UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

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

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 þ 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 þ 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 þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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 9, 2011, the registrant had 4,830,503 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 — September 30, 2011 and December 31, 2010			3
Condensed Statements of Operations — Three and Nine Months Ended September 30, 2011 and 2010			4
Condensed Statements of Cash Flows — Nine Months Ended September 30, 2011 and 2010			5
Notes to Condensed Financial Statements			6-10
Item 2 —Management’s Discussion and Analysis of Financial Condition and Results of Operations			11-16
Item 3 —Quantitative and Qualitative Disclosures about Market Risk			16
Item 4 —Controls and Procedures			17
Part II — Other Information:
Item 5 — Other Information			18
Item 6 Exhibits			18
Signatures			19
EX-31.1
EX-31.2
EX-32
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

Part I — Financial Information

Item 1. Financial Statements

PROVIDENCE AND WORCESTER RAILROAD COMPANY

CONDENSED BALANCE SHEETS
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)

		September 30,				December 31,
		2011				2010
ASSETS
Current Assets:
Cash and cash equivalents		$	515			$	1,517
Receivables:
Trade receivable, net of allowance for doubtful accounts of $55 in 2011 and 2010			3,638				2,849
Note receivable, less allowance of $60 in 2011 and 2010			309				37
Materials and supplies			634				552
Prepaid expenses and other current assets			600				382
Deferred income taxes			240				240
Total Current Assets			5,936				5,577
Note receivable, less current portion			—				347
Property and Equipment, net			84,309				79,595
Land Held for Development			12,457				12,457
Total Assets		$	102,702			$	97,976
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Borrowings under line of credit		$	400			$	900
Current portion of long term debt			118				—
Accounts payable			3,941				3,029
Accrued expenses			1,551				1,751
Total Current Liabilities			6,010				5,680
Long term debt, net of current portion			3,852				—
Deferred Income Taxes			12,391				11,596
Deferred Grant Income			7,865				8,063
Other			39				40
Commitments and Contingent Liabilities
Shareholders’ Equity:
Preferred stock, 10% noncumulative, $50 par value; authorized, issued and outstanding 640 shares in 2011 and 2010			32				32
Common stock, $.50 par value; authorized 15,000,000 shares; issued and outstanding 4,830,503 shares in 2011 and 4,822,650 shares in 2010			2,415				2,411
Additional paid-in capital			37,247				37,045
Retained earnings			32,851				33,109
Total Shareholders’ Equity			72,545				72,597
Total Liabilities and Shareholders’ Equity		$	102,702			$	97,976

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

PROVIDENCE AND WORCESTER RAILROAD COMPANY

CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenues:
Operating Revenues		$	8,321			$	7,467			$	22,945			$	21,244
Other Income			1,380				286				1,860				697
Total Revenues			9,701				7,753				24,805				21,941
Operating Expenses:
Maintenance of way and structures			999				1,017				3,016				3,688
Maintenance of equipment			921				865				2,944				2,426
Transportation			2,671				2,141				8,054				6,618
General and administrative			1,216				1,471				3,850				4,062
Depreciation			817				776				2,392				2,328
Taxes, other than income taxes			606				577				1,755				1,807
Car hire, net			230				238				820				612
Employee retirement plans			59				60				182				173
Track usage fees			200				198				585				449
Total Operating Expenses			7,719				7,343				23,598				22,163
Operating income (Loss) before Income Taxes			1,982				410				1,207				(222	)
Interest expense			40				9				56				38
Income (loss) from operations prior to income taxes			1,942				401				1,151				(260	)
Provision for Income Taxes (Benefit)			360				171				825				(67	)
Net Income (Loss)			1,582				230				326				(193	)
Preferred Stock Dividends			—				—				3				3
Net Income (Loss) Available to Common Shareholders.		$	1,582			$	230			$	323			$	(196	)
Basic and Diluted Income (Loss) Per Common Share		$	.32			$	.05			$	.07			$	(.04	)
Weighted-Average Common Shares Outstanding:
For basic			4,828,286				4,818,312				4,826,126				4,816,276
For diluted			4,897,901				4,888,517				4,898,442				4,816,276

