10-Q 1 body10-q20080630.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 June 30, 2008 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, 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. Large accelerated filer Accelerated filer Non-accelerated filer X Smaller reporting company 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 August 13, 2008, the registrant has 4,796,876 shares of common stock, par value $.50 per share, outstanding. PROVIDENCE AND WORCESTER RAILROAD COMPANY Index Part I - Financial Information Item 1 - Financial Statements: Balance Sheets - June 30, 2008 ((Unaudited) and December 31, 2007.......................................3 Statements of Operations (Unaudited) - Three and Six Months Ended June 30, 2008 and 2007...........4 Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2008 and 2007.........................5 Notes to Financial Statements (Unaudited).................6-8 Item 2 -Management's Discussion and Analysis of Financial Condition and Results of Operations......................9-13 Item 3 -Quantitative and Qualitative Disclosures About Market Risk..........................................13 Item 4 -Controls and Procedures...................................13 Part II - Other Information: Item 4 -Submission of Matters to a Vote of Security Holders.......14 Item 5 -Reports on Form 8-K.......................................14 Item 6 -Exhibits..................................................14 Signatures.............................................................15 2 Item 1. Financial Statements ----------------------------- PROVIDENCE AND WORCESTER RAILROAD COMPANY BALANCE SHEETS (Dollars in Thousands Except Per Share Amounts) ASSETS JUNE 30,DECEMBER 31, 2008 2007 (Unaudited) ------- ------- Current Assets: Cash and cash equivalents ........................... $ 2,046 $ 181 Accounts receivable, net of allowance for doubtful accounts of $130 in 2008 and $150 in 2007 ............................................ 3,484 2,726 Materials and supplies .............................. 1,075 914 Prepaid expenses and other current assets ........... 33 90 Deferred income taxes ............................... 315 325 ------- ------- Total Current Assets ............................... 6,953 4,236 Property and Equipment, net .......................... 79,128 78,964 Land Held for Development ............................ 11,958 11,958 ------- ------- Total Assets ......................................... $98,039 $95,158 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable, bank ................................. $ -- $ 900 Accounts payable .................................... 2,513 2,809 Accrued expenses .................................... 1,330 1,511 ------- ------- Total Current Liabilities .......................... 3,843 5,220 ------- ------- Deferred Income Taxes ................................ 11,669 11,969 ------- ------- Deferred Grant Income ................................ 8,193 8,294 ------- ------- Commitments and Contingent Liabilities................ Shareholders' Equity: Preferred stock, 10% noncumulative, $50 par value; authorized, issued and outstanding 640 shares in 2008 and 2007 ........................ 32 32 Common stock, $.50 par value; authorized 15,000,000 shares; issued and outstanding 4,796,002 shares in 2008 and 4,552,557 shares in 2007 ..................................... 2,398 2,276 Additional paid-in capital .......................... 36,630 31,104 Retained earnings ................................... 35,274 36,263 ------- ------- Total Shareholders' Equity ......................... 74,334 69,675 ------- ------- Total Liabilities and Shareholders' Equity ........... $98,039 $95,158 ======= ======= 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 Six Months Ended June 30, June 30, 2008 2007 2008 2007 ------- ------- ------- ------- Revenues: Operating Revenues .............. $ 8,094 $ 6,972 $14,090 $ 12,157 Other Income .................... 188 478 307 593 ------- ------- ------- ------- Total Revenues ................ 8,282 7,450 14,397 12,750 ------- ------- ------- ------- Operating Expenses: Maintenance of way and structures ..................... 1,150 870 2,524 2,214 Maintenance of equipment ........ 888 929 1,730 1,769 Transportation .................. 2,772 2,092 5,023 4,046 General and administrative ...... 1,213 1,268 2,540 2,596 Depreciation .................... 719 708 1,438 1,415 Taxes, other than income taxes .......................... 595 575 1,211 1,166 Car hire, net ................... 229 186 431 369 Employee retirement plans ....... 58 59 116 118 Track usage fees ................ 178 206 276 301 ------- ------- ------- ------- Total Operating Expenses ....... 7,802 6,893 15,289 13,994 ------- ------- ------- ------- Income (Loss) before Income Taxes ........................... 480 557 (892) (1,244) Provision for Income Taxes (Benefit) ....................... 160 210 (290) (430) ------- ------- ------- ------- Net Income (Loss) ................ 