GENESEE & WYOMING INC - FORM 10-Q

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EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - GENESEE & WYOMING INC	gwr03312017ex312.htm
EX-32.1 - SECTION 1350 CERTIFICATION - GENESEE & WYOMING INC	gwr03312017ex321.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - GENESEE & WYOMING INC	gwr03312017ex311.htm
EX-10.2 - FORM OF PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD NOTICE FOR CEO - GENESEE & WYOMING INC	gwr03312017ex102.htm
EX-10.1 - FORM OF PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD NOTICE - GENESEE & WYOMING INC	gwr03312017ex101.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________________________________________

FORM 10-Q

________________________________________________



(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 001-31456

_________________________________________________________________

GENESEE & WYOMING INC.

(Exact name of registrant as specified in its charter)

__________________________________________________________________



Delaware		06-0984624
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
20 West Avenue, Darien, Connecticut 06820
(Address of principal executive offices)(Zip Code)

(203) 202-8900

(Registrant's telephone number, including area code)

_____________________________________________________________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

Shares of common stock outstanding as of the close of business on May 1, 2017:



Class		Number of Shares Outstanding
Class A Common Stock		61,523,997
Class B Common Stock		758,138

Table of Contents



INDEX
		Page

	Forward-Looking Statements	3

Part I	Financial Information	4

Item 1.	Financial Statements:

	Consolidated Balance Sheets (Unaudited) - As of March 31, 2017 and December 31, 2016	4
	Consolidated Statements of Operations (Unaudited) - For the Three Months Ended March 31, 2017 and 2016	5
	Consolidated Statements of Comprehensive Income (Unaudited) - For the Three Months Ended March 31, 2017 and 2016	6
	Consolidated Statements of Cash Flows (Unaudited) - For the Three Months Ended March 31, 2017 and 2016	7
	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	51

Part II	Other Information	52

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Defaults Upon Senior Securities	53

Item 4.	Mine Safety Disclosures	53

Item 5.	Other Information	53

Item 6.	Exhibits	53

Signatures		54

Index to Exhibits		55

Table of Contents

Unless the context otherwise requires, when used in this Quarterly Report on Form 10-Q, the terms "Genesee & Wyoming," "G&W," the "Company," "we," "our" and "us" refer to Genesee & Wyoming Inc. and its subsidiaries. All references to currency amounts included in this Quarterly Report on Form 10-Q, including the financial statements, are in United States dollars unless specifically noted otherwise. The term carload represents physical railcars and the estimated railcar equivalents of commodities transported by metric ton or other measure, as well as intermodal units.

From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information regarding the Company is routinely posted on and accessible at www.gwrr.com/investors. In addition, you may automatically receive email alerts and other information about us by enrolling your email address in the "Email Alerts" section of www.gwrr.com/investors. The information contained on or connected to our Internet website is not deemed to be incorporated by reference in this Quarterly Report or filed with the SEC.

Forward-Looking Statements

This report and other documents referred to in this report contain forward-looking statements regarding future events and the future performance of Genesee & Wyoming Inc. that are based on current expectations, estimates and projections about our industry, our business and our performance, management's beliefs and assumptions made by management. Words such as "anticipates," "intends," "plans," "believes," "could," "should," "seeks," "expects," "will," "estimates," "trends," "outlook," variations of these words and similar expressions are intended to identify these forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast, including the following: risks related to the operation of our railroads; severe weather conditions and other natural occurrences that could result in shutdowns, derailments, railroad network and port congestion or other substantial disruption of operations; customer demand and changes in our operations or loss of important customers; exposure to the credit risk of customers and counterparties; changes in commodity prices; consummation of acquisitions; economic, political and industry conditions, including employee strikes or work stoppages; retention and contract continuation; legislative and regulatory developments, including changes in environmental and other laws and regulations to which we or our customers are subject; increased competition in relevant markets; funding needs and financing sources, including our ability to obtain government funding for capital projects; international complexities of operations, currency fluctuations, finance, tax and decentralized management; challenges of managing rapid growth, including retention and development of senior leadership; unpredictability of fuel costs; susceptibility to and outcome of various legal claims, lawsuits and arbitrations; increase in, or volatility associated with, expenses related to estimated claims, self-insured retention amounts and insurance coverage limits; consummation of new business opportunities; decrease in revenues and/or increase in costs and expenses; susceptibility to the risks of doing business in foreign countries; uncertainties arising from a referendum in which voters in the United Kingdom (U.K.) approved an exit from the European Union (E.U.), commonly referred to as Brexit; our ability to integrate acquired businesses successfully or to realize the expected synergies associated with acquisitions; risks associated with our substantial indebtedness; failure to maintain satisfactory working relationships with partners in Australia; failure to maintain an effective system of internal control over financial reporting as well as disclosure controls and procedures and others including, but not limited to, those set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any, and those noted in our 2016 Annual Report on Form 10-K under "Risk Factors." Therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Forward-looking statements speak only as of the date of this report or as of the date they were made. We do not undertake, and expressly disclaim, any duty to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

GENESEE & WYOMING INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2017 and DECEMBER 31, 2016 (Unaudited)

(dollars in thousands, except per share and share amounts)



	March 31, 2017			December 31, 2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	38,265		$	32,319
Accounts receivable, net	354,925			363,923
Materials and supplies	46,811			43,621
Prepaid expenses and other	48,265			45,475
Total current assets	488,266			485,338
PROPERTY AND EQUIPMENT, net	4,531,419			4,503,319
GOODWILL	1,149,582			1,125,596
INTANGIBLE ASSETS, net	1,495,358			1,472,376
DEFERRED INCOME TAX ASSETS, net	2,547			2,671
OTHER ASSETS, net	43,439			45,658
Total assets	$	7,710,611		$	7,634,958
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	49,004		$	52,538
Accounts payable	254,820			266,867
Accrued expenses	145,396			159,705
Total current liabilities	449,220			479,110
LONG-TERM DEBT, less current portion	2,305,753			2,306,915
DEFERRED INCOME TAX LIABILITIES, net	1,190,655			1,162,221
DEFERRED ITEMS - grants from outside parties	301,244			301,383
OTHER LONG-TERM LIABILITIES	209,894			198,208
COMMITMENTS AND CONTINGENCIES
EQUITY:
Class A Common Stock, $0.01 par value, one vote per share; 180,000,000 shares authorized at March 31, 2017 and December 31, 2016; 74,348,967 and 74,162,972 shares issued and 61,505,278 and 61,362,665 shares outstanding (net of 12,843,689 and 12,800,307 shares in treasury) on March 31, 2017 and December 31, 2016, respectively	743			742
Class B Common Stock, $0.01 par value, ten votes per share; 30,000,000 shares authorized at March 31, 2017 and December 31, 2016; 758,138 shares issued and outstanding on March 31, 2017 and December 31, 2016	8			8
Additional paid-in capital	1,658,465			1,651,703
Retained earnings	1,712,051			1,685,813
Accumulated other comprehensive loss	(187,505		)	(211,336		)
Treasury stock, at cost	(235,510		)	(232,348		)
Total Genesee & Wyoming Inc. stockholders' equity	2,948,252			2,894,582
Noncontrolling interest	305,593			292,539
Total equity	3,253,845			3,187,121
Total liabilities and equity	$	7,710,611		$	7,634,958

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

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GENESEE & WYOMING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2017 and 2016 (Unaudited)

(in thousands, except per share amounts)



	Three Months Ended
	March 31,
	2017			2016
OPERATING REVENUES	$	519,108		$	482,616
OPERATING EXPENSES:
Labor and benefits	165,584			163,114
Equipment rents	33,871			38,430
Purchased services	51,001			46,502
Depreciation and amortization	60,774			49,330
Diesel fuel used in train operations	38,153			25,466
Electricity used in train operations	3,173			3,365
Casualties and insurance	12,543			10,120
Materials	20,546			21,591
Trackage rights	22,223			20,576
Net (gain)/loss on sale and impairment of assets	(427		)	12,825
Restructuring costs	3,755			1,127
Other expenses	30,458			33,174
Total operating expenses	441,654			425,620
OPERATING INCOME	77,454			56,996
Interest income	227			75
Interest expense	(26,365		)	(17,975		)
Other (loss)/income, net	(2,099		)	731
Income before income taxes	49,217			39,827
Provision for income taxes	(21,928		)	(12,808		)
Net income	$	27,289		$	27,019
Less: Net income attributable to noncontrolling interest	1,051			—
Net income attributable to Genesee & Wyoming Inc.	$	26,238		$	27,019
Basic earnings per common share attributable to Genesee & Wyoming Inc. common stockholders:	$	0.43		$	0.47
Weighted average shares - Basic	61,413			57,025
Diluted earnings per common share attributable to Genesee & Wyoming Inc. common stockholders:	$	0.42		$	0.47
Weighted average shares - Diluted	62,353			57,964

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

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GENESEE & WYOMING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2017 and 2016 (Unaudited)

(dollars in thousands)



	Three Months Ended
	March 31,
	2017			2016
NET INCOME	$	27,289		$	27,019
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment	36,253			31,121
Net unrealized gain/(loss) on qualifying cash flow hedges, net of tax (provision)/benefit of ($624) and $6,288, respectively	506			(9,431		)
Changes in pension and other postretirement benefits, net of tax benefit/(provision) of $449 and ($520), respectively	(893		)	1,923
Other comprehensive income	35,866			23,613
COMPREHENSIVE INCOME	$	63,155		$	50,632
Less: Comprehensive income attributable to noncontrolling interest	13,086			—
COMPREHENSIVE INCOME ATTRIBUTABLE TO GENESEE & WYOMING INC.	$	50,069		$	50,632

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

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GENESEE & WYOMING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2017 and 2016 (Unaudited)

(dollars in thousands)



	Three Months Ended
	March 31,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	27,289		$	27,019
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	60,774			49,330
Stock-based compensation	4,213			5,074
Deferred income taxes	13,572			5,029
Net (gain)/loss on sale and impairment of assets	(427		)	12,825
Changes in assets and liabilities which provided/(used) cash, net of effect of acquisitions:
Accounts receivable, net	6,524			9,617
Materials and supplies	(2,140		)	(1,381		)
Prepaid expenses and other	(2,226		)	(6,564		)
Accounts payable and accrued expenses	(29,330		)	(34,956		)
Other assets and liabilities, net	6,767			4,048
Net cash provided by operating activities	85,016			70,041
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(34,738		)	(47,912		)
Grant proceeds from outside parties	4,771			16,229
Net cash provided by acquisitions	2,935			—
Insurance proceeds for the replacement of assets	1,406			2,418
Proceeds from disposition of property and equipment	928			292
Net cash used in investing activities	(24,698		)	(28,973		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on revolving line-of-credit, long-term debt and capital lease obligations	(167,730		)	(143,684		)
Proceeds from revolving line-of-credit and long-term borrowings	112,294			104,316
Proceeds from employee stock purchases	2,348			2,668
Treasury stock purchases	(3,162		)	(1,974		)
Net cash used in financing activities	(56,250		)	(38,674		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	1,878			778
INCREASE IN CASH AND CASH EQUIVALENTS	5,946			3,172
CASH AND CASH EQUIVALENTS, beginning of period	32,319			35,941
CASH AND CASH EQUIVALENTS, end of period	$	38,265		$	39,113

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

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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 months ended March 31, 2017 and 2016 are presented on a basis consistent with the audited financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of the results for the interim periods presented. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. The consolidated balance sheet data for 2016 was derived from the audited financial statements in the Company's 2016 Annual Report on Form 10-K, but does not include all disclosures required by U.S. GAAP.

The results of operations of the foreign entities are maintained in the local currency of the respective subsidiary and translated into United States dollars at the applicable exchange rates for inclusion in the consolidated financial statements. As a result, any appreciation or depreciation of these currencies against the United States dollar will impact the Company's results of operations.

The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2016 included in the Company's 2016 Annual Report on Form 10-K. Certain reclassifications have been made to prior period balances to conform to the current year presentation, including changes to the statement of cash flows from the adoption of the Accounting Standards Update (ASU) noted below.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based compensation arrangements, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The Company elected to account for forfeitures as they occur and elected the retrospective transition method in regards to the classification of tax-related cash flows from stock-based payments. The amendment became effective for the Company on January 1, 2017 and did not have a material impact on the consolidated financial statements for the three months ended March 31, 2017. However, this guidance could have a material impact on the Company’s future consolidated financial statements, dependent upon the volatility of the Company's stock price. This price volatility could materially increase or decrease the amount of the income tax benefit related to stock compensation recognized in the consolidated statement of operations and classified as an operating activity in the consolidated statement of cash flows.

When comparing the Company's results of operations from one reporting period to another, it is important to consider that the Company has historically experienced fluctuations in revenues and expenses due to acquisitions, changing economic conditions, fluctuations in commodity prices, competitive forces, changes in foreign currency exchange rates, rail network congestion, one-time freight moves, fuel price fluctuations, customer plant expansions and shutdowns, sales of property and equipment, derailments and weather-related conditions, such as hurricanes, cyclones, tornadoes, high winds, droughts, heavy snowfall, unseasonably hot or cold weather, freezing and flooding, among other factors. In periods when these events occur, the Company's results of operations are not easily comparable from one period to another. Finally, certain of the Company's railroads have commodity shipments that are sensitive to general economic conditions, global commodity prices and foreign exchange rates, such as steel products, iron ore, paper products, lumber and forest products and agricultural products, as well as product specific market conditions, such as the availability of lower priced alternative sources of power generation (coal) and energy commodity price differentials (crude oil and natural gas liquids) or congestion at deep seaports (intermodal). Other shipments are relatively less affected by economic conditions and are more closely affected by other factors, such as winter weather (salt) and seasonal rainfall (agricultural products). As a result of these and other factors, the Company's results of operations in any reporting period may not be directly comparable to the Company's results of operations in other reporting periods.

2. CHANGES IN OPERATIONS:

North American Operations

Heart of Georgia Railroad, Inc.: On February 7, 2017, the Company announced it agreed to acquire the shares of Atlantic Western Transportation, Inc., parent company of Heart of Georgia Railroad, Inc. (HOG). The acquisition is expected to be completed in the second quarter of 2017.

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GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

HOG was founded in 1999 and operates 219 miles of track that runs across the State of Georgia. The track is leased from the Georgia Department of Transportation. It connects with the Company’s Georgia Southwestern Railroad at Americus, Georgia, and with the Company’s Georgia Central Railway at Vidalia, Georgia. HOG serves an inland intermodal terminal at Cordele, Georgia, providing five days per week, direct rail service via the Georgia Central Railway to the Port of Savannah for auto, agricultural products and other merchandise customers. HOG has Class I railroad connections with CSX Corp. at Cordele and with Norfolk Southern at Americus and Helena, Georgia.

HOG transports approximately 10,000 annual carloads of agricultural products, feed, fertilizer, and lumber and forest products, of which approximately 2,000 carloads are interchanged with the Company’s Georgia Central Railway. Following the acquisition, HOG will be managed as one of the Company’s Coastal Region railroads within its North American Operations segment.

Providence and Worcester Railroad Company: On November 1, 2016, the Company completed the acquisition of 100% of the outstanding common stock of Providence and Worcester Railroad Company (P&W) for $25.00 per share, or $126.2 million. The Company funded the acquisition with borrowings under the Company's Second Amended and Restated Senior Secured Syndicated Credit Facility Agreement, as amended (the Credit Agreement) (see Note 5, Long-Term Debt). The results of operations from P&W have been included in the Company's consolidated statement of operations since the acquisition date within the Company's North American Operations segment. The Company incurred $2.4 million of integration costs associated with P&W during the three months ended March 31, 2017, of which $2.2 million was included within labor and benefits expense for severance costs and $0.2 million was included within other expenses in the Company's consolidated statement of operations.

P&W is headquartered in Worcester, Massachusetts, and operates in Rhode Island, Massachusetts, Connecticut and New York. P&W is contiguous with the Company’s New England Central Railroad (NECR) and Connecticut Southern Railroad (CSO). Rail service is provided by approximately 140 P&W employees with 32 locomotives across 163 miles of owned track and over approximately 350 track miles under track access agreements. P&W has exclusive freight access over Amtrak’s Northeast Corridor between New Haven, Connecticut, and Providence, Rhode Island, and track rights over Metro-North Commuter Railroad, Amtrak and CSX Corp. between New Haven, Connecticut, and Queens, New York. P&W interchanges with the Company’s NECR and CSO railroads, as well as with CSX Corp., Norfolk Southern, Pan Am Railways, Pan Am Southern, the Housatonic Railroad and the New York and Atlantic Railroad, and also connects to Canadian National and Canadian Pacific via NECR.

P&W serves a diverse mix of aggregates, auto, chemicals, metals and lumber customers in southeastern New England, handling approximately 44,000 carloads and intermodal units annually. In addition, P&W provides rail service to three ports (Providence, Davisville and New Haven) and to a United States Customs bonded intermodal terminal in Worcester, Massachusetts, that receives inbound intermodal containers for distribution in New England.

The Company accounted for the acquisition as a business combination using the acquisition method of accounting under U.S. GAAP. The acquired assets and liabilities of P&W were recorded at their acquisition-date fair values and were consolidated with those of the Company as of the acquisition date. The following acquisition-date fair values were assigned to the acquired net assets (dollars in thousands). The $27.9 million of fair value assigned to goodwill will not be deductible for tax purposes.



	Amount
Cash and cash equivalents	$	1,529
Accounts receivable	4,011
Materials and supplies	1,048
Prepaid expenses and other	648
Property and equipment	129,473
Goodwill	27,938
Total Assets	164,647
Accounts payable and accrued expenses	9,759
Deferred income tax liabilities, net	27,464
Other long-term liabilities	1,273
Net assets	$	126,151

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GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Australian Operations

Glencore Rail (NSW) Pty Limited: On December 1, 2016, a subsidiary of the Company completed the acquisition of Glencore Rail (NSW) Pty Limited (GRail) for A$1.14 billion (or approximately $844.9 million at an exchange rate of $0.74 for one Australian dollar) and concurrently issued a 48.9% equity stake in G&W Australia Holdings LP (GWAHLP) (collectively, the Australia Partnership), which is the holding entity for all of the Company’s Australian businesses, including GRail, to Macquarie Infrastructure and Real Assets (MIRA), a large private-equity infrastructure investment firm. The Company, through wholly-owned subsidiaries, retained a 51.1% ownership in GWAHLP. As the Company maintained control of its Australian Operations, it will continue to consolidate 100% of the Company's Australian Operations in its financial statements and report a noncontrolling interest for MIRA’s 48.9% equity ownership. The acquisition of GRail was funded through a combination of third-party debt and contributions from the Company and MIRA in the form of equity and partner loans.

