UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2009
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
_____________________________ __________________________
Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.50 par value
________________________________________________________________
(Title of Class)
________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes No X
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _
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 Act). Yes No X
As of June 30, 2009, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $29,135,892. (For this purpose, all
directors of the Registrant are considered affiliates.)
As of March 5, 2010, the Registrant had 4,814,728 shares of Common Stock
outstanding.
Documents Incorporated by Reference -
-------------------------------------
Portions of the Registrant's Proxy Statement for the 2010 Annual Meeting of
Shareholders to be held on April 28, 2010, is incorporated by reference into
Part III of this Form 10-K.
Exhibit Index - Page IV-1.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR
THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 28, 2010.
The Company's Proxy Statement, sample proxy card and 2009 Annual Report on
Form 10-K are available at: www.edocumentview.com/pwx.
Providence and Worcester Railroad Company
FORM 10-K
For the Fiscal Year Ended December 31, 2009
INDEX
PAGE NO.
PART I
ITEM 1. Business I-1
ITEM 1A. Risk Factors I-5
ITEM 1B. Unresolved Staff Comments I-9
ITEM 2. Properties I-9
ITEM 3. Legal Proceedings I-10
ITEM 4. Submission of Matters to a Vote of Security Holders I-11
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder
Matters and Issuer Purchases of Equity Securities II-1
ITEM 6. Selected Financial Data II-3
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations II-4
ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk II-12
ITEM 8. Financial Statements and Supplementary Data II-13
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure II-31
ITEM 9A. Controls and Procedures II-31
ITEM 9B. Other Information II-32
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance III-1
ITEM 11. Executive Compensation III-1
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters III-1
ITEM 13. Certain Relationships and Related Transactions and
Director Independence III-2
ITEM 14. Principal Accounting Fees and Services III-2
PART IV
ITEM 15. Exhibits and Financial Statement Schedules IV-1
Signatures IV-2
Forward Looking Statements
The statements contained in Item 1 "Business", Item 1A "Risk Factors" and Item 7
"Management's Discussions and Analysis of Financial Condition and Results of
Operations" 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, which represent the
Company's beliefs or expectations concerning future events. The Company cautions
that these statements are further qualified by important factors that could
cause results to differ from those in the forward-looking statements to include
the matters listed In Item 1A "Risk Factors".
PART I
Item 1. Business
----------------
Providence and Worcester Railroad Company ("P&W" or "the Company") is a
class II regional freight railroad operating in Massachusetts, Rhode Island,
Connecticut and New York. The Company is the only interstate freight carrier
serving the State of Rhode Island and possesses the exclusive and perpetual
right to conduct freight operations over Amtrak's Northeast Corridor between New
Haven, Connecticut and the Massachusetts/Rhode Island border. Since commencing
independent operations in 1973, the Company, through a series of acquisitions of
connecting lines and trackage rights agreements, has grown from 45 miles of
track to its current system of approximately 516 miles. P&W services the largest
international double-stack intermodal terminal facility in New England in
Worcester, Massachusetts, a strategic location for regional transportation and
distribution enterprises.
The Company transports a wide variety of commodities for its customers,
including automobiles, construction aggregates, iron and steel products,
chemicals, lumber, scrap metals, plastic resins, cement, coal, construction and
demolition debris, and processed foods and edible foodstuffs, such as corn syrup
and vegetable oils. Its customers include Global Industries, Inc., GDF SUEZ
Energy North America, Lehigh Cement, Cargill, Inc., The Dow Chemical Company,
Exxon Mobil Corporation, Frito-Lay, Inc., International Paper Company, Northeast
Utilities, Nucor Steel, Renewable Products Marketing Group and Tilcon
Connecticut, Inc. In 2009, P&W transported 27,632 carloads of freight and 10,465
intermodal containers. The Company also generates income through sales of
properties, grants of easements and licenses and leases of land and tracks.
P&W's connections to multiple Class I railroads, either directly or through
connections with regional and short-line carriers, provide the Company with a
competitive advantage by allowing it to offer various pricing and routing
alternatives to its customers. In addition, the Company's commitment to
maintaining its track and equipment to high standards enables P&W to provide
fast, reliable and efficient service.
Industry Overview
General
Freight railroads are divided into three classes based on operating
revenues for three consecutive years: Class I, $359.6 million or more; Class II,
$28.8 million to $359.6 million; and Class III, less than $28.8 million. As a
result of mergers and consolidations, there are now only seven Class I railroads
in North America. The Class I railroads handle more than 90% of North America's
rail freight business.
The freight rail industry underwent revitalization after the passage of the
Staggers Rail Act in 1980 which deregulated the pricing and types of services
provided by railroads. As a result, railroads were able to achieve significant
productivity gains and operating cost decreases while gaining pricing
flexibility. Freight rail service became more competitive with other
transportation modes with respect to both quality and price. Since 1980, the
volume of freight moved by rail has risen dramatically and profitability has
improved significantly.
One result of revitalization of the industry has been the growth of
regional (over 350 miles) and short-line railroads, which has been fueled by a
trend among Class I railroads to divest certain branch lines in order to focus
on their long-haul core systems. There are now more than 550 of these regional
and short-line railroads. They operate in 47 of the 48 contiguous states
comprising the continental United States, account for 29% of all rail track,
employ about 11% of all rail workers and generate about 9% of all rail revenue.
Generally, freight railroads handle two types of traffic: conventional
carloads and intermodal containers used in the shipment of goods via more than
one mode of transportation, e.g., by ship, rail and truck. By using a
hub-and-spoke approach to shipping, multiple containers can be moved by rail to
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and from an intermodal terminal and then either delivered to their final
destinations by truck or transferred to ship for export. During the periods
1996-1997, commodity shippers increasingly turned to intermodal transportation
principally as an alternative to long-haul trucking. The development of new
intermodal technology, which allows containers to be moved by rail double-
stacked (i.e., stacked one on top of the other) on specially designed railcars,
together with increasing highway traffic congestion, contributed to this trend.
Beginning with the second quarter of 2007 and continuing through 2009, the
number of containers arriving in southern New England by way of landbridge
(across the continental United States) declined, as containers began being
routed from Far East ports directly to East Coast ports over all-water routes.
The economic downturn that began in 2007 and continued through 2009 has
compounded the decline in container volumes.
Regional Developments
Over the past decade, a number of development projects within the Company's
service area have been completed. Some have increased port capacity along the
extensive coastline of southern New England and improved the intermodal
transportation and distribution infrastructure in the region, while others have
improved the Company's connections to Class I carriers servicing southern New
England. This infrastructure presents the Company with multiple opportunities
for increased business and routing options, enhancing its customers' market
access.
Quonset/Davisville
The State of Rhode Island and the federal government are continuing
redevelopment efforts on a 1,000 acre portion of the former naval facility at
Quonset/Davisville for an active port and industrial park that houses a number
of rail-oriented industries and an auto port. Construction of a freight rail
improvement project, providing additional track capacity and Phase 1
double-stack clearances on the Northeast Corridor between Quonset/Davisville and
Boston Switch, the connection of the Northeast Corridor to the Company's
mainline at Central Falls, RI, was completed in October 2006. Shipment of
automobiles by rail commenced in the fall of 2007 with the Company handling 167
autoracks in 2007, 1043 autoracks in 2008 and 1,022 autoracks in 2009.
Port of Providence
Infrastructure improvements undertaken by the Port of Providence and the
Company in 2003, including the installation of paving, lighting and "on dock"
rail, have accommodated substantial growth in the Company's movement of imported
coal to inland markets. Though coal proved to be a significant source of revenue
for the Company during 2008, that traffic declined significantly during 2009.
The Company resumed the movement of coal in January 2010.
In October 2006, the Company initiated rehabilitation of a substantial
portion of its South Providence yard to facilitate handling unit trains of
ethanol. This commodity is being transported by rail throughout the country and
is a component of the gasoline mix available at gasoline service stations
throughout southern New England. Rehabilitation was completed and shipments of
ethanol commenced during the third quarter of 2007. The Company intends to
undertake expansion of track structure in the remainder of the South Providence
yard in 2010.
Middletown/Hartford Line
In 2005, with partial funding from with the state of Connecticut, the
Company restored to active service that portion of the Middletown branch between
Middletown and Hartford, Connecticut. Presently, the Company operates between
Middletown and Rocky Hill.
New London and Willimantic Interchanges
Through its New London interchange with the New England Central Railroad
("NEC"), P&W interchanges traffic with the Canadian National Railway ("CN") and
the Canadian Pacific Railway ("CP"). With the Company's reactivation of the
Willimantic Interchange in late 2007, across a route with improved overhead
clearances to NEC, the Willimantic Branch has become the primary interchange
route to NEC and further strengthened the Company's connections with CP via the
Vermont Rail Systems' Green Mountain Gateway at Bellows Falls, Vermont and CN
via St. Albans, Vermont.
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Railroad Operations
The Company's rail freight system comprises approximately 516 miles of
track. The Company interchanges freight traffic: with CSX Transportation at
Worcester, Massachusetts and at New Haven, Connecticut; with Pan Am Railways
(formerly Springfield Terminal Railway Company) at Worcester, Massachusetts;
with Pan Am Southern at Gardner, Massachusetts; with NEC at New London and
Willimantic, Connecticut; with CN and CP via the NEC; and with New York and
Atlantic Railroad at Fresh Pond Junction on Long Island. Through its
connections, P&W links more than 80 communities on its lines. The Company
operates four classification yards (areas containing tracks used to group
freight cars destined for a particular industry or interchange) located in
Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield and New Haven,
Connecticut.
The Company is dependent upon the railroads with which it interchanges
freight traffic to enable it to properly service its customers at competitive
rates. Failure of any of these connecting railroads to provide adequate service
at reasonable rates can result in a loss of freight customers and revenues.
By agreement with a private operator, the Company services an approved
customs intermodal yard in Worcester. A customs intermodal yard is an area
containing tracks used for the loading and unloading of containers. This yard is
U.S. Customs bonded, and international traffic must be inspected and approved by
U.S. Customs officials. The intermodal yard serves primarily as a terminal for
movement of container traffic from the Far East, Southeast Asia and Europe
destined for points in New England. Container ship lines utilize double-stack
train service through this terminal, though traffic has fallen off since 2006.
P&W is working closely with the terminal operator to develop relationships with
steamship lines involved in international intermodal transportation. In
addition, the Company and CN have entered into an Intermodal Haulage Agreement
with respect to international intermodal containers to and from Canadian ports.
Customers
The Company serves approximately 160 customers in Massachusetts, Rhode
Island, Connecticut and New York. The Company's ten (10) largest customers
account for more than half of its operating revenues. One customer accounted for
10% or more of its total operating revenues in 2009.
Markets
The Company transports a wide variety of commodities for its customers. In
recent years, chemicals and plastics (including ethanol, beginning in 2007) and
construction aggregates were the two largest commodity groups transported by the
Company, constituting 40% and 16%, respectively, of conventional carload freight
revenues in 2009. The following table summarizes the Company's conventional
carload freight revenues by commodity group as a percentage of such revenues:
Commodity 2009 2008 2007
--------- ---- ---- ----
Chemicals and plastics (including ethanol) 40% 36% 37%
Construction aggregates .................. 16 13 17
Coal ..................................... 5 12 8
Metal products ........................... 8 10 9
Food and agricultural products ........... 10 9 12
Forest and paper products ................ 8 9 12
Other (including automobiles) ............ 13 11 5
---- ---- ----
Total .................................... 100% 100% 100%
==== ==== ====
Sales and Marketing
P&W's sales and marketing staff of three people has substantial experience
in pricing and marketing railroad services. The sales and marketing staff
focuses on understanding and addressing the raw material requirements and
transportation needs of its existing customers and businesses on its lines. The
staff grows existing business by maintaining close working relationships with
both customers and connecting carriers. The sales and marketing staff strives to
generate new business for the Company through (i) targeting companies already on
P&W's rail lines but not currently using rail services or not using them to
their full capacity, (ii) working with state and local development officials,
developers and real estate brokers to encourage the development of industry on
the Company's rail lines, and (iii) identifying and targeting the non-rail
transportation of goods into and out of the region in which the Company
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operates. Unlike many other regional and short-line railroads which have access
to a single Class I connection, the Company is able to offer its customers
various pricing and routing alternatives because of its multiple connections to
other carriers.
Safety
An important component of the Company's operating strategy is conducting
safe railroad operations for the benefit and protection of employees, customers
and the communities served by its rail lines. Since commencing active operations
in 1973, the Company has committed significant resources to track maintenance to
minimize the risk of derailments and believes its rail system is in good
condition. In addition, the Company has an employee training program utilizing
classroom instruction and video programs on topics including NORAC Operating
Rules, Safety Rules, Rail Security Awareness plans and Hazardous Materials
Awareness, as well as manufacturer-provided training materials.
