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, 2005
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
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(Exact name of registrant as specified in its charter)
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Rhode Island 05-0344399
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(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
75 Hammond Street, Worcester, Massachusetts 01610
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(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
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Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.50 par value
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(Title of Class)
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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. X
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (check one)
Large accelerated filer Accelerated filer Non-accelerated filer X
As of June 30, 2005, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $48,490,938. (For this purpose, all
directors of the Registrant are considered affiliates.)
As of March 3, 2006, the Registrant had 4,509,092 shares of Common Stock
outstanding.
Documents Incorporated by Reference -
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Portions of the Registrant's Proxy Statement for the 2006 Annual Meeting of
Shareholders to be held on April 26, 2006, is incorporated by reference into
Part III of this Form 10-K.
Exhibit Index - Page III-2.
PART I
Item 1. Business
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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 the 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, has grown from 45 miles of track to its current system of
approximately 516 miles. P&W operates the largest double stack intermodal
terminal facilities 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 construction aggregate, iron and steel products, chemicals, lumber,
scrap metals, plastic resins, cement, coal, construction and demolition debris,
processed foods and edible food stuffs, such as frozen foods, corn syrup and
animal and vegetable oils. Its customers include Cargill, Inc., The Dow Chemical
Company, Exxon- Mobil Corporation, Frito-Lay, Inc., Gateway Terminal,
International Paper Company, Northeast Utilities, Smurfit-Stone Container
Corporation and Tilcon Connecticut, Inc. In 2005, P&W transported approximately
33,000 carloads of freight and 63,000 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 creative 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
Railroads are divided into three classes based on operating revenues: Class
I, $289.4 million or more; Class II, $23.1 million to $289.4 million; and Class
III, less than $23.1 million. As a result of mergers and consolidations, there
are now only seven Class I railroads in the country. The Class I railroads
handle 93% of the nation's rail freight business.
The rail freight industry underwent a revitalization after the passage of
the Staggers Rail Act, 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. Rail freight service became more competitive with other
transportation modes with respect to both quality and price. The volume of
freight moved by rail has risen dramatically since 1980 and profitability has
improved significantly.
One result of the 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 nearly 550 of these regional and
short-line railroads. They operate in all 50 states, account for 30% of all rail
track, employ 11% of all rail workers and generate about 7% 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
and from an intermodal terminal and then either delivered to their final
destinations by truck or transferred to ship for export. Over the past decade,
commodity shippers have 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) in specially designed railcars,
together with increasing highway traffic congestion and the shortage of
long-haul truck drivers have contributed to this trend.
Regional Developments
There are a number of development projects underway in New England to
increase port capacity along the extensive coastline and to improve the
intermodal transportation and distribution infrastructure in the region. These
projects present significant opportunities for the Company to increase its
business.
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Quonset/Davisville
The State of Rhode Island and the federal government are progressing with
the redevelopment of a 1,000 acre portion of the former Naval facility at
Quonset/Davisville to a more active port and industrial park. This facility
already houses a number of rail oriented industries and an auto port.
Construction of a freight rail improvement project to provide additional track
capacity and double stack clearance on the Northeast Corridor between
Quonset/Davisville and the connection of the Corridor to the Company's main line
at Central Falls, R.I commenced in 2002 at a cost of $148 million to Rhode
Island and the federal government and is scheduled to be completed by the third
quarter of 2006.
Massachusetts Highway Improvement Program
In 2005 work was completed on a significant expansion of the Company's bulk
transload and intermodal yards in Worcester in conjunction with the
Massachusetts Highway Department's $250 million project creating a direct
Worcester connection to the Massachusetts Turnpike. This project adds six acres
and over 4,000 feet of track storage space to the Company's transload
facilities, and a major petrochemical distribution company is in the process of
relocating its local plastics distribution business to Worcester in order to
utilize this facility.
Middletown/Hartford Line
In cooperation with the state of Connecticut, the Company has been engaged
in the restoration of the rail line extending from Middletown to Hartford,
Connecticut. In April 2000, the state of Connecticut appropriated $1.85 million
to fund their portion of the project (approx 70%). The restoration of this 11
mile segment is now complete and the line is in service. With a planned
industrial park along this line and a new connection to other carriers in
Hartford, the Company believes restoration of this line presents opportunities
for future revenue growth.
New London Interchange
Through its New London interchange with the New England Central Railroad,
P&W has been able to develop significant new business with the Canadian National
Railway ("CN") and the Canadian Pacific Railway. P&W has worked aggressively to
leverage its extensive bulk transload facilities in developing additional
chemical and plastics traffic with CN and has developed a significant volume of
steel traffic with CN that had previously moved via truck.
Port of Providence
The Port of Providence, in conjunction with the Company, has made
investments in its infrastructure, including paving, lighting and "on dock"
rail, to accommodate growth in the movement of imported coal to inland markets
and to handle that product more efficiently. This is expected to be a growing
source of revenue for the Company over the next few years. Approximately 350,000
tons of coal were handled through the Port of Providence in 2005.
Railroad Operations
The Company's rail freight system extends over approximately 516 miles of
track. The Company interchanges freight traffic with CSX at Worcester,
Massachusetts and at New Haven, Connecticut; with the Springfield Terminal
Railway Company at Gardner, Massachusetts; with the New England Central Railroad
at New London, Connecticut; and with the 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. It 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 operates two approved
customs intermodal yards in Worcester. A customs intermodal yard is an area
containing tracks used for the loading and unloading of containers. These yards
are U.S. Customs bonded, and international traffic must be inspected and
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approved by U.S. Customs officials. The intermodal facility serves primarily as
a terminal for movement of container traffic from the Far East destined for
points in New England. Several major container ship lines utilize double stack
train service through this terminal. P&W works closely with the terminal
operator to develop and maintain strong relationships with steamship lines
involved in international intermodal transportation.
Customers
The Company serves approximately 165 customers in Massachusetts, Rhode
Island, Connecticut and New York. The Company's 10 largest customers account for
nearly half of its operating revenues. In 2005, Tilcon Connecticut, Inc., which
ships construction aggregate from three separate quarries on P&W's system to
asphalt production plants in Connecticut and New York, accounted for
approximately 13.3% of the Company's operating revenues. No other customer
accounted for 10% or more of its total operating revenues in 2005.
Markets
The Company transports a wide variety of commodities for its customers. In
recent years, chemicals and plastics and construction aggregate were the two
largest commodity groups transported by the Company, constituting 31% and 16%,
respectively, of conventional carload freight revenues in 2005. The following
table summarizes the Company's conventional carload freight revenues by
commodity group as a percentage of such revenues:
Commodity 2005 2004 2003 2002 2001
- --------- ---- ---- ---- ---- ----
Chemicals and plastics ............ 31% 32% 33% 35% 34%
Construction aggregate ............ 16 15 16 20 19
Metal products .................... 14 11 10 7 7
Forest and paper products ......... 13 15 12 13 16
Food and agricultural products .... 11 11 12 12 13
Other, including coal ............. 10 9 8 5 5
Scrap metal and waste ............. 5 7 9 8 6
--- --- --- --- ---
Total .......................... 100% 100% 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
operates. Unlike many other regional and short-line railroads, the Company is
able to offer its customers creative 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.
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 increasing operations
and expanding the work force.
