QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
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 No. 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.)
66 Field Point Road,
Greenwich, Connecticut
06830
(Address of principal executive offices)
(Zip Code)
(203) 629-3722
(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 or posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x YES o NO
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer
x
Accelerated Filer
o
Non-Accelerated Filer
o (Do not check if a smaller reporting company)
Smaller Reporting Company
o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): o YES x NO
Shares of common stock outstanding as of the close of business on July 29, 2011:
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,” “should,” “seeks,” “expects,” “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, including the following risks applicable to all of our operations: risks related to the acquisition and integration of railroads; economic and competitive uncertainties and contingencies and third-party approvals; economic, political and industry conditions; customer demand, retention and contract continuation; legislative and regulatory developments, including changes in environmental and other laws and regulations to which we are subject; increased competition in relevant markets; funding needs and financing sources; unpredictability of fuel costs; susceptibility to various legal claims and lawsuits; strikes or work stoppages; severe weather conditions and other natural occurrences; and others including, but not limited to, those set forth in this Item 2 and Part II, Item 1A, if any, and those noted in our 2010 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 disclaim any intention to update the current expectations or forward-looking statements contained in this report.
Class A Common Stock, $0.01 par value, one vote per share; 180,000,000 and 90,000,000 shares authorized at June 30, 2011 and December 31, 2010, respectively; 52,526,102 and 51,861,249 shares issued and 40,066,867 and 39,426,351 shares outstanding (net of 12,459,235 and 12,434,898 shares in treasury) on June 30, 2011 and December 31, 2010, respectively
525
519
Class B Common Stock, $0.01 par value, ten votes per share; 30,000,000 and 15,000,000 shares authorized at June 30, 2011 and December 31, 2010, respectively; 2,206,343 and 2,409,027 shares issued and outstanding on June 30, 2011 and December 31, 2010, respectively
22
24
Additional paid-in capital
375,975
358,024
Retained earnings
675,452
622,185
Accumulated other comprehensive income
56,656
40,114
Treasury stock, at cost
(204,912
)
(203,626
)
Total stockholders’ equity
903,718
817,240
Total liabilities and stockholders’ equity
$
2,145,959
$
2,067,560
The accompanying notes are an integral part of these consolidated financial statements.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
The interim consolidated financial statements presented herein include the accounts of Genesee & Wyoming Inc. and its subsidiaries (the Company). All references to currency amounts included in this Quarterly Report on Form 10-Q, including the consolidated financial statements, are in United States dollars unless specifically noted otherwise. All significant intercompany transactions and accounts have been eliminated in consolidation. These interim consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). They do not contain all disclosures which would be required in a full set of financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, the unaudited financial statements for the three and six months ended June 30, 2011 and 2010, 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 interim periods. 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 2010 was derived from the audited financial statements in the Company’s 2010 Annual Report on Form 10-K but does not include all disclosures required by U.S. GAAP.
The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2010, included in the Company’s 2010 Annual Report on Form 10-K.
2.
CHANGES IN OPERATIONS:
Australia
On December 1, 2010, the Company completed the acquisition of the assets of FreightLink Pty Ltd, Asia Pacific Transport Pty Ltd and related corporate entities (together, FreightLink) for A$331.9 million (or $320.0 million at the exchange rate on December 1, 2010) (FreightLink Acquisition). The Company has included the results from GWA (North) Pty Ltd (GWA North), the Company’s subsidiary that acquired certain assets of FreightLink, in its statement of operations since December 1, 2010. Pursuant to the Business Sale Agreement, the Company acquired FreightLink’s freight rail business between Tarcoola in South Australia and Darwin in the Northern Territory of Australia, certain material contracts, equipment and property leases, as well as FreightLink’s plant, equipment and business inventory. In addition, as part of the acquisition, GWA North assumed debt with a carrying value of A$1.8 million (or $1.7 million at the exchange rate on December 1, 2010), which represents the fair value of an A$50.0 million (or $48.2 million at the exchange rate on December 1, 2010) non-interest bearing loan due in 2054.
As a result of the acquisition, GWA North is now the concessionaire and operator of the Tarcoola to Darwin rail line, which links the Port of Darwin to the Australian interstate rail network in South Australia. The rail line is located on land leased to GWA North by the AustralAsia Railway Corporation (a statutory corporation established by legislation in the Northern Territory) under a concession agreement that expires in 2054. GWA North is both a provider of rail haulage to customers on its railroad (above rail services), as well as a track owner, charging access fees to any rail operators that run on its track (below rail services). The track access rights are regulated under a statutory access regime established by legislation in the Northern Territory and South Australia. The Company’s subsidiary, Genesee & Wyoming Australia Pty Ltd (GWA), historically operated FreightLink’s rail haulage services, provided its crews, managed its train operations and leased locomotives and wagons to FreightLink. As a result of the acquisition, approximately A$25 million (or $27 million at the June 30, 2011 exchange rate) of annual GWA non-freight revenues generated from services provided to FreightLink will be eliminated in consolidation in the post-acquisition period. This elimination will not have any effect on operating income of the Company.
The Company accounted for the transaction using the acquisition method of accounting under U.S. GAAP. Under the acquisition method of accounting, the assets and liabilities of FreightLink have been recorded at their respective estimated acquisition-date fair values and have been consolidated with those of the Company as of the acquisition date. The foreign exchange rate
used to translate the preliminary balance sheet to United States dollars was $0.96 for one Australian dollar (the exchange rate on December 1, 2010).
The preliminary acquisition-date fair values assigned to the acquired net assets were as follows (dollars in thousands):
Australian
Dollars
United States
Dollars
Accounts receivable
$
161
$
155
Materials and supplies
3,328
3,209
Prepaid expenses and other
101
97
Deferred income tax assets
171
165
Property and equipment
330,712
318,843
Total assets
$
334,473
$
322,469
Accrued expenses
$
731
$
705
Long-term debt
1,806
1,741
Net assets
$
331,936
$
320,023
The Company financed the purchase of FreightLink’s assets through a combination of cash on hand and borrowing $100.0 million and A$97.0 million (or $94.0 million at the December 1, 2010 exchange rate) under its credit agreement, as amended.
