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GWR.06.30.2012 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________________________________________

FORM 10-Q

________________________________________________



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

For the quarterly period ended June 30, 2012



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 31, 2012:



Class		Number of Shares Outstanding
Class A Common Stock		40,725,958
Class B Common Stock		2,112,048

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INDEX
		Page

	Forward-looking Statements	3

Part I	Financial Information

Item 1.	Financial Statements:

	Consolidated Balance Sheets (Unaudited) - As of June 30, 2012 and December 31, 2011	4
	Consolidated Statements of Operations (Unaudited) - For the Three and Six Months Ended June 30, 2012 and 2011	5
	Consolidated Statements of Comprehensive Income (Unaudited) - For the Three and Six Months Ended June 30, 2012 and 2011	6
	Consolidated Statements of Cash Flows (Unaudited) - For the Six Months Ended June 30, 2012 and 2011	7
	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	40

Part II	Other Information	41

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Mine Safety Disclosures	44

Item 5.	Other Information	44

Item 6.	Exhibits	44

Signatures		45

Index to Exhibits		46

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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,” “should,” “seeks,” “expects,” “estimates,” “trends,” “outlook,” and 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 (including employee strikes or work stoppages); customer demand and changes in our operations, 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, including our ability to obtain government funding for capital projects; international complexities of operations, currency fluctuations, finance, tax and decentralized management; challenges of managing rapid growth including retention and development of senior leadership; unpredictability of fuel costs; susceptibility to various legal claims and lawsuits; increase in, or volatility associated with expenses associated with estimated claims, self-insured retention amounts, and insurance coverage limits; consummation of new business opportunities; exposure to the credit risk of customers or counterparties; severe weather conditions and other natural occurrences, which could result in shutdowns, derailments or other substantial disruption of operations; susceptibility to the risks of doing business in foreign countries; uncertainties as to the timing or approval of the merger between us and RailAmerica, Inc. that was announced on July 23, 2012; the conditions, if any, imposed by the Surface Transportation Board to approve the merger; the possibilities that various closing conditions for the merger will not be satisfied or waived; our success integrating RailAmerica, Inc. into our operations and our ability to achieve the expected synergies as a result of the merger; 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 2011 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 undertake no obligation to update the current expectations or forward-looking statements contained in this report.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

GENESEE & WYOMING INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2012 and DECEMBER 31, 2011 (Unaudited)

(dollars in thousands, except share amounts)



	June 30, 2012			December 31, 2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	50,219		$	27,269
Accounts receivable, net	159,792			165,768
Materials and supplies	16,343			14,445
Prepaid expenses and other	15,621			13,332
Deferred income tax assets, net	19,666			19,385
Total current assets	261,641			240,199
PROPERTY AND EQUIPMENT, net	1,712,879			1,643,589
GOODWILL	159,963			160,277
INTANGIBLE ASSETS, net	227,145			230,628
DEFERRED INCOME TAX ASSETS, net	2,442			2,342
OTHER ASSETS, net	17,716			17,122
Total assets	$	2,381,786		$	2,294,157
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	64,351		$	57,168
Accounts payable	112,095			134,081
Accrued expenses	70,497			69,097
Deferred income tax liabilities, net	—			925
Total current liabilities	246,943			261,271
LONG-TERM DEBT, less current portion	563,599			569,026
DEFERRED INCOME TAX LIABILITIES, net	307,681			285,780
DEFERRED ITEMS - grants from outside parties	208,785			198,824
OTHER LONG-TERM LIABILITIES	17,873			18,622
COMMITMENTS AND CONTINGENCIES	—			—
STOCKHOLDERS’ EQUITY:
Class A Common Stock, $0.01 par value, one vote per share; 180,000,000 shares authorized; 53,212,117 and 52,717,553 shares issued and 40,723,031 and 40,257,656 shares outstanding (net of 12,489,086 and 12,459,897 shares in treasury) on June 30, 2012 and December 31, 2011, respectively	532			527
Class B Common Stock, $0.01 par value, ten votes per share; 30,000,000 shares authorized; 2,112,048 and 2,192,473 shares issued and outstanding on June 30, 2012 and December 31, 2011, respectively	21			22
Additional paid-in capital	403,767			385,473
Retained earnings	800,273			741,669
Accumulated other comprehensive income	39,026			37,895
Treasury stock, at cost	(206,714		)	(204,952		)
Total stockholders’ equity	1,036,905			960,634
Total liabilities and stockholders’ equity	$	2,381,786		$	2,294,157

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 AND SIX MONTHS ENDED JUNE 30, 2012 and 2011 (Unaudited)

(in thousands, except per share amounts)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
OPERATING REVENUES	$	217,419		$	209,589		$	424,855		$	401,500
OPERATING EXPENSES:
Labor and benefits	61,366			58,966			127,123			117,048
Equipment rents	8,967			10,986			18,784			21,530
Purchased services	19,304			19,705			37,335			37,147
Depreciation and amortization	18,334			16,297			35,967			32,158
Diesel fuel used in operations	21,134			22,654			43,132			44,075
Diesel fuel sold to third parties	4,111			4,500			9,101			8,579
Casualties and insurance	5,943			6,228			11,490			11,666
Materials	6,783			6,090			12,890			12,673
Net gain on sale of assets	(6,199		)	(1,088		)	(7,429		)	(2,098		)
Gain on insurance recoveries	(5,186		)	(1,018		)	(5,186		)	(1,043		)
Other operating expenses	20,389			15,104			37,861			29,397
Total operating expenses	154,946			158,424			321,068			311,132
INCOME FROM OPERATIONS	62,473			51,165			103,787			90,368
Interest income	964			858			1,831			1,633
Interest expense	(8,622		)	(10,253		)	(17,238		)	(20,192		)
Gain on sale of investments	—			625			—			894
Other income, net	15			170			999			469
Income from continuing operations before income taxes	54,830			42,565			89,379			73,172
Provision for income taxes	18,443			11,420			30,748			19,905
Income from continuing operations, net of tax	36,387			31,145			58,631			53,267
Loss from discontinued operations, net of tax	(24		)	—			(27		)	—
NET INCOME	$	36,363		$	31,145		$	58,604		$	53,267
BASIC EARNINGS PER SHARE:
Basic earnings per common share from continuing operations	$	0.90		$	0.78		$	1.45		$	1.34
Basic loss per common share from discontinued operations	—			—			—			—
Basic earnings per common share	$	0.90		$	0.78		$	1.45		$	1.34
Weighted average shares - basic	40,614			39,903			40,487			39,695
DILUTED EARNINGS PER SHARE
Diluted earnings per common share from continuing operations	$	0.84		$	0.73		$	1.36		$	1.25
Diluted loss per common share from discontinued operations	—			—			—			—
Diluted earnings per common share	$	0.84		$	0.73		$	1.36		$	1.25
Weighted average shares - diluted	43,153			42,757			43,116			42,654

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 AND SIX MONTHS ENDED JUNE 30, 2012 and 2011 (Unaudited)