The Company and MIRA contributed a combined A$1.3 billion in the form of cash, partner loans and contributed equity, and the Company's recently established subsidiary, GWI Acquisitions Pty Ltd (GWIA), entered into a five-year A$690 million senior secured term loan facility that is non-recourse to the Company and to MIRA. The proceeds were used to acquire GRail for A$1.14 billion, repay Genesee & Wyoming Australia’s (GWA) existing A$250 million term loan (under the Company’s credit facility) and pay A$19.8 million in debt issuance costs and A$13.2 million of acquisition-related costs (collectively the GRail Transactions). The foreign exchange rate used to translate the transaction amounts to United States dollars (USD) was $0.74 for one Australian dollar (AUD).

GRail’s coal haulage business was established in 2010 as an alternative rail service provider to the incumbent railroads in the Hunter Valley and has grown to be the third largest coal haulage business in Australia. The Company’s Freightliner Australia subsidiary (acquired by the Company in March 2015) has been the rail operator of GRail since inception and presently provides haulage and logistics services for approximately 40 million tonnes per year of steam coal that is among the lowest cost and highest quality coal in the world sold principally to customers in Japan, Korea and Taiwan. These services have continued following the GRail transaction.

In conjunction with the GRail acquisition, the Company entered into a 20-year rail haulage contract with the seller, Glencore Coal Pty Limited (GC), to exclusively haul all coal produced at GC’s existing mines in the Hunter Valley to the Port of Newcastle. The contract has minimum guaranteed volumes over the first 18 years.

The GRail transaction includes the acquisition of nine train sets (30 locomotives and 894 railcars). Rail haulage service is operated on government-owned, open-access track that is coordinated by a neutral third party. Track access fees will continue to be paid directly by GC.

The results of operations from GRail have been included in the Company's consolidated statement of operations since the December 1, 2016 acquisition date within the Company's Australian Operations segment. The Company incurred $0.1 million of integration costs associated with GRail during the three months ended March 31, 2017, which were included within other expenses in the Company's consolidated statement of operations.

The Company paid GC, the seller of GRail, A$1.14 billion in cash at closing and received A$3.8 million (or $2.9 million at the exchange rate on the date the cash was received) from the seller for the final working capital adjustment during the three months ended March 31, 2017. The Company accounted for the acquisition as a business combination using the acquisition method of accounting under U.S. GAAP. The acquired assets and liabilities of GRail were recorded at their acquisition-date fair values and were consolidated with those of the Company as of the acquisition date. The foreign exchange rate used to translate the balance sheet to United States dollars was $0.74 for one Australian dollar, the exchange rate on December 1, 2016.

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GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following acquisition-date fair values were assigned to the acquired net assets (amounts in thousands):



	AUD		USD
Accounts receivable	A$	1,556	$	1,153
Materials and supplies	411		305
Property and equipment	279,592		207,206
Goodwill	415,959		308,267
Intangible assets	635,000		470,599
Total assets	1,332,518		987,530
Accounts payable and accrued expenses	5,796		4,296
Deferred income tax liabilities, net	190,551		141,217
Net assets	A$	1,136,171	$	842,017

The A$635.0 million (or $470.6 million at the exchange rate on December 1, 2016) of fair value assigned to intangible assets relates to an amortizable customer contract associated with the 20-year take-or-pay rail haulage contract with GC. The A$416.0 million (or $308.3 million at the exchange rate on December 1, 2016) of fair value assigned to goodwill will not be deductible for tax purposes.

Arrium Limited: Between 2011 and 2014, GWA invested a total of $78 million to purchase locomotives and railcars, as well as to construct a standard gauge rolling-stock maintenance facility to support iron ore shipments from Arrium's Southern Iron mine and Whyalla-based operations, which include the Middleback Range iron ore mines and the Whyalla steelworks. Arrium mothballed its Southern Iron mine in April 2015, citing the significant decline in the price of iron ore, while the mines in the Middleback Range continued to operate.

On April 7, 2016, Arrium announced it had entered into voluntary administration. As a result, the Company recorded a $13.0 million non-cash charge related to the impairment of GWA's now idle rolling-stock maintenance facility, which was recorded to net (gain)/loss on sale and impairment of assets within operating expenses, which represented the entire carrying value of these assets, and an allowance for doubtful accounts charge of $8.1 million associated with accounts receivable from Arrium, which was recorded to other expenses within operating expenses, during the three months ended March 31, 2016. Also, as a result of the voluntary administration, all payments to GWA associated with the Southern Iron rail haulage agreement have ceased. GWA is in the process of redeploying rolling-stock previously used to provide service under the Southern Iron rail haulage agreement to serve other customers.

GWA continues to provide service and receive payments under the remaining rail haulage agreement to serve several iron ore mines in the Middleback Range and the Whyalla Steelworks operations, which the Company expects will represent A$40 million (or approximately $31 million at the exchange rate on March 31, 2017) of annual revenue, prospectively. Pending the outcome of the voluntary administration process, GWA could lose some or all of the revenue associated with the remaining rail haulage agreement. In the event of an adverse determination regarding the viability of the Middleback Range or the Whyalla Steelworks operations, or a termination of the remaining rail haulage agreement, all or a portion of GWA's assets deployed to provide service under this agreement, which consist largely of narrow gauge locomotives and railcars, could be redeployed elsewhere in Australia.

Pro Forma Financial Results (Unaudited)

The following table summarizes the Company's unaudited pro forma operating results for the three months ended March 31, 2016 as if the GRail Transactions had been consummated as of January 1, 2015. As such, these results include pro forma results from the GRail Transactions for the period from January 1, 2016 through March 31, 2016. The following pro forma financial information does not include the impact of any costs to integrate the operations or the impact of derivative instruments that the Company has entered into or may enter into to mitigate foreign currency or interest rate risk (dollars in thousands, except per share amounts):



	Three Months Ended March 31, 2016
Operating revenues	$	493,837
Net income attributable to Genesee & Wyoming Inc.	$	27,268
Basic earnings per common share	$	0.48
Diluted earnings per common share	$	0.47

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The unaudited pro forma operating results included the acquisition of GRail adjusted, net of tax, for depreciation and amortization expense resulting from the determination of fair values of the acquired property and equipment and amortizable intangible asset, the inclusion of interest expense related to borrowings used to fund the acquisition, the amortization of debt issuance costs related to the Australian Credit Agreement, noncontrolling interest related to MIRA's 48.9% ownership and the elimination of Australia's interest expense related to debt under the Credit Agreement. Prior to the GRail acquisition, the Company's Australian subsidiary, Freightliner Australia Pty Ltd (FLA), provided rail operator services to GRail, which has been eliminated in the pro forma financial results.

The unaudited pro forma operating results for the three months ended March 31, 2016 were based on the Company's consolidated statement of operations and GRail's historical operating results for the three months ended March 31, 2016. The foreign exchange rate used to translate GRail's 2016 historical operating results to United States dollars was $0.72 for one Australian dollar (which was calculated based on the weighted average monthly exchange rates for the first three months of 2016).

The pro forma financial information does not purport to be indicative of the results that actually would have been obtained had the GRail Transactions been completed as of January 1, 2015 and for the periods presented and are not intended to be a projection of future results or trends.

U.K./European Operations

Continental Europe Intermodal Business: During 2016, the Company explored ways to enhance the long-term viability of ERS Railways B.V. (ERS), the Continental Europe intermodal business Freightliner acquired from Maersk, which the Company acquired in 2015 with the Freightliner acquisition. Due to its limited history of profitability and competitive dynamics in the market in which it operates, the Company ascribed little value to it at the time of acquisition.

Despite a significant and focused effort by the Company, the performance of ERS reached unsustainable levels during 2016. As such, a restructuring plan was initiated that includes the cessation of all "open" train services from the port of Rotterdam, the closing of the ERS offices in Rotterdam and Frankfurt and the closing of the ERS customer services function in Warsaw. The Company is in the process of redistributing ERS’s leased locomotives and railcars, which have lease termination dates ranging from 2017 to 2021. These steps will enable the Company to focus on the deep-sea intermodal sector. The Company's subsidiary, Rotterdam Rail Feeding B.V., will continue its existing services and not be affected by the restructuring of ERS.

As a result of the ERS restructuring plan, the Company recorded impairment and related charges of $21.5 million in December 2016. These charges primarily included $14.5 million for an impairment of goodwill and $4.1 million for an impairment of a customer-related intangible asset, which were both recorded to net (gain)/loss on sale and impairment of assets within operating expenses, which represented the entire carrying value of these assets. For the three months ended March 31, 2017, the Company recorded $3.1 million of restructuring costs, primarily related to severance costs. The Company expects to recognize approximately $1.0 million of additional remaining severance costs related to ERS restructuring in the three months ended June 30, 2017.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3. EARNINGS PER COMMON SHARE:

The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2017 and 2016 (in thousands, except per share amounts):



	Three Months Ended
	March 31,
	2017		2016
Numerator:
Net income attributable to Genesee & Wyoming Inc.	$	26,238	$	27,019
Denominators:
Weighted average Class A common shares outstanding – Basic	61,413		57,025
Weighted average Class B common shares outstanding	758		793
Dilutive effect of employee stock-based awards	182		146
Weighted average shares – Diluted	62,353		57,964

Earnings per common share attributable to Genesee & Wyoming Inc. common stockholders:
Basic earnings per common share	$	0.43	$	0.47
Diluted earnings per common share	$	0.42	$	0.47

The Company's weighted average basic shares outstanding for the three months ended March 31, 2017 included 4,000,000 shares as a result of the Company's public offering of Class A Common Stock on December 13, 2016.

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



	Three Months Ended
	March 31,
	2017	2016
Antidilutive shares	1,094	1,254

4. ACCOUNTS RECEIVABLE:

Accounts receivable consisted of the following as of March 31, 2017 and December 31, 2016 (dollars in thousands):



	March 31, 2017			December 31, 2016
Accounts receivable – trade	$	349,834		$	353,347
Accounts receivable – grants from outside parties	7,921			10,652
Accounts receivable – insurance and other third-party claims	10,938			11,994
Total accounts receivable	368,693			375,993
Less: Allowance for doubtful accounts	(13,768		)	(12,070		)
Accounts receivable, net	$	354,925		$	363,923

During the three months ended March 31, 2017, the Company recorded a $1.5 million accounts receivable reserve associated with a Continental European intermodal customer entering into bankruptcy.

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 $4.8 million and $16.2 million for the three months ended March 31, 2017 and 2016, respectively, from such grant programs. The proceeds were presented as cash inflows from investing activities within each of the applicable periods.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

None of the Company's grants represent a future liability of the Company unless the Company abandons the rehabilitated or new track structure within a specified period of time or fails to maintain the upgraded or new track to certain standards, fails to make certain minimum capital improvements or ceases use of the locomotives within the specified geographic area and time period, or fails to comply with other grant provisions in each case, as set forth in the applicable grant agreement. As the Company intends to comply with the requirements of these agreements, the Company has recorded additions to track property and locomotives and has deferred the amount of the grants. The amortization of deferred grants is a non-cash offset to depreciation expense over the useful lives of the related assets.

The following table sets forth the offset to depreciation expense from the amortization of deferred grants recorded by the Company during the three months ended March 31, 2017 and 2016 (dollars in thousands):



	Three Months Ended
	March 31,
	2017		2016
Amortization of deferred grants	$	3,245	$	2,949

Insurance and Third-Party Claims

Accounts receivable from insurance and other third-party claims at March 31, 2017 included $5.7 million from the Company's U.K./European Operations, $4.3 million from the Company's North American Operations and $0.9 million from the Company's Australian Operations. The balance from the Company's U.K./European Operations resulted primarily from the Company's anticipated insurance recoveries associated with a pre-acquisition rail-related collision in Germany in 2014. The balance from the Company's North American Operations resulted predominately from the Company's anticipated insurance recoveries associated with a 2015 trestle fire in the United States and derailments in Canada. The Company received proceeds from insurance totaling $1.4 million and $2.4 million for the three months ended March 31, 2017 and 2016, respectively.

5. LONG-TERM DEBT:

Credit Agreement

As of the March 20, 2015 closing, the Second Amended and Restated Senior Secured Syndicated Credit Facility Agreement (the Credit Agreement) was comprised of a $1,782.0 million United States term loan, an A$324.6 million (or $252.5 million at the exchange rate on March 20, 2015) Australian term loan, a £101.7 million (or $152.2 million at the exchange rate on March 20, 2015) U.K. term loan and a $625.0 million revolving credit facility. The revolving credit facility includes borrowing capacity for letters of credit and swingline loans. The stated maturity date of each of the Company's credit facilities under the Credit Agreement is March 31, 2020.

On October 20, 2016, the Company entered into Amendment No. 2 to the Credit Agreement (Amendment No. 2). Amendment No. 2 permitted, among other things, the Company to enter into the Australia Partnership transaction and the GRail Transactions (collectively, the Australian Reorganization). Amendment No. 2 also permitted the repayment in full and termination of the obligations of the Australia Partnership and its subsidiaries (the Australian Loan Parties) under the Credit Agreement (the Australian Refinancing). Following the Australian Refinancing and Australian Reorganization, the Australian Loan Parties became unrestricted subsidiaries under, ceased to be party to and have no obligations under the Credit Agreement.

As a result of the Australian Reorganization, on December 1, 2016, the $625.0 million revolving credit facility under the Credit Agreement was reallocated and includes flexible sub-limits for revolving loans denominated in United States dollars, British pounds, Canadian dollars and Euros and provides for the ability to reallocate commitments among the sub-limits, provided that the total amount of all British pound, Canadian dollar, Euro or other designated currencies sub-limits cannot exceed a combined $500.0 million. The Company also repaid in full the outstanding Australian term loan of A$250.0 million (or $185.3 million at the exchange rate on December 1, 2016 when the payment was made).

During the three months ended March 31, 2017, the Company made prepayments on its United States term loan of $45.8 million. The Company also made scheduled quarterly principal payments of $4.3 million on the United States term loan and £1.3 million (or $1.6 million at the exchange rate on the date the payment was made) on its U.K. term loan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The United States dollar-denominated and the British pound-denominated term loans began to amortize in quarterly installments during the three months ended September 30, 2016, with the remaining principal balance payable upon maturity, as set forth below (amounts in thousands):



	Quarterly Payment Date	Principal Amount Due on Each Payment Date
United States dollar:	June 30, 2017 through June 30, 2018	$	2,441
	September 30, 2018 through December 31, 2019	$	4,882
	Maturity date - March 31, 2020	$	1,336,500

British pound:	June 30, 2017 through June 30, 2018	£	1,271
	September 30, 2018 through December 31, 2019	£	2,542
	Maturity date - March 31, 2020	£	75,532

As of March 31, 2017, the Company had the following outstanding term loans under its Credit Agreement (amounts in thousands, except percentages):



	Local Currency		United States Dollar Equivalent		Interest Rate
United States dollar	$	1,378,000	$	1,378,000	2.98	%
British pound	£	97,139	$	121,832	2.26	%

The Company's availability to draw from the unused borrowing capacity is subject to covenant limitations as discussed below. As of March 31, 2017, the Company had the following unused borrowing capacity under its revolving credit facility (dollars in thousands):



	2017
Total available borrowing capacity	$	625,000
Outstanding revolving loans	$	96,808
Outstanding letter of credit guarantees	$	2,582
Unused borrowing capacity	$	525,610

As of March 31, 2017, the Company had the following outstanding revolving loans under its revolving credit facility (amounts in thousands, except percentages):



	Local Currency		United States Dollar Equivalent		Interest Rate
British pound (swingline loan)	£	11,000	$	13,796	2.22	%
British pound	£	37,000	$	46,405	2.26	%
Canadian dollar	C$	8,000	$	6,014	2.89	%
Euro	€	28,600	$	30,593	2.00	%

As of March 31, 2017, the Company was in compliance with the covenants under the Credit Agreement, as amended by Amendment No. 1 and Amendment No. 2 (the Amendments), including the maximum senior secured leverage ratio covenant noted above.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

6. DERIVATIVE FINANCIAL INSTRUMENTS:

The Company actively monitors its exposure to interest rate and foreign currency exchange rate risks and uses derivative financial instruments to manage the impact of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. The Company does not trade or use derivative instruments with the objective of earning financial gains on the interest rate or exchange rate fluctuations alone, nor does the Company use derivative instruments where it does not have underlying exposures. Complex instruments involving leverage or multipliers are not used. The Company manages its hedging position and monitors the credit ratings of counterparties and does not anticipate losses due to counterparty nonperformance. Management believes its use of derivative instruments to manage risk is in the Company's best interest. However, the Company's use of derivative financial instruments may result in short-term gains or losses and increased earnings volatility. The Company's instruments are recorded in the consolidated balance sheets at fair value in prepaid expenses and other, other assets, net, accrued expenses or other long-term liabilities.

The Company may designate derivatives as a hedge of a forecasted transaction or a hedge of the variability of the cash flows to be received or paid in the future related to a recognized asset or liability (cash flow hedge). The portion of the changes in the fair value of the derivative used as a cash flow hedge that is offset by changes in the expected cash flows related to a recognized asset or liability (the effective portion) is recorded in other comprehensive income/(loss). As the hedged item is realized, the gain or loss included in accumulated other comprehensive income/(loss) is reported in the consolidated statements of operations on the same line item as the hedged item. The portion of the changes in the fair value of derivatives used as cash flow hedges that is not offset by changes in the expected cash flows related to a recognized asset or liability (the ineffective portion) is immediately recognized in earnings on the same line item as the hedged item.

The Company matches the hedge instrument to the underlying hedged item (assets, liabilities, firm commitments or forecasted transactions). At inception of the hedge and at least quarterly thereafter, the Company assesses whether the derivatives used to hedge transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. When it is determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting, and any gains or losses on the derivative instrument thereafter are recognized in earnings during the period in which it no longer qualifies for hedge accounting.

From time to time, the Company may enter into certain derivative instruments that may not be designated as hedges for accounting purposes. For example, to mitigate currency exposures related to intercompany debt, cross-currency swap contracts may be entered into for periods consistent with the underlying debt. The Company believes such instruments are closely correlated with the underlying exposure, thus reducing the associated risk. The gains or losses from the changes in the fair value of derivative instruments not accounted for using hedge accounting are recognized in current period earnings within other income/(loss), net. Derivative instruments entered into in conjunction with contemplated acquisitions also do not qualify as hedges for accounting purposes.