Canada
Huron Central Railway Inc.: In June 2009, the Company announced that its subsidiary, Huron Central Railway Inc. (HCRY), intended to cease its operations in the third quarter of 2009. Consequently, in the second quarter of 2009, the Company recorded charges of $5.4 million after-tax associated with HCRY. These charges reflected a non-cash write-down of non-current assets of $6.7 million and restructuring charges of $2.3 million and were partially offset by a tax benefit of $3.6 million. In September 2010, the governments of Canada and the Province of Ontario agreed to provide C$30 million (or $31 million at the June 30, 2011 exchange rate) to fund infrastructure improvements that, combined with certain customer agreements, will enable HCRY to continue operations on a long-term basis. In addition, HCRY has committed to fund approximately C$3 million (or $3 million at the June 30, 2011 exchange rate) of infrastructure improvements. As a result, the Company reversed $2.3 million ($1.5 million after-tax) of accrued restructuring charges related to HCRY in September 2010, as HCRY no longer intends to cease its operations. Because of the substance of the temporary agreement HCRY was operating under from August 15, 2009, through December 31, 2010, HCRY’s net operating earnings were included within non-freight revenues as other operating income. On January 1, 2011, HCRY began operating under a new agreement with certain customers. Because of the substance of the new arrangement, on January 1, 2011, the Company resumed reporting HCRY’s operating revenues, including freight revenues and corresponding carloads, and operating expenses on a gross basis within each respective line item of the statement of operations.
Discontinued Operations
In August 2009, the Company completed the sale of 100% of the share capital of its Mexican operating subsidiary, Ferrocarriles Chiapas-Mayab, S.A. de C.V. (FCCM) to Viablis, S.A. de C.V. (Viablis). The net assets, results of operations and cash flows of the Company’s remaining Mexican subsidiary, GW Servicios S.A., which were classified as discontinued operations, were not material as of and for the three and six months ended June 30, 2011 and 2010. The Company does not expect any material future adverse financial impact from its remaining Mexican subsidiary.
Results from Continuing Operations
When comparing the Company’s results from continuing operations from one reporting period to another, consider that the Company has historically experienced fluctuations in revenues and expenses due to economic conditions, acquisitions, competitive forces, one-time freight moves, fuel price fluctuations, customer plant expansions and shut-downs, sales of property and equipment, derailments and weather-related conditions, such as hurricanes, cyclones, droughts, heavy snowfall, freezing and flooding. In periods when these events occur, 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, including steel products, paper products and lumber and forest products. However, shipments of other commodities are relatively less affected by economic conditions and are more closely affected by other factors, such as inventory levels maintained at customer plants, winter weather (salt) and seasonal rainfall (South Australian grain). As a result of these and other factors, the Company’s operating results in any reporting period may not be directly comparable to its operating results in other reporting periods.
The following table summarizes the Company’s unaudited pro forma operating results for the three and six months ended June 30, 2010, as if the FreightLink Acquisition had been consummated as of January 1, 2009. The following pro forma financial results do not include the impact of any potential operating efficiencies, savings from expected synergies, costs to integrate the operations or costs necessary to achieve savings from expected synergies or the impact of derivative instruments that the Company has entered into or may enter into to mitigate interest rate or currency exchange rate risk (dollars in thousands, except per share amounts):
Three Months Ended
Six Months Ended
June 30, 2010
June 30, 2010
Operating revenues
$
182,112
$
347,842
Net income
$
22,995
$
39,793
Earnings per common share:
Basic earnings per common share from continuing operations
$
0.59
$
1.03
Diluted earnings per common share from continuing operations
$
0.55
$
0.96
The unaudited pro forma operating results for the three and six months ended June 30, 2010, include the FreightLink Acquisition adjusted, net of tax, for depreciation and amortization expense resulting from the property and equipment assets based on the preliminary assignment of fair values, an adjustment to interest income for the reduction in available cash and cash equivalents due to the use of cash on hand to fund the acquisition, the inclusion of interest expense related to borrowings used to fund the acquisition, the amortization of debt issuance costs related to amendments to the Company’s credit agreement, the elimination of FreightLink’s deferred grant income for a liability not acquired and the elimination of FreightLink’s interest expense related to debt not assumed in the acquisition. In addition, the unaudited pro forma operating results include an additional tax provision to report FreightLink as a tax paying entity using the Australian statutory income tax rate of 30%.
The pro forma financial information does not purport to be indicative of the results that actually would have been obtained had the transactions been completed as of the assumed date and for the period presented and are not intended to be a projection of future results or trends.
The following table sets forth the computation of basic and diluted earnings per share (EPS) for the three and six months ended June 30, 2011 and 2010 (in thousands, except per share amounts):
Three Months Ended
Six Months Ended
June 30,
June 30,
2011
2010
2011
2010
Numerators:
Income from continuing operations, net of tax
$
31,145
$
20,691
$
53,267
$
36,667
Loss from discontinued operations, net of tax
—
(56
)
—
(72
)
Net income
$
31,145
$
20,635
$
53,267
$
36,595
Denominators:
Weighted average Class A common shares outstanding - Basic
39,903
38,831
39,695
38,711
Weighted average Class B common shares outstanding
2,218
2,484
2,311
2,503
Dilutive effect of employee stock grants
636
408
648
381
Weighted average shares - Diluted
42,757
41,723
42,654
41,595
Basic:
Earnings per common share from continuing operations
$
0.78
$
0.53
$
1.34
$
0.95
Loss per common share from discontinued operations
—
—
—
—
Earnings per common share
$
0.78
$
0.53
$
1.34
$
0.95
Diluted:
Earnings per common share from continuing operations
$
0.73
$
0.50
$
1.25
$
0.88
Loss per common share from discontinued operations
—
—
—
—
Earnings per common share
$
0.73
$
0.49
$
1.25
$
0.88
The following total number of Class A common stock issuable under the assumed exercise of stock options 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 anti-dilutive:
Three Months Ended
Six Months Ended
June 30,
June 30,
2011
2010
2011
2010
Anti-dilutive shares
98,129
634,883
78,441
677,410
4.
ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following as of June 30, 2011 and December 31, 2010 (dollars in thousands):
June 30, 2011
December 31, 2010
Accounts receivable - trade
$
139,033
$
118,265
Accounts receivable - grants
17,277
17,039
Total accounts receivable
156,310
135,304
Less: Allowance for doubtful accounts
(2,979
)
(3,079
)
Accounts receivable, net
$
153,331
$
132,225
5.
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 certain of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. The Company does not trade or use 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 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 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 hedge inception 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 periods it no longer qualifies as a hedge.
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 as hedges are recognized in current period earnings within other income/(expense).
Interest Rate Risk Management
The Company uses interest rate swap agreements to manage its exposure to changes in interest rates of 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. On October 2, 2008, the Company entered into an interest rate swap agreement to manage its exposure to interest rates on a portion of its outstanding borrowings. The swap has a notional amount of $120.0 million and requires the Company to pay a fixed rate of 3.88% on the notional amount. In return, the Company receives one-month LIBOR on the notional amount of the swap, which is equivalent to the Company’s variable rate portion of its interest obligation on the notional amount under its credit agreement. This swap expires on September 30, 2013. The fair value of the interest rate swap agreement was estimated based on Level 2 inputs. The Company’s effectiveness testing as of June 30, 2011, resulted in no amount of gain or loss reclassified from accumulated other comprehensive income into earnings.
Foreign Currency Exchange Rate Risk
As of June 30, 2011, $160.5 million of third-party debt, related to the Company’s foreign operations, is denominated in the currencies in which its subsidiaries operate, including the Australian dollar, Canadian dollar and Euro. The debt service obligations associated with this foreign currency debt are generally funded directly from those 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 from the Company’s foreign operations, the Company may face exchange rate risk if the Australian or Canadian dollar or Euro were to appreciate relative to the United States dollar and require higher United States dollar equivalent cash.
The Company is also exposed to foreign currency exchange rate risk related to its foreign operations, including non-
functional currency intercompany debt, typically from the Company’s United States operations to its foreign subsidiaries, and any timing difference between announcement and closing of an acquisition of a foreign business to the extent such acquisition is funded with United States dollars. To mitigate currency exposures related to non-functional currency denominated intercompany debt, cross-currency swap 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. To mitigate currency exposures of non-United States dollar denominated acquisitions, the Company may enter into foreign exchange forward contracts. Although these derivative 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 are not accounted for as hedges are recognized in current period earnings within other income/(expense).
On December 1, 2010, the Company completed the FreightLink Acquisition for A$331.9 million (or $320.0 million at the exchange rate on December 1, 2010). The Company financed the acquisition through a combination of cash on hand and borrowings under its credit agreement, as amended. A portion of the funds were transferred from the United States to Australia through an intercompany loan with a notional amount of A$105.0 million (or $100.6 million at the exchange rate on December 1, 2010). To mitigate the foreign currency exchange rate risk related to this non-functional currency intercompany loan, the Company entered into an Australian dollar/United States dollar floating to floating cross-currency swap agreement (the Swap), effective as of December 1, 2010, which effectively converted the A$105.0 million intercompany loan receivable in the United States into a $100.6 million loan receivable. The Swap requires the Company to pay Australian dollar BBSW plus 3.125% based on a notional amount of A$105.0 million and allows the Company to receive United States LIBOR plus 2.48% based on a notional amount of $100.6 million on a quarterly basis. BBSW is the wholesale interbank rate within Australia. It is the Australian equivalent to LIBOR. As a result of these quarterly net settlement payments, the Company realized an expense of $1.5 million within interest (expense)/income related to the quarterly settlement for the three months ended June 30, 2011. In addition, the Company recognized a net gain of $0.1 million within other income/(expense) related to the mark-to-market of the derivative agreement and the underlying intercompany debt instrument to the exchange rate on June 30, 2011. The fair value of the Swap represented a liability of $12.9 million as of June 30, 2011. The fair value of the Swap was estimated based on Level 2 valuation inputs. The Swap expires on December 1, 2012.
The following table summarizes the fair value of derivative instruments recorded in the consolidated balance sheets as of June 30, 2011 and December 31, 2010 (dollars in thousands):
June 30, 2011
December 31, 2010
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Liability Derivatives:
Derivatives designated as hedges:
Interest rate swap agreement
Accrued expenses
$
4,271
Accrued expenses
$
4,202
Interest rate swap agreement
Other long-term liabilities
4,151
Other long-term liabilities
4,917
Total derivatives designated as hedges
$
8,422
$
9,119
Derivatives not designated as hedges:
Cross-currency swap agreement
Accrued expenses
$
5,778
Accrued expenses
$
5,541
Cross-currency swap agreement
Other long-term liabilities
7,077
Other long-term liabilities
2,091
Total derivatives not designated as hedges
$
12,855
$
7,632
The following table shows the effect of the Company’s derivative instrument designated as a cash flow hedge for the three and six months ended June 30, 2011 and 2010 in other comprehensive income/(loss) (OCI) (dollars in thousands):
Total Cash Flow Hedge
OCI Activity, Net of Tax
Three Months Ended June 30,
Six Months Ended June 30,
2011
2010
2011
2010
Derivatives Designated as Cash Flow Hedges:
Effective portion of changes in fair value recognized in OCI:
The following table shows the effect of the Company’s derivative instruments not designated as hedges for the three and six months ended June 30, 2011 in the consolidated statement of operations (dollars in thousands):
Amount Recognized in Earnings
Location of Amount
Recognized in
Earnings
Three Months Ended June 30, 2011
Six Months Ended June 30, 2011
Derivative Instruments Not Designated as Hedges:
Cross-currency swap agreement
Interest (expense)/income
$
(1,524
)
$
(2,960
)
Cross-currency swap agreement
Other income/(expense), net
97
119
$
(1,427
)
$
(2,841
)
6.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company:
•
Long-term debt: Since the Company’s long-term debt is not quoted, 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.
