10-Q 1 body10-q20070930.txt QUARTERLY UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2007 _ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0-16704 ------- PROVIDENCE AND WORCESTER RAILROAD COMPANY --------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) --------------------------------------------------------------------------- Rhode Island 05-0344399 ----------------------------- -------------------------- (State or other jurisdiction of I.R.S. Employer Identification No. incorporation or organization) 75 Hammond Street, Worcester, Massachusetts 01610 ----------------------------- -------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508) 755-4000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.) YES X NO ___ --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (check one) Large accelerated filer___ Accelerated filer___ Non-accelerated filer X --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ___ NO X --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of November 12, 2007, the registrant has 4,550,930 shares of common stock, par value $.50 per share, outstanding. PROVIDENCE AND WORCESTER RAILROAD COMPANY Index Part I - Financial Information Item 1 - Financial Statements (Unaudited): Balance Sheets - September 30, 2007 (Unaudited) and December 31, 2006........................................... 3 Statements of Operations (Unaudited) - Three and Nine Months Ended September 30, 2007 and 2006........................................................ 4 Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2007 and 2006........................ 5 Notes to Financial Statements (Unaudited)....................... 6-10 Item 2 -Management's Discussion and Analysis of Financial Condition and Results of Operations ............................11-15 Item 3 -Quantitative and Qualitative Disclosures About Market Risk... 15 Item 4 -Controls and Procedures...................................... 15 Part II - Other Information: Item 5 - Reports on Form 8-K......................................... 15 Item 6 - Exhibits.................................................... 16 Signatures ............................................................... 17 2 Item 1. Financial Statements ----------------------------- PROVIDENCE AND WORCESTER RAILROAD COMPANY BALANCE SHEETS (Dollars in Thousands Except Per Share Amounts) ASSETS September 30,December 31, 2007 2006 (Unaudited) ------- ------- Current Assets: Cash and cash equivalents ........................... $ 135 $ 1,253 Accounts receivable, net of allowance for doubtful accounts of $175 in 2007 and 2006 ......... 3,743 3,244 Materials and supplies .............................. 1,317 1,483 Prepaid expenses and other current assets ........... 149 148 Deferred income taxes ............................... 359 347 ------- ------- Total Current Assets ............................... 5,703 6,475 Property and Equipment, net .......................... 78,032 76,591 Land Held for Development ............................ 11,958 11,958 ------- ------- Total Assets ......................................... $95,693 $95,024 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable, bank ................................. $ 1,200 $ -- Accounts payable .................................... 3,307 2,717 Accrued expenses .................................... 1,522 1,433 ------- ------- Total Current Liabilities .......................... 6,029 4,150 ------- ------- Profit-Sharing Plan Contribution ..................... -- 178 ------- ------- Deferred Income Taxes ................................ 11,733 12,051 ------- ------- Deferred Grant Income ................................ 8,120 8,021 ------- ------- Commitments and Contingent Liabilities ............... Shareholders' Equity: Preferred stock, 10% noncumulative, $50 par value; authorized, issued and outstanding 640 shares in 2007 and 2006 ........................ 32 32 Common stock, $.50 par value; authorized 15,000,000 shares; issued and outstanding 4,549,928 shares in 2007 and 4,534,056 shares in 2006 ..................................... 2,275 2,267 Additional paid-in capital .......................... 31,040 30,680 Retained earnings ................................... 36,464 37,645 ------- ------- Total Shareholders' Equity ......................... 69,811 70,624 ------- ------- Total Liabilities and Shareholders' Equity ........... $95,693 $95,024 ======= ======= The accompanying notes are an integral part of the financial statements. 3 PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF OPERATIONS (Unaudited) (Dollars in Thousands Except Per Share Amounts) Three Months Ended Nine Months Ended September 30, September 30, 2007 2006 2007 2006 (as restated, (as restated, see Note 2) see Note 2) ------- ------ -------- ------- Revenues: Operating Revenues ................ $ 7,296 $7,786 $ 19,453 $ 21,636 Other Income ...................... 159 682 752 1,106 ------- ------ -------- ------- Total Revenues ................. 7,455 8,468 20,205 22,742 ------- ------ -------- ------- Operating Expenses: Maintenance of way and structures ...................... 881 1,002 3,095 3,559 Maintenance of equipment ......... 885 820 2,654 2,640 Transportation ................... 