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, 2008
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-16704
PROVIDENCE AND WORCESTER RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0344399
_____________________________ __________________________
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
75 Hammond Street, Worcester, Massachusetts 01610
_____________________________ __________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(508) 755-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
_____________________________ __________________________
Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.50 par value
________________________________________________________________
(Title of Class)
________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes No X
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer X Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act) Yes No X
As of June 30, 2008, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $52,329,402. (For this purpose, all
directors of the Registrant are considered affiliates.)
As of March 6, 2009, the Registrant had 4,803,900 shares of Common Stock
outstanding.
Documents Incorporated by Reference -
- -------------------------------------
Portions of the Registrant's Proxy Statement for the 2009 Annual Meeting of
Shareholders to be held on April 29, 2009, is incorporated by reference into
Part III of this Form 10-K.
Exhibit Index - Page IV-1.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR
THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 29, 2009.
The Company's Proxy Statement, sample proxy card and 2008 Annual Report on
Form 10-K are available at: www.edocumentview.com/pwx.
PART I
Item 1. Business
- ----------------
Providence and Worcester Railroad Company ("P&W" or "the Company") is a
class II regional freight railroad operating in Massachusetts, Rhode Island,
Connecticut and New York. The Company is the only interstate freight carrier
serving the State of Rhode Island and possesses the exclusive and perpetual
right to conduct freight operations over 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 services the largest international doublestack
intermodal terminal facility in New England in Worcester, Massachusetts, a
strategic location for regional transportation and distribution enterprises.
The Company transports a wide variety of commodities for its customers,
including automobiles, construction aggregates, iron and steel products,
chemicals, lumber, scrap metals, plastic resins, cement, coal, construction and
demolition debris, and processed foods and edible foodstuffs, such as frozen
foods, corn syrup and animal and vegetable oils. Its customers include Aventine
Renewable Energy, Inc., Cargill, Inc., The Dow Chemical Company, Exxon Mobil
Corporation, First Light Power Resources, Frito-Lay, Inc., International Paper
Company, Northeast Utilities, Nucor Steel and Tilcon Connecticut, Inc. In 2008,
P&W transported 33,953 carloads of freight and 20,938 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
Freight railroads are divided into three classes based on operating
revenues: Class I, $359.6 million or more; Class II, $28.8 million to $359.6
million; and Class III, less than $28.8 million. As a result of mergers and
consolidations, there are now only seven Class I railroads in the country. The
Class I railroads handle 93% of the nation's rail freight business.
The freight rail industry underwent revitalization after the passage of the
Staggers Rail Act in 1980 which deregulated the pricing and types of services
provided by railroads. As a result, railroads were able to achieve significant
productivity gains and operating cost decreases while gaining pricing
flexibility. Freight rail service became more competitive with other
transportation modes with respect to both quality and price. The volume of
freight moved by rail has risen dramatically since 1980 and profitability has
improved significantly.
One result of revitalization of the industry has been the growth of
regional (over 350 miles) and short-line railroads, which has been fueled by a
trend among Class I railroads to divest certain branch lines in order to focus
on their long-haul core systems. There are now more than 550 of these regional
and short-line railroads. They operate in 47 of the 48 contiguous states
comprising the continental United States, account for 29% of all rail track,
employ 11% of all rail workers and generate about 9% of all rail revenue.
Generally, freight railroads handle two types of traffic: conventional
carloads and intermodal containers used in the shipment of goods via more than
one mode of transportation, e.g., by ship, rail and truck. By using a
hub-and-spoke approach to shipping, multiple containers can be moved by rail to
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) on specially designed railcars,
together with increasing highway traffic congestion and the shortage of
long-haul truck drivers have contributed to this trend. Beginning with the
second quarter of 2007 and continuing through 2008, the number of containers
arriving in southern New England by way of landbridge (across the continental
United States) declined, as containers began being routed from Far East ports
I-1
directly to East Coast ports over all-water routes. The economic downturn has
compounded the decline in container volumes.
Regional Developments
Over the past several years, a number of development projects within the
Company's service area have been completed. Some have increased port capacity
along the extensive coastline of southern New England and improved the
intermodal transportation and distribution infrastructure in the region, while
others have improved the Company's connections to Class I carriers servicing
southern New England. This infrastructure presents the Company with multiple
opportunities for increased business and routing options, and enhancing its
customers' market access.