320 347 (602) (814) Preferred Stock Dividends ........ -- -- 3 3 ------- ------- ------- ------- Net Income (Loss) Available to Common Shareholders ............. $ 320 $ 347 $ (605) $ (817) ======= ======= ======= ======= Basic Income (Loss) Per Common Share ........................... $ .07 $ .08 $ (.13) $ (.18) ======= ======= ======= ======= Diluted Income (Loss) Per Common Share .................... $ .07 $ .07 $ (.13) $ (.18) ======= ======= ======= ======= 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) Six Months Ended June 30, 2008 2007 ------- ------- Cash flows from operating activities: Net loss ............................................ $ (602) $ (814) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation ...................................... 1,438 1,415 Amortization of deferred grant income ............. (126) (120) Gains from sale and disposal of property, equipment and easements ......................... (26) (275) Deferred income taxes ............................. (290) (430) Share-based compensation .......................... 103 101 Increase (decrease) in cash from: Accounts receivable ............................. (915) (57) Materials and supplies .......................... (161) (117) Prepaid expenses and other ...................... 57 51 Accounts payable and accrued expenses ........... (333) 451 ------- ------- Net cash flows (used in) from operating activities ......................................... (855) 205 ------- ------- Cash flows from Investing Activities: Purchase of property and equipment .................. (1,746) (2,284) Proceeds from sale of property, equipment and easements ...................................... 26 275 ------- ------- Net cash flows used in investing activities ......... (1,720) (2,009) ------- ------- Cash Flows from Financing Activities: Borrowings (payments) under line of credit .......... (900) 1,200 Dividends paid ...................................... (387) (367) Issuance of common shares to GATX Corporation ........................................ 5,509 -- Issuance of common shares for stock options exercised and employee stock purchases ............. 36 42 Proceeds from deferred grant income ................. 182 74 ------- ------- Net cash flows from financing activities ............ 4,440 949 ------- ------- Increase in Cash and Cash Equivalents ................ 1,865 (855) Cash and Cash Equivalents, Beginning of Period .............................................. 181 1,253 ------- ------- Cash and Cash Equivalents, End of Period ............. $ 2,046 $ 398 ======= ======= The accompanying notes are an integral part of the financial statements. 5 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (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 June 30, 2008 and the results of operations and cash flows for the Interim periods ended June 30, 2008 and 2007. 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, 2007 filed with the Securities and Exchange Commission. 2. Changes in Shareholders' Equity: Total Additional Share Preferred Common Paid-in Retained holders' Stock Stock Capital Earnings Equity ------- ------- ------- ------- ------- Balance December 31,2007. $ 32 $ 2,276 $31,104 $36,263 $69,675 Issuance of 239,523 common shares to GATX Corporation ....... 120 5,389 5,509 Issuance of 3,922 common shares for stock options exercised, employee stock purchases and employee stock awards ................. 2 67 69 Share-based compensation - options granted ........ 70 70 Dividends: Preferred stock, $5.00 per share ........ (3) (3) Common stock, $.08 per share .............. (384) (384) Net loss for the period ................. (602) (602) ----- ------- ------- ------- ------- Balance June 30, 2008 ... $ 32 $ 2,398 $36,630 $35,274 $74,334 ===== ======= ======= ======= ======= On January 10, 2008 the Company entered into an agreement with GATX Corporation ("GATX") whereby GATX acquired 239,523 (approximately 4.99%) newly issued shares of the Company's common stock for $5,509 to be utilized for capital improvements to enhance the Company's railroad lines. The parties also entered into an Exclusive Railcar Supply Agreement whereby GATX has the exclusive right to supply the Company with railcars for certain rail traffic on market- competitive terms to be determined by the two parties. In addition the Company exchanged 72 of its mill gondolas for 137 open-top hoppers owned by GATX. The Company agreed to lease the 72 mill gondolas from GATX under operating leases for a period of up to 7 years at an annual rental of $248. 6 3. Other Income: Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------ 2008 2007 2008 2007 ------ ------ ------ ------ Gains from sale and disposal of property, equipment and easements, net ...... $ 26 $269 $ 26 $275 Rentals .............. 156 202 260 301 Interest ............. 6 7 21 17 ---- ---- ---- ---- $188 $478 $307 $593 ==== ==== ==== ==== 4. 