(dollars in thousands)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
NET INCOME	$	36,363		$	31,145		$	58,604		$	53,267
OTHER COMPREHENSIVE (LOSS)/INCOME:
Foreign currency translation adjustment	(5,801		)	9,547			445			16,223
Net unrealized gain/(loss) on qualifying cash flow hedges, net of tax (provision)/benefit of ($351), $140, ($604) and ($253) respectively	617			(246		)	1,063			444
Changes in pension and other postretirement benefits, net of tax (provision)/benefit of ($18), ($26), $214 and $71, respectively	32			46			(377		)	(125		)
Other comprehensive (loss)/income	(5,152		)	9,347			1,131			16,542
COMPREHENSIVE INCOME	$	31,211		$	40,492		$	59,735		$	69,809

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 SIX MONTHS ENDED JUNE 30, 2012 and 2011 (Unaudited)

(dollars in thousands)



	Six Months Ended
	June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	58,604		$	53,267
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations	27			—
Depreciation and amortization	35,967			32,158
Compensation cost related to equity awards	3,948			3,839
Excess tax benefit from share-based compensation	(2,687		)	(2,049		)
Deferred income taxes	21,608			11,071
Net gain on sale of assets	(7,429		)	(2,098		)
Gain on sale of investments	—			(894		)
Gain on insurance recoveries	(5,186		)	(1,043		)
Insurance proceeds received	21,373			24
Changes in assets and liabilities which provided (used) cash, net of effect of acquisitions:
Accounts receivable, net	3,617			(17,612		)
Materials and supplies	(1,870		)	(1,763		)
Prepaid expenses and other	(2,331		)	2,048
Accounts payable and accrued expenses	(35,365		)	(24,174		)
Other assets and liabilities, net	579			(813		)
Net cash provided by operating activities from continuing operations	90,855			51,961
Net cash used in operating activities from discontinued operations	(27		)	(5		)
Net cash provided by operating activities	90,828			51,956
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(106,538		)	(62,065		)
Grant proceeds from outside parties	18,281			11,700
Cash paid for acquisitions, net of cash acquired	(837		)	(440		)
Proceeds from sale of investments	—			1,369
Proceeds from disposition of property and equipment	8,141			3,106
Net cash used in investing activities from continuing operations	(80,953		)	(46,330		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term borrowings, including capital leases	(131,390		)	(115,764		)
Proceeds from issuance of long-term debt	133,118			94,612
Proceeds from employee stock purchases	10,742			12,631
Treasury stock purchases	(1,763		)	(1,287		)
Excess tax benefit from share-based compensation	2,687			2,049
Net cash provided by/(used in) financing activities from continuing operations	13,394			(7,759		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(319		)	653
CHANGE IN CASH BALANCES INCLUDED IN CURRENT ASSETS OF DISCONTINUED OPERATIONS	—			1
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	22,950			(1,479		)
CASH AND CASH EQUIVALENTS, beginning of period	27,269			27,417
CASH AND CASH EQUIVALENTS, end of period	$	50,219		$	25,938

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 (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, 2012 and 2011 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 2011 was derived from the audited financial statements in the Company’s 2011 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, 2011 included in the Company’s 2011 Annual Report on Form 10-K. Certain reclassifications have been made to prior period balances to conform to the current year presentation.

2. CHANGES IN OPERATIONS:

Australia

The Company's subsidiary, Genesee & Wyoming Australia Pty Ltd (GWA), entered into an agreement with Asciano Services Pty Ltd (AIO), a subsidiary of Asciano Pty Ltd, whereby GWA purchased an intermodal and freight terminal in Alice Springs, Northern Territory from AIO. Pursuant to the agreement, the Company will sell to AIO certain assets in the township of Cook, South Australia that include a fuel-sales business. The Company completed the purchase of the Alice Springs intermodal and freight terminal in June 2012 for A$9.0 million (or $9.2 million at the exchange rate on June 30, 2012) plus A$0.5 million (or $0.5 million at the exchange rate on June 30, 2012) tax liability for stamp duty (an Australian asset transfer tax). Previously, GWA had leased the facility from AIO. The sale of the assets in Cook is expected to close in the third quarter of 2012 following completion of certain conditions to the closing. The Company expects to receive A$4.0 million (or $4.1 million at the exchange rate on June 30, 2012) in pre-tax cash proceeds from the sale and recognize an after-tax book gain of A$1.3 million (or $1.3 million at the exchange rate on June 30, 2012), or approximately $0.03 per share.

United States

Columbus & Chattahoochee Railroad, Inc.: In April 2012, the Company's newly formed subsidiary, the Columbus & Chattahoochee Railroad, Inc. (CCH), signed an agreement with Norfolk Southern Railway Company (NS) to lease and operate a 26-mile segment of NS track that runs from Girard, Alabama to Mahrt, Alabama. Operations commenced on July 1, 2012. The CCH interchanges with NS in Columbus, Georgia where the Company's Georgia Southwestern Railroad, Inc. also has operations. The results from CCH’s operations will be included in the Company’s statement of operations effective July 1, 2012 and will be included in the Company’s North American & European Operations segment.

Hilton & Albany Railroad, Inc.: In November 2011, the Company's newly formed subsidiary, the Hilton & Albany Railroad, Inc. (HAL), signed an agreement with NS to lease and operate a 56-mile segment of NS track that runs from Hilton, Georgia to Albany, Georgia. Operations commenced on January 1, 2012. The HAL handles primarily overhead traffic between NS and the Company's following railroads: The Bay Line Railroad, L.L.C.; Chattahoochee Bay Railroad, Inc.; Chattahoochee Industrial Railroad; and Georgia Southwestern Railroad, Inc. In addition, the HAL serves several local agricultural and aggregate customers in southwest Georgia. The results from HAL’s operations have been included in the Company’s statement of operations since January 1, 2012 and are included in the Company’s North American & European Operations segment.

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Arizona Eastern Railway Company: On September 1, 2011, the Company acquired all of the capital stock of Arizona Eastern Railway Company (AZER). The Company paid the seller $89.5 million in cash at closing, which included a reduction to the purchase price of $0.6 million for the estimated working capital adjustment. Based on the final working capital adjustment, the Company recorded an additional $0.8 million of purchase price in December 2011, which was paid to the seller in January 2012. The Company incurred $0.6 million of acquisition costs related to this transaction through December 31, 2011, which were expensed as incurred. The results from AZER’s operations have been included in the Company’s statement of operations since September 1, 2011 and are included in the Company’s North American & European Operations segment.

Headquartered near Miami, Arizona, with 43 employees and 10 locomotives, AZER owns and operates two rail lines totaling approximately 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. (Freeport-McMoRan). AZER 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 entered into a long-term transportation agreement.

Results from Continuing Operations

When comparing the Company’s results from continuing 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 changing economic conditions, acquisitions, competitive forces, changes in foreign currency exchange rates, 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, tornadoes, droughts, heavy snowfall, unseasonably warm or cool weather, 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, such as steel products, paper products and lumber and forest products, as well as product specific economic conditions, such as the availability of lower priced alternative sources of power generation (coal). Other shipments are relatively less affected by economic conditions and are more closely affected by other factors, such as inventory levels maintained at customer plants (coal), winter weather (salt and coal) 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.