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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.
Overhead traffic passes from one connecting carrier to another and neither
originates nor terminates with shippers located on a railroad. 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.
Rail freight rates can be in various forms. Generally, customers are given
a "through" rate, a single figure 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 between 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, receives revenue greater than an amount based simply on mileage
hauled.
Employees
As of January 1, 2005, the Company had 147 full-time employees, 115 of whom
are represented by three railroad labor organizations that are national in
scope. The Company's 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 re-negotiation after the agreed-upon moratoriums. The labor agreement
may next be amended at July 1, 2006 for the Brotherhood of Railroad Signalmen
(maintenance), while the Transportation Communications Union (clerical) filed a
notice regarding its desire for re-negotiation prior to the end of the agreed
upon moratorium which ended on December 31, 2005. The Company signed an eight
year agreement with the United Transportation Union (trainmen) in October 2005.
The Company considers its employee and labor relations to be good.
Competition
The Company is the only rail carrier serving businesses located on- line.
However, the Company competes with other carriers in the location of new
rail-oriented businesses in the region. Certain rail competitors, including CSX
Transportation and Norfolk Southern, are larger and better capitalized than the
Company. The Company also competes with other modes of transportation,
particularly long-haul trucking companies, for the transportation of
commodities. Any improvement in the cost or quality of these alternate modes of
transportation, 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.
I-4
Governmental Regulation
The Company is subject to governmental regulation by the United States
Surface Transportation Board ("the STB"), the Federal Railroad Administration
("the FRA") 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 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 material compliance
with applicable environmental laws and regulations.
Internet Address and SEC Reports
We maintain 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. 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
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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. A
downturn in general 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
have also fluctuated 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 could 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.
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
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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 Surface Transportation Board. 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
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 in
the location of new businesses in the region. The Company also competes with
other modes of transportation, particularly long-haul trucking companies. Any
improvement in the cost or quality 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.
Customer Concentration
The Company's ten largest customers accounted for approximately 50% of the
Company's operating revenues for 2005 with one customer accounting for more than
13%. The Company's business could be materially adversely affected if any of
these customers reduces shipments of commodities transported by the Company.
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. Significant increases in
the taxes payable pursuant to the Railroad Retirement Act would increase the
Company's costs of operations.
Relationships with Other Railroads
The railroad industry in the United States 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 transporting 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 such projects. However, there
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can be no assurance 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 rail infrastructure improvements and
significantly increase its costs of rail maintenance.
Potential for Increased Governmental Regulation and Mandated Upgrade
to Property
The Company is subject to governmental regulation by the Surface
Transportation Board, the Federal Railroad Administration 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. 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 House of Representatives and Senate (which have jurisdiction over the
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. 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 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 financial condition, liquidity 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.
Item 1B. Unresolved Staff Comments
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None
Item 2. Properties
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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 main lines 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 main line tracks which it owns in such excellent condition.
Of the approximately 516 miles of the Company's system, 306 miles, or 59%,
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%, are located in
New York.
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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 2,600 square feet are leased to outside tenants.
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 amount, 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, which is adjacent to 12 acres of land owned by the Company. This
investment has resulted in the creation of approximately 33 acres of waterfront
land which is being held for future development.
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.
Rolling Stock
The following schedule sets forth the rolling stock owned by the Company as
of December 31, 2005:
Description Number
----------- ------
Locomotive .................................................. 31
Gondola ..................................................... 77
Flat Car .................................................... 5
Ballast Car ................................................. 30
Passenger Equipment ......................................... 7
Caboose ..................................................... 2
------
Total .................................................. 152
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The 31 diesel electric locomotives, which include nine pre-owned 3,900
horsepower GE B39-8 locomotives acquired in 2002 and 2003 and three pre-owned GE
B40-8 locomotive 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 and flat cars are considered modern rail cars
and are used by certain P&W customers. 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 adjoining 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.
I-8
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. The system also enables each train
crew to maintain radio contact with other crew members. The Company maintains a
computer facility in Worcester with back-up computer facilities in Worcester and
Plainfield, 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 are equipped with the cab signal technology necessary for
operations on the Northeast Corridor and are equipped with automatic civil speed
enforcement systems which were required by the introduction of high speed
passenger service on the Northeast Corridor.
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 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
Superfund Site. Via these Notice letters, EPA makes a demand for payment of past
costs (identified in the letter as $762,000) 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). 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.
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.
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 is one of about sixty parties named thus far
by Plaintiffs, who seek to recover response costs incurred in investigating and
responding to the releases of hazardous substances at the Site. Plaintiffs
allege 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 has
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 has agreed to settle this suit for
$45,000 and has accrued a liability for this amount as of December 31, 2004 and
2005. A settlement agreement was finalized and the $45,000 was paid in March
2006.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable.
I-9
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 American Stock Exchange ("AMEX") 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
AMEX. 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
---- --- --------- ------
2004
- ----
First Quarter ........ 9.75 8.89 $ 5.00 $ .04
Second Quarter ....... 10.91 9.25 -0- .04
Third Quarter ........ 11.38 9.63 -0- .04
Fourth Quarter ....... 13.50 10.75 -0- .04
2005
- ----
First Quarter ........ 16.16 12.10 $ 5.00 $ .04
Second Quarter ....... 14.97 12.50 -0- .04
Third Quarter ........ 15.20 13.20 -0- .04
Fourth Quarter ....... 15.40 12.52 -0- .04
As of March 3, 2006, there were approximately 681 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
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.
Years Ended December 31,
2005 2004 2003 2002 2001
------- ------- ------- ------- -------
(in thousands, except per share amounts)
Income Statement Data:
Operating revenues .......... $26,734 $24,943 $23,961 $22,868 $22,598
Other income ................ 1,208 1,547 661 877 1,003
------- ------- ------- ------- -------
Total Revenues .............. 27,942 26,490 24,622 23,745 23,601
Operating expenses .......... 26,044 24,802 23,554 23,698 22,245
------- ------- ------- ------- -------
Income before income taxes 1,898 1,688 1,068 47 1,356
Provision for income taxes 640 650 400 25 505
------- ------- ------- ------- -------
Net income .................. 1,258 1,038 668 22 851
Preferred Stock dividend .... 3 3 3 3 3
------- ------- ------- ------- -------
Net income available to
common shareholders ........ $ 1,255 $ 1,035 $ 665 $ 19 $ 848
======= ======= ======= ======= =======
Basic income per common
share ...................... $ .28 $ .23 $ .15 $ -- $ .19
======= ======= ======= ======= =======
Diluted income per common
share ...................... $ .28 $ .23 $ .15 $ -- $ .19
======= ======= ======= ======= =======
Weighted average
shares--basic .............. 4,496 4,470 4,449 4,429 4,390
======= ======= ======= ======= =======
Weighted average
shares--diluted ............ 4,574 4,548 4,516 4,497 4,458
======= ======= ======= ======= =======
Cash dividends declared on
Common Stock ............... $ 720 $ 715 $ 712 $ 710 $ 702
======= ======= ======= ======= =======
December 31,
2005 2004 2003 2002 2001
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Total assets ................ $93,348 $91,471 $90,619 $90,500 $89,161
Shareholders' equity ........ 70,091 69,228 68,691 68,641 69,073
II-2
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.
The statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MDA") which are not historical are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward- looking statements represent the Company's present
expectations or beliefs concerning future events. The Company cautions, however,
that actual results could differ materially from those indicated in MDA.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") defines critical accounting
policies as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
The Company's significant accounting policies are described in Note 1 of the
Notes to Financial Statements. Not all of these significant accounting policies
require management to make difficult, subjective or complex judgments or
estimates. Management believes that the Company's policy for the evaluation of
long-lived asset impairment meets the SEC definition of critical.
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. When factors indicate that assets should be evaluated for
possible impairment, the Company uses an estimate of the related undiscounted
future cash flows over the remaining lives of the assets in 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.
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.
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 shut-downs. 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.
II-3
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 collectibility is
assured. This income varies significantly from year to year.
One of the Company's customers, Tilcon Connecticut, Inc., which ships
construction aggregate from three separate quarries on the Company's system to
asphalt production plants in Connecticut and New York, accounted for
approximately 13.3%, 12.6% and 13.3% of its operating revenues in 2005, 2004,
and 2003, respectively. The Company does not believe that this customer will
cease to be a rail shipper or will significantly decrease its freight volume in
the foreseeable future. In the event that this customer should cease or
significantly reduce its rail freight operations, management believes that the
Company could restructure its operations to reduce operating costs by an amount
sufficient to substantially offset the decrease in operating revenues.
Results of Operations
The following tableF sets forth the Company's operating revenues by category in
dollars and as a percentage of operating revenues:
Years Ended December 31,
-----------------------------------------------
2005 2004 2003
------------- -------------- -------------
(in thousands, except percentages)
Freight Revenues:
Conventional carloads ....... $22,082 82.6% $20,705 83.0% $19,795 82.6%
Containers .................. 3,201 12.0 2,778 11.1 2,953 12.3
Other freight related........ 850 3.2 836 3.4 727 3.1
Other operating revenues...... 601 2.2 624 2.5 486 2.0
------- ----- ------- ----- ------- -----
Total ...................... $26,734 100.0% $24,943 100.0% $23,961 100.0%
======= ===== ======= ===== ======= =====
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,
-----------------------------------------------
2005 2004 2003
------------- -------------- -------------
(in thousands, except percentages)
Chemicals and plastics ....... $ 6,923 31.4% $ 6,684 32.3% $ 6,463 32.7%
Construction aggregate ....... 3,485 15.8 3,102 15.0 3,086 15.6
Metal products ............... 2,985 13.5 2,222 10.7 1,966 9.9
Forest and paper products .... 2,917 13.2 3,036 14.7 2,454 12.4
Food and agricultural products 2,391 10.8 2,325 11.2 2,480 12.5
Coal and other ............... 2,219 10.0 1,868 9.0 1,652 8.3
Scrap metal and waste ........ 1,162 5.3 1,468 7.1 1,694 8.6
------- ----- ------- ----- ------- -----
Total ...................... $22,082 100.0% $20,705 100.0% $19,795 100.0%
======= ===== ======= ===== ======= =====
II-4
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,
-----------------------------------------------
2005 2004 2003
------------- -------------- -------------
(in thousands, except percentages)
Salaries, wages, payroll taxes
and employee benefits ....... $14,401 53.9 $13,758 55.2% $13,550 56.5%
Casualties and insurance ..... 1,084 4.1 1,409 5.6 1,031 4.3
Depreciation ................. 2,764 10.3 2,764 11.1 2,754 11.5
Diesel fuel .................. 2,014 7.5 1,348 5.4 1,203 5.0
Car hire, net ................ 1,123 4.2 954 3.8 753 3.1
Purchased services, including
legal and professional fees . 1,564 5.8 1,357 5.4 1,313 5.5
Repairs and maintenance of
equipment ................... 1,280 4.8 1,046 4.2 947 4.0
Track and signal materials ... 2,428 9.1 1,862 7.5 1,985 8.3
Track usage fees ............. 827 3.1 899 3.6 812 3.4
Other materials and supplies . 1,016 3.8 1,060 4.3 1,056 4.4
Other ........................ 1,680 6.3 1,628 6.5 1,596 6.7
------- ----- ------- ----- ------- -----
Total ....................... 30,181 112.9 28,085 112.6 27,000 112.7
Less capitalized and
recovered costs ............ 4,137 15.5 3,283 13.2 3,446 14.4
------- ----- ------- ----- ------- -----
Total ...................... $26,044 97.4% $24,802 99.4% $23,554 98.3%
======= ===== ======= ===== ======= =====
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Operating Revenues
Operating Revenues increased $1.8 million, or 7.2%, to $26.7 million in 2005
from $24.9 million in 2004. This increase was the result of a $1.4 million
(6.7%) increase in conventional freight revenues, a $423,000 (15.2%) increase in
container freight revenues and a $14,000 (1.7%) increase in other freight
related revenues partially offset by a $23,000 (3.7%) decrease in other
operating revenues.
The increase in conventional freight revenues results from a 6.8% increase in
the average revenue received per conventional carload. Conventional traffic
volume decreased slightly (.1%) between years. The Company's conventional
carloadings decreased by 41 to 33,203 in 2005 from 33,244 in 2004. Rate
increases, including diesel fuel surcharges, and a shift in the mix of
commodities hauled account for the increase in the average rate received per
conventional carload. Increases in carloadings of metal products and coal were
largely offset by smaller decreases in carloadings of various other commodities.
The increase in container freight revenues results from an 18.7% increase in the
average revenue received per container partially offset by a 3.0% decrease in
container traffic volume. Intermodal containers handled during 2005 decreased by
1,913 to 62,905 from 64,818 in 2004. The increase in the average revenue
received per container is attributable to contractual rate adjustments as well
as a shift in the mix of containers handled.
The increase in other freight revenues results from increased demurrage billings
largely offset by decreases in secondary switching and other charges. This
increased demurrage revenue offsets the increased car hire expense incurred
during the year.
The decrease in other operating revenues results from an overall reduction in
maintenance department billings. Revenues of this type vary from year to year
depending upon the needs of freight customers and other outside parties.
Other Income
Other income decreased by $339,000 to $1.2 million in 2005 from $1.5 million in
2004. The decrease results from the fact that 2004 included a $948,000 gain
realized on the disposal of a portion of a branch line which the Commonwealth of
Massachusetts acquired by eminent domain during the year, whereas 2005 did not
include any gains of that magnitude. Revenues of this nature typically vary from
year to year.
II-5
realized on the disposal of a portion of a branch line which the Commonwealth of
Massachusetts acquired by eminent domain during the year. Revenues of this
nature typically vary from year to year.
Operating Expenses
Operating expenses increased by $1.2 million, or 4.8%, to $26.0 million in 2005
from $24.8 million in 2004. Expressed as a percentage of operating revenues,
however, operating expenses decreased to 97.4% in 2005 compared to 99.4% in
2004. Diesel fuel expense for the year increased by $666,000 reflecting the high
cost of petroleum products in effect in 2005. Car hire expense increased by
$169,000 during the year which costs were largely offset by increased demurrage
revenue as previously discussed.