Quonset/Davisville
The State of Rhode Island and the federal government are continuing
redevelopment efforts on a 1,000 acre portion of the former naval facility at
Quonset/Davisville for an active port and industrial park that houses a number
of rail-oriented industries and an auto port. Construction of a freight rail
improvement project, providing additional track capacity and Phase 1
double-stack clearances on the Northeast Corridor between Quonset/Davisville and
Boston Switch, the connection of the Corridor to the Company's mainline at
Central Falls, RI, was completed in October 2006. Shipment of automobiles by
rail commenced in the fall of 2007 with the Company handling 167 autoracks
through 2007 and 1043 autoracks in 2008.
Port of Providence
Infrastructure improvements undertaken by the Port of Providence and the
Company in 2003, including the installation of paving, lighting and "on dock"
rail, have accommodated substantial growth in the Company's movement of imported
coal to inland markets. Coal proved to be a significant source of revenue for
the Company during 2008.
In October 2006, the Company initiated rehabilitation of a substantial
portion of its South Providence yard to facilitate handling unit trains of
ethanol. This commodity is being transported by rail throughout the country and
is a component of the gasoline mix available at gasoline service stations
throughout southern New England. Rehabilitation was completed and shipments of
ethanol commenced during the third quarter of 2007. The Company intends to
undertake rehabilitation of the remainder of the South Providence yard in 2009.
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 its portion of the project (approximately 70%). The portion of the line
south of Rocky Hill is currently in service.
New London and Willimantic Interchanges
Through its New London interchange with the New England Central Railroad
("NEC"), P&W began interchanging traffic with the Canadian National Railway
("CN") and the Canadian Pacific Railway ("CP"). With the Company's reactivation
of the Willimantic Interchange in late 2007, across a route with improved
overhead clearances to NEC, the Willimantic Branch became the primary
interchange route to NEC and further strengthened the Company's connections with
CP via the Green Mountain gateway at Bellows Falls, Vermont and CN via St.
Albans, Vermont.
Railroad Operations
The Company's rail freight system comprises approximately 516 miles of
track. The Company interchanges freight traffic with CSX Transportation at
Worcester, Massachusetts and at New Haven, Connecticut; with Pan Am Railways
(formerly Springfield Terminal Railway Company) at Gardner, Massachusetts; with
NEC at New London and Willimantic, Connecticut; with CN and CP via the NEC; and
with New York and Atlantic Railroad at Fresh Pond Junction on Long Island.
Through its connections, P&W links more than 80 communities on its lines. The
I-2
Company operates four classification yards (areas containing tracks used to
group freight cars destined for a particular industry or interchange) located in
Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield and New Haven,
Connecticut.
The Company is dependent upon the railroads with which it interchanges
freight traffic to enable it to properly service its customers at competitive
rates. Failure of any of these connecting railroads to provide adequate service
at reasonable rates can result in a loss of freight customers and revenues.
By agreement with a private operator, the Company services an approved
customs intermodal yard in Worcester. A customs intermodal yard is an area
containing tracks used for the loading and unloading of containers. This yard is
U.S. Customs bonded, and international traffic must be inspected and approved by
U.S. Customs officials. The intermodal yard serves primarily as a terminal for
movement of container traffic from the Far East, Southeast Asia and Europe
destined for points in New England. Numerous 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
more than half of its operating revenues. In 2008, one customer, which ships
construction aggregates from three separate quarries on P&W's system to asphalt
production plants in Connecticut and New York, accounted for 10% of the
Company's operating revenues. No other customer accounted for 10% or more of its
total operating revenues in 2008.
Markets
The Company transports a wide variety of commodities for its customers. In
recent years, chemicals and plastics (including ethanol, beginning in 2007) and
construction aggregates were the two largest commodity groups transported by the
Company, constituting 36% and 13%, respectively, of conventional carload freight
revenues in 2008. The following table summarizes the Company's conventional
carload freight revenues by commodity group as a percentage of such revenues:
Commodity 2008 2007 2006
- --------- ---- ---- ----
Chemicals and plastics (including ethanol). 36% 37% 33%
Construction aggregates ................... 13 17 19
Coal ...................................... 12 8 11
Metal products ............................ 10 9 7
Food and agricultural products ............ 9 12 12
Forest and paper products ................. 9 12 14
Other (including automobiles) ............. 11 5 4
---- ---- ----
Total...................................... 100% 100% 100%
=== === ===
Sales and Marketing
P&W's sales and marketing staff of four 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
I-3
minimize the risk of derailments and believes its rail system is in good
condition. In addition, the Company has an employee training program utilizing
classroom instruction and video programs on topics including NORAC Operating
Rules, Safety Rules, Rail Security Awareness plans and Hazardous Materials
Awareness, as well as manufacturer-provided training materials.