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3. EARNINGS PER SHARE:

The following table sets forth the computation of basic and diluted earnings per share (EPS) for the three and six months ended June 30, 2012 and 2011 (in thousands, except per share amounts):



	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2011		2012			2011
Numerators:
Income from continuing operations, net of tax	$	36,387		$	31,145	$	58,631		$	53,267
Loss from discontinued operations, net of tax	(24		)	—		(27		)	—
Net income	$	36,363		$	31,145	$	58,604		$	53,267
Denominators:
Weighted average Class A common shares outstanding - Basic	40,614			39,903		40,487			39,695
Weighted average Class B common shares outstanding	2,112			2,218		2,139			2,311
Dilutive effect of employee stock grants	427			636		490			648
Weighted average shares - Diluted	43,153			42,757		43,116			42,654
Basic:
Earnings per common share from continuing operations	$	0.90		$	0.78	$	1.45		$	1.34
Loss per common share from discontinued operations	—			—		—			—
Earnings per common share	$	0.90		$	0.78	$	1.45		$	1.34
Diluted:
Earnings per common share from continuing operations	$	0.84		$	0.73	$	1.36		$	1.25
Loss per common share from discontinued operations	—			—		—			—
Earnings per common share	$	0.84		$	0.73	$	1.36		$	1.25

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 (in thousands):



	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2012	2011	2012	2011
Anti-dilutive shares	274	98	245	78

4. ACCOUNTS RECEIVABLE:

Accounts receivable consisted of the following as of June 30, 2012 and December 31, 2011 (dollars in thousands):



	June 30, 2012			December 31, 2011
Accounts receivable - trade	$	127,237		$	130,486
Accounts receivable - grants	16,375			20,753
Accounts receivable - insurance claims	19,524			17,336
Total accounts receivable	163,136			168,575
Less: Allowance for doubtful accounts	(3,344		)	(2,807		)
Accounts receivable, net	$	159,792		$	165,768

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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, 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 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 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 represented a liability of $5.4 million as of June 30, 2012 and was estimated based on Level 2 inputs. The Company’s effectiveness testing during the period ended June 30, 2012 resulted in no amount of gain or loss reclassified from accumulated other comprehensive income into earnings.

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Foreign Currency Exchange Rate Risk

As of June 30, 2012, $220.1 million of third-party debt, related to the Company’s foreign operations, was 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, net.

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). The Company financed the acquisition through a combination of cash on hand and borrowings under its credit agreement. A portion of the funds was 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 reference rate within Australia, which the Company believes is generally considered the Australian equivalent to LIBOR. As a result of these quarterly net settlement payments, the Company realized a net expense of $1.2 million within interest expense, net related to the quarterly settlement for the three months ended June 30, 2012. In addition, the Company recognized a net gain of $0.1 million within other income, net related to the mark-to-market of the derivative agreement and the underlying intercompany debt instrument to the exchange rate on June 30, 2012. The fair value of the Swap represented a current liability of $7.2 million as of June 30, 2012. 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, 2012 and December 31, 2011 (dollars in thousands):



	June 30, 2012			December 31, 2011
Liability Derivatives:	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedges:
Interest rate swap agreement	Accrued expenses	$	4,288	Accrued expenses	$	4,143
Interest rate swap agreement	Other long-term liabilities	1,070		Other long-term liabilities	2,882
Total derivatives designated as hedges		$	5,358		$	7,025
Derivatives not designated as hedges:
Cross-currency swap agreement	Accrued expenses	$	7,232	Accrued expenses	$	7,170
Total liability derivatives not designated as hedges		$	7,232		$	7,170

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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, 2012 and 2011 in other comprehensive income/(loss) (OCI) (dollars in thousands):



	Total Cash Flow Hedge OCI Activity, Net of Tax
	Three Months Ended					Six Months Ended
	June 30,					June 30,
Derivatives Designated as Cash Flow Hedges:	2012		2011			2012		2011
Effective portion of changes in fair value recognized in OCI:
Interest rate swap agreement	$	617	$	(246	)	$	1,063	$	444

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, 2012 and 2011 in the consolidated statement of operations (dollars in thousands):



		Amount Recognized in Earnings
Derivative Instruments Not Designated as Hedges:		Three Months Ended						Six Months Ended
	Location of Amount Recognized in Earnings	June 30,						June 30,
	Location of Amount Recognized in Earnings	2012			2011			2012			2011
Cross-currency swap agreement	Interest expense, net	$	(1,203	)	$	(1,524	)	$	(2,521	)	$	(2,960	)
Cross-currency swap agreement	Other income, net	115			97			288			119
		$	(1,088	)	$	(1,427	)	$	(2,233	)	$	(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:

•

Derivative instruments: Derivative instruments are recorded on the balance sheet as either assets or liabilities measured at fair value. As of June 30, 2012, 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, Australian dollar BBSW implied forward interest rates and the remaining time to maturity.


•	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.

The following table presents the Company's financial instruments that are carried at fair value as of June 30, 2012 and December 31, 2011 (dollars in thousands):



	June 30, 2012		December 31, 2011
Financial liabilities carried at fair value using Level 2 inputs:
Interest rate swap agreement	$	5,358	$	7,025
Cross-currency swap agreement	7,232		7,170
Total financial liabilities carried at fair value	$	12,590	$	14,195

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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 June 30, 2012 and December 31, 2011 (dollars in thousands):



	June 30, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial liabilities carried at historical cost:
Series B senior notes	$	100,000	$	109,722	$	100,000	$	107,704
Series C senior notes	25,000		25,023		25,000		24,822
Revolving credit facility	209,077		210,096		191,919		186,590
United States term loan	180,000		178,717		190,000		183,869
Canadian term loan	20,912		20,851		21,983		21,226
Australia term loan	85,039		85,895		89,443		88,299
Other debt	7,922		8,053		7,849		7,775
Total	$	627,950	$	638,357	$	626,194	$	620,285

7. INCOME TAXES:

The Company’s effective income tax rate in the three months ended June 30, 2012 was 33.6% compared with 26.8% in the three months ended June 30, 2011. The Company’s effective income tax rate in the six months ended June 30, 2012 was 34.4% compared with 27.2% in the six months ended June 30, 2011. The increase in the effective income tax rate for the three and six months ended June 30, 2012 was primarily attributable to the expiration of the United States Short Line Tax Credit on December 31, 2011.

The Short Line Tax Credit is a track maintenance income tax 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 their tax year. The Short Line Tax Credit had been in existence since 2005.

8. COMMITMENTS AND CONTINGENCIES:

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

9. ACCUMULATED OTHER COMPREHENSIVE INCOME:

The following table sets forth accumulated other comprehensive income included in the consolidated balance sheets as of June 30, 2012 and December 31, 2011 (dollars in thousands):



	Foreign Currency Translation Adjustment		Defined Benefit Plans			Net Unrealized Gain/(Loss) on Cash Flow Hedges			Accumulated Other Comprehensive Income
Balance, December 31, 2011	$	42,394	$	(20	)	$	(4,479	)	$	37,895
Current period change	445		(377		)	1,063			1,131
Balance, June 30, 2012	$	42,839	$	(397	)	$	(3,416	)	$	39,026

10. SIGNIFICANT NON-CASH INVESTING ACTIVITIES:

As of June 30, 2012 and 2011, the Company had outstanding grants receivable from outside parties for capital expenditures of $16.4 million and $17.3 million, respectively. As of June 30, 2012 and 2011, the Company also had approximately $18.1 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.