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 stock 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 Six Months Ended June 30, June 30, --------------------- --------------------- 2008 2007 2008 2007 --------- --------- --------- --------- Weighted-average shares for basic ............ 4,794,964 4,546,337 4,782,213 4,540,460 Dilutive effect of convertible preferred stock and stock options 80,949 89,149 -- -- --------- --------- --------- --------- Weighted-average shares for diluted .......... 4,875,813 4,635,486 4,782,213 4,540,460 ========= ========= ========= ========= Options to purchase 8,310 shares of common stock were outstanding for the three-month period ended June 30, 2007, but were not included in the computation of diluted income per share because their effect would be antidilutive. Preferred stock convertible into 64,000 shares of common stock and options to purchase 48,833 and 48,137 shares of common stock were outstanding for the six-month periods ended June 30, 2008 and 2007, respectively. These common stock equivalents were not included in the computation of the diluted loss per share for these periods because their effect would be antidilutive. 5. 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 that includes the J.M. Mills Landfill in 7 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. 6. Dividends: On July 30, 2008, the Company declared a dividend of $.04 per share on its outstanding Common Stock payable August 25, 2008 to shareholders of record August 11, 2008. 8 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 June 30, Six Months Ended June 30, ---------------------------- ----------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- -------------- (In thousands, except percentages) Freight Revenues: Conventional carloads ...... $7,477 92.4% $6,033 86.5% $12,756 90.5% $10,214 84.0% Containers ..... 351 4.3 649 9.3 720 5.1 1,421 11.7 Other freight related ....... 182 2.3 219 3.2 417 3.0 369 3.0 Other Operating Revenues ....... 84 1.0 71 1.0 197 1.4 153 1.3 ------ ----- ------ ----- ------- ----- ------- ----- Total ........ $8,094 100.0% $6,972 100.0% $14,090 100.0% $12,157 100.0% ====== ===== ====== ===== ======= ===== ======= ===== 9 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 June 30, Six Months Ended June 30, ---------------------------- ----------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- -------------- (In thousands, except percentages) Salaries, wages, payroll taxes and employee benefits $3,863 47.7% $3,719 53.3% $7,800 55.3% $7,469 61.4% Casualties and insurance ...... 222 2.7 232 3.3 447 3.2 465 3.8 Depreciation .... 719 8.9 708 10.1 1,438 10.2 1,415 11.6 Diesel fuel ..... 1,215 15.0 597 8.6 1,920 13.6 1,061 8.7 Car hire, net ... 229 2.8 186 2.7 431 3.0 369 3.0 Purchased services, including legal and professional fees ........... 461 5.7 437 6.3 969 6.9 905 7.5 Repair and maintenance of equipment ...... 338 4.2 503 7.2 646 4.6 920 7.6 Track and signal materials ...... 271 3.3 574 8.2 545 3.9 990 8.1 Track usage fees. 177 2.2 206 3.0 275 2.0 301 2.5 Other materials and supplies ... 280 3.5 272 3.9 577 4.1 606 5.0 Other ........... 499 6.2 535 7.7 975 6.9 1,040 8.6 ------ ----- ------ ----- ------- ----- ------- ----- Total .......... 8,274 102.2 7,969 114.3 16,023 113.7 15,541 127.8 Less capitalized and recovered costs ......... 472 5.8 1,076 15.4 734 5.2 1,547 12.7 ------ ----- ------ ----- ------- ----- ------- ----- Total ........ $7,802 96.4% $6,893 98.9% $15,289 108.5% $13,994 115.1% ====== ===== ====== ===== ======= ===== ======= ===== Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007 Operating Revenues: Operating revenues increased $1.9 million, or 15.9%, to $14.1 million in the six months ended June 30, 2008 from $12.2 million in 2007. This increase is the net result of a $2.5 million (24.9%) increase in conventional freight revenues, a $48,000 (13.0%) increase in other freight-related revenues and a $44,000 (28.8%), increase in other operating revenues partially offset by a $701,000 (49.3%) decrease in container freight revenues. The increase in conventional freight revenues is attributable to a 19.8% increase in traffic volume and a 4.2% increase in the average revenue received per conventional carloading. The Company's conventional carloadings increased by 2,648 to 15,994 in the first six months of 2008 from 13,346 in 2007. Shipments of ethanol, coal, automobiles and steel ingots accounted for most of the increase in traffic volume. Ethanol and automobiles are commodities which the Company began hauling during the second half of 2007. These increases were somewhat offset by declines in shipments of construction aggregate, chemicals, building products and other commodities during the period. These decreases appear largely to result from the economic slow-down which the United States economy is currently experiencing. The increase in the average revenue received per conventional carloading is attributable to a shift in the mix of freight toward higher rated commodities, as well as some modest rate increases, including diesel fuel surcharges. 