-related revenues
66,135

 
63,467

 
1,467

 
62,000

 
2,668

 
4.2
 %
 
4,135

 
6.7
 %
 
(224
)
 
(171
)
All other revenues
16,531

 
16,222

 
423

 
15,799

 
309

 
1.9
 %
 
732

 
4.6
 %
 
(91
)
 
(77
)
Total operating revenues
$
341,847

 
$
339,557

 
$
5,623

 
$
333,934

 
$
2,290

 
0.7
 %
 
$
7,913

 
2.4
 %
 
$
(960
)
 
$
(766
)
Carloads
406,895

 
430,353

 
8,679

 
421,674

 
(23,458
)
 
(5.5
)%
 
(14,779
)
 
(3.5
)%
 
 
 
 
*
Currency impact was calculated by comparing the 2018 results translated from local currency to United States dollars using 2019 exchange rates to the 2018 results in United States dollars as reported.

40


Freight Revenues
The following table sets forth our North American Operations total freight revenues for the three months ended June 30, 2019 and 2018 . The table below also reflects the calculation of our existing operations by subtracting the 2018 revenues and carloads from the Canadian leases that expired at the end of 2018 from our total operations for the three months ended June 30, 2018 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease) in Existing Operations
 
Currency Impact on Existing Operations
 
2018 Constant Currency Existing Operations*
 
Increase/(Decrease) in Existing Operations Constant Currency*
 
2019
 
2018
 
 
 
 
Commodity Group
 
Total Operations
 
Divested Operations
 
Existing Operations
 
 
 
 
Agricultural Products
$
32,846

 
$
29,693

 
$
458

 
$
29,235

 
$
3,611

 
$
(24
)
 
$
29,211

 
$
3,635

Autos & Auto Parts
6,084

 
5,806

 
301

 
5,505

 
579

 
(26
)
 
5,479

 
605

Chemicals & Plastics
39,813

 
38,972

 
775

 
38,197

 
1,616

 
(87
)
 
38,110

 
1,703

Coal & Coke
18,563

 
19,087

 

 
19,087

 
(524
)
 
(34
)
 
19,053

 
(490
)
Food & Kindred Products
8,801

 
8,476

 
186

 
8,290

 
511

 
(2
)
 
8,288

 
513

Intermodal
523

 
380

 

 
380

 
143

 

 
380

 
143

Lumber & Forest Products
23,519

 
23,810

 
109

 
23,701

 
(182
)
 
(40
)
 
23,661

 
(142
)
Metallic Ores
2,865

 
3,670

 
1

 
3,669

 
(804
)
 
(28
)
 
3,641

 
(776
)
Metals
29,055

 
32,493

 
589

 
31,904

 
(2,849
)
 
(57
)
 
31,847

 
(2,792
)
Minerals & Stone
38,597

 
38,034

 
268

 
37,766

 
831

 
(31
)
 
37,735

 
862

Petroleum Products
17,053

 
16,151

 
717

 
15,434

 
1,619

 
(40
)
 
15,394

 
1,659

Pulp & Paper
28,013

 
29,514

 
41

 
29,473

 
(1,460
)
 
(127
)
 
29,346

 
(1,333
)
Waste
7,964

 
7,339

 
66

 
7,273

 
691

 
(3
)
 
7,270

 
694

Other
5,485

 
6,443

 
222

 
6,221

 
(736
)
 
(19
)
 
6,202

 
(717
)
Total
$
259,181

 
$
259,868

 
$
3,733

 
$
256,135

 
$
3,046

 
$
(518
)
 
$
255,617

 
$
3,564

*     Constant currency amounts reflect the prior period existing operations translated at the current period exchange rates.
The following table sets forth our North American Operations freight revenues, carloads and average freight revenues per carload for the three months ended June 30, 2019 and 2018 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
 
2019
 
2018 Constant Currency*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2019
 
2018
 
2019
 
2018
 
2018 Constant Currency*
Agricultural Products
$
32,846

 
12.7
%
 
$
29,653

 
11.4
%
 
56,134

 
51,762

 
$
585

 
$
574

 
$
573

Autos & Auto Parts
6,084

 
2.3
%
 
5,769

 
2.2
%
 
9,041

 
9,106

 
673

 
638

 
634

Chemicals & Plastics
39,813

 
15.3
%
 
38,858

 
15.0
%
 
44,376

 
45,285

 
897

 
861

 
858

Coal & Coke
18,563

 
7.2
%
 
19,053

 
7.4
%
 
48,140

 
59,346

 
386

 
322

 
321

Food & Kindred Products
8,801

 
3.4
%
 
8,468

 
3.3
%
 
14,699

 
14,907

 
599

 
569

 
568

Intermodal
523

 
0.2
%
 
380

 
0.1
%
 
3,984

 
3,816

 
131

 
100

 
100

Lumber & Forest Products
23,519

 
9.1
%
 
23,765

 
9.2
%
 
35,140

 
37,733

 
669

 
631

 
630

Metallic Ores
2,865

 
1.1
%
 
3,642

 
1.4
%
 
3,813

 
4,448

 
751

 
825

 
819

Metals
29,055

 
11.2
%
 
32,418

 
12.5
%
 
34,860

 
40,806

 
833

 
796

 
794

Minerals & Stone
38,597

 
14.9
%
 
37,994

 
14.7
%
 
62,005

 
62,156

 
622

 
612

 
611

Petroleum Products
17,053

 
6.6
%
 
16,085

 
6.2
%
 
23,811

 
24,340

 
716

 
664

 
661

Pulp & Paper
28,013

 
10.8
%
 
29,386

 
11.3
%
 
37,943

 
41,762

 
738

 
707

 
704

Waste
7,964

 
3.1
%
 
7,334

 
2.8
%
 
15,331

 
14,837

 
519

 
495

 
494

Other
5,485

 
2.1
%
 
6,418

 
2.5
%
 
17,618

 
20,049

 
311

 
321

 
320

Total
$
259,181

 
100.0
%
 
$
259,223

 
100.0
%
 
406,895

 
430,353

 
$
637

 
$
604

 
$
602

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

41


Total traffic from our North American Operations decreased 23,458 carloads, or 5.5% , to 406,895 carloads for the three months ended June 30, 2019 , compared with the three months ended June 30, 2018 . Excluding traffic from the two railroad leases in Canada that expired at the end of 2018, existing operations traffic decreased 14,779 carloads, or 3.5% . The decrease in traffic from existing operations included decreases of 11,206 carloads of coal and coke traffic, 4,221 carloads of metals traffic, 3,734 carloads of pulp and paper traffic, 2,307 carloads of lumber and forest products traffic and 1,683 carloads of other commodity traffic, partially offset by increases of 5,418 carloads of agricultural products traffic and 1,015 carloads of chemicals and plastics traffic. All remaining traffic increased by a net 1,939 carloads.
Changes in average freight revenues per carload in a commodity group may be impacted by changes in customer rates, fuel surcharges, commodity mix and the mix of customer traffic within a commodity group. Excluding a 0.3% impact of foreign currency, average freight revenues per carload from our North American Operations increased 5.8% to $637 for the three months ended June 30, 2019 , compared with the same period in 2018 . Average freight revenues per carload from existing operations, excluding the impact of foreign currency, increased 5.1% for the three months ended June 30, 2019 , compared with the same period in 2018 . The increase in average freight revenues per carload was impacted by a change in the mix of commodities, which increased average freight revenues per carload by 0.7%, and higher fuel surcharges, which increased average freight revenues per carload by 0.6%. Excluding these factors, average freight revenues per carload increased 3.8%.
The following information discusses the significant changes in our North American Operations freight revenues by commodity group excluding the impact of foreign currency and the Canadian leases that expired at the end of 2018.
Agricultural products revenues increased $3.6 million , or 12.4% . Agricultural products traffic increased 5,418 carloads, or 10.7%, which increased revenues by $3.2 million, and average freight revenues per carload increased 1.6%, which increased revenues by $0.4 million. The increase in carloads was primarily due to increased farm products shipments in the western United States and grain shipments in the midwestern United States.
Chemicals and plastics revenues increased $1.7 million , or 4.5% . Chemicals and plastics traffic increased 1,015 carloads, or 2.3%, which increased revenues by $0.9 million, and average freight revenues per carload increased 2.0%, which increased revenues by $0.8 million. The increase in carloads was primarily due to an increase in industrial chemical shipments in the western United States.
Coal and coke revenues decreased $0.5 million , or 2.6% . Coal and coke traffic decreased 11,206 carloads, or 18.9%, which decreased revenues by $4.3 million, while average freight revenues per carload increased 20.2%, which increased revenues by $3.8 million. The decrease in carloads was primarily due to decreased demand in the southern United States primarily associated with low natural gas prices, high inventory levels and mild temperatures as well as decreased coal shipments in the midwestern United States due to flooding, partially offset by increased demand in the northeastern United States primarily associated with new business. The increase in average freight revenues per carload was primarily due to stronger pricing and a change in the mix of business.
Metals revenues decreased $2.8 million , or 8.8% . Metals traffic decreased 4,221 carloads, or 10.8%, which decreased revenues by $3.5 million, while average freight revenues per carload increased 2.2%, which increased revenues by $0.7 million. The decrease in carloads was primarily due to decreased scrap and finished steel shipments across the United States, decreased pipe shipments in the northeastern and midwestern United States and decreased pig iron shipments in the southern and midwestern United States.
Minerals and stone revenues increased $0.9 million , or 2.3% . Minerals and stone traffic increased 704 carloads, or 1.0%, which increased revenues $0.4 million, and average freight per carload increased 1.0%, which increased revenues by $0.4 million. The increase in average freight per carload and traffic was primarily due to new business and strong demand for rock salt and frac sand in the northeastern United States, partially offset by a decrease in bentonite and clay shipments due to flooding in the midwestern and southern United States.
Petroleum products revenues increased $1.7 million , or 10.8% . Petroleum products average freight revenues per carload increased 9.6%, which increased revenues by $1.5 million, and traffic increased 233 carloads, or 1.0%, which increased revenues by $0.2 million. The increase in average freight revenues per carload was primarily due to stronger pricing and a change in the mix of business.
Pulp and paper revenues decreased $1.3 million , or 4.5% . Pulp and paper traffic decreased 3,734 carloads, or 9.0%, which decreased revenues by $2.8 million, while average freight revenues per carload increased 4.8%, which increased revenues by $1.5 million. The decrease in carloads was primarily due to decreased containerboard shipments across North America.
Freight revenues from all remaining commodities combined increased by $0.3 million .

42


Freight-Related Revenues
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, were $66.1 million for the three months ended June 30, 2019 , compared with $63.5 million for the three months ended June 30, 2018 , an increase of $2.7 million , or 4.2% . Excluding a decrease of $1.5 million in revenues from leased railroads in Canada that we ceased operating at the end of 2018, and a $0.2 million decrease due to the impact of foreign currency depreciation, freight-related revenues from our North American Operations increased $4.3 million , or 7.0% , for the three months ended June 30, 2019 , compared with $61.8 million for the three months ended June 30, 2018 . The increase was primarily due to increased switching and storage revenues in the southeastern United States and increased demurrage revenues in the midwestern United States.
All Other Revenues
All other revenues from our North American 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, were $16.5 million for the three months ended June 30, 2019 , compared with $16.2 million for the three months ended June 30, 2018 , an increase of $0.3 million , or 1.9% . Excluding a decrease of $0.4 million in revenues from the Canadian leases that expired at the end of 2018 and a $0.1 million decrease due to the impact of foreign currency depreciation, all other revenues from our North American Operations increased $0.8 million , or 5.1% , for the three months ended June 30, 2019 , compared with $15.7 million for the three months ended June 30, 2018 .
Operating Expenses
Total operating expenses from our North American Operations decreased $1.7 million , or 0.7% , to $257.6 million for the three months ended June 30, 2019 , compared with $259.3 million for the three months ended June 30, 2018 . The decrease included a $5.7 million decrease in expenses from the two leased railroads in Canada that we ceased operating at the end of 2018, and a $0.9 million decrease due to the impact of foreign currency depreciation, partially offset by a $4.9 million increase from existing operations. The increase from existing operations included increases of $2.7 million in purchased services expense, $1.7 million in net loss on sale and impairment of assets, $1.5 million in materials expense and $1.1 million in depreciation and amortization expense, partially offset by decreases of $1.2 million in equipment rent expense and $1.1 million in casualties and insurance expense. The following table sets forth operating expenses from our North American Operations for the three months ended June 30, 2019 and 2018 (dollars in thousands):  
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Currency
Impact
 
2018 Constant Currency*
 
Increase/(Decrease) Constant Currency*
 
2019
 
2018
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
 
Labor and benefits
$
108,458

 
31.7
%
 
$
109,289

 
32.2
 %
 
$
(831
)
 
$
(326
)
 
$
108,963

 
$
(505
)
Equipment rents
12,257

 
3.6
%
 
13,633

 
4.0
 %
 
(1,376
)
 
(41
)
 
13,592

 
(1,335
)
Purchased services
16,821

 
4.9
%
 
14,652

 
4.3
 %
 
2,169

 
(56
)
 
14,596

 
2,225

Depreciation and amortization
38,738

 
11.3
%
 
41,247

 
12.2
 %
 
(2,509
)
 
(225
)
 
41,022

 
(2,284
)
Diesel fuel used in train operations
21,672

 
6.4
%
 
23,253

 
6.8
 %
 
(1,581
)
 
(105
)
 
23,148

 
(1,476
)
Casualties and insurance
8,978

 
2.6
%
 
10,156

 
3.0
 %
 
(1,178
)
 
(11
)
 
10,145

 
(1,167
)
Materials
14,551

 
4.3
%
 
13,163

 
3.9
 %
 
1,388

 
(51
)
 
13,112

 
1,439

Trackage rights
10,906

 
3.2
%
 
10,527

 
3.1
 %
 
379

 
(7
)
 
10,520

 
386

Net loss/(gain) on sale and impairment of assets
1,037

 
0.3
%
 
(706
)
 
(0.2
)%
 
1,743

 

 
(706
)
 
1,743

Restructuring and related costs
641

 
0.2
%
 
7

 
 %
 
634

 

 
7

 
634

Other expenses, net
23,527

 
6.9
%
 
24,062

 
7.1
 %
 
(535
)
 
(62
)
 
24,000

 
(473
)
Total operating expenses
$
257,586

 
75.4
%
 
$
259,283

 
76.4
 %
 
$
(1,697
)
 
$
(884
)
 
$
258,399

 
$
(813
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
The following information discusses the significant changes in operating expenses of our North American Operations excluding a decrease of $0.9 million due to the impact from foreign currency depreciation .
Equipment rents expense was $12.3 million for the three months ended June 30, 2019 , compared with $13.6 million for the three months ended June 30, 2018 , a decrease of $1.3 million , or 9.8% . The decrease was primarily due to decreased car hire expense from existing operations.