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11. EDITH RIVER DERAILMENT:

On December 27, 2011, a train operated by the Company's subsidiary, GWA, derailed on the Edith River Bridge in Australia's Northern Territory (the Edith River Derailment). Flood waters associated with heavy rainfall from Cyclone Grant washed away the southern portion of the Edith River Bridge while a northbound GWA intermodal train consisting of three locomotives, an unoccupied crew van and 33 wagons was passing over the bridge en route to Darwin. The locomotives were damaged and the crew van and several intermodal containers and wagons containing copper concentrate were derailed into the river.

The railroad segment between Katherine and Darwin remained out of service for approximately 60 days. The Edith River Bridge reopened on February 29, 2012. While the bridge was out of service, the Company estimates it lost revenues of approximately $7 million and income from operations of approximately $5 million. In June 2012, the Company recorded a gain on insurance recoveries and a related insurance receivable of A$4.8 million (or $4.8 million at the average exchange rate on June 30, 2012) for a business interruption claim related to the Edith River Derailment. The Company anticipates further business interruption insurance recovery related to the Edith River Derailment in the fourth quarter of 2012.

In December 2011, the Company recorded a liability of A$15.0 million (or $15.3 million at the exchange rate on December 31, 2011) for the estimated repair and related costs associated with the Edith River Derailment. Since the Company believes substantially all of these costs will be recovered through insurance, the Company also recorded a receivable of A$14.0 million (or $14.3 million at the exchange rate on December 31, 2011), with the difference representing the Company's insurance deductible. The Company increased its estimate of costs associated with the Edith River Derailment, as well as its estimate of insurance recovery, by A$12.3 million (or $12.7 million at the exchange rate on June 30, 2012) during the six months ended June 30, 2012. During the six months ended June 30, 2012, the Company made cash payments of A$18.0 million (or $18.8 million at the average exchange rate during the period) as a result of the derailment and received cash proceeds from insurance of A$20.0 million (or $20.9 million at the exchange rate on the date received). As of June 30, 2012, the Company's outstanding insurance receivable associated with repair costs was A$6.3 million (or $6.5 million at the exchange rate on June 30, 2012).

The Company believes it is possible that additional claims related to the Edith River Derailment may arise and additional costs may be incurred. The Company is unable to estimate the range of such claims based on currently available information. However, the Company does not anticipate that these additional claims or costs, if any, will have a material adverse effect on its operating results, financial condition or liquidity.

12. SEGMENT INFORMATION:

The Company's various railroad lines are divided into 10 operating regions. All of the regions have similar characteristics; however, the Company presents 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, 2012 and 2011 (dollars in thousands):



	Three Months Ended June 30, 2012									Three Months Ended June 30, 2011
	North American & European Operations			Australian Operations			Total Operations			North American & European Operations			Australian Operations			Total Operations
Revenues	$	145,055		$	72,364		$	217,419		$	139,335		$	70,254		$	209,589
Income from operations	39,898			22,575			62,473			33,737			17,428			51,165
Depreciation and amortization	12,541			5,793			18,334			11,565			4,732			16,297
Interest expense	(4,721		)	(3,901		)	(8,622		)	(5,935		)	(4,318		)	(10,253		)
Interest income	819			145			964			791			67			858
Provision for income taxes	12,420			6,023			18,443			7,485			3,935			11,420
Expenditures for additions to property & equipment, net of grants from outside parties	13,934			32,442			46,376			14,742			27,412			42,154

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The following table sets forth our North American & European Operations and Australian Operations for the six months ended June 30, 2012 and 2011 (dollars in thousands):



	Six Months Ended June 30, 2012									Six Months Ended June 30, 2011
	North American & European Operations			Australian Operations			Total Operations			North American & European Operations			Australian Operations			Total Operations
Revenues	$	289,128		$	135,727		$	424,855		$	271,642		$	129,858		$	401,500
Income from operations	71,211			32,576			103,787			60,672			29,696			90,368
Depreciation and amortization	24,859			11,108			35,967			22,911			9,247			32,158
Interest expense	(9,486		)	(7,752		)	(17,238		)	(11,891		)	(8,301		)	(20,192		)
Interest income	1,624			207			1,831			1,507			126			1,633
Provision for income taxes	22,959			7,789			30,748			13,557			6,348			19,905
Expenditures for additions to property & equipment, net of grants from outside parties	26,738			61,519			88,257			21,811			28,554			50,365

The following table sets forth the property and equipment recorded in the consolidated balance sheets for our North American & European Operations and Australian Operations as of June 30, 2012 and December 31, 2011 (dollars in thousands):



	June 30, 2012			December 31, 2011
	North American & European Operations	Australian Operations	Total Operations	North American & European Operations	Australian Operations	Total Operations
Property & equipment, net	$1,139,298	$573,581	$1,712,879	$1,120,121	$523,468	$1,643,589

13. RECENTLY ISSUED ACCOUNTING STANDARDS:

Accounting Standards Not Yet Effective

In July 2012, the Financial Accounting Standards Board issued Accounting Standards Update 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which gives entities the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

14. SUBSEQUENT EVENTS:

RailAmerica Acquisition

On July 23, 2012, the Company and RailAmerica, Inc. (RailAmerica) jointly announced their entry into an agreement under which the Company will acquire RailAmerica for a cash purchase price of $27.50 per share, or $1.4 billion based on a 50.8 million diluted share count, plus the assumption of net debt of approximately $600 million (RailAmerica Acquisition). The Company expects to fund the RailAmerica Acquisition and the simultaneous refinancing of the Company's existing and acquired debt with approximately $2 billion of new debt and approximately $800 million of equity or equity-linked securities. The Company has received $2.3 billion of committed debt financing from Bank of America Merrill Lynch and $800 million of committed equity financing from The Carlyle Group of which the Company has agreed to take a minimum of $350 million through a private placement of two-year mandatorily convertible preferred stock (the Carlyle Convertible) with Carlyle Partners V. The Carlyle Convertible has a coupon of 5% per annum for two years and is mandatorily convertible at a conversion price of $58.49. The Company has the option to fund up to an additional $450 million of the Carlyle Convertible on the same terms, subject to certain conditions. Alternatively, the Company may instead choose to fund up to $450 million through the issuance of equity or equity-linked securities.

The acquisition is subject to customary closing conditions, including the formal approval by the United States Surface Transportation Board (STB) of the Company's control of the RailAmerica railroads. The Company will seek STB consent to close the transaction into a voting trust, which will be managed by a voting trustee until the Company is granted approval from the STB to control the RailAmerica railroads.