Safety of the Company's operations is of paramount importance for the
benefit and protection of the Company's employees, customers and the communities
served by its rail lines. The Company and its employees have continued to make
improvements in preventing injuries while at the same time expanding operations
and the work force.
Rail Traffic
Rail traffic is classified as on-line or overhead traffic. On-line traffic
is traffic that originates or terminates with shippers located on a railroad's
rights-of-way. Overhead traffic passes from one connecting carrier to another
and neither originates nor terminates with shippers located on a railroad's
rights-of-way. Presently, P&W is solely an on-line carrier but may provide
overhead service in the future for certain rail traffic to and from Long Island.
Freight rail rates can be in various forms. Generally, customers are given
a "through" rate, a single amount encompassing the rail transportation of a
commodity from point of origin to point of destination, regardless of the number
of carriers which handle the car. Rates are developed by the carriers based on
the commodity, volume, distance and competitive market considerations. The
entire freight bill is paid either to the originating carrier ("prepaid") or to
the destination carrier ("collect") and divided among all carriers which handle
the move. The basis for the division varies and can be based on factors (or
revenue requirements) independently established by each carrier which comprise
the through rate, or on a percentage basis established by division agreements
among the carriers. A carrier such as P&W, which actually places the car at the
customer's location and attends to the customer's daily switching requirements,
typically receives a share of revenue greater than an amount based simply on
mileage hauled.
Employees
As of December 31, 2008, the Company had 153 full-time employees, 118 of
whom are represented by three railroad labor organizations that are national in
scope. The Company's non-management employees have been represented by unions
since the Company commenced independent operations in 1973.
The Company's initial agreement with the United Transportation Union
covering the trainmen was unusual in the railroad industry since it provided the
Company with discretion in determining crew sizes, eliminated craft distinctions
and provided a guaranteed annual wage for a maximum number of hours worked. The
Company's collective bargaining agreements have been in effect since February
1973 for trainmen, since May 1974 for clerical employees and dispatchers and
since June 1974 for maintenance employees. These contracts do not expire but are
subject to renegotiation after the agreed-upon moratoria. The Company signed
eight year agreements with the United Transportation Union (trainmen) in October
2005, the Transportation Communications International Union (clerical) in August
2006 and the Brotherhood of Railroad Signalmen (maintenance) in July 2007. The
Company considers its employee and labor relations to be good.
Competition
The Company is the only rail carrier serving businesses located on-line.
The Company competes with other carriers, however, in the location of new
rail-oriented businesses in the region. Certain rail competitors, including CSX
Transportation and Norfolk Southern Corp., are 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,
and ocean-going vessels for the transportation of containers. Any improvement in
the cost or quality of these alternate modes of transportation including, for
example, legislation granting material increases in truck size or allowable
weight, could increase competition and may materially adversely affect the
Company's business and results of operations. As a means of competing, P&W
strives to offer greater convenience and better service than competing rail
carriers and at costs lower than some competing non-rail carriers. The Company
also competes by participating in efforts to attract new industry to the areas
which it serves.
I-4
The Company believes that its ability to grow depends, in part, upon its
ability to acquire additional connecting rail lines. In making acquisitions, P&W
competes with other short-line and regional rail operators, some of which are
larger and have greater financial resources than the Company.
Governmental Regulation
The Company is subject to governmental regulation by the United States
Surface Transportation Board (the "STB"), the Federal Railroad Administration
(the "FRA"), the Transportation Security Administration (the "TSA") and other
federal, state and local regulatory authorities with respect to certain rates
and railroad operations, as well as a variety of health, safety, labor,
environmental and other matters, all of which could potentially affect the
competitive position and profitability of the Company. Additionally, the Company
is subject to STB regulation and may be required to obtain STB approval prior to
its acquisition of any new railroad properties. Management of the Company
believes that the regulatory freedoms granted by the Staggers Rail Act of 1980
(the "Staggers Rail Act") have been beneficial to the Company by giving it
flexibility to adjust prices and operations to respond to market forces and
industry changes. However, various interests, and certain members of the United
States Congress (which has jurisdiction over federal regulation of railroads),
have from time to time expressed their intention to support legislation that
would eliminate or reduce significant freedoms granted by the Staggers Rail Act.