Provision for Income Taxes
The Company's income tax provision for 2005 amounts to 34% of income before
income taxes compared to 39% in 2004. The largest component of this decrease is
$65,000 of railroad tax maintenance credits which the Company was able to
utilize in 2005 to reduce its current income tax provision. utilize in 2005 to
reduce its current income tax provision.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Operating Revenues
Operating Revenues increased $982,000, or 4.1%, to $24.9 million in 2004 from
$24.0 million in 2003. This increase was the net result of a $910,000 (4.6%)
increase in conventional freight revenues, a $109,000 (15.0%) increase in other
freight related revenues and a $138,000 (28.4%) increase in other operating
revenues partially offset by a $175,000 (5.9%) decrease in container freight
revenues.
The increase in conventional freight revenues results from a 4.1% increase in
carloadings. The average revenue received per carloading increased by less than
one percent between years. The Company's conventional carloadings increased by
1,296 to 33,244 in 2004 from 31,948 in 2003. The increase in carloadings was
spread throughout the mix of commodities handled by the Company with no
particular commodity experiencing a disproportionate increase or decrease in
volume. The small increase in the average revenue per carloading reflects a
slight shift in the mix of commodities from construction aggregates to higher
rated commodities.
The decrease in container freight revenues results from a 1.0% decrease in
traffic volume and a 4.9% decrease in the average revenue received per
container. Intermodal containers handled decreased by 667 to 64,818 in 2004 from
65,485 in 2003. The decrease in the average revenue received per container
results from contractual rate adjustments, as well as a shift in the mix of
containers handled.
The increase in other freight related revenues is largely attributable to
increased demurrage charges, secondary switching fees, weighing charges, special
train charges, etc. Revenues of this nature can vary from year to year depending
upon the needs of freight customers.
The increase in other operating revenues is due to maintenance department
billings to freight customers and other outside parties. Revenues of this type
typically vary from year to year depending upon customer requirements.
Other Income
Other income increased by $886,000 to $1.5 million in 2004 from $661,000 in
2003. This increase is the result of a $948,000 gain realized on the disposal of
a portion of a branch line which the Commonwealth of Massachusetts acquired by
eminent domain during the year.
Operating Expenses
Operating expenses increased $1.2 million, or 5.3%, to $24.8 million in 2004
from $23.6 million in 2003. Operating expenses as a percentage of operating
revenues increased to 99.4% from 98.3% in 2003. Operating expenses in 2004
includes a $425,000 provision for casualty losses, $208,000 of which was to
settle a lawsuit judgment against the Company. In addition, the Company's
profit-sharing expense for 2004 was $188,000 compared to $119,000 in 2003.
II-6
Liquidity and Capital Resources
The Company generated $4.9 million, $3.1 million and $2.4 million of cash from
operations in 2005, 2004 and 2003, respectively. The Company's total cash and
cash equivalents increased by $328,000 in 2005, $503,000 in 2004 and decreased
by $1.7 million in 2003. The principal utilization of cash during the three year
period was for expenditures for property and equipment acquisitions and payment
of dividends.
During 2005, 2004 and 2003 the Company generated $691,000, $1.5 million and
$237,000, respectively, from the sales and disposals of properties not
considered essential for railroad operations and from the granting of easements
and licenses. The Company holds various properties which could be made available
for sale, lease or grants of easements and licenses. Revenues from sales of
properties, easements and licenses can vary significantly from year to year.
In June 2005, the Company's principal bank renewed the Company's $3.0 million
revolving line of credit for a two year period through May 31, 2005. Borrowings
under this line are unsecured and bear interest at either the prime rate or one
and one half per cent over either the one or three month London Interbank
Offered Rates. The Company does not pay any commitment fee on this line and has
no compensating balance requirements. The Company had no advances against this
line of credit during 2005 and 2004.
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 $2.9 million, $2.5 million and $2.5 million for track structure and
bridge improvements in 2005, 2004 and 2003, respectively. Deferred grant income
of $411,000 in 2005, $39,000 in 2004 and $399,000 in 2003 financed a portion of
these improvements. Management estimates that $2.5 million to $3.0 million of
improvements to the Company's track structure and bridges will be made in 2006,
provided that sufficient funds, including grant proceeds, are available.
Improvements to the Company's track structure are made, for the most part, by
the Company's Maintenance of Way Department personnel.
During 2004 the Company entered into a contract for the construction of a
building for its Communications and Signals Department on land which it owns in
Plainfield, Connecticut. Construction costs of $44,000 were incurred under this
contract through December 31, 2004. The building was completed and placed in
service during 2005 at a total cost of $506,000
In 2005, the Company paid dividends in the amount of $5.00 per share,
aggregating $3,000, on its outstanding noncumulative preferred stock and $0.16
per share, aggregating $721,000, 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 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
Superfund Site. Via these Notice letters, EPA makes a demand for payment of past
costs (identified in the letter as $762,000) 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). 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.
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
II-7
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.
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 is one of about sixty parties named thus far
by Plaintiffs, who seek to recover response costs incurred in investigating and
responding to the releases of hazardous substances at the Site. Plaintiffs
allege 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 has
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 has agreed to settle this suit for
$45,000 and has accrued a liability for this amount as of December 31, 2004 and
2005. A settlement agreement was finalized and the $45,000 was paid in March
2006.
Land Held for Development
Pursuant to permits issued by the United States Department of the Army Corps of
Engineers ("ACE") and the Rhode Island Coastal Resources Management Council
("CRMC"), the Company created 33 acres of waterfront land in East Providence,
Rhode Island ("South Quay"). The permits for the property, both of which have
been extended to 2009, 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 a half mile from I-195. In 1999, the Rhode Island
Department of Transportation entered into a contract for engineering services to
undertake roadway improvements to provide direct vehicular access from the
interstate highway system to the South Quay. The project is anticipated to be
substantially complete by 2007.
The City of East Providence has created a large 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.
In addition, the State of Rhode Island is moving forward with the plan,
described above, that will provide a direct connection from I-195 to the South
Quay.
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 2005 and 2004. 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.
II-8
Year Ended December 31, 2005
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating Revenues .................... $ 5,640 $ 6,588 $ 7,449 $ 7,057
Other income .......................... 195 164 133 716
------- ------- ------- -------
Total revenues ........................ 5,835 6,752 7,582 7,773
Operating expenses .................... 6,205 6,435 6,475 6,929
------- ------- ------- -------
Income (loss) before income taxes
(benefits) ........................... (370) 317 1,107 844
Provision for income taxes
(benefits) ........................... (115) 110 405 240
------- ------- ------- -------
Net income (loss) ..................... $ (255) $ 207 $ 702 $ 604
------- ------- ------- -------
Basic income (loss) per common
share ................................ $ (.06) $ .05 $ .16 $ .13
------- ------- ------- -------
Diluted income (loss) per common
share ................................ $ (.06) $ .05 $ .16 $ .13
------- ------- ------- -------
Year Ended December 31, 2004
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating Revenues .................... $ 5,067 $ 6,493 $ 7,036 $ 6,347
Other income .......................... 121 142 1,169 115
------- ------- ------- -------
Total revenues ........................ 5,188 6,635 8,205 6,462
Operating expenses .................... 5,875 6,293 6,193 6,441
------- ------- ------- -------
Income (loss) before income taxes
(benefits) ........................... (687) 342 2,012 21
Provision for income taxes
(benefits) ........................... (225) 120 715 40
------- ------- ------- -------
Net income (loss) ..................... $ (462) $ 222 $ 1,297 $ (19)
------- ------- ------- -------
Basic income (loss) per common
share ................................ $ (.10) $ .05 $ .29 $ --
------- ------- ------- -------
Diluted income (loss) per common
share ................................ $ (.10) $ .05 $ .28 $ --
------- ------- ------- -------
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 aggregate shipments during this period and to
winter weather conditions.