Interest Rate Risk Management

The Company uses interest rate swap agreements to manage its exposure to the changes in interest rates on the Company's variable rate debt. These swap agreements are recorded in the consolidated balance sheets at fair value. Changes in the fair value of the swap agreements are recorded in net income or other comprehensive income/(loss), based on whether the agreements are designated as part of a hedge transaction and whether the agreements are effective in offsetting the change in the value of the future interest payments attributable to the underlying portion of the Company's variable rate debt. Interest payments accrued each reporting period for these interest rate swaps are recognized in interest expense. The Company formally documents its hedge relationships, including identifying the hedge instruments and hedged items, as well as its risk management objectives and strategies for entering into the hedge transaction.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table summarizes the terms of the Company's outstanding interest rate swap agreements entered into to manage the Company's exposure to changes in interest rates on its variable rate debt (amounts in thousands):

Notional Amount

Effective Date

Expiration Date

Date

Amount

Pay Fixed Rate

Receive Variable Rate

9/30/2016

9/30/2026

100,000

2.76%

1-month LIBOR

9/30/2016

9/30/2026

100,000

2.74%

1-month LIBOR

9/30/2016

9/30/2026

100,000

2.73%

1-month LIBOR

12/1/2016

12/1/2021

93,150

2.44%

AUD-BBR

12/1/2016

12/1/2021

93,150

2.44%

AUD-BBR

12/1/2016

12/1/2021

93,150

2.44%

AUD-BBR

12/1/2016

12/1/2021

93,150

2.44%

AUD-BBR

12/1/2016

12/1/2021

55,373

2.44%

AUD-BBR

12/1/2016

12/1/2021

55,373

2.44%

AUD-BBR

12/1/2016

12/1/2021

34,155

2.44%

AUD-BBR

On November 9, 2012, the Company entered into multiple 10-year forward starting interest rate swap agreements to manage the exposure to changes in interest rates on the Company's variable rate debt. On September 30, 2016, the Company amended its forward starting swaps, which included moving the mandatory settlement date from September 30, 2016 to September 30, 2026, changing from 3-month LIBOR to 1-month LIBOR and adjusting the fixed rate. The amended forward starting swaps continue to qualify for hedge accounting. In addition, it remains probable that the Company will either issue $300.0 million of fixed-rate debt or have $300.0 million of variable-rate debt under the Company's commercial banking lines throughout the term of the outstanding swap agreements. The Company expects to amortize any gains or losses on the settlements over the life of the respective swap.

The fair values of the Company's interest rate swap agreements were estimated based on Level 2 inputs. The Company's effectiveness testing during the three months ended March 31, 2017 and 2016 resulted in no amount of gain or loss reclassified from accumulated other comprehensive loss into earnings due to ineffectiveness. During the three months ended March 31, 2017 and 2016, $0.4 million and $0.3 million, respectively, of existing net losses were realized and recorded as interest expense in the consolidated statements of operations. Based on the Company's fair value assumptions as of March 31, 2017, it expects to realize $2.0 million of existing net losses that are reported in accumulated other comprehensive loss into earnings within the next 12 months. See Note 11, Accumulated Other Comprehensive Loss, for additional information regarding the Company's cash flow hedges.

Foreign Currency Exchange Rate Risk

As of March 31, 2017, the Company's foreign subsidiaries had $997.1 million of third-party debt, including capital leases, denominated in the local currencies in which the Company's foreign subsidiaries operate, including the Australian dollar, the British pound, the Canadian dollar and the Euro. The debt service obligations associated with this foreign currency debt are generally funded directly from those foreign operations. As a result, foreign currency risk related to this portion of the Company's debt service payments is limited. However, in the event the foreign currency debt service is not paid by the Company's foreign subsidiaries and is paid by its United States subsidiaries, the Company may face exchange rate risk if the Australian dollar, the British pound, the Canadian dollar or the Euro were to appreciate relative to the United States dollar and require higher United States dollar equivalent cash.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The Company is also exposed to foreign currency exchange rate risk related to its foreign subsidiaries, including non-functional currency intercompany debt, typically associated with intercompany debt from the Company's United States subsidiaries to its foreign subsidiaries, associated with acquisitions and any timing difference between announcement and closing of an acquisition of a foreign business. To mitigate currency exposures of non-United States dollar-denominated acquisitions, the Company may enter into foreign currency forward purchase contracts. To mitigate currency exposures related to non-functional currency denominated intercompany debt, cross-currency swaps or foreign currency forward contracts may be entered into for periods consistent with the underlying debt. In determining the fair value of the derivative contract, the significant inputs to valuation models are quoted market prices of similar instruments in active markets. However, cross-currency swap contracts and foreign currency forward contracts used to mitigate exposures on foreign currency intercompany debt may not qualify for hedge accounting. In cases where the cross-currency swap contracts and foreign currency forward contracts do not qualify for hedge accounting, the Company believes that such instruments are closely correlated with the underlying exposure, thus reducing the associated risk. The gains or losses from changes in the fair value of derivative instruments that do not qualify for hedge accounting are recognized in current period earnings within other income/(loss), net.

On March 25, 2015, the Company closed on the Freightliner acquisition and paid cash consideration of £492.1 million (or $733.0 million at the exchange rate on March 25, 2015). The Company financed the acquisition through a combination of available cash and borrowings under the Company's Credit Agreement. A portion of the funds were transferred from the United States to the U.K. through an intercompany loan with a notional amount of £120.0 million (or $181.0 million at the exchange rate on the effective date of the loan) and accrued interest as of March 31, 2017 of £15.5 million (or $19.4 million at the exchange rate on March 31, 2017), each of which are expected to remain until maturity of the loan. To mitigate the foreign currency exchange rate risk related to this non-functional currency intercompany loan and the related interest, the Company entered into British pound forward contracts, which are accounted for as cash flow hedges.

The fair values of the Company's British pound forward contracts were estimated based on Level 2 inputs. The Company's effectiveness testing during the three months ended March 31, 2017 and 2016 resulted in no amount of gain or loss reclassified from accumulated other comprehensive loss into earnings due to ineffectiveness. During the three months ended March 31, 2017, $0.1 million of net gains was recorded as interest income in the consolidated statements of operations. Based on the Company's fair value assumptions as of March 31, 2017, it expects to realize $0.5 million of existing net gains that are reported in accumulated other comprehensive loss into earnings within the next 12 months. See Note 11, Accumulated Other Comprehensive Loss, for additional information regarding the Company's cash flow hedges.

The following table summarizes the Company's outstanding British pound forward contracts (British pounds in thousands):



Effective Date	Settlement Date	Notional Amount	Exchange Rate
3/25/2015	3/31/2020	£60,000	1.51
3/25/2015	3/31/2020	£60,000	1.50
6/30/2015	3/31/2020	£2,035	1.57
9/30/2015	3/31/2020	£1,846	1.51
12/31/2015	3/31/2020	£1,873	1.48
3/31/2016	3/31/2020	£1,881	1.45
6/30/2016	3/31/2020	£1,909	1.35
9/30/2016	3/31/2020	£1,959	1.33
12/31/2016	3/31/2020	£1,989	1.28
3/31/2017	3/31/2020	£1,975	1.30

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

On December 1, 2016, GWAHLP and the Company's subsidiary, GWI Holding B.V. (GWBV), entered into an A$248.9 million non-recourse subordinated partner loan agreement (GRail Intercompany Loan), which loan is eliminated in consolidation. GWBV used the proceeds from this loan to fund a portion of the acquisition of GRail. To mitigate the foreign currency exchange rate risk related to the non-functional currency intercompany loan, the Company entered into two Euro/Australian dollar floating-to-floating cross-currency swap agreements (the Swaps) on December 22, 2016, which effectively convert the A$248.9 million intercompany loan receivable in the Netherlands into a €171.7 million loan receivable. These agreements do not qualify as hedges for accounting purposes and, accordingly, mark-to-market changes in the fair value of the Swaps relative to the underlying GRail Intercompany Loan will be recorded over the life of the agreements, which expire on June 30, 2019. The first swap requires the Company to pay Australian dollar BBR plus 4.50% based on a notional amount of A$123.9 million and allows the Company to receive EURIBOR plus 2.68% based on a notional amount of €85.5 million on a semi-annual basis. EURIBOR is the Euro Interbank Offered Rate, which the Company believes is generally considered the Euro equivalent to LIBOR. The second swap requires the Company to pay Australian dollar BBR plus 4.50% based on a notional amount of A$125.0 million and allows the Company to receive EURIBOR plus 2.90% based on a notional amount of €86.3 million on a semi-annual basis. As a result of the mark-to-market impact of the GRail Intercompany Loan compared to the Swaps, the Company realized a net expense of $2.9 million within other (loss)/income, net for the three months ended March 31, 2017. Over the life of the Swaps, the Company expects the cumulative impact of net gains and losses from the GRail Intercompany Loan and Swaps to be approximately zero.

The following table summarizes the fair value of the Company's derivative instruments recorded in the consolidated balance sheets as of March 31, 2017 and December 31, 2016 (dollars in thousands):



		Fair Value
	Balance Sheet Location	March 31, 2017		December 31, 2016
Asset Derivatives:
Derivatives designated as hedges:
British pound forward contracts	Other assets, net	$	24,570	$	26,359
Total derivatives designated as hedges		$	24,570	$	26,359
Derivatives not designated as hedges:
Cross-currency swap contract	Prepaid expenses and other	$	—	$	174
Cross-currency swap contract	Other assets, net	—		506
Total derivatives not designated as hedges		$	—	$	680

Liability Derivatives:
Derivatives designated as hedges:
Interest rate swap agreements	Accrued expenses	$	1,952	$	1,747
Interest rate swap agreements	Other long-term liabilities	13,168		13,411
British pound forward contracts	Other long-term liabilities	51		17
Total derivatives designated as hedges		$	15,171	$	15,175
Derivatives not designated as hedges:
Cross-currency swap contract	Accrued expenses	$	3,888	$	—
Cross-currency swap contract	Other long-term liabilities	6,305		—
Total derivatives not designated as hedges		$	10,193	$	—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table shows the effect of the Company's derivative instruments designated as cash flow hedges for the three months ended March 31, 2017 and 2016 in other comprehensive income (OCI) (dollars in thousands):



	Total Cash Flow Hedge OCI Activity, Net of Tax
	Three Months Ended
	March 31,
	2017			2016
Derivatives Designated as Cash Flow Hedges:
Effective portion of net changes in fair value recognized in OCI, net of tax:
Interest rate swap agreements	$	(123	)	$	(9,302	)
British pound forward contracts, net ^(a)	629			(129		)
	$	506		$	(9,431	)

(a)

The three months ended March 31, 2017 represents a net gain of $1.6 million for the mark-to-market of the U.K. intercompany loan, partially offset by a net loss of $1.0 million for the mark-to-market of the British pound forward contracts. The three months ended March 31, 2016 represents a net loss of $2.6 million for the mark-to-market of the U.K. intercompany loan, partially offset by a net gain of $2.5 million 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 months ended March 31, 2017 and 2016 in the consolidated statements of operations (dollars in thousands):



		Amount Recognized in Earnings
		Three Months Ended
	Location of Amount Recognized in Earnings	March 31,
	Location of Amount Recognized in Earnings	2017			2016
Derivative Instruments Not Designated as Hedges:
Cross-currency swap agreements, net ^(a)	Other (loss)/income, net	$	(2,859	)	$	—
		$	(2,859	)	$	—


(a)	The three months ended March 31, 2017 represents a net loss of $10.9 million for the mark-to-market of the Swaps, partially offset by a net gain of $8.0 million for the mark-to-market of the GRail Intercompany Loan.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The Company applies the following three-level hierarchy of valuation inputs for measuring fair value:


•	Level 1 - Quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.


•	Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs are observable market data.


•	Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments held by the Company:

Financial Instruments Carried at Fair Value: Derivative instruments are recorded on the consolidated balance sheets as either assets or liabilities measured at fair value. During the reporting period, the Company's derivative financial instruments consisted of interest rate swap agreements, foreign currency forward contracts and cross-currency swap agreements. The Company estimated the fair value of its interest rate swap agreements based on Level 2 valuation inputs, including fixed interest rates, LIBOR and BBR implied forward interest rates and the remaining time to maturity. The Company estimated the fair value of its British pound forward contracts based on Level 2 valuation inputs, including LIBOR implied forward interest rates, British pound LIBOR implied forward interest rates and the remaining time to maturity. The Company estimated the fair value of its cross-currency swap agreements based on Level 2 valuation inputs, including EURIBOR implied forward interest rates, BBR implied forward interest rates and the remaining time to maturity.

The Company's recurring fair value measurements using significant unobservable inputs (Level 3) relate solely to the Company's deferred consideration from the Freightliner acquisition in 2015. The fair value of the deferred consideration liability was estimated by discounting, to present value, contingent payments expected to be made.

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Financial Instruments Carried at Historical Cost: Since the Company's long-term debt is not actively traded, fair value was estimated using a discounted cash flow analysis based on Level 2 valuation inputs, including borrowing rates the Company believes are currently available to it for loans with similar terms and maturities.

The following table presents the Company's financial instruments carried at fair value using Level 2 inputs as of March 31, 2017 and December 31, 2016 (dollars in thousands):



	March 31, 2017		December 31, 2016
Financial instruments carried at fair value using Level 2 inputs:
Financial assets carried at fair value:
British pound forward contracts	$	24,570	$	26,359
Cross-currency swap contracts	—		680
Total financial assets carried at fair value	$	24,570	$	27,039
Financial liabilities carried at fair value:
Interest rate swap agreements	$	15,120	$	15,158
British pound forward contracts	51		17
Cross-currency swap contracts	10,193		—
Total financial liabilities carried at fair value	$	25,364	$	15,175

The following table presents the Company's financial instrument carried at fair value using Level 3 inputs as of March 31, 2017 and December 31, 2016 (amounts in thousands):



	March 31, 2017				December 31, 2016
	GBP		USD		GBP		USD
Financial instrument carried at fair value using Level 3 inputs:
Financial liabilities carried at fair value:
Accrued deferred consideration	£	26,477	$	33,208	£	25,882	$	31,933

The Company's recurring fair value measurements using significant unobservable inputs (Level 3) relate solely to the Company's deferred consideration from the Freightliner acquisition in 2015. At the date of acquisition, this contingent liability represented the aggregate fair value of the shares transferred to the Company by the Management Shareholders in exchange for the right to receive cash consideration for the representative economic interest of approximately 6% in Freightliner in the future (deferred consideration). Each of the Management Shareholders may elect to receive one third of their respective deferred consideration valued as of March 31, 2018, 2019 and 2020. The remaining portion of the deferred consideration will be valued as of March 31, 2020 and paid by the end of 2020.

The contingent liability is adjusted each period to represent the fair value of the deferred consideration as of the balance sheet date. To do so, the Company recalculates the estimated fair value of the deferred consideration in each reporting period until it is paid in full by using a contractual formula designed to estimate the economic value of the Management Shareholders' retained interest in a manner consistent with that used to derive the Freightliner acquisition price per share on the acquisition date. This calculation effectively represents the present value of the expected payment to be made upon settlement of the deferred consideration. Accordingly, such recalculations will reflect both the impact of the time value of money and the impact of changes in the expected future performance of the acquired business, as applicable. During the three months ended March 31, 2017, the Company recognized $0.7 million through other expenses within the Company's consolidated statements of operations as a result of the change in the estimated fair value of the deferred consideration, which primarily represented the time value of money. The Company expects to recognize future changes in the contingent liability for the estimated fair value of the deferred consideration through other expenses within the Company's consolidated statement of operations. These future changes in the estimated fair value of the deferred consideration are not expected to be deductible for tax purposes.

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The following table presents the carrying value and fair value using Level 2 inputs of the Company's financial instruments carried at historical cost as of March 31, 2017 and December 31, 2016 (dollars in thousands):



	March 31, 2017				December 31, 2016
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial liabilities carried at historical cost:
United States term loan	$	1,366,922	$	1,373,806	$	1,415,873	$	1,422,512
U.K. term loan	119,969		121,860		121,149		121,594
Australian Credit Agreement	509,951		522,689		484,703		501,909
Partner Loan Agreement	182,061		183,472		172,154		171,435
Revolving credit facility	92,212		96,953		74,297		81,192
Other debt	2,861		2,860		4,882		4,889
Total	$	2,273,976	$	2,301,640	$	2,273,058	$	2,303,531

8. U.K. PENSION PLAN:

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

The following tables summarize the components of the Pension Program related to the net benefit costs recognized in labor and benefits in the Company's consolidated statements of operations for the three months ended March 31, 2017 and 2016 (amounts in thousands):



	Three Months Ended March 31,
	2017						2016
	GBP			USD			GBP			USD
Service cost	£	2,988		$	3,688		£	2,395		$	3,427
Interest cost	1,978			2,441			2,227			3,188
Expected return on plan assets	(3,307		)	(4,082		)	(2,847		)	(4,074		)
Net periodic benefit cost	£	1,659		$	2,047		£	1,775		$	2,541

During the three months ended March 31, 2017, the Company contributed £1.5 million (or $1.9 million at the March 31, 2017 exchange rate) to fund the Pension Program. The Company expects to contribute £5.6 million (or $7.0 million at the March 31, 2017 exchange rate) to the Pension Program for the remainder of 2017. The Pension Program's assets may undergo significant changes over time as a result of market conditions. 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.

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9. INCOME TAXES:

The Company's effective income tax rate for the three months ended March 31, 2017 was 44.6%, compared with 32.2% for the three months ended March 31, 2016. The higher effective income tax rate for the three months ended March 31, 2017 was primarily driven by an income tax benefit of $6.3 million recorded in the three months ended March 31, 2016 associated with the now expired United States Short Line Tax Credit. In addition, the Company's provision for income taxes for the three months ended March 31, 2017 included the recording of a valuation allowance of €1.6 million (or $1.7 million at the average exchange rate on March 31, 2017) associated with tax losses in the Netherlands primarily driven by losses at ERS. The Company's provision for income taxes for the three months ended March 31, 2016 also included the recording of a valuation allowance of A$2.6 million (or $2.0 million at the average exchange rate in March of 2016) associated with the impairment of GWA's now idle rolling-stock maintenance facility that was formerly used in connection with the Southern Iron rail haulage agreement (see Note 2, Changes in Operations).

The United States Short Line Tax Credit is an income tax track maintenance credit for Class II and Class III railroads to reduce their federal income tax based on qualified railroad track maintenance expenditures. Qualified expenditures include amounts incurred for maintaining track, including roadbed, bridges and related track structures owned or leased by a Class II or Class III railroad. The credit is equal to 50% of the qualified expenditures, subject to an annual limitation of $3,500 multiplied by the number of miles of railroad track owned or leased by the Class II or Class III railroad as of the end of its tax year. The United States Short Line Tax Credit was initially enacted for a three year period, 2005 through 2007, and was subsequently extended a series of times following expiration and on a retroactive basis, with the last extension expiring on December 31, 2016.