43


Purchased services expense was $16.8 million for the three months ended June 30, 2019 , compared with $14.6 million for the three months ended June 30, 2018 , an increase of $2.2 million , or 15.2% . The increase consisted of $2.7 million from existing operations, partially offset by a decrease of $0.5 million from the expired Canadian leases. The increase in existing operations was primarily due to increases in track maintenance expense in 2019.
Depreciation and amortization expense was $38.7 million for the three months ended June 30, 2019 , compared with $41.0 million for the three months ended June 30, 2018 , a decrease of $2.3 million , or 5.6% . The decrease consisted of $3.4 million from the expired Canadian leases, partially offset by an increase of $1.1 million from existing operations. The increase from existing operations was primarily attributable to a larger depreciable asset base in 2019 compared with 2018, reflecting capital spending in 2018.
The cost of diesel fuel used in train operations was $21.7 million for the three months ended June 30, 2019 , compared with $23.1 million for the three months ended June 30, 2018 , a decrease of $1.5 million , or 6.4% . The decrease consisted of $0.8 million from existing operations and $0.7 million from the expired Canadian leases.
Casualties and insurance expense was $9.0 million for the three months ended June 30, 2019 , compared with $10.1 million for the three months ended June 30, 2018 , a decrease of $1.2 million , or 11.5% . The decrease was primarily attributable to decreased derailment expenses in 2019.
Materials expense was $14.6 million for the three months ended June 30, 2019 , compared with $13.1 million for the three months ended June 30, 2018 , an increase of $1.4 million , or 11.0% . The increase was primarily due to an increase in track maintenance expense in 2019.
Net loss on the sale and impairment of assets was $1.0 million for the three months ended June 30, 2019 , compared with a net gain on the sale and impairment of assets of $0.7 million for the three months ended June 30, 2018 , an increase of $1.7 million . The net loss in the three months ended June 30, 2019 was primarily attributable to the impairment of assets related to the expiration of a lease of a rail line in the southeastern United States, partially offset by a gain on the sale of land in the northeastern United States.
Operating Income/Operating Ratio
Operating income from our North American Operations was $84.3 million for the three months ended June 30, 2019 , compared with $80.3 million for the three months ended June 30, 2018 . Operating income for the three months ended June 30, 2019 included corporate development and related costs of $2.3 million , net loss on the sale and impairment of certain assets in United States of $1.0 million and restructuring and related costs of $0.6 million . Operating income for the three months ended June 30, 2018 included credit facility refinancing-related costs of $0.4 million and corporate development and related costs of $0.3 million . The operating ratio was 75.4% for the three months ended June 30, 2019 , compared with 76.4% for the three months ended June 30, 2018 .
Australian Operations
Operating Revenues
As previously disclosed, we own a controlling 51.1% interest in our Australian Operations, and therefore, we include 100% of our Australian Operations 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 for the three months ended June 30, 2019 and 2018 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease) in Total Operations
 
Currency Impact on 2018 Total Operations*
 
2019
 
2018
 
Amount
 
%
 
Freight revenues
$
56,923

 
$
66,075

 
$
(9,152
)
 
(13.9
)%
 
$
(4,960
)
Freight-related revenues
8,036

 
11,515

 
(3,479
)
 
(30.2
)%
 
(866
)
All other revenues
1,572

 
1,439

 
133

 
9.2
 %
 
(108
)
Total operating revenues
$
66,531

 
$
79,029

 
$
(12,498
)
 
(15.8
)%
 
$
(5,934
)
Carloads
134,395

 
147,965

 
(13,570
)
 
(9.2
)%
 
 
*
Currency impact was calculated by comparing the 2018 results translated from local currency to United States dollars using 2019 exchange rates to the 2018 results in United States dollars as reported.

44


Freight Revenues
The following table sets forth the changes in our Australian Operations freight revenues by commodity group for the three months ended June 30, 2019 and 2018 (dollars in thousands):  
 
Three Months Ended June 30,
 
Increase/(Decrease) in Total Operations
 
Currency Impact
 
2018 Constant Currency*
 
Increase/(Decrease) in Total Operations Constant Currency*
 
 
 
 
 
Commodity Group
2019
 
2018
 
 
 
 
Agricultural Products
$
2,999

 
$
6,006

 
$
(3,007
)
 
$
(451
)
 
$
5,555

 
$
(2,556
)
Coal & Coke
28,965

 
32,570

 
(3,605
)
 
(2,445
)
 
30,125

 
(1,160
)
Intermodal
15,459

 
17,102

 
(1,643
)
 
(1,284
)
 
15,818

 
(359
)
Metallic Ores
7,523

 
8,125

 
(602
)
 
(610
)
 
7,515

 
8

Minerals & Stone
1,817

 
2,087

 
(270
)
 
(157
)
 
1,930

 
(113
)
Petroleum Products
160

 
185

 
(25
)
 
(13
)
 
172

 
(12
)
Total
$
56,923

 
$
66,075

 
$
(9,152
)
 
$
(4,960
)
 
$
61,115

 
$
(4,192
)
*     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 three months ended June 30, 2019 and 2018 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
 
2019
 
2018 Constant Currency*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2019
 
2018
 
2019
 
2018
 
2018 Constant Currency*
Agricultural Products
$
2,999

 
5.3
%
 
$
5,555

 
9.1
%
 
4,224

 
14,175

 
$
710

 
$
424

 
$
392

Coal & Coke
28,965

 
50.9
%
 
30,125

 
49.3
%
 
96,749

 
97,282

 
299

 
335

 
310

Intermodal
15,459

 
27.1
%
 
15,818

 
25.9
%
 
13,294

 
13,957

 
1,163

 
1,225

 
1,133

Metallic Ores
7,523

 
13.2
%
 
7,515

 
12.3
%
 
5,272

 
5,586

 
1,427

 
1,455

 
1,345

Minerals & Stone
1,817

 
3.2
%
 
1,930

 
3.1
%
 
14,791

 
16,891

 
123

 
124

 
114

Petroleum Products
160

 
0.3
%
 
172

 
0.3
%
 
65

 
74

 
2,462

 
2,500

 
2,324

Total
$
56,923

 
100.0
%
 
$
61,115

 
100.0
%
 
134,395

 
147,965

 
$
424

 
$
447

 
$
413

*     Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our Australian Operations decreased 13,570 carloads, or 9.2% , to 134,395 carloads for the three months ended June 30, 2019 , compared with the three months ended June 30, 2018 . The traffic decrease was primarily due to decreases of 9,951 carloads of agricultural products traffic and 2,100 carloads of minerals and stone traffic. All remaining traffic decreased by a net 1,519 carloads.
Changes in average freight revenues per carload in a commodity group may be impacted by changes in customer rates, fuel surcharges, commodity mix and the mix of customer traffic within a commodity group. Excluding a 7.8% impact of foreign currency, average freight revenues per carload from our Australian Operations increased 2.7% to $424 for the three months ended June 30, 2019 , compared with the same period in 2018 . A change in the mix of commodities decreased average freight revenues per carload by 4.8%, while higher fuel surcharges increased average freight revenues per carload by 0.3%. Excluding these factors, average freight revenues per carload increased 7.2%.
The following information discusses the significant changes in our Australian Operations freight revenues by commodity group excluding the impact of foreign currency.
Agricultural products revenues decreased $2.6 million , or 46.0% . Agricultural products traffic decreased 9,951 carloads, or 70.2%, which decreased revenues by $7.1 million, while average freight revenues per carload increased 81.1%, which increased revenues by $4.5 million. The carload decrease was primarily due to a smaller grain harvest in 2019. The decrease in grain traffic resulted in higher average freight revenues per carload, primarily due to the rate structure for Australian grain traffic, which has both a fixed and variable component.

45


Coal and coke revenues decreased $1.2 million , or 3.9% . Coal and coke average freight revenues per carload decreased 3.5%, which decreased revenues by $1.0 million, and traffic decreased 533 carloads, or 0.5%, which decreased revenues by $0.2 million. The decrease in average freight revenues per carload was primarily due to lower spot coal revenue in 2019.
Freight revenues from all remaining commodities decreased by a net $0.5 million .
Freight-Related Revenues
Excluding a $0.9 million decrease due to the impact of foreign currency depreciation, freight-related revenues from our Australian Operations, which includes revenues from railcar switching, track access rights, crewing services, storage and other ancillary revenues related to the movement of freight, decreased $2.6 million , or 24.5% , to $8.0 million for the three months ended June 30, 2019 , compared with $10.6 million for the three months ended June 30, 2018 . The decrease was primarily due to switching competition and prolonged drought conditions in 2019.
All Other Revenues
All other revenues from our Australian Operations for the three months ended June 30, 2019 , which includes revenues from third-party railcar and locomotive repairs, property rentals and other ancillary revenues not directly related to the movement of freight, remained relatively flat compared with the three months ended June 30, 2018 .
Operating Expenses
Total operating expenses from our Australian Operations for the three months ended June 30, 2019 increased $1.7 million , or 3.3% , to $54.9 million , compared with $53.1 million for the three months ended June 30, 2018 . The operating expenses for the three months ended June 30, 2018 included a $6.3 million gain on settlement related to Arrium's voluntary administration that was recognized as an offset to other expenses, net. The operating expenses for the three months ended June 30, 2019 included $2.6 million of expense associated with amending an enterprise bargaining agreement, partially offset by decreases in purchased services expense, trackage rights expense and the cost of diesel fuel used in train operations. In addition, operating expenses included a $4.0 million decrease due to the impact of foreign currency depreciation for the three months ended June 30, 2019 compared with the three months ended June 30, 2018 .
The following table sets forth operating expenses from our Australian Operations for the three months ended June 30, 2019 and 2018 (dollars in thousands):  
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Currency Impact
 
2018 Constant Currency*
 
Increase/(Decrease)
Constant Currency*
 
2019
 
2018
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
 
Labor and benefits
$
19,462

 
29.3
 %
 
$
18,886

 
23.9
 %
 
$
576

 
$
(1,417
)
 
$
17,469

 
$
1,993

Equipment rents
827

 
1.2
 %
 
1,183

 
1.5
 %
 
(356
)
 
(89
)
 
1,094

 
(267
)
Purchased services
5,451

 
8.2
 %
 
6,895

 
8.7
 %
 
(1,444
)
 
(518
)
 
6,377

 
(926
)
Depreciation and amortization
14,192

 
21.3
 %
 
15,288

 
19.4
 %
 
(1,096
)
 
(1,147
)
 
14,141

 
51

Diesel fuel used in train operations
6,962

 
10.5
 %
 
8,173

 
10.3
 %
 
(1,211
)
 
(614
)
 
7,559

 
(597
)
Casualties and insurance
1,573

 
2.4
 %
 
1,766

 
2.2
 %
 
(193
)
 
(131
)
 
1,635

 
(62
)
Materials
2,693

 
4.0
 %
 
2,761

 
3.5
 %
 
(68
)
 
(207
)
 
2,554

 
139

Trackage rights
1,576

 
2.4
 %
 
2,364

 
3.0
 %
 
(788
)
 
(178
)
 
2,186

 
(610
)
Net gain on sale and impairment of assets
(42
)
 
(0.1
)%
 
(67
)
 
(0.1
)%
 
25

 
5

 
(62
)
 
20

Restructuring and related costs
137

 
0.2
 %
 

 
 %
 
137

 

 

 
137

Other expenses, net
2,045

 
3.1
 %
 
(4,116
)
 
(5.2
)%
 
6,161

 
296

 
(3,820
)
 
5,865

Total operating expenses
$
54,876

 
82.5
 %
 
$
53,133

 
67.2
 %
 
$
1,743

 
$
(4,000
)
 
$
49,133

 
$
5,743

* 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 $4.0 million decrease from the impact of foreign currency depreciation.
Labor and benefits expense was $19.5 million for the three months ended June 30, 2019 , compared with $17.5 million for the three months ended June 30, 2018 , an increase of $2.0 million , or 11.4% . The increase was primarily due to $2.6 million of expense associated with amending an enterprise bargaining agreement.