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In addition to receipt of STB approvals, completion of the transaction is subject to customary conditions, including without limitation (1) the clearance by the SEC of an information statement and the mailing of such information statement to stockholders of RailAmerica, (2) the absence of any law restraining, enjoining or prohibiting the transaction, (3) the absence of any action or proceeding by any governmental entity challenging, materially delaying or otherwise restraining or prohibiting the transaction or seeking to obtain material damages with respect to the transaction, and (4) (if applicable) the expiration or early termination of the waiting period applicable to the consummation of the transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended and any other applicable foreign competition law. Moreover, each party’s obligation to complete the transaction is subject to certain other conditions, including without limitation, the accuracy of the other party’s representations and warranties and the other party’s compliance with its covenants and agreements contained in the merger agreement, in each case subject to customary materiality qualifiers.

RailAmerica's majority stockholder, RR Acquisition Holding LLC, executed a written consent adopting the merger agreement, which is only revocable in the event RailAmerica receives a superior proposal within 30 days of execution of the merger agreement. As a result, the required approval by the shareholders of RailAmerica has been obtained, and no further action by RailAmerica's stockholders in connection with this transaction is required.

The agreement contains certain termination rights for RailAmerica and the Company. Upon termination of the agreement under specified circumstances, RailAmerica will be required to pay the Company a termination fee of $49 million. The agreement also provides that if the Company fails to close the transaction, it will be required to pay RailAmerica a reverse termination fee of $135 million under certain circumstances specified in the agreement.

The Company expects to close the transaction into a voting trust as early as the third quarter of 2012 while it awaits formal STB approval of its application to control RailAmerica's railroads. STB formal approval may be as early as the fourth quarter of 2012 but could be delayed until the third quarter of 2013. Upon formal STB approval, the Company would be able to fully integrate RailAmerica.

In connection with the agreement with RailAmerica, four putative stockholder class action lawsuits have been filed in state courts located in Florida and Delaware. On July 26, 2012, John Langan v. RailAmerica Inc., et al., No. 16-2012-CA-008207 was filed in the Circuit Court of the Fourth Judicial Circuit for Duval County, Florida Civil Division against RailAmerica, the RailAmerica directors, the Company and the merger subsidiary. The complaint alleges, inter alia, that the RailAmerica directors breached their fiduciary duties in connection with their decision to sell RailAmerica to the Company via an allegedly flawed process and failed to obtain the best financial and other terms. The complaint also alleges that RailAmerica, the Company and the merger subsidiary aided and abetted those alleged breaches of duty. The complaint requests, among other relief, an order to enjoin consummation of the merger, rescission of the merger agreement, and attorneys' fees. On July 31, 2012, Nicolas Sambuco v. RailAmerica Inc., et al., No. 16-2012-CA-008339 was filed in the same court, names the same defendants, and alleges substantially similar claims. Also on July 31, 2012, plaintiffs Langan and Sambuco filed a motion to consolidate the two Florida actions, appoint plaintiffs Langan and Sambuco as lead plaintiffs, and appoint Robbins Geller Rudman & Dowd LLP as lead counsel in the proposed consolidated action. Brian T. Ford v. RailAmerica, Inc., et al., Civil Action No. 7744, and KBC Asset Management N.V. v. RailAmerica, Inc., et al., Civil Action No. 7755, were filed in the Court of Chancery of the State of Delaware on August 2, 2012 and August 7, 2012, respectively. The Delaware complaints name the same defendants and allege substantially similar claims as the Florida actions. Both Delaware actions seek, among other relief, an order to enjoin consummation of the merger and attorneys' fees. The Ford complaint also seeks damages.

Arrium Limited

In July 2012, the Company's subsidiary, GWA, expanded two existing rail haulage contracts with Arrium Limited (formerly OneSteel) to transport an additional 2.7 million tons per year of export iron ore in South Australia. To support the increased shipments under the two contracts, GWA will invest A$60.0 million (or $61.5 million at the exchange rate on June 30, 2012) to purchase narrow gauge locomotives and wagons as well as construct a standard gauge rolling-stock maintenance facility.

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Tata Steel Minerals Canada Ltd.

On August 2, 2012, the Company announced that it and the Company's newly formed subsidiary, KeRail Inc. (KeRail), have entered into a long-term agreement with Tata Steel Minerals Canada Ltd. (TSMC), for KeRail to provide rail transportation services to the direct shipping iron ore mine TSMC is developing near Schefferville, Quebec in the Labrador Trough (the Mine). In addition, KeRail will construct an approximately 21-kilometer rail line (Rail Line) which will connect TSMC's mine to the Tshiuetin Rail Transportation (TSH) interchange point in Schefferville. Operated as part of GWI's Canada Region, KeRail will haul unit trains of iron ore from its rail connection with the Mine that will then travel over three privately owned railways to the Port of Sept-Iles for export primarily to Tata Steel's European operations. The agreement and construction is contingent on certain conditions being met, including the receipt of necessary governmental permits and approvals. Once the track construction has commenced, which is anticipated in the third or fourth quarter of 2012, the Rail Line is expected to be completed three to six months thereafter.

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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 with the consolidated financial statements, related notes and other financial information included in our 2011 Annual Report on Form 10-K.

Overview

We own and operate short line and regional freight railroads and provide railcar switching services in the United States, Australia, Canada, the Netherlands and Belgium. In addition, we operate the longer-haul 1,400-mile Tarcoola to Darwin rail line, which links the Port of Darwin to the Australian interstate rail network in South Australia. Operations currently include 66 railroads organized into 10 regions, with approximately 7,600 miles of owned and leased track and 1,405 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.

On July 23, 2012, we and RailAmerica, Inc. (RailAmerica) jointly announced our entry into an agreement under which we will acquire RailAmerica for a cash purchase price of $27.50 per share, or $1.4 billion based on a 50.8 million diluted share count, plus the assumption of net debt of approximately $600 million (RailAmerica Acquisition). The RailAmerica Acquisition and its related financing are more fully described in Note 14 to our Consolidated Financial Statements included elsewhere in this Form 10-Q.

Our newly formed subsidiaries, the Columbus & Chattahoochee Railroad, Inc. (CCH) and the Hilton & Albany Railroad, Inc. (HAL) commenced operations in the United States on July 1, 2012 and January 1, 2012, respectively. In addition, on September 1, 2011, we completed the acquisition of the Arizona Eastern Railway Company (AZER) in the United States. Each of these is described in more detail below.

Operating revenues increased $7.8 million, or 3.7%, to $217.4 million in the three months ended June 30, 2012, compared with $209.6 million in the three months ended June 30, 2011. The increase in operating revenues included $6.9 million in revenues from new operations and a $1.0 million, or 0.5%, increase in revenues from existing operations. During the three months ended June 30, 2012, the depreciation of the Australian and Canadian dollars and the Euro relative to the United States dollar decreased operating revenues from existing operations by $4.4 million. Other than the impact from the change in foreign currency exchange rates, revenues from existing operations increased $5.4 million, or 2.6%. 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 we managed in both periods (i.e., excluding the impact of businesses acquired/initiated).