10. COMMITMENTS AND CONTINGENCIES:

From time to time, the Company is a defendant in certain lawsuits resulting from the Company's operations in the ordinary course as the nature of the Company's business exposes it to the potential for various claims and litigation, including those related to property damage, personal injury, freight loss, labor and employment, environmental and other matters. The Company maintains insurance policies to mitigate the financial risk associated with such claims. However, any material changes to pending litigation or a catastrophic rail accident or series of accidents involving material freight loss or property damage, personal injuries or environmental liability or other claims or disputes that are not covered by insurance could have a material adverse effect on the Company's results of operations, financial condition and liquidity.

In November 2014, the Company received a notice from the United States Environmental Protection Agency (EPA) requesting information under the Clean Water Act related to the discharge of crude oil as a result of a derailment of an Alabama & Gulf Coast Railway LLC (AGR) freight train in November 2013 in the vicinity of Aliceville, Alabama. A fine associated with the contamination has not yet been assessed and is not estimable.

The Company is also involved in several arbitrations related to contractual disputes that are not covered by insurance. In March 2017, CSX Transportation, Inc. (CSXT) initiated arbitration against several of the Company’s subsidiaries associated with freight revenue factors (or divisions) under certain operating agreements associated with leased railroads. CSXT is seeking to reduce certain of the Company's freight revenue factors for the time period after August 21, 2016. In an unrelated matter, on May 3, 2017, the AGR initiated arbitration related to the collection of outstanding liquidated damages under a volume commitment (or take-or-pay) contract with a customer. The obligations of the customer under the volume commitment contract are supported by a parent company guaranty. Although the Company believes it has meritorious defenses against the CSXT claims, and that it will prevail in the collection of the outstanding liquidated damages, arbitration is inherently uncertain and it is possible that an unfavorable ruling could have adverse effect on the Company's results of operations, financial condition and liquidity.

Management believes there are adequate provisions in the financial statements for any probable liabilities that may result from disposition of the pending lawsuits and the aforementioned arbitrations. Based upon currently available information, the Company does not believe it is reasonably possible that any such lawsuit or arbitration would be material to the Company's results of operations or have a material adverse effect on the Company's financial position or liquidity.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

11. ACCUMULATED OTHER COMPREHENSIVE LOSS:

The following tables set forth the components of accumulated other comprehensive loss attributable to Genesee & Wyoming Inc. included in the consolidated balance sheets and consolidated statements of comprehensive income (dollars in thousands):



	Foreign Currency Translation Adjustment			Defined Benefit Plans				Net Unrealized Gain/(Loss) on Cash Flow Hedges				Accumulated Other Comprehensive Loss
Balance, December 31, 2016	$	(177,662	)	$	(19,948	)		$	(13,726	)		$	(211,336	)
Other comprehensive income/(loss) before reclassifications	23,630			(931		)		1,285				23,984
Amounts reclassified from accumulated other comprehensive loss, net of tax (provision)/benefit of $(20) and $120, respectively	—			38			(a)	(191		)	(b)	(153		)
Current period change	23,630			(893		)		1,094				23,831
Balance, March 31, 2017	$	(154,032	)	$	(20,841	)		$	(12,632	)		$	(187,505	)



	Foreign Currency Translation Adjustment			Defined Benefit Plans			Net Unrealized Gain/(Loss) on Cash Flow Hedges				Accumulated Other Comprehensive Loss
Balance, December 31, 2015	$	(156,146	)	$	11,005		$	(8,316	)		$	(153,457	)
Other comprehensive income/(loss) before reclassifications	31,121			—			(9,261		)		21,860
Amounts reclassified from accumulated other comprehensive loss, net of tax (provision)/benefit of $(520) and $113, respectively	—			1,923		(a)	(170		)	(b)	1,753
Current period change	31,121			1,923			(9,431		)		23,613
Balance, March 31, 2016	$	(125,025	)	$	12,928		$	(17,747	)		$	(129,844	)


(a)	Existing net gains realized were recorded in labor and benefits on the consolidated statements of operations.


(b)	Existing net losses realized were recorded in interest expense on the consolidated statements of operations (see Note 6, Derivative Financial Instruments).

Comprehensive Income Attributable to Noncontrolling Interest

The following table sets forth comprehensive income attributable to noncontrolling interest for the three months ended March 31, 2017 and 2016 (dollars in thousands):



	Three Months Ended March 31,
	2017			2016
Net income attributable to noncontrolling interest	$	1,051		$	—
Other comprehensive income/(loss):
Foreign currency translation adjustment	12,623			—
Net unrealized loss on qualifying cash flow hedges, net of tax benefit of $252	(588		)	—
Comprehensive income attributable to noncontrolling interest	$	13,086		$	—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

12. STOCKHOLDERS' EQUITY

The following table reconciles the beginning and end of the period equity balance attributable to Genesee & Wyoming Inc. and to noncontrolling interest (dollars in thousands):



	Genesee & Wyoming Inc. Stockholders' Equity		Noncontrolling Interest			Total Equity
Balance, December 31, 2016	$	2,894,582	$	292,539		$	3,187,121
Net income	26,238		1,051			27,289
Other comprehensive income	23,831		12,035			35,866
Adjustments to additional paid-in capital for stock-based compensation and exercise of stock options	3,601		—			3,601
Other	—		(32		)	(32		)
Balance, March 31, 2017	$	2,948,252	$	305,593		$	3,253,845

13. SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:

As of March 31, 2017 and 2016, the Company had outstanding receivables from outside parties for the funding of capital expenditures of $7.9 million and $13.7 million, respectively. At March 31, 2017 and 2016, the Company also had $10.7 million and $15.4 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.

14. SEGMENT INFORMATION:

The Company presents the financial results of its 10 operating regions as three reportable segments: North American Operations, Australian Operations and U.K./European Operations. Each of the Company's segments generates the following three categories of revenues from external customers: freight revenues, freight-related revenues and all other revenues. The Company's eight North American regions are aggregated into one reportable segment as a result of having similar economic and operating characteristics.

The results of operations of the foreign entities are maintained in the respective local currency (the Australian dollar, the British pound, the Canadian dollar and the Euro) and then translated into United States dollars at the applicable exchange rates for inclusion in the consolidated financial statements. As a result, any appreciation or depreciation of these currencies against the United States dollar will impact the Company's results of operations.

The following table reflects the average exchange rates used to translate the foreign entities respective local currency results of operations into United States dollars for the three months ended March 31, 2017 and 2016:



	Three Months Ended March 31,
	2017		2016
United States dollar per Australian dollar	$	0.76	$	0.72
United States dollar per British pound	$	1.24	$	1.43
United States dollar per Canadian dollar	$	0.76	$	0.73
United States dollar per Euro	$	1.07	$	1.10

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following tables set forth selected financial data for the Company's reportable segments for the three months ended March 31, 2017 and 2016 (dollars in thousands):



	Three Months Ended March 31, 2017
	North American Operations		Australian Operations		U.K./European Operations			Total Operations
Operating revenues:
Freight revenues	$	238,281	$	60,874	$	78,590		$	377,745
Freight-related revenues	65,345		11,709		42,283			119,337
All other revenues	15,850		1,324		4,852			22,026
Total operating revenues	$	319,476	$	73,907	$	125,725		$	519,108
Operating income/(loss)	$	67,570	$	17,159	$	(7,275	)	$	77,454
Depreciation and amortization	$	38,867	$	15,192	$	6,715		$	60,774
Interest expense, net	$	10,551	$	13,987	$	1,600		$	26,138
Provision for/(benefit from) income taxes	$	22,074	$	861	$	(1,007	)	$	21,928
Expenditures for additions to property & equipment, net of grants from outside parties	$	24,215	$	1,462	$	4,290		$	29,967



	Three Months Ended March 31, 2016
	North American Operations		Australian Operations			U.K./European Operations			Total Operations
Operating revenues:
Freight revenues	$	221,825	$	24,777		$	79,812		$	326,414
Freight-related revenues	61,525		25,490			46,443			133,458
All other revenues	16,428		1,531			4,785			22,744
Total operating revenues	$	299,778	$	51,798		$	131,040		$	482,616
Operating income/(loss)	$	69,978	$	(11,751	)	$	(1,231	)	$	56,996
Depreciation and amortization	$	36,189	$	6,656		$	6,485		$	49,330
Interest expense, net	$	10,465	$	2,395		$	5,040		$	17,900
Provision for/(benefit from) income taxes	$	16,009	$	(2,525	)	$	(676	)	$	12,808
Expenditures for additions to property & equipment, net of grants from outside parties	$	25,416	$	867		$	5,400		$	31,683

The following tables set forth the property and equipment recorded in the consolidated balance sheets for the Company's reportable segments as of March 31, 2017 and December 31, 2016 (dollars in thousands):



	March 31, 2017
	North American Operations		Australian Operations		U.K./European Operations		Total Operations
Property and equipment, net	$	3,586,131	$	662,839	$	282,449	$	4,531,419



	December 31, 2016
	North American Operations		Australian Operations		U.K./European Operations		Total Operations
Property and equipment, net	$	3,590,625	$	634,148	$	278,546	$	4,503,319

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

15. RECENTLY ISSUED ACCOUNTING STANDARDS:

Accounting Standards Not Yet Effective

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and includes the specific steps for recognizing revenue and disclosure requirements. In August 2015, the FASB issued ASU 2015-14, which approved a one-year deferral of the effective date of the new revenue recognition standard. In March 2016, the FASB issued ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, which provides clarification when identifying performance obligations and providing implementation guidance on licensing. In May 2016, the FASB issued ASU 2016-12, which clarifies the objective of the collectibility criterion. The new standards will become effective for the Company on January 1, 2018, and the Company plans to adopt the accounting standards on a modified retrospective basis with the cumulative effect of initially applying the standards recognized as an adjustment to opening retained earnings at January 1, 2018. The Company is currently assessing the impact of adopting this guidance for its existing portfolio of customer contracts and will continue to assess new contracts entered into prior to the adoption of the new standard. Based on its current assessment, the Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value, with subsequent changes in fair value recognized in net income. The amendments also impact certain disclosure requirements for financial instruments. The amendments will become effective for the Company beginning January 1, 2018. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will require lessees to recognize leases on their balance sheets as a right-of-use asset with a corresponding liability. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of 12 months or less. Additional qualitative and quantitative disclosures, including significant judgments made by management, will also be required. The new standard will become effective for the Company beginning January 1, 2019, and will require a modified retrospective transition approach. Early application is permitted. The Company is currently assessing the impact of adopting this guidance on its consolidated financial statements. At December 31, 2016, the Company disclosed approximately $546 million in aggregate future minimum operating lease payments and will evaluate those contracts as well as other existing arrangements to determine if they qualify for lease accounting under the new standard and will assess new contracts entered into prior to the adoption of the new standard. The Company does not plan to adopt the standard early.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows. The amendments will become effective for the Company January 1, 2018. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated statements of cash flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, which requires that a statement of cash flows explain the change during the period in total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The amendments will become effective for the Company beginning January 1, 2018. The Company does not expect the adoption of this guidance to have a material impact on its consolidated statements of cash flows.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments will become effective for the Company beginning January 1, 2018. The Company will take the amendments into consideration when assessing whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments will become effective for the Company beginning January 1, 2020. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of the net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside a subtotal of operating income, if one is presented. The amendments will become effective for the Company beginning after January 1, 2018. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

16. SUBSEQUENT EVENTS:

Acquisition of Pentalver Transport Limited

On May 3, 2017, the Company's subsidiary, GWI UK Acquisition Company Limited, purchased for cash all of the issued share capital of Pentalver Transport Limited (Pentalver) from a subsidiary of APM Terminals (a subsidiary of A P Møller-Maersk A/S) for £97.7 million (or approximately $126.2 million at the exchange rate on May 3, 2017).

Headquartered in Southampton, U.K., Pentalver operates off-dock container terminals (most under long-term lease) strategically placed at each of the four major seaports of Felixstowe, Southampton, London Gateway and Tilbury, as well as an inland terminal located at Cannock, in the U.K. Midlands, near many of the nation’s largest distribution centers. In addition to providing storage for loaded and empty containers on over 100 acres of land, Pentalver also operates a trucking haulage service with more than 150 trucks, primarily providing daily service between the seaports of Felixstowe and Southampton and its inland terminal at Cannock. Pentalver also provides services related to container maintenance and repair (including refrigerated containers) and is one of the largest sellers of new and used containers in the U.K.

Pentalver’s operations are complementary to those of the Company's Freightliner subsidiary, which is the largest provider of maritime container transportation by rail in the U.K. The logistics of maritime container transportation in the U.K. are highly competitive, whether by road, rail or short-sea, with a premium placed on timely, efficient and safe service. The Company expects that the Pentalver acquisition will enable it to (i) enhance its U.K. services by providing rail and road transportation solutions, as well as offering storage options at the ports and inland, and (ii) unlock efficiencies from shared services and enhanced asset utilization from Pentalver’s trucking fleet and Freightliner’s existing fleet of approximately 250 trucks that currently provide local collection and delivery haulage from Freightliner’s inland terminals. With approximately 600 employees, Pentalver will operate as part of the Company’s U.K./Europe Region.

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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our 2016 Annual Report on Form 10-K. When comparing our results of operations from one reporting period to another, it is important to consider that we have historically experienced fluctuations in revenues and expenses due to acquisitions, changing economic conditions, commodity prices, competitive forces, changes in foreign currency exchange rates, rail network congestion, one-time freight moves, fuel price fluctuations, customer plant expansions and shutdowns, sales of property and equipment, derailments and weather-related conditions, such as hurricanes, cyclones, tornadoes, high winds, droughts, heavy snowfall, unseasonably hot or cold weather, freezing and flooding, among other factors. In periods when these events occur, our results of operations are not easily comparable from one period to another. Finally, certain of our railroads have commodity shipments that are sensitive to general economic conditions, global commodity prices and foreign exchange rates, such as steel products, iron ore, paper products, lumber and forest products and agricultural products, as well as product specific market conditions, such as the availability of lower priced alternative sources of power generation (coal) and energy commodity price differentials (crude oil and natural gas liquids) or congestion at deep seaports (intermodal). Other shipments are relatively less affected by economic conditions and are more closely affected by other factors, such as winter weather (salt) and seasonal rainfall (agricultural products). As a result of these and other factors, our results of operations in any reporting period may not be directly comparable to our results of operations in other reporting periods. When we discuss foreign exchange impact, we are referring to the change in our results due to the change in foreign currency exchange rates. We calculate foreign exchange impact by comparing the prior period results translated from local currency to United States dollars using current period exchange rates to the prior period results in United States dollars as reported. Constant currency, which is a non-GAAP measure, reflects the prior period results translated at the current period exchange rates. When we discuss results from existing operations or same railroad operations, we are referring to the change in our results, period-over-period, associated with operations that we managed in both periods (i.e., excluding the impact of acquisitions).

Overview

We own or lease 122 freight railroads worldwide that are organized in 10 operating regions with approximately 7,300 employees and more than 3,000 customers.

The financial results of our 10 operating regions are reported in the following three reportable segments:


•	North America Operations: Our eight North American regions serve 41 U.S. states and four Canadian provinces and include 115 short line and regional freight railroads with more than 13,000 track-miles.

•

Australia Operations: Our Australia Region provides rail freight services in New South Wales, including in the Hunter Valley coal supply chain, the Northern Territory and South Australia, including operating the 1,400-mile Tarcoola-to-Darwin rail line. As of December 1, 2016, our Australia Region is 51.1% owned by us and 48.9% owned by a consortium of funds and clients managed by Macquarie Infrastructure and Real Assets (MIRA).

•

U.K./Europe Operations: Our U.K./European Region is led by Freightliner Group Limited (Freightliner), the United Kingdom's (U.K.) largest rail maritime intermodal operator and the second-largest rail freight company. Operations also include heavy-haul in Poland and Germany, intermodal services connecting Northern European seaports with key industrial regions in Germany, and regional rail services in the Netherlands and Belgium.

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Recent Developments

Pentalver Transport Limited: On May 3, 2017, our subsidiary, GWI UK Acquisition Company Limited, purchased for cash all of the issued share capital of Pentalver Transport Limited (Pentalver) from a subsidiary of APM Terminals (a subsidiary of A P Møller-Maersk A/S) for £97.7 million (or approximately $126.2 million at the exchange rate on May 3, 2017). For additional information regarding Pentalver, see Note 16, Subsequent Events, to our Consolidated Financial Statements.

Overview of Three-Month Results

Consolidated Results

Our operating revenues increased $36.5 million, or 7.6%, to $519.1 million for the three months ended March 31, 2017, compared with $482.6 million for the three months ended March 31, 2016. Operating income for the three months ended March 31, 2017 was $77.5 million, compared with $57.0 million for the three months ended March 31, 2016. Our operating ratio, defined as operating expenses divided by operating revenues, was 85.1% for the three months ended March 31, 2017, compared with 88.2% for the three months ended March 31, 2016.

Net income attributable to G&W for the three months ended March 31, 2017 was $26.2 million, compared with net income of $27.0 million for the three months ended March 31, 2016. Our diluted earnings per common share (EPS) attributable to G&W for the three months ended March 31, 2017 were $0.42 with 62.4 million weighted average shares outstanding, compared with diluted EPS of $0.47 with 58.0 million weighted average shares outstanding for the three months ended March 31, 2016.

Impact of GRail Acquisition on our Financial Presentation

Our Australian business underwent a transformational change on December 1, 2016, with the acquisition of Glencore Rail (NSW) Pty Limited (GRail) and the formation of the Australia Partnership, which we control through our 51.1% interest. The GRail acquisition significantly expanded our operations in New South Wales. In conjunction with the GRail acquisition that closed on December 1, 2016, we issued a 48.9% equity stake in our Australian subsidiary, G&W Australia Holdings LP (GWAHLP) to MIRA. We retained a 51.1% controlling interest in GWAHLP and continue to consolidate 100% of our Australian Operations in our financial statements and report a noncontrolling interest for MIRA’s 48.9% equity ownership. As a result, our operating revenues and operating income for the three months ended March 31, 2017 includes 100% of our Australian business, while net income attributable to G&W reflects our 51.1% ownership position in our Australian business.

Prior to the GRail acquisition, our Australian subsidiary, Freightliner Australia Pty Ltd (FLA), provided rail operator services to GRail, which were recorded as freight-related revenues. These freight-related services continued post acquisition, but are now eliminated in consolidation. Revenues from the GRail acquisition are now included in G&W’s consolidated freight revenues from new operations.