•
Derivative instruments: Derivative instruments are recorded on the balance sheet as either assets or liabilities measured at fair value. As of June 30, 2011, the Company’s derivative financial instruments consisted of an interest rate swap agreement and a cross-currency swap agreement. The Company estimates the fair value of its interest rate swap agreement based on Level 2 valuation inputs, including fixed interest rates, LIBOR implied forward interest rates and the remaining time to maturity. The Company estimates the fair value of its cross-currency swap agreement based on Level 2 valuation inputs, including LIBOR implied forward interest rates, AUD BBSW implied forward interest rates and the remaining time to maturity.
The following table presents the Company's financial instruments that are carried at fair value as of June 30, 2011 and December 31, 2010 (dollars in thousands):
June 30, 2011
December 31, 2010
Financial liabilities carried at fair value using Level 2 inputs:
Interest rate swap agreement
$
8,422
$
9,119
Cross-currency swap agreement
12,855
7,632
Total financial liabilities carried at fair value
$
21,277
$
16,751
The following table presents the carrying value and fair value using Level 2 inputs of the Company’s financial instruments carried at historical cost as of June 30, 2011 and December 31, 2010 (dollars in thousands):
The Company’s effective income tax rate in the three months ended June 30, 2011, was 26.8% compared with 36.8% in the three months ended June 30, 2010. The Company's effective income tax rate in the six months ended June 30, 2011, was 27.2% compared with 37.2% in the six months ended June 30, 2010. The decrease in the effective tax rate for the three and six months ended June 30, 2011, was primarily attributable to the extension of the Short Line Tax Credit in the fourth quarter of 2010.
The Short Line Tax Credit, which had been in existence from 2005 through 2009, expired on December 31, 2009, but was retroactively extended for 2010 on December 17, 2010. Unless it is further extended, the credit expires on January 1, 2012. The income tax credit provides for Class II and Class III railroads to reduce their federal income tax based on 50% of qualified railroad track maintenance expenditures during each year, subject to a limitation of $3,500 per track mile owned or leased at the end of the year. Historically, the Company incurred sufficient spending to meet the limitation.
8.
COMMITMENTS AND CONTINGENCIES:
From time to time, the Company is a defendant in certain lawsuits resulting from its operations. Management believes there are adequate provisions in the financial statements for any expected liabilities that may result from disposition of the pending lawsuits. Nevertheless, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. Though currently unexpected and not possible to reasonably estimate, were an unfavorable ruling to occur, there could be a material adverse impact on the Company’s operating results, financial condition and liquidity as of and for the period in which the ruling occurs.
9.
COMPREHENSIVE INCOME:
Comprehensive income is the total of net income and all other non-owner changes in equity. The following tables set forth the Company’s comprehensive income for the three and six months ended June 30, 2011 and 2010 (dollars in thousands):
Three Months Ended
June 30,
2011
2010
Net income
$
31,145
$
20,635
Other comprehensive income:
Foreign currency translation adjustments
9,547
(14,535
)
Net unrealized loss on qualifying cash flow hedges, net of tax benefits of $140 and $693, respectively
(246
)
(1,219
)
Changes in pension and other postretirement benefits, net of tax provisions of $26 and $20, respectively
46
35
Comprehensive income
$
40,492
$
4,916
Six Months Ended
June 30,
2011
2010
Net income
$
53,267
$
36,595
Other comprehensive income:
Foreign currency translation adjustments
16,223
(12,193
)
Net unrealized gain/(loss) on qualifying cash flow hedges, net of tax (provision)/benefit of ($253) and $1,125, respectively
444
(1,978
)
Changes in pension and other postretirement benefits, net of tax benefit/(provision) of $71 and ($156), respectively
The following table sets forth accumulated other comprehensive income included in the consolidated balance sheets as of June 30, 2011 and December 31, 2010 (dollars in thousands):
Foreign Currency Translation Adjustment
Defined Benefit Plans
Net Unrealized Losses on Cash Flow Hedges
Accumulated Other Comprehensive Income
Balance, December 31, 2010
$
45,905
$
22
$
(5,813
)
$
40,114
Current period change
16,223
(125
)
444
16,542
Balance, June 30, 2011
$
62,128
$
(103
)
$
(5,369
)
$
56,656
The change in the foreign currency translation adjustment for the six months ended June 30, 2011, related primarily to the Company’s operations with a functional currency in Australian and Canadian dollars.
10.
SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
As of June 30, 2011 and 2010, the Company had outstanding grant receivables from outside parties for capital expenditures of $17.3 million and $4.3 million, respectively. As of June 30, 2011 and 2010, the Company also had approximately $15.4 million and $8.3 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.
11.
SEGMENT INFORMATION:
The Company's various railroad lines are divided into nine operating regions. Since each region has similar characteristics, they previously had been aggregated into one reportable segment. Beginning January 1, 2011, the Company has decided to present its financial information as two reportable segments, North American & European Operations and Australian Operations.
The results of operations of the foreign entities are maintained in the respective local currency (the Australian dollar, 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 our results of operations.