Our traffic in the three months ended June 30, 2012 was 232,315 carloads, a decrease of 17,193 carloads, or 6.9%, compared with the three months ended June 30, 2011. The traffic decrease consisted of a decrease of 21,508 carloads, or 8.6%, from existing operations, partially offset by 4,315 carloads from new operations. The decrease from existing operations was principally due to decreases of 13,893 carloads of other commodity traffic primarily due to a decline in coal-related haulage traffic, 7,834 carloads of coal & coke traffic and 4,238 carloads of farm and food traffic, partially offset by an increase of 1,983 carloads of metallic ores traffic and 1,487 carloads of intermodal traffic. All remaining traffic from existing operations increased by a net 987 carloads.

Income from operations in the three months ended June 30, 2012 was $62.5 million, compared with $51.2 million in the three months ended June 30, 2011, an increase of $11.3 million, or 22.1%. Our operating ratio, defined as operating expenses divided by operating revenues, was 71.3% in the three months ended June 30, 2012, compared with 75.6% in the three months ended June 30, 2011. Income from operations in the three months ended June 30, 2012 included a $6.2 million net gain on sale of assets and insurance recoveries of $5.2 million. Income from operations in the three months ended June 30, 2012 was negatively impacted by $1.9 million of business/corporate development expenses and $0.5 million of lost income resulting from the 9-day strike of Canadian Pacific Railway's engineers in May 2012. Income from operations in the three months ended June 30, 2011 included a $1.1 million gain on sale of assets and a $1.0 million gain on insurance recoveries and was negatively impacted by $0.4 million of business/corporate development expenses.

Our effective income tax rate in the three months ended June 30, 2012 was 33.6%, compared with 26.8% in the three months ended June 30, 2011. The higher income tax rate was driven primarily by the expiration of the United States Short Line Tax Credit (described in Note 7 to our Consolidated Financial Statements included elsewhere in this Form 10-Q) on December 31, 2011.

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Net income in the three months ended June 30, 2012 was $36.4 million, compared with net income of $31.1 million in the three months ended June 30, 2011. Our diluted earnings per share (EPS) in the three months ended June 30, 2012 were $0.84 with 43.2 million weighted average shares outstanding, compared with diluted EPS of $0.73 with 42.8 million weighted average shares outstanding in the three months ended June 30, 2011.

Net income from continuing operations in the six months ended June 30, 2012 was $58.6 million, a 10.1% increase over $53.3 million of net income from continuing operations in the six months ended June 30, 2011. Our diluted EPS from continuing operations in the six months ended June 30, 2012 were $1.36 with 43.1 million weighted average shares outstanding, an 8.8% increase compared with diluted EPS from continuing operations in the six months ended June 30, 2011 of $1.25 with 42.7 million weighted average shares outstanding. Operating revenues increased $23.4 million, or 5.8%, to $424.9 million in the six months ended June 30, 2012 compared with $401.5 million in the six months ended June 30, 2011. Income from operations in the six months ended June 30, 2012 was $103.8 million, compared with $90.4 million in the six months ended June 30, 2011, an increase of $13.4 million, or 14.8%.

During the six months ended June 30, 2012, we generated $90.9 million in cash flow from operating activities from continuing operations. During the same period, we purchased $106.5 million of property and equipment, including $54.5 million for Australian new business investments. These payments were partially offset by $18.3 million in cash received from outside parties for capital spending and $8.1 million in proceeds from the disposition of property and equipment.

Changes in Operations

Australia

Our subsidiary, Genesee & Wyoming Australia Pty Ltd (GWA), entered into an agreement with Asciano Services Pty Ltd (AIO), a subsidiary of Asciano Pty Ltd, whereby GWA purchased an intermodal and freight terminal in Alice Springs, Northern Territory from AIO. Pursuant to the agreement, we will sell to AIO certain assets in the township of Cook, South Australia that include a fuel-sales business. We completed the purchase of the Alice Springs intermodal and freight terminal in June 2012 for A$9.0 million (or $9.2 million at the exchange rate on June 30, 2012) plus A$0.5 million (or $0.5 million at the exchange rate on June 30, 2012) tax liability for stamp duty (an Australian asset transfer tax). Previously, GWA had leased the facility from AIO. The sale of the assets in Cook is expected to close in the third quarter of 2012 following completion of certain conditions to the closing. We expect to receive A$4.0 million (or $4.1 million at the exchange rate on June 30, 2012) in pre-tax cash proceeds from the sale and recognize an after-tax book gain of A$1.3 million (or $1.3 million at the exchange rate on June 30, 2012), or approximately $0.03 per share.

United States

Columbus & Chattahoochee Railroad, Inc.: In April 2012, our newly formed subsidiary, CCH, signed an agreement with Norfolk Southern Railway Company (NS) to lease and operate a 26-mile segment of NS track that runs from Girard, Alabama to Mahrt, Alabama. Operations commenced July 1, 2012. The CCH interchanges with NS in Columbus, Georgia where our Georgia Southwestern Railroad, Inc. also has operations. The results from CCH’s operations will be included in our statement of operations effective July 1, 2012 and will be included in our North American & European Operations segment.

Hilton & Albany Railroad, Inc.: In November 2011, our newly formed subsidiary, HAL, signed an agreement with NS to lease and operate a 56-mile segment of NS track that runs from Hilton, Georgia to Albany, Georgia. Operations commenced on January 1, 2012. The HAL handles primarily overhead traffic between NS and our following railroads: The Bay Line Railroad, L.L.C.; Chattahoochee Bay Railroad, Inc.; Chattahoochee Industrial Railroad; and Georgia Southwestern Railroad, Inc. In addition, the HAL serves several local agricultural and aggregate customers in southwest Georgia. The results from HAL’s operations have been included in our statement of operations since January 1, 2012 and are included in our North American & European Operations segment.

Arizona Eastern Railway Company: On September 1, 2011, we acquired all of the capital stock of AZER. We paid the seller $89.5 million in cash at closing, which included a reduction to the purchase price of $(0.6) million for the estimated working capital adjustment. Based on the final working capital adjustment, we recorded an additional $0.8 million of purchase price in December 2011, which was paid to the seller in January 2012. We incurred $0.6 million of acquisition costs related to this transaction through December 31, 2011, which were expensed as incurred. The results from AZER’s operations have been included in our statement of operations since September 1, 2011 and are included in our North American & European Operations segment.