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

PROVIDENCE AND WORCESTER RAILROAD COMPANY

CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

		Nine Months Ended September 30,
		2011				2010
Cash Flows from Operating Activities:
Net income (loss)		$	326			$	(193	)
Adjustments to reconcile the net income (loss) to cash flows from operating activities:
Depreciation			2,392				2,328
Amortization of deferred grant income			(198	)			(194	)
(Gains) losses from sale and disposal of property, equipment and easements			(1,921	)			350
Note receivable			—				(486	)
Deferred income tax benefit			807				(98	)
Share-based compensation			113				94
Increase (decrease) in cash from:
Trade receivable			(789	)			(542	)
Materials and supplies			(82	)			177
Prepaid expenses and other			(218	)			(208	)
Accounts payable and accrued expenses			308				539
Net cash flows from operating activities			738				1,767
Cash flows from Investing Activities:
Purchase of property and equipment			(6,715	)			(1,732	)
Proceeds from note receivable			75				10
Proceeds from sale of property, equipment and easements			1,921				350
Net cash flows used in investing activities			(4,719	)			(1,372	)
Cash Flows from Financing Activities:
Borrowings (payments) under line of credit			(500	)			1,000
Proceeds from long term debt			4,000				—
Repayments of long term debt			(30	)			—
Dividends paid			(584	)			(582	)
Issuance of common shares for stock options exercised and employee stock purchases			93				52
Net cash flows from financing activities			2,979				470
Increase (decrease) in Cash and Cash Equivalents			(1,002	)			865
Cash and Cash Equivalents, Beginning of Period			1,517				157
Cash and Cash Equivalents, End of Period		$	515			$	1,022
Supplemental Disclosures:
Cash paid for interest		$	104			$	37
Property and equipment included in accounts payable and accrued expenses		$	391			$	—

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

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

(Dollars in Thousands Except Per Share Amounts)

1. Basis of Presentation

1.		In the opinion of management, the accompanying interim financial statements of 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, 2011, the results of operations for the three and nine months ended September 30, 2011 and 2010 and cash flows for the nine months ended September 30, 2011 and 2010. Results for interim periods may not be necessarily indicative of the results to be expected for the full 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, 2010 filed with the Securities and Exchange Commission.

Certain amounts in the 2010 financial statements have been reclassified to conform with the current presentation.

2.		Recent Accounting Pronouncements:

The Company reviews new accounting standards as issued. Although some of these accounting standards may be applicable to the Company, the Company has not identified any standards that it believes merit further discussion. The Company expects none of the recent accounting pronouncements will have a significant impact on its financial statements.

3.		Note Receivable and Subsequent Event:

In conjunction with a settlement agreement with an existing customer, the Company accepted an unsecured promissory note in the face amount of $486 thousand, whereby the Company receives monthly installments of $10 thousand including interest at 3.91% through January 2015, the maturity date. In October 2011, the customer and the Company agreed to settle the remaining amounts outstanding for $300 thousand. The Company received payment of $300 thousand in October 2011, and executed a release concurrently.

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES CONDENSED TO FINANCIAL STATEMENTS (Unaudited)—(Continued)
(Dollars in Thousands Except Per Share Amounts)

4.

Changes in Shareholders’ Equity:

										Additional								Total
		Preferred				Common				Paid-in				Retained				Shareholders’
		Stock				Stock				Capital				Earnings				Equity
Balance December 31, 2010		$	32			$	2,411			$	37,045			$	33,109			$	72,597
Issuance of 7,082 common shares for stock options exercised, employee stock purchases and employee stock awards							4				100								104
Share-based compensation, options granted											102								102
Dividends:
Preferred stock, $5.00 per share															(3	)			(3	)
Common stock, $.12 per share															(581	)			(581	)
Net income for the period															326				326
Balance September 30, 2011		$	32			$	2,415			$	37,247			$	32,851			$	72,545

5.