We financed a portion of the GRail acquisition with an A$248.9 million intercompany loan (GRail Intercompany Loan). To mitigate the foreign currency exchange rate risk related to this non-functional currency intercompany loan, we entered into two cross-currency swap agreements (the Swaps). These agreements do not qualify as hedges for accounting purposes and, accordingly, mark-to-market changes in the fair value of the Swaps relative to the underlying GRail intercompany loan will be recorded to earnings over the life of the agreements, which expire on June 30, 2019. Our results for the three months ended March 31, 2017 included a $2.9 million loss from the mark-to-market impact of the GRail Intercompany Loan compared to the cross-currency swaps ($2.9 million after-tax, or $0.05 per diluted share). Over the life of the Swaps, we expect the cumulative impact of net gains and losses from the intercompany loan and swaps to be approximately zero. For additional information regarding the Swaps, see Note 6, Derivative Financial Instruments to our Consolidated Financial Statements.

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Items Affecting Comparability

Our results for the three months ended March 31, 2017 and 2016 included certain items affecting comparability between the periods that are set forth below (dollars in millions, except per share amounts):



	Income/(Loss) Before Taxes Impact			After-Tax Net Income/(Loss) Attributable to G&W Impact			Diluted Earnings/(Loss) Per Common Share Attributable to G&W Impact
Three Months Ended March 31, 2017
Corporate development and related costs	$	(5.4	)	$	(3.2	)	$	(0.05	)
Restructuring costs	$	(3.8	)	$	(3.5	)	$	(0.06	)

Three Months Ended March 31, 2016
Australia impairment and related costs	$	(21.1	)	$	(16.8	)	$	(0.29	)
Corporate development and related costs	$	(0.5	)	$	(0.3	)	$	—
Restructuring costs	$	(1.1	)	$	(0.8	)	$	(0.01	)
Q1 2016 Short Line Tax Credit	$	—		$	6.3		$	0.11

For the three months ended March 31, 2017, our results included corporate development and related costs of $5.4 million, about half of which related to the Providence and Worcester Railroad Company (P&W) integration and the remainder to other corporate development activities, as well as restructuring costs of $3.8 million, primarily related to severance costs associated with our previously announced restructuring of ERS Railways B.V. (ERS).

For the three months ended March 31, 2016, our results included Australia impairment and related costs of $21.1 million, consisting of a $13.0 million impairment of a rolling-stock maintenance facility and an accounts receivable reserve of $8.1 million, both of which were associated with an iron ore/steel making customer in Australia entering into voluntary administration. The results for the three months ended March 31, 2016 also included an income tax benefit of $6.3 million associated with the United States Short Line Tax Credit. The Short Line Tax Credit expired on December 31, 2016.

Results by Segment

North America

Operating revenues from our North American Operations increased $19.7 million, or 6.6%, to $319.5 million for the three months ended March 31, 2017, compared with $299.8 million for the three months ended March 31, 2016. The increase in operating revenues from our North American Operations was primarily due to an increase in agricultural products and coal freight revenues and $7.4 million from new operations.

North American Operations traffic increased 19,824 carloads, or 5.2%, to 403,016 carloads for the three months ended March 31, 2017. Excluding 7,908 carloads from new operations, same railroad traffic increased 11,916 carloads, or 3.1%. The traffic increase was principally due to increases of 14,621 carloads of coal and coke traffic (primarily in the Midwest Region), 2,376 carloads of minerals and stone traffic (primarily in the Northeast and Southern regions) and 2,172 carloads of waste traffic (primarily in the Northeast Region), partially offset by decreases of 2,607 carloads of pulp and paper traffic (primarily in the Southern Region), 1,474 carloads of other commodity traffic (primarily in the Canada and Southern regions), 1,465 carloads of lumber and forest products traffic (primarily in the Pacific Region), 1,393 carloads of petroleum products traffic (primarily in the Northeast Region) and 1,301 carloads of metallic ores traffic (primarily in the Coastal and Mountain West regions). All remaining traffic increased by a net 987 carloads.

Operating income from our North American Operations for the three months ended March 31, 2017 was $67.6 million, compared with $70.0 million for the three months ended March 31, 2016. The operating ratio for our North American Operations for the three months ended March 31, 2017 was 78.8%, compared with 76.7% for the three months ended March 31, 2016. Operating income for the three months ended March 31, 2017 included $5.2 million of corporate development and related costs, about half of which related to the P&W integration and the remainder to other corporate development activities.

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Australia

Operating revenues from our Australian Operations increased $22.1 million, or 42.7%, to $73.9 million for the three months ended March 31, 2017, compared with $51.8 million for the three months ended March 31, 2016. Excluding a net increase of $17.4 million of revenues from new operations and a $2.6 million increase due to the impact of foreign currency appreciation, Australian Operations same railroad revenues increased $2.1 million, or 3.9%.

Australian Operations traffic increased 103,193 carloads to 149,416 carloads for the three months ended March 31, 2017. Excluding 97,684 carloads from new operations, same railroad traffic increased 5,509 carloads, or 11.9% for the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The traffic increase was principally due to increases of 4,588 carloads of metallic ores traffic and 1,693 carloads of agricultural products traffic, partially offset by a decrease of 720 carloads of minerals and stone traffic. All remaining traffic decreased by 52 carloads.

Operating income from our Australian Operations for the three months ended March 31, 2017 was $17.2 million, compared with an operating loss of $11.8 million for the three months ended March 31, 2016. The operating ratio for our Australian Operations was 76.8% for the three months ended March 31, 2017, compared with an operating ratio of 122.7% for the three months ended March 31, 2016. Operating income for the three months ended March 31, 2016 included $21.1 million of impairment and related costs consisting of a $13.0 million non-cash write-down of a standard gauge rolling-stock maintenance facility and an accounts receivable reserve of $8.1 million, both of which were associated with an iron ore/steel making customer entering into voluntary administration.

U.K./Europe

Operating revenues from our U.K./European Operations decreased $5.3 million, or 4.1%, to $125.7 million for the three months ended March 31, 2017, compared with $131.0 million for the three months ended March 31, 2016. Excluding a $14.2 million impact from foreign currency depreciation, U.K./European operating revenues increased 7.6%, primarily due to stronger intermodal traffic and minerals and stone and agricultural products shipments.

U.K./European Operations traffic increased 16,847 carloads, or 6.7%, to 268,816 carloads for the three months ended March 31, 2017. The traffic increase was principally due to increases of 11,718 carloads of intermodal traffic (primarily in the U.K.), 2,498 carloads of coal and coke traffic (Poland and the U.K.), 1,692 carloads of minerals and stone traffic (primarily in Poland) and 1,119 carloads of agricultural products traffic (Poland). All remaining traffic decreased by 180 carloads.

Our U.K./European Operations had an operating loss of $7.3 million for the three months ended March 31, 2017 compared with an operating loss of $1.2 million for the three months ended March 31, 2016. Our U.K./Operations operating loss for the three months ended March 31, 2017 included $3.4 million of restructuring costs, primarily related to severance costs associated with our previously announced restructuring of ERS. In addition, for the three months ended March 31, 2017, ERS recorded a $1.5 million accounts receivable reserve associated with a customer entering into bankruptcy in Continental Europe.

Changes in Operations

North American Operations

Heart of Georgia Railroad, Inc.: On February 7, 2017, we announced we agreed to acquire the shares of Atlantic Western Transportation, Inc., parent company of Heart of Georgia Railroad, Inc. (HOG). The acquisition is expected to be completed in the second quarter of 2017. For additional information regarding the HOG, see Note 2, Changes in Operations, to our Consolidated Financial Statements.

Providence and Worcester Railroad Company: On November 1, 2016, we completed the acquisition of 100% of the outstanding common stock of P&W for $25.00 per share, or $126.2 million. The acquisition was funded with borrowings under our Second Amended and Restated Senior Secured Syndicated Credit Facility Agreement, as amended (the Credit Agreement) (see Note 5, Long-Term Debt, to our Consolidated Financial Statements). The results of operations from P&W have been included in our consolidated statements of operations since the acquisition date within our North American Operations segment. We incurred $2.4 million of integration costs associated with P&W during the three months ended March 31, 2017, of which $2.2 million was included within labor and benefits expense for severance costs and $0.2 million was included within other expenses in our consolidated statement of operations. For additional information regarding the acquisition of P&W, see Note 2, Changes in Operations, to our Consolidated Financial Statements.

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Australian Operations

Glencore Rail (NSW) Pty Limited: On December 1, 2016, we completed the acquisition of GRail for A$1.14 billion (or approximately $844.9 million at an exchange rate of $0.74 for one Australian dollar) and concurrently issued a 48.9% equity stake in GWAHLP (collectively, the Australia Partnership), which is the holding entity for all of our Australian businesses, including GRail, to MIRA, a large private-equity infrastructure investment firm. Through wholly-owned subsidiaries, we retained a 51.1% ownership in GWAHLP. As we maintain control of our Australian Operations, we continue to consolidate 100% of our Australian Operations in our financial statements and report a noncontrolling interest for MIRA’s 48.9% equity ownership.

We and MIRA contributed A$1.3 billion in the form of cash, partner loans and contributed equity, and our recently established subsidiary, GWI Acquisitions Pty Ltd (GWIA), entered into a five-year A$690 million senior secured term loan facility that is non-recourse to us and to MIRA. The proceeds were used to acquire GRail for A$1.14 billion, repay Genesee & Wyoming Australia’s (GWA) existing A$250 million term loan (under our credit facility) and pay A$19.8 million in debt issuance costs and A$13.2 million of acquisition-related costs (collectively the GRail Transactions). The foreign exchange rate used to translate the transaction amounts to United States dollars (USD) was $0.74 for one Australian dollar (AUD).

GRail’s coal haulage business was established in 2010 as an alternative rail service provider to the incumbent railroads in the Hunter Valley and has grown to be the third-largest coal haulage business in Australia. Our Freightliner Australia subsidiary (acquired by us in March 2015) has been the rail operator of GRail since inception and presently provides haulage and logistics services for approximately 40 million tonnes per year of steam coal that is among the lowest cost and highest quality coal in the world sold principally to customers in Japan, Korea and Taiwan. These services have continued following the GRail transaction.

In conjunction with the GRail acquisition, we entered into a 20-year rail haulage contract with the seller, Glencore Coal Pty Limited (GC), to exclusively haul all coal produced at GC’s existing mines in the Hunter Valley to the Port of Newcastle. The contract has minimum guaranteed volumes over the first 18 years.

The results of operations from GRail have been included in our consolidated statement of operations within our Australian Operations segment since the December 1, 2016 acquisition date. We incurred $0.1 million of integration costs associated with GRail during the three months ended March 31, 2017, which were included within other expenses in our consolidated statement of operations.

For additional information regarding the acquisition of GRail, see Note 2, Changes in Operations, to our Consolidated Financial Statements.

Arrium Limited: Between 2011 and 2014, GWA invested a total of $78 million to purchase locomotives and railcars, as well as to construct a standard gauge rolling-stock maintenance facility to support iron ore shipments from Arrium's Southern Iron mine and Whyalla-based operations, which include the Middleback Range iron ore mines and the Whyalla Steelworks. Arrium mothballed its Southern Iron mine in April 2015, citing the significant decline in the price of iron ore, while the mines in the Middleback Range continued to operate.

On April 7, 2016, Arrium announced it had entered into voluntary administration. As a result, we recorded a $13.0 million non-cash charge related to the impairment of GWA's now idle rolling-stock maintenance facility, which was recorded to net (gain)/loss on sale and impairment of assets within operating expenses, which represented the entire carrying value of these assets, and an allowance for doubtful accounts charge of $8.1 million associated with accounts receivable from Arrium, which was recorded to other expenses within operating expenses, during the three months ended March 31, 2016. Also, as a result of the voluntary administration, all payments to GWA associated with the Southern Iron rail haulage agreement have ceased. GWA is in the process of redeploying rolling-stock previously used to provide service under the Southern Iron rail haulage agreement to serve other customers.

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GWA continues to provide service and receive payments under the remaining rail haulage agreement to serve several iron ore mines in the Middleback Range and the Whyalla Steelworks operations, which we expect will represent A$40 million (or approximately $31 million at the exchange rate on March 31, 2017) of annual revenue, prospectively. Pending the outcome of the voluntary administration process, GWA could lose some or all of the revenue associated with the remaining rail haulage agreement. In the event of an adverse determination regarding the viability of the Middleback Range or the Whyalla Steelworks operations, or a termination of the remaining rail haulage agreement, all or a portion of GWA's assets deployed to provide service under this agreement, which consist largely of narrow gauge locomotives and railcars, could be redeployed elsewhere in Australia.

U.K./European Operations

Continental Europe Intermodal Business: During 2016, we explored ways to enhance the long-term viability of ERS, the Continental Europe intermodal business Freightliner acquired from Maersk, which we acquired in 2015 with the Freightliner acquisition. Due to its limited history of profitability and competitive dynamics in the market in which it operates, we ascribed little value to it at the time of acquisition.

Despite a significant and focused effort by us, the performance of ERS reached unsustainable levels during 2016. As such, a restructuring plan was initiated that includes the cessation of all "open" train services from the port of Rotterdam, the closing of the ERS offices in Rotterdam and Frankfurt and the closing of the ERS customer services function in Warsaw. We are in the process of redistributing ERS’s leased locomotives and railcars, which have lease termination dates ranging from 2017 to 2021. These steps will enable us to focus on the deep-sea intermodal sector. Our subsidiary, Rotterdam Rail Feeding B.V., will continue its existing services and not be affected by the restructuring of ERS.

As a result of the ERS restructuring plan, we recorded impairment and related charges of $21.5 million in December 2016. These charges primarily included $14.5 million for an impairment of goodwill and $4.1 million for an impairment of a customer-related intangible asset, which were both recorded to net (gain)/loss on sale and impairment of assets within operating expenses, which represented the entire carrying value of these assets. For the three months ended March 31, 2017, we recorded $3.1 million of restructuring costs, primarily related to severance costs. We expect to recognize approximately $1 million of additional remaining severance costs related to the ERS restructuring in the three months ended June 30, 2017. In addition, for the three months ended March 31, 2017, ERS recorded a $1.5 million accounts receivable reserve associated with a customer entering into bankruptcy.

Three Months Ended March 31, 2017 Compared with Three Months Ended March 31, 2016

Consolidated Operating Results

Operating Revenues

The following table sets forth our operating revenues and carloads for the three months ended March 31, 2017 and 2016 (dollars in thousands):



	Three Months Ended March 31,											Increase/(Decrease) in Total Operations					Increase/(Decrease) in Existing Operations					Currency Impact
	2017											Increase/(Decrease) in Total Operations					Increase/(Decrease) in Existing Operations
	Total Operations		New Operations		Eliminations (a)			Existing Operations		2016		Amount			%		Amount			%
Freight revenues	$	377,745	$	36,130	—			$	341,615	$	326,414	$	51,331		15.7	%	$	15,201		4.7	%	$	(6,784	)
Freight-related revenues	119,337		335		(12,089		)	131,091		133,458		(14,121		)	(10.6	)%	(2,367		)	(1.8	)%	(3,597		)
All other revenues	22,026		479		—			21,547		22,744		(718		)	(3.2	)%	(1,197		)	(5.3	)%	(449		)
Total operating revenues	$	519,108	$	36,944	$	(12,089	)	$	494,253	$	482,616	$	36,492		7.6	%	$	11,637		2.4	%	$	(10,830	)
Carloads	821,248		105,592		—			715,656		681,384		139,864			20.5	%	34,272			5.0	%


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

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Operating Expenses

Total operating expenses for the three months ended March 31, 2017 increased $16.0 million, or 3.8%, to $441.7 million, compared with $425.6 million for the three months ended March 31, 2016. The increase consisted of $18.8 million from new operations, partially offset by a decrease of $2.8 million from existing operations. When we discuss either operating expenses from existing operations or same railroad operating expenses, we are referring to the change in our operating expenses, period-over-period, associated with operations that we managed in both periods (i.e., excluding the impact of acquisitions). The decrease from existing operations was primarily due to a $10.6 million decrease from the net depreciation of foreign currencies relative to the United States dollar. The decrease was partially offset by increases of $12.8 million in diesel fuel used in train operations, $4.8 million in purchased services and $3.2 million in depreciation and amortization. Operating expenses for the three months ended March 31, 2016 also included a $13.0 million impairment of a rolling-stock maintenance facility and an accounts receivable reserve of $8.1 million, both of which were associated with an iron ore/steel making customer entering into voluntary administration.

The following table sets forth our total operating expenses for the three months ended March 31, 2017 and 2016 (dollars in thousands):



	Three Months Ended March 31,									Increase/(Decrease)			Currency Impact			2016 Constant Currency*		Increase/(Decrease)Constant Currency*
	2017					2016
	Amount			% of Operating Revenues		Amount		% of Operating Revenues
Labor and benefits	$	165,584		31.9	%	$	163,114	33.8	%	$	2,470		$	(4,400	)	$	158,714	$	6,870
Equipment rents	33,871			6.5	%	38,430		8.0	%	(4,559		)	(2,010		)	36,420		(2,549		)
Purchased services	51,001			9.8	%	46,502		9.6	%	4,499			(1,679		)	44,823		6,178
Depreciation and amortization	60,774			11.7	%	49,330		10.2	%	11,444			(190		)	49,140		11,634
Diesel fuel used in train operations	38,153			7.4	%	25,466		5.2	%	12,687			(610		)	24,856		13,297
Electricity used in train operations	3,173			0.6	%	3,365		0.7	%	(192		)	(225		)	3,140		33
Casualties and insurance	12,543			2.4	%	10,120		2.1	%	2,423			(61		)	10,059		2,484
Materials	20,546			4.0	%	21,591		4.5	%	(1,045		)	(580		)	21,011		(465		)
Trackage rights	22,223			4.3	%	20,576		4.3	%	1,647			(746		)	19,830		2,393
Net (gain)/loss on sale and impairment of assets	(427		)	(0.1	)%	12,825		2.7	%	(13,252		)	199			13,024		(13,451		)
Restructuring costs	3,755			0.7	%	1,127		0.2	%	2,628			1			1,128		2,627
Other expenses	30,458			5.9	%	33,174		6.9	%	(2,716		)	(311		)	32,863		(2,405		)
Total operating expenses	$	441,654		85.1	%	$	425,620	88.2	%	$	16,034		$	(10,612	)	$	415,008	$	26,646

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

Operating Income/Operating Ratio

Operating income was $77.5 million for the three months ended March 31, 2017, compared with $57.0 million for the three months ended March 31, 2016. Operating income for the three months ended March 31, 2017 included corporate development and related costs of $5.4 million, about half of which related to the P&W integration and the remainder to other corporate development activities, and restructuring costs of $3.8 million, primarily related to severance costs associated with our previously announced restructuring of ERS. Operating income for the three months ended March 31, 2016 included a $13.0 million impairment of a rolling-stock maintenance facility and an accounts receivable reserve of $8.1 million, both of which were associated with an iron ore/steel making customer in Australia entering voluntary administration. Operating income for the three months ended March 31, 2016 also included restructuring costs of $1.1 million and corporate development and related costs of $0.5 million. Our operating ratio was 85.1% for the three months ended March 31, 2017, compared with 88.2% for the three months ended March 31, 2016.