II-9
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 123R, "Share-Based Payment." ("SFAS No.
123R"). This Statement is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), and supersedes Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB No.
25"), and its related implementation guidance. SFAS No. 123R focuses primarily
on accounting for transactions in which an entity obtains employee services in
share- based payment transactions. The Statement requires entities to recognize
compensation expense for awards of equity instruments to employees based on the
grant-date fair value of those awards (with limited exceptions). In April 2005
the Securities and Exchange Commission issued a revision to SFAS No. 123R and
the effective date for this pronouncement is the first annual reporting period
that begins after June 15, 2005, although earlier adoption is encouraged.
Effective January 1, 2006, we adopted the provisions of SFAS No. 123R using the
statement's modified-prospective transition method. Adoption of SFAS No. 123R
will not affect the Company's cash flows or financial position, but it will
reduce periodically reported income and earnings per share. We previously
applied the intrinsic value based method prescribed in APB Opinion No. 25 in
accounting for employee stock-based compensation. Going forward, we will
recognize stock-based compensation costs ratably over the service period. This
statement also amends SFAS No. 95, "Statement of Cash Flows", to require that
excess tax benefits be reflected as financing cash inflows rather than operating
cash inflows. In March 2005, the SEC issued Staff Accounting Bulletin, or SAB
No. 107 regarding the Staff's interpretation of SFAS No. 123R. This
interpretation provides the Staff's views regarding interactions between SFAS
No. 123R and certain SEC rules and regulations and provides interpretations of
the valuation of share- based payments for public companies. The interpretive
guidance is intended to assist companies in applying the provisions of SFAS No.
123R and investors and users of the financial statements in analyzing the
information provided. We will follow the guidance prescribed in SAB No. 107 in
connection with our adoption of SFAS No. 123R. The impact of the adoption of
SFAS No. 123R and SAB No. 107 is estimated to result in a compensation charge
for 2006 which is not material.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Cash and Equivalents
As of December 31, 2005, the Company is exposed to market risks which primarily
include changes in U.S. interest rates.
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. In
addition, the Company's revolving line of credit agreement provides for
borrowings which bear interest at variable rates based on either prime rate or
one and one half percent over either the one or three month London Interbank
Offered Rates. The Company had no borrowings outstanding pursuant to the
revolving line of credit agreement at December 31, 2005. 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.
II-10
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-12
Balance Sheets as of December 31, 2005 and 2004...... II-13
Statements of Income for the Years Ended December 31,
2005, 2004 and 2003................................. II-14
Statements of Shareholders' Equity for the Years Ended
December 31, 2005, 2004 and 2003.................... II-15
Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003.................... II-16
Notes to Financial Statements........................ II-17
II-11
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, 2005 and 2004, and the
related statements of income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2005. Our audits also included
the financial statement schedule listed in the Index at Item 15(a)(2). 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 auditing 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 on 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, 2005 and 2004, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2005, 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
Boston, Massachusetts
March 24, 2006
II-12
PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS
(Dollars in Thousands Except Per Share Amounts)
December 31,
2005 2004
------- -------
ASSETS
Current Assets:
Cash and cash equivalents ............................. $ 2,063 $ 1,735
Accounts receivable, net of allowance for
doubtful accounts of $175 in 2005 and $125 in 2004.... 3,202 3,564
Materials and supplies ................................ 1,654 1,889
Prepaid expenses and other current assets ............. 152 239
Deferred income taxes ................................. 193 212
------- -------
Total Current Assets ................................. 7,264 7,639
Property and Equipment, net ............................ 74,126 71,874
Land Held for Development .............................. 11,958 11,958
------- -------
Total Assets ........................................... $93,348 $91,471
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ...................................... $ 1,905 $ 1,679
Accrued expenses ...................................... 1,471 1,284
------- -------
Total Current Liabilities ............................ 3,376 2,963
------- -------
Profit-Sharing Plan Contribution ....................... 211 188
------- -------
Deferred Income Taxes .................................. 11,530 11,129
------- -------
Deferred Grant Income .................................. 8,140 7,963
------- -------
Commitments and Contingencies (Note 8)
Shareholders' Equity:
Preferred stock, 10% noncumulative, $50 par
value; authorized, issued and outstanding 645
shares in 2005 and 2004 .............................. 32 32
Common stock, $.50 par value; authorized
15,000,000 shares; issued and outstanding
4,507,056 shares in 2005 and 4,481,007 shares
in 2004 .............................................. 2,254 2,241
Additional paid-in capital ............................ 30,230 29,914
Retained earnings ..................................... 37,575 37,041
------- -------
Total Shareholders' Equity ........................... 70,091 69,228
------- -------
Total Liabilities and Shareholders' Equity ............. $93,348 $91,471
======= =======
The accompanying notes are an integral part of the financial statements.
II-13
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31,
2005 2004 2003
-------- -------- --------
Revenues:
Operating Revenues ........................... $26,734 $24,943 $23,961
Other Income ................................. 1,208 1,547 661
-------- -------- --------
Total Revenues ............................. 27,942 26,490 24,622
-------- -------- --------
Expenses:
Operating:
Maintenance of way and structures ........... 3,739 3,404 3,639
Maintenance of equipment .................... 2,886 2,627 2,421
Transportation .............................. 7,892 7,335 6,701
General and administrative .................. 4,333 4,205 3,876
Depreciation ................................ 2,764 2,764 2,754
Taxes, other than income taxes .............. 2,045 2,209 2,258
Car hire, net ............................... 1,123 954 753
Employee retirement plans ................... 435 405 340
Track usage fees ............................ 827 899 812
-------- -------- --------
Total Operating Expenses ................... 26,044 24,802 23,554
-------- -------- --------
Income before Income Taxes .................... 1,898 1,688 1,068
Provision for Income Taxes .................... 640 650 400
-------- -------- --------
Net Income .................................... 1,258 1,038 668
Preferred Stock Dividends ..................... 3 3 3
-------- -------- --------
Net Income Available to Common Shareholders ... $ 1,255 $1,035 $ 665
======= ======= =======
Basic and Diluted Income Per Common Share ..... $ .28 $ .23 $ .15
======= ======= =======
The accompanying notes are an integral part of the financial statements.