Debt:

Revolving Line of Credit

In June 2011, the Company extended its revolving line of credit facility in the amount of $5 million from a commercial bank. The line of credit facility matures on June 25, 2013. 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. It is subject to financial and non-financial covenants including maintenance of a minimum net worth and restrictions on the incurrence of additional indebtedness, as well as the sale or encumbrance of its assets. At September 30, 2011, $400 thousand was outstanding under this line of credit.

Long term debt

In December 2010, the Company entered into an unsecured loan agreement with the same commercial bank as the revolving line of credit in order to borrow up to $4 million for rehabilitation of the Willimantic Branch (“Construction Loan”). The Construction Loan requires payments of interest only for the first six months accruing at the bank’s prime rate. After the initial six month period, the Construction Loan converted to a 10 year term loan with a 20 year amortization period and bears interest at the Federal Home Loan Bank of Boston 5/20 rate plus 3% (5.18% as of the conversion date). The Company has the right to prepay the balance or any part thereof out of internally-generated funds without penalty. No amounts were outstanding as of December 31, 2010. The outstanding balance of the Construction Loan converted to a term loan under the terms stated above during June 2011 and the first payment on the term loan was made during July 2011. The Construction Loan is subject to financial and non-financial covenants, including maintenance of minimum net worth and minimum debt service coverage.

The carrying value of the Company’s debt facilities approximated its fair value at September 30, 2011 which was estimated using current borrowing rates available to the Company.

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES CONDENSED TO FINANCIAL STATEMENTS (Unaudited)—(Continued)
(Dollars in Thousands Except Per Share Amounts)

6.

Other Income:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Gains (losses) from sale and disposal of property, equipment and easements, net		$	—			$	(350	)		$	1			$	(350	)
Proceeds from legal settlement			1,242				—				1,242				—
Rentals			77				147				431				497
Interest			5				—				12				1
Other			56				489				174				549
		$	1,380			$	286			$	1,860			$	697

The Company received $1.2 million in July 2011 for settlement of certain legal proceedings and the grant of a permanent easement.

7.

Track Maintenance Agreement:

In the second quarter of 2011, the Company entered into a track maintenance agreement with an unrelated third party customer (“Shipper”). The Shipper paid for qualifying railroad track maintenance expenditures during 2011 in consideration of the assignment of railroad track miles which permits the Shipper to claim certain federal tax credits pursuant to Internal Revenue Code Section 45G. During 2011, the Company received $869 thousand, net of related expenses and credits, which offsets maintenance of way expenses. Since the authorizing federal legislation for 2010 track maintenance credits was not renewed by Congress until December 2010, no amounts were received during the three and nine months ended September 30, 2010 for 2010 track maintenance credits.

8.

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.

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES CONDENSED TO FINANCIAL STATEMENTS (Unaudited)—(Continued)
(Dollars in Thousands Except Per Share Amounts)

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,
		2011				2010				2011				2010
Weighted-average shares for basic			4,828,286				4,818,312				4,826,126				4,816,276
Dilutive effect of convertible preferred stock and stock options			69,615				70,205				72,316				—
Weighted-average shares for diluted			4,897,901				4,888,517				4,898,442				4,816,276

		Options to purchase 59,244 shares of common stock were outstanding for the three and nine-month periods ended September 30, 2011. Options to purchase 55,952 shares of common stock were outstanding for the three and nine-month periods ended September 30, 2010. For the three month periods ended September 30, 2011 and 2010, 5,615 and 6,205 of outstanding options to purchase common shares were included in the computation of diluted earnings per share (EPS). The remaining outstanding options to purchase common stock were not included in the computation of diluted EPS because the options exercise price was greater than the average market prices of the Company’s common stock.
		For the nine month period ended September 30, 2011, 8,316 of outstanding options to purchase common shares were included in the computation of diluted earnings per share (EPS). The remaining outstanding options to purchase common stock were not included in the computation of diluted EPS because the options exercise price was greater than the average market prices of the Company’s common stock. The options, which expire at various times, were still outstanding at September 30, 2011.
		Preferred stock convertible into 64,000 shares of common stock was outstanding for the three and nine-month periods ended September 30, 2011 and 2010. For the three month periods ended September 30, 2011 and 2010 and for the nine month period ended September 30, 2011, 64,000 shares of the Company’s common stock were included in the diluted EPS. For the nine month period ended September 30, 2010, the 64,000 shares of the Company’s common stock were not included as the effect would be anitdilutive.