2,191 2,035 6,237 6,241 General and administrative ....... 1,336 1,173 3,932 3,332 Depreciation ..................... 707 690 2,122 2,071 Taxes, other than income taxes ........................... 580 572 1,746 1,741 Car hire, net .................... 282 349 651 875 Employee retirement plans ........ 59 215 177 329 Track usage fees ................. 253 278 554 614 ------- ------ -------- ------- Total Operating Expenses ........ 7,174 7,134 21,168 21,402 ------- ------ -------- ------- Income (Loss) before Income Taxes ............................ 281 1,334 (963) 1,340 Provision for Income Taxes (Benefit) ........................ 100 425 (330) 441 ------- ------ -------- ------- Net Income (Loss) ................. 181 909 (633) 899 Preferred Stock Dividends ......... -- -- 3 3 ------- ------ -------- ------- Net Income (Loss) Available to Common Shareholders. ............. $ 181 $ 909 $ (636) $ 896 ======= ======= ======= ======= Basic and Diluted Income (Loss) Per Common Share .......... $ .04 $ .20 $ (.14) $ .20 ======= ======= ======= ======= The accompanying notes are an integral part of the financial statements. 4 PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands) Nine Months Ended September 30, 2007 2006 (as restated, see Note 2) ------- ------- Cash Flows from Operating Activities: Net(loss) income .................................... $ (633) $ 899 Adjustments to reconcile net (loss) income to net cash flows from operating activities: Depreciation ........................................ 2,122 2,071 Amortization of deferred grant income ............... (180) (178) Profit-sharing plan contribution to be funded with common stock ........................... -- 158 Gains from sale and disposal of property, equipment and easements ............................ (285) (638) Deferred income taxes ............................... (330) 371 Share-based compensation ............................ 131 89 Increase (decrease) in cash from: Accounts receivable ................................ (403) (707) Materials and supplies ............................. 166 (43) Prepaid expenses and other ......................... (1) (22) Accounts payable and accrued expenses .............. 775 177 ------- ------- Net cash flows from operating activities ............. 1,362 2,177 ------- ------- Cash Flows from Investing Activities: Purchase of property and equipment ................... (3,659) (2,757) Proceeds from sale and condemnation of property, equipment and easements ................... 285 723 ------- ------- Net cash flows used in investing activities .......... (3,374) (2,034) ------- ------- Cash Flows from Financing Activities: Borrowings under line of credit ...................... 1,200 -- Dividends paid ....................................... (548) (545) Issuance of common shares for stock options exercised and employee stock purchases .............. 59 105 Proceeds from deferred grant income .................. 183 207 ------- ------- Net cash flows from (used in) financing activities .......................................... 894 (233) ------- ------- Decrease in Cash and Cash Equivalents ................ (1,118) (90) Cash and Cash Equivalents, Beginning of Period .............................................. 1,253 2,063 ------- ------- Cash and Cash Equivalents, End of Period ............. $ 135 $ 1,973 ======= ======= Supplemental Disclosure, Cash Paid for Income Taxes ............................................... $ -- $ 51 ======= ======= Non-cash transactions are described in Note 3. The accompanying notes are an integral part of the financial statements. 5 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 (Dollars in Thousands Except Per Share Amounts) 1. In the opinion of management, the accompanying interim financial statements of the Providence and Worcester Railroad Company (the "Company") contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2007 and the results of operations and cash flows for the Interim periods ended September 30, 2007 and 2006. Results for interim periods may not be necessarily indicative of the results to be expected for the year. These interim financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission. 2. Restatement of previously issued financial statements: Prior to the issuance of the 2006 financial statements, the Company determined that its liability for accrued compensated time off had not been recorded. The Company's contracts with the labor unions representing its union employees require the Company to provide employees with accrued compensated time off at the rate of one or one and one half hours, as applicable, for each hour worked in excess of eight hours per day (for a five-day work week) or forty hours per week. The Company did not accrue any liability for such compensation and related payroll taxes in the past. The Company has restated its financial statements for 2004, 2005 and the first three quarters of 2006 to reflect this liability reduced by the related deferred income tax benefit. In addition, the Company has reclassified the proceeds from deferred grant income in the statement of cash flows from investing activities to financing activities. The effects of the restatement adjustments on the Statements of Operations and Cash Flows for the Interim periods Ended September 30, 2006 are summarized as follows: 6 Three Months Ended Nine Months Ended ------------------------ ------------------------ September 30, 2006 ------------------------------------------------- As As Previously Adjust- As Previously Adjust- As Reported ment Restated Reported ment Restated ------------------------ ------------------------ Statement of Operations: Operating Expenses: Maintenance of way and structures .... $ 992 $ 10 $1,002 $ 3,530 $ 29 $ 3,559 Maintenance of equipment ...... 