Safety of the Company's operations is of paramount importance for the
benefit and protection of the Company's employees, customers and the communities
served by its rail lines. The Company and its employees have continued to make
improvements in preventing injuries while at the same time expanding operations
and the work force.
Rail Traffic
Rail traffic is classified as on-line or overhead traffic. On-line traffic
is traffic that originates or terminates with shippers located on a railroad's
rights-of-way. Overhead traffic passes from one connecting carrier to another
and neither originates nor terminates with shippers located on a railroad's
rights-of-way. Presently, P&W is solely an on-line carrier but may provide
overhead service in the future for certain rail traffic to and from Long Island.
Freight rail rates can be in various forms. Generally, customers are given
a "through" rate, a single amount encompassing the rail transportation of a
commodity from point of origin to point of destination, regardless of the number
of carriers which handle the car. Rates are developed by the carriers based on
the commodity, volume, distance and competitive market considerations. The
entire freight bill is paid either to the originating carrier ("prepaid") or to
the destination carrier ("collect") and divided among all carriers which handle
the move. The basis for the division varies and can be based on factors (or
revenue requirements) independently established by each carrier which comprise
the through rate, or on a percentage basis established by division agreements
among the carriers. A carrier such as P&W, which actually places the car at the
customer's location and attends to the customer's daily switching requirements,
typically receives a share of revenue greater than an amount based simply on
mileage hauled.
Employees
As of December 31, 2009, the Company had 142 full-time employees, 109 of
whom are represented by three railroad labor organizations that are national in
scope. The Company's non-management employees have been represented by unions
since the Company commenced independent operations in 1973.
The Company's initial agreement with the United Transportation Union
covering the trainmen was unusual in the railroad industry since it provided the
Company with discretion in determining crew sizes, eliminated craft distinctions
and provided a guaranteed annual wage for a maximum number of hours worked. The
Company's collective bargaining agreements have been in effect since February
1973 for trainmen, since May 1974 for clerical employees and dispatchers and
since June 1974 for maintenance employees. These contracts do not expire but are
subject to renegotiation after the agreed-upon moratoria. The Company signed
eight year agreements with the United Transportation Union (trainmen) in October
2005, the Transportation Communications International Union (clerical) in August
2006 and the Brotherhood of Railroad Signalmen (maintenance) in July 2007. The
Company considers its employee and labor relations to be good.
Competition
The Company is the only rail carrier serving businesses located on- line.
The Company competes with other carriers, however, in the location of new
rail-oriented businesses in the region. Certain rail competitors, including CSX
Transportation and Norfolk Southern Corp., are substantially larger and better
capitalized than the Company. The Company also competes with other modes of
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transportation, particularly long-haul trucking companies for the transportation
of commodities, and ocean-going vessels for the transportation of containers.
Any improvement in the cost or quality of these alternate modes of
transportation including, for example, legislation granting material increases
in truck size or allowable weight, could increase competition and may materially
adversely affect the Company's business and results of operations. As a means of
competing, P&W strives to offer greater convenience and better service than
competing rail carriers and at costs lower than some competing non-rail
carriers. The Company also competes by participating in efforts to attract new
industry to the areas which it serves.
The Company believes that its ability to grow depends, in part, upon its
ability to acquire additional connecting rail lines. In making acquisitions, P&W
competes with other short-line and regional rail operators, some of which are
larger and have greater financial resources than the Company.
Governmental Regulation
The Company is subject to governmental regulation by the United States
Surface Transportation Board (the "STB"), the Federal Railroad Administration
(the "FRA"), the Transportation Security Administration (the "TSA") and other
federal, state and local regulatory authorities with respect to certain rates
and railroad operations, as well as a variety of health, safety, labor,
environmental and other matters, all of which could potentially affect the
competitive position and profitability of the Company. Additionally, the Company
is subject to STB regulation and may be required to obtain STB approval prior to
its acquisition of any new railroad properties. Management of the Company
believes that the regulatory freedoms granted by the Staggers Rail Act of 1980
(the "Staggers Rail Act") have been beneficial to the Company by giving it
flexibility to adjust prices and operations to respond to market forces and
industry changes. However, various interests, and certain members of the United
States Congress (which has jurisdiction over federal regulation of railroads),
have from time to time expressed their intention to support legislation that
would eliminate or reduce significant freedoms granted by the Staggers Rail Act.
Environmental Matters
The Company's railroad operations and real estate ownership are subject to
extensive federal, state and local environmental laws and regulations
concerning, among other things, emissions to the air, discharges to waters and
the handling, storage, transportation and disposal of waste and other materials.
The Company handles, stores, transports and disposes of petroleum and other
hazardous substances and wastes. The Company also transports hazardous
substances for third parties and arranges for the disposal of hazardous wastes
generated by the Company. The Company believes that it is in compliance with
applicable environmental laws and regulations.
Internet Address and SEC Reports
The Company maintains a website with the address www.pwrr.com. We are not
including the information contained on our website as a part of, or
incorporating it by reference into, this Annual Report on Form 10-K. We make
available free of charge through our website our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments
to these reports, as soon as reasonably practicable after we electronically file
such material with, or furnish such material to, the Securities and Exchange
Commission ("SEC"). We also include on our website our corporate governance
guidelines and the charters for each of the major committees of our board of
directors. In addition, we intend to disclose on our website any amendments to,
or waivers from, our code of business conduct and ethics that are required to be
publicly disclosed pursuant to rules of the SEC.
Item 1A. Risk Factors
---------------------
Fluctuations in Operating Revenues
Historically, the Company's operating revenues have been tied to national
and regional economic conditions, especially those impacting the manufacturing
sector, while the Company's expenses have been relatively inelastic.
Increasingly, the Company's business is impacted by global economic events.
Economic activity worldwide has undergone a sharp decline that began during the
third quarter of 2007 and has continued through 2009. This decline is believed
to affect substantially all segments of the economy including the Company, its
customers and its vendors. The extent and the duration of this downturn and its
impact upon our customers or our business in general cannot be predicted.
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Continuation or further worsening of economic conditions could materially
adversely affect the Company's business and results of operations. In addition,
shifts in the New England economy between manufacturing and service sectors
could materially affect the Company's performance. The Company's operating
revenues and expenses may also fluctuate due to unpredictable events, such as
adverse weather conditions and customer plant closings. While generally the
Company has been able to replace revenues lost due to plant closings through
expansion of existing business or replacement with new customers, there can be
no assurance that it can do so in the future. The occurrence of such
unpredictable events in the future could cause further fluctuations in operating
revenues and expenses and materially adversely affect the Company's financial
performance.
Banking Facility
The Company has a revolving line of credit facility in the amount of $5
million from a commercial bank that expires in June 2011. 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 requirement. The Company is subject to financial
and non-financial covenants, including maintenance of minimum net worth and
restrictions against incurring additional indebtedness, as well as the sale or
encumbrance of Company assets. The Company's inability to comply with its loan
covenants could result in the occurrence of an event of default which, if
neither cured nor waived, could permit acceleration of outstanding indebtedness.
In addition, there is no assurance that the Company will be able to extend the
maturity of its line of credit with its current lender or to replace such
facility with another lender.
Availability of Acquisition and Growth Opportunities and Associated Risks
The Company believes that its ability to grow depends, in part, upon its
ability to acquire additional connecting rail lines. There are a limited number
of acquisition targets in the Company's market. In addition, in making
acquisitions, the Company competes with other short- line and regional rail
operators, some of which are larger and have greater financial resources than
the Company. The growing competition for such acquisitions may cause an increase
in acquisition prices and related costs, resulting in fewer attractive
acquisition opportunities, which could materially adversely affect the Company's
growth. No assurance can be given that the Company will be able to acquire
suitable additional rail lines or that, if acquired, the Company would be able
to successfully operate such additional rail lines.
Acquisitions of additional rail lines may be subject to regulatory review
and approval by the STB. The Company is a Class II railroad and acquisitions
made by Class II railroads are subject to a requirement that employees affected
by an acquisition be paid up to one year's severance.
Competition
For customers located directly on line, which constitute the majority of
the Company's freight business, the Company is the only rail carrier providing
direct service. However, the Company competes with other freight railroads on
the location of new businesses in the region. The Company also competes with
other modes of transportation such as long- haul trucking companies and
ocean-going vessels, including short-sea shipping. Any improvement in the cost,
quality or availability of these alternate modes of transportation, for example,
legislation granting increases in truck size or allowable weight, could increase
this competition and materially affect the Company's business and results of
operations. In addition, the revenues derived from the handling of intermodal
containers could continue to be materially adversely affected by the rerouting
of containers from Far East ports directly to East Coast ports via an all-water
route rather than by way of landbridge.
Customer Concentration and Customer Credit Risk
The Company's ten (10) largest customers accounted for more than half of
the Company's operating revenues for 2009. The Company's business could be
materially adversely affected if any of these customers reduces shipments of
commodities transported by the Company. In addition, our business is subject to
I-6
our customers' credit risks. Default by a significant customer or multiple
customers could adversely affect the Company's operating results, financial
condition and liquidity.
Although in the past the Company has been able to replace revenues lost due to a
reduction in existing customers' rail service requirements, no assurance can be
given that it could do so in the future.
Labor Issues
Substantially all of the Company's non-management employees are represented
by national railroad labor organizations. The Company's inability to
satisfactorily conclude negotiations with unions could materially adversely
affect the Company's operations and financial performance. Similarly, any
protracted work stoppages against the Company's connecting railroads could
materially adversely affect the Company's business and results of operations.
Historically, Congress has intervened in such events to avoid disruptions in
interstate commerce, but there can be no assurance that it would do so in the
future.
All railroad industry employees are covered by the Railroad Retirement Act
and the Railroad Unemployment Insurance Act in lieu of Social Security and other
federal and state unemployment insurance programs, and the Federal Employers
Liability Act in lieu of state workers' compensation. Increases in the taxes
payable pursuant to the Railroad Retirement Act and/or the Railroad Unemployment
Insurance Act would increase the Company's costs of operations.
Relationships with Other Railroads
The railroad industry in North America is dominated by a small number of
large Class I carriers that have substantial market control and negotiating
leverage. A majority of the Company's carloadings is interchanged with a Class I
carrier, CSX Transportation. A decision by CSX Transportation to discontinue
serving routes or to disadvantageously price the transport of certain
commodities could materially adversely affect the Company's business.
The Company's ability to provide rail service to its customers depends in
large part upon its ability to maintain cooperative relationships with all its
connecting carriers with respect to, among other matters, freight rates, car
supply, interchange and trackage rights. A deterioration in the operating
relationships with or service provided by those connecting carriers could
materially adversely affect the Company's business.
Rail Infrastructure and Availability of Government Programs
Certain of the Company's growth opportunities are contingent upon
anticipated improvements to P&W's existing rail infrastructure. No assurance can
be given that the Company will be able to complete such projects as planned.
Unforeseen delays or other problems which prevent completion of such
improvements could materially adversely affect the Company's business and
results of operations. In addition, the Company has worked with federal and
state agencies to improve its rail infrastructure and has been effective in
obtaining federal and state financial support for certain projects. There can be
no assurance, however, that such federal and state programs or funds will be
available in the future or that the Company will be eligible to participate in
such programs. Failure to participate in federal and state programs or to
receive federal or state funding for rail infrastructure improvements would
cause the Company to incur the full cost of those infrastructure improvements
undertaken and completed and significantly increase its costs of rail
infrastructure improvement.
Potential for Increased Governmental Regulation and Mandated Upgrade
to Property
The Company is subject to governmental regulation by the STB, the FRA, the
TSA and other federal, state and local regulatory authorities with respect to
certain rates and railroad operations, as well as a variety of health, safety,
labor, environmental, security and other matters, all of which could potentially
affect the competitive position and profitability of the Company. Management of
the Company believes that the regulatory freedoms granted by the Staggers Rail
Act have been beneficial to the Company by giving it flexibility to adjust
prices and operations to respond to market forces and industry changes. However,
various interests and certain members of the United States House of
Representatives and Senate (which have jurisdiction over the federal regulation
of railroads) have from time to time expressed their intention to support
I-7
legislation that would eliminate or reduce significant freedoms granted by the
Staggers Rail Act. If enacted, these proposals, or court or administrative
rulings to the same effect under current law, could materially adversely affect
the Company's business and results of operations.