9.

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

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES CONDENSED TO FINANCIAL STATEMENTS (Unaudited) — (Continued)
(Dollars in Thousands Except Per Share Amounts)

		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. § 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 thousand to settle this suit in March 2006.

10.

Dividends:

On October 26, 2011, the Company declared a dividend of $.04 per share on its outstanding Common Stock payable November 23, 2011 to shareholders of record on November 9, 2011.

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. 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, 2010.

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 ability to comply with financial and non-financial covenants contained in our revolving line of credit and long 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;
	•		our dependence upon our key customers, executives and other key employees and our ability to renegotiate our union contracts.

Recent Accounting Pronouncements

The Company reviews new accounting standards as issued. Although some of these accounting standards may be applicable to the Company, the Company has not identified any standards that it believes merit further discussion. The Company expects none of the recent accounting pronouncements will have a significant impact on its financial statements.

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,
		2011								2010								2011								2010
		(In thousands, except percentages)
Freight Revenues:
Conventional carloads		$	7,791				93.6	%		$	7,133				95.5	%		$	21,130				92.1	%		$	19,624				92.4	%
Containers			179				2.2				208				2.8				570				2.5				515				2.4
Other freight related			152				1.8				54				0.7				485				2.1				431				2.0
Other Operating Revenues			199				2.4				72				1.0				760				3.3				674				3.2
Total		$	8,321				100.0	%		$	7,467				100.0	%		$	22,945				100.0	%		$	21,244				100.0	%

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,
		2011								2010								2011								2010
		(In thousands, except percentages)
Salaries, wages, payroll taxes and employee benefits		$	4,097				49.2	%		$	4,147				55.5	%		$	11,994				52.3	%		$	11,811				55.6	%
Casualties and insurance			214				2.6				119				1.6				524				2.3				710				3.3
Depreciation			817				9.8				776				10.4				2,392				10.4				2,328				11.0
Diesel fuel			911				10.9				626				8.4				3,026				13.2				1,896				8.9
Car hire, net			230				2.8				238				3.2				820				3.6				612				2.9
Purchased services, including legal and professional fees			860				10.3				792				10.6				2,336				10.2				1,951				9.2
Repair and maintenance of equipment			204				2.5				276				3.7				899				3.9				848				4.0
Track and signal materials			798				9.6				353				4.7				1,225				5.3				1,084				5.1
Track usage fees			200				2.4				198				2.6				585				2.5				449				2.1
Other materials and supplies			289				3.5				288				3.9				895				3.9				634				3.0
Other			492				5.9				429				5.7				1,546				6.7				1,404				6.6
Total			9,112				109.5				8,242				110.3				26,242				114.3				23,727				111.7
Less capitalized and recovered costs			1,393				16.7				899				12.0				2,644				11.5				1,564				7.4
Total		$	7,719				92.8	%		$	7,343				98.3	%		$	23,598				102.8	%		$	22,163				104.3	%

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

Operating Revenues:

Operating revenues increased $1.7 million, or 8%, to $22.9 million in the nine months ended September 30, 2011 from $21.2 million in 2010. This increase is the result of a $1.5 million (7.7%) increase in conventional freight revenues, a $55,000 (10.7%) increase in container freight revenues, a $54,000 (12.5%) increase in other freight-related revenues, and an $86,000 (12.8%) increase in other operating revenues.

The increase in conventional freight revenues results from a 1.4% rise in traffic volume and a 6.3% increase in the average revenue received per conventional carloading. The Company’s conventional carloadings increased by 357 to 26,395 in the nine-month period ended September 30, 2011 from 26,038 in 2010.