Environmental Matters
The Company's railroad operations and real estate ownership are subject to
extensive federal, state and local environmental laws and regulations
concerning, among other things, emissions to the air, discharges to waters and
the handling, storage, transportation and disposal of waste and other materials.
The Company handles, stores, transports and disposes of petroleum and other
hazardous substances and wastes. The Company also transports hazardous
substances for third parties and arranges for the disposal of hazardous wastes
generated by the Company. The Company believes that it is in material compliance
with applicable environmental laws and regulations.
Internet Address and SEC Reports
The Company maintains a website with the address www.pwrr.com. We are not
including the information contained on our website as a part of, or
incorporating it by reference into, this Annual Report on Form 10-K. We make
available free of charge through our website our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments
to these reports, as soon as reasonably practicable after we electronically file
such material with, or furnish such material to, the Securities and Exchange
Commission ("SEC"). We also include on our website our corporate governance
guidelines and the charters for each of the major committees of our board of
directors. In addition, we intend to disclose on our website any amendments to,
or waivers from, our code of business conduct and ethics that are required to be
publicly disclosed pursuant to rules of the SEC.
Item 1A. Risk Factors
- ---------------------
Fluctuations in Operating Revenues
Historically, the Company's operating revenues have been tied to national
and regional economic conditions, especially those impacting the manufacturing
sector, while the Company's expenses have been relatively inelastic.
Increasingly, the Company's business is impacted by global economic events. 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.
I-5
Availability of Acquisition and Growth Opportunities and Associated Risks
The Company believes that its ability to grow depends, in part, upon its
ability to acquire additional connecting rail lines. There are a limited number
of acquisition targets in the Company's market. In addition, in making
acquisitions, the Company competes with other short-line and regional rail
operators, some of which are larger and have greater financial resources than
the Company. The growing competition for such acquisitions may cause an increase
in acquisition prices and related costs, resulting in fewer attractive
acquisition opportunities, which could materially adversely affect the Company's
growth. No assurance can be given that the Company will be able to acquire
suitable additional rail lines or that, if acquired, the Company would be able
to successfully operate such additional rail lines.
Acquisitions of additional rail lines may be subject to regulatory review
and approval by the STB. The Company is a Class II railroad and acquisitions
made by Class II railroads are subject to a requirement that employees affected
by an acquisition be paid up to one year's severance.
Competition
For customers located directly on line, which constitute the majority of
the Company's freight business, the Company is the only rail carrier providing
direct service. However, the Company competes with other freight railroads on
the location of new businesses in the region. The Company also competes with
other modes of transportation such as long-haul trucking companies and
ocean-going vessels, including short-sea shipping. Any improvement in the cost,
quality or availability of these alternate modes of transportation, for example,
legislation granting increases in truck size or allowable weight, could increase
this competition and materially affect the Company's business and results of
operations. In addition, the revenues derived from the handling of intermodal
containers could be materially adversely affected by the rerouting of containers
from Far East ports directly to East Coast ports via an all-water route rather
than by way of landbridge.
Customer Concentration
The Company's ten largest customers accounted for more than 50% of the
Company's operating revenues for 2008 with one customer accounting for 10%. 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. Increases in the taxes
payable pursuant to the Railroad Retirement Act and/or the Railroad Unemployment
Insurance Act would increase the Company's costs of operations.
Relationships with Other Railroads
The railroad industry in the United States is dominated by a small number
of large Class I carriers that have substantial market control and negotiating
I-6
leverage. A majority of the Company's carloadings is interchanged with a Class I
carrier, CSX Transportation. A decision by CSX Transportation to discontinue
serving routes or to disadvantageously price the transport of certain
commodities could materially adversely affect the Company's business.
The Company's ability to provide rail service to its customers depends in
large part upon its ability to maintain cooperative relationships with all its
connecting carriers with respect to, among other matters, freight rates, car
supply, interchange and trackage rights. A deterioration in the operating
relationships with or service provided by those connecting carriers could
materially adversely affect the Company's business.