Casualty Losses
The Company has obtained insurance coverage for losses arising from
personal injury and for property damage in the event of derailments or other
accidents or occurrences. The Company believes that its insurance coverage is
adequate based on its experience. However, under catastrophic circumstances such
as accidents involving passenger trains or spillage of hazardous materials, the
Company's liability could exceed its insurance limits. The Company transports
hazardous chemicals throughout its system on account of its status as a common
carrier and conducts operations on the Northeast Corridor on which there is
heavy passenger traffic. Insurance is available from only a limited number of
insurers, and there can be no assurance that insurance protection at the
Company's current levels will continue to be available or, if available, will be
obtainable on terms acceptable to the Company. Losses or other liabilities
incurred by the Company which are not covered by insurance or which exceed the
Company's insurance limits could materially adversely affect the Company's
business and results of operation.
Environmental Matters
The Company's railroad operations and real estate ownership are subject to
extensive federal, state and local environmental laws and regulations
concerning, among other things, emissions to the air, discharges to waters and
the handling, storage, transportation and disposal of waste and other materials.
The Company transports hazardous materials and periodically uses hazardous
material in its operations. While the Company believes it is in substantial
compliance with all applicable environmental laws and regulations, any
allegations or findings to the effect that the Company had violated such laws or
regulations could materially adversely affect the Company's business and results
of operations. The Company operates on properties that have been used for rail
operations for over a century. There can be no assurance that historic releases
of hazardous waste or materials will not be discovered, requiring remediation of
Company properties, and that the cost of such remediation would not be material.
Track Maintenance Credits
In 2009, the Company received approximately $975 thousand from its
assignment of tax credits for track maintenance expenditures under Section 45G
of the Internal Revenue Code of 1986. Section 45G expired effective December 31,
2009 and, unless legislation to extend or renew Section 45G or other similar
legislation is enacted, the Company would not be eligible to earn or assign
credits during 2010 or any subsequent period.
Climate Change
The Company is subject to various laws, regulations and other controls
("Climate Controls") with respect to clean air, greenhouse gasses, diesel
emissions and the like. Additional Climate Controls could increase the Company's
operating costs, which in turn could materially adversely affect the Company's
business and results of operations. In addition, Climate Controls could also
affect our customers which consume or burn fossil fuels, including coal-fired
power plants, chemical producers, farmers and manufacturers, including
automakers.
Fuel Costs
Fuel costs were approximately 8.2%, 13.4% and 9.6% of our operating
revenues for the years ended December 31, 2009, December 31, 2008 and December
31, 2007, respectively. Fuel prices and supplies are influenced significantly by
political and economic circumstances. Fuel shortages or unusual price volatility
could increase our fuel costs and adversely affect our results of operations.
I-8
Item 1B. Unresolved Staff Comments
----------------------------------
None
Item 2. Properties
------------------
Track
P&W's rail system extends over approximately 516 miles of track, of which
it owns approximately 163 miles. The Company has the right to use the remaining
353 miles pursuant to perpetual easements and long- term trackage rights
agreements. Under certain of these agreements, the Company pays fees based on
usage.
Virtually all of the mainlines on which the Company operates are in FRA
class 3 condition (allowing 40 m.p.h. speeds) or better. The Company intends to
maintain the mainline tracks which it owns in such excellent condition.
Of the approximately 516 miles that comprise the Company's system, 306
miles, or 58.5%, are located in Connecticut, 95 miles, or 19%, are located in
Massachusetts, 87 miles, or 17%, are located in Rhode Island and 28 miles, or
5.5%, are located in New York.
Rail Facilities
P&W owns land and a building with approximately 69,500 square feet of floor
space in Worcester, Massachusetts. The building houses the Company's executive
and administrative offices and some of the Company's storage space.
Approximately 4,735 square feet are leased to outside tenants. In addition, the
Company owns various maintenance buildings and other structures related to its
railroad operations.
The Company owns and operates three principal classification yards located
in Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield,
Connecticut and also operates a classification yard in New Haven, Connecticut.
In addition, the Company has maintenance facilities in Putnam and Plainfield,
Connecticut and in Worcester, Massachusetts. P&W believes that its executive and
administrative office facilities, classification yards and maintenance
facilities are adequate to support its current level of operations.
Other Properties
The Company owns or has the right to use a total of approximately 130 acres
of real estate located along the principal railroad lines from downtown
Providence through Pawtucket, Rhode Island. Of this acreage, P&W owns
approximately eight acres in Pawtucket and has a perpetual easement for railroad
purposes over the remaining 122 acres.
The Company has invested nearly $12 million in the development of the South
Quay in East Providence, Rhode Island which has resulted in the creation of
approximately 33 acres of waterfront land, located adjacent to a 12 acre site,
also owned by the Company.
P&W actively manages its real estate assets in order to maximize revenues.
The income from property management is derived from sales and leasing of
properties and tracks and grants of easements to government agencies, utility
companies and other parties for the installation of overhead or underground
cables, pipelines and transmission wires as well as recreational uses such as
bike paths.
I-9
Rolling Stock
The following schedule sets forth the rolling stock owned by the Company as
of December 31, 2009:
Description Number
---------- -------
Locomotive ................................... 30
Gondola ...................................... 5
Open-Top Hopper .............................. 137
Flat Car ..................................... 5
Ballast Car .................................. 30
Passenger Equipment .......................... 7
Caboose ...................................... 2
---
Total ..................................... 216
===
The 30 diesel electric locomotives, which include nine pre-owned 3,900
horsepower GE B39-8 locomotives acquired in 2002 and 2003 and four pre-owned GE
B40-8 locomotives acquired in 2004 and 2005, are used on a daily basis, are
maintained to a high standard, comply with all FRA and Association of American
Railroads rules and regulations and are adequate for the needs of the Company's
freight operations. The gondolas, flat cars and ballast cars are considered
modern rail cars and are used in track maintenance and, very occasionally, by
certain P&W customers. The open-top hopper cars are used to support the
Company's coal traffic. Other rail freight customers use their own freight cars
or obtain such equipment from other sources. The ballast cars are used in track
maintenance. From time to time, the Company has leased ballast cars to other
railroads. The passenger equipment and caboose are not utilized in P&W's rail
freight operations but are used on an occasional basis for Company functions,
excursions and charter trips.
In January 2008, simultaneous with the purchase by GATX Corporation of
239,523 shares of common stock of the Company for the purchase price of
$5,509,029 ($23.00/share), the Company and GATX entered into various agreements
including an Exclusive Railcar Supply Agreement (the "ERSA") for a term of five
(5) years to renew automatically for successive one- year periods unless earlier
terminated by either party. Under the ERSA, provided that market-competitive
terms are furnished, GATX became the exclusive supplier of substantially all of
P&W's railcar needs, while various other agreements between the parties provided
for the Company's acquisition of 137 open-top hopper cars, its lease of 72 mill
gondolas, and its lease of 200 automobile-carrying railcars (autoracks).
Equipment
P&W has a state-of-the-art digital touch control dispatching system at its
Worcester operations center permitting two-way radio contact with every train
crew and maintenance vehicle on its lines and a computer-based manual block
dispatching system with safety overrides to enhance dispatching and safety. The
Company maintains a computer facility in Worcester with back-up computer
facilities in Putnam, Connecticut to assure the Company's ability to operate in
the event of disruption of service in Worcester. The Company also has
state-of-the- art automatic train defect detectors at strategic locations which
inspect passing trains and audibly communicate the results to train crews and
dispatchers in order to protect against equipment failure en route.
The Company maintains a modern fleet of track maintenance equipment and
aggressively pursues available opportunities to work with federal and state
agencies for the rehabilitation of bridges, grade crossings and track. The
Company's locomotives that operate on the Northeast Corridor are equipped with
cab signal technology, automatic civil speed enforcement systems and positive
train control (PTC).
In July 2008, the Company installed at its Worcester Engine House a
fifty-ton drop table to facilitate the efficient exchange of wheels on
locomotives and railcars by lowering the wheels beneath the level of the Engine
House floor and across to an adjacent track where exchange with a second wheel
set is made.
Item 3. Legal Proceedings
-------------------------
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
I-10
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. ss. 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 the Site, or that its activities caused
contamination at the Site, the Company paid $45 to settle this suit in March
2006.
In addition to the litigation concerning the Superfund Site, the Company is
defendant in certain lawsuits related to its operations. The Company believes it
has made adequate provisions for any expected liability that may result from the
disposition of pending litigation. Litigation is subject to inherent
uncertainty, however, and an unfavorable outcome could materially adversely
affect the Company's business.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
Reserved.
I-11
Part II
-------
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters and
--------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------
The Common Stock is quoted on the Nasdaq Stock Market, LLC ("NASDAQ") under the
trading symbol "PWX". The following table sets forth, for the periods indicated,
the high and low sale prices per share for the Common Stock as reported on the
NASDAQ. Also included are dividends paid per share of Preferred Stock and Common
Stock during these quarterly periods.
Common Stock
------------
Trading Prices Dividends Paid
-------------- --------------
High Low Preferred Common
---- --- --------- ------
2008
----
First Quarter ........ $20.00 $15.75 $5.00 $ .04
Second Quarter ....... 21.40 18.55 -0- .04
Third Quarter ........ 20.24 14.79 -0- .04
Fourth Quarter ....... 17.18 7.72 -0- .04
2009
----
First Quarter ........ $15.50 $ 8.01 $5.00 $ .04
Second Quarter ....... 12.75 9.05 -0- .04
Third Quarter ........ 12.50 9.62 -0- .04
Fourth Quarter ....... 12.00 9.97 -0- .04
As of February 26, 2010, there were approximately 648 holders of record of the
Company's common stock.
The declaration of cash dividends on both the preferred and the common stock is
made at the discretion of the Board of Directors based on the Company's
earnings, financial condition, capital requirements and other relevant factors
and restrictions.
II-1
PERFORMANCE GRAPH
Prepared by Burnham Securities Inc. for Providence and Worcester
Railroad Company.
5 - Year Return
Providence and Worcester Railroad Company,
U.S. Railroad Index and Russell 2000(R) Index
[GRAPHIC OMITTED]
*Compiled by Burnham Securities Inc.
--------------------------------------------------------------------------------
Index Components: Burlington Northern Santa Fe Corp. (NYSE:BNI), CSX
Corp. (NYSE:CSX), Genesee & Wyoming Inc. (NYSE:GWR), Kansas City
Southern (NYSE:KSU), Norfolk Southern Corp. (NYSE:NSC), Pioneer
Railcorp (OTCPK:PRRR), Providence and Worcester Railroad Co.
(NasdaqGM:PWX) and Union Pacific Corp. (NYSE:UNP)
--------------------------------------------------------------------------------
Fiscal Years Ended December 31
The Russell 2000(R) Index measures the performance of small capitalization US
companies by measuring the performance of the 2,000 smallest securities in the
Russell 3000(R) Index. The U.S. Railroad Index is compiled by Burnham Securities
Inc. and includes 8 railroad- operating companies.
The Board of Directors recognizes that the market price of stock is influenced
by many factors, only one of which is issuer performance. The Company's stock
price may also be influenced by market perception, economic conditions and
government regulation. The stock price performance shown in the graph is not
necessarily an indicator of future price performance.
II-2
Item 6. Selected Financial Data
-------------------------------
The selected financial data set forth below has been derived from the Company's
audited financial statements. The data should be read in conjunction with the
Company's audited financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other information included elsewhere in this annual report on Form 10-K.
The selected historical financial data may not be indicative of future
performance.
Years Ended December 31,
2009 2008 2007 2006 2005
------- ------- ------- ------- -------
(in thousands, except per share amounts)
Income Statement Data:
Operating revenues ........ $ 23,284 $ 29,736 $26,164 $28,451 $26,734
Other income .............. 1,707 1,050 890 1,373 1,208
------- ------- ------- ------- -------
Total Revenues ............ 24,991 30,786 27,054 29,824 27,942
Operating expenses ........ 26,416 30,485 27,856 28,222 26,114
------- ------- ------- ------- -------
(Loss) Income before income
taxes .................... (1,425) 301 (802) 1,602 1,828
Provision (benefit) for
income taxes ............. (468) 135 (150) 560 615
------- ------- ------- ------- -------
Net (loss) income ......... (957) 166 (652) 1,042 1,213
Preferred stock dividend .. 3 3 3 3 3
------- ------- ------- ------- -------
Net (loss) income available
to common shareholders ... $ (960) $ 163 $ (655) $ 1,039 $ 1,210
======= ======= ======= ======= =======
Basic and diluted (loss)
income per common share .. $ (.20) $ .03 $ (.14) $ .23 $ .27
======= ======= ======= ======= =======
Weighted average
shares--basic ............ 4,806 4,790 4,545 4,523 4,496
======= ======= ======= ======= =======
Weighted average
shares--diluted .......... 4,806 4,866 4,545 4,602 4,574
======= ======= ======= ======= =======
Cash dividends per share of
Common Stock ............. $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16
======= ======= ======= ======= =======
December 31,
2009 2008 2007 2006 2005
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Total assets ................ $97,857 $99,010 $95,158 $95,024 $93,484
Shareholders' equity ....... 73,247 74,797 69,675 70,624 69,845
II-3
Item 7. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
The following discussion should be read in connection with the Company's audited
financial statements and notes thereto included elsewhere in this annual report.
