Providence & Worcester Railroad (PWX) 10-Q 2016 Q2 Quarterly report

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, 2016

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

For the transition period from _______________ to _______________

Commission file number 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 incorporation or organization)	I.R.S. Employer Identification No.
75 Hammond Street, Worcester, Massachusetts	01610
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (508) 755-4000

(Former name, former address and former fiscal year, if changed since last report)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 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 fields).  Yes x No o

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	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o 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 1, 2016, the registrant had 4,866,593 shares of common stock, par value $.50 per share, outstanding.

PROVIDENCE AND WORCESTER RAILROAD COMPANY

Index to Quarterly Report on Form 10-Q

Part I – Financial Information
Item 1 –Financial Statements (Unaudited):
Condensed Balance Sheets – June 30, 2016 (Unaudited) and December 31, 2015	3
Condensed Statements of Operations – Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)	4
Condensed Statements of Cash Flows – Six Months Ended June 30, 2016 and 2015 (Unaudited)	5
Notes to Condensed Financial Statements (Unaudited)	6-9
Item 2 –Management’s Discussion and Analysis of Financial Condition and Results of Operations	10-14
Item 4 –Controls and Procedures	14
Part II – Other Information:
Item 5 –Other Information	15
Item 6 –Exhibits	15
Signatures	16

Part I – Financial Information

Item 1.  Financial Statements

PROVIDENCE AND WORCESTER RAILROAD COMPANY

CONDENSED BALANCE SHEETS

(Dollars in Thousands Except Per Share Amounts)

(Unaudited)

	June 30,		December 31,
	2016		2015
ASSETS
Current Assets:
Cash and cash equivalents	$	8,607	$	6,281
Accounts receivable, net of allowance for doubtful accounts of $160 in 2016    and 2015		5,466		4,977
Materials and supplies		1,208		911
Prepaid expenses and other current assets		146		621
Total Current Assets		15,427		12,790
Property and Equipment, net		91,328		88,910
Land Held for Development		12,457		12,457
Total Assets	$	119,212	$	114,157
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	5,909	$	4,251
Current portion of long-term debt		162		20
Current portion of deferred grant and other income		433		319
Accrued expenses		1,939		1,653
Total Current Liabilities		8,443		6,243
Long-Term Debt, net of current portion		4,828		980
Deferred Income Taxes		13,126		13,602
Deferred Grant and Other Income		13,283		12,714
Shareholders’ Equity:
Preferred stock, 10% noncumulative, $50 par value; authorized, issued and    outstanding 640 shares in 2016 and 2015		32		32
Common stock, $.50 par value; authorized 15,000,000 shares; issued and    outstanding 4,866,593 shares in 2016 and 4,862,693 shares in 2015		2,433		2,432
Additional paid-in capital		38,172		38,050
Retained earnings		38,895		40,104
Total Shareholders’ Equity		79,532		80,618
Total Liabilities and Shareholders’ Equity	$	119,212	$	114,157

The accompanying notes are an integral part of the financial statements.

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PROVIDENCE AND WORCESTER RAILROAD COMPANY

CONDENSED STATEMENTS OF OPERATIONS

(Dollars in Thousands Except Per Share Amounts)

(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016			2015
Operating Revenues	$	8,600	$	9,516	$	15,823		$	16,777
Operating Expenses:
Maintenance of way and structures		1,255		1,229		2,798			2,762
Maintenance of equipment		961		945		2,058			1,707
Transportation		2,314		2,659		4,605			5,451
General and administrative		1,238		1,108		2,606			2,489
Depreciation		1,046		880		2,005			1,757
Taxes, other than income taxes		783		830		1,589			1,563
Car hire, net		333		525		720			908
Employee retirement plans		57		56		113			113
Track usage fees		383		179		638			219
Total Operating Expenses		8,370		8,411		17,132			16,969
Income (loss) from operations		230		1,105		(1,309	)		(192	)
Other income		40		103		49			110
Interest expense		25		—		30			—
Income (loss) from operations prior to income taxes		245		1,208		(1,290	)		(82	)
Provision for income taxes		60		435		(476	)		(12	)
Net Income (Loss)		185		773		(814	)		(70	)
Preferred Stock Dividends		—		—		3			3
Net Income (Loss) Attributable to Common Shareholders	$	185	$	773	$	(817	)	$	(73	)
Net Income (Loss) Per Common Share
Basic	$	.04	$	.16	$	(0.17	)	$	(0.01	)
Diluted	$	.04	$	.16	$	(0.17	)	$	(0.01	)
Weighted-Average Common Shares Outstanding:
For basic		4,867		4,861		4,865			4,860
For diluted		4,989		4,935		4,865			4,860

The accompanying notes are an integral part of the financial statements.