Interest Expense

Interest expense was $26.4 million for the three months ended March 31, 2017, compared with $18.0 million for the three months ended March 31, 2016. The increase in interest expense was primarily due to a higher debt balance resulting from the GRail Transactions in December 2016, as well as higher interest rates in 2017 compared with 2016.

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Provision for Income Taxes

Our effective income tax rate for the three months ended March 31, 2017 was 44.6%, compared with 32.2% for the three months ended March 31, 2016. The higher effective income tax rate for the three months ended March 31, 2017 was primarily driven by an income tax benefit of $6.3 million recorded in three months ended March 31, 2016 associated with the United States Short Line Tax Credit. The Short Line Tax Credit expired on December 31, 2016. In addition, our provision for income taxes for the three months ended March 31, 2017 included the recording of a valuation allowance of €1.6 million (or $1.7 million at the average exchange rate on March 31, 2017) associated with tax losses in the Netherlands, primarily driven by losses at ERS. Our provision for income taxes for the three months ended March 31, 2016 also included the recording of a valuation allowance of A$2.6 million (or $2.0 million at the average exchange rate in March of 2016) associated with the impairment of GWA's now idle rolling-stock maintenance facility that was formerly used in connection with the Southern Iron rail haulage agreement (see Note 2, Changes in Operations). For additional information regarding our provision for income taxes, see Note 9, Income Taxes, to our Consolidated Financial Statements.

Net Income and Earnings Per Common Share Attributable to G&W Common Stockholders

Net income attributable to G&W for the three months ended March 31, 2017 was $26.2 million, compared with $27.0 million for the three months ended March 31, 2016. Our basic EPS were $0.43 with 61.4 million weighted average shares outstanding for the three months ended March 31, 2017, compared with basic EPS of $0.47 with 57.0 million weighted average shares outstanding for the three months ended March 31, 2016. Our diluted EPS for the three months ended March 31, 2017 were $0.42 with 62.4 million weighted average shares outstanding, compared with diluted EPS of $0.47 with 58.0 million weighted average shares outstanding for the three months ended March 31, 2016. Our results for the three months ended March 31, 2017 and 2016 included certain items affecting comparability between the periods as previously presented in the "Overview—Overview of Three Month Results—Items Affecting Comparability."

Operating Results by Segment

Our various rail operations are organized into 10 operating regions. We present our financial information as three reportable segments: North American Operations, Australian Operations and U.K./European Operations. Each of our segments generates the following three categories of revenues from external customers: freight revenues, freight-related revenues and all other revenues. Our eight North American regions are aggregated into one segment as a result of having similar economic and operating characteristics.

The results of operations of our foreign entities are maintained in the respective local currency (the Australian dollar, the British pound, the Canadian dollar and the Euro) and then translated into United States dollars at the applicable exchange rates for inclusion in our consolidated financial statements. As a result, any appreciation or depreciation of these currencies against the United States dollar can impact our results of operations.

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The following tables set forth our North American Operations, Australian Operations and U.K./European Operations for the three months ended March 31, 2017 and 2016 (dollars in thousands):



	Three Months Ended March 31, 2017
	North American Operations			Australian Operations			U.K./European Operations			Total Operations
Operating revenues:
Freight revenues	$	238,281		$	60,874		$	78,590		$	377,745
Freight-related revenues	65,345			11,709			42,283			119,337
All other revenues	15,850			1,324			4,852			22,026
Total operating revenues	$	319,476		$	73,907		$	125,725		$	519,108
Operating expenses:
Labor and benefits	$	110,251		$	17,054		$	38,279		$	165,584
Equipment rents	13,990			1,401			18,480			33,871
Purchased services	14,673			6,212			30,116			51,001
Depreciation and amortization	38,867			15,192			6,715			60,774
Diesel fuel used in train operations	20,558			6,590			11,005			38,153
Electricity used in train operations	—			—			3,173			3,173
Casualties and insurance	10,233			1,473			837			12,543
Materials	13,463			2,714			4,369			20,546
Trackage rights	9,518			3,408			9,297			22,223
Net (gain)/loss on sale and impairment of assets	(432		)	(2		)	7			(427		)
Restructuring costs	54			338			3,363			3,755
Other expenses	20,731			2,368			7,359			30,458
Total operating expenses	251,906			56,748			133,000			441,654
Operating income/(loss)	$	67,570		$	17,159		$	(7,275	)	$	77,454
Operating ratio	78.8		%	76.8		%	105.8		%	85.1		%
Interest expense, net	$	10,551		$	13,987		$	1,600		$	26,138
Provision for/(benefit from) income taxes	$	22,074		$	861		$	(1,007	)	$	21,928
Expenditures for additions to property & equipment, net of grants from outside parties	$	24,215		$	1,462		$	4,290		$	29,967
Carloads	403,016			149,416			268,816			821,248

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	Three Months Ended March 31, 2016
	North American Operations			Australian Operations			U.K./European Operations			Total Operations
Operating revenues:
Freight revenues	$	221,825		$	24,777		$	79,812		$	326,414
Freight-related revenues	61,525			25,490			46,443			133,458
All other revenues	16,428			1,531			4,785			22,744
Total operating revenues	$	299,778		$	51,798		$	131,040		$	482,616
Operating expenses:
Labor and benefits	102,590			15,768			44,756			163,114
Equipment rents	15,056			1,695			21,679			38,430
Purchased services	15,701			5,251			25,550			46,502
Depreciation and amortization	36,189			6,656			6,485			49,330
Diesel fuel used in train operations	13,524			4,037			7,905			25,466
Electricity used in train operations	—			—			3,365			3,365
Casualties and insurance	7,240			1,535			1,345			10,120
Materials	13,000			2,419			6,172			21,591
Trackage rights	8,867			2,289			9,420			20,576
Net (gain)/loss on sale and impairment of assets	(159		)	12,982			2			12,825
Restructuring costs	359			693			75			1,127
Other expenses	17,433			10,224			5,517			33,174
Total operating expenses	229,800			63,549			132,271			425,620
Operating income/(loss)	$	69,978		$	(11,751	)	$	(1,231	)	$	56,996
Operating ratio	76.7		%	122.7		%	100.9		%	88.2		%
Interest expense, net	$	10,465		$	2,395		$	5,040		$	17,900
Provision for income taxes	$	16,009		$	(2,525	)	$	(676	)	$	12,808
Expenditures for additions to property & equipment, net of grants from outside parties	$	25,416		$	867		$	5,400		$	31,683
Carloads	383,192			46,223			251,969			681,384

North American Operations

Operating Revenues

The following table sets forth our North American Operations operating revenues and carloads for the three months ended March 31, 2017 and 2016 (dollars in thousands):



	Three Months Ended March 31,								Increase/(Decrease) in Total Operations					Increase/(Decrease) in Existing Operations					Currency Impact
	2017						2016		Increase/(Decrease) in Total Operations					Increase/(Decrease) in Existing Operations
	Total Operations		New Operations		Existing Operations		2016		Amount			%		Amount			%
Freight revenues	$	238,281	$	6,609	$	231,672	$	221,825	$	16,456		7.4	%	$	9,847		4.4	%	$	574
Freight-related revenues	65,345		335		65,010		61,525		3,820			6.2	%	3,485			5.7	%	159
All other revenues	15,850		479		15,371		16,428		(578		)	(3.5	)%	(1,057		)	(6.4	)%	105
Total operating revenues	$	319,476	$	7,423	$	312,053	$	299,778	$	19,698		6.6	%	$	12,275		4.1	%	$	838
Carloads	403,016		7,908		395,108		383,192		19,824			5.2	%	11,916			3.1	%

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Freight Revenues

The following table sets forth the changes in our North American Operations freight revenues by commodity group for the three months ended March 31, 2017, compared with the three months ended March 31, 2016 (dollars in thousands):



	Three Months Ended March 31,				Increase/(Decrease) in Total Operations			New Operations		Currency Impact		2016 Constant Currency*		Increase/(Decrease) in Existing Operations Constant Currency*
	2017		2016
Commodity Group	Amount		Amount
Agricultural Products	$	32,978	$	28,056	$	4,922		$	355	$	67	$	28,123	$	4,500
Autos & Auto Parts	5,210		4,035		1,175			758		17		4,052		400
Chemicals & Plastics	37,515		33,748		3,767			2,164		108		33,856		1,495
Coal & Coke	21,733		16,826		4,907			—		23		16,849		4,884
Food & Kindred Products	8,274		8,434		(160		)	105		11		8,445		(276		)
Intermodal	177		1		176			176		—		1		—
Lumber & Forest Products	20,376		20,870		(494		)	234		29		20,899		(757		)
Metallic Ores	3,896		5,062		(1,166		)	—		24		5,086		(1,190		)
Metals	26,594		27,043		(449		)	781		95		27,138		(1,325		)
Minerals & Stone	28,115		24,794		3,321			773		30		24,824		2,518
Petroleum Products	18,427		18,273		154			592		49		18,322		(487		)
Pulp & Paper	25,478		26,128		(650		)	313		110		26,238		(1,073		)
Waste	5,194		3,788		1,406			195		1		3,789		1,210
Other	4,314		4,767		(453		)	163		10		4,777		(626		)
Total freight revenues	$	238,281	$	221,825	$	16,456		$	6,609	$	574	$	222,399	$	9,273

* Constant currency amounts reflect the prior period results 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 March 31, 2017 and 2016 (dollars in thousands, except average freight revenues per carload):



	Freight Revenues								Carloads		Average Freight Revenues Per Carload
	Freight Revenues								Carloads		Average Freight Revenues Per Carload
	Three Months Ended March 31,								Three Months Ended March 31,		Three Months Ended March 31,
	2017				2016 Constant Currency*				Three Months Ended March 31,		Three Months Ended March 31,
Commodity Group	Amount		% of Total		Amount		% of Total		2017	2016	2017		2016		2016 Constant Currency*
Agricultural Products	$	32,978	13.8	%	$	28,123	12.7	%	57,251	56,015	$	576	$	501	$	502
Autos & Auto Parts	5,210		2.2	%	4,052		1.8	%	8,793	6,806	593		593		595
Chemicals & Plastics	37,515		15.7	%	33,856		15.2	%	46,008	44,359	815		761		763
Coal & Coke	21,733		9.1	%	16,849		7.6	%	63,299	48,678	343		346		346
Food & Kindred Products	8,274		3.5	%	8,445		3.8	%	14,870	14,964	556		564		564
Intermodal	177		0.1	%	1		—	%	1,801	12	98		83		83
Lumber & Forest Products	20,376		8.6	%	20,899		9.4	%	33,555	34,832	607		599		600
Metallic Ores	3,896		1.6	%	5,086		2.3	%	4,924	6,225	791		813		817
Metals	26,594		11.2	%	27,138		12.2	%	35,798	35,905	743		753		756
Minerals & Stone	28,115		11.8	%	24,824		11.2	%	47,045	43,681	598		568		568
Petroleum Products	18,427		7.7	%	18,322		8.2	%	25,137	25,989	733		703		705
Pulp & Paper	25,478		10.7	%	26,238		11.8	%	38,774	41,168	657		635		637
Waste	5,194		2.2	%	3,789		1.7	%	10,744	8,286	483		457		457
Other	4,314		1.8	%	4,777		2.1	%	15,017	16,272	287		293		294
Total	$	238,281	100.0	%	$	222,399	100.0	%	403,016	383,192	$	591	$	579	$	580

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

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Total traffic from our North American Operations increased 19,824 carloads, or 5.2%, to 403,016 carloads for the three months ended March 31, 2017, compared with the same period in 2016. The increase consisted of 7,908 carloads from new operations and 11,916 carloads from existing operations. The traffic increase from existing operations was principally due to increases of 14,621 carloads of coal and coke traffic, 2,376 carloads of minerals and stone traffic and 2,172 carloads of waste traffic, partially offset by decreases of 2,607 carloads of pulp and paper traffic, 1,474 carloads of other commodity traffic, 1,465 carloads of lumber and forest products traffic, 1,393 carloads of petroleum products traffic and 1,301 carloads of metallic ores traffic. All remaining traffic increased by a net 987 carloads.

Changes in average freight revenues per carload in a commodity group may be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group. Excluding the impact of foreign currency, average freight revenues per carload from our North American Operations increased 1.9% to $591 for the three months ended March 31, 2017, compared with the same period in 2016. Average freight revenues per carload from existing operations excluding the impact of foreign currency increased 1.0% to $586 for the three months ended March 31, 2017, compared with the same period in 2016. A change in the mix of commodities decreased average freight revenues per carload by 1.8% and lower fuel surcharges decreased average freight revenues per carload by 0.1%. Excluding these factors, average freight revenues per carload increased 2.9%.

The following information discusses the significant changes in our North American Operations freight revenues from existing operations by commodity group excluding the impact of foreign currency.

Agricultural products revenues increased $4.5 million, or 16.0%. Agricultural products average freight revenues per carload increased 14.1%, which increased revenues by $4.0 million, and an increase in traffic of 921 carloads, or 1.6%, increased revenues by $0.5 million. The increase in average freight revenues per carload was primarily driven by a change in customer mix and a longer average length of haul.

Coal and coke revenues increased $4.9 million, or 29.0%, primarily due to an increase in traffic of 14,621 carloads, or 30.0%. The increase was primarily due to increased demand for coal power generation in the midwestern United States and replenishment of stockpiles.

Metallic ores revenues decreased $1.2 million, or 23.4%, primarily due to a decrease in traffic of 1,301 carloads, or 20.9%. The carload decrease was primarily due to the planned idling of an alumina customer facility in the southern United States and lower production at a copper facility in the western United States.

Minerals and stone revenues increased $2.5 million, or 10.1%. Minerals and stone traffic increased 2,376 carloads, or 5.4%, which increased revenues by $1.4 million, and average freight revenues per carload increased 4.6%, which increased revenues by $1.1 million. The carload increase was primarily due to increased shipments of rock salt and clay, partially offset by decreased shipments of construction aggregates.

Pulp and paper revenues decreased $1.1 million, or 4.1%. Pulp and paper traffic decreased 2,607 carloads, or 6.3%, which decreased revenues by $1.7 million, while average freight revenues per carload increased 2.5%, which increased revenues by $0.6 million. The carload decrease was primarily due to decreased shipments resulting from truck competition and the temporary shutdown of a mill in the southern United States.

Waste revenues increased $1.2 million, or 31.9%, primarily due to an increase in traffic of 2,172 carloads or 26.2%. The carload increase was primarily due to new and expanded contracts in the midwestern United States.

Freight revenues from all remaining commodities combined decreased by a net $1.6 million.

Freight-Related Revenues

Excluding a $0.2 million increase due to the impact of foreign currency appreciation, freight-related revenues from our North American Operations, which includes revenues from railcar switching, track access fees, storage and other ancillary revenues related to the movement of freight, increased $3.7 million, or 5.9%, to $65.3 million for the three months ended March 31, 2017, compared with $61.7 million for the three months ended March 31, 2016. The increase included $3.3 million from existing operations and $0.3 million from new operations. The increase from existing operations was primarily due to the recognition of revenue from a multi-year take-or-pay volume shortfall under a crude-by-rail contract, partially offset by decreased demurrage revenues.

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All Other Revenues

Excluding a $0.1 million increase due to the impact of foreign currency appreciation, all other revenues from our North American Operations, which includes revenues from third-party railcar and locomotive repairs, property rentals, railroad construction and other ancillary revenues not directly related to the movement of freight, decreased $0.7 million, or 4.1%, to $15.9 million for the three months ended March 31, 2017, compared with $16.5 million for the three months ended March 31, 2016. The decrease included $1.2 million from existing operations, partially offset by $0.5 million from new operations.

Operating Expenses

Total operating expenses from our North American Operations increased $22.1 million, or 9.6%, to $251.9 million for the three months ended March 31, 2017, compared with $229.8 million for the three months ended March 31, 2016. The increase included $12.0 million from existing operations and $10.1 million from new operations. The increase from existing operations was primarily due to an increase of $6.4 million in diesel fuel used in train operations, $2.8 million in other expenses and $2.4 million in casualties and insurance, partially offset by decreases of $2.1 million in equipment rents and $1.9 million in purchased services. The appreciation of the Canadian dollar relative to the United States dollar also resulted in a $0.8 million increase in operating expenses from existing operations. The following table sets forth operating expenses from our North American Operations for the three months ended March 31, 2017 and 2016 (dollars in thousands):



	Three Months Ended March 31,																			Increase/(Decrease) Constant Currency*
	2017					2016								Currency Impact			2016 Constant Currency*
	Amount			% of Operating Revenues		Amount			% of Operating Revenues		Increase/(Decrease)			Currency Impact			2016 Constant Currency*
Labor and benefits	$	110,251		34.5	%	$	102,590		34.2	%	$	7,661		$	313		$	102,903		$	7,348
Equipment rents	13,990			4.4	%	15,056			5.1	%	(1,066		)	44			15,100			(1,110		)
Purchased services	14,673			4.6	%	15,701			5.2	%	(1,028		)	52			15,753			(1,080		)
Depreciation and amortization	38,867			12.1	%	36,189			12.1	%	2,678			187			36,376			2,491
Diesel fuel used in train operations	20,558			6.4	%	13,524			4.5	%	7,034			84			13,608			6,950
Casualties and insurance	10,233			3.2	%	7,240			2.4	%	2,993			16			7,256			2,977
Materials	13,463			4.2	%	13,000			4.4	%	463			57			13,057			406
Trackage rights	9,518			3.0	%	8,867			3.0	%	651			7			8,874			644
Net gain on sale and impairment of assets	(432		)	(0.1	)%	(159		)	(0.1	)%	(273		)	(1		)	(160		)	(272		)
Restructuring costs	54			—	%	359			0.1	%	(305		)	—			359			(305		)
Other expenses	20,731			6.5	%	17,433			5.8	%	3,298			56			17,489			3,242
Total operating expenses	$	251,906		78.8	%	$	229,800		76.7	%	$	22,106		$	815		$	230,615		$	21,291

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

The following information discusses the significant changes in operating expenses of our North American Operations excluding an increase of $0.8 million due to the net impact from foreign currency appreciation.

Labor and benefits expense was $110.3 million for the three months ended March 31, 2017, compared with $102.9 million for the three months ended March 31, 2016, an increase of $7.3 million, or 7.1%. The increase consisted of $5.6 million from new operations, of which $2.2 million related to the P&W integration primarily due to severance costs, and $1.8 million, or 1.7%, from existing operations.