Critical Accounting Policies and Estimates
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. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. The following critical accounting policies are a subset of the
Company's significant accounting policies described in Note 1 of the Notes to
Financial Statements. Not all of these significant accounting policies require
management to make difficult, subjective or complex judgments or estimates.
The Company's rail operations are highly capital intensive. Property and
equipment, including land held for development, is stated at historical cost
(including self-construction costs). Self-construction costs for track structure
include material costs for ties, rail, other track materials and ballast; the
cost of direct and supervisory labor, including railroad retirement taxes and
employee benefits; costs for track machinery and equipment (including
depreciation) and various other overhead costs. Major renewals or betterments
are capitalized while routine maintenance and repairs that do not improve or
extend asset lives are charged to expense when incurred. Properties and
equipment are carried at cost and are depreciated over their useful lives. Items
included in track structures with similar physical characteristics, use, date of
installation and expected life are grouped together into separate asset classes
and depreciated by the estimated useful life for the asset class group. Gains or
losses on sales or other dispositions of property are credited or charged to
income.
The Company reviews property and equipment retirements each year in order to
determine whether or not the estimated useful lives are reasonable. Since, in
most instances, assets retired have been fully or substantially depreciated, the
Company has not found it necessary, historically, to make any significant
adjustments to their estimated useful lives. Retirements of track structures are
recorded by removing the historical cost and related accumulated depreciation of
the equipment amount of its oldest track structures with the related gain or
loss being charged to income. Historically, the Company has not had any
significant retirements of track infrastructure which it considers to be
abnormal and not in the normal course of business.
The conclusions and ongoing evaluations of our estimated useful lives may result
in future material changes in the Company's maintenance and capital spending, as
well as revisions to the useful lives of property and equipment which may affect
depreciation rates and expenses.
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 circumstances 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 determining whether
the carrying amounts of the assets are recoverable. If an impairment exists, the
impairment is measured by comparing the carrying value to the fair value. No
impairments were recognized in the three years presented.
Overview
The Company is a regional freight railroad operating in Massachusetts, Rhode
Island, Connecticut and New York.
The Company generates operating revenues primarily from the movement of freight
in both conventional freight cars and in intermodal containers on flat cars over
its rail lines. Freight revenues are recorded at the time delivery is made to
the customer or the connecting carrier. Modest freight-related operating
revenues are derived from demurrage, switching, weighing, special train and
other transportation services. Other operating revenues are derived from
services rendered to freight customers and other outside parties by the
Company's Maintenance of Way, Communications & Signals, and Maintenance of
Equipment departments. Operating revenues also include amortization of deferred
grant income.
II-4
The Company's operating expenses consist of salaries and wages and related
payroll taxes and employee benefits, depreciation, insurance and casualty claim
expense, diesel fuel, car hire, property taxes, materials and supplies,
purchased services, track usage fees and other expenses. Many of the Company's
operating expenses are of a relatively fixed nature and do not increase or
decrease proportionately with increases or decreases in operating revenues
unless the Company's management were to take specific actions to restructure the
Company's operations.
When comparing the Company's results of operations from one year to another, the
following factors should be taken into consideration. First, the Company has
historically experienced fluctuations in operating revenues and expenses due to
unpredictable events such as one-time freight moves and customer plant
expansions and shutdowns. Second, the Company's freight volumes are susceptible
to increases and decreases due to changes in international, national and
regional economic conditions. Third, the volume of capitalized track or
recollectible projects performed by the Company's Maintenance of Way and
Communications & Signals Departments can vary significantly from year to year,
thereby impacting total operating expenses. Fourth, diesel fuel comprises a
significant portion of the Company's operating costs. As fuel prices increase
the Company attempts to recover these costs through surcharges and increased
fees; however, the Company's profitability can be impacted by changes in fuel
prices.
The Company also generates income through sales of properties, grants of
easements and licenses, and leases of land and tracks. Income or loss from sale,
condemnation and disposal of property and equipment and grants of easements is
recorded at the time the transaction is consummated and collectability is
assured. This income varies significantly from year to year.
One of the Company's customers, which ships construction aggregates from three
separate quarries on the Company's rail system to asphalt production plants in
Connecticut and New York, accounted for 11.1%, 10.0% and 13.8% of its operating
revenues in 2009, 2008 and 2007, respectively. The Company does not believe that
this customer will cease to be a rail shipper or will substantially decrease its
freight volume in the foreseeable future. In the event that this customer should
cease or substantially reduce its rail freight operations, management believes
that the Company could restructure its operations to reduce operating costs by
an amount sufficient to largely offset the decrease in operating revenues.
Results of Operations
The following table sets forth the Company's operating revenues by category in
dollars and as a percentage of operating revenues:
Years Ended December 31,
-----------------------------------------------
2009 2008 2007
------------- -------------- -------------
(in thousands, except percentages)
Freight Revenues:
Conventional carloads . $21,028 90.3% $27,113 91.2% $22,682 86.7%
Containers ............ 709 3.0 1,341 4.5 2,389 9.1
Other freight-related . 717 3.1 837 2.8 774 3.0
Other operating revenues 830 3.6 445 1.5 319 1.2
------- ----- ------- ----- ------- -----
Total ................ $23,284 100.0% $29,736 100.0% $26,164 100.0%
======= ===== ======= ===== ======= =====
II-5
The following table sets forth conventional carload freight revenues by
commodity group in dollars and as a percentage of such revenues:
Years Ended December 31,
-----------------------------------------------
2009 2008 2007
------------- -------------- -------------
(in thousands, except percentages)
Chemicals and plastics
(including ethanol) ......... $ 8,348 39.7% $ 9,761 36.0% $ 8,387 37.0%
Construction aggregate ....... 3,428 16.3 3,389 12.5 3,840 16.9
Coal ......................... 1,093 5.2 3,281 12.1 1,818 8.0
Metal products ............... 1,787 8.5 2,793 10.3 2,132 9.4
Food and agricultural products 2,082 9.9 2,522 9.3 2,777 12.2
Forest and paper products .... 1,703 8.1 2,467 9.1 2,756 12.2
Other (including automobiles) 2,587 12.3 2,900 10.7 972 4.3
------- ----- ------- ----- ------- -----
Total ...................... $21,028 100.0% $27,113 100.0% $22,682 100.0%
======= ===== ======= ===== ======= =====
The following table sets forth a comparison of the Company's operating expenses
expressed in dollars and as a percentage of operating revenues:
Years Ended December 31,
-----------------------------------------------
2009 2008 2007
------------- -------------- -------------
(in thousands, except percentages)
Salaries, wages, payroll taxes
and employee benefits . $15,731 67.6% $15,631 52.6% $15,204 58.1%
Casualties and insurance 874 3.7 867 2.9 919 3.5
Depreciation ........... 3,104 13.3 2,941 9.9 2,884 11.0
Diesel fuel ............ 1,904 8.2 3,986 13.4 2,524 9.6
Car hire, net .......... 694 3.0 928 3.1 818 3.1
Purchased services, including
legal and professional fee 2,398 10.3 2,304 7.7 2,037 7.8
Repairs and maintenance of
equipment ............. 1,633 7.0 1,993 6.7 1,711 6.5
Track and signal materials 1,023 4.4 1,716 5.8 2,135 8.2
Track usage fees ....... 537 2.3 633 2.1 615 2.4
Other materials and supplie 943 4.0 1,265 4.3 1,222 4.7
Other .................. 1,786 7.7 1,894 6.4 1,833 7.0
------- ----- ------- ----- ------- -----
Total ................. 30,627 131.5 34,158 114.9 31,902 121.9
Less capitalized and
recovered costs ...... 4,211 18.1 3,673 12.4 4,046 15.4
------- ----- ------- ----- ------- -----
Total ................ $26,416 113.4% $30,485 102.5% $27,856 106.5%
======= ===== ======= ===== ======= =====
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Operating Revenues
Operating Revenues decreased $6.5 million, or 21.8%, to $23.3 million in 2009
from $29.8 million in 2008. This decrease is the net result of a $6.1 million
(22.4%) decrease in conventional freight revenues, a $632 thousand (47.1%)
decrease in container freight revenues and a $120 thousand (14.3%) decrease in
other freight-related revenues partially offset by a $385 thousand (86.5%)
increase in other operating revenues.
The decrease in conventional freight revenues is attributable to an 18.6%
decrease in traffic volume and an 4.6% decrease in the average revenue received
per carloading. The Company's conventional carloadings decreased by 6,321 to
27,632 in 2009 from 33,953 in 2008. Shipments of most commodities handled by the
Company decreased during the year-ended December 31, 2009. Of particular note
are declines in shipments of coal and ethanol. This is primarily attributable to
the continuing state of the United States and world economies and is consistent
with the experience of other railroads in North America. Carloadings for some
new customers have partially offset the overall decrease in conventional traffic
volume. Signs indicating future increases in traffic volume have been mixed and
therefore management cannot definitely predict when economic conditions will
II-6
improve enough to enable the Company to return to operating profitability. The
modest decrease in the average revenue received per conventional carloading is
largely attributable to a reduction in diesel fuel surcharges due to the
significant reduction in the cost of diesel fuel experienced this year.
The decrease in container freight revenues is the result of a 50.0% decline in
traffic volume somewhat offset by a 5.8% increase in the average revenue
received per container. Container traffic volume decreased by 10,473 containers
to 10,465 in 2009 from 20,938 in 2008. This significant decline in traffic
volume continues a trend which began in 2007 in which cross-country container
traffic to the East Coast has shifted from rail to all water routes. Current
economic conditions have further added to this decline in traffic. The increase
in the average revenue received per container is primarily attributable to a
change in the mix of traffic toward higher rated containers.
The decrease in other freight-related revenues results, primarily, from a
decrease in demurrage revenue, consistent with the decrease in conventional
traffic volume and the related car hire expense.
The increase in other operating revenues results from an increase in maintenance
department billings for siding maintenance, flagging and other services rendered
to freight customers and other outside parties. Of particular note is an
increase in flagging services rendered to contractors.
Other Income
Other income increased by $657 thousand to $1.7 million in 2009 from $1.1
million in 2008. The Company received $950 thousand during the second quarter of
2009 for the settlement of certain legal proceedings and the granting of a
permanent easement which accounted for the increase.
Operating Expenses
Operating expenses decreased by $4.1 million, or 13.4%, to $26.4 million in 2009
from $30.5 million in 2008. Reductions in diesel fuel expense due to lower
prices for petroleum products, as well as decreased usage due to reduced traffic
volume, accounted for $2.1 million of this decrease. Also contributing to the
decrease in operating costs is the fact that the Company's Maintenance of Way
personnel were engaged in more projects covered by state grants in 2009 than in
2008, resulting in an increase in material, labor and overhead cost recoveries
in the amount of $311 thousand. Proceeds from the railroad track maintenance
agreement with an unrelated third-party shipping customer, as discussed in Note
8, accounted for $975 thousand of the decrease in operating expenses. Decreases
in other operating expenses were partially offset by increased costs incurred
for the repair and maintenance of locomotives and freight cars.
Provision for Income Taxes (Benefit)
The Company's federal income tax benefit for 2009 was $468 thousand. This was
mainly due to net operating loss carryforwards.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Operating Revenues
Operating Revenues increased $3.6 million, or 13.7%, to $29.8 million in 2008
from $26.2 million in 2007. This increase is the net result of a $4.4 million
(19.5%) increase in conventional freight revenues, a $63 thousand (8.1%)
increase in other freight-related revenues and a $126 thousand (39.5%) increase
in other operating revenues partially offset by a $1.0 million (44.8%) decrease
in container freight revenues.
The increase in conventional freight revenues is attributable to a 10.2%
increase in traffic volume and an 8.4% increase in the average revenue received
per carloading. The Company's conventional carloadings increased by 3,156 to
33,953 in 2008 from 30,797 in 2007. Shipments of ethanol, coal, automobiles and
steel ingots accounted for substantially all of the increase in traffic volume.