The number of shipments of most commodities handled by the Company was relatively constant except for increases in automobile shipments during the first nine months of 2011. There was a decrease in coal shipments due to a power plant customer being offline during a substantial portion of the period. The increase in the average revenue received per conventional carloading is due to a shift in the mix of commodities, as well as some rate changes.

The increase in container freight revenues is the result of a 4.7% increase in traffic volume and a 4.9% increase in the average revenue received per container. Container traffic volume increased by 373 to 8,251 in the first nine months of 2011 from 7,878 containers in 2010. This increase in traffic, along with improved economic conditions, contributed to the increase in the average revenue received per container.

The increase in other freight-related revenues and other operating revenues result primarily from overall increase in the number of shipments handled by the Company.

Other Income:

Other income increased by $1,163 million to $1.86 million in the nine-month period ended September 30, 2011 from $697,000 in 2010. The settlement of certain legal proceedings and the granting of a permanent easement for $1.2 million account for the increase.

Operating Expenses:

Operating expenses for the nine-month period ended September 30, 2011 increased by $1.4 million, or 6.5%, to $23.6 million from $22.2 million in 2010. The increase was mainly caused by higher diesel fuel prices and usage ($1.1 million), maintenance of way costs which were offset by tax maintenance credits ($869 thousand) and scrap recoveries ($500 thousand), repair parts for maintenance of equipment ($350 thousand), car hire expenses ($208 thousand), and track usage fees ($136 thousand), which were all associated with changes in the traffic mix, volume and routing.

Interest Expense

Interest expense increased due to the long term debt the Company incurred in order to complete improvements to the Company’s Willimantic Branch.

Provision for Income Tax Benefit/Expense:

The income tax benefit for the nine months ended September 30, 2011 is equal to 72% of the Company’s pre-tax income. This effective rate reflects the federal income tax rate increased by the effect of non-deductible expenses and by the allowance against tax credit carryovers that are reserved based upon the reversal pattern of the Company’s deferred tax assets and liabilities.

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

Operating Revenues:

Operating revenues increased $854,000, or 11.4%, to $8.3 million in the third quarter of 2011 from $7.5 million in the third quarter of 2010. The increase is the result of a $658,000 (9.2%) increase in conventional freight revenues, a $98,000 (181.5%) increase in other freight related revenue, and a $127,000 (176%) increase in other operating revenues, offset by a $29,000 (13.9%) decrease in container freight revenues.

The increase in conventional freight revenues is attributable to a 13.5% increase in the average revenue received per conventional carloading, offset by a 2.8% decrease in conventional traffic volume. Conventional carloading decreased by 283 to 9,949 in the third quarter of 2011 from 9,773 in the third quarter of 2010. The reasons for the increase in average revenue received per carloading and the decrease in conventional traffic volume are the same as for the nine-month period ended September 30, 2011, as previously discussed.

The decrease in container freight revenues for the quarter is the result of a 16.8% decrease traffic volume and a 65.5% decrease in the average revenue received per container. Container traffic volume decreased by 523 to 2,592 in the third quarter of 2011 from 3,115 in the third quarter of 2010. The reason for the decrease in container traffic volume is a shift in the traffic pattern to utilize water-based routes.

The reason for the increase in other freight-related revenues is the same as for the nine-month period ended September 30, 2011, as previously discussed.

Other Income:

Other income increased by $1.1 million to $1.4 million in the third quarter of 2011 from $286,000 in the third quarter 2010. The settlement of certain legal proceedings and the granting of a permanent easement for $1.2 million account for the increase.

Operating Expenses:

Operating expenses for the third quarter of 2011 increased by $376 thousand, or 5.1%, to $7.7 million from $7.3 million in the third quarter of 2010. The principal reasons for this overall increase in costs were associated with the rise of traffic volume as previously discussed for the nine-month period ended September 30, 2011.

Interest Expense

Interest expense increased due to the long term debt the Company incurred in order to complete improvements along the Company’s Willimantic Branch.

Provision for Income Tax Benefit/Expense:

The income tax provision for the third quarter of 2011 is equal to 19% of pre-tax income for reasons discussed for the nine-month period ended September 30, 2011.