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Discontinued Operations

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, 2012 and 2011. 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, it is important to consider that we have historically experienced fluctuations in revenues and expenses due to economic conditions, acquisitions, competitive forces, changes in foreign currency exchange rates, 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, tornadoes, droughts, heavy snowfall, unseasonable warm or cool weather, 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, such as steel products, paper products and lumber and forest products, as well as product specific economic conditions, such as the availability of lower priced alternative sources of power generation (coal). Other shipments are relatively less affected by economic conditions and are more closely affected by other factors, such as inventory levels maintained at customer plants (coal), winter weather (salt and coal) 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, 2012 Compared with Three Months Ended June 30, 2011

Operating Revenues

The following table breaks down our operating revenues into new operations and existing operations for the three months ended June 30, 2012 and 2011 (dollars in thousands):



	2012						2011		Increase/(Decrease) in Total Operations					Increase/(Decrease) in Existing Operations
	Total Operations		New Operations		Existing Operations		Total Operations		Amount			%		Amount			%		Currency Impact
Freight revenues	$	154,176	$	6,397	$	147,779	$	146,788	$	7,388		5.0	%	$	991		0.7	%	$	(3,033	)
Non-freight revenues	63,243		473		62,770		62,801		442			0.7	%	(31		)	—	%	(1,391		)
Total operating revenues	$	217,419	$	6,870	$	210,549	$	209,589	$	7,830		3.7	%	$	960		0.5	%	$	(4,424	)
Carloads	232,315		4,315		228,000		249,508		(17,193		)	(6.9	)%	(21,508		)	(8.6	)%

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Freight Revenues

The following table compares freight revenues, carloads and average freight revenues per carload for the three months ended June 30, 2012 and 2011 (dollars in thousands, except average freight revenues per carload):



	Freight Revenues								Carloads						Average Freight Revenues Per Carload
	2012				2011				2012			2011
Commodity Group	Amount		% of Total		Amount		% of Total		Amount	% of Total		Amount	% of Total		2012		2011
Intermodal*	$	23,087	15.0	%	$	22,049	15.0	%	16,710	7.2	%	15,223	6.1	%	$	1,382	$	1,448
Coal & Coke	16,462		10.7	%	20,122		13.7	%	39,697	17.1	%	47,531	19.0	%	415		423
Farm & Food Products	17,393		11.3	%	17,440		11.9	%	28,299	12.2	%	32,315	13.0	%	615		540
Pulp & Paper	15,789		10.2	%	15,480		10.6	%	23,481	10.1	%	23,823	9.5	%	672		650
Metallic Ores**	16,491		10.7	%	13,926		9.5	%	11,148	4.8	%	7,951	3.2	%	1,479		1,751
Metals	15,531		10.1	%	11,686		8.0	%	24,014	10.3	%	22,198	8.9	%	647		526
Minerals & Stone	13,202		8.5	%	12,513		8.5	%	35,403	15.2	%	35,330	14.2	%	373		354
Chemicals & Plastics	13,841		9.0	%	11,376		7.7	%	16,558	7.1	%	15,135	6.1	%	836		752
Lumber & Forest Products	8,701		5.6	%	8,224		5.6	%	17,756	7.7	%	16,961	6.8	%	490		485
Petroleum Products	6,732		4.4	%	5,932		4.0	%	7,449	3.2	%	7,041	2.8	%	904		842
Auto & Auto Parts	2,115		1.4	%	2,203		1.5	%	2,546	1.1	%	2,881	1.1	%	831		765
Other	4,832		3.1	%	5,837		4.0	%	9,254	4.0	%	23,119	9.3	%	522		252
Total	$	154,176	100.0	%	$	146,788	100.0	%	232,315	100.0	%	249,508	100.0	%	$	664	$	588

______________________



*	Carload amounts represent intermodal units
**	Carload amounts include carloads and intermodal units in the 2012 period

Total freight traffic decreased by 17,193 carloads, or 6.9%, in the three months ended June 30, 2012, compared with the same period in 2011. Carloads from existing operations decreased by 21,508 carloads, or 8.6%, and new operations contributed 4,315 carloads. The decrease from existing operations was principally due to decreases of 13,893 carloads of other commodity traffic primarily due to the decline in coal-related haulage traffic, 7,834 carloads of coal and coke traffic and 4,238 carloads of farm and food traffic, partially offset by an increase of 1,983 carloads of metallic ores traffic and 1,487 carloads of intermodal traffic. All remaining traffic from existing operations increased by a net 987 carloads.

Average freight revenues per carload increased 12.9% to $664 in the three months ended June 30, 2012, compared with the same period in 2011. Average freight revenues per carload from existing operations increased 10.2% to $648. Changes in the commodity mix and higher fuel surcharges increased average freight revenues per carload from existing operations by 4.5% and 0.3% respectively, and were partially offset by the depreciation of the Australian and Canadian dollars relative to the United States dollar, which decreased average freight revenues per carload from existing operations by 2.3%. Other than these factors, average freight revenues per carload from existing operations increased by 7.7%. Average freight revenues per carload were also positively impacted by changes in the mix of customers within certain commodity groups, primarily other commodities and metals.

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The following table sets forth freight revenues by commodity group segregated into new operations and existing operations for the three months ended June 30, 2012 and 2011 (dollars in thousands):



	2012						2011		Increase/(Decrease) in Total Operations					Increase/(Decrease) in Existing Operations					Currency Impact
Commodity Group	Total Operations		New Operations		Existing Operations		Total Operations		Amount			%		Amount			%		Currency Impact
Intermodal	$	23,087	$	—	$	23,087	$	22,049	$	1,038		4.7	%	$	1,038		4.7	%	$	(1,109	)
Coal & Coke	16,462		69		16,393		20,122		(3,660		)	(18.2	)%	(3,729		)	(18.5	)%	(12		)
Farm & Food Products	17,393		92		17,301		17,440		(47		)	(0.3	)%	(139		)	(0.8	)%	(613		)
Pulp & Paper	15,789		285		15,504		15,480		309			2.0	%	24			0.2	%	(136		)
Metallic Ores	16,491		1,718		14,773		13,926		2,565			18.4	%	847			6.1	%	(693		)
Metals	15,531		1,347		14,184		11,686		3,845			32.9	%	2,498			21.4	%	(102		)
Minerals & Stone	13,202		283		12,919		12,513		689			5.5	%	406			3.2	%	(184		)
Chemicals & Plastics	13,841		2,400		11,441		11,376		2,465			21.7	%	65			0.6	%	(65		)
Lumber & Forest Products	8,701		26		8,675		8,224		477			5.8	%	451			5.5	%	(16		)
Petroleum Products	6,732		117		6,615		5,932		800			13.5	%	683			11.5	%	(46		)
Auto & Auto Parts	2,115		—		2,115		2,203		(88		)	(4.0	)%	(88		)	(4.0	)%	(53		)
Other	4,832		60		4,772		5,837		(1,005		)	(17.2	)%	(1,065		)	(18.2	)%	(4		)
Total freight revenues	$	154,176	$	6,397	$	147,779	$	146,788	$	7,388		5.0	%	$	991		0.7	%	$	(3,033	)

The following information discusses the significant changes in freight revenues from existing operations by commodity group. Changes in average freight revenues per carload in a commodity group can be impacted by changes in customer

rates, fuel surcharges, change in foreign currency exchange rates, as well as changes in the mix of customer traffic within a commodity group.

Intermodal revenues increased $1.0 million, or 4.7%. Intermodal traffic volume increased 1,487 carloads, or 9.8%, which increased revenues by $2.1 million, while average freight revenues per carload decreased 4.6%, which decreased revenues by $1.0 million, primarily due to the depreciation of the Australian dollar relative to the United States dollar. The carload increase was primarily due to increased traffic in Australia.