Ethanol and automobiles are commodities which the Company began hauling during
the third quarter of 2007. These increases were somewhat offset by decreases in
II-7
shipments of construction aggregates, chemicals (other than ethanol), building
materials and certain other commodities during the year. These decreases appear
to result from the current economic downturn in the United States economy. The
increase in the average revenue received per conventional carloading is
attributable to a shift in the mix of freight hauled toward higher-rated
commodities, as well as some rate increases, including diesel fuel surcharges.
The decrease in container freight revenues is the result of a 48.3% decline in
traffic volume somewhat offset by an 8.6% increase in the average revenue
received per container. Container traffic volume decreased by 19,567 containers
to 20,938 in 2008 from 40,505 in 2007. During the second quarter of 2007 the
Company began to experience a steady decrease in the volume of its container
traffic which continued throughout 2008. Among other factors, rate increases
imposed by western rail carriers in the United States 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. In addition, the current economic
downturn has added to the decline in container traffic volume. The Company is
unable to predict if and when container traffic may significantly increase.
The increase in the average revenue received per container is attributable to
contractual rate adjustments based upon railroad industry cost indices as well
as a change in the mix of containers handled.
The increase in other freight-related revenues is primarily due to an increase
in secondary switching services provided to freight customers. This is directly
related to the increase in conventional traffic volume during the year.
The increase in other operating revenues reflects greater maintenance department
billings for services rendered to freight customers and outside parties.
Other Income
Other income increased by $160 thousand to $1.1 million in 2008 from $890
thousand in 2007. The most significant change was an increase in gains realized
from the sale of property, equipment and easements, which revenues can vary
significantly from year to year.
Operating Expenses
Operating expenses increased by $2.6 million, or 9.4%, to $30.5 million in 2008
from $27.9 million in 2007. Higher expenditures for diesel fuel accounted for
$1.5 million of this increase. This is primarily the result of significantly
higher prices for petroleum products which were in effect for most of the year.
The price of diesel fuel decreased during the fourth quarter of 2008 and such
lower prices have continued into 2009.
Provision for Income Taxes (Benefit)
The provision for income taxes for 2008 is $135 thousand, or 45%, of pre-tax
income compared to 19% in 2007. The rate in 2008 reflects normal nondeductible
expenses compared to a relatively small pre-tax income. The 2007 effective rate
reflects the utilization of track maintenance credits that were freed up by the
operating loss.
Liquidity and Capital Resources
During 2009, 2008 and 2007, the Company generated $3.7 million, $832 thousand
and $3.3 million, respectively, of cash from operating activities. Changes in
working capital increased cash flow from operating activities by $1.5 million
and $2.9 million, in 2009 and 2008, respectively. In 2007, changes in working
capital decreased cash flows from operating activities by $2.8 million.
During 2009, 2008 and 2007, the Company's cash flows used in investing
activities were $3.8 million, $4.4 million and $5.0 million, respectively. For
2009, 2008 and 2007, primary drivers of cash used in investing activities were
capital expenditures of $4.0 million, $5.0 million and $5.3 million,
respectively, partially offset by proceeds from the sale of property, equipment
and easements of $154 thousand, $583 thousand and $288 thousand, for 2009, 2008
and 2007, respectively.
II-8
The Company's expenditures for track structure replacement net of grants for the
past three years were:
December 31 Net Expenditures for Track Structure
----------- Replacements
(In Thousands)
--------------
2007 $2,992
2008 $2,411
2009 $2,809
Substantially all of the mainline track owned by the Company meets FRA Class 3
standards (permitting freight train speeds of 40 miles per hour), and the
Company intends to continue to maintain this track at this level. The Company
expended $2.8 million, $2.6 million and $3.5 million for additions and
improvements to its track structure in 2009, 2008 and 2007, respectively. The
Company expects that on average it will continue to spend between $2 million and
$3 million per year for capitalized track improvements adjusted annually for
inflation. Deferred grant income of $158 thousand in 2009, $172 thousand in 2008
and $520 thousand in 2007 financed a portion of these additions and
improvements. Improvements to the Company's track structure are made, for the
most part, by the Company's Maintenance of Way Department personnel.
During 2009, the Company's cash flows used in financing activities were $591
thousand. For 2009, primary drivers of the cash flows used in financing
activities were $772 thousand for the payment of dividends, partially offset by
proceeds of $102 thousand from deferred grant income and $79 thousand from the
exercise of stock options and employee stock purchases.
During 2008 and 2007, the Company generated $4.3 million and $614 thousand,
respectively, of cash from financing activities. For 2008, the primary drivers
of cash flows generated from financing activities were $5.5 million from the
issuance of common shares to GATX Corporation and $338 thousand in proceeds from
deferred grant income, partially offset by $900 thousand in payments made on
borrowings under the Company's line of credit and $770 thousand for the payment
of dividends. For 2007, primary drivers of cash flows generated from financing
activities were $900 thousand received from borrowings under the Company's line
of credit and $354 thousand in proceeds from deferred grant income, partially
offset by $730 thousand for the payment of dividends.
In 2009, the Company paid dividends in the amount of $5 per share, aggregating
$3.2 thousand, on its outstanding noncumulative preferred stock and $0.16 per
share, aggregating $769 thousand, on its outstanding common stock. Continued
payment of such dividends is contingent upon the Company's continuing to have
the necessary financial resources available.
On January 10, 2008, the Company entered into an agreement with GATX Corporation
("GATX") whereby GATX acquired 239,523 newly-issued shares of the Company's
common stock (4.99%) for approximately $5.5 million which was and is being
utilized for capital improvements to enhance the Company's operations. The
Company and GATX 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. In addition, the Company exchanged 72
of its mill gondolas for 137 open-top hoppers owned by GATX. The Company is
leasing the 72 mill gondolas from GATX under operating leases for a period of up
to 7 years at minimum annual rentals of $248 thousand. This amount is not
significantly different from the rentals previously paid to GATX for the
open-top hoppers which have been used by the Company to transport coal.
The Company has a revolving line of credit of $5.0 million with its principal
bank, which line expires on June 25, 2011. 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 and has no compensating
balance requirements. The Company had no borrowings outstanding against this
line as of December 31, 2009.
Contractual Obligations and Commitments
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.
II-9
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 thousand) 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. ss. 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.
Pursuant to permits issued by the United States Department of the Army Corps of
Engineers and the Rhode Island Coastal Resources Management Council, the Company
created 33 acres of waterfront land in East Providence, Rhode Island ("South
Quay") investing nearly $12 million in its development. The permits for the
property, which have been extended to December 2014 and December 2011,
respectively, also allow for construction of a dock along the west face of the
South Quay. The property is adjacent to a 12 acre site, also owned by the
Company.
The property is located one-half mile from I-195. In 2006, the Rhode Island
Department of Transportation ("RIDOT") awarded a contract to construct
Waterfront Drive, which provides direct vehicular access from the interstate
highway system to the South Quay, which project was completed in 2007. The
planned extension by RIDOT of Waterfront Drive northward toward an industrial
area in which the Company owns two additional waterfront parcels comprising 11
acres, creating direct access to such property, is underway, with substantial
completion expected in 2011.
The City of East Providence has created a waterfront redevelopment area with a
zoning overlay that would encourage development of offices, hotels, restaurants,
shops, marinas, apartments and other "clean" employment. The Company has been
cooperating with the City of East Providence in these efforts.
II-10
The following table sets forth the Company's significant contractual obligations
as of December 31, 2009.
Payments Due by Period
----------------------
Contractual Total Less than 1 - 3 Years 3 - 5 years More than
Obligations/Commitments ----- 1 Year ----------- ----------- 5 Years
(in Thousands) ------ -------
--------------
Operating lease (a) $1,245 $248 $496 $496 $5
Debt obligation (b) $ -- $ -- $ -- $ -- $ --
-------------------------------------------------------------------------------
Total $1,245 $248 $496 $496 $5
-------------------------------------------------------------------------------
(a) Represents future minimum lease payments under a non-cancelable
operating lease in effect as of January 10, 2008.
(b) $5 million borrowing capacity. No borrowings outstanding at year end.
Selected Quarterly Financial Data
Historically, the Company has experienced lower operating revenues in the first
quarter of the year. The following table sets forth selected financial data for
each quarter of 2009 and 2008. The information for each of these quarters is
unaudited but includes all normal recurring adjustments that the Company
considers necessary for a fair presentation. These results, however, are not
necessarily indicative of results for any future period.
Year Ended December 31, 2009
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating revenues ................ $ 4,941 $ 6,111 $ 6,072 $ 6,160
Other income ...................... 145 1,189 160 213
------- ------- ------- -------
Total revenues .................... 5,086 7,300 6,232 6,373
Operating expenses ................ 7,148 6,733 6,019 6,516
------- ------- ------- -------
(Loss) income before income taxes
(benefit) ........................ (2,062) 567 213 (143)
Provision (benefit) for income
taxes ............................ (680) 245 55 (88)
------- ------- ------- -------
(Loss) net income ................. $(1,382) $ 322 $ 158 $ (55)
------- ------- ------- -------
Basic and diluted (loss) income per
common share ..................... $ (.29) $ .07 $ .03 $ (.01)
------- ------- ------- -------
II-11
Year Ended December 31, 2009
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating revenues ................ $ 5,996 $ 8,094 $ 8,136 $ 7,510
Other income ...................... 119 188 617 126
------- ------- ------- -------
Total revenues .................... 6,115 8,282 8,753 7,636
Operating expenses ................ 7,487 7,802 7,964 7,232
------- ------- ------- -------
Income (loss) before income taxes
(benefit) ........................ (1,372) 480 789 404
Provision for income taxes
(benefit) ........................ (450) 160 255 170
------- ------- ------- -------
Net income (loss) ................. $ (922) $ 320 $ 534 $ 234
------- ------- ------- -------
Basic and diluted income (loss) per
common share ..................... $ (.19) $ .07 $ .11 $ .04
------- ------- ------- -------
Inflation
In recent years, inflation has not had a significant impact on the Company's
operations.
Seasonality
Historically, the Company's operating revenues are lowest for the first quarter
due to the absence of construction aggregates shipments during this period and
winter weather conditions.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
Cash and Cash Equivalents
As of December 31, 2009, the Company is exposed to market risks which primarily
include changes in U.S. interest rates and purchases of diesel fuel.
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 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 had no borrowings outstanding pursuant to the
revolving line of credit agreement at December 31, 2009. 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. The Company does not hedge its diesel fuel
purchases. Fuel prices and supplies are influenced significantly by political
and economic circumstances. Fuel shortages or unusual price volatility could
increase our fuel costs and adversely affect our results of operations.
II-12
Item 8. Financial Statements and Supplementary Data
---------------------------------------------------
PROVIDENCE AND WORCESTER RAILROAD COMPANY
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting
Firm................................................ II-14
Balance Sheets as of December 31, 2009 and 2008...... II-15
Statements of Operations for the Years Ended
December 31, 2009, 2008 and 2007.................... II-16
Statements of Shareholders' Equity for the Years Ended
December 31, 2009, 2008 and 2007.................... II-17
Statements of Cash Flows for the Years Ended
December 31, 2009, 2008 and 2007 .................... II-18
Notes to Financial Statements........................ II-20
II-13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Providence and Worcester Railroad Company
Worcester, Massachusetts
We have audited the accompanying balance sheets of Providence and Worcester
Railroad Company (the "Company") as of December 31, 2009 and 2008, and the
related statements of operations, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2009. Our audits also
included the financial statement schedule listed in the Index at Item 15. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Providence and Worcester Railroad Company as
of December 31, 2009 and 2008, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
March 26, 2010
II-14
PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS
(Dollars in Thousands Except Per Share Amounts)
December 31,
2009 2008
------- -------
ASSETS
Current Assets:
Cash and cash equivalents ........................... $ 157 $ 876
Accounts receivable, net of allowance for
doubtful accounts of $70 in 2009 and $130 in 2008 2,862 3,526
Materials and supplies .............................. 602 1,103
Prepaid expenses and other current assets ........... 343 442
Deferred income taxes ............................... 322 318
------- -------
Total Current Assets ............................... 4,286 6,265
Property and Equipment, net .......................... 81,114 80,787
Land Held for Development ............................ 12,457 11,958
------- -------
Total Assets ......................................... $97,857 $99,010
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................... 3,317 2,418
Accrued expenses .................................... 1,523 1,460
------- -------
Total Current Liabilities .......................... 4,840 3,878
------- -------
Deferred Income Taxes ................................ 11,659 12,123
------- -------
Deferred Grant Income ................................ 8,111 8,212
------- -------
Commitments and Contingent Liabilities
Shareholders' Equity:
Preferred stock, 10% noncumulative, $50 par
value; authorized, issued and outstanding 640
shares in 2009 and 2008 ............................ 32 32
Common stock, $.50 par value; authorized
15,000,000 shares; issued and outstanding
4,812,613 shares in 2009 and 4,801,340 shares
in 2008 ............................................ 2,406 2,401
Additional paid-in capital .......................... 36,879 36,705
Retained earnings ................................... 33,930 35,659
------- -------
Total Shareholders' Equity ......................... 73,247 74,797
------- -------
Total Liabilities and Shareholders' Equity ........... $97,857 $99,010
======= =======
The accompanying notes are an integral part of the financial statements.