46


Other expenses, net were $2.0 million for the three months ended June 30, 2019 , compared with a net gain of $3.8 million for the three months ended June 30, 2018 . The three months ended June 30, 2018 included a $6.3 million gain on settlement related to Arrium's voluntary administration.
Operating Income/Operating Ratio
Our Australian Operations had operating income of $11.7 million for the three months ended June 30, 2019 , compared with $25.9 million for the three months ended June 30, 2018 . Operating income for the three months ended June 30, 2019 included $0.1 million of restructuring and related costs. The operating ratio was 82.5% for the three months ended June 30, 2019 , compared with 67.2% for the three months ended June 30, 2018 . Operating income from our Australian Operations was negatively impacted by $1.9 million from foreign currency depreciation, a decrease in grain volumes due to drought conditions in South Australia and New South Wales as well as $2.6 million of expense associated with amending an enterprise bargaining agreement . The operating income for the three months ended June 30, 2018 included a gain on settlement of $6.3 million from the recovery of pre-petition claims associated with Arrium's voluntary administration (bankruptcy) in the second quarter of 2016.
U.K./European Operations
Operating Revenues
The following table sets forth our U.K./European Operations total operating revenues for the three months ended June 30, 2019 and 2018 . The table below also reflects the calculation of our U.K./European Operations existing operations by subtracting the revenues and carloads from the divested ERS operations from our U.K./European Operations total operations for the three months ended June 30, 2018 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease) in Total Operations
 
Increase/(Decrease) in Existing Operations
 
Currency Impact on 2018 Total Operations*
 
Currency Impact on 2018 Existing Operations*
 
2019
 
2018
 
 
 
 
 
 
Total Operations
 
Divested Operations
 
Existing Operations
 
Amount
 
%
 
Amount
 
%
 
 
Freight revenues
$
81,577

 
$
92,289

 
$
6,674

 
$
85,615

 
$
(10,712
)
 
(11.6
)%
 
$
(4,038
)
 
(4.7
)%
 
$
(5,280
)
 
$
(4,808
)
Freight-related revenues
68,225

 
67,420

 
2,685

 
64,735

 
805

 
1.2
 %
 
3,490

 
5.4
 %
 
(3,786
)
 
(3,609
)
All other revenues
13,300

 
16,695

 
9

 
16,686

 
(3,395
)
 
(20.3
)%
 
(3,386
)
 
(20.3
)%
 
(944
)
 
(943
)
Total operating revenues
$
163,102

 
$
176,404

 
$
9,368

 
$
167,036

 
$
(13,302
)
 
(7.5
)%
 
$
(3,934
)
 
(2.4
)%
 
$
(10,010
)
 
$
(9,360
)
Carloads
225,065

 
256,045

 
20,823

 
235,222

 
(30,980
)
 
(12.1
)%
 
(10,157
)
 
(4.3
)%
 
 
 
 
* Currency impact was calculated by comparing the 2018 results translated from local currency to United States dollars using 2019 exchange rates to the 2018 results in United States dollars as reported.
Freight Revenues
The following table sets forth our U.K./European Operations total freight revenues for the three months ended June 30, 2019 and 2018 . The table below also reflects the calculation of our U.K./European Operations existing operations by subtracting the revenues from the divested ERS operations from our U.K./European Operations total operations for the three months ended June 30, 2018 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease) in Existing Operations
 
Currency Impact on Existing Operations
 
2018 Constant Currency Existing Operations*
 
Increase/(Decrease) in Existing Operations Constant Currency*
 
2019
 
2018
 
 
 
 
Commodity Group
 
Total Operations
 
Divested Operations
 
Existing Operations
 
 
 
 
Agricultural Products
$
512

 
$
785

 
$

 
$
785

 
$
(273
)
 
$
(43
)
 
$
742

 
$
(230
)
Coal & Coke
896

 
2,687

 

 
2,687

 
(1,791
)
 
(150
)
 
2,537

 
(1,641
)
Intermodal
58,297

 
66,483

 
6,674

 
59,809

 
(1,512
)
 
(3,311
)
 
56,498

 
1,799

Minerals & Stone
21,155

 
22,326

 

 
22,326

 
(1,171
)
 
(1,304
)
 
21,022

 
133

Petroleum Products
717

 
8

 

 
8

 
709

 

 
8

 
709

Total
$
81,577

 
$
92,289

 
$
6,674

 
$
85,615

 
$
(4,038
)
 
$
(4,808
)
 
$
80,807

 
$
770

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

47



The following table sets forth our U.K./European Operations freight revenues, carloads and average freight revenues per carload for the three months ended June 30, 2019 and 2018 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
 
2019
 
2018 Constant Currency*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2019
 
2018
 
2019
 
2018
 
2018 Constant Currency*
Agricultural Products
$
512

 
0.6
%
 
$
742

 
0.8
%
 
393

 
607

 
$
1,303

 
$
1,293

 
$
1,222

Coal & Coke
896

 
1.1
%
 
2,537

 
2.9
%
 
1,655

 
4,038

 
541

 
665

 
628

Intermodal
58,297

 
71.5
%
 
62,700

 
72.1
%
 
172,966

 
201,058

 
337

 
331

 
312

Minerals & Stone
21,155

 
25.9
%
 
21,022

 
24.2
%
 
46,517

 
50,322

 
455

 
444

 
418

Petroleum Products
717

 
0.9
%
 
8

 
%
 
3,534

 
20

 
203

 
400

 
400

Total
$
81,577

 
100.0
%
 
$
87,009

 
100.0
%
 
225,065

 
256,045

 
$
362

 
$
360

 
$
340

*
Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our U.K./European Operations decreased 30,980 carloads, or 12.1% , to 225,065 carloads for the three months ended June 30, 2019 , compared with the same period in 2018 . Excluding traffic from our divested ERS operations for 2018, existing operations traffic decreased 10,157 carloads, or 4.3%. The decrease in traffic from existing operations was primarily due to decreases of 7,269 carloads of intermodal traffic, 3,805 carloads of minerals and stone traffic and 2,383 carloads of coal and coke traffic, partially offset by an increase of 3,514 carloads of petroleum products traffic. All remaining traffic decreased by a net 214 carloads.
Changes in average freight revenues per carload in a commodity group may be impacted by changes in customer rates, fuel surcharges, commodity mix and the mix of customer traffic within a commodity group. Excluding a 5.9% impact of foreign currency, average freight revenues per carload from our U.K./European Operations increased 6.5% to $362 for the three months ended June 30, 2019 , compared with the same period in 2018 . Average freight revenues per carload from existing operations, excluding the impact of foreign currency, increased 5.2% for the three months ended June 30, 2019 , compared with the same period in 2018 .
The following information discusses the significant changes in our U.K./European Operations freight revenues by commodity group excluding the impact of foreign currency and the divested ERS operations.
Coal and coke revenues decreased $1.6 million , or 64.7% . Coal and coke traffic decreased 2,383 carloads, or 59.0%, which decreased revenues by $1.3 million, and average freight revenues per carload decreased 13.7%, which decreased revenues by $0.3 million. The carload decrease was primarily due to decreased demand in the U.K.
Intermodal revenues increased $1.8 million , or 3.2% . Intermodal average freight revenues per carload increased 7.7%, which increased revenues by $4.2 million, while traffic decreased 7,269 carloads, or 4.0%, which decreased revenues by $2.4 million. The increase in average freight revenues per carload was primarily due to stronger pricing in the U.K. The decrease in carloads was primarily due to temporary rail network outages.
Freight revenues from all remaining commodities combined increased by a net $0.6 million .
Freight-Related Revenues
Freight-related revenues from our U.K./European Operations includes 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 from our U.K./European Operations also include traction services (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.

48


Freight-related revenues from our U.K./European Operations were $68.2 million for the three months ended June 30, 2019 , compared with $67.4 million for the three months ended June 30, 2018 , an increase of $0.8 million , or 1.2% . Excluding a decrease of $3.8 million due to the impact of foreign currency depreciation and $2.5 million from our divested ERS operations, freight-related revenues from our existing operations increased $7.1 million , or 11.6% , for the three months ended June 30, 2019 , compared with $61.1 million for the three months ended June 30, 2018 . The increase in freight-related revenues from our existing operations was primarily due to increased rates on trucking, switching and storage revenues and stronger trucking volumes in the U.K. as well as increased crewing services in Poland.
All Other Revenues
All other revenues from our U.K./European Operations includes revenues from container sales and conversions, third-party car and locomotive repairs, property rentals and other ancillary revenues not directly related to the movement of freight. All other revenues from our U.K./European Operations were $13.3 million for the three months ended June 30, 2019 , compared with $16.7 million for the three months ended June 30, 2018 , a decrease of $3.4 million , or 20.3% . Excluding a $0.9 million decrease due to the impact of foreign currency depreciation, all other revenues from our existing operations decreased $2.4 million , or 15.5% , for the three months ended June 30, 2019 , compared with the three months ended June 30, 2018 . The decrease in all other revenues from our existing operations was primarily due to decreased container sales.
Operating Expenses
Total operating expenses from our U.K./European Operations decreased $14.6 million , or 8.2% , to $164.8 million for the three months ended June 30, 2019 , compared with $179.4 million for the three months ended June 30, 2018 . The decrease consisted of $10.1 million due to the impact of foreign currency depreciation and $7.7 million from divested operations, partially offset by a $3.2 million increase from existing operations. The increase from existing operations included increases of $3.6 million in labor and benefits expense and $2.1 million in purchased services expense, partially offset by decreases of $2.1 million in restructuring and related costs and $1.5 million in materials expense.
The following table sets forth operating expenses from our U.K./European Operations for the three months ended June 30, 2019 and 2018 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Currency Impact
 
2018 Constant Currency*
 
Increase/(Decrease)
Constant Currency*
 
2019
 
2018
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
 
Labor and benefits
$
52,023

 
31.9
%
 
$
51,663

 
29.3
%
 
$
360

 
$
(2,894
)
 
$
48,769

 
$
3,254

Equipment rents
18,926

 
11.6
%
 
19,986

 
11.3
%
 
(1,060
)
 
(1,133
)
 
18,853

 
73

Purchased services
31,762

 
19.5
%
 
39,498

 
22.4
%
 
(7,736
)
 
(2,301
)
 
37,197

 
(5,435
)
Depreciation and amortization
9,587

 
5.9
%
 
9,210

 
5.2
%
 
377

 
(517
)
 
8,693

 
894

Diesel fuel used in train operations
12,870

 
7.9
%
 
14,197

 
8.0
%
 
(1,327
)
 
(794
)
 
13,403

 
(533
)
Electricity used in train operations
2,226

 
1.4
%
 
2,044

 
1.2
%
 
182

 
(113
)
 
1,931

 
295

Casualties and insurance
1,288

 
0.8
%
 
1,062

 
0.6
%
 
226

 
(64
)
 
998

 
290

Materials
14,050

 
8.6
%
 
16,452

 
9.3
%
 
(2,402
)
 
(927
)
 
15,525

 
(1,475
)
Trackage rights
9,245

 
5.7
%
 
10,412

 
5.9
%
 
(1,167
)
 
(590
)
 
9,822

 
(577
)
Net gain on sale and impairment of assets
(15
)
 
%
 
(50
)
 
%
 
35

 
(19
)
 
(69
)
 
54

Restructuring and related costs
6,783

 
4.1
%
 
9,355

 
5.3
%
 
(2,572
)
 
(481
)
 
8,874

 
(2,091
)
Other expenses, net
6,073

 
3.7
%
 
5,620

 
3.2
%
 
453

 
(312
)
 
5,308

 
765

Total operating expenses
$
164,818

 
101.1
%
 
$
179,449

 
101.7
%
 
$
(14,631
)
 
$
(10,145
)
 
$
169,304

 
$
(4,486
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.