II-14
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 2005, 2004 and 2003
Additional Share-
Preferred Common Paid-in Retained holders'
Stock Stock Capital Earnings Equity
------- ------- ------- ------- -------
Balance, January 1, 2003 . $ 32 $ 2,222 $29,619 $36,768 $68,641
Issuance of 14,114 common
shares for stock options
exercised, employee stock
purchases, and other .... 7 90 97
Dividends paid:
Preferred stock, $5.00 per
share .................. (3) (3)
Common stock, $.16 per share (712) (712)
Net income for the year .. 668 668
------- ------- ------- ------- -------
Balance, December 31, 2003. 32 2,229 29,709 36,721 68,691
Issuance of 12,628 common
shares to fund the Company's
2003 profit sharing plan
contribution ............ 6 113 119
Issuance of 10,885 common
shares for stock options
exercised, employee stock
purchases, and other .... 6 92 98
Dividends paid:
Preferred stock, $5.00 per
share .................. (3) (3)
Common stock, $.16 per share (715) (715)
Net income for the year .. 1,038 1,038
------- ------- ------- ------- -------
Balance, December 31, 2004 32 2,241 29,914 37,041 69,228
Issuance of 13,980 common
shares to fund the Company's
2004 profit sharing plan
contribution ............ 7 181 188
Issuance of 12,069 common
shares for stock options
exercised, employee stock
purchases, and other .... 6 135 141
Dividends paid:
Preferred stock, $5.00 per
share .................. (3) (3)
Common stock, $.16 per share (721) (721)
Net income for the year .. 1,258 1,258
------- ------- ------- ------- -------
Balance, December 31, 2005 $ 32 $ 2,254 $30,230 $37,575 $70,091
======= ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
II-15
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Years Ended December 31,
2005 2004 2003
------- ------- -------
Cash Flows from Operating
Activities:
Net income ................................... $ 1,258 $1,038 $ 668
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation ............................... 2,764 2,764 2,754
Amortization of deferred grant income ...... (234) (229) (224)
Profit-sharing plan contribution to be
funded with common stock ................. 211 188 119
Gains from sale, condemnation and
disposal of property, equipment and
easements, net ........................... (691) (1,081) (206)
Deferred income taxes ...................... 420 850 295
Other, net ................................. 32 7 32
Increase (decrease) in cash and
equivalents from:
Accounts receivable ...................... 422 118 (559)
Materials and supplies ................... 235 (118) (137)
Prepaid expenses and other ............... 87 -- 297
Accounts payable and accrued expenses .... 405 (396) (604)
------- ------- -------
Net cash flows from operating activities ..... 4,909 3,141 2,435
------- ------- -------
Cash Flows from Investing Activities:
Purchase of property and equipment ........... (5,011) (3,659) (4,127)
Proceeds from sale and condemnation of
property, equipment and easements ........... 691 1,488 237
Proceeds from deferred grant income .......... 351 156 427
------- ------- -------
Net cash flows used in investing activities (3,969) (2,015) (3,463)
------- ------- -------
Cash Flows from Financing Activities:
Dividends paid ............................... (724) (718) (715)
Issuance of common shares for stock options
exercised and employee stock purchases ...... 112 95 87
------- ------- -------
Net cash flows used in financing activities .. (612) (623) (628)
------- ------- -------
Increase (Decrease) in Cash and Cash
Equivalents .................................. 328 503 (1,656)
Cash and Cash Equivalents, Beginning of Year .. 1,735 1,232 2,888
------- ------- -------
Cash and Cash Equivalents, End of Year ........ $ 2,063 $ 1,735 $ 1,232
======= ======= =======
Supplemental Disclosures:
Cash paid during year for income taxes ....... $ -- $ -- $ 35
======= ======= =======
The accompanying notes are an integral part of the financial statements.
II-16
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(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 (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.
One customer accounted for 13.3%, 12.6% and 13.3% of the Company's
operating revenues in 2005, 2004 and 2003, respectively.
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. 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. Gains or
losses on sales or other dispositions are credited or charged to income.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:
Track structure 20 to 67 years
Buildings and other structures 33 to 45 years
Equipment 4 to 25 years
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. When factors indicate that assets should be evaluated
for possible impairment, the Company uses an estimate of the related
undiscounted future cash flows over the remaining lives of the assets in
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.
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 ($234 in 2005, $229 in 2004 and $224 in 2003).
II-17
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
collectibility is assured.
Income Taxes
------------
Deferred income taxes are recorded based on the differences between the
financial statement and tax basis of assets and liabilities. Such deferred
income taxes are also adjusted to reflect changes in the U.S. tax laws when
enacted and changes in state tax rates. Valuation allowances are recorded
against deferred tax assets that are not expected to be realized.
Income per Common Share
-----------------------
Basic income per common share is computed using the weighted average number
of common shares outstanding during each year. Diluted income per common
share reflects the effect of the Company's outstanding convertible
preferred stock and options (using the treasury stock method), except where
such items would be antidilutive.
A reconciliation of weighted average shares used for the basic computation
and that used for the diluted computation is as follows:
Years Ended December 31,
2005 2004 2003
--------- --------- ---------
Weighted average shares for basic ...... 4,495,683 4,470,332 4,448,627
Dilutive effect of convertible preferred
stock and options ..................... 77,975 77,278 67,050
--------- --------- ---------
Weighted average shares for diluted .... 4,573,658 4,547,610 4,515,677
========= ========= =========
Options to purchase 5,029, 11,110 and 118,517 shares of common stock were
outstanding during 2005, 2004 and 2003, respectively, but were not included
in the computation of diluted earnings per common share because their
effect would be antidilutive.
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. The Company's principal estimates
include the allowance for doubtful accounts, useful lives of properties,
accrued liabilities including health insurance claims and legal and other
contingencies, and income taxes.
o The Company has a self funded medical plan with stop-loss insurance
which covers all of its full time employees. Medical claims are paid
from a claims fund which the Company contributes to monthly. The
estimated liability for unpaid claims incurred is adjusted at the end
II-18
of each reporting period based upon historical experience modified by
actual claim payments made through the date the financial statements
are issued.
o 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.
Stock Based Compensation
------------------------
The Company accounts for stock-based compensation awards to employees using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Had the Company
used the fair value method to value compensation, as set forth in Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and net income per share would have
been reported as follows:
Years Ended December 31,
2005 2004 2003
------- ------- -------
Net income (loss) available to common shareholders:
As reported ............................. $ 1,255 $ 1,035 $ 665
Less impact of stock option expense,
net of tax effects ..................... 42 40 38
------- ------- -------
Pro forma ............................... $ 1,213 $ 995 $ 627
======= ======= =======
Basic income per share:
As reported ............................. $ .28 $ .23 $ .15
Less impact of stock option expense,
net of tax effects ..................... .01 .01 .01
------- ------- -------
Pro forma ............................... $ .27 $ .22 $ .14
======= ======= =======
Diluted income per share:
As reported ............................. $ .28 $ .23 $ .15
Less impact of stock option expense,
net of tax effects .................... .01 .01 .01
------- ------- -------
Pro forma ............................... $ .27 $ .22 $ .14
======= ======= =======
The fair value of options on their grant date is measured using the
Black/Scholes option pricing model. The estimated weighted average fair
value of options granted during 2005, 2004 and 2003 were $ . , $5.24, and
$4.49, respectively. Key assumptions used to apply this pricing model are
as follows:
2005 2004 2003
--------- --------- ---------
Average risk-free interest rate 3.94% 3.90% 3.62%
Expected life of option grants 7.0 years 7.0 years 7.0 years
Expected volatility of underlying stock 65% 70% 73%
Expected dividend payment rate, as
a percentage of the share price
on the date of grant 1.19% 1.80% 2.06%
Comprehensive Income
--------------------
Comprehensive Income equals net income for 2005, 2004 and 2003.
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
II-19
freight customers and other outside parties by the Company's Maintenance of
Way, Communications & Signals and Maintenance of Equipment Departments.