II-15
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31,
2009 2008 2007
-------- -------- --------
Revenues:
Operating Revenues ........................... $23,284 $29,736 $26,164
Other Income ................................. 1,707 1,050 890
-------- -------- --------
Total Revenues ............................. 24,991 30,786 27,054
-------- -------- --------
Expenses:
Operating:
Maintenance of way and structures ........... 2,746 3,934 3,746
Maintenance of equipment .................... 3,667 4,105 3,539
Transportation .............................. 8,140 10,284 8,598
General and administrative .................. 4,925 5,064 5,205
Depreciation ................................ 3,104 2,941 2,884
Taxes, other than income taxes .............. 2,374 2,349 2,223
Car hire, net ............................... 694 928 818
Employee retirement plans ................... 229 247 228
Track usage fees ............................ 537 633 615
-------- -------- --------
Total Operating Expenses ................... 26,416 30,485 27,856
-------- -------- --------
(Loss) Income before Income Taxes ............. (1,425) 301 (802)
Provision (Benefit) for Income Taxes .......... (468) 135 (150)
-------- -------- --------
Net (Loss) Income ............................. (957) 166 (652)
Preferred Stock Dividends ..................... 3 3 3
-------- -------- --------
Net (Loss) Income Available to Common
Shareholders ................................. $ (960) $ 163 $ (655)
======= ======= =======
Basic and Diluted (Loss) Income Per Common
Share ........................................ $ (.20) $ .03 $ (.14)
======= ======= =======
The accompanying notes are an integral part of the financial statements.
II-16
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 2009, 2008 and 2007
Additional Share-
Preferred Common Paid-in Retained holders'
Stock Stock Capital Earnings Equity
------- ------- ------- ------- -------
Balance, January 1, 2007.. $ 32 $ 2,267 $30,680 $37,645 $70,624
Issuance of 9,581 common
shares to fund the Company's
2006 profit sharing plan
contribution ........... 5 173 178
Issuance of 8,920 common
shares for stock options
exercised, employee stock
purchases, and other ... 4 131 135
Share-based compensation -
options granted ........ 120 120
Dividends paid:
Preferred stock, $5.00 per
share ................. (3) (3)
Common stock, $.16 per share (727) (727)
Net loss for the year ... (652) (652)
------- ------- ------- ------- -------
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 9,260 common
shares for stock options
exercised, employee stock
purchases, and other ... 5 122 127
Share based compensation -
options granted ........ 90 90
Dividends paid:
Preferred stock, $5.00 per
share ................. (3) (3)
Common stock, $.16 per share (767) (767)
Net income for the year . 166 166
------- ------- ------- ------- -------
Balance, December 31, 2008 32 2,401 36,705 35,659 74,797
Issuance of 11,273 common
shares for stock options
exercised, employee stock
purchases, and other ... 5 107 112
Share based compensation -
options granted ........ 67 67
Dividends paid:
Preferred stock, $5.00 per
share ................. (3) (3)
Common stock, $.16 per share (769) (769)
Net loss for the year ... (957) (957)
------- ------- ------- ------- -------
Balance, December 31, 2009 $ 32 $ 2,406 $36,879 $33,930 $73,247
======= ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
II-17
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Years Ended December 31,
2009 2008 2007
------- ------- -------
Cash Flows from Operating
Activities:
Net (loss) income ............................ $ (957) $ 166 $ (652)
Adjustments to reconcile net (loss) income
to net cash flows from operating
activities:
Depreciation ............................... 3,104 2,941 2,884
Amortization of deferred grant income ...... (258) (254) (247)
Gains from sale, condemnation and
disposal of property, equipment and
easements, net ........................... (129) (523) (288)
Deferred income taxes ...................... (468) 161 (60)
Share-based compensation ................... 101 127 165
Increase (decrease) in cash and cash
equivalents from:
Accounts receivable ...................... 721 (966) 684
Materials and supplies ................... 501 (189) 569
Prepaid expenses and other ............... 99 (352) 58
Accounts payable and accrued expenses .... 962 (279) 206
------- ------- -------
Net cash flows from operating activities ..... 3,676 832 3,319
------- ------- -------
Cash Flows from Investing Activities:
Purchase of property and equipment ........... (3,958) (4,987) (5,293)
Proceeds from sale and condemnation of
property, equipment and easements ........... 154 583 288
------- ------- -------
Net cash flows used in investing activities (3,804) (4,404) (5,005)
------- ------- -------
Cash Flows from Financing Activities:
Net borrowings (payments) under line of
credit ...................................... -- (900) 900
Dividends paid ............................... (772) (770) (730)
Issuance of common shares to GATX
Corporation ................................. -- 5,509 --
Issuance of common shares for stock options
exercised and employee stock purchases ...... 79 90 90
Proceeds from deferred grant income .......... 102 338 354
------- ------- -------
Net cash flows (used in) from financing
activities .................................. (591) 4,267 614
(Decrease) Increase in Cash and Cash Equivalent (719) 695 (1,072)
Cash and Cash Equivalents, Beginning of Year .. 876 181 1,253
------- ------- -------
Cash and Cash Equivalents, End of Year ........ $ 157 $ 876 $ 181
======= ======= =======
II-18
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Supplemental Disclosures:
Cash paid during year for interest ........ $ -- $ -- $ 47
Cash paid (received) during year for income
taxes, net ............................... $ -- $ (73) $ --
======= ======= =======
The accompanying notes are an integral part of the financial statements.
II-19
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands Except Per Share Amounts)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
-----------------------
Providence and Worcester Railroad Company ("P&W" or the "Company") is an
interstate freight carrier conducting railroad operations in Massachusetts,
Rhode Island, Connecticut and New York. Through its connecting carriers, it
services customers located throughout North America. The Company services
the largest international double-stack intermodal terminal facility in New
England. P&W's connections to multiple Class I railroads, either directly
or through connections with regional and short- line carriers, provide the
Company with a competitive advantage by allowing it to offer various
pricing and routing alternatives to its customers.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents for purposes of
classification in the balance sheets and statements of cash flows. Cash
equivalents are stated at cost, which approximates fair market value.
Materials and Supplies
----------------------
Materials and supplies, which consist of items for the improvement and
maintenance of track structure and equipment, are stated at cost,
determined on a first-in, first-out basis, and are charged to expense or
added to the cost of property and equipment when used.
Property and Equipment
----------------------
Property and equipment, including land held for development, is stated at
historical cost (including self-construction costs). Acquired railroad
property is recorded at the purchased cost. Self-construction costs for
track structure include material costs for ties, rail, other track
materials and ballast; the cost of direct and supervisory labor, including
railroad retirement taxes and employee benefits; costs for track machinery
and equipment (including depreciation) and various other overhead costs.
Major renewals or betterments are capitalized while routine maintenance and
repairs, which do not improve or extend asset lives, are charged to expense
when incurred. Properties and equipment are carried at cost and are
depreciated over their useful lives. Items included in track structures
with similar physical characteristics use year of installation and expected
life and are grouped into separate asset classes and depreciated by the
estimated useful life of the asset class group.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:
Track structure:
Ties 40 years
Rail and other track material 67 years
Ballast 67 years
Bridges and trestles 67 years
Other 33 years
Buildings and other structures 33 to 45 years
Equipment, including rolling stock 4 to 25 years
The Company reviews property and equipment retirements each year, in order
to determine whether or not the estimated useful lives are reasonable.
Since, in most instances, assets retired have been fully or substantially
depreciated, the Company has not found it necessary, historically, to make
any significant adjustments to their estimated useful lives. Retirements of
track structure are recorded by removing the historical cost and related
accumulated depreciation of the equivalent amount of its oldest track
II-20
structures in the related asset class group. Gains or losses on sales or
other dispositions are credited or charged to income. 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 circumstances 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
determining whether the carrying amounts of the assets are recoverable. If
an impairment exists it is measured by comparing the carrying value to the
fair value. No impairments were recognized in the three years presented.
Deferred Grant Income
---------------------
The Company has availed itself of various federal and state programs
administered by the states of Connecticut, Massachusetts and Rhode Island
for reimbursement of expenditures for capital improvements. In order to
receive reimbursement, the Company must submit requests for the projects,
including cost estimates. The Company receives from 70% to 100% of the
costs of such projects, which have included bridges, track structure and
public improvements. To the extent that such grant proceeds are used to
fund capital improvements to bridges and track structure, they are recorded
as deferred grant income and amortized into operating revenues on a
straight-line basis over the estimated useful lives of the related
improvements ($258 thousand in 2009, $254 thousand in 2008 and $247
thousand in 2007).
Grant proceeds utilized to finance public improvements, such as grade
crossings and signals, are recorded as a direct offset to the cost of the
improvements, which are not capitalized.
Revenue Recognition
-------------------
Freight revenues are recorded at the time delivery is made to the customer
or the connecting carrier.
Other freight-related revenues and other operating revenues are recorded at
the time the services are rendered to the customer.
Gain or loss from sale, condemnation and disposal of property and equipment
and easements is recorded at the time the transaction is consummated and
collectability is assured.
Income Taxes
------------
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying
amounts and the tax basis of assets and liabilities using expected tax
rates in effect in the years in which the differences are expected to
reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount that is more likely than not to be
realized.
Income (Loss) per Common Share
------------------------------
Basic income (loss) per common share is computed using the weighted average
number of common shares outstanding during each year. Diluted income (loss)
per common share reflects the effect of the Company's outstanding
convertible preferred stock (using the if-converted method) and options
(using the treasury stock method), except where such items would be
anti-dilutive.
II-21
A reconciliation of weighted average shares used for the basic computation
and that used for the diluted computation is as follows:
Years Ended December 31,
2009 2008 2007
--------- --------- ---------
Weighted average shares for basic ...... 4,806,311 4,790,005 4,545,160
Dilutive effect of convertible preferred
stock and options ..................... -- 76,114 --
--------- --------- ---------
Weighted average shares for diluted .... 4,806,311 4,866,119 4,545,460
========= ========= =========
Options to purchase 51,530, 7,410 and 43,634 shares of common stock were
outstanding during 2009, 2008 and 2007, respectively. These options were
not included in the computation of diluted (loss) earnings per common share
for 2009 and 2007 because of the anti-dilutive effect. Shares of preferred
stock convertible into 64,000 shares of common stock were outstanding
during 2009, 2008 and 2007. These shares were not included in the
computation of diluted (loss) earnings per common share for 2009 and 2007
because of the anti-dilutive effect.
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
Liabilities for casualty claims, legal judgments and other loss
contingencies are recorded when it is probable that an asset has been
impaired or a liability has been incurred and the amount of the loss can be
reasonably estimated. The Company does not accrue estimated legal fees for
appeals of legal judgments since we do not believe that such costs meet the
definition of a liability and thus are accruable only at such time as legal
services have been provided.
Comprehensive Income
--------------------
Comprehensive Income equals net income for 2009, 2008 and 2007.
Segment Reporting
-----------------
The Company organizes itself as one segment reporting to the chief
operating decision maker. Products and services consist primarily of
interstate freight rail services. These include the movement of freight in
both conventional freight cars and in intermodal containers on flat cars
over the Company's rail lines, as well as freight-related services such as
switching, weighing and special trains and other services rendered to
freight customers and other outside parties by the Company's Maintenance of
Way, Communications & Signals and Maintenance of Equipment Departments.
Recent Accounting Pronouncements
--------------------------------
In April 2009, the Financial Accounting Standards Board ("FASB") issued
FASB Accounting Standards Codification ("ASC") 825-10-65-1, "Interim
Disclosures about Fair Value of Financial Instruments." FASB ASC
825-10-65-1 amends previous guidance to require disclosures about fair
value of financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. This guidance
also requires those disclosures in summarized financial information at
interim reporting periods. This guidance is effective for interim and
annual reporting periods ending after June 15, 2009. The impact of adoption
did not have a material impact on the Company's financial statements.