The following table sets forth our North American & European Operations and Australian Operations for the three months ended June 30, 2011 and 2010 (dollars in thousands):
Three Months Ended June 30, 2011
Three Months Ended June 30, 2010
North American & European Operations
Australian Operations
Total Operations
North American & European Operations
Australian Operations
Total Operations
Revenues
$
139,335
$
70,254
$
209,589
$
127,004
$
31,449
$
158,453
Income from operations
33,737
17,428
51,165
31,153
6,720
37,873
Depreciation and amortization
11,565
4,732
16,297
10,908
1,544
12,452
Interest expense
(5,935
)
(4,318
)
(10,253
)
(5,411
)
—
(5,411
)
Interest income
791
67
858
56
415
471
Provision for income taxes
7,485
3,935
11,420
9,981
2,086
12,067
Expenditures for additions to property & equipment, net of grants from outside parties
The following table sets forth our North American & European Operations and Australian Operations for the six months ended June 30, 2011 and 2010 (dollars in thousands):
Six Months Ended June 30, 2011
Six Months Ended June 30, 2010
North American & European Operations
Australian Operations
Total Operations
North American & European Operations
Australian Operations
Total Operations
Revenues
$
271,642
$
129,858
$
401,500
$
244,240
$
59,792
$
304,032
Income from operations
60,672
29,696
90,368
55,164
12,815
67,979
Depreciation and amortization
22,911
9,247
32,158
21,823
3,077
24,900
Interest expense
(11,891
)
(8,301
)
(20,192
)
(10,773
)
—
(10,773
)
Interest income
1,507
126
1,633
111
783
894
Provision for income taxes
13,557
6,348
19,905
17,692
4,016
21,708
Expenditures for additions to property & equipment, net of grants from outside parties
21,811
28,554
50,365
5,877
4,736
10,613
The following table sets forth the property and equipment recorded in the consolidated balance sheets as of June 30, 2011 and December 31, 2010 (dollars in thousands):
June 30, 2011
December 31, 2010
North American & European Operations
Australian Operations
Total Operations
North American & European Operations
Australian Operations
Total Operations
Property & equipment
$1,012,010
$491,378
$1,503,388
$1,000,350
$443,827
$1,444,177
12. RECENTLY ISSUED ACCOUNTING STANDARDS:
Accounting Standards Not Yet Effective
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which provides clarification about the application of existing fair value measurement and disclosure requirements, and expands certain other disclosure requirements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and is to be applied prospectively. Early adoption is not permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which requires entities to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. This guidance does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This requirement will become effective for the Company beginning with the first quarter of 2012 Form 10-Q filing and will require retrospective application for all periods presented.
13. SUBSEQUENT EVENTS:
Credit Agreement
On July 29, 2011, the Company entered into the Third Amended and Restated Revolving Credit and Term Loan Agreement (the Credit Agreement). The Credit Agreement expanded the size of the Company's senior credit facility from $620.0 million to $750.0 million and extended the maturity date to July 29, 2016. The Credit Agreement includes a $425.0 million revolving loan, a $200.0 million United States term loan, a A$92.2 million ($100.0 million at the July 29, 2011 exchange rate) Australian term loan and a C$23.6 million ($25.0 million at the July 29, 2011 exchange rate) Canadian term loan. The Credit Agreement allows for borrowings in United States dollars, Australian dollars, Canadian dollars and Euros. The Credit Agreement and revolving loans are guaranteed by substantially all of the United States subsidiaries for the United States
guaranteed obligations and by substantially all of the Company's foreign subsidiaries for the foreign guaranteed obligations.
The Credit Agreement contains customary representations and warranties, events of default and covenants, including, among other things, covenants that restrict the ability of the Company to incur certain additional indebtedness, create or permit liens on assets and engage in mergers or consolidations. The Credit Agreement also contains financial covenants restricting the Company's funded debt to EBITDAR ratio and the Company's consolidated EBITDA to consolidated total interest expense ratio.
The proceeds of the senior credit facilities will be used for working capital, capital expenditures, investments permitted under the Credit Agreement, acquisitions permitted under the Credit Agreement, other lawful general corporate purposes and to refinance existing indebtedness.
Acquisition
On August 2, 2011, the Company announced that it signed an agreement to acquire all of the capital stock of Arizona Eastern Railway Company (AZER) for approximately $90.1 million in cash. The acquisition is expected to close during the third quarter of 2011. Headquartered near Miami, Arizona, with 45 employees and 10 locomotives, AZER is composed of two rail lines operating over 200 track miles in southeast Arizona and southwest New Mexico that are connected by 52 miles of trackage rights over the Union Pacific Railroad. The largest customer on AZER is Freeport-McMoRan Copper & Gold Inc., the world's largest publicly traded copper producer. In connection with the acquisition of AZER, each party will make an election under Section 338(h)10 of the Internal Revenue Code of 1986, as amended. The acquisition of AZER is expected to be immediately accretive to GWI's earnings per share. The acquisition will be subject to customary closing conditions and includes certain adjustments for closing date working capital and indebtedness of AZER.
AZER primarily provides rail service to Freeport-McMoRan's largest North American copper mine and its North American smelter, hauling copper concentrate, copper anode, copper rod and sulfuric acid. In conjunction with the transaction, AZER and Freeport-McMoRan have entered into a long term agreement. AZER also serves other local customers.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements, related notes and other financial information included in our 2010 Annual Report on Form 10-K.
Recent Developments
Credit Agreement
On July 29, 2011, we entered into the Third Amended and Restated Revolving Credit and Term Loan Agreement (the Credit Agreement). The Credit Agreement expanded the size of our senior credit facility from $620.0 million to $750.0 million and extended the maturity date to July 29, 2016. The Credit Agreement includes a $425.0 million revolving loan, a $200.0 million United States term loan, a A$92.2 million ($100.0 million at the July 29, 2011 exchange rate) Australian term loan and a C$23.6 million ($25.0 million at the July 29, 2011 exchange rate) Canadian term loan. The Credit Agreement allows for borrowings in United States dollars, Australian dollars, Canadian dollars and Euros. The Credit Agreement and revolving loans are guaranteed by substantially all of our United States subsidiaries for the United States guaranteed obligations and by substantially all of the our foreign subsidiaries for the foreign guaranteed obligations.
The Credit Agreement contains customary representations and warranties, events of default and covenants, including, among other things, covenants that restrict our ability to incur certain additional indebtedness, create or permit liens on assets and engage in mergers or consolidations. The Credit Agreement also contains financial covenants restricting our funded debt to EBITDAR ratio and our consolidated EBITDA to consolidated total interest expense ratio.
The proceeds of the senior credit facilities will be used for working capital, capital expenditures, investments permitted under the Credit Agreement, acquisitions permitted under the Credit Agreement, other lawful general corporate purposes and to refinance existing indebtedness.