49


The following information discusses the significant changes in operating expenses from our U.K./European Operations excluding a decrease of $10.1 million due to the impact of foreign currency depreciation.
Labor and benefits expense was $52.0 million for the three months ended June 30, 2019 , compared with $48.8 million for the three months ended June 30, 2018 , an increase of $3.3 million , or 6.7% . The increase consisted of $3.6 million from existing operations, partially offset by a $0.3 million decrease from our divested ERS operations. The increase from existing operations was primarily due to annual wage increases and an increase in headcount to support increased infrastructure services and new aggregate business expected to commence in the fourth quarter of 2019, partially offset by savings resulting from the U.K. operations optimization program.
Purchased services expense was $31.8 million for the three months ended June 30, 2019 , compared with $37.2 million for the three months ended June 30, 2018 , a decrease of $5.4 million , or 14.6% . The decrease consisted of $7.6 million from our divested ERS operations, partially offset by an increase of $2.1 million from existing operations. The increase from existing operations was primarily due to an increase in subcontractor costs associated with trucking activity.
Materials expense, which primarily consists of the cost 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 $14.1 million for the three months ended June 30, 2019 , compared with $15.5 million for the three months ended June 30, 2018 , a decrease of $1.5 million , or 9.5% . The decrease was primarily due to a decrease in container sales.
Restructuring and related costs for the three months ended June 30, 2019 and 2018 of $6.8 million and $8.9 million , respectively, were primarily related to our optimization activities in the U.K.
Operating Loss/Operating Ratio
Operating loss from our U.K./European Operations was $1.7 million for the three months ended June 30, 2019 , compared with an operating loss of $3.0 million for the three months ended June 30, 2018 . The operating loss for the three months ended June 30, 2019 included $6.8 million of restructuring and related costs primarily driven by our optimization activities in the U.K. The operating loss for the three months ended June 30, 2018 included $9.4 million , or $8.9 million excluding the impact of foreign currency, of restructuring and related costs. The operating ratio was 101.1% for the three months ended June 30, 2019 , compared with 101.7% for the three months ended June 30, 2018 .
Six Months Ended June 30, 2019 Compared with Six Months Ended June 30, 2018
Consolidated Operating Results
Operating Revenues
The following table sets forth our total operating revenues and carloads for the six months ended June 30, 2019 and 2018 . The table below also reflects the calculation of our existing operations by subtracting the 2018 revenues and carloads of the divested operations of ERS and the leased railroads in Canada that we ceased operating at the end of 2018, from our total operations for the six months ended June 30, 2019 and 2018 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase/(Decrease) in
Total Operations
 
Increase/(Decrease) in
Existing Operations
 
Currency Impact on 2018 Total Operations*
 
Currency Impact on 2018 Existing Operations*
 
 
 
2018
 
 
 
 
 
2019
 
Total Operations
 
Divested Operations
 
Existing Operations
 
Amount
 
%
 
Amount
 
%
 
 
Freight revenues
$
786,470

 
$
817,871

 
$
23,905

 
$
793,966

 
$
(31,401
)
 
(3.8
)%
 
$
(7,496
)
 
(0.9
)%
 
$
(24,258
)
 
$
(22,720
)
Freight-related revenues
278,658

 
283,599

 
10,325

 
273,274

 
(4,941
)
 
(1.7
)%
 
$
5,384

 
2.0
 %
 
(10,563
)
 
(9,948
)
All other revenues
64,441

 
68,181

 
958

 
67,223

 
(3,740
)
 
(5.5
)%
 
$
(2,782
)
 
(4.1
)%
 
(2,474
)
 
(2,432
)
Total operating revenues
$
1,129,569

 
$
1,169,651

 
$
35,188

 
$
1,134,463

 
$
(40,082
)
 
(3.4
)%
 
$
(4,894
)
 
(0.4
)%
 
$
(37,295
)
 
$
(35,100
)
Carloads
1,527,868

 
1,645,676

 
67,094

 
1,578,582

 
(117,808
)
 
(7.2
)%
 
(50,714
)
 
(3.2
)%
 
 
 
 
* Currency impact was calculated by comparing the 2018 results translated from local currency to United States dollars using 2019 exchange rates to the 2018 results in United States dollars as reported.

50


Operating Expenses
Total operating expenses for the six months ended June 30, 2019 decreased $24.0 million , or 2.4% , to $955.7 million , compared with $979.6 million for the six months ended June 30, 2018 . The decrease consisted of $34.0 million from divested operations, partially offset by an increase of $10.1 million from existing operations. Excluding a $31.9 million benefit from the net depreciation of foreign currencies relative to the United States dollar, operating expenses from existing operations increased $42.0 million . The increase from existing operations included increases of $13.3 million in labor and benefits expense, $8.4 million in other expenses, net, $7.2 million of purchased services expense, $6.0 million in restructuring and related costs and $4.5 million in depreciation and amortization expense.
The following table sets forth our total operating expenses for the six months ended June 30, 2019 and 2018 (dollars in thousands):  
 
Six Months Ended June 30,
 
Increase/(Decrease)
 
Currency
Impact
 
2018 Constant Currency*
 
Increase/(Decrease)
Constant Currency*
 
2019
 
2018
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
Labor and benefits
$
364,251

 
32.3
%
 
$
363,554

 
31.1
 %
 
$
697

 
$
(10,393
)
 
$
353,161

 
$
11,090

Equipment rents
64,243

 
5.7
%
 
68,889

 
5.9
 %
 
(4,646
)
 
(2,944
)
 
65,945

 
(1,702
)
Purchased services
105,282

 
9.3
%
 
125,147

 
10.7
 %
 
(19,865
)
 
(6,561
)
 
118,586

 
(13,304
)
Depreciation and amortization
125,143

 
11.1
%
 
131,735

 
11.3
 %
 
(6,592
)
 
(4,336
)
 
127,399

 
(2,256
)
Diesel fuel used in train operations
86,141

 
7.6
%
 
91,774

 
7.9
 %
 
(5,633
)
 
(3,344
)
 
88,430

 
(2,289
)
Electricity used in train operations
4,550

 
0.4
%
 
4,278

 
0.4
 %
 
272

 
(283
)
 
3,995

 
555

Casualties and insurance
23,211

 
2.1
%
 
22,950

 
2.0
 %
 
261

 
(528
)
 
22,422

 
789

Materials
62,514

 
5.5
%
 
64,845

 
5.5
 %
 
(2,331
)
 
(2,589
)
 
62,256

 
258

Trackage rights
43,367

 
3.8
%
 
44,281

 
3.8
 %
 
(914
)
 
(1,724
)
 
42,557

 
810

Net gain on sale and impairment of assets
(510
)
 
%
 
(1,859
)
 
(0.2
)%
 
1,349

 
(2
)
 
(1,861
)
 
1,351

Restructuring costs
15,195

 
1.3
%
 
9,645

 
0.8
 %
 
5,550

 
(497
)
 
9,148

 
6,047

Other expenses, net
62,272

 
5.5
%
 
54,374

 
4.6
 %
 
7,898

 
(818
)
 
53,556

 
8,716

Total operating expenses
$
955,659

 
84.6
%
 
$
979,613

 
83.8
 %
 
$
(23,954
)
 
$
(34,019
)
 
$
945,594

 
$
10,065

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Operating Income/Operating Ratio
Operating income was $173.9 million for the six months ended June 30, 2019 , compared with $190.0 million for the six months ended June 30, 2018 . Operating income for the six months ended June 30, 2019 included restructuring and related costs of $15.2 million , primarily driven by our optimization activities in the U.K., $2.9 million of corporate development and related costs, $2.6 million of expense associated with amending an enterprise bargaining agreement in Australia and a $1.0 million net loss on the sale and impairment of certain assets in North America. Operating income for the six months ended June 30, 2018 included restructuring and related costs of $9.6 million , primarily related to the restructuring of ERS, and corporate development and related costs of $0.5 million , partially offset by a $6.3 million gain on settlement related to Arrium's voluntary administration. Our operating ratio was 84.6% for the six months ended June 30, 2019 , compared with 83.8% for the six months ended June 30, 2018 .
Interest Expense
Interest expense was $55.0 million for the six months ended June 30, 2019 , compared with $54.2 million for the six months ended June 30, 2018 . The increase in interest expense for the six months ended June 30, 2019 was primarily driven by an increase in interest rates as compared with the six months ended June 30, 2018 and an increase in outstanding borrowing primarily related to the funding of our share repurchases, partially offset by the write-off of deferred financing fees associated with our credit facility refinancing in June 2018.

51


Provision for Income Taxes
Our provision for income taxes for the six months ended June 30, 2019 was $33.1 million compared with $10.6 million for the six months ended June 30, 2018 . Our effective income tax rate for the six months ended June 30, 2019 was 26.9% . Our results for the six months ended June 30, 2018 included an income tax benefit of $31.6 million associated with the retroactive extension of the United States Short Line Tax Credit for fiscal year 2017, which was enacted in February 2018. Based on developments during the six months ended June 30, 2018 , we recorded a reserve for uncertain tax positions of $4.8 million related to tax deductions on intercompany financing arrangements in the U.K., of which $3.7 million related to the period from March 25, 2015, the date of the Freightliner acquisition when the arrangements were established, through December 31, 2017. Excluding the benefit from the retroactive extension and the prior period portion of the reserve for uncertain tax positions, our effective income tax rate for the six months ended June 30, 2018 was 28.5% . For additional information regarding our provision for income taxes, see Note 9 , 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 six months ended June 30, 2019 was $90.1 million , compared with $119.3 million for the six months ended June 30, 2018 . Our basic EPS were $1.60 with 56.4 million weighted average shares outstanding for the six months ended June 30, 2019 , compared with basic EPS of $1.96 with 60.9 million weighted average shares outstanding for the six months ended June 30, 2018 . Our diluted EPS for the six months ended June 30, 2019 were $1.58 with 57.2 million weighted average shares outstanding, compared with diluted EPS of $1.93 with 61.8 million weighted average shares outstanding for the six months ended June 30, 2018 . Our results for the six months ended June 30, 2019 and 2018 included certain items affecting comparability between the periods as previously presented in the "Overview—Overview of Six-Month Results—Items Affecting Comparability."
Net Income Attributable to Noncontrolling Interest
We own a 51.1% controlling interest in our Australian Operations. As such, we include 100% of the revenues and expenses from our Australian Operations within our consolidated financial statements and report a noncontrolling interest for MIRA’s 48.9% equity ownership. Net income attributable to noncontrolling interest for the six months ended June 30, 2019 was less than $0.1 million, compared with $5.4 million for six months ended June 30, 2018 .
North American Operations
Operating Revenues
The following table sets forth our North American Operations total operating revenues and carloads for the six months ended June 30, 2019 and 2018 . The table also reflects the calculation of our existing operations by subtracting the 2018 revenues and carloads from the Canadian leases that expired at the end of 2018 from our total operations for the six months ended June 30, 2018 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase/(Decrease) in
Total Operations
 
Increase/(Decrease) in Existing Operations
 
Currency Impact on 2018 Total Operations*
 
Currency Impact on 2018 Existing Operations*
 
 
 
2018
 
 
 
 
 
2019
 
Total Operations
 
Divested Operations
 
Existing Operations
 
Amount
 
%
 
Amount
 
%
 
 
Freight revenues
$
510,944

 
$
505,285

 
$
6,819

 
$
498,466

 
$
5,659

 
1.1
 %
 
$
12,478

 
2.5
 %
 
$
(1,533
)
 
$
(1,258
)
Freight-related revenues
130,611

 
127,299

 
3,319

 
123,980

 
3,312

 
2.6
 %
 
6,631

 
5.3
 %
 
(493
)
 
(352
)
All other revenues
32,738

 
32,603

 
937

 
31,666

 
135

 
0.4
 %
 
1,072

 
3.4
 %
 
(256
)
 
(216
)
Total operating revenues
$
674,293

 
$
665,187

 
$
11,075

 
$
654,112

 
$
9,106

 
1.4
 %
 
$
20,181

 
3.1
 %
 
$
(2,282
)
 
$
(1,826
)
Carloads
800,752

 
836,366

 
16,145

 
820,221

 
(35,614
)
 
(4.3
)%
 
(19,469
)
 
(2.4
)%
 
 
 
 
* Currency impact was calculated by comparing the 2018 results translated from local currency to United States dollars using 2019 exchange rates to the 2018 results in United States dollars as reported.

52


Freight Revenues
The following table sets forth our North American Operations total freight revenues for the six months ended June 30, 2019 and 2018 . The table below also reflects the calculation of our existing operations by subtracting the revenues and carloads from the Canadian leases that expired at the end of 2018 from our total operations for the six months ended June 30, 2018 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase/(Decrease) in Existing Operations
 
Currency Impact on Existing Operations
 
2018 Constant Currency Existing Operations*
 
Increase/(Decrease) in Existing Operations Constant Currency*
 
 
 
2018
 
 
 
 
Commodity Group
2019
 
Total Operations
 
Divested Operations
 
Existing Operations
 
 
 
 
Agricultural Products
$
64,809

 
$
61,065

 
$
1,007

 
$
60,058

 
$
4,751

 
$
(123
)
 
$
59,935

 
$
4,874

Autos & Auto Parts
11,566

 
11,173

 
481

 
10,692

 
874

 
(53
)
 
10,639

 
927

Chemicals & Plastics
76,986

 
75,189

 
1,368

 
73,821

 
3,165

 
(206
)
 
73,615

 
3,371

Coal & Coke
37,753

 
39,032

 

 
39,032

 
(1,279
)
 
(62
)
 
38,970

 
(1,217
)
Food & Kindred Products
17,204

 
16,826

 
326

 
16,500

 
704

 
(5
)
 
16,495

 
709

Intermodal
978

 
689

 

 
689

 
289

 
(1
)
 
688

 
290

Lumber & Forest Products
45,376

 
46,249

 
187

 
46,062

 
(686
)
 
(88
)
 
45,974

 
(598
)
Metallic Ores
5,658

 
7,243

 
3

 
7,240

 
(1,582
)
 
(72
)
 
7,168

 
(1,510
)
Metals
58,917

 
60,887

 
983

 
59,904

 
(987
)
 
(147
)
 
59,757

 
(840
)
Minerals & Stone
70,407

 
68,552

 
527

 
68,025

 
2,382

 
(63
)
 
67,962

 
2,445

Petroleum Products
37,752

 
34,634

 
1,357

 
33,277

 
4,475

 
(101
)
 
33,176

 
4,576

Pulp & Paper
58,292

 
58,385

 
83

 
58,302

 
(10
)
 
(297
)
 
58,005

 
287

Waste
14,826

 
13,227

 
117

 
13,110

 
1,716

 
(4
)
 
13,106

 
1,720

Other
10,420

 
12,134

 
380

 
11,754

 
(1,334
)
 
(36
)
 
11,718

 
(1,298
)
Total
$
510,944

 
$
505,285

 
$
6,819

 
$
498,466

 
$
12,478

 
$
(1,258
)
 