Rail Infrastructure and Availability of Government Programs
Certain of the Company's growth opportunities are contingent upon
anticipated improvements to P&W's existing rail infrastructure. No assurance can
be given that the Company will be able to complete such projects as planned.
Unforeseen delays or other problems which prevent completion of such
improvements could materially adversely affect the Company's business and
results of operations. In addition, the Company has worked with federal and
state agencies to improve its rail infrastructure and has been effective in
obtaining federal and state financial support for certain projects. There can be
no assurance, however, that such federal and state programs or funds will be
available in the future or that the Company will be eligible to participate in
such programs. Failure to participate in federal and state programs or to
receive federal or state funding for rail infrastructure improvements would
cause the Company to incur the full cost of those infrastructure improvements
undertaken and completed and significantly increase its costs of rail
infrastructure improvement.
Potential for Increased Governmental Regulation and Mandated Upgrade to
Property
The Company is subject to governmental regulation by the STB, the FRA, the
TSA and other federal, state and local regulatory authorities with respect to
certain rates and railroad operations, as well as a variety of health, safety,
labor, environmental, security and other matters, all of which could potentially
affect the competitive position and profitability of the Company. Management of
the Company believes that the regulatory freedoms granted by the Staggers Rail
Act have been beneficial to the Company by giving it flexibility to adjust
prices and operations to respond to market forces and industry changes. However,
various interests and certain members of the United States House of
Representatives and Senate (which have jurisdiction over the federal regulation
of railroads) have from time to time expressed their intention to support
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
I-7
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
- ----------------------------------
None
Item 2. Properties
- ------------------
Track
P&W's rail system extends over approximately 516 miles of track, of which
it owns approximately 163 miles. The Company has the right to use the remaining
353 miles pursuant to perpetual easements and long-term trackage rights
agreements. Under certain of these agreements, the Company pays fees based on
usage.
Virtually all of the mainlines on which the Company operates are in FRA
class 3 condition (allowing 40 m.p.h. speeds) or better. The Company intends to
maintain the mainline tracks which it owns in such excellent condition.
Of the approximately 516 miles that comprise the Company's system, 306
miles, or 58.5%, are located in Connecticut, 95 miles, or 19%, are located in
Massachusetts, 87 miles, or 17%, are located in Rhode Island and 28 miles, or
5.5%, are located in New York.
Rail Facilities
P&W owns land and a building with approximately 69,500 square feet of floor
space in Worcester, Massachusetts. The building houses the Company's executive
and administrative offices and some of the Company's storage space.
Approximately 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 acreage, P&W owns
approximately eight acres in Pawtucket and has a perpetual easement for railroad
purposes over the remaining 122 acres.
The Company has invested nearly $12 million in the development of the South
Quay in East Providence, Rhode Island which has resulted in the creation of
approximately 33 acres of waterfront land. The Company also owns 12 acres of
land adjacent to the South Quay, as well as 11 acres off Dexter Road, East
Providence, all of which are 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.
I-8
Rolling Stock
The following schedule sets forth the rolling stock owned by the Company as
of December 31, 2008:
Description Number
----------- ------
Locomotive .................................................. 30
Gondola ..................................................... 5
Open-Top Hopper.............................................. 137
Flat Car ................................................... 5
Ballast Car.................................................. 30
Passenger Equipment.......................................... 7
Caboose...................................................... 2
------
Total.................................................... 216
======
The 30 diesel electric locomotives, which include nine pre-owned 3,900
horsepower GE B39-8 locomotives acquired in 2002 and 2003 and four pre-owned GE
B40-8 locomotives acquired in 2004 and 2005, are used on a daily basis, are
maintained to a high standard, comply with all FRA and Association of American
Railroads rules and regulations and are adequate for the needs of the Company's
freight operations. The gondolas, open-top hoppers, flat cars and ballast cars
are considered modern rail cars and are used in track maintenance and, very
occasionally, 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 railroads. The passenger equipment and caboose are not utilized in
P&W's rail freight operations but are used on an occasional basis for Company
functions, excursions and charter trips.