Liquidity and Capital Resources

During the nine months ended September 30, 2011, the Company generated $738,000 of cash from operating activities. The Company utilized cash of approximately $4.7 million, the majority of which related to the improvement of the Willimantic Branch. The Company funded the majority of this capital improvement project with its $4 million long term debt obligation and from operating cash flows.

The long term debt requires monthly payments of principal and interest of approximately $30 thousand.

On October 26, 2011, the Company declared a quarterly dividend of approximately $193 thousand ($.04 per common share) to be paid on November 23, 2011. The declaration of future dividends and the amount thereof will depend on the Company’s future earnings, financial factors and other events.

The Company assigned, in the second quarter of 2011, its federal income tax credit under Internal Revenue Code Section 45G to a qualified shipper under substantially similar terms and conditions as it has done in prior years. Net cash proceeds were $869 thousand. The Company expects to assign the remainder of its credits during the fourth quarter of 2011.

The Company’s $5 million revolving line of credit expires June 25, 2013. As of September 30, 2011, $4.6 million remained available.

During October 2011, the Company received $300,000 in full settlement of the outstanding note receivable obligation due to the Company. Concurrent with receipt of the funds accepted in satisfaction of the note receivable, the Company released the customer from its obligations under the promissory note.

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 due to winter weather conditions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Cash and Equivalents

As of September 30, 2011, the Company is exposed to market risks which primarily include changes in U.S. interest rates and the purchase price of diesel fuel.

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 three- quarters percent over the thirty, sixty or ninety day London Interbank Offered Rates (“LIBOR”) with a LIBOR floor of one and one-quarter percent. The Company pays no commitment fee on this line, and has no compensating balance requirements. The Company’s Construction Loan provides a 10 year loan with a 20 year amortization period bearing interest at 5.18%. The Company has the right to prepay the balance or any part thereof out of internally-generated funds without penalty. The Company had no borrowings outstanding pursuant to the Construction Loan at December 31, 2010. 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.

The Company purchases in excess of one million gallons of diesel fuel each year to operate its locomotives. Fuel prices and supplies are influenced significantly by political and economic circumstances. Fuel shortages or price volatility could continue to increase our fuel costs and adversely affect our results of operations.

Inflation

In recent years, with the exception of the cost for diesel fuel, inflation has not had a significant impact on the Company’s operations.

Item 4. Controls and Procedures

Management with the participation of the Company’s 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 and Exchange Act of 1934) as of September 30, 2011. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2011, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weakness described below.

As discussed in Part II, Item 9 “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2010, we identified a material weakness in our internal control over financial reporting because we did not maintain effective controls over the accounting for income taxes, including the determination and reporting of deferred income taxes and the related income tax provision. Specifically, we did not have adequate personnel and other resources to enable us to (i) properly consider and apply U.S. generally accepted accounting principles providing guidance over accounting for income taxes, and (ii) review and monitor the accuracy and completeness of the components of the income tax provision calculations and the related deferred taxes. In addition, until remediated, this material weakness could result in a misstatement described above that would result in a material misstatement to our interim or annual financial statements and disclosures that would not be prevented or detected.

As of September 30, 2011, we have not yet completely remediated the material weakness in our internal control over financial reporting with respect to our processes to accurately report our income tax provision as discussed above. Since the material weakness has been identified, we have undertaken an evaluation of our available resources deployed for the accounting for income taxes and have identified necessary changes to our processes and our allocation of resources as required. Other than as described in this Item 4, there have been no significant changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — Other Information

Item 5.		Other information
		None.

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
(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 September 30, 2011, filed with the Securities and Exchange Commission on August 12, 2011, formatted in eXtensible Business Reporting Language:
(i)		Balance Sheets as of September 30, 2011 and December 31, 2010;
(ii)		Statements of Operations for the Three and Nine Months ended September 30, 2011 and 2010;
(iii)		Statements of Cash Flows for the Nine Months ended September 30, 2011 and 2010; and
(iv)		Notes to Financial Statements.

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.

DATED: November 14, 2011