Coal and coke revenues decreased $3.7 million, or 18.5%. Coal and coke traffic volume decreased 7,834 carloads, or 16.5%, which decreased revenues by $3.2 million, while average freight revenues per carload decreased 2.4%, which decreased revenues by $0.5 million. The decrease in traffic was driven by customer-specific circumstances (such as temporary plant shut-downs, high inventory and a plant closing) as well as lower natural gas prices and lower levels of export coal.

Metallic ores revenues increased $0.8 million, or 6.1%. Effective January 1, 2012, a metallic ores customer in Australia switched its mode of transportation from using wagons to using containers. As a result, our metallic ores traffic count increased 1,715 for an equivalent volume of product shipped. Otherwise, metallic ores traffic volume increased 268 carloads and average revenues per carload increased 2.5%. The increase in average freight revenues per carload was partially offset by a $0.7 million decrease due to the depreciation of the Australian and Canadian dollars relative to the United States dollar.

Metals revenues increased $2.5 million, or 21.4%. Average freight revenues per carload increased 16.3%, which increased revenues by $1.9 million, and metals traffic volume increased 994 carloads, or 4.5%, which increased revenues by $0.6 million. The carload increase was primarily due to the expansion of a plant we serve in the southern United States.

Petroleum products revenues increased $0.7 million, or 11.5%. Average freight revenues per carload increased 6.3%, which increased revenues by $0.4 million, and petroleum products traffic volume increased 349 carloads, or 5.0%, which increased revenues by $0.3 million.

Other freight revenues decreased $1.1 million, or 18.2%. Other freight traffic volume decreased 13,893 carloads, or 60.1%, primarily driven by a decline in coal-related haulage traffic.

Freight revenues from all remaining commodities increased by $0.7 million.

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Non-Freight Revenues

The following table sets forth non-freight revenues for the three months ended June 30, 2012 and 2011 (dollars in thousands):



	2012				2011
	Amount		% of Total		Amount		% of Total
Railcar switching	$	33,082	52.3	%	$	32,108	51.1	%
Car hire and rental income	5,314		8.4	%	5,740		9.2	%
Fuel sales to third parties	4,338		6.9	%	4,592		7.3	%
Demurrage and storage	6,564		10.4	%	5,529		8.8	%
Car repair services	2,110		3.3	%	2,203		3.5	%
Other non-freight revenues	11,835		18.7	%	12,629		20.1	%
Total non-freight revenues	$	63,243	100.0	%	$	62,801	100.0	%

The following table sets forth non-freight revenues by new operations and existing operations for the three months ended June 30, 2012 and 2011 (dollars in thousands):



	2012						2011		Increase/( Decrease) in Total Operations					Increase/ (Decrease) in Existing Operations					Currency Impact
	Total Operations		New Operations		Existing Operations		Total Operations		Amount			%		Amount			%		Currency Impact
Railcar switching	$	33,082	$	134	$	32,948	$	32,108	$	974		3.0	%	$	840		2.6	%	$	(859	)
Car hire and rental income	5,314		120		5,194		5,740		(426		)	(7.4	)%	(546		)	(9.5	)%	(113		)
Fuel sales to third parties	4,338		—		4,338		4,592		(254		)	(5.5	)%	(254		)	(5.5	)%	—
Demurrage and storage	6,564		90		6,474		5,529		1,035			18.7	%	945			17.1	%	(32		)
Car repair services	2,110		124		1,986		2,203		(93		)	(4.2	)%	(217		)	(9.9	)%	(16		)
Other non-freight revenues	11,835		5		11,830		12,629		(794		)	(6.3	)%	(799		)	(6.3	)%	(371		)
Total non-freight revenues	$	63,243	$	473	$	62,770	$	62,801	$	442		0.7	%	$	(31	)	—	%	$	(1,391	)

Non-freight revenues increased $0.4 million, or 0.7%, to $63.2 million in the three months ended June 30, 2012, compared with $62.8 million in the three months ended June 30, 2011. The increase in non-freight revenues included $0.5 million from new operations. The increase in non-freight revenues from existing operations was entirely offset by a $1.4 million decrease due to the depreciation of the Australian and Canadian dollars and the Euro relative to the United States dollar.

The following information discusses the significant changes in non-freight revenues from existing operations.

Railcar switching revenues increased $0.8 million, or 2.6%. The increase was due to a $1.3 million increase in industrial switching revenues primarily due to new and expanded customer service contracts and a $0.4 million increase in port switching revenues, partially offset by a $0.9 million decrease due to the depreciation of the Australian and Canadian dollars and the Euro relative to the United States dollar.

Fuel sales to third parties decreased $0.3 million, or 5.5%, and included a $0.2 million decrease resulting from a 4.5% decrease in the average price per gallon.

Demurrage and storage revenues increased $0.9 million, or 17.1%. The increase was primarily due to an increase in the number of third-party rail cars being stored in the United States.

Other non-freight revenues decreased $0.8 million, or 6.3%. The decrease was primarily due to the closure of our drayage (trucking) business in the fourth quarter of 2011.

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Operating Expenses

Overview

Operating expenses were $154.9 million in the three months ended June 30, 2012, compared with $158.4 million in the three months ended June 30, 2011, a decrease of $3.5 million, or 2.2%. The decrease in operating expenses was attributable to a decrease of $7.4 million from existing operations, partially offset by $3.9 million from new operations. The decrease from existing operations in the three months ended June 30, 2012 was primarily due to a $5.1 million increase in gain on sale of assets, a $4.2 million increase in gain on insurance recoveries and a $2.7 million decrease due to the depreciation of the Australian and Canadian dollars and the Euro relative to the United States dollar, partially offset by an increase in other expenses of $5.3 million primarily due to increased property related expenses and business/corporate development and consulting costs.

Operating Ratios

Our operating ratio, defined as total operating expenses divided by total operating revenues, was 71.3% in the three months ended June 30, 2012, compared with 75.5% in the three months ended June 30, 2011. Changes in foreign currency exchange rates can have a material impact on our operating revenues and operating expenses. However, the net impact of these foreign currency translation effects should not have a material impact on our operating ratio.

The following table sets forth a comparison of our operating expenses for the three months ended June 30, 2012 and 2011 (dollars in thousands):



	2012					2011					Currency Impact
	Amount			% of Operating Revenues		Amount			% of Operating Revenues		Currency Impact
Labor and benefits	$	61,366		28.3	%	$	58,966		28.1	%	$	(985	)
Equipment rents	8,967			4.1	%	10,986			5.2	%	(257		)
Purchased services	19,304			8.9	%	19,705			9.4	%	(762		)
Depreciation and amortization	18,334			8.4	%	16,297			7.8	%	(329		)
Diesel fuel used in operations	21,134			9.8	%	22,654			10.8	%	—
Diesel fuel sold to third parties	4,111			1.9	%	4,500			2.1	%	—
Casualties and insurance	5,943			2.7	%	6,228			3.0	%	(103		)
Materials	6,783			3.1	%	6,090			2.9	%	(67		)
Net gain on sale of assets	(6,199		)	(2.9	)%	(1,088		)	(0.5	)%	60
Gain on insurance recoveries	(5,186		)	(2.4	)%