$
497,208

 
$
13,736

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

53


The following table sets forth our North American Operations freight revenues, carloads and average freight revenues per carload for the six months ended June 30, 2019 and 2018 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018 Constant Currency*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2019
 
2018
 
2019
 
2018
 
2018 Constant Currency*
Agricultural Products
$
64,809

 
12.7
%
 
$
60,900

 
12.1
%
 
110,389

 
105,526

 
$
587

 
$
579

 
$
577

Autos & Auto Parts
11,566

 
2.3
%
 
11,101

 
2.2
%
 
17,460

 
17,822

 
662

 
627

 
623

Chemicals & Plastics
76,986

 
15.1
%
 
74,928

 
14.9
%
 
85,304

 
88,627

 
902

 
848

 
845

Coal & Coke
37,753

 
7.4
%
 
38,970

 
7.7
%
 
102,210

 
121,312

 
369

 
322

 
321

Food & Kindred Products
17,204

 
3.4
%
 
16,808

 
3.4
%
 
29,064

 
30,090

 
592

 
559

 
559

Intermodal
978

 
0.2
%
 
688

 
0.1
%
 
7,793

 
6,900

 
125

 
100

 
100

Lumber & Forest Products
45,376

 
8.9
%
 
46,153

 
9.2
%
 
68,085

 
73,983

 
666

 
625

 
624

Metallic Ores
5,658

 
1.0
%
 
7,170

 
1.4
%
 
7,415

 
8,844

 
763

 
819

 
811

Metals
58,917

 
11.5
%
 
60,702

 
12.1
%
 
72,110

 
76,044

 
817

 
801

 
798

Minerals & Stone
70,407

 
13.8
%
 
68,468

 
13.6
%
 
109,510

 
109,852

 
643

 
624

 
623

Petroleum Products
37,752

 
7.4
%
 
34,476

 
6.8
%
 
50,879

 
50,000

 
742

 
693

 
690

Pulp & Paper
58,292

 
11.4
%
 
58,085

 
11.5
%
 
79,256

 
83,119

 
735

 
702

 
699

Waste
14,826

 
2.9
%
 
13,218

 
2.6
%
 
28,305

 
26,818

 
524

 
493

 
493

Other
10,420

 
2.0
%
 
12,085

 
2.4
%
 
32,972

 
37,429

 
316

 
324

 
323

Total
$
510,944

 
100.0
%
 
$
503,752

 
100.0
%
 
800,752

 
836,366

 
$
638

 
$
604

 
$
602

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our North American Operations decreased 35,614 carloads, or 4.3% , for the six months ended June 30, 2019 , compared with the same period in 2018 . Excluding traffic from the Canadian leases that expired at the end of 2018, existing operations traffic decreased 19,469 carloads, or 2.4% . The decrease in traffic from existing operations was primarily due to decreases of 19,102 carloads of coal and coke traffic, 5,404 carloads of lumber and forest products traffic, 3,695 carloads of pulp and paper traffic, 3,143 carloads of other commodities traffic, 1,422 carloads of metallic ores traffic and 1,053 carloads of metals traffic, partially offset by increases of 7,191 carloads of agricultural products traffic, 2,509 carloads of petroleum products traffic, 1,670 carloads of waste traffic and 1,378 carloads of minerals and stone traffic. All remaining traffic increased by a net 1,602 carloads.
Changes in average freight revenues per carload in a commodity group may be impacted by changes in customer rates, fuel surcharges, commodity mix and the mix of customer traffic within a commodity group. Excluding a 0.4% impact of foreign currency, average freight revenues per carload from our North American Operations increased 6.0% to $638 for the six months ended June 30, 2019 , compared with the same period in 2018 . Average freight revenues per carload from existing operations, excluding the impact of foreign currency, increased 5.3% to $638 for the six months ended June 30, 2019 , compared with the same period in 2018 . The increase in average freight revenues per carload from existing operations was impacted by higher fuel surcharges, which increased average freight revenues per carload by 0.9%, and a change in the mix of commodities, which increased average freight revenues per carload by 0.9%. Excluding these factors, average freight revenues per carload increased 3.4%.
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.

54


Agricultural products revenues increased $4.9 million , or 8.1% . Agricultural products traffic increased 7,191 carloads, or 7.0%, which increased revenues by $4.2 million, and average freight revenues per carload increased 1.0%, which increased revenues by $0.7 million. The increase in carloads was primarily due to increased farm products and soybean shipments in the western United States and increased grain and dried distillers' grains in the midwestern United States, partially offset by decreased grain shipments in Canada.
Chemicals and plastics revenues increased $3.4 million , or 4.6% , primarily due to an increase in average freight revenues per carload of 4.3%, which increased revenues $3.2 million. Traffic remained relatively flat at a net increase of 171 carloads, or 0.2%, which increased revenues by $0.2 million. The increase in average revenue per carload was primarily related to increased sulphuric acid shipments in the western United States.
Coal and coke revenues decreased $1.2 million , or 3.1% . Coal and coke traffic decreased 19,102 carloads, or 15.7%, which decreased revenues by $7.0 million, while average freight revenues per carload increased 15.0%, which increased revenues by $5.8 million. The decrease in carloads was primarily due to decreased demand in the midwestern and southern United States. The increase in average freight revenues per carload was primarily due to a change in the mix of business.
Metallic ores revenues decreased $1.5 million , or 21.1% . Metallic ores traffic decreased 1,422 carloads, or 16.1%, which decreased revenues by $1.1 million, and average freight revenues per carload decreased 5.9%, which decreased revenues by $0.4 million. The decrease in carloads was primarily due to decreased copper shipments in the western United States and decreased alumina shipments in Canada.
Minerals and stone revenues increased $2.4 million , or 3.6% . Minerals and stone average freight revenues per carload increased 2.2%, which increased revenues by $1.6 million, and traffic increased 1,378 carloads, or 1.3%, which increased revenues by $0.9 million. The increase in average freight revenue per carload was primarily due to stronger pricing and increased fuel surcharge revenues. The increase in carloads was primarily due to increased rock salt and sand shipments in the northeastern United States, partially offset by decreased aggregates shipments in the western United States and decreased sand shipments in the southern United States.
Petroleum products revenues increased $4.6 million , or 13.8% . Petroleum products average freight revenues per carload increased 8.2%, which increased revenues by $2.7 million, and traffic increased 2,509 carloads, or 5.2%, which increased revenues by $1.9 million. The increase in average freight revenues per carload was primarily due to stronger pricing and increased fuel surcharge revenues. The increase in carloads was primarily due to increased liquid petroleum gas shipments in the western and southern United States and increased other petroleum products shipments in the northeastern United States, partially offset by decreased liquid petroleum gas and other petroleum products shipments in Canada.
Waste revenues increased $1.7 million , or 13.1% . Waste traffic increased 1,670 carloads, or 6.3%, which increased revenues by $0.9 million, and average freight revenues per carload increased 6.5%, which increased revenues by $0.8 million. The increase in carloads was primarily due to increased waste carloads in the northeastern United States.
Other revenues decreased $1.3 million , or 11.1% . Other traffic decreased 3,143 carloads, or 8.7%, which decreased revenues by $1.0 million, and average freight revenues per carload decreased 2.5%, which decreased revenues by $0.3 million. The decrease in carloads was primarily due to decreased empty car traffic across North America. The decrease in average freight revenues per carload was primarily due to decreased shipments of wind tower components in the midwestern United States.
Freight revenues from all remaining commodities combined increased by a net $0.8 million .
Freight-Related Revenues
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, were $130.6 million for the six months ended June 30, 2019 , compared with $127.3 million for the six months ended June 30, 2018 , an increase of $3.3 million , or 2.6% . Excluding a decrease of $3.3 million in revenues from leased railroads in Canada that we ceased operating at the end of 2018, and a $0.4 million decrease due to the impact of foreign currency depreciation, freight-related revenues from our North American Operations increased $7.0 million , or 5.6% , for the six months ended June 30, 2019 , compared with $123.6 million for the six months ended June 30, 2018 . The increase was primarily due to increased demurrage revenues across North America.

55


All Other Revenues
All other revenues from our North American 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, were $32.7 million for the six months ended June 30, 2019 , compared with $32.6 million for the six months ended June 30, 2018 , an increase of $0.1 million , or 0.4% . Excluding a decrease of $0.9 million in revenues from the Canadian leases that expired at the end of 2018 and a $0.2 million decrease due to the impact of foreign currency depreciation, all other revenues from our North American Operations increased $1.3 million , or 4.1% , for the six months ended June 30, 2019 , compared with $31.5 million for the six months ended June 30, 2018 . The increase was primarily due to increases in other rental revenues in the western and midwestern United States.
Operating Expenses
Total operating expenses from our North American Operations increased $9.0 million , or 1.8% , to $520.7 million for the six months ended June 30, 2019 , compared with $511.8 million for the six months ended June 30, 2018 . The increase included an $11.1 million decrease in expenses from the two leased railroads in Canada that we ceased operating at the end of 2018, and a $2.2 million decrease due to the impact of foreign currency depreciation, partially offset by a $22.2 million increase from existing operations. The increase from existing operations was primarily due to increases of $6.8 million in labor and benefits expense, $5.3 million in purchased services expense, $2.6 million in depreciation and amortization expense, $2.5 million in trackage rights expense, $1.6 million in materials expense, $1.4 million in casualties and insurance expense and $1.2 million in restructuring and related costs, partially offset by a decrease of $1.3 million in equipment rents expense. The six months ended June 30, 2019 also included a $0.4 million net loss on the sale and impairment of assets compared with a $1.6 million net gain on the sale and impairment of assets for the six months ended June 30, 2018 .
The following table sets forth operating expenses from our North American Operations for the six months ended June 30, 2019 and 2018 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase/(Decrease)
 
Currency
Impact
 
2018 Constant Currency*
 
Increase/(Decrease) Constant Currency*
 
2019
 
2018
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
 
Labor and benefits
$
225,810

 
33.5
%
 
$
221,206

 
33.3
 %
 
$
4,604

 
$
(800
)
 
$
220,406

 
$
5,404

Equipment rents
24,534

 
3.6
%
 
26,133

 
3.9
 %
 
(1,599
)
 
(99
)
 
26,034

 
(1,500
)
Purchased services
33,116

 
4.9
%
 
28,582

 
4.3
 %
 
4,534

 
(111
)
 
28,471

 
4,645

Depreciation and amortization
77,169

 
11.4
%
 
81,878

 
12.3
 %
 
(4,709
)
 
(542
)
 
81,336

 
(4,167
)
Diesel fuel used in train operations
47,140

 
7.0
%
 
48,733

 
7.3
 %
 
(1,593
)
 
(285
)
 
48,448

 
(1,308
)
Casualties and insurance
17,829

 
2.6
%
 
16,613

 
2.5
 %
 
1,216

 
(54
)
 
16,559

 
1,270

Materials
27,716

 
4.1
%
 
26,353

 
4.0
 %
 
1,363

 
(111
)
 
26,242

 
1,474

Trackage rights
22,095

 
3.3
%
 
19,639

 
2.9
 %
 
2,456

 
(16
)
 
19,623

 
2,472

Net loss/(gain) on sale and impairment of assets
358

 
0.1
%
 
(1,618
)
 
(0.2
)%
 
1,976

 
3

 
(1,615
)
 
1,973

Restructuring and related costs
1,230

 
0.2
%
 
41

 
 %
 
1,189

 

 
41

 
1,189

Other expenses, net
43,720

 
6.5
%
 
44,193

 
6.6
 %
 
(473
)
 
(147
)
 
44,046

 
(326
)
Total operating expenses
$
520,717

 
77.2
%
 
$
511,753

 
76.9
 %
 
$
8,964

 
$
(2,162
)
 
$
509,591

 
$
11,126

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
The following information discusses the significant changes in operating expenses of our North American Operations excluding a decrease of $2.2 million due to the impact of foreign currency depreciation.
Labor and benefits expense was $225.8 million for the six months ended June 30, 2019 , compared with $220.4 million for the six months ended June 30, 2018 , an increase of $5.4 million , or 2.5% . The increase consisted of $6.8 million , or 3.1% , from existing operations, partially offset by a decrease of $1.4 million from the expired Canadian leases. The increase from existing operations was primarily due to annual wage increases and $2.1 million of expense representing the mark-to-market impact on our deferred compensation plan liabilities. This expense was offset by $2.1 million of mark-to-market earnings on investment assets associated with the deferred compensation plan recognized in other non-operating income.