10 The decrease in container freight revenues is the result of a 52.6% decline in traffic volume partially offset by a 6.8% increase in the average revenue received per container. Container traffic volume decreased by 12,728 containers to 11,479 in the first six months of 2008 from 24,207 in 2007. During the second quarter of 2007 the Company began to experience a steady decrease in the volume of its container traffic which has continued into 2008. Among other factors, rate increases imposed by western rail carriers in the United States have resulted in steamship lines using "all water" routings to the East Coast for an increasingly larger portion of container traffic thereby significantly reducing the volume of such traffic shipped cross- country by rail. While the reduced level of traffic seems to have stabilized, the Company is unable to predict if and when container traffic volume may significantly increase. The increase in the average revenue received per container is attributable to contractual rate adjustments based upon railroad industry cost indices and to a change in the mix of containers handled. The increase in other freight related revenues results from increased billings for special train and secondary switching services. This is directly attributable to the significant increase in conventional traffic volume during the six month period. The increase in other operating revenues reflects more maintenance department billings for services rendered to freight customers and other outside parties Other Income: Other income decreased by $286,000 to $307,000 in the six-months ended June 30, 2008 from $593,000 in 2007. The most significant item was a reduction in gains realized from the sale of property, equipment and easements, which revenues can vary significantly from period to period. Operating Expenses: Operating expenses for the first six months of 2008 increased by $1.3 million, or 9.3%, to $15.3 million from $14.0 million in 2007. The increased cost of diesel fuel during the period accounted for $859,000 of this increase. This is primarily the result of significant price increases for petroleum products which have recently occurred. Also contributing to the increased operating expenses is the fact that the Company's maintenance of way personnel have been engaged in fewer capitalized track projects in 2008 than was the case in 2007. Income Tax Benefit: The income tax benefit for the first six months of 2008 is approximately 33% of the pre-tax loss. This is the effective federal income tax rate which the Company expects to realize for 2008 before giving effect to any track maintenance credits to which it may be entitled. Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007 Operating Revenues: Operating revenues increased $1.1 million or 16.1%, to $8.1 million in the second quarter of 2008 from $7.0 million in the second quarter of 2007. This increase is the net result of a $1.4 million (23.9%) increase in conventional freight revenues and a $13,000 (18.3%) increase in other operating revenues partially offset by a $298,000 (45.9%) decrease in container freight revenues and a $37,000 (16.9%) decrease in other freight- related revenues. 11 The increase in conventional freight revenues is attributable to a 17.1% increase in traffic volume and a 5.8% increase in the average revenue received per conventional carloading. The Company's conventional carloadings increased by 1,483 to 10,131 in the second quarter of 2008 from 8,648 in the second quarter of 2007. The reasons for the increases in traffic volume and revenue received per carloading are as previously explained in the discussion of the results of operations for the six months ended June 30, 2008. The decrease in container freight revenues is the result of a 49.3% decline in traffic volume partially offset by a 6.7% increase in the average revenue received per container. Container traffic volume decreased by 5,397 containers to 5,545 in the second quarter of 2008 from the second quarter of 2007. The reasons for the decrease in traffic volume and increase in the average revenue received per container are as previously explained in the discussion of the results of operations for the six months ended June 30, 2008. The decrease in other freight-related revenues during the quarter is attributable to a decline in billings for demurrage charges partially offset by an increase in billings for special train services. The increase in other operating revenues reflects more maintenance department billings for services rendered to freight customers and other outside parties. Other Income: Other income decreased by $290,000 to $188,000 in the second quarter of 2008 from $478,000 in the second quarter of 2007. Reductions in gains realized from the sale of property, equipment and easements, as previously discussed, accounts for the