II-22
In May 2009, the FASB issued FASB ASC 855, "Subsequent Events" which was
modified in February 2010. FASB ASC 855-10 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued. This guidance sets forth the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in
its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date.
The impact of adoption did not have a material impact on the Company's
financial statements.
In June 2009, the FASB issued FASB ASC 105, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
- a replacement of FASB Statement No. 162" (SFAS 168). ASC 105 provides for
the FASB Accounting Standards Codification (the "Codification") to become
the single official source of authoritative, nongovernmental U.S. generally
accepted accounting principles (GAAP). The Codification did not change GAAP
but reorganizes the literature. ASC 105 is effective for interim and annual
periods ending after September 15, 2009.
In August 2009, the FASB issued Accounting Standards Update No. 2009-04,
"Accounting for Redeemable Equity Instruments - Amendments to Section
480-10-99." This Update amends Topic 480, "Distinguishing Liabilities from
Equity," reflecting the SEC staff's views regarding the application of
Accounting Series Release No. 268, "Presentation in Financial Statements of
Redeemable Preferred Stocks." This guidance did not have a material impact
on the Company's financial statements.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05,
"Fair Value Measurements and Disclosures - Measuring Liabilities at Fair
Value." This Update provides clarification for Topic 820 for circumstances
in which a quoted price in an active market for the identical liability is
not available. The guidance in this Update is effective for the first
reporting period, including interim periods, beginning after August 27,
2009. This guidance did not have a material impact on the Company's
financial statements.
2. Share-Based Compensation
The Company has a non-qualified stock option plan ("SOP") covering all
management personnel who have a minimum of one year of service with the
Company and who are not holders of a majority of either its outstanding
common stock or its outstanding preferred stock. In addition, the Company's
outside directors are eligible to participate in the SOP. The Company's
stockholders have authorized 5% of the shares of common stock outstanding
(240,631 shares at December 31, 2009) for issuance under the SOP. Options
granted under the SOP, which are fully vested when granted, are exercisable
over a ten year period at the closing market price for the Company's common
stock on the last business day of the year prior to the date the options
are granted. The Company issues new common stock to satisfy stock options
exercised.
The Company recognizes compensation expense for new stock option grants at
fair value on the grant date. Stock-based employee compensation expense,
net of income taxes, in the amounts of $43 thousand, $58 thousand and $77
thousand, have been charged against income in 2009, 2008 and 2007,
respectively, for stock options granted. The Company's policy is to
estimate the fair market value of each option granted on the date of grant,
the first business day in January of each year, using the Black-Scholes
option pricing model, and record the compensation expense on a
straight-line basis over the year in which the grant was made.
II-23
Key assumptions used to apply the Black-Scholes option pricing model are
set forth below:
2009 2008 2007
--------- --------- ---------
Average risk-free interest rate 1.87% 3.7% 4.68%
Expected life of option grants 6.0 years 6.0 years 7.0 years
Expected volatility of underlying stock 86% 75% 87%
Expected dividend payment rate, as a
percentage of the share price on the
date of grant 1.33% .96% .82%
Weighted average grant date fair value $7.90 $10.55 $14.39
The following table summarizes the stock option activity under the
Company's plan for 2009:
Weighted Average
----------------
Number of Exercise Fair
Options Price Value
------ ------ ------
Outstanding and exercisable at
December 31, 2008................... 46,618 $13.13
Granted ........................... 8,450 11.99 $ 7.90
Exercised ......................... (600) 9.24
Expired ........................... (2,938) 12.38
------ ------ ------
Outstanding and exercisable at
December 31, 2009................ 51,530 $13.03
====== ====== ======
The total intrinsic value of options exercised for the years ended December
31, 2009, 2008 and 2007 totaled approximately $2 thousand, $14 thousand and
$14 thousand, respectively, and cash proceeds from the exercise of stock
options totaled approximately $6 thousand, $17 thousand and $21 thousand
for the years ended December 31, 2009, 2008 and 2007, respectively. The
income tax benefits realized from the exercise of stock options were not
material for the periods presented.
The aggregate intrinsic value of the stock options outstanding, based on
the closing stock price of the Company's common stock as of December 31,
2009, 2008 and 2007, totaled approximately $48 thousand, $70 thousand and
$205 thousand, respectively.
Common Stock Awards
-------------------
The Company has awarded certain of its employees common stock under stock
award plans. During the years ended December 31, 2009, 2008 and 2007, the
Company awarded 2,625, 1,970, and 2,575 shares, respectively. The
compensation expense recorded for these awards was $34 thousand, $37
thousand and $45 thousand for 2009, 2008 and 2007, respectively.
II-24
3. Property and Equipment
Property and equipment consists of the following:
December 31,
2009 2008
------- -------
Land and improvements, excluding land held
for development .......................... $ 11,465 $ 11,952
Track structure .......................... 84,509 81,515
Buildings and other structures ........... 8,630 8,462
Equipment ................................ 24,517 24,503
------- -------
129,121 126,432
Less accumulated depreciation ............ 48,007 45,645
------- -------
Total property and equipment, net ........ $ 81,114 $ 80,787
======== ========
4. Land Held for Development
Pursuant to permits issued by the United States Department of the Army
Corps of Engineers and the Rhode Island Coastal Resources Management
Council, the Company created 33 acres of waterfront land in East
Providence, Rhode Island ("South Quay"). The permits for the property,
which have been extended to December 2014 and December 2011, respectively,
also allow for construction of a dock along the west face of the South
Quay. The property is adjacent to a 12 acre site, also owned by the
Company. The Company has invested nearly $12 million in the development of
the South Quay, which has resulted in the creation of approximately 33
acres of waterfront land.
The property is located one half-mile from I-195. In 2006, the Rhode Island
Department of Transportation ("RIDOT") awarded a contract for roadway
improvements to provide direct vehicular access from the interstate highway
system to the South Quay, which project was completed in 2007. The planned
extension by RIDOT of Waterfront Drive northward toward an industrial area
in which the Company owns two additional waterfront parcels comprising 11
acres, creating direct access to such property, is expected to commence in
2010.
The City of East Providence has created a waterfront redevelopment area
with a zoning overlay that would encourage development of offices, hotels,
restaurants, shops, marinas, apartments and other "clean" employment. The
Company has been cooperating with the City of East Providence in these
efforts.
5. Revolving Line of Credit
In June 2009 the Company obtained a revolving line of credit facility in
the amount of $5 million from a commercial bank expiring on June 25, 2011.
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 as
to the incurrence of additional indebtedness, as well as the sale or
encumbrance of its assets. No borrowings have been made under this line of
credit through December 31, 2009.
II-25
6. Accrued Expenses
Accrued expenses consist of the following:
December 31,
2009 2008
------- -------
Salaries and wages ............. $ 585 $ 486
Payroll taxes .................. 167 142
Simplified employee pension plan
contributions .................. 208 232
Legal and professional fees .... 126 178
Casualty loss claims ........... 263 280
Other .......................... 174 142
------- -------
$ 1,523 $ 1,460
======= =======
7. Other Income
Other income consists of the following: Years Ended December 31,
2009 2008 2007
------ ------ ------
Gains from sale, condemnation and
disposal of property, equipment and
easements, net ...................... $ 129 $ 523 $ 288
Proceeds from legal settlement ....... 950 -- --
Rentals and license fees under various
operating leases .................... 627 494 577
Interest ............................. 1 33 25
------ ------ ------
$1,707 $1,050 $ 890
====== ====== ======
In June 2009 the Company received $950 thousand for the settlement of
certain legal proceedings that arose following the expiration of leasehold
rights of an unrelated third party to a pipeline location located on the
Company's right-of-way, and the Company's grant of a permanent easement for
such pipeline location.
8. Railroad Track Maintenance Credits:
During the third quarter of 2009 the Company entered into an agreement with
an unrelated third-party shipping customer. Under the agreement, the
customer agreed to pay for certain qualified railroad track maintenance
expenditures, including capital additions to the Company's track structure.
In return the Company agreed to assign railroad track miles to the shipping
customer which would enable that customer to claim certain track
maintenance credits pursuant to section 45G of the Internal Revenue Code of
1986. For the year ended December 31, 2009, the amount of $975 thousand was
realized as a result of an agreement with an unrelated third party shipping
customer for Railroad Track Maintenance Credits generated in 2009 and
accounted for as a reduction of Operating Expenses - Maintenance of Way and
Structures in the Consolidated Statement of Operations.
II-26
9. Income Taxes (Benefit)
The provision for income taxes (benefit) consists of the following:
Years Ended December 31,
2009 2008 2007
------ ------ ------
Current:
Federal .......................... $ -- $ (44) $ (90)
State ............................ -- 18 --
------ ------ ------
-- (26) (90)
Deferred, Federal and State ....... (468) 161 (60)
------ ------ ------
$ (468) $ 135 $ (150)
====== ====== ======
The following summarizes the estimated tax effect of temporary differences
that are included in the net deferred income tax provision:
Years Ended December 31,
2009 2008 2007
----- ----- -----
Depreciation ........................... $ 319 $ 423 $ 495
Deferred grant income .................. 34 29 (96)
Net operating loss carry forward ....... (801) (278) (362)
Contribution carry forward ............. 8 12 (75)
Accrued casualty and other claims ...... 6 9 1
Accrued compensated time off and related
payroll taxes ......................... (31) (10) 12
Share based compensation ............... (23) (32) (42)
Allowance for doubtful accounts ........ 20 8 7
----- ----- -----
$(468) $ 161 $ (60)
===== ===== =====
II-27
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effect of significant items comprising the Company's net deferred income
tax liability as of December 31, 2009 and 2008 are as follows:
December 31,
2009 2008
------- -------
Deferred income tax liabilities -
Differences between book and tax basis
of property and equipment ........................ $ 16,165 $15,846
------- -------
Deferred income tax assets:
Deferred grant income ............................ 2,881 2,915
Net operating loss carry forward ................. 1,441 640
Track maintenance credit carry forward ........... 4,491 4,491
Contribution carry forward ....................... 55 63
Accrued casualty and other claims ................ 94 100
Accrued compensated time off and related
payroll taxes ................................... 203 172
Share based compensation ......................... 128 105
Allowance for doubtful accounts and other ........ 26 46
------- -------
9,319 8,532
Valuation allowance ............................... (4,491) (4,491)
------- -------
Net deferred income tax liability ................. $11,337 $11,805
During 2005 through 2008, the Company generated Railroad Track Maintenance
Credits in the cumulative amount of $4,491 thousand. These credits may be
utilized, subject to certain limitations, to offset the Company's current
federal income tax liability. Any credits not utilized in the year earned
may be carried forward to offset future income tax liabilities for a period
of 20 years. None of these credits have been utilized to date and,
therefore, such unused credits constitute deferred income tax assets. Such
assets, however, have been fully reserved since their future realization is
not assured. In 2009, the tax credit arising on account of track
maintenance in the amount of $975 thousand was realized as a result of an
agreement with an unrelated third-party shipping customer and accounted for
as a reduction of Operating Expenses - Maintenance of Way and Structures in
the Consolidated Statement of Operations.
The Company had $4,031 thousand and $1,983 thousand of federal net
operating loss carryforwards for the years ended December 31, 2009 and
2008, respectively. It is anticipated that the Company will be able to
fully utilize these losses prior to expiration, which begins in 2025.
A reconciliation of the U.S. federal statutory rate to the effective tax
rate is as follows:
Years Ended December 31,
2009 2008 2007
---- ---- ----
Federal statutory rate .............. (34%) 34% (34%)
Railroad track maintenance credits .. -- -- 14
Non deductible expenses, state income
taxes, and other ................... 4 4 1
Other ............................... -- 7 --
---- ---- ----
Effective tax rate .................. (30%) 45% (19%)
==== ==== ====
II-28
The Company is subject to U.S. federal income tax as well as income tax in
the Commonwealth of Massachusetts. All U.S. federal income and
Massachusetts income tax matters have been concluded through 2006.
10. 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
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
thousand) 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. ss. 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.
11. Employee Benefit Plans
Defined Contribution Retirement Plans
-------------------------------------
The Company has a deferred profit-sharing plan ("Plan") which covers all of
its employees who are members of its collective bargaining units.
Contributions to the Plan are required in years in which the Company has
income from "railroad operations" as defined in the Plan. Contributions are
to be equal to at least 10% but not more than 15% of the greater of income
before income taxes or income from railroad operations subject to a maximum
contribution of $3.5 thousand per eligible employee. Contributions to the
Plan may be made in cash or in shares of the Company's common stock valued
at the closing market price for the Company's stock on the last business
day of the year prior to the date the options are granted. No contribution
II-29
was made for 2009, 2008 or 2007 since the Company did not generate income
from railroad operations during those years.