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PROVIDENCE AND WORCESTER RAILROAD COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Six Months Ended June 30,
	2016			2015
Cash Flows from Operating Activities:
Net Loss	$	(814	)	$	(70	)
Adjustments to reconcile the net loss to cash flows from operating    activities:
Depreciation		2,005			1,757
Amortization of deferred grant and other income		(489	)		(471	)
Deferred grant and other income		398			445
Deferred income taxes		(476	)		(12	)
Share-based compensation		93			96
Increase (decrease) in cash from:
Accounts receivable		285			709
Materials and supplies		(297	)		(91	)
Prepaid expenses and other current assets		475			472
Accounts payable and accrued expenses		(153	)		(400	)
Net cash flows provided by operating activities		1,027			2,435
Cash Flows from Investing Activities:
Purchase of property and equipment		(2,326	)		(1,128	)
Net cash flows used in investing activities		(2,326	)		(1,128	)
Cash Flows from Financing Activities:
Dividends paid		(395	)		(392	)
Issuance of common shares for stock options exercised and employee stock    purchases		30			32
Proceeds from long term debt		4,000			—
Repayments on long term debt		(10	)		—
Net cash flows provided by (used in) financing activities		3,625			(360	)
Increase in Cash and Cash Equivalents		2,326			947
Cash and Cash Equivalents, Beginning of Period		6,281			6,414
Cash and Cash Equivalents, End of Period	$	8,607		$	7,361
Supplemental Disclosures:
Cash paid for income taxes	$	310		$	448
Deferred grant income in accounts receivable	$	774		$	-
Property and equipment included in accounts payable	$	2,097		$	570

The accompanying notes are an integral part of the financial statements.

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PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

(Dollars in Thousands Except Per Share Amounts)

1. In the opinion of management, the accompanying interim condensed financial statements of Providence and Worcester Railroad Company (the “Company”) contain all adjustments (consisting solely of normal and recurring adjustments) necessary to present fairly the financial position as of June 30, 2016, the results of operations for the three and six months ended June 30, 2016 and 2015 and cash flows for the six months ended June 30, 2016 and 2015 in accordance with accounting principles generally accepted in the United States.  The accompanying condensed balance sheet as of December 31, 2015, has been derived from audited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission.  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, 2015 filed with the Securities and Exchange Commission.  Results for interim periods may not be necessarily indicative of the results to be expected for the full year.

2. Recent Accounting Pronouncements:

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services.  ASU 2014-09 anticipates companies using more judgment and estimates than under the current guidance. On July 9, 2015, the FASB approved a one year deferral of the effective date of ASU 2014-09. ASU 2014-09 permits the use of retrospective application to period presented or a cumulative effect transition adjustment. The Company is currently evaluating the impact and method of implementing this new guidance on its financial statements and related disclosures.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which, effective for annual and interim reporting periods beginning after December 15, 2016, simplifies the presentation of deferred income taxes, requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. Since early application is permitted, the new standard has been applied in the Company’s financial statements as of December 31, 2015.  

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.The Company is currently evaluating the impact of our pending adoption of the new standard on our financial statements.

3. Changes in Shareholders’ Equity:

					Additional					Total
	Preferred		Common		Paid-in		Retained			Shareholders’
	Stock		Stock		Capital		Earnings			Equity
Balance, December 31, 2015	$	32	$	2,432	$	38,050	$	40,104		$	80,618
Issuance of 1,905 common shares for stock options    exercised, employee stock purchases, and other				1		29					30
Share based compensation – options granted						93					93
Dividends paid:
Preferred stock, $5.00 per share								(3	)		(3	)
Common stock, $.04 per share								(392	)		(392	)
Net loss								(814	)		(814	)
Balance, June 30, 2016	$	32	$	2,433	$	38,172	$	38,895		$	79,532