Recently Issued Financial Accounting Standards
----------------------------------------------
In December 2004, the Financial Accounting Standards Board issued Statement
on Financial Accounting Standards No. 123R, "Share-Based Payment." ("SFAS
No. 123R"). This Statement is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), and supersedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", ("APB No. 25"), and its related implementation guidance. SFAS
No. 123R focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. The
Statement requires entities to recognize compensation expense for awards of
equity instruments to employees based on the grant-date fair value of those
awards (with limited exceptions). In April 2005 the Securities and Exchange
Commission issued a revision to SFAS No. 123R and the effective date for
this pronouncement is the first annual reporting period that begins after
June 15, 2005, although earlier adoption is encouraged.
Effective January 1, 2006, we adopted the provisions of SFAS No. 123R using
the statement's modified-prospective transition method. Adoption of SFAS
No. 123R will not affect the Company's cash flows or financial position,
but it will reduce periodically reported income and earnings per share. We
previously applied the intrinsic value based method prescribed in APB
Opinion No. 25 in accounting for employee stock-based compensation. Going
forward, we will recognize stock-based compensation costs ratably over the
service period. This statement also amends SFAS No. 95, "Statement of Cash
Flows", to require that excess tax benefits be reflected as financing cash
inflows rather than operating cash inflows. In March 2005, the SEC issued
Staff Accounting Bulletin, or SAB No. 107 regarding the Staff's
interpretation of SFAS No. 123R. This interpretation provides the Staff's
views regarding interactions between SFAS No. 123R and certain SEC rules
and regulations and provides interpretations of the valuation of
share-based payments for public companies. The interpretive guidance is
intended to assist companies in applying the provisions of SFAS No. 123R
and investors and users of the financial statements in analyzing the
information provided. We will follow the guidance prescribed in SAB No. 107
in connection with our adoption of SFAS No. 123R. The impact of the
adoption of SFAS No. 123R and SAB No. 107 is estimated to result in a
compensation charge for 2006 which is not material.
2. Property and Equipment
Property and equipment consists of the following:
December 31,
2005 2004
------- -------
Land and improvements .................... $10,938 $10,609
Track structure .......................... 70,445 67,368
Buildings and other structures ........... 8,363 7,916
Equipment ................................ 26,052 25,577
------- -------
115,798 111,470
Less accumulated depreciation ............ 41,672 39,596
------- -------
Total property and equipment, net......... $74,126 $71,874
======= =======
II-20
3. Land Held for Development
Pursuant to permits issued by the United States Department of the Army
Corps of Engineers ("ACE") and the Rhode Island Coastal Resources
Management Council ("CRMC"), the Company created 33 acres of waterfront
land in East Providence, Rhode Island ("South Quay"). The permits for the
property, both of which have been extended to 2009, 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 with a carrying
value of $11,958.
The property is located a half mile from I-195. In 1999, the Rhode Island
Department of Transportation entered into a contract for engineering
services to undertake roadway improvements to provide direct vehicular
access from the interstate highway system to the South Quay. The project is
anticipated to be substantially complete by 2007.
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. In addition, the State of Rhode Island is moving forward with the
plan, described above, that will provide a direct connection from I-195 to
the South Quay.
4. Revolving Line of Credit
The Company has a revolving line of credit with its principal bank in the
amount of $3,000 expiring May 31, 2007. Borrowings under this line of
credit are unsecured, due on demand and bear interest at either the bank's
prime rate or one and one half percent over either the one or three month
London Interbank Offered Rates. The Company pays no commitment fee on this
line and has no compensating balance requirements. There were no loans
outstanding under the line at any time during 2005 or 2004.
5. Accrued Expenses
Accrued expenses consist of the following:
December 31,
2005 2004
------- -------
Simplified employee pension plan
contributions ........................ $ 229 $ 210
Health insurance plan claims ......... 375 150
Casualty loss claims ................. 370 473
Other ................................ 497 451
------- -------
$ 1,471 $ 1,284
======= =======
6. Other Income
Other income consists of the following: Years Ended December 31,
2005 2004 2003
------ ------ ------
Gains from sale, condemnation and
disposal of property, equipment and
easements, net ...................... $ 691 $1,081 $ 206
Rentals and license fees under
various operating leases ............ 486 454 443
Interest ............................. 31 12 12
------ ------ ------
$1,208 $1,547 $ 661
====== ====== ======
II-21
Gains from sale, condemnation and disposal of property, equipment and
easements for 2004 includes a $948,000 gain realized on the disposal of a
portion of a branch line which the Commonwealth of Massachusetts acquired
by eminent domain.
7. Income Taxes
The provision for income taxes consists of the following:
Years Ended December 31,
2005 2004 2003
------ ------ ------
Current:
Federal .......................... $ 202 $ (210) $ 105
State ............................ 18 10 --
------ ------ ------
220 (200) 105
Deferred, Federal and State ....... 420 850 295
------ ------ ------
$ 640 $ 650 $ 400
====== ====== ======
The following summarizes the estimated tax effect of temporary differences
that are included in the net deferred income tax provision:
Years Ended December 31,
2005 2004 2003
----- ----- -----
Depreciation ........................... $ 462 $ 462 $ 431
Deferred grant income .................. (63) 68 (62
Gains from sale, condemnation and
disposal of property and equipment..... -- 348 (8)
Accrued casualty and other claims ...... 37 (14) (74)
Other .................................. (16) (14) 8
----- ----- -----
$ 420 $ 850 $ 295
===== ===== =====
In 2005 the Company generated Railroad Track Maintenance Credits in the
amount of $1,124. 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. The Company
utilized $65 of these credits to reduce its current federal income tax
liability in 2005. The unused credits, in the amount of $1,059 constitute
deferred income tax assets. Such assets, however, have been fully reserved
since their future realization is not assured.
II-22
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes anFd the amounts used for income tax purposes. The tax
effects of significant items comprising the Company's net deferred income
tax liability as of December 31, 2005 and 2004 are as follows:
December 31,
2005 2004
------- -------
Deferred income tax liabilities -
Differences between book and tax basis
of property and equipment ....................... $14,420 $13,956
------- -------
Deferred income tax assets:
Deferred grant income ........................... 2,890 2,827
Accrued casualty and other claims ............... 131 168
Allowance for doubtful accounts and other........ 62 44
------- -------
3,083 3,039
------- -------
Net deferred income tax liability ................ $11,337 $10,917
======= =======
A reconciliation of the U.S. federal statutory rate to the
effective tax rate is as follows:
Years Ended December 31,
2005 2004 2003
---- ---- ----
Federal statutory rate ....................... 34% 34% 34%
Depreciation of properties acquired from
bankrupt railroads having a tax basis
in excess of cost ........................... (1) (2) (6)
Railroad track maintenance credits ........... (3) -- --
Non deductible expenses, state income
taxes, etc .................................. 4 7 9
---- ---- ----
Effective tax rate ........................... 34% 39% 37%
==== ==== ====
8. Commitments and Contingencies
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 Superfund 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). The Company believes that none
II-23
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.
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.
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 is one of about
sixty parties named thus far by Plaintiffs, who seek to recover response
costs incurred in investigating and responding to the releases of hazardous
substances at the Site. Plaintiffs allege 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 has 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 has agreed to settle this suit for
$45 and has accrued a liability for this amount as of December 31, 2004and
2005. A settlement agreement was finalized and the $45 was paid in March
2006.