806 14 820 2,600 40 2,640 Taxes, other than income taxes ...... 568 4 572 1,728 13 1,741 ------ ----- ------ -------- ----- ------- Total Operating Expenses .......... 7,106 28 7,134 21,320 82 21,402 Income before Income Taxes ...... 1,362 (28) 1,334 1,422 (82) 1,340 Provision for Income Taxes ...... 435 (10) 425 470 (29) 441 Net Income ......... 927 (18) 909 952 (53) 899 Net Income Attributable to Common Shareholders.$ 927 $ (18) $ 909 $ 949 $ (53) $ 896 Basic and Diluted Income per Common Share ...... $ .20 $ -- $ .20 $ .21 $(.01) $ .20 ====== ===== ====== ======== ===== ======= Statements of Cash Flows: Cash flows from Operating Activities: Net Income ......... $ 952 $ (53) $ 899 Deferred income taxes ...... 400 (29) 371 Accounts payable and accrued expenses .......... 95 82 177 Net cash flows from operating activities ........ $ 2,177 $ -- $ 2,177 ------- ----- ------- Net cash flows used in investing activities ........ $(1,827) $(207) $(2,034) ------- ----- ------- Net cash flows used in financing activities ........ $ (440) $ 207 $ (233) ------- ----- ------- 7 3. Changes in Shareholders' Equity: Total Additional Share Preferred Common Paid-in Retained holders' Stock Stock Capital Earnings Equity ------- ------- ------- ------- ------- Balance December 31,2006 $ 32 $ 2,267 $30,680 $37,645 $70,624 Issuance of 6,291 common shares for stock options exercised, employee stock purchases and employee stock awards ................. 3 97 100 Issuance of 9,581 common shares to fund the Company's 2006 profit-sharing plan contribution (non-cash transaction) ........... 5 173 178 Share-based compensation - options granted ........ 90 90 Dividends: Preferred stock, $5.00 per share ........ (3) (3) Common stock, $.12 per share .............. (545) (545) Net loss for the period ................. (633) (633) ------- ------- ------- ------- ------- Balance, September 30, 2007 ..... $ 32 $ 2,275 $31,040 $36,464 $69,811 ======= ======= ======= ======= ======= During the nine months ended September 30, 2006 the Company issued 13,011 shares of its common stock with an aggregate fair market value of $211 to fund its 2005 profit-sharing plan contribution. 4. Revolving Line of Credit: The Company has a revolving line of credit with its principal bank in the amount of $5,000 expiring May 31, 2009. Borrowings under this line of credit are unsecured, due on demand and bear interest at either the bank's prime rate or one and one half percent over either the one or three month London Interbank Offered Rates. The Company pays no commitment fee on this line and has no compensating balance requirements. During the second quarter of 2007 the Company borrowed $1,200 under this line. This balance was outstanding as of September 30, 2007 at a blended annual interest rate of 7.21%. Interest expense in the amount of $21 and $34 was incurred during the three and nine-month periods ended September 30, 2007, respectively, and is included in general and administrative expense. 8 5. Other Income: Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2007 2006 2007 2006 ------ ------ ------ ------ Gains from sale and disposal of property, equipment and easements, net ...... $ 10 $ 509 $ 285 $ 638 Rentals .............. 145 156 446 425 Interest ............. 4 17 21 43 ------ ------ ------ ------ $ 159 $ 682 $ 752 $1,106 ====== ====== ====== ====== 6. Income Taxes: The Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes. Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. 7. Income (Loss) Per Common Share: Basic income (loss) per common share is computed using the weighted-average number of common shares outstanding during each period. Diluted income (loss) per common share reflects the effect of the Company's outstanding convertible preferred stock and options except where such items would be antidilutive. A reconciliation of weighted-average shares used for the basic computation and that used for the diluted computation is as follows: Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2007 2006 2007 2006 --------- --------- --------- --------- Weighted average shares for basic ............ 4,548,864 4,528,407 4,543,292 4,519,796 Dilutive effect of convertible preferred stock and options .... 79,065 81,706 -- 79,640 --------- --------- --------- --------- Weighted-average shares for diluted .......... 