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PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Dollars in Thousands Except Per Share Amounts)

4. Debt: 

Revolving Line of Credit

The Company has a revolving line of credit facility in the amount of $5,000 from a commercial bank expiring on June 25, 2017. Borrowings under this line of credit are unsecured, due on demand and bear interest at either the bank's prime rate or one and three-quarters percent over the thirty, sixty or ninety day London Interbank Offered Rate ("LIBOR") with a LIBOR floor of one and one-quarter percent. The Company pays no commitment fee on this line of credit and has no compensating balance requirements. The Company is subject to financial and non-financial covenants including maintenance of a minimum net worth and restrictions as to the incurrence of additional indebtedness, as well as the sale or encumbrance of its assets. At June 30, 2016 and December 31, 2015, no amounts were outstanding.

Long-term Debt

The Company entered into a loan agreement with its commercial bank for $5 million in 2014, the majority of which was or will be utilized to rehabilitate four and replace one main line bridges. Once the rehabilitation and replacement are complete, the Company will have the ability to haul freight with a lading of 286,000 pounds on its main line from Worcester, MA to Davisville/Providence RI. As provided in the agreement, the loan requires payments of interest only for twelve months whereupon it converts to a ten year term loan with payments based upon a twenty year amortization.  The loan will bear interest at 4.11% per annum for the life of the loan. The loan is unsecured and subjects the Company to certain financial and non-financial covenants, including the maintenance of certain tangible net worth levels. The Company drew down the remaining $4 million in April 2016.

Based upon amounts the Company currently has outstanding, the maturities of long-term debt are as follows:

2017	$	162
2018	$	169
2019	$	176
2020	$	183
2021	$	191
Thereafter	$	4,109

5. Net Loss per Common Share:

Basic income per common share is computed using the weighted-average number of common shares outstanding during each period.  Diluted income 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,
	2016		2015		2016		2015
Weighted-average shares for basic		4,866,593		4,860,863		4,865,223		4,859,990
Dilutive effect of convertible preferred stock and stock options		122,296		74,327		-		-
Weighted-average shares for diluted		4,988,889		4,935,190		4,865,223		4,859,990

Options to purchase 103,465 and 67,063 shares of common stock were outstanding at June 30, 2016 and 2015, respectively. For the three month periods ended June 30, 2016 and 2015, 58,296 and 10,327 of outstanding options to purchase common shares were included in the computation of diluted earnings per share (EPS). For the six month period ended June 30, 2016 and 2015, no outstanding options were included as the effect would be antidilutive.

7

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Dollars in Thousands Except Per Share Amounts)

Shares of preferred stock convertible into 64,000 shares of common stock were outstanding for the three and six-month periods ended June 30, 2016 and 2015. For the three month periods ended June 30, 2016 and 2015, the 64,000 shares were included in the calculation of diluted earnings per share. For the six month period ended June 30, 2016 and 2015, the 64,000 shares were not included in the calculation of diluted earnings per share as the effect would be antidilutive.

6. 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.

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. § 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. This settlement covered investigation costs; not cleanup costs.

The Government has now selected a remedy for the Site and has indicated that it will negotiate with all of the PRPs at the site to take over and or pay for the cleanup. As it did before, the Company responded 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.

7. Amtrak Agreement

On April 4, 2012, the Company and National Railroad Passenger Corporation (“Amtrak”) entered into the 2012 Settlement and Amendment Agreement (the “2012 Agreement”) which settles certain disputes between the parties and amends, in part, both an Agreement dated January 3, 1978 (the “1978 Agreement”) and an Agreement dated July 9, 1979 by and between Amtrak and the Company.

Pursuant to the Agreement, the Company received a credit for mileage travelled along the Northeast Corridor.  The Company recognized the expense offset relative to Track Usage Fees as the expenses were incurred.  As such, the Company did not record any related assets or liabilities relative to the mileage credit at the date of the settlement.  The Company has recorded the following offsets to Track Usage expense. No credits remained outstanding as of June 30, 2016.