56


Equipment rents expense was $24.5 million for the six months ended June 30, 2019 , compared with $26.0 million for the six months ended June 30, 2018 , a decrease of $1.5 million , or 5.8% . The decrease consisted of $1.3 million , or 5.2% , from existing operations and $0.2 million from the expired Canadian leases. The decrease from existing operations was primarily due to decreases in car hire expense.
Purchased services expense was $33.1 million for the six months ended June 30, 2019 , compared with $28.5 million for the six months ended June 30, 2018 , an increase of $4.6 million , or 16.3% . The increase consisted of $5.3 million , or 19.0% , from existing operations, partially offset by a decrease of $0.6 million from the expired Canadian leases. The increase from existing operations was primarily due to increases in track maintenance expense in 2019.
Depreciation and amortization expense was $77.2 million for the six months ended June 30, 2019 , compared with $81.3 million for the six months ended June 30, 2018 , a decrease of $4.2 million , or 5.1% . The decrease consisted of $6.8 million from the expired Canadian leases, partially offset by an increase of $2.6 million , or 3.5% , from existing operations. The increase from existing operations was primarily attributable to a larger depreciable asset base in 2019 compared with 2018, reflecting capital spending in 2018.
The cost of diesel fuel used in train operations was $47.1 million for the six months ended June 30, 2019 , compared with $48.4 million for the six months ended June 30, 2018 , a decrease of $1.3 million , or 2.7% , which was primarily due to the expired Canadian leases.
Casualties and insurance expense was $17.8 million for the six months ended June 30, 2019 , compared with $16.6 million for the six months ended June 30, 2018 , an increase of $1.3 million , or 7.7% , primarily due to increased derailment expense in the first quarter of 2019, partially offset by decreased derailment expense in the second quarter of 2019 and a gain on an insurance recovery from a business interruption claim related to Hurricane Michael in the southern United States in October 2018.
Materials expense was $27.7 million for the six months ended June 30, 2019 , compared with $26.2 million for the six months ended June 30, 2018 , an increase of $1.5 million , or 5.6% . The increase consisted of $1.6 million , or 6.3% , from existing operations, partially offset by a decrease of $0.2 million from the expired Canadian leases. The increase in existing operations was primarily due to increases in track maintenance expense in 2019.
Trackage rights expense was $22.1 million for the six months ended June 30, 2019 , compared with $19.6 million for the six months ended June 30, 2018 , an increase of $2.5 million , or 12.6% . The increase was primarily attributable to increased traffic at port switching locations and increased rail traffic.
Net loss on the sale and impairment of assets was $0.4 million for the six months ended June 30, 2019 , compared with a net gain on the sale and impairment of assets of $1.6 million for the six months ended June 30, 2018 , a change of $2.0 million . The net loss for the six months ended June 30, 2019 was primarily attributable to an impairment of assets related to the expiration of a lease of a rail line in the southeastern United States, partially offset by a gain on the sale of land in the northeastern United States.
Restructuring costs for the six months ended June 30, 2019 of $1.2 million were primarily related to the consolidation of our Central Region.
Operating Income/Operating Ratio
Operating income from our North American Operations was $153.6 million for the six months ended June 30, 2019 , compared with $153.4 million for the six months ended June 30, 2018 . Operating income for the six months ended June 30, 2019 and 2018 included corporate development and related costs of $2.7 million and $0.5 million , respectively. The operating ratio was 77.2% for the six months ended June 30, 2019 , compared with 76.9% for the six months ended June 30, 2018 .

57


Australian Operations
Operating Revenues
As previously disclosed, we own a controlling 51.1% interest in our Australian Operations, and therefore, we include 100% of our Australian Operations 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 for the six months ended June 30, 2019 and 2018 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase/(Decrease) in Total Operations
 
Currency Impact on 2018 Total Operations*
 
2019
 
2018
 
Amount
 
%
 
Freight revenues
$
112,742

 
$
129,086

 
$
(16,344
)
 
(12.7
)%
 
$
(10,863
)
Freight-related revenues
15,891

 
22,078

 
(6,187
)
 
(28.0
)%
 
(1,852
)
All other revenues
3,005

 
2,699

 
306

 
11.3
 %
 
(226
)
Total operating revenues
$
131,638

 
$
153,863

 
$
(22,225
)
 
(14.4
)%
 
$
(12,941
)
Carloads
271,773

 
291,480

 
(19,707
)
 
(6.8
)%
 
 
* Currency impact was calculated by comparing the 2018 results translated from local currency to United States dollars using 2019 exchange rates to the 2018 results in United States dollars as reported.
Freight Revenues
The following table sets forth the changes in our Australian Operations freight revenues by commodity group for the six months ended June 30, 2019 and 2018 (dollars in thousands):  
 
 
 
Increase/(Decrease) in Total Operations
 
Currency Impact
 
2018 Constant Currency*
 
Increase/(Decrease) Total Operations Constant Currency*
 
Six Months Ended June 30,
 
 
 
 
Commodity Group
2019
 
2018
 
 
 
 
Agricultural Products
$
6,053

 
$
11,489

 
$
(5,436
)
 
$
(963
)
 
$
10,526

 
$
(4,473
)
Coal and Coke
58,136

 
64,149

 
(6,013
)
 
(5,406
)
 
58,743

 
(607
)
Intermodal
29,259

 
33,075

 
(3,816
)
 
(2,780
)
 
30,295

 
(1,036
)
Metallic Ores
15,141

 
15,856

 
(715
)
 
(1,333
)
 
14,523

 
618

Minerals & Stone
3,855

 
4,181

 
(326
)
 
(354
)
 
3,827

 
28

Petroleum Products
298

 
336

 
(38
)
 
(27
)
 
309

 
(11
)
Total
$
112,742

 
$
129,086

 
$
(16,344
)
 
$
(10,863
)
 
118,223

 
$
(5,481
)
* 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 six months ended June 30, 2019 and 2018 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018 Constant Currency*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2019
 
2018
 
2019
 
2018
 
2018 Constant Currency*
Agricultural Products
$
6,053

 
5.4
%
 
$
10,526

 
8.9
%
 
8,484

 
27,287

 
$
713

 
$
421

 
$
386

Coal & Coke
58,136

 
51.6
%
 
58,743

 
49.7
%
 
196,251

 
194,138

 
296

 
330

 
303

Intermodal
29,259

 
25.9
%
 
30,295

 
25.6
%
 
24,995

 
26,711

 
1,171

 
1,238

 
1,134

Metallic Ores
15,141

 
13.4
%
 
14,523

 
12.3
%
 
10,629

 
10,457

 
1,424

 
1,516

 
1,389

Minerals & Stone
3,855

 
3.4
%
 
3,827

 
3.2
%
 
31,290

 
32,754

 
123

 
128

 
117

Petroleum Products
298

 
0.3
%
 
309

 
0.3
%
 
124

 
133

 
2,403

 
2,526

 
2,323

Total
$
112,742

 
100.0
%
 
$
118,223

 
100.0
%
 
271,773

 
291,480

 
$
415

 
$
443

 
$
406

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

58


Total traffic from our Australian Operations decreased 19,707 carloads, or 6.8% , to 271,773 carloads for the six months ended June 30, 2019 , compared with the same period in 2018 . The traffic decrease was primarily due to decreases of 18,803 carloads of agricultural products traffic, 1,716 carloads of intermodal traffic and 1,464 carloads of minerals and stone traffic, partially offset by an increase of 2,113 carloads of coal and coke traffic. All remaining traffic increased by a net 163 carloads .
Changes in average freight revenues per carload in a commodity group may be impacted by changes in customer rates, fuel surcharges, commodity mix and the mix of customer traffic within a commodity group. Excluding an 8.5% impact of foreign currency, average freight revenues per carload from our Australian Operations increased 2.2% to $415 for the six months ended June 30, 2019 , compared with the same period in 2018 . A change in the mix of commodities decreased average freight revenues per carload by 5.6%, while higher fuel surcharges increased average freight revenues per carload by 0.2%. Excluding these factors, average freight revenues per carload increased 7.6%.
The following information discusses the significant changes in our Australian Operations freight revenues by commodity group excluding the impact of foreign currency.
Agricultural products revenues decreased $4.5 million , or 42.5% . Agricultural products traffic decreased 18,803 carloads, or 68.9%, which decreased revenues by $13.4 million, while average freight revenues per carload increased 85.0%, which increased revenues by $8.9 million. The carload decrease was primarily due to a smaller grain harvest in 2019. The decrease in grain traffic resulted in higher average freight revenues per carload, primarily due to the rate structure for Australian grain traffic, which has both a fixed and variable component.
Intermodal revenues decreased $1.0 million , or 3.4% . Intermodal traffic decreased 1,716 carloads, or 6.4%, which decreased revenues by $2.0 million, while average freight revenues per carload increased 3.3%, which increased revenues by $1.0 million. The carload decrease was primarily due to service cancellations and decreased automotive movements.
Freight revenues from all remaining commodities combined had a net increase of less than $0.1 million.
Freight-Related Revenues
Excluding a $1.9 million decrease due to the impact of foreign currency depreciation, freight-related revenues from our Australian Operations, which includes revenues from railcar switching, track access rights, crewing services, storage and other ancillary revenues related to the movement of freight, decreased $4.3 million , or 21.4% , to $15.9 million for the six months ended June 30, 2019 , compared with $20.2 million for the six months ended June 30, 2018 . The decrease in freight-related revenues was primarily due to prolonged drought conditions in 2019, switching competition and a customer termination payment received in 2018.
All Other Revenues
Excluding the impact of foreign currency depreciation, all other revenues from our Australian Operations, which includes revenues from third-party railcar and locomotive repairs, property rentals and other ancillary revenues not directly related to the movement of freight, decreased to $3.0 million for the six months ended June 30, 2019 , compared with $2.5 million for the six months ended June 30, 2018 .
Operating Expenses
Total operating expenses from our Australian Operations for the six months ended June 30, 2019 decreased $4.5 million , or 4.0% , to $107.5 million , compared with $112.0 million for the six months ended June 30, 2018 . The decrease in operating expenses included decreases of $9.5 million from the impact of foreign currency depreciation, $1.3 million in trackage rights expense, $1.1 million in purchased services expense and $1.0 million in the cost of diesel fuel used in operations, partially offset by increases of $1.7 million in restructuring and related costs and $1.0 million in labor and benefits expense. In addition, total operating expenses for the six months ended June 30, 2018 included a $6.3 million gain on settlement related to Arrium's voluntary administration that was recognized as an offset to other expenses, net.

59


The following table sets forth operating expenses from our Australian Operations for the six months ended June 30, 2019 and 2018 (dollars in thousands):  
 
Six Months Ended June 30,
 
Increase/(Decrease)
 
Currency
Impact
 
2018 Constant Currency*
 
Increase/(Decrease) Constant Currency*
 
2019
 
2018
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
 
Labor and benefits
$
35,740

 
27.1
%
 
$
37,918

 
24.7
 %
 
$
(2,178
)
 
$
(3,201
)
 
$
34,717

 
$
1,023

Equipment rents
1,884

 
1.4
%
 
2,498

 
1.6
 %
 
(614
)
 
(213
)
 
2,285

 
(401
)
Purchased services
11,023

 
8.4
%
 
13,284

 
8.6
 %
 
(2,261
)
 
(1,114
)
 
12,170

 
(1,147
)
Depreciation and amortization
28,603

 
21.7
%
 
31,295

 
20.3
 %
 
(2,692
)
 
(2,648
)
 
28,647

 
(44
)
Diesel fuel used in train operations
13,165

 
10.0
%
 
15,483

 
10.1
 %
 
(2,318
)
 
(1,300
)
 
14,183

 
(1,018
)
Casualties and insurance
2,955

 
2.2
%
 
3,547

 
2.3
 %
 
(592
)
 
(298
)
 
3,249

 
(294
)
Materials
5,491

 
4.2
%
 
5,722

 
3.7
 %
 
(231
)
 
(482
)
 
5,240

 
251

Trackage rights
2,942

 
2.2
%
 
4,578

 
3.0
 %
 
(1,636
)
 
(385
)
 
4,193

 
(1,251
)
Net (gain)/loss on sale and impairment of assets
(59
)
 
%
 
(113
)
 
(0.1
)%
 
54

 
9

 
(104
)
 
45

Restructuring and related costs
1,686

 
1.3
%
 

 
 %
 
1,686

 

 

 
1,686

Other expenses, net
4,050

 
3.1
%
 
(2,221
)
 
(1.4
)%
 
6,271

 
121

 
(2,100
)
 
6,150

Total operating expenses
$
107,480

 
81.6
%
 
$
111,991

 
72.8
 %
 
$
(4,511
)
 
$
(9,511
)
 
$
102,480

 
$
5,000

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
The following information discusses the significant changes in operating expenses of our Australian Operations excluding a decrease of $9.5 million due to the impact of foreign currency depreciation.
Labor and benefits expense was $35.7 million for the six months ended June 30, 2019 , compared with $34.7 million for the six months ended June 30, 2018 , an increase of $1.0 million , or 2.9% . The increase from existing operations was primarily due to $2.6 million of expense associated with amending an enterprise bargaining agreement, partially offset by a decrease in labor expense attributable to a smaller grain harvest in 2019.
Purchased services expense was $11.0 million for the six months ended June 30, 2019 , compared with $12.2 million for the six months ended June 30, 2018 , a decrease of $1.1 million , or 9.4% . The decrease was primarily due to the timing of track maintenance, decreased unscheduled repairs in 2019 and decreased infrastructure services.
The cost of diesel fuel used in train operations was $13.2 million for the six months ended June 30, 2019 , compared with $14.2 million for the six months ended June 30, 2018 , a decrease of $1.0 million , or 7.2% . The decrease consisted of $1.7 million due to a 10.9% decrease in diesel fuel consumption, partially offset by an increase of $0.7 million due to a 4.1% increase in average fuel cost per gallon.
Trackage rights expense was $2.9 million for the six months ended June 30, 2019 , compared with $4.2 million for the six months ended June 30, 2018 , a decrease of $1.3 million , or 29.8% . The decrease was primarily due to lower volumes related to drought affected harvests and decreased intermodal activity in 2019.
Restructuring and related costs of $1.7 million for the six months ended June 30, 2019 were primarily related to a severance provision associated with the termination of grain service on the Eyre Peninsula.
Other expenses, net for the six months ended June 30, 2018 included a $6.3 million gain on settlement related to Arrium's voluntary administration .
Operating Income/Operating Ratio
Operating income from our Australian Operations was $24.2 million for the six months ended June 30, 2019 , compared with $41.9 million for the six months ended June 30, 2018 . Operating income for the six months ended June 30, 2019 included $2.6 million of expense associated with amending an enterprise bargaining agreement and $1.7 million of expense primarily related to a severance provision associated with the termination of grain service on the Eyre Peninsula. Operating income for the six months ended June 30, 2018 included a $6.3 million gain on a settlement related to Arrium's voluntary administration. The operating ratio was 81.6% for the six months ended June 30, 2019 , compared with 72.8% for the six months ended June 30, 2018 .