4,627,929 4,610,113 4,543,292 4,599,436 ========= ========= ========= ========= Options to purchase 12,041 shares of common stock which were outstanding for the three month period ended September 30, 2007 and options to purchase 48,137 and 3,821 shares of common stock which were outstanding for the nine month periods ended September 30, 2007 and 2006, respectively, were not included in the computation of diluted income or loss per share because their effect would be antidilutive. Preferred stock convertible into 64,000 shares of common stock was outstanding for the nine month period ended September 30, 2007 but was not included in the computation of the diluted loss per share for that period because its effect would be antidilutive. 9 8. Commitments and Contingent Liabilities: The Company is a defendant in certain lawsuits relating to casualty losses, many of which are covered by insurance subject to a deductible. The Company believes that adequate provision has been made in the financial statements for any expected liabilities which may result from disposition of such lawsuits. On January 29, 2002, the Company received a "Notice of Potential Liability" from the United States Environmental Protection Agency ("EPA") regarding an existing Superfund Site ("the Site") that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially responsible parties ("PRPs") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its status as an owner and/or operator because its railroad property traverses the Site. Via these Notice letters, EPA makes a demand for payment of past costs (identified in the letter as $762) and future costs associated with the response actions taken to address the contamination at the Site, and requests PRPs to indicate their willingness to participate and resolve their potential liability at the Site. The Company has responded to EPA by stating that it does not believe it has any liability for this Site, but that it is interested in cooperating with EPA to address issues concerning liability at the Site. At this point, two other parties have already committed via a consent order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS") phase of the clean-up at the Site, which will take approximately two or more years to complete. After that, EPA will likely seek to negotiate the cost of the Remedial Design and implementation of the remedy at the Site with the PRPs it has identified via these Notice Letters (which presently includes over sixty parties, and is likely to increase after EPA completes its investigation of the identity of PRPs). On December 15, 2003, the EPA issued a second "Notice of Potential Liability" letter to the Company regarding the Site. EPA again identified the Company as a PRP, this time because EPA "believes that [the Company] accepted hazardous substance for transport to disposal or treatment facilities and selected the site for disposal." The Company responded again to EPA stating that it is interested in cooperating with EPA but that it does not believe it has engaged in any activities that caused contamination at the Site. The Company believes that none of its activities caused contamination at the Site, and will contest this claim by EPA and therefore no liability has been accrued for this matter. In connection with the EPA claim described above, the two parties who have committed to conduct the RI/FS at the Site filed a complaint in the U.S. District Court of Rhode Island against the Company, in an action entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L, on December 18, 2002. The Company was one of about sixty parties named by Plaintiffs, in this suit, to recover response costs incurred in investigating and responding to the releases of hazardous substances at the Site. Plaintiffs alleged that the Company is liable under 42 U.S.C. section 961(a)(3) of CERCLA as an "arranger" or "generator" of waste that ended up at the Site. The Company entered into a Generator Cooperation Agreement with other defendants to allocate costs in responding to this suit, and to share technical costs and information in evaluating the Plaintiffs' claims. Although the Company does not believe it generated any waste that ended up at this Site, or that its activities caused contamination at the Site, the Company paid $45 to settle this suit in March 2006. 9. Dividends: On October 31, 2007, the Company declared a dividend of $.04 per share on its outstanding Common Stock payable November 26, 2007 to shareholders of record on November 12, 2007. 10 PROVIDENCE AND WORCESTER RAILROAD COMPANY ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MDA") which are not historical are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions, however, that actual results could differ materially from those indicated in MDA. Critical Accounting Policies ---------------------------- The Securities and Exchange Commission ("SEC") defines critical accounting policies as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The Company's significant accounting policies are described in Note 1 of the Notes to Financial Statements in its Annual Report on Form 10-K. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. Management believes that the Company's policy for the evaluation of long-lived asset impairment is a critical accounting policy. The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When factors indicate that assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining lives of the assets in measuring whether the carrying amounts of the assets are recoverable. Results of Operations --------------------- The following table sets forth the Company's operating revenues by category in dollars and as a percentage of operating revenues: Three Months Ended September 30,Nine Months Ended September 30, ---------------------------- ----------------------------- 2007 2006 2007 2006 ------------- ------------- -------------- -------------- (In thousands, except percentages) Freight Revenues: Conventional carloads ...... $6,517 89.3% 6,484 83.3% $16,731 86.0% $17,884 82.7% Containers ..... 539 7.4 995 12.8 1,960 10.1 2,708 12.5 Other freight related ....... 174 2.4 221 2.8 543 2.8 609 2.8 Other Operating Revenues ....... 66 .9 86 1.1 219 1.1 435 2.0 ------ ----- ------ ----- ------- ----- ------- ----- Total ........ $7,296 100.0% 7,786 100.0% $19,453 100.0% $21,636 100.0% ====== ===== ====== ===== ======= ===== ======= ===== 11 The following table sets forth a comparison of the Company's operating expenses expressed in dollars and as a percentage of operating revenues: Three Months Ended September 30,Nine Months Ended September 30, ---------------------------- ----------------------------- 2007 2006 2007 2006 ------------- ------------- -------------- -------------- (In thousands, except percentages) Salaries, wages, payroll taxes and employee benefits $3,898 53.4% $3,768 48.4% $11,367 58.4% $11,306 52.3% Casualties and insurance ....... 226 3.1 228 2.9 691 3.6 595 2.7 Depreciation ..... 707 9.7 690 8.9 2,122 10.9 2,071 9.6 Diesel fuel ...... 672 9.2 594 7.6 1,733 8.9 1,836 8.5 Car hire, net .... 282 3.9 349 4.5 651 3.4 875 4.0 Purchased services, including legal and professional fees ............ 531 7.3 408 5.2 1,436 7.4 1,400 6.5 Repair and maintenance of equipment ....... 389 5.3 362 4.6 1,309 6.7 1,382 6.4 Track and signal materials ....... 601 8.2 728 9.4 1,591 8.2 2,142 9.9 Track usage fees . 253 3.5 278 3.6 554 2.8 614 2.8 Other materials and supplies .... 324 4.4 312 4.0 930 4.8 863 4.0 Other ............ 400 5.5 491 6.3 1,440 7.4 1,384 6.4 ------ ----- ------ ----- ------- ----- ------ ----- Total ........... 8,283 113.5 8,208 105.4 23,824 122.5 24,468 113.1 Less capitalized and recovered costs .......... 1,109 15.2 1,074 13.8 2,656 13.7 3,066 14.2 ------ ----- ------ ----- ------- ----- ------ ----- Total ......... $7,174 98.3% $7,134 91.6% $21,168 108.8% $21,402 98.9% ====== ===== ====== ===== ======= ===== ======= ===== Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006 Operating Revenues: Operating revenues decreased $2.2 million, or 10.1%, to $19.4 million in the nine months ended September 30, 2007 from $21.6 million in 2006. This decrease is the combined result of a $1.2 million (6.4%) decrease in conventional freight revenues, a $748,000 (27.6%) decrease in container freight revenues, a $66,000 (10.8%) decrease in other freight-related revenues and a $216,000 (49.7%) decrease in other operating revenues. It should be noted that $1.4 million of this decrease in operating revenues occurred during the first quarter of the year. The decrease in conventional freight revenues results from an 11.0% reduction in traffic volume partially offset by a 5.2% increase in the average revenue received per carloading. The Company's conventional carloadings decreased by 2,826 to 22,769 in the nine months ended September 30, 2007 from 25,595 in 2006. While declines in carloadings of coal, steel ingots and contaminated soil were particularly heavy during the first quarter of 2007 they have returned to more normal levels during the second and third quarters of the year. Year-to-date traffic for these commodities has not yet caught up to their 2006 levels, however. In addition the Company has experienced a significant reduction in construction aggregate traffic during the period. Reductions in the volume of other commodities handled has pretty much mirrored the experience of the rest of the North American railroad industry which has seen a 2.6% decline in conventional traffic volume during 2007. On a more positive, note the Company began handling shipments of ethanol and automobiles during the third quarter of the year and anticipates that these commodities will contribute to future traffic growth. The increase in the average revenue received per conventional carloading is largely attributable to a shift in the mix of traffic away from lower rated commodities such as construction aggregates, as well as modest rate increases. 12 The decrease in container freight revenues is the result of a 30.9% reduction in traffic volume somewhat offset by a 4.7% increase in the average revenue received per container. Container traffic volume decreased by 14,867 containers to 33,250 in the nine months ended September 30, 2007 from 48,117 in 2006. Significant rate increases imposed by western United States rail carriers have resulted in steamship lines using "all water" routings to the East Coast for a larger portion of the traffic thereby significantly reducing the volume of containers shipped cross country by rail. The Company is unable to predict if and when this trend will be reversed. The increase in the average revenue received per container is attributable to contractual rate adjustments based upon railroad industry cost indices. The decrease in other freight related revenues is