8

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Dollars in Thousands Except Per Share Amounts)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Mileage credit available	$	-	$	288	$	-	$	418
Utilized		-		288		-		418
Mileage credit remaining	$	-	$	-	$	-	$	-

8. Share-Based Compensation:

In April 2015, the Company’s shareholders approved the Providence and Worcester Railroad Company 2015 Equity Incentive Plan (“Plan”), which replaced the Company’s non-qualified stock option plan (“SOP”). In January and April 2016, awards totaling 60,000 options and 70,500 restricted stock units (“RSU”) were issued under the Plan. The option awards vest in accordance with the term of the option agreements (mainly time vested over a 5 year period) and the RSUs are performance based. Each of the options and RSUs vest upon a change in control. Options issued but not exercised under both the SOP and the Equity Incentive Plan totaling 103,465 remain outstanding until they are either exercised or expire.

9. Subsequent events:

On July 27, 2016, the Company declared a dividend of $.04 per share on its outstanding common stock payable August 24, 2016 to shareholders of record as of August 10, 2016.

9

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. The following discussion should be read in conjunction with the Condensed Financial Statements and applicable notes to the Condensed Financial Statements, Item 1.  

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. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. There have been no significant changes to these policies as discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and during the first six months of 2016.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, including, without limitations, statements concerning the conditions in our industry and our operations, economic performance and financial condition, including, in particular, statements relating to our business and strategy.  The words “may,” “might,” “should,” “estimate,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe,” and other similar expressions are intended to identify forward-looking statements and information although not all forward-looking statements include these identifying words. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.  These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties.

In particular, our business might be affected by uncertainties affecting the railroad and transportation industry generally as well as the following, among other factors:

· general economic, financial and political conditions, including downturns affecting the railroad industry and credit markets;

· our relationships with Class I railroads and other carriers;

· legislative and regulatory developments by the Surface Transportation Board, Railroad Retirement Board or the Federal Railroad Administration;

· our ability to comply with financial and non-financial covenants contained in our revolving line of credit and term debt;

· limitations and restrictions on the operation of our business contained in the documents governing our indebtedness;

· increases in transportation costs, including fuel prices, which in some instances may not be passed on to customers;

· competitive pressures, including changes in competitors’ pricing;

· our ability to generate cash flows to invest in the operation of our business; and

· our dependence upon our key customers, executives and other key employees and our ability to renegotiate our union contracts.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in

10

exchange for those goods or services.  ASU 2014-09 anticipates companies using more judgment and estimates than under the current guidance. On July 9, 2015, the FASB approved a one year deferral of the effective date of ASU 2014-09. ASU 2014-09 permits the use of retrospective application to period presented or a cumulative effect transition adjustment. The Company is currently evaluating the impact and method of implementing this new guidance on its financial statements and related disclosures.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which, effective for annual and interim reporting periods beginning after December 15, 2016, simplifies the presentation of deferred income taxes, requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. Since early application is permitted, the new standard has been applied in the Company’s financial statements as of December 31, 2015. Prior periods were not retrospectively adjusted.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of our pending adoption of the new standard on our financial statements.

Results of Operations

The following table sets forth the Company’s operating revenues, exclusive of rental operating revenues of $198 and $175 during the three months ended June 30, 2016 and 2015, respectively, and $372 and $346 during the six months ended June 30, 2016 and 2015, respectively, by category in dollars and as a percentage of operating revenues:

	Three Months Ended June 30,								Six Months Ended June 30,
	2016				2015				2016				2015
	(In thousands, except percentages)
Freight Revenues:
Conventional carloads	$	7,958	94.7	%	$	8,497	91.0	%	$	14,366	93.0	%	$	14,981	91.2	%
Containers		166	2.0			318	3.4			361	2.3			619	3.8
Other freight related		134	1.6			233	2.5			341	2.2			413	2.5
Other Operating Revenues		144	1.7			293	3.1			383	2.5			419	2.5
Total	$	8,402	100.0	%	$	9,341	100.0	%	$	15,451	100.0	%	$	16,432	100.0	%

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The following table sets forth a comparison of the Company’s operating expenses expressed in dollars and as a percentage of operating revenues, exclusive of rental operating revenues:

	Three Months Ended June 30,								Six Months Ended June 30,
	2016				2015				2016				2015
	(In thousands, except percentages)
Salaries, wages, payroll taxes and employee    benefits	$	4,166	49.6	%	$	3,954	42.4	%	$	8,362	54.1	%	$	8,039	48.9	%
Casualties and insurance		329	3.9			371	4.0			697	4.5			899	5.5
Depreciation		1,046	12.4			880	9.4			2,005	13.0			1,757	10.7
Diesel fuel		424	5.0			833	8.9			888	5.7			1,575	9.6
Car hire, net		333	4.0			525	5.6			720	4.7			908	5.5
Purchased services, including legal and    professional fees		733	8.7			630	6.7			1,288	8.3			1,172	7.1
Repair and maintenance of equipment		416	5.0			339	3.6			887	5.7			543	3.3
Track and signal materials		825	9.8			189	2.0			1,049	6.8			416	2.5
Track usage fees		383	4.6			467	5.0			638	4.1			637	3.9
Other materials and supplies		358	4.3			430	4.6			795	5.1			816	5.0
Other		459	5.5			704	7.6			1,169	7.6			1,505	9.1
Total		9,472	112.8			9,322	99.8			18,498	119.6			18,267	111.1
Less capitalized and recovered costs,    including amounts relating to the Amtrak    Agreement		1,102	13.1			911	9.7			1,366	8.8			1,298	7.9
Total	$	8,370	99.7	%	$	8,411	90.1	%	$	17,132	110.6	%	$	16,969	103.2	%

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Operating Revenues:

Operating revenues decreased by $900 thousand, or 5.4%, to $15.5 million in the six months ended June 30, 2016 from $16.4 million in 2015. This decrease is the result of a $615 thousand (4.1%) decrease in revenue from conventional carloads, a $258 thousand (41.6%) decrease in container freight revenues, a $72 thousand (17.4%) decrease in other freight related revenues, and a $36 thousand (8.5%) decrease in other operating revenues.  

The decrease in conventional freight revenues is attributable to a 5.1% decrease in traffic volume, offset in part by a 1.0% increase in the average revenue received per conventional carload. The Company’s conventional carloads decreased by 909 to 16,907 in the first six months of 2016 from 17,816 in 2015.

The number of shipments of most commodities handled by the Company decreased. The majority of the decrease was attributable to shipments of automobiles, plastics, metal and construction products, and other commodities. This decrease was offset, in part, by increases in shipments of chemicals (including ethanol). The increase in the average revenue received per conventional carload is due to a shift of the mix of commodities, the origin of the shipments, as well as some rate changes.  

The decrease in container freight revenues is mainly the result of a 42.3% decrease in traffic volume. Container traffic volume decreased by 3,718 containers to 5,068 containers in the first six months of 2016 from 8,786 containers in 2015 as a result of more international freight being transloaded at the west coast ports to domestic containers.  

The decrease in other freight-related revenues results from decreases in miscellaneous operating revenue while the decrease in other operating revenues reflects a decrease in maintenance department billings for services rendered to freight customers and other outside parties.

Operating Expenses:

Operating expenses for the six-month period ended June 30, 2016 increased by $160 thousand, or 0.9%, to $17.13 million from $16.97 million in 2015. The increase is attributable mainly to increases in payroll related expense ($323 thousand), depreciation expense ($248 thousand), purchased services ($116 thousand), repairs and maintenance expense ($344 thousand) and track and signal materials ($633 thousand).  These increases were offset in part by decreases in casualty related expense ($202 thousand), diesel fuel expense

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($687 thousand), car hire expense ($188 thousand), and other expenses ($336 thousand). The decrease in recovered costs was attributable to less works performed by the Company’s Maintenance of Way department for various state agencies.

Provision for Income Taxes (Benefit):

The income tax benefit for the first six months of 2016 and 2015 is equal to (36.8%) and (14.6%) of the pre-tax loss, resulting principally from the amounts of pre-tax loss for the periods ended. The income tax rate for 2015 represents the effective tax benefit, absent any changes to the valuation allowance against the Company’s deferred tax assets.

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Operating Revenues:

Operating revenues in the second quarter of 2016 decreased by $900 thousand, or 9.6%, to $8.4 million from $9.3 million in the second quarter of 2015.  