Equipment rents expense was $14.0 million for the three months ended March 31, 2017, compared with $15.1 million for the three months ended March 31, 2016, a decrease of $1.1 million, or 7.4%. The decrease consisted of $2.1 million from existing operations, partially offset by $1.0 million from new operations. The decrease from existing operations was due to reduced car hire expense.

Purchased services expense was $14.7 million for the three months ended March 31, 2017, compared with $15.8 million for the three months ended March 31, 2016, a decrease of $1.1 million, or 6.9%. The decrease consisted of $1.9 million from existing operations, partially offset by $0.8 million from new operations. The decrease from existing operations was primarily due to a reduction in the use of third-party contractors for track repairs.

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Depreciation and amortization expense was $38.9 million for the three months ended March 31, 2017, compared with $36.4 million for the three months ended March 31, 2016, an increase of $2.5 million, or 6.8%. The increase consisted of $2.0 million from existing operations and $0.5 million from new operations. The increase from existing operations was primarily attributable to a larger depreciable asset base in 2017 compared with 2016, reflecting capital spending in 2016.

The cost of diesel fuel used in train operations was $20.6 million for the three months ended March 31, 2017, compared with $13.6 million for the three months ended March 31, 2016, an increase of $7.0 million, or 51.1%. The increase consisted of $6.4 million from existing operations and $0.5 million from new operations. The increase from existing operations was primarily attributable to a 39.0% increase in average fuel cost per gallon.

Casualties and insurance expense was $10.2 million for the three months ended March 31, 2017, compared with $7.3 million for the three months ended March 31, 2016, an increase of $3.0 million, or 41.0%. The increase consisted of $2.4 million from existing operations and $0.6 million from new operations. The increase from existing operations was primarily attributable to increased derailment and washout expense in 2017.

Other expenses were $20.7 million for the three months ended March 31, 2017, compared with $17.5 million for the three months ended March 31, 2016, an increase of $3.2 million, or 18.5%. The increase consisted of $2.8 million from existing operations and $0.5 million from new operations. The increase from existing operations was primarily due to corporate development and related costs.

Operating Income/Operating Ratio

Operating income from our North American Operations was $67.6 million for the three months ended March 31, 2017, compared with $70.0 million for the three months ended March 31, 2016. Operating income for the three months ended March 31, 2017 included corporate development and related costs of $5.2 million, about half of which relate to the Providence and Worcester integration and the remainder to other corporate development activities. Operating income for the three months ended March 31, 2016 included corporate development and related costs of $0.5 million. The operating ratio was 78.8% for the three months ended March 31, 2017, compared with 76.7% for the three months ended March 31, 2016.

Australian Operations

Operating Revenues

As previously disclosed, we own a controlling 51.1% ownership interest in our Australian Operations and, therefore, 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 March 31, 2017 and 2016 (dollars in thousands):



	Three Months Ended March 31,											Increase/(Decrease) in Total Operations					Increase/(Decrease) in Existing Operations					Currency Impact
	2017											Increase/(Decrease) in Total Operations					Increase/(Decrease) in Existing Operations
	Total Operations		New Operations		Eliminations (a)			Existing Operations		2016		Amount			%		Amount			%
Freight revenues	$	60,874	$	29,521	$	—		$	31,353	$	24,777	$	36,097		145.7	%	$	6,576		26.5	%	$	1,243
Freight-related revenues	11,709		—		(12,089		)	23,798		25,490		(13,781		)	(54.1	)%	(1,692		)	(6.6	)%	1,254
All other revenues	1,324		—		—			1,324		1,531		(207		)	(13.5	)%	(207		)	(13.5	)%	82
Total operating revenues	$	73,907	$	29,521	$	(12,089	)	$	56,475	$	51,798	$	22,109		42.7	%	$	4,677		9.0	%	$	2,579
Carloads	149,416		97,684		—			51,732		46,223		103,193			223.3	%	5,509			11.9	%


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

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Freight Revenues

The following table sets forth the changes in our Australian Operations freight revenues by commodity group for the three months ended March 31, 2017, compared with the three months ended March 31, 2016 (dollars in thousands):



	Three Months Ended March 31,				Increase/(Decrease) in Total Operations			New Operations		Currency Impact		2016 Constant Currency*		Increase/(Decrease) in Existing Operations Constant Currency*
	Three Months Ended March 31,
Commodity Group	2017		2016
Agricultural Products	$	5,746	$	4,999	$	747		$	—	$	246	$	5,245	$	501
Coal & Coke	29,521		—		29,521			29,521		—		—		—
Intermodal	15,867		14,573		1,294			—		733		15,306		561
Metallic Ores	7,631		3,107		4,524			—		159		3,266		4,365
Minerals & Stone	1,979		1,879		100			—		94		1,973		6
Petroleum Products	130		219		(89		)	—		11		230		(100		)
Total freight revenues	$	60,874	$	24,777	$	36,097		$	29,521	$	1,243	$	26,020	$	5,333

* 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 March 31, 2017 and 2016 (dollars in thousands, except average freight revenues per carload):



	Freight Revenues								Carloads		Average Freight Revenues Per Carload
	Freight Revenues								Carloads		Average Freight Revenues Per Carload
	Three Months Ended March 31,								Three Months Ended March 31,		Three Months Ended March 31,
	2017				2016 Constant Currency*				Three Months Ended March 31,		Three Months Ended March 31,
Commodity Group	Amount		% of Total		Amount		% of Total		2017	2016	2017		2016		2016 Constant Currency*
Agricultural Products	$	5,746	9.4	%	$	5,245	20.2	%	15,266	13,573	$	376	$	368	$	386
Coal & Coke	29,521		48.5	%	—		—	%	97,684	—	302		—		—
Intermodal	15,867		26.1	%	15,306		58.8	%	13,578	13,623	1,169		1,070		1,124
Metallic Ores	7,631		12.5	%	3,266		12.5	%	6,906	2,318	1,105		1,340		1,409
Minerals & Stone	1,979		3.3	%	1,973		7.6	%	15,928	16,648	124		113		119
Petroleum Products	130		0.2	%	230		0.9	%	54	61	2,407		3,590		3,770
Total	$	60,874	100.0	%	$	26,020	100.0	%	149,416	46,223	$	407	$	536	$	563

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

Total traffic from our Australian Operations increased 103,193 carloads to 149,416 carloads for the three months ended March 31, 2017, compared with the same period in 2016. The increase consisted of 97,684 carloads from new operations and 5,509 carloads from existing operations. The increase in traffic from existing operations was principally due to increases of 4,588 carloads of metallic ores traffic and 1,693 carloads of agricultural products traffic, partially offset by a decrease of 720 carloads of minerals and stone traffic. All remaining traffic decreased by 52 carloads.

Changes in average freight revenues per carload in a commodity group may be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group. Excluding the impact of foreign currency, average freight revenues per carload from our Australian Operations decreased 27.7% to $407 for the three months ended March 31, 2017, compared with the same period in 2016. Average freight revenues per carload from existing operations excluding the impact of foreign currency increased 7.6% to $606 for the three months ended March 31, 2017, compared with the same period in 2016. The increase in average freight revenues per carload from existing operations was primarily due to increased metallic ores shipments as a result of previously closed iron ore and manganese mines recommencing operations.

The following information discusses the significant changes in our Australian Operations freight revenues from existing operations by commodity group excluding the impact of foreign currency.

Metallic ores revenues increased $4.4 million primarily due to a traffic increase of 4,588 carloads. The carload increase was primarily due to the recommencement of operations at two previously closed iron ore and manganese mines.

Freight revenues from all remaining commodities combined increased by a net $1.0 million.

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Freight-Related Revenues

Excluding a $1.3 million increase due to the impact of foreign currency appreciation, freight-related revenues from our Australian Operations, which includes revenues from railcar switching, track access rights, crewing services, storage and other ancillary revenues related to the movement of freight, decreased $15.0 million, or 56.2%, to $11.7 million for the three months ended March 31, 2017, compared with $26.7 million for the three months ended March 31, 2016. Excluding $12.1 million of freight-related revenues for services provided by Freightliner Australia to GRail for the three months ended March 31, 2017, which were eliminated in our consolidated freight-related revenues, our freight-related revenues from existing operations decreased $2.9 million. The decrease was primarily due to the loss of the fixed payments from Arrium associated with our rail haulage agreement to serve their Southern Iron mine that is now closed, partially offset by increased switching revenues primarily due to increased agricultural products shipments.

All Other Revenues

Excluding a $0.1 million increase due to the impact of foreign currency appreciation, all other revenues from our Australian Operations, which includes revenues from third-party railcar and locomotive repairs, property rentals and other ancillary revenues not directly related to the movement of freight, decreased $0.3 million, or 17.9%, to $1.3 million for the three months ended March 31, 2017, compared with $1.6 million for the three months ended March 31, 2016. The decrease was primarily due to reduced third-party railcar and locomotive repair revenues.

Operating Expenses

Total operating expenses from our Australian Operations for the three months ended March 31, 2017 decreased $6.8 million, or 10.7%, to $56.7 million, compared with $63.5 million for the three months ended March 31, 2016. The decrease in operating expenses consisted of $18.0 million from existing operations, partially offset by $8.7 million from new operations and $2.5 million from the appreciation of the Australian dollar relative to the United States dollar. Operating expenses for the three months ended March 31, 2016 included a $13.0 million impairment of a rolling-stock maintenance facility and an accounts receivable reserve of $8.1 million, both of which were associated with an iron ore/steel making customer entering into voluntary administration. The following table sets forth operating expenses from our Australian Operations for the three months ended March 31, 2017 and 2016 (dollars in thousands):



	Three Months Ended March 31,									Increase/(Decrease)			Currency Impact		2016 Constant Currency*		Increase/(Decrease) Constant Currency*
	2017					2016
	Amount			% of Operating Revenues		Amount		% of Operating Revenues
Labor and benefits	$	17,054		23.1	%	$	15,768	30.5	%	$	1,286		$	823	$	16,591	$	463
Equipment rents	1,401			1.9	%	1,695		3.3	%	(294		)	85		1,780		(379		)
Purchased services	6,212			8.4	%	5,251		10.1	%	961			264		5,515		697
Depreciation and amortization	15,192			20.6	%	6,656		12.8	%	8,536			355		7,011		8,181
Diesel fuel used in train operations	6,590			8.9	%	4,037		7.8	%	2,553			197		4,234		2,356
Casualties and insurance	1,473			2.0	%	1,535		3.0	%	(62		)	80		1,615		(142		)
Materials	2,714			3.6	%	2,419		4.7	%	295			128		2,547		167
Trackage rights	3,408			4.6	%	2,289		4.4	%	1,119			113		2,402		1,006
Net (gain)/loss on sale and impairment of assets	(2		)	—	%	12,982		25.1	%	(12,984		)	200		13,182		(13,184		)
Restructuring costs	338			0.5	%	693		1.3	%	(355		)	11		704		(366		)
Other expenses	2,368			3.2	%	10,224		19.7	%	(7,856		)	228		10,452		(8,084		)
Total operating expenses	$	56,748		76.8	%	$	63,549	122.7	%	$	(6,801	)	$	2,484	$	66,033	$	(9,285	)

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

The following information discusses the significant changes in operating expenses of our Australian Operations excluding a $2.5 million increase from the appreciation of the Australian dollar relative to the United States dollar.

Depreciation and amortization expense was $15.2 million for the three months ended March 31, 2017, compared with $7.0 million for the three months ended March 31, 2016, an increase of $8.2 million. The increase was primarily attributable to new operations.

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The cost of diesel fuel used in train operations was $6.6 million for the three months ended March 31, 2017, compared with $4.2 million for the three months ended March 31, 2016, an increase of $2.4 million, or 55.6%. The increase from existing operations consisted of $1.5 million due to a 34.6% increase in average fuel cost per gallon and $0.9 million due to a 15.7% increase in diesel fuel consumption.

Trackage rights expense was $3.4 million for the three months ended March 31, 2017, compared with $2.4 million for the three months ended March 31, 2016, an increase of $1.0 million, or 41.9%. The increase was primarily attributable to services for an iron ore customer that recommenced operations in July 2016.

Net (gain)/loss on sale and impairment of assets of $13.0 million for the three months ended March 31, 2016 was primarily related to the impairment of a rolling-stock maintenance facility resulting from an iron ore/steel making customer entering voluntary administration.

Other expenses were $2.4 million for the three months ended March 31, 2017, compared with $10.5 million for the three months ended March 31, 2016, a decrease of $8.1 million. The decrease was primarily due to an accounts receivable reserve recorded during the three months ended March 31, 2016 associated with an iron ore/steel making customer entering into voluntary administration.

Operating Income/Operating Ratio

Our Australian Operations had operating income of $17.2 million for the three months ended March 31, 2017, compared with an operating loss of $11.8 million for the three months ended March 31, 2016. Operating income for the three months ended March 31, 2017 included $0.3 million of restructuring costs and $0.1 million of corporate development and related costs. For the three months ended March 31, 2016, our Australian Operations recorded charges of $21.1 million, including a $13.0 million impairment of a rolling-stock maintenance facility and an associated accounts receivable reserve of $8.1 million, resulting from an iron ore/steel making customer entering voluntary administration. The operating ratio was 76.8% for the three months ended March 31, 2017, compared with 122.7% for the three months ended March 31, 2016.

U.K./European Operations

Operating Revenues

The following table sets forth our U.K./European Operations operating revenues and carloads for the three months ended March 31, 2017 and 2016 (dollars in thousands):



	Three Months Ended				Increase/(Decrease) in Total Operations					Currency Impact
	March 31,				Increase/(Decrease) in Total Operations
	2017		2016		Amount			%
Freight revenues	$	78,590	$	79,812	$	(1,222	)	(1.5	)%	$	(8,601	)
Freight-related revenues	42,283		46,443		(4,160		)	(9.0	)%	(5,010		)
All other revenues	4,852		4,785		67			1.4	%	(636		)
Total operating revenues	$	125,725	$	131,040	$	(5,315	)	(4.1	)%	$	(14,247	)
Carloads	268,816		251,969		16,847			6.7	%

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Freight Revenues

The following table sets forth the changes in our U.K./European Operations freight revenues by commodity group for the three months ended March 31, 2017, compared with the three months ended March 31, 2016 (dollars in thousands):



	Three Months Ended March 31,								Increase/(Decrease)			Currency Impact			2016 Constant Currency*		Increase/(Decrease) Constant Currency*
	2017				2016
Commodity Group	Amount		% of Total		Amount		% of Total
Agricultural Products	$	1,739	2.2	%	$	343	0.4	%	$	1,396		$	(9	)	$	334	$	1,405
Coal & coke	3,400		4.3	%	4,344		5.4	%	(944		)	(507		)	3,837		(437		)
Intermodal	61,996		78.9	%	64,529		80.9	%	(2,533		)	(7,315		)	57,214		4,782
Lumber & Forest products	—		—	%	67		0.1	%	(67		)	(2		)	65		(65		)
Minerals & Stone	11,455		14.6	%	10,529		13.2	%	926			(768		)	9,761		1,694
Total freight revenues	$	78,590	100.0	%	$	79,812	100.0	%	$	(1,222	)	$	(8,601	)	$	71,211	$	7,379

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

The following table sets forth our U.K./European Operations freight revenues, carloads and average freight revenues per carload for the three months ended March 31, 2017 and 2016 (dollars in thousands, except average freight revenues per carload):



	Freight Revenues								Carloads		Average Freight Revenues Per Carload
	Freight Revenues								Carloads		Average Freight Revenues Per Carload
	Three Months Ended March 31,								Three Months Ended March 31,		Three Months Ended March 31,
	2017				2016 Constant Currency*				Three Months Ended March 31,		Three Months Ended March 31,
Commodity Group	Amount		% of Total		Amount		% of Total		2017	2016	2017		2016		2016 Constant Currency*
Agricultural Products	$	1,739	2.2	%	$	334	0.5	%	1,513	394	$	1,149	$	871	$	848
Coal & Coke	3,400		4.3	%	3,837		5.4	%	10,561	8,063	322		539		476
Intermodal	61,996		78.9	%	57,214		80.3	%	223,813	212,095	277		304		270
Lumber & Forest Products	—		—	%	65		0.1	%	—	180	—		372		361
Minerals & Stone	11,455		14.6	%	9,761		13.7	%	32,929	31,237	348		337		312
Total	$	78,590	100.0	%	$	71,211	100.0	%	268,816	251,969	$	292	$	317	$	283

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

Total traffic from our U.K./European Operations increased 16,847 carloads, or 6.7%, for the three months ended March 31, 2017, compared with the same period in 2016. The traffic increase was principally due to increases of 11,718 carloads of intermodal traffic (primarily in the U.K.), 2,498 carloads of coal and coke traffic (Poland and the U.K.), 1,692 carloads of minerals and stone traffic (primarily in Poland) and 1,119 carloads of agricultural products traffic (Poland). All remaining traffic decreased by 180 carloads.

Changes in average freight revenues per carload in a commodity group can be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group. Excluding the impact of foreign currency, average freight revenues per carload from our U.K./European Operations increased 3.2% to $292 for the three months ended March 31, 2017, compared with the same period in 2016.

The following information discusses the significant changes in our U.K./European Operations freight revenues by commodity group excluding the impact of foreign currency.

Agricultural products revenues increased $1.4 million, primarily due to a traffic increase of 1,119 carloads in Poland due to the development of new business.

Coal and coke revenues decreased $0.4 million, or 11.4%. Average freight revenues per carload decreased 32.4%, which decreased revenues by $1.2 million, while traffic increased 2,498 carloads, or 31.0%, which increased revenues by $0.8 million. The decrease in average freight revenues per carload was primarily due to a change in the mix of business in the U.K. The increase in carloads was primarily due to increased spot traffic in Poland and the movement of stockpiled coal from a mothballed power station in the U.K.

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Intermodal revenues increased $4.8 million, or 8.4%. Intermodal traffic increased 11,718 carloads, or 5.5%, which increased revenues by $3.2 million, and average freight revenues per carload increased 2.6%, which increased revenues by $1.5 million. The increase in carloads was primarily due to network disruptions in the U.K. in 2016 as a result of a temporary flood-related bridge outage.

Minerals and stone revenues increased $1.7 million, or 17.4%. Minerals and stone average freight revenues per carload increased 11.5%, which increased revenues by $1.1 million, and traffic increased 1,692 carloads, or 5.4%, which increased revenues by $0.6 million. The increase in average freight revenues per carload was primarily due to a change in the mix of business. The increase in carloads was primarily due to higher construction aggregates shipments in Poland and the U.K.

Freight revenues from all remaining commodities combined decreased by $0.1 million.