Acquisition
On August 2, 2011, we announced that we signed an agreement to acquire all of the capital stock of Arizona Eastern Railway Company (AZER) for approximately $90.1 million in cash. The acquisition is expected to close during the third quarter of 2011. Headquartered near Miami, Arizona, with 45 employees and 10 locomotives, AZER is composed of two rail lines operating over 200 track miles in southeast Arizona and southwest New Mexico that are connected by 52 miles of trackage rights over the Union Pacific Railroad. The largest customer on AZER is Freeport-McMoRan Copper & Gold Inc., the world's largest publicly traded copper producer. In connection with the acquisition of AZER, each party will make an election under Section 338(h)10 of the Internal Revenue Code of 1986, as amended. The acquisition of AZER is expected to be immediately accretive to our earnings per share. The acquisition will be subject to customary closing conditions and includes certain adjustments for closing date working capital and indebtedness of AZER.
AZER primarily provides rail service to Freeport-McMoRan's largest North American copper mine and its North American smelter, hauling copper concentrate, copper anode, copper rod and sulfuric acid. In conjunction with the transaction, AZER and Freeport-McMoRan have entered into a long term agreement. AZER also serves other local customers.
Overview
We own and operate short line and regional freight railroads and provide railcar switching services in the United States, Canada, Australia, the Netherlands and Belgium. In addition, we operate the Tarcoola to Darwin rail line, which links the Port of Darwin to the Australian interstate rail network in South Australia. Operations currently include 63 railroads organized into nine regions, with approximately 7,400 miles of owned and leased track and approximately 1,400 additional miles under track access arrangements. In addition, we provide rail service at 17 ports in North America and Europe and perform contract coal loading and railcar switching for industrial customers.
In 2010, we acquired certain assets of FreightLink Pty Ltd, Asia Pacific Transport Pty Ltd and related corporate entities (together FreightLink) in Australia (FreightLink Acquisition). As a result of the FreightLink Acquisition, we are now the operator of the Tarcoola to Darwin rail line pursuant to a concession agreement that expires in 2054.
Net income in the three months ended June 30, 2011, was $31.1 million, compared with net income of $20.6 million in the three months ended June 30, 2010. Our diluted earnings per share (EPS) in the three months ended June 30, 2011, were
$0.73 with 42.8 million weighted average shares outstanding, compared with diluted EPS of $0.49 with 41.7 million weighted average shares outstanding in the three months ended June 30, 2010.
Our effective income tax rate in the three months ended June 30, 2011, was 26.8%, compared with 36.8% in the three months ended June 30, 2010, primarily due to the extension of the Short Line Tax Credit in the fourth quarter of 2010.
Operating revenues increased $51.1 million, or 32.3%, to $209.6 million in the three months ended June 30, 2011, compared with $158.5 million in the three months ended June 30, 2010. The increase in operating revenues included a $20.8 million, or 13.1%, increase in revenues from existing operations and $37.6 million in revenues from new operations. Our consolidated results reflect the elimination of $7.2 million of non-freight revenues for services provided to GWA (North) Pty Ltd (GWA North), our subsidiary that acquired certain assets of FreightLink, by Genesee & Wyoming Australia Pty Ltd (GWA) in the three months ended June 30, 2011. When we discuss either revenues from existing operations or same railroad revenues, we are referring to the change in our revenues, period-over-period, associated with operations that were managed in both periods (i.e., excluding the impact of acquisitions). The increase in our revenues from existing operations included a $6.8 million benefit due to the appreciation of the Australian and Canadian dollars and the Euro relative to the United States dollar. Excluding the impact from the change in foreign currency exchange rates, revenues from existing operations increased $14.0 million, or 8.8%.
Freight revenues increased $46.6 million, or 46.5%, to $146.8 million in the three months ended June 30, 2011, compared with $100.2 million in the three months ended June 30, 2010. The $46.6 million increase in freight revenues consisted of $35.2 million in freight revenues from new operations and an $11.4 million, or 11.4%, increase in freight revenues from existing operations. The increase in freight revenues from existing operations included a benefit of $3.0 million due to the appreciation of the Australian and Canadian dollars relative to the United States dollar. Excluding the impact from foreign currency appreciation, freight revenues from existing operations increased by $8.4 million, or 8.4%.
Our traffic in the three months ended June 30, 2011, was 249,508 carloads, an increase of 31,801 carloads, or 14.6%, compared with the three months ended June 30, 2010. The traffic increase consisted of 11,607 carloads from existing operations and 20,194 carloads from new operations. The increase from existing operations was principally due to increases of 3,515 carloads of coal and coke traffic, 2,685 carloads of farm and food products traffic, 2,253 carloads of pulp and paper traffic and 2,253 carloads of minerals and stone traffic. All other traffic increased by a net 901 carloads.
Average freight revenues per carload increased 27.8% to $588 in the three months ended June 30, 2011, compared with $460 in the three months ended June 30, 2010. Average freight revenues per carload from existing operations increased 5.9% to $487. The appreciation of the Australian and Canadian dollars relative to the United States dollar and higher fuel surcharges increased average freight revenues per carload from existing operations by 3.2% and 2.5%, respectively, and changes in commodity mix decreased average freight revenues per carload from existing operations by 0.3%. Excluding these factors, average freight revenues per carload from existing operations increased 0.5%. Same railroad average freight revenues per carload were also negatively impacted by changes in the mix of customers within certain commodity groups, such as coal, farm and food products and metals, primarily due to length of haulage.
Non-freight revenues increased $4.5 million, or 7.8%, to $62.8 million in the three months ended June 30, 2011, compared with $58.3 million in the three months ended June 30, 2010. The increase in non-freight revenues included a $9.4 million, or 16.1%, increase in existing operations and $2.4 million from new operations. Our consolidated results reflect the elimination of $7.2 million of non-freight revenues for services provided to GWA North by GWA for the three months ended June 30, 2011. The increase in non-freight revenues from existing operations included a benefit of $3.8 million due to the impact from the change in foreign currency exchange rates. Excluding this impact, non-freight revenues from existing operations increased $5.6 million, or 9.6%, primarily due to higher switching revenues in the United States, Canada and the Netherlands.
Income from operations in the three months ended June 30, 2011, was $51.2 million, compared with $37.9 million in the three months ended June 30, 2010, an increase of $13.3 million, or 35.1%. Our operating ratio, defined as operating expenses divided by operating revenues, was 75.6% in the three months ended June 30, 2011, compared with 76.1% in the three months ended June 30, 2010.