The Company’s conventional carloads decreased by 1,083 (10.0%) to 9,697 in the second quarter of 2016 from 10,780 in 2015. The majority of the decrease was attributable to shipments of automobiles, plastics, metal and construction products, and other commodities. This decrease was offset, in part, by increases in shipments of chemicals (including ethanol). The increase in the average revenue received per conventional carload is due to a shift of the mix of commodities, the origin of the shipments, as well as some rate changes.

The decrease in container freight revenues is mainly the result of a 48.5% decrease in traffic volume. Container traffic volume decreased by 2,172 containers to 2,303 containers in the second quarter of 2016 from 4,475 containers in 2015. The reason for the decrease is as previously discussed for the six months ended June 30, 2016.

The decrease in other freight-related revenues results from decreases in miscellaneous operating revenue while the decrease in other operating revenues reflects a decrease in maintenance department billings for services rendered to freight customers and other outside parties.

Operating Expenses:

Operating expenses for the second quarter of 2016 decreased by $40 thousand, or 0.4%, to $8.37 million from $8.41 million in the second quarter of 2015. The decrease is attributable mainly to decreases in diesel fuel expense ($409 thousand), car hire expense ($192 thousand), and other expenses ($245 thousand). These decreases were offset in part by increases in payroll related expense ($212 thousand), depreciation expense ($166 thousand), purchased services ($103 thousand), and track and signal material expenses ($636). The decrease in recovered costs was attributable to less works performed by the Company’s Maintenance of Way department for various state agencies..

Provision for Income Taxes:

The income tax provision for the three month period ended June 30, 2016 and 2015 is equal to approximately 24.4% and 36.0% respectively of pre-tax income. The income tax rate for 2016 represents the effective tax benefit which the Company expects. The income tax rate for 2015 represents the effective tax benefit, absent any changes to the valuation allowance against the Company’s deferred tax assets.

Liquidity and Capital Resources

During the six months ended June 30, 2016, the Company generated $1.0 million of cash from operating activities, used $2.3 million in investing activities, and generated $3.6 million from financing activities.

On July 27, 2016, the Company declared a quarterly dividend of approximately $195 thousand ($.04 per common share) to be paid on August 24, 2016. The declaration of future dividends and the amount thereof will depend on the Company’s future earnings, financial factors and other events

The Company entered into a loan agreement with its commercial bank for $5 million in 2014, the majority of which was or will be utilized to rehabilitate four and replace one main line bridges. Once the rehabilitation and replacement are complete, the Company will have the ability to haul freight with a lading of 286,000 pounds on its main line from Worcester, MA to Davisville/Providence RI. As

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provided in the agreement, the loan requires payments of interest only for twelve months whereupon it converts to a ten year term loan with payments based upon a twenty year amortization. The loan will bear interest at 4.11% per annum for the life of the loan. The loan is unsecured and subjects the Company to certain financial and non-financial covenants, including the maintenance of certain tangible net worth levels. The Company drew down the remaining $4 million in April 2016.

The Company’s $5 million revolving credit line expires on June 25, 2017.  

Item 4. Controls and Procedures

Our management with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a–15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

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. The Company continues to enhance its internal controls over financial reporting, primarily by evaluating and enhancing process and control documentation. Management discusses with and discloses these matters to the Audit Committee of the Board of Directors and the Company’s auditors.

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PART II – Other Information

Item 5. Other information

(a)Reports on Form 8-K were appropriately filed during the quarter ended June 30, 2016.

Item 6. Exhibits

4.1 Notice of long-term debt of the Company that is less than 10% of the assets of the Company

10.7 Restricted Stock Unit Award Agreement – Officers

10.8 2015 Equity Incentive Plan Non-qualified Stock Option Agreement – Officers

10.9 2015 Equity Incentive Plan Non-qualified Stock Option Agreement - Directors

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

32.1 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

101 The following financial information from the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2016, filed with the Securities and Exchange Commission on August 12, 2016, formatted in eXtensible Business Reporting Language:

(i) Balance Sheets as of June 30, 2016 and December 31, 2015;

(ii) Statements of Operations for the Three Months and Six Months ended June 30, 2016 and 2015;

(iii) Statements of Cash Flows for the Six Months ended June 30, 2016 and 2015; and

(iv) Notes to Financial Statements.

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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/ Daniel T. Noreck
	Daniel T. Noreck
	Treasurer and Chief Financial Officer

DATED: August 11, 2016

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