Freight-Related Revenues

Freight-related revenues from our U.K./European Operations include port switching as well as traction service (or hook and pull). Traction service requires us to provide locomotives and drivers to move a customer's train between specified origin and destination points. Freight-related revenues in the U.K./Europe also include infrastructure services, where we operate work trains for the track infrastructure owner, drayage and other ancillary revenues related to the movement of freight. With the exception of infrastructure services, which are primarily in the U.K., freight-related revenues from our U.K./European Operations are primarily associated with the Continental Europe intermodal business.

Excluding a $5.0 million decrease due to the impact of foreign currency depreciation, freight-related revenues from our U.K./European Operations increased $0.9 million, or 2.1%, to $42.3 million for the three months ended March 31, 2017, compared with $41.4 million for the three months ended March 31, 2016.

All Other Revenues

Excluding a $0.6 million decrease due to the impact of foreign currency depreciation, all other revenues from our U.K./European Operations, which includes revenues from third-party car and locomotive repairs, property rentals and other ancillary revenues not directly related to the movement of freight, increased $0.7 million, or 16.9%, to $4.9 million for the three months ended March 31, 2017, compared with $4.1 million for the three months ended March 31, 2016.

Operating Expenses

Total operating expenses from our U.K./European Operations were $133.0 million for the three months ended March 31, 2017, compared with $132.3 million for the three months ended March 31, 2016, an increase of $0.7 million, or 14.1%. Excluding a $13.9 million decrease from the impact of foreign currency depreciation, operating expenses increased $14.6 million. The following table sets forth operating expenses from our U.K./European Operations for the three months ended March 31, 2017 and 2016 (dollars in thousands):

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	Three Months Ended March 31,								Increase/(Decrease)			Currency Impact			2016 Constant Currency*		Increase/(Decrease) Constant Currency*
	2017				2016
	Amount		% of Operating Revenues		Amount		% of Operating Revenues
Labor and benefits	$	38,279	30.4	%	$	44,756	34.2	%	$	(6,477	)	$	(5,536	)	$	39,220	$	(941	)
Equipment rents	18,480		14.7	%	21,679		16.5	%	(3,199		)	(2,139		)	19,540		(1,060		)
Purchased services	30,116		24.0	%	25,550		19.5	%	4,566			(1,995		)	23,555		6,561
Depreciation and amortization	6,715		5.3	%	6,485		4.9	%	230			(732		)	5,753		962
Diesel fuel used in train operations	11,005		8.8	%	7,905		6.0	%	3,100			(891		)	7,014		3,991
Electricity used in train operations	3,173		2.5	%	3,365		2.6	%	(192		)	(225		)	3,140		33
Casualties and insurance	837		0.7	%	1,345		1.0	%	(508		)	(157		)	1,188		(351		)
Materials	4,369		3.5	%	6,172		4.7	%	(1,803		)	(765		)	5,407		(1,038		)
Trackage rights	9,297		7.4	%	9,420		7.2	%	(123		)	(866		)	8,554		743
Net gain on sale of assets	7		—	%	2		—	%	5			—			2		5
Restructuring costs	3,363		2.7	%	75		0.1	%	3,288			(10		)	65		3,298
Other expenses	7,359		5.8	%	5,517		4.2	%	1,842			(595		)	4,922		2,437
Total operating expenses	$	133,000	105.8	%	$	132,271	100.9	%	$	729		$	(13,911	)	$	118,360	$	14,640

* 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 $13.9 million due to the impact of foreign currency depreciation.

Labor and benefits expense was $38.3 million for the three months ended March 31, 2017, compared with $39.2 million for the three months ended March 31, 2016, a decrease of $0.9 million, or 2.4%. The decrease was primarily due to reduced headcount as a result of the previously announced restructuring of our U.K. coal business.

Equipment rents expense was $18.5 million for the three months ended March 31, 2017, compared with $19.5 million for the three months ended March 31, 2016, a decrease of $1.1 million, or 5.4%. The decrease was primarily due to reduced locomotive costs as a result of favorable renegotiations of existing leases in the U.K. and surplus lease costs in 2016 in Continental Europe, partially offset by additional locomotives to support increased aggregates and grain business in Poland.

Purchased services expense was $30.1 million for the three months ended March 31, 2017, compared with $23.6 million for the three months ended March 31, 2016, an increase of $6.6 million, or 27.9%. The increase was primarily due to lower net service costs incurred in 2016, which included cost reimbursements as a result of disruptions caused by a temporary flood-related bridge outage in the U.K., and increased third-party costs for services performed at the ports.

Depreciation and amortization expense was $6.7 million for the three months ended March 31, 2017, compared with $5.8 million for the three months ended March 31, 2016, an increase of $1.0 million, or 16.7%. The increase was primarily attributable to a larger depreciable asset base in 2017 compared with 2016, reflecting capital spending in 2016.

Diesel fuel used in train operations was $11.0 million for the three months ended March 31, 2017, compared with $7.0 million for the three months ended March 31, 2016, an increase of $4.0 million, or 56.9%. The increase consisted of $2.8 million due to a 40.8% increase in average fuel cost per gallon and $1.2 million due to an 11.4% increase in diesel fuel consumption.

Materials expense, which primarily consists of the costs of materials purchased for use in repairing and maintaining our locomotives, railcars and other equipment as well as costs for general tools and supplies used in our business, was $4.4 million for the three months ended March 31, 2017, compared with $5.4 million for the three months ended March 31, 2016, a decrease of $1.0 million, or 19.2%. The decrease was primarily due to timing of terminal infrastructure maintenance in the U.K. in 2016.

Trackage rights expense was $9.3 million for the three months ended March 31, 2017, compared with $8.6 million for the three months ended March 31, 2016, an increase of $0.7 million, or 8.7%. The increase was primarily due to increased aggregates and grain business in Poland and intermodal services in the U.K.

Restructuring costs for the three months ended March 31, 2017 of $3.4 million were primarily related to severance costs associated with our previously announced restructuring of our Continental European intermodal business, ERS.

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Other expenses were $7.4 million for the three months ended March 31, 2017, compared with $4.9 million for the three months ended March 31, 2016, an increase of $2.4 million, or 49.5%. The increase was primarily due to a $1.5 million accounts receivable reserve associated with a customer entering into bankruptcy and $0.7 million of expense due to the change in the estimated fair value of deferred consideration. For additional information regarding deferred consideration, see Note 7, Fair Value of Financial Instruments, to our Consolidated Financial Statements.

Operating Income

Our U.K./European Operations had an operating loss of $7.3 million for the three months ended March 31, 2017, compared with an operating loss of $1.2 million for the three months ended March 31, 2016. The operating loss from our U.K./European Operations for the three months ended March 31, 2017 included $3.4 million of restructuring costs, primarily related to severance costs associated with our previously announced restructuring of ERS, and a $1.5 million accounts receivable reserve associated with a customer entering into bankruptcy.

Liquidity and Capital Resources

We had cash and cash equivalents of $38.3 million at March 31, 2017. Based on current expectations, we believe our cash, together with our other liquid assets, anticipated future cash flows from operations, availability under our credit agreement, access to debt and equity capital markets and sources of available financing will be sufficient to fund expected operating, capital and debt service requirements and other financial commitments for the foreseeable future.

At March 31, 2017, we had long-term debt, including current portion, of $2,354.8 million, which comprised 42.0% of our total capitalization, and $525.6 million of unused borrowing capacity under the Credit Agreement. At December 31, 2016, we had long-term debt, including current portion, totaling $2,359.5 million, which comprised 42.5% of our total capitalization.

During the three months ended March 31, 2017 and 2016, we generated $85.0 million and $70.0 million, respectively, of cash from operating activities. Changes in working capital decreased net cash flows by $20.4 million and $29.2 million for the three months ended March 31, 2017 and 2016, respectively.

During the three months ended March 31, 2017 and 2016, our cash used in investing activities was $24.7 million and $29.0 million, respectively. For the three months ended March 31, 2017, the primary drivers of cash used in investing activities were $34.7 million of cash used for capital expenditures, including $2.2 million for new business investments, partially offset by $4.8 million of cash received from grants from outside parties for capital spending, $2.9 million of cash received from a working capital adjustment related to the GRail acquisition and $1.4 million of insurance proceeds for the replacement of assets. For the three months ended March 31, 2016, primary drivers of cash used in investing activities were $47.9 million of cash used for capital expenditures, including new business investments of $1.6 million, partially offset by $16.2 million in cash received from grants from outside parties for capital spending and $2.4 million of insurance proceeds for the replacement of assets.

During the three months ended March 31, 2017 and 2016, our cash used in financing activities was $56.3 million and $38.7 million, respectively. For the three months ended March 31, 2017, the primary driver of cash used in financing activities was a net decrease in outstanding debt of $55.4 million. For the three months ended March 31, 2016, the primary driver of cash used in financing activities was a decrease in outstanding debt of $39.4 million.

Credit Agreement

As of the March 20, 2015 closing date, the credit facilities under the Credit Agreement were comprised of a $1,782.0 million United States term loan, an A$324.6 million (or $252.5 million at the exchange rate on the closing date) Australian term loan, a £101.7 million (or $152.2 million at the exchange rate on the closing date) U.K. term loan and a $625.0 million revolving credit facility. The revolving credit facility includes borrowing capacity for letters of credit and swingline loans. The maturity date of each of our credit facilities under the Credit Agreement is March 31, 2020.

On October 20, 2016, we entered into Amendment No. 2 to the Credit Agreement (Amendment No. 2). Amendment No. 2 permitted, among other things, us to enter into the Australia Partnership transaction and the GRail Transactions (collectively, the Australian Reorganization). As a result of the Australian Reorganization, on December 1, 2016, we paid the balance on the Australia term loan and the $625.0 million revolving credit facility under the Credit Agreement was reallocated and includes flexible sub-limits for revolving loans denominated in United States dollars, British pounds, Canadian dollars and Euros.

During the three months ended March 31, 2017, we made prepayments on our United States term loan of $45.8 million. We also made scheduled quarterly principal payments of $4.3 million on the United States term loan and £1.3 million (or $1.6 million at the exchange rate on the date the payments were made) on our U.K. term loan.

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For additional information regarding our Credit Agreement, see Note 5, Long-Term Debt, to our Consolidated Financial Statements.

2017 Budgeted Capital Expenditures

The following table sets forth our budgeted capital expenditures for the year ending December 31, 2017 (dollars in thousands):



	2017 Budgeted
	Capital
	Expenditures
Track and equipment improvements, self-funded	$	195,000
Track and equipment improvements, subject to third-party funding	79,000
New business investments	39,000
Gross capital expenditures	$	313,000
Grants from outside parties	(61,000		)
Net capital expenditures	$	252,000

During the three months ended March 31, 2017, we incurred $32.9 million in aggregate capital expenditures related to current year projects of which we paid $22.2 million in cash and accrued $10.7 million in accounts payable as of March 31, 2017. Of the $2.1 million of grants from outside parties related to these current year projects, we received $0.1 million in cash and we expect to receive an additional $2.0 million, which was included in outstanding grant receivables from outside parties as of March 31, 2017.

The following table sets forth our capital expenditures incurred by segment for the three months ended March 31, 2017 (dollars in thousands):



	Three Months Ended
	March 31, 2017
	North American Operations			Australian Operations		U.K./European Operations		Total
Capital Expenditures:
Track and equipment, self-funded	$	24,749		$	918	$	4,290	$	29,957
Track and equipment, subject to third-party funding	2,847			—		—		2,847
New business investments	91			—		—		91
Gross capital expenditures	27,687			918		4,290		32,895
Grants from outside parties	(2,096		)	—		—		(2,096		)
Net capital expenditures	$	25,591		$	918	$	4,290	$	30,799

Cash of $34.7 million paid for purchases of property and equipment during the three months ended March 31, 2017 consisted of $22.2 million for 2017 capital projects and $12.5 million related to capital expenditures accrued in 2016. Grant proceeds from outside parties during the three months ended March 31, 2017 consisted of $0.1 million for grants related to 2017 capital expenditures and $4.7 million for grants related to our capital expenditures from prior years.

We periodically receive grants for the upgrade and construction of rail lines and the upgrade of locomotives from federal, provincial, state and local agencies and other outside parties in the United States, Canada and Australia. These grants typically reimburse us for 50% to 100% of the actual cost of specific projects.

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.

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Our off-balance sheet arrangements as of December 31, 2016 consisted of operating lease obligations, as well as credit/payment guarantees. There were no material changes in our off-balance sheet arrangements during the three months ended March 31, 2017.

Impact of Foreign Currencies on Operating Revenues and Expenses

When comparing the effects of average foreign currency exchange rates on operating revenues and operating expenses during the three months ended March 31, 2017 with the three months ended March 31, 2016, foreign currency translation had a net negative impact on our consolidated operating revenues and a net positive impact on our consolidated operating expenses. Currency effects related to operating revenues and 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.



	Three Months Ended March 31,
	2017		2016
United States dollar per Australian dollar	$	0.76	$	0.72
United States dollar per British pound	$	1.24	$	1.43
United States dollar per Canadian dollar	$	0.76	$	0.73
United States dollar per Euro	$	1.07	$	1.10


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

During the three months ended March 31, 2017, there were no material changes to the Quantitative and Qualitative Disclosures About Market Risk previously disclosed in our 2016 Annual Report on Form 10-K (see Note 6, Derivative Financial Instruments, to our Consolidated Financial Statements).


ITEM 4.	CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures — We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2017. Consistent with the guidance issued by the Securities and Exchange Commission that an assessment of a recently acquired business may be omitted from management's report on internal control over financial reporting in the year following the acquisition, management excluded an assessment of the effectiveness of internal control over financial reporting related to P&W and GRail, whose total assets represented 2% and 13%, respectively, of Genesee & Wyoming Inc.'s consolidated total assets at March 31, 2017. P&W's total revenues and operating income for the three months ended March 31, 2017 each represented 1% and less than 1%, respectively, of Genesee & Wyoming Inc.'s revenues and operating income for the three months ended March 31, 2017. GRail's total revenues and operating income for the three months ended March 31, 2017 each represented 3% and 11%, respectively, of Genesee & Wyoming Inc.'s revenues and operating income for the three months ended March 31, 2017. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2017, the disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

Internal Control Over Financial Reporting — On November 1, 2016, we completed the acquisition of P&W and on December 1, 2016, we completed the acquisition of GRail. We extended our oversight and monitoring processes that support our internal control over financial reporting, as appropriate, to include P&W's and GRail's financial position, results of operations and cash flow into our consolidated financial statements from the commencement date of each acquisition through March 31, 2017. We are continuing to integrate the acquired operations of P&W and GRail into our overall internal control over financial reporting and related processes. Except as disclosed in this paragraph, there were no other changes in our internal control over financial reporting (as the term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2017 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 resulting from our operations in the ordinary course as the nature of our business exposes us to the potential for various claims and litigation, including those related to property damage, personal injury, freight loss, labor and employment, environmental and other matters. We maintain insurance policies to mitigate the financial risk associated with such claims. However, any material changes to pending litigation or a catastrophic rail accident or series of accidents involving material freight loss or property damage, personal injuries or environmental liability or other claims or disputes that are not covered by insurance could have a material adverse effect on our results of operations, financial condition and liquidity.

In November 2014, we received a notice from the United States Environmental Protection Agency (EPA) requesting information under the Clean Water Act related to the discharge of crude oil as a result of a derailment of an Alabama & Gulf Coast Railway LLC (AGR) freight train in November 2013 in the vicinity of Aliceville, Alabama. A fine associated with the contamination has not yet been assessed and is not estimable.

We are also involved in several arbitrations related to contractual disputes that are not covered by insurance. In March 2017, CSX Transportation, Inc. (CSXT) initiated arbitration against several of our subsidiaries associated with freight revenue factors (or divisions) under certain operating agreements associated with leased railroads. CSXT is seeking to reduce certain of our freight revenue factors for the time period after August 21, 2016. In an unrelated matter, on May 3, 2017, the AGR initiated arbitration related to the collection of outstanding liquidated damages under a volume commitment (or take-or-pay) contract with a customer. The obligations of the customer under the volume commitment contract are supported by a parent company guaranty. Although we believe we have meritorious defenses against the CSXT claims, and that we will prevail in the collection of the outstanding liquidated damages, arbitration is inherently uncertain and it is possible that an unfavorable ruling could have adverse effect on our results of operations, financial condition and liquidity.

Management believes there are adequate provisions in the financial statements for any probable liabilities that may result from disposition of the pending lawsuits and the aforementioned arbitrations. Based upon currently available information, we do not believe it is reasonably possible that any such lawsuit or arbitration would be material to our results of operations or have a material adverse effect on our financial position or liquidity.


ITEM 1A.	RISK FACTORS.

For a discussion of our potential risks or uncertainties, please see Risk Factors in Part I, Item 1A of the Company's 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

There were no unregistered sales of equity securities for the period covered by this Quarterly Report on Form 10-Q.

Issuer Purchases of Equity Securities



Period in 2017	(a) Total Number of Shares (or Units) Purchased (1)	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares (or Units) (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs (2)
January 1 to January 31	—	$	—	—	$	300,000,000
February 1 to February 28	10,737	$	74.39	—	$	300,000,000
March 1 to March 31	32,645	$	74.20	—	$	300,000,000
Total	43,382	$	74.25	—	$	300,000,000

(1) The 43,382 shares acquired in the three months ended March 31, 2017 represent common stock acquired by us from our employees who surrendered shares in lieu of cash either to fund their exercise of stock options or to pay taxes on equity awards granted under our Third Amended and Restated 2004 Omnibus Plan.

(2) In conjunction with Amendment No. 1 to the Credit Agreement, the Board authorized the repurchase of up to $300.0 million of our Class A Common Stock and appointed a special committee of the Board to review and approve repurchases proposed by management.

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ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.

NONE


ITEM 4.	MINE SAFETY DISCLOSURES.

Not applicable.


ITEM 5.	OTHER INFORMATION.

NONE


ITEM 6.	EXHIBITS.

For a list of exhibits, see INDEX TO EXHIBITS following the signature page to this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

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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:	May 9, 2017	By:	/s/ TIMOTHY J. GALLAGHER
		Name:	Timothy J. Gallagher
		Title:	Chief Financial Officer (Principal Financial Officer)

Date:	May 9, 2017	By:	/s/ CHRISTOPHER F. LIUCCI
		Name:	Christopher F. Liucci
		Title:	Chief Accounting Officer (Principal Accounting Officer)

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INDEX TO EXHIBITS

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure, other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.



Exhibit No.		Description of Exhibits

*10.1		Form of Performance-Based Restricted Unit Award Notice Under the Third Amended and Restated Omnibus Incentive Plan

*10.2		Form of Performance-Based Restricted Unit Award Notice for the CEO Under the Third Amended and Restated Omnibus Incentive Plan

*31.1		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

*31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

*32.1		Section 1350 Certification

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

*Exhibit filed or furnished with this Report.

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