attributable to reduced billings for demurrage resulting from the reduction in conventional traffic. The decrease in other operating revenues results from a reduction in maintenance department billings. Revenues of this nature can vary from period to period depending upon the needs of freight customers and other third parties. Other Income: Other income for the nine-month period decreased by $354,000 to $752,000 in 2007 from $1.1 million in 2006. This decrease is largely attributable to a reduction in gains from the sale and disposal of property equipment and easements which can vary significantly from period to period. Operating Expenses: Operating expenses for the nine month period ended September 30, 2007 decreased by $234,000, or 1.1%, to $21.2 million from $21.4 million in 2006. As discussed in Note 2 to the financial statements the Company has restated its Statement of Operations for the nine months ended September 30, 2006 to reflect its liability for accrued compensated time off and related payroll taxes. The impact of this restatement was to increase operating expenses (salaries, wages, payroll taxes and employee benefits) by $82,000. The Company's operating expenses are of a relatively fixed nature and do not fluctuate proportionally with changes in operating revenues. Provision for Income Taxes (Benefit): The income tax benefit for the nine months ended September 30, 2007 was calculated at 35.5% of the pre-tax loss after excluding non-tax deductible expense items. This is the effective tax rate which the Company expects to realize for all of 2007 before giving effect to any track maintenance credits to which it may be entitled. The provision for income taxes for the nine months ended September 30, 2007 was reduced by $29,000 as part of the restatement previously noted. Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006 Operating Revenues: Operating revenues decreased $490,000, or 6.3%, to $7.3 million in the third quarter of 2007 from $7.8 million in the third quarter of 2006. This decrease is the net result of a $456,000 (45.8%) decrease in container freight revenues, a $47,000 (21.3%) decrease in other freight-related revenues and a $20,000 (23.3%) decrease in other operating revenues offset to a limited degree by a $33,000 (.5%) increase in conventional freight revenues. 13 The significant decrease in container freight revenues experienced during the third quarter results from a 48.1% decrease in traffic volume slightly offset by a 4.4% increase in the average revenue received per container. Container traffic volume decreased by 8,383 containers to 9,043 in the third quarter of 2007 from 17,426 in 2006. As previously discussed this decrease is primarily due to a substantial increase in container traffic being transported to the east coast of the United States by ship rather than being brought overland from the west coast by rail. The increase in the average revenue received per container is attributable to contractual rate adjustments based upon railroad industry cost indices. The relatively small increase in conventional freight revenues results from a 3.2% increase in the average revenue received per conventional carloading largely offset by a 2.6% decrease in traffic volume. The Company's conventional carloadings decreased by 255 to 9,423 in the third quarter of 2007 from 9,678 in 2006. This decline in conventional traffic is virtually identical to that experienced by the railroad industry in North America as a whole. While the Company experienced a reduction in construction aggregate traffic during the quarter it was largely offset by carloadings of other commodities including ethanol and automobiles. The shift in traffic volume away from construction aggregates to higher rated commodities largely accounts for the increase in the average revenue received per carloading. The decrease in other freight-related revenues is primarily related to a decrease in demurrage billings. The decrease in other operating revenues is the result of a reduction in maintenance department billings. Other Income: Other income for the third quarter decreased by $523,000 to $159,000 in 2007 from $682,000 in 2006. The decrease is largely attributable to the fact that no significant gains from the sale of property and easements were realized during the third quarter of 2007. Operating Expenses: Operating expenses for the third quarter increased by $40,000, or .6%, to $7.2 million in 2007 from $7.1 million in 2006. As disclosed in Note 2 to the financial statements the Company has restated its Statement of Operations for the third quarter of 2006 to reflect its liability for accrued compensated time off and related payroll taxes. The impact of this restatement was to increase operating expenses (salaries, wages, payroll taxes and employee benefits) by $28,000. Provision for Income Taxes: The income tax provision for the third quarter of 2007 is 35.6% of pre tax income which is the approximate effective rate which the Company expects to realize for the year. The income tax provision for the third quarter of 2007 was increased by $10,000 as a result of the restatement of the Statement of Operations as previously discussed. Liquidity and Capital Resources ------------------------------- During the first nine months of 2007 the Company generated $1.4 million of cash from its operations. Total cash and cash equivalents decreased by $1.1 million for the period. The principal utilization of cash during the period, other than for operations, was for expenditures for property and equipment and for the payment of dividends. During the second quarter of 2007, the Company borrowed $1.2 million under its revolving line of credit, at interest rates ranging from 6.82% to 8.25%, for working capital purposes. In November 2007 the Company repaid $200,000 of these borrowings and intends to make additional repayments as sufficient surplus cash is generated. 