largest portion of this decrease. Operating Expenses: Operating expenses for the second quarter of 2008 increased by $909,000, or 13.2%, to $7.8 million from $6.9 million in the second quarter of 2007. As previously discussed for the six- months ended June 30, 2008, the increased cost of diesel fuel ($618,000) and the decrease in capitalized track projects account for substantially all of this increase. Income Tax Benefit: The income tax benefit for the second quarter of 2008 is approximately 33% of pre-tax loss. This is the effective federal income tax rate which the Company expects to realize for 2008 before giving effect to any track maintenance credits to which it may be entitled. Liquidity and Capital Resources ------------------------------- In January 2008 the Company, pursuant to an agreement with GATX Corporation ("GATX"), received approximately $5.5 million in cash in exchange for 239,523 newly-issued shares of its common stock which it sold to GATX. This infusion of capital is to be used for future capital improvements to enhance the Company's railroad lines. During the first six months of 2008 the Company's operations consumed $855,000 of cash. Total cash and cash equivalents, however, increased by $1.9 million during the period. The principal utilization of cash during the period, other than for operations, was to pay off the Company's outstanding borrowings under its bank line-of-credit and for capital expenditures and the payment of dividends. 12 In management's opinion cash generated from operations during the remainder of 2008 will be sufficient to enable the Company to meet its operating expenses, routine capital expenditures and dividend requirements. 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 June 30, 2008, the Company is exposed to market risks which primarily include changes in U.S. interest rates. The Company invests cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less. In addition, the Company's revolving line of credit agreement provides for borrowings which bear interest at variable rates based on either the prime rate or one and one half percent over either the one or three month London Interbank Offered Rates. The Company had no borrowings outstanding pursuant to the revolving line of credit agreement at June 30, 2008. 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 and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Treasurer and Chief Financial Officer 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 materially affect, the Company's internal control over financial reporting. 13 PART II - Other Information --------------------------- Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- The Annual Meeting of Shareholders was held on April 30, 2008. Of the 4,793,909 shares of common stock entitled to vote, 4,619,988 shares were present, in person or by proxy. Of the 640 shares of preferred stock entitled to vote, 508 shares were present, in person or by proxy. All directors of the Company are elected on an annual basis and the following were so elected at this Annual Meeting: Richard W. Anderson, Robert H. Eder, John J. Healy and Paul F. Titterton were elected Common Stock Directors. Mr. Anderson received 4,526,292 affirmative votes and 93,696 votes withheld, Mr. Eder received 4,036,405 affirmative votes and 583,583 votes withheld, Mr. Healy received 4,198,600 affirmative votes and 421,388 votes withheld and Mr. Titterton received 4,531,634 affirmative votes and 88,354 votes withheld of common shares. Frank W. Barrett, P. Scott Conti, J. Joseph Garrahy, James C. Garvey, Charles M. McCollam, Jr. and Craig M. Scott were elected Preferred Stock Directors. Each of them received 508 affirmative votes with no votes withheld of preferred shares. Item 5. Reports on Form 8-K ------------------- A report on Form 8-K was filed on May 2, 2008 in which the Company announced that its Board of Directors had voted to transfer the listings of its common stock from the American Stock Exchange to The NASDAQ Stock Market LLC effective May 14, 2008. 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 14 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: August 13, 2008 15 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: August 13, 2008 By: /s/ Robert H. Eder ---------------------------- Robert H. Eder, Chairman of the Board and Chief Executive Officer 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: August 13, 2008 By: /s/ Robert J. Easton ---------------------------- Robert J. Easton Treasurer and Chief Financial Officer EXHIBIT 32 PROVIDENCE AND WORCESTER RAILROAD COMPANY CERTIFICATION 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 June 30, 2008, 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 August 13, 2008 In connection with the Quarterly Report of Providence and Worcester Railroad Company ("the Company") on form 10-Q for the quarterly period ended June 30, 2008, 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 August 13, 2008