9. Employee Benefit Plans
Stock Option Plan
-----------------
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 SOP has
authorized 50,000 common shares or 5% of the shares of common stock
outstanding, whichever is greater (225,353 shares at December 31, 2005).
Options granted under the SOP, which are fully vested when granted, are
exercisable over a ten year period at the market price for the Company's
common stock as of the date the options are granted.
II-24
Changes in stock options outstanding are as follows:
Weighted Average
----------------
Number Exercise Fair
of shares Price Value
------ ------ ------
Outstanding at January 1, 2003 .... 48,759 $ 9.35
Granted ........................... 8,270 7.75 $ 4.49
Exercised ......................... (2,344) 7.21
Expired ........................... (3,379) 7.34
------ ------ ------
Outstanding and exercisable at
December 31, 2003................. 51,306 9.32
Granted ........................... 8,340 8.89 $ 5.24
Exercised ......................... (3,242) 8.04
Expired ........................... (10,181) 8.68
------ ------ ------
Outstanding and exercisable at
December 31, 2004................. 46,223 9.47
Granted ........................... 8,260 13.49 $ 8.02
Exercised ......................... (4,006) 10.35
Expired ........................... (5,809) 8.95
------ ------ ------
Outstanding and exercisable at
December 31, 2005................. 44,668 $10.20
====== ====== ======
The following table sets forth information regarding options at December
31, 2005:
Weighted Average
Range of Number ----------------
Number Exercise Currently Exercise Remaining
of Options Prices Exercisable Price Life (in years)
--------- ---------- ---------- ---------- -----------
28,773 $6.88 - 8.84 28,773 $7.71 6
15,895 12.38 - 18.38 15,895 14.72 6
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 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 on the day contributed. Contributions accrued under
this Plan amounted to $211 in 2005, $188 in 2004 and $119 in 2003. The
Company made its 2003 and 2004 contributions and intends to make its 2005
contribution in newly issued shares of its common stock.
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 in 2005, $203 in 2004 and $204 in
2003 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
II-25
1997. Any shares purchased under the ESPP are subject to a two year
lock-up. ESPP purchases amounted to 5,928 shares in 2005, 7,439 shares in
2004 and 10,665 shares in 2003.
10. Preferred Stock
The Company's $50 par value preferred stock is convertible into 100 shares
of common stock at the option of the shareholder. 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-26
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
Item 9A. Controls and Procedures
- --------------------------------
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company carried out an evaluation of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
as of the end of the year covered by this annual report. This evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Treasurer. Based upon that evaluation, the Chief Executive Officer and the
Treasurer concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms.
There was no significant change in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal year that has
materially affected, or is reasonably likely to affect, the Company's internal
control over financial reporting.
Item 9B. Other Information
- --------------------------
None.
II-27
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
For information with respect to the directors of the Company, see Pages 3
through 6 of the Company's definitive proxy statement for the 2005 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 73 Chairman 1980
P. Scott Conti 48 President 2005
David F. Fitzgerald 55 Vice President 2005
Frank K. Rogers 44 Vice President 2005
Robert J. Easton 62 Treasurer 1988
Mary A. Tanona 48 Secretary 2000
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 1999 until his election as
President in 2005. Prior to that he served first as Engineering Manager and then
Chief Engineer after joining the Company in 1988. Mr. Fitzgerald joined the
Company in 1973 and served as Superintendent of Transportation prior to his
election as Vice President in 2005. Mr. Rogers joined the Company in 1994 and
served as Director of Marketing prior to his election as Vice President in 2005.
Ms. Tanona joined the Company as Assistant General Counsel and Assistant
Secretary in 1999 and was named secretary and General Counsel in 2000. Prior to
joining the Company she was Associate General Counsel of Arbor National
Commercial Mortgage Corporation in Boston.
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 6 through 10 of the Company's definitive proxy statement for the 2006
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 pages 12 and 13 of the Company's definitive proxy statement for the 2006
annual meeting of its shareholders, which pages are incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
See page 5 of the Company's definitive proxy statement for the 2006 annual
meeting of its shareholders which page is incorporated herein by reference.
III-1
Item 14. Principal Accountant Fees and Services
- -----------------------------------------------
See pages 14 and 15 of the Company's definitive proxy statement for the 2006
annual meeting of its shareholders which pages are incorporated herein by
reference.
Item 15. Exhibits and Financial Statement Schedules
- ---------------------------------------------------
(a) (1) All financial statements:
An index of financial statements is included in Item 8, page II- 11 of
this annual report
(2) Financial Statement schedule:
Schedule II Valuation and Qualifying AccountsPage........ III-4
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.
(10A)Material Contracts (incorporated by reference to Exhibit 10 to
the registration statement of the Registrant on Form 10, to the
Non-Qualified Stock Option Plan and Employee Stock Purchase Plan
of the Registrant on Forms S-8 and to the registration statements
of the Registrant on Form S-1).
(23) Consent of Independent Registered Public Accounting Firm
(31) Certifications 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.
(b) Not applicable.
(c) Exhibits (annexed).
Financial Statement Schedule. See item (a) (2) above
III-2
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 24, 2006
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 24, 2006
Robert H. Eder Officer
and Chairman
(Principal
Executive Officer)
/s/ P. Scott Conti
________________________ President and March 24, 2006
P. Scott Conti Director
(Chief Operating
Officer)
/s/ Robert J. Easton
________________________ Treasurer March 24, 2006
Robert J. Easton (Principal financial
officer and principal
accounting officer)
/s/ Richard W. Anderson
________________________ Director March 24, 2006
Richard W. Anderson
/s/ Frank W. Barrett
________________________ Director March 24, 2006
Frank W. Barrett
/s/ J. Joseph Garrahy
________________________ Director March 24, 2006
J. Joseph Garrahy
III-3
SCHEDULE II
PROVIDENCE AND WORCESTER RAILROAD COMPANY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
(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 Deductions of
of period describe (A) period
Allowance for doubtful
accounts:
Year ended
December 31, 2005..... $125 $ 50 $ 0 $175
==== ==== ==== ====
Year ended
December 31, 2004..... $125 $ 8 $ 8 $125
==== ==== ==== ====
Year ended
December 31, 2003..... $125 $125
==== ====
(A) Bad debts written off.
III-4
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 of Providence and Worcester Railroad Company
on Form S-8 of our report dated March , 2006 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, 2005.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 24, 2006
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:
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)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report, based on our evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
DATE: March 24, 2006
/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, ROBERT J. EASTON 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)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report, based on our evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
DATE: March 24, 2006
/s/ Robert J. Easton
By:
______________________________
Robert J. Easton
Treasurer and Principal
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, 2005, as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Robert H. Eder, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13 (a) or 15
(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Robert H. Eder
_____________________________
Robert H. Eder,
Chairman of the Board and Chief
Executive Officer
March 24, 2006
In connection with the Annual Report of Providence and Worcester Railroad
Company (the Company) on form 10-K for the year ended December 31, 2005, as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Robert J. Easton, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15
(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Robert J. Easton
_____________________________
Robert J. Easton,
Treasurer and Chief Financial Officer
March 24, 2006