60


U.K./European Operations
Operating Revenues
The following table sets forth our U.K./European Operations total operating revenues for the six months ended June 30, 2019 and 2018 . The table below also reflects the calculation of our U.K./European Operations existing operations by subtracting the revenues and carloads from the divested ERS operations from our U.K./European total operations for the six months ended June 30, 2019 and 2018 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase/(Decrease) in Total Operations
 
Increase/(Decrease) in Existing Operations
 
Currency Impact on 2018 Total Operations*
 
Currency Impact on 2018 Existing Operations*
 
 
 
2018
 
 
 
 
 
2019
 
Total Operations
 
Divested Operations
 
Existing Operations
 
Amount

%
 
Amount
 
%
 
 
Freight revenues
$
162,784

 
$
183,500

 
$
17,086

 
$
166,414

 
$
(20,716
)
 
(11.3
)%
 
$
(3,630
)
 
(2.2
)%
 
$
(11,862
)
 
$
(10,599
)
Freight-related revenues
132,156

 
134,222

 
7,006

 
127,216

 
(2,066
)
 
(1.5
)%
 
4,940

 
3.9
 %
 
(8,218
)
 
(7,744
)
All other revenues
28,698

 
32,879

 
21

 
32,858

 
(4,181
)
 
(12.7
)%
 
(4,160
)
 
(12.7
)%
 
(1,992
)
 
(1,990
)
Total operating revenues
$
323,638

 
$
350,601

 
$
24,113

 
$
326,488

 
$
(26,963
)
 
(7.7
)%
 
$
(2,850
)
 
(0.9
)%
 
$
(22,072
)
 
$
(20,333
)
Carloads
455,343

 
517,830

 
50,949

 
466,881

 
(62,487
)
 
(12.1
)%
 
(11,538
)
 
(2.5
)%
 
 
 
 
* Currency impact was calculated by comparing the 2018 results translated from local currency to United States dollars using 2019 exchange rates to the 2018 results in United States dollars as reported.
Freight Revenues
The following table sets forth our U.K./European Operations total freight revenues for the six months ended June 30, 2019 and 2018 . The table below also reflects the calculation of our U.K./European Operations existing operations by subtracting the revenues from the divested ERS operations from our U.K./ European Operations total operations for the six months ended June 30, 2019 and 2018 (dollars in thousands):  
 
Six Months Ended June 30,
 
Increase/(Decrease) in Existing Operations
 
Currency Impact on Existing Operations
 
2018 Constant Currency Existing Operations*
 
Increase/(Decrease) in Existing Operations Constant Currency*
 
 
 
2018
 
 
 
 
Commodity Group
2019
 
Total Operations
 
Divested Operations
 
Existing Operations
 
 
 
 
Agricultural Products
$
1,248

 
$
2,020

 
$

 
$
2,020

 
$
(772
)
 
$
(171
)
 
$
1,849

 
$
(601
)
Coal & Coke
5,589

 
6,163

 

 
6,163

 
(574
)
 
(426
)
 
5,737

 
(148
)
Intermodal
117,502

 
133,804

 
17,086

 
116,718

 
784

 
(6,955
)
 
109,763

 
7,739

Minerals & Stone
37,037

 
41,505

 

 
41,505

 
(4,468
)
 
(3,047
)
 
38,458

 
(1,421
)
Petroleum Products
1,408

 
8

 

 
8

 
1,400

 

 
8

 
1,400

Total
$
162,784

 
$
183,500

 
$
17,086

 
$
166,414

 
$
(3,630
)
 
$
(10,599
)
 
$
155,815

 
$
6,969

*Constant currency amounts reflect the prior period Total Ongoing Operations translated at the current period exchange rates.
The following table sets forth our U.K./European Operations freight revenues, carloads and average freight revenues per carload for the six months ended June 30, 2019 and 2018 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018 Constant Currency*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2019
 
2018
 
2019
 
2018
 
2018 Constant Currency*
Agricultural Products
$
1,248

 
0.8
%
 
$
1,849

 
1.1
%
 
926

 
1,573

 
$
1,348

 
$
1,284

 
$
1,175

Coal & Coke
5,589

 
3.4
%
 
5,737

 
3.3
%
 
9,939

 
9,933

 
562

 
620

 
578

Intermodal
117,502

 
72.2
%
 
125,586

 
73.2
%
 
353,968

 
411,838

 
332

 
325

 
305

Minerals & Stone
37,037

 
22.7
%
 
38,458

 
22.4
%
 
83,990

 
94,466

 
441

 
439

 
407

Petroleum Products
1,408

 
0.9
%
 
8

 
%
 
6,520

 
20

 
216

 
400

 
400

Total
$
162,784

 
100.0
%
 
$
171,638

 
100.0
%
 
455,343

 
517,830

 
$
357

 
$
354

 
$
331

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

61


Total traffic from our U.K./European Operations decreased 62,487 carloads, or 12.1% , to 455,343 carloads for the six months ended June 30, 2019 , compared with the same period in 2018 . Excluding traffic from our divested ERS operations, existing operations traffic decreased 11,538 carloads, or 2.5%. The decrease in traffic from existing operations was primarily due to decreases of 10,476 carloads of minerals and stone traffic and 6,921 carloads of intermodal traffic, partially offset by an increase of 6,500 carloads of petroleum products traffic. All remaining traffic decreased by a net 641 carloads.
Changes in average freight revenues per carload in a commodity group may be impacted by changes in customer rates, fuel surcharges, commodity mix and the mix of customer traffic within a commodity group. Excluding a 7.1% impact of foreign currency, average freight revenues per carload from our U.K./European Operations increased 7.9% to $357 for the six months ended June 30, 2019 , compared with the same period in 2018 . Average freight revenues per carload from existing operations, excluding the impact of foreign currency, increased 6.9% to $357 for the six months ended June 30, 2019 , compared with the same period in 2018 .
The following information discusses the significant changes in our U.K./European Operations freight revenues by commodity group excluding the impact of foreign currency and the divested ERS operations.
Intermodal revenues increased $7.7 million , or 7.1% . Intermodal average freight revenues per carload increased 9.2%, which increased revenues by $10.0 million, while traffic decreased 6,921 carloads, or 1.9%, which decreased revenues by $2.3 million. The increase in average freight revenues per carload was primarily due to stronger pricing in the U.K. The decrease in carloads was primarily due to temporary rail network outages.
Minerals and stone revenues decreased $1.4 million , or 3.7% . Minerals and stone traffic decreased 10,476 carloads, or 11.1%, which decreased revenues by $4.6 million, while average freight revenues per carload increased 8.3%, which increased revenues by $3.2 million. The carload decrease was due to lower construction aggregates shipments in Poland primarily as a result of unfavorable weather conditions, partially offset by higher construction aggregates shipments in the U.K. The increase in average freight revenues per carload was primarily due to stronger pricing.
Petroleum products revenues increased $1.4 million , primarily due to an increase in traffic of 6,500 carloads. The carload increase was primarily due to a new customer contract in the U.K.
Freight revenues from all remaining commodities decreased by $0.7 million .
Freight-Related Revenues
Freight-related revenues from our U.K./European Operations includes 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 from our U.K./European Operations 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.
Freight-related revenues from our U.K./European Operations were $132.2 million for the six months ended June 30, 2019 , compared with $134.2 million for the six months ended June 30, 2018 , a decrease of $2.1 million , or 1.5% . Excluding a decrease of $8.2 million due to the impact of foreign currency depreciation and $6.5 million from our divested ERS operations, freight-related revenues from our existing operations increased $12.7 million , or 10.6% , for the six months ended June 30, 2019 , compared with $119.5 million for the six months ended June 30, 2018 . The increase in freight-related revenues from our existing operations was primarily due to increased rates on trucking, switching and storage services in the U.K. and increased crewing services in Poland, partially offset by a decrease in infrastructure services in the U.K.
All Other Revenues
All other revenues from our U.K./European Operations 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. All other revenues from our U.K./European Operations were $28.7 million for the six months ended June 30, 2019 , compared with $32.9 million for the six months ended June 30, 2018 , a decrease of $4.2 million , or 12.7% . Excluding a $2.0 million decrease due to the impact of foreign currency depreciation, all other revenues from our existing operations decreased $2.2 million , or 7.0% , for the six months ended June 30, 2019 , compared with $30.9 million for the six months ended June 30, 2018 . The decrease in all other revenues from our existing operations was primarily due to reduced management and technical support revenues in Saudi Arabia and decreased container sales in 2019.

62


Operating Expenses
Total operating expenses from our U.K./European Operations were $327.5 million for the six months ended June 30, 2019 , compared with $355.9 million for the six months ended June 30, 2018 , a decrease of $28.4 million , or 8.0% . The decrease consisted of $22.3 million due to the impact of foreign currency depreciation and $20.9 million from divested operations, partially offset by a $14.8 million increase from existing operations. The increase from existing operations included increases of $5.5 million in labor and benefits expense, $3.2 million in restructuring and related costs, $3.1 million in purchased services expense, $2.2 million in other expenses, net, $2.0 million in depreciation and amortization expense and $1.1 million in equipment rents expense, partially offset by a decrease of $1.5 million in materials expense.
The following table sets forth operating expenses from our U.K./European Operations for the six months ended June 30, 2019 and 2018 (dollars in thousands):  
 
Six Months Ended June 30,
 
Increase/(Decrease)
 
Currency
Impact
 
2018 Constant Currency*
 
Increase/(Decrease) Constant Currency*
 
2019
 
2018
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
 
Labor and benefits
$
102,701

 
31.7
 %
 
$
104,430

 
29.8
%
 
$
(1,729
)
 
$
(6,392
)
 
$
98,038

 
$
4,663

Equipment rents
37,825

 
11.7
 %
 
40,258

 
11.5
%
 
(2,433
)
 
(2,632
)
 
37,626

 
199

Purchased services
61,143

 
18.9
 %
 
83,281

 
23.8
%
 
(22,138
)
 
(5,336
)
 
77,945

 
(16,802
)
Depreciation and amortization
19,371

 
6.0
 %
 
18,562

 
5.3
%
 
809

 
(1,146
)
 
17,416

 
1,955

Diesel fuel used in train operations
25,836

 
8.0
 %
 
27,558

 
7.9
%
 
(1,722
)
 
(1,759
)
 
25,799

 
37

Electricity used in train operations
4,550

 
1.4
 %
 
4,278

 
1.2
%
 
272

 
(283
)
 
3,995

 
555

Casualties and insurance
2,427

 
0.7
 %
 
2,790

 
0.8
%
 
(363
)
 
(176
)
 
2,614

 
(187
)
Materials
29,307

 
9.0
 %
 
32,770

 
9.3
%
 
(3,463
)
 
(1,996
)
 
30,774

 
(1,467
)
Trackage rights
18,330

 
5.7
 %
 
20,064

 
5.7
%
 
(1,734
)
 
(1,323
)
 
18,741

 
(411
)
Net loss/(gain) on sale and impairment of assets
(809
)
 
(0.2
)%
 
(128
)
 
%
 
(681
)
 
(14
)
 
(142
)
 
(667
)
Restructuring and related costs
12,279

 
3.8
 %
 
9,604

 
2.7
%
 
2,675

 
(497
)
 
9,107

 
3,172

Other expenses, net
14,502

 
4.5
 %
 
12,402

 
3.5
%
 
2,100

 
(792
)
 
11,610

 
2,892

Total operating expenses
$
327,462

 
101.2
 %
 
$
355,869

 
101.5
%
 
$
(28,407
)
 
$
(22,346
)
 
$
333,523

 
$
(6,061
)
* 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 $22.3 million due to the impact of foreign currency depreciation.
Labor and benefits expense was $102.7 million for the six months ended June 30, 2019 , compared with $98.0 million for the six months ended June 30, 2018 , an increase of $4.7 million , or 4.8% . The increase consisted of $5.5 million from existing operations, partially offset by a decrease of $0.8 million from divested operations. The increase from existing operations was primarily due to annual wage increases and an increase in headcount to support increased infrastructure services and new aggregate business expected to commence in the fourth quarter of 2019, partially offset by savings resulting from the U.K. Operations optimization program.
Purchased services expense was $61.1 million for the six months ended June 30, 2019 , compared with $77.9 million for the six months ended June 30, 2018 , a decrease of $16.8 million , or 21.6% . The decrease consisted of $19.9 million from divested operations, partially offset by an increase of $3.1 million from existing operations. The decrease was primarily due to crewing costs incurred in 2018 associated with our divested ERS operations. The increase from existing operations was primarily due to an increase in trucking activity and the timing of maintenance.
Depreciation and amortization expense was $19.4 million for the six months ended June 30, 2019 , compared with $17.4 million for the six months ended June 30, 2018 , an increase of $2.0 million , or 11.2% . The increase was primarily attributable to a larger depreciable asset base in 2019 compared with 2018, reflecting capital spending in 2018.
Materials expense, which primarily consists of the cost 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 $29.3 million for the six months ended June 30, 2019 , compared with $30.8 million for the six months ended June 30, 2018 , a decrease of $1.5 million , or 4.8% . The decrease was primarily due to a decrease in container sales in 2019 and timing of roadway maintenance.