Income from operations in the six months ended June 30, 2011, was $90.4 million, compared with $68.0 million in the six months ended June 30, 2010, an increase of $22.4 million, or 32.9%. Net income from continuing operations in the six months ended June 30, 2011, was $53.3 million, a 45.3% increase over $36.7 million of net income from continuing operations in the six months ended June 30, 2010. Our diluted earnings per share (EPS) from continuing operations in the six months ended June 30, 2011, were $1.25 with 42.7 million weighted average shares outstanding, a 42.0% increase compared with diluted EPS from continuing operations of $0.88 with 41.6 million weighted average shares outstanding in the six months ended June 30, 2010. Operating revenues increased $97.5 million, or 32.1%, to $401.5 million in the six months ended June 30,
2011, compared with $304.0 million in the six months ended June 30, 2010.
Our results for the six months ended June 30, 2011, included a tax benefit of $4.7 million ($0.11 per diluted share) associated with the Short Line Tax Credit, which was extended in December 2010.
During the six months ended June 30, 2011, we generated $52.0 million in cash flow from operating activities from continuing operations, which was after the payment of $13.0 million in FreightLink acquisition-related expenses accrued as of December 31, 2010. During the same period, we purchased $62.1 million of property and equipment and received $11.7 million in cash from outside parties for capital spending and $3.1 million in proceeds from the disposition of property and equipment.
Changes in Operations
Australia
On December 1, 2010, through our subsidiary, GWA North, we completed the FreightLink Acquisition for A$331.9 million (or $320.0 million at the exchange rate on December 1, 2010). The results of operations for GWA North have been included in our consolidated statements of operations since the acquisition date. Pursuant to the Business Sale Agreement, we acquired FreightLink’s freight rail business between Tarcoola in South Australia and Darwin in the Northern Territory of Australia, certain material contracts, equipment and property leases, as well as FreightLink’s plant, equipment and business inventory. In addition, as part of the acquisition, we assumed debt with a carrying value of A$1.8 million (or $1.7 million at the exchange rate on December 1, 2010), which represents the fair value of an A$50.0 million (or $48.2 million at the exchange rate on December 1, 2010) non-interest bearing loan due in 2054.
As a result of the acquisition, GWA North is now the concessionaire and operator of the approximately 1,400-mile Tarcoola to Darwin rail line, which links the Port of Darwin to the Australian interstate rail network in South Australia. The rail line is located on land leased to GWA North by the AustralAsia Railway Corporation (a statutory corporation established by legislation in the Northern Territory) under a concession agreement that expires in 2054. GWA North is both a provider of rail haulage to customers on its railroad (above rail services), as well as a track owner, charging access fees to any rail operators that run on its track (below rail services). The track access rights are regulated under a statutory access regime established by legislation in the Northern Territory and South Australia. Our subsidiary, GWA, historically operated FreightLink’s rail haulage services, provided its crews, managed its train operations and leased locomotives and wagons to FreightLink. As a result of the acquisition, approximately A$25 million (or $27 million at the June 30, 2011 exchange rate) of annual GWA non-freight revenues generated from services provided to FreightLink will be eliminated in consolidation in the post-acquisition period. This elimination will not have any effect on our operating income.
Prior to the completion of the Tarcoola to Darwin rail line in 2004, potential mining projects located in the Northern Territory had no economically viable transportation link to an export port. Since the completion of the rail line , there has been an increase in mineral exploration and development in the Northern Territory and South Australia along the rail corridor. We believe that the FreightLink Acquisition provides us significant growth opportunities as it positions us to capitalize on future mineral development in the Northern Territory and South Australia.
We accounted for the transaction using the acquisition method of accounting under accounting principles generally accepted in the United States of America (U.S. GAAP). Under the acquisition method of accounting, the assets and liabilities of FreightLink have been recorded at their respective estimated acquisition-date fair values and have been consolidated with those of GWI as of the acquisition date. The foreign exchange rate used to translate the preliminary balance sheet to United States dollars was $0.96 for one Australian dollar (the exchange rate on December 1, 2010).
The preliminary acquisition-date fair values assigned to the acquired net assets were as follows (dollars in thousands):
Australian
Dollars
United States
Dollars
Accounts receivable
$
161
$
155
Materials and supplies
3,328
3,209
Prepaid expenses and other
101
97
Deferred income tax assets
171
165
Property and equipment
330,712
318,843
Total assets
$
334,473
$
322,469
Accrued expenses
$
731
$
705
Long-term debt
1,806
1,741
Net assets
$
331,936
$
320,023
We financed the purchase of FreightLink’s assets through a combination of cash on hand and borrowing $100.0 million and A$97.0 million (or $94.0 million at the December 1, 2010 exchange rate) under our credit agreement, as amended.
Canada
Huron Central Railway Inc.: In June 2009, we announced that our subsidiary, Huron Central Railway Inc. (HCRY), intended to cease its operations in the third quarter of 2009. Consequently, in the second quarter of 2009 we recorded charges of $5.4 million after-tax associated with HCRY. These charges reflected a non-cash write-down of non-current assets of $6.7 million and restructuring charges of $2.3 million, and were partially offset by a tax benefit of $3.6 million. In September 2010, the governments of Canada and the Province of Ontario agreed to provide C$30 million (or $31 million at the June 30, 2011 exchange rate) to fund infrastructure improvements that, combined with certain customer agreements, will enable HCRY to continue operations on a long-term basis. In addition, HCRY has committed to fund approximately C$3 million (or $3 million at the June 30, 2011 exchange rate) for infrastructure improvements. As a result, we reversed $2.3 million ($1.5 million after-tax) of accrued restructuring charges related to HCRY in September 2010, as HCRY no longer intends to cease its operations. Because of the substance of the temporary agreement HCRY was operating under from August 15, 2009, through December 31, 2010, HCRY’s net operating earnings were included within non-freight revenues as other operating income. On January 1, 2011, HCRY began operating under a new agreement with certain customers. Because of the substance of the new arrangement, on January 1, 2011, we resumed reporting HCRY’s operating revenues, including freight revenues and corresponding carloads, and operating expenses on a gross basis within each respective line item of our statement of operations.