14 In management's opinion, cash generated from operations during the remainder of 2007 will be sufficient to enable the Company to meet its operating expenses and capital expenditure and dividend requirements, as well as to make repayments on the borrowings under its revolving line of credit. Seasonality ----------- Historically, the Company's operating revenues are lowest for the first quarter due to the absence of construction aggregate shipments during a portion of this period and to winter weather conditions. Item 3. Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------------------------------ Cash and Equivalents As of September 30, 2007, the Company is exposed to market risks which primarily include changes in U.S. interest rates. The Company's revolving line of credit agreement provides for borrowings which bear interest at variable rates based on either prime rate or one and one half percent over either the one or three month London Interbank Offered Rates. The Company had $1,200,000 of borrowings outstanding pursuant to the revolving line of credit agreement at September 30, 2007. The Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company's financial position, results of operations, and cash flows should not be material. Item 4. Controls and Procedures ------------------------------- As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Treasurer. Based upon that evaluation, the Chief Executive Officer and the Treasurer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There was no significant change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to affect, the Company's internal control over financial reporting. PART II - Other Information --------------------------- Item 5. Reports on Form 8-K ------------------- (a) A report on Form 8-K was filed on July 11, 2007 in which the Company reported that it had entered into an eight-year collective bargaining agreement with the Brotherhood of Railroad Signalman, whose members constitute all of the Company's maintenance crafts. 15 Item 6. Exhibits -------- (31.1) Rule 13a-14(a) Certification of Chairman of the Board and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31.2) Rule 13a-14(a) Certification of Treasurer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32) Certifications of Chairman of the Board and Chief Executive Officer and Treasurer and Principal Financial Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 16 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROVIDENCE AND WORCESTER RAILROAD COMPANY By: /s/ Robert H. Eder --------------------------- Robert H. Eder, Chairman of the Board and Chief Executive Officer By: /s/ Robert J. Easton --------------------------- Robert J. Easton Treasurer and Chief Financial Officer DATED: November 14, 2007 17 EXHIBIT 31.1 Providence and Worcester Railroad Company Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, ROBERT H. EDER, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Providence and Worcester Railroad Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on our evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: November 14, 2007 By: /s/ Robert H. Eder --------------------------- Robert H. Eder, Chairman of the Board and Chief Executive Officer 18 EXHIBIT 31.2 Providence and Worcester Railroad Company Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, ROBERT J. EASTON certify that: 1. I have reviewed this quarterly report on Form 10-Q of Providence and Worcester Railroad Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on our evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: November 14, 2007 By: /s/ Robert J. Easton --------------------------- Robert J. Easton Treasurer and Chief Financial Officer 19 EXHIBIT 32 PROVIDENCE AND WORCESTER RAILROAD COMPANY CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Providence and Worcester Railroad Company (the Company) on form 10-Q for the quarterly period ended September 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Robert H. Eder, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert H. Eder ----------------------------- Robert H. Eder, Chairman of the Board And Chief Executive Officer November 14, 2007 In connection with the Quarterly Report of Providence and Worcester Railroad Company (the Company) on form 10-Q for the quarterly period ended September 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Robert J. Easton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert J. Easton ----------------------------- Robert J. Easton, Treasurer and Chief Financial Officer November 14, 2007