63


Restructuring and related costs for the six months ended June 30, 2019 and 2018 of $12.3 million and $9.1 million , respectively, were primarily related to our optimization activities in the U.K.
Other expenses, net were $14.5 million for the six months ended June 30, 2019 , compared with $11.6 million for the six months ended June 30, 2018 , an increase of $2.9 million , or 24.9% . The increase consisted of $2.2 million from existing operations and $0.7 million from divested operations. The increase from existing operations was primarily attributable to implementation costs associated with information technology initiatives.
Operating Loss and Operating Ratio
Our U.K./European Operations had an operating loss of $3.8 million for the six months ended June 30, 2019 , compared with an operating loss of $5.3 million for the six months ended June 30, 2018 . The operating loss for the six months ended June 30, 2019 included $12.3 million of restructuring and related costs primarily driven by our optimization activities in the U.K. The operating loss for the six months ended June 30, 2018 included $9.6 million , or $9.1 million excluding the impact of foreign currency, of restructuring and related costs. The operating ratio was 101.2% for the six months ended June 30, 2019 , compared with 101.5% for the six months ended June 30, 2018 .
Liquidity and Capital Resources
We had cash and cash equivalents of $82.4 million as of June 30, 2019 , of which $41.3 million was from our Australian Operations, which we control through a 51.1% ownership interest. In accordance with our Australia partnership agreement with MIRA, the cash and cash equivalents of our Australian Operations can be used to make payments in the ordinary course of business, pay down debt of the Australia Partnership and make distributions to the partners in proportion to their investments. No such distributions were made during the six months ended June 30, 2019 . During the six months ended June 30, 2018 , the Australia Partnership made an A$40.0 million distribution, of which A$20.4 million (or $15.6 million at the exchange rate on June 5, 2018) and A$19.6 million (or $14.9 million at the exchange rate on June 5, 2018) were distributed to us and MIRA, respectively.
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 and access to debt and equity capital markets and other 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 June 30, 2019 , we had $586.1 million of unused borrowing capacity under our credit agreement.
As of June 30, 2019 , we had long-term debt, including current portion, of $2,338.5 million , which comprised 38.8% of our total capitalization. As of December 31, 2018 , we had long-term debt, including current portion, of $2,453.5 million , which comprised 40.3% of our total capitalization. Our long-term debt, including current portion, consisted of the following as of June 30, 2019 and December 31, 2018 (dollars in thousands):
 
June 30, 2019
 
December 31, 2018
Senior secured credit facility
$
1,654,098

 
$
1,783,423

Australian senior secured credit facility (a)
448,266

 
458,166

Australian subordinated shareholder loan from MIRA (b)
166,962

 
167,796

Other debt
86,416

 
64,261

Less: deferred financing fees
(17,262
)
 
(20,108
)
Total debt
$
2,338,480

 
$
2,453,538

(a) Standalone credit agreement is non-recourse to us and MIRA.
(b) Shareholder loan is non-recourse to us.
During the six months ended June 30, 2019 and 2018 , we generated $223.1 million and $231.3 million , respectively, of cash from operating activities. Changes in working capital decreased net cash flows by $23.9 million and $20.3 million for the six months ended June 30, 2019 and 2018 , respectively.

64


During the six months ended June 30, 2019 and 2018 , our cash used in investing activities was $81.4 million and $110.8 million , respectively. For the six months ended June 30, 2019 , the primary drivers of cash used in investing activities were $144.7 million of cash used for capital expenditures, including $26.8 million related to capital expenditures accrued in 2018 , partially offset by $14.9 million of cash received from grants from outside parties for capital spending and $45.4 million of cash received from the settlement of certain derivative investments. For the six months ended June 30, 2018 , primary drivers of cash used in investing activities were $133.3 million of cash used for capital expenditures, including $20.1 million related to capital expenditures accrued in 2017, partially offset by $12.9 million in cash received from grants from outside parties for capital spending and $7.9 million of net proceeds received from the sale of ERS.
During the six months ended June 30, 2019 and 2018 , our cash used in financing activities was $152.9 million and $131.4 million , respectively. For the six months ended June 30, 2019 , the primary drivers of cash used in financing activities were net payments on outstanding debt of $140.6 million , $4.8 million for common share repurchases and $4.7 million for the purchase of additional shares in Freightliner Australia from its noncontrolling interest holders. For the six months ended June 30, 2018 , the primary drivers of cash used in financing activities were $192.3 million for common share repurchases and $14.9 million of cash distributed to MIRA, partially offset by a net increase in outstanding debt of $88.3 million . For additional information regarding our common share repurchases, see Note 3 , Earnings Per Common Share , to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report.
Property Insurance
We recently completed our annual property insurance renewal, which takes effect on August 1, 2019. Effective with this renewal, our property policies will have various self-insured retentions, which vary based on the type and location of the incident, up to $10.0 million.
2019 Capital Expenditures
During the six months ended June 30, 2019 , we incurred $140.3 million in aggregate capital expenditures related to current year projects of which we paid $118.0 million in cash and accrued $22.3 million in accounts payable as of June 30, 2019 . We expect to receive $11.5 million of grants from outside parties related to these current year projects, which was included in outstanding grant receivables from outside parties as of June 30, 2019 .
The following table sets forth our capital expenditures related to current year projects incurred by segment for the six months ended June 30, 2019 (dollars in thousands):
 
Six Months Ended June 30, 2019
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Capital Expenditures:
 
 
 
 
 
 
 
Track and equipment, self-funded
$
103,184

 
$
4,637

 
$
17,187

 
$
125,008

Track and equipment, subject to third-party funding
7,992

 

 

 
7,992

New business investments
1,208

 
6,117

 

 
7,325

Gross capital expenditures
112,384

 
10,754

 
17,187

 
140,325

Grants from outside parties
(13,993
)
 

 

 
(13,993
)
Net capital expenditures
$
98,391

 
$
10,754

 
$
17,187

 
$
126,332

Cash paid for purchases of property and equipment during the six months ended June 30, 2019 of $144.7 million consisted of $118.0 million for 2019 capital projects and  $26.8 million related to capital expenditures accrued in 2018 . Grant proceeds from outside parties received during the six months ended June 30, 2019 of $14.9 million were primarily related to our capital expenditures from prior years.
Recently Adopted and Recently Issued Accounting Standards
See Note 5 , Leases , and Note 14 , Recently Issued Accounting Standards , to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report for additional information regarding recently adopted and recently issued accounting standards.

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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, 2018 consisted of operating lease obligations. Effective January 1, 2019, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), which required lessees to now recognize operating leases on their balance sheet as a right-of-use asset with a corresponding liability. See Note 5 , Leases , to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report for additional information regarding this standard. As of June 30, 2019 , we had no off-balance sheet arrangements.
Impact of Foreign Currencies on Consolidated Results
As more fully described in Note 13 , Segment Information , to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report, the results of operations of our foreign entities are maintained in the respective local currency and then translated into United States dollars at the applicable exchange rates for inclusion in the consolidated financial statements. When comparing the effects of average foreign currency exchange rates on operating revenues and operating expenses during the three and six months ended June 30, 2019 and 2018 , foreign currency translation had a negative impact on our consolidated operating revenues and a 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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
During the six months ended June 30, 2019 , we settled certain of our British pound forward contracts, which had notional amounts totaling £120.0 million and received cash proceeds of $26.1 million . In addition, we settled our cross-currency swap agreements, which had notional amounts totaling A$248.9 million , and received cash proceeds of €17.0 million (or $19.3 million at the exchange rate on June 30, 2019).
In June 2019, we entered into two new cross-currency swap agreements designated as a fair value hedges and a cross-currency swap designated as a net investment hedge (see Note 6 , Derivative Financial Instruments , to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report).
ITEM 4.
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures  — We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019 . Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2019 , the disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Internal Control Over Financial Reporting  — There were no changes in our internal control over financial reporting (as the term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS.
From time to time, we are a defendant in certain lawsuits and a party to certain arbitrations 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. In May 2018, the EPA notified the AGR of a maximum civil payment penalty of $14.1 million, based on the amount of oil allegedly discharged and other relevant factors considered under the applicable regulation. Although the cleanup associated with this derailment is substantially complete, the civil penalty associated with the contamination is subject to further discussion and potential litigation.
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 EPA matter. Based upon currently available information, we do not believe it is reasonably possible that any such lawsuit or matter 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 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Except for the risks described below, there have been no material changes to the risk factors disclosed in the 2018 Annual Report.
There are risks and uncertainties associated with the proposed merger.
On July 1, 2019, G&W entered into an Agreement and Plan of Merger (the Merger Agreement), by and among G&W, DJP XX, LLC, a Delaware limited liability company (Parent), and MKM XXII Corp., a Delaware corporation and a wholly owned subsidiary of Parent (Merger Sub), pursuant to which Merger Sub will be merged with and into G&W (the Merger) with G&W surviving the Merger as a wholly-owned subsidiary of Parent. The proposed Merger will result in G&W becoming a privately-held company.
Completion of the proposed Merger is subject to various conditions, including, among others, (i) the adoption of the Merger Agreement by holders of 66 2/3% of the voting power of the outstanding shares of G&W’s common stock, (ii) the absence of any law, injunction or other order that prohibits the consummation of the Merger, (iii) the approval or authorization of, or exemption by, the Surface Transportation Board, (iv) receipt of other antitrust and regulatory approvals, including approval of the Committee on Foreign Investment in the United States, and (v) other customary closing conditions, including the accuracy of each party’s representations and warranties and each party’s compliance with its covenants and agreements contained in the Merger Agreement (subject in the case of this clause (v) to certain materiality qualifiers). We cannot provide any assurance that these conditions will be met or waived, or that we will be able to successfully consummate the proposed Merger as provided for under the Merger Agreement, or at all.
In this regard, we face risks and uncertainties due both to the pendency of the proposed Merger as well as the potential failure to consummate the proposed Merger, including:
the occurrence of any event, change or other circumstances that could give us or Parent the right to terminate the Merger Agreement;
the outcome of any legal proceedings that may be instituted against us with respect to the proposed Merger;
the risk that we may not obtain the required stockholder approval on the expected schedule or at all;
the ability to obtain regulatory approvals and satisfy other closing conditions to the proposed Merger in a timely manner or at all, including the risk that regulatory approvals required for the proposed Merger are not obtained or are obtained subject to conditions that are not anticipated;
delay in closing the proposed Merger;

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business disruptions from the proposed Merger that may harm our business, including our current plans and operations;
adverse effects on our ability to retain and hire key personnel or maintain relationships with customers or on our operating results and business generally;
the risk that developments with respect to the proposed Merger could have adverse effects on the market price of our common stock;
certain restrictions during the pendency of the proposed Merger that may impact our ability to pursue certain business opportunities or strategic transactions; and
the risk that G&W will be required to pay Parent a termination fee of $194 million in the event the Merger Agreement is terminated by G&W or Parent under certain circumstances specified in the Merger Agreement, including upon a termination by G&W in connection with G&W’s entry into a superior proposal (which termination fee would be payable even if such superior proposal is not consummated).
In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, and these fees and costs are payable by us regardless of whether the proposed Merger is consummated.
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 2019
(a) Total Number of
Shares (or Units)
Purchased (1)
 
(b) Average Price Paid
per Share (or Unit)(1)
 
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (2)
 
(d) Maximum Number
of Shares (or Units)
(or Approximate Dollar Value)
that May Yet Be Purchased
Under the Plans or
Programs (2)
April 1 to April 30
92

 
$
82.00

 

 
$
335,000,045

May 1 to May 30

 
$

 

 
$
335,000,045

June 1 to June 30
15

 
$
82.00

 

 
$
335,000,045

Total
107

 
$
82.00

 

 
 
(1) The 107 shares acquired in the three months ended June 30, 2019 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 Fourth Amended and Restated 2004 Omnibus Plan.
(2) In November 2018, the Board of Directors authorized the repurchase of $500 million of our Class A Common Stock. During the three months ended June 30, 2019 , we did not purchase any shares of our Class A Common Stock under the repurchase program. In connection with entering into the Merger Agreement, we suspended future share repurchases under the repurchase program.
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 in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

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INDEX TO EXHIBITS
Number
 
Description
 
 
 
2.1

 
 
 
 
*2.2

 
 
 
 
3.1

 
 
 
 
*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 June 30, 2019, formatted in Inline Extensible Business Reporting Language (iXBRL) includes: (i) Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018, (iv) Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018, and (vi) the Notes to Consolidated Financial Statements.
 
 
 
*104

 
Cover Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101)
*Exhibit filed or furnished with this Report.
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.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
GENESEE & WYOMING INC.
 
 
 
 
Date:
August 7, 2019
By:
/s/      T IMOTHY  J. G ALLAGHER
 
 
Name:
Timothy J. Gallagher
 
 
Title:
Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
Date:
August 7, 2019
By:
/ s/ C HRISTOPHER  F. L IUCCI
 
 
Name:
Christopher F. Liucci
 
 
Title:
Chief Accounting Officer
(Principal Accounting Officer)


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