The Company also has a Simplified Employee Pension Plan ("SEPP") which
covers substantially all employees who are not members of one of its
collective bargaining units. Contributions to the SEPP are discretionary
and are determined annually as a percentage of each covered employee's
compensation up to the maximum amount allowable by law. Contributions
accrued under the SEPP amounted to $208 thousand in 2009, $232 thousand in
2008 and $208 thousand in 2007 which, in each year, was less than the
maximum amount allowable by law.
Employee Stock Purchase Plan
----------------------------
The Company has an Employee Stock Purchase Plan ("ESPP") under which
eligible employees may purchase registered shares of common stock at 85% of
the market price for such shares. An aggregate of 200,000 shares of common
stock are authorized for issuance under the ESPP which was established in
1997. Any shares purchased under the ESPP are subject to a two year
lock-up. ESPP purchases amounted to 8,048 shares in 2009, 5,281 shares in
2008, and 4,492 shares in 2007.
401(k) Plan
-----------
The Company has a 401(k) Plan ("401(k)") which covers employees who are
members of a collective bargaining unit as well as management employees.
Contributions to employees' 401(k) accounts are made from individual
employees' payroll contributions. The Company is not liable for
contributions, other than de minimus matching contributions for employees
subject to collective bargaining agreements.
12. GATX Corporation
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 approximately $5.5
million 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. In addition,
the Company exchanged 72 of its mill gondolas for 137 open-top hoppers
owned by GATX, which exchange was accounted for as a purchase. The Company
agreed to lease the 72 mill gondolas from GATX under operating leases for a
period of up to 7 years at a minimum annual rental of $248 thousand through
January 2015 and, as of December 31, 2009, the total remaining obligation
under this lease was $1,245 thousand. Rental expense of $248 thousand and
$241 thousand was incurred under this lease in 2009 and 2008, respectively.
In addition to the lease of the gondolas, which is a fixed-rent, fixed-term
lease, the Company also entered into a 7 year "per-diem" lease of 200 auto
carrying railcars, for which the Company is obligated to remit car-hire
revenues only. In 2009, the car-hire earned from other railroads and
remitted to GATX was approximately $744 thousand.
13. Preferred Stock
The Company's $50 par value preferred stock is convertible at any time at
the option of the holder of the preferred stock into 100 shares of common
stock. The noncumulative stock dividend is fixed by the Company's Charter
at an annual rate of $5.00 per share, out of funds legally available for
the payment of dividends.
The holders of preferred stock and holders of common stock are entitled to
one vote per share, voting as separate classes, upon matters voted on by
shareholders. The holders of common stock elect one third of the Board of
Directors; the voters of preferred stock elect the remainder of the Board.
II-30
Item 9. Changes in and Disagreements with Accountants on Accounting and
--------------------------------------------------------------------------------
Financial Disclosure
--------------------
There have been no changes in or disagreements with our independent registered
public accounting firm, Deloitte & Touche LLP.
Item 9A. (T) Controls and Procedures
------------------------------------
Management's Report Regarding the Effectiveness of Disclosure Controls and
Procedures
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, have conducted an evaluation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934 (the "Exchange Act")). Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of the period covered by this annual report,
the Company's disclosure controls and procedures were effective. Management's
report was not subject to attestation by the Company's independent registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.
Management's Evaluation Regarding the Effectiveness of Internal Controls and
Procedures
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. The Company's internal control over financial reporting
includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate as a result of changes in conditions, or that the
degree of compliance with the applicable polices and procedures may deteriorate.
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, has conducted an evaluation of the Company's
internal control over financial reporting as of the end of the period covered by
this annual report based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Such evaluation included reviewing the documentation of the
Company's internal controls, evaluating the design effectiveness of the internal
controls and testing their operating effectiveness. Based on such evaluation,
the Company's management has concluded that as of the end of the period covered
by this annual report, the Company's internal control over financial reporting
was effective.
Management's annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management's report in this Annual Report.
II-31
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during
the fourth quarter of the fiscal year covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B. Other Information
--------------------------
The Company did not fail to file any reports required to be filed on Form 8-K
for the last fiscal quarter.
II-32
PART III
Item 10. Directors, Executive Officers and Corporate Governance
---------------------------------------------------------------
For information with respect to the directors of the Company, see pages 2
through 8 and 10 through 13 of the Company's definitive proxy statement for the
2010 annual meeting of its shareholders, which pages are incorporated herein by
reference
The following are the executive officers of the Company:
Date of First
Name Age Position Election to Office
---- --- -------- ------------------
Robert H. Eder 77 Chairman 1980
P. Scott Conti 52 President 2005
David F. Fitzgerald 59 Vice President 2005
Frank K. Rogers 48 Vice President 2005
Elizabeth A. Deforge 46 Treasurer 2009
Marie A. Angelini 51 Secretary 2007
Until December of 2009 the Company's Treasurer was Robert J. Easton. Mr. Easton
retired on December 11, 2009.
Any officer elected or appointed by the Company's Board of Directors may be
removed at any time by the affirmative vote of a majority of the Board of
Directors. Mr. Conti served as Vice President from March 1999 until his election
as President in 2005. Upon joining the Company in 1988, he served as Engineering
Manager through December 1997, and then as Chief Engineer from 1998 until March
1999. Mr. Fitzgerald joined the Company in 1973 and served as Superintendent of
Transportation prior to his promotion to Vice President in 2005. Mr. Rogers
joined the Company in 1994 and served as Director of Marketing prior to his
promotion to Vice President in 2005. Ms. Deforge joined the Company in 2000 and
served as Assistant Controller and Manager of Taxes prior to her promotion to
Treasurer in 2009. Ms. Angelini joined the Company in 2005 and served as
Assistant General Counsel prior to her promotion to General Counsel and election
as Secretary in 2007.
The Company has adopted a written code of ethics that applies to all of its
employees including its Chief Executive Officer and its Chief Financial Officer.
A copy of the Company's code of ethics, entitled "Business Conduct Policy," is
available on the Company's website at http://www.pwrr.com, and/or may be
obtained without charge by contacting:
Investor Relations
Attention: Wendy Lavely
Providence and Worcester Railroad Company
75 Hammond Street
Worcester, Massachusetts 01610
(800) 447-2003
Internet Address: http://www.pwrr.com; wlavely@pwrr.com
Item 11. Executive Compensation
-------------------------------
See pages 10 through 18 of the Company's definitive proxy statement for the 2010
annual meeting of its shareholders, which pages are incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
--------------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
See page 9 of the Company's definitive proxy statement for the 2010 annual
meeting of its shareholders, which pages are incorporated herein by reference.
III-1
The following table sets forth information as of the end of the Company's most
recently completed fiscal year with respect to compensation plans (including
individual compensation arrangements) under which equity securities of the
Company are authorized for issuance.
Number of Securities Number of
To be Issued Upon Weighted Average Securities
Exercise of Exercise Price of Remaining
Outstanding Options Outstanding Options Available For
Plan Category Warrants and Rights Warrants and Rights Future Issuance
------------- -------------------- ------------------- ---------------
Equity compensation
plans approved by
security holders ... 51,530 $13.03 280,842
Equity compensation
plans not approved
by security holders. N/A N/A 181,775
Total .............. 51,530 $13.03 462,617
Item 13. Certain Relationships and Related Transactions and Director
--------------------------------------------------------------------------------
Independence
------------
See pages 2, 5-6, 8 and 18 of the Company's definitive proxy statement for the
2010 annual meeting of its shareholders which pages are incorporated herein by
reference
Item 14. Principal Accounting Fees and Services
-----------------------------------------------
See pages 18-19 of the Company's definitive proxy statement for the 2010 annual
meeting of its shareholders which pages are incorporated herein by reference.
III-2
PART IV
Item 15. Exhibits and Financial Statement Schedules
---------------------------------------------------
(a) (1) All financial statements:
An index of financial statements is included in Item 8, page II- 13 of
this annual report.
(2) Financial Statement schedule:
Schedule II Valuation and Qualifying Accounts..........Page IV-3
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or the notes thereto.
(3) Listing of Exhibits.
3.1 Articles of Incorporation, as amended, incorporated by reference
from the Company's Registration Statement on Form S-1,
Registration No. 333-46433
3.2 By-laws, as amended, incorporated by reference from the Company's
Registration Statement on Form S-8, Registration No. 333-02975
10.1 Business Loan Agreement dated June 25, 2009 between the
Registrant and Commerce Bank & Trust Company, incorporated by
reference from the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2009
10.2 Common Stock Purchase Agreement dated January 10, 2008 between
the Registrant and GATX Corporation, incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008
10.3 Exclusive Railcar Supply Agreement dated January 10, 2008 between
the Registrant and GATX Corporation, incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008
10.4 Registration Rights Agreement dated January 10, 2008 between the
Registrant and GATX Corporation, incorporated by reference from
the Company's Quarterly Report on Form 10- Q for the quarter
ended March 31, 2008
10.5 Non-Qualified Stock Option Plan (incorporated by reference from
the Company's Registration Statement on Form S-1 Registration No.
33-46433
23 Consent of Independent Registered Public Accounting Firm.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32 Certification 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 the Sarbanes-Oxley Act of 2002.
(b) Not applicable.
(c) Exhibits (annexed).
Financial Statement Schedule. See item (a) (2) above.
IV-1
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ Robert H. Eder
------------------
By Robert H. Eder
Chief Executive Officer
Dated: March 26, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Robert H. Eder
________________________ Chief Executive March 26, 2010
Robert H. Eder Officer
and Chairman
(Principal
Executive Officer)
/s/ P. Scott Conti
________________________ President and March 26, 2010
P. Scott Conti Director
(Chief Operating
Officer)
/s/ Elizabeth A. Deforge
________________________ Treasurer March 26, 2010
Elizabeth A. Deforge (Principal financial
officer and principal
accounting officer)
/s/ Richard W. Anderson
________________________ Director March 26, 2010
Richard W. Anderson
/s/ Frank W. Barrett
________________________ Director March 26, 2010
Frank W. Barrett
/s/ J. Joseph Garrahy
________________________ Director March 26, 2010
J. Joseph Garrahy
/s/ John J. Healy
________________________ Director March 26, 2010
John J. Healy
IV-2
SCHEDULE II
PROVIDENCE AND WORCESTER RAILROAD COMPANY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(IN THOUSAND DOLLARS)
Column A Column B Column C Additions Column D Column E
-------- -------- ------------------ -------- --------
(1) (2)
Balance Charged to Charged to Balance
at costs and other at end
Description beginning expenses accounts of
of period describe Deductions period
Allowance for doubtful
accounts:
Year ended
December 31, 2009..... $130 $ 0 $ 60 $70
==== ==== ==== ====
Year ended
December 31, 2008..... $150 $ 6 $ 26 $130
==== ==== ==== ====
Year ended
December 31, 2007..... $175 $ 0 $ 25 $150
==== ==== ==== ====
IV-3
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos.
333-65937, 333-65949, and 333-21617 each on Form S-8 of our report dated March
26, 2010, relating to the financial statements and financial statement schedule
of Providence and Worcester Railroad Company, appearing in this Annual Report on
Form 10-K of Providence and Worcester Railroad Company for the year ended
December 31, 2009.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
March 26, 2010
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 annual report on Form 10-K 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 annual 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 annual 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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the
registrant and 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, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) 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 such evaluation; and
d) 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 (the registrant's fourth fiscal quarter in
the case of an annual report) 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
(or persons performing the equivalent functions):
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: March 26, 2010
/s/ Robert H. Eder
By:
------------------------------
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, ELIZABETH A. DEFORGE, certify that:
1. I have reviewed this annual report on Form 10-K 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 annual 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 annual 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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the
registrant and 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, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) 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 such evaluation; and
d) 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 (the registrant's fourth fiscal quarter in
the case of an annual report) 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
(or persons performing the equivalent functions):
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: March 26, 2010
/s/ Elizabeth A. Deforge
By:
------------------------------
Elizabeth A. Deforge
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 Annual Report of Providence and Worcester Railroad
Company (the Company) on Form 10-K for the year ended December 31, 2009, as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Robert H. Eder, Chief Executive Officer of the Company, hereby
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
March 26, 2010
EXHIBIT 32.1
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 Annual Report of Providence and Worcester Railroad
Company (the Company) on Form 10-K for the year ended December 31, 2009, as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Elizabeth A. Deforge, Chief Financial Officer of the Company, hereby
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/ Elizabeth A. Deforge
----------------------------------------
Elizabeth A. Deforge,
Treasurer and Chief Financial Officer
March 26, 201