Discontinued Operations
In August 2009, we completed the sale of 100% of the share capital of our Mexican operating subsidiary, Ferrocarriles Chiapas-Mayab, S.A. de C.V. (FCCM), to Viablis, S.A. de C.V. (Viablis). The net assets, results of operations and cash flows of our remaining Mexican subsidiary, GW Servicios S.A., which were classified as discontinued operations, were not material as of and for the three and six months ended June 30, 2011 and 2010. We do not expect any material future adverse financial impact from our remaining Mexican subsidiary.
Results from Continuing Operations
When comparing our results from continuing operations from one reporting period to another, consider that we have historically experienced fluctuations in revenues and expenses due to economic conditions, acquisitions, competitive forces,
one-time freight moves, fuel price fluctuations, customer plant expansions and shut-downs, sales of property and equipment, derailments and weather-related conditions, such as hurricanes, cyclones, droughts, heavy snowfall, freezing and flooding. In periods when these events occur, 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, including steel products, paper products and lumber and forest products. However, shipments of other commodities are relatively less affected by economic conditions and are more closely affected by other factors, such as inventory levels maintained at a customer plants, winter weather (salt) and seasonal rainfall (South Australian grain). As a result of these and other factors, our operating results in any reporting period may not be directly comparable to our operating results in other reporting periods.
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
Operating Revenues
Overview
Operating revenues were $209.6 million in the three months ended June 30, 2011, compared with $158.5 million in the three months ended June 30, 2010, an increase of $51.1 million, or 32.3%. Revenues from existing operations increased $20.8 million, or 13.1%, and new operations generated $37.6 million in revenues. New operations are those that were not included in our consolidated financial results for a comparable period in the prior year. Our consolidated results reflect the elimination of $7.2 million of non-freight revenues for services provided to GWA North by GWA for the three months ended June 30, 2011. Revenues from existing operations consisted of increases of $11.4 million in freight revenues and $9.4 million in non-freight revenues. The $20.8 million increase in revenues from existing operations included a benefit of $6.8 million from the change in foreign currency exchange rates.
The following table breaks down our operating revenues into new operations and existing operations for the three months ended June 30, 2011 and 2010 (dollars in thousands):
2011
2010
Increase in Total
Operations
Increase in Existing
Operations
Total
Operations
New
Operations
Eliminations
Existing
Operations
Total
Operations
Amount
%
Amount
%
Currency Impact
Freight revenues
$
146,788
$
35,213
$
—
$
111,575
$
100,194
$
46,594
46.5
%
$
11,381
11.4
%
$
3,000
Non-freight revenues
62,801
2,406
(7,244
)
67,639
58,259
4,542
7.8
%
9,380
16.1
%
3,782
Total operating revenues
$
209,589
$
37,619
$
(7,244
)
$
179,214
$
158,453
$
51,136
32.3
%
$
20,761
13.1
%
$
6,782
Freight Revenues
The following table compares freight revenues, carloads and average freight revenues per carload for the three months ended June 30, 2011 and 2010 (dollars in thousands, except average freight revenues per carload):
Freight Revenues
Carloads
Average Freight
Revenues Per
Carload
2011
2010
2011
2010
Commodity Group
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
2011
2010
Intermodal*
$
22,049
15.0
%
$
92
0.1
%
15,223
6.1
%
856
0.4
%
$
1,448
$
107
Coal & Coke
20,122
13.7
%
18,178
18.1
%
47,531
19.0
%
44,016
20.2
%
423
413
Farm & Food Products
17,440
11.9
%
14,955
14.9
%
32,315
13.0
%
29,630
13.6
%
540
505
Pulp & Paper
15,480
10.6
%
13,180
13.2
%
23,823
9.5
%
21,570
9.9
%
650
611
Metallic Ores
13,926
9.5
%
1,112
1.1
%
7,951
3.2
%
2,124
1.0
%
1,751
524
Metals
11,686
8.0
%
11,983
12.0
%
22,198
8.9
%
23,916
11.0
%
526
501
Minerals & Stone
12,513
8.5
%
10,841
10.8
%
35,330
14.2
%
33,077
15.2
%
354
328
Chemicals & Plastics
11,376
7.7
%
9,840
9.8
%
15,135
6.1
%
14,262
6.6
%
752
690
Lumber & Forest Products
8,224
5.6
%
7,609
7.6
%
16,961
6.8
%
16,766
7.7
%
485
454
Petroleum Products
5,932
4.0
%
4,916
4.9
%
7,041
2.8
%
6,851
3.1
%
842
718
Auto & Auto Parts
2,203
1.5
%
2,257
2.3
%
2,881
1.1
%
3,013
1.4
%
765
749
Other
5,837
4.0
%
5,231
5.2
%
23,119
9.3
%
21,626
9.9
%
252
242
Total
$
146,788
100.0
%
$
100,194
100.0
%
249,508
100.0
%
217,707
100.0
%
$
588
$
460
______________________
*
Represents intermodal units
Total freight traffic increased by 31,801 carloads, or 14.6%, in the three months ended June 30, 2011, compared with the same period in 2010. Carloads from existing operations increased by 11,607, or 5.3%, and new operations contributed 20,194
Average freight revenues per carload increased 27.8% to $588 in the three months ended June 30, 2011, compared with the same period in 2010. Average freight revenues per carload from existing operations increased 5.9% to $487. This increase included a 3.2% benefit from the appreciation of the Australian and Canadian dollars relative to the United States dollar. In addition, higher fuel surcharges increased average revenues per carload from existing operations by 2.5% and changes in the commodity mix decreased average revenues per carload from existing operations by 0.3%. Excluding these factors, average revenues per carload from existing operations increased by 0.5%. Average revenues per carload from existing operations were negatively impacted by changes in the mix of customers within certain commodity groups, such as coal and coke, farm and food products and metals, primarily due to length of haulage.
The following table sets forth freight revenues by commodity group segregated into new operations and existing operations for the three months ended June 30, 2011 and 2010 (dollars in thousands):