In January 2008, simultaneous with the purchase by GATX Corporation of
239,523 shares of common stock of the Company for the purchase price of
$5,509,029 ($23.00/share), the Company and GATX entered into various agreements
including an Exclusive Railcar Supply Agreement (the "ERSA") for a term of five
(5) years to renew automatically for successive one-year periods unless earlier
terminated by either party. Under the ERSA, provided that market-competitive
terms are furnished, GATX became the exclusive supplier of substantially all of
P&W's railcar needs, while various other agreements between the parties provided
for the Company's acquisition of 137 open-top hopper cars, its lease of 72 mill
gondolas, and its lease of 200 automobile-carrying railcars (autoracks).
Equipment
P&W has a state-of-the-art digital touch control dispatching system at its
Worcester operations center permitting two-way radio contact with every train
crew and maintenance vehicle on its lines and a computer-based manual block
dispatching system with safety overrides to enhance dispatching and safety. The
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 Putnam, Connecticut to assure the Company's
ability to operate in the event of disruption of service in Worcester. The
Company also has state-of-the-art automatic train defect detectors at strategic
locations which inspect passing trains and audibly communicate the results to
train crews and dispatchers in order to protect against equipment failure en
route.
The Company maintains a modern fleet of track maintenance equipment and
aggressively pursues available opportunities to work with federal and state
agencies for the rehabilitation of bridges, grade crossings and track. The
Company's locomotives 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.
In July 2008, the Company installed a fifty-ton drop table unit to
facilitate the efficient exchange of wheels on locomotives and railcars by
lowering the wheels beneath the level of the Engine House floor and across to an
adjacent track where exchange with a second wheel set is made.
Item 3. Legal Proceedings
- -------------------------
On January 29, 2002, the Company received a "Notice of Potential Liability"
from the United States Environmental Protection Agency ("EPA") regarding an
existing Superfund Site (the "Site") that includes the J.M. Mills Landfill in
Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially
I-9
responsible parties ("PRPs") under the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA"). EPA identified the Company as a PRP
based on its status as an owner and/or operator because its railroad property
traverses the Site. Via these Notice letters, EPA makes a demand for payment of
past costs (identified in the letter as $762,000) 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). On December 15, 2003, the EPA issued a second "Notice of
Potential Liability" letter to the Company regarding the Site. EPA again
identified the Company as a PRP, this time because EPA "believes that [the
Company] accepted hazardous substance for transport to disposal or treatment
facilities and selected the site for disposal." The Company responded again to
EPA stating that it is interested in cooperating with EPA but that it does not
believe it has engaged in any activities that caused contamination at the Site.
The Company believes that none of its activities caused contamination at the
Site, and will contest this claim by EPA and therefore no liability has been
accrued for this matter.
In connection with the EPA claim described above, the two parties who have
committed to conduct the RI/FS at the Site filed a complaint in the U.S.
District Court of Rhode Island against the Company, in an action entitled CCL
Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with
Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L,
on December 18, 2002. The Company was one of about sixty parties named by
Plaintiffs in this suit, to recover response costs incurred in investigating and
responding to the releases of hazardous substances at the Site. Plaintiffs
alleged that the Company is liable under 42 U.S.C. ss. 961(a)(3) of CERCLA as an
"arranger" or "generator" of waste that ended up at the Site. The Company
entered into a Generator Cooperation Agreement with other defendants to allocate
costs in responding to this suit, and to share technical costs and information
in evaluating the Plaintiffs' claims. Although the Company does not believe it
generated any waste that ended up at the Site, or that its activities caused
contamination at the Site, the Company paid $45,000 to settle this suit in March
2006.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable.
I-10
Part II
-------
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters and
- --------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
- -------------------------------------
The Common Stock is quoted on the Nasdaq Stock Market, LLC ("NASDAQ") under the
trading symbol "PWX". The following table sets forth, for the periods indicated,
the high and low sale prices per share for the Common Stock as reported on the
NASDAQ. Also included are dividends paid per share of Preferred Stock and Common
Stock during these quarterly periods.
Common Stock
------------
Trading Prices Dividends Paid
-------------- --------------
High Low Preferred Common
---- --- --------- ------
2007
- ----
First Quarter ........ $19.50 $16.70 $5.00 $ .04
Second Quarter ....... 21.61 17.46 -0- .04
Third Quarter ........ 19.55 14.35 -0- .04
Fourth Quarter ....... 20.74 16.50 -0- .04
2008
- ----
First Quarter ........ $20.00 $15.75 $5.00 $ .04
Second Quarter ....... 21.40 18.55 -0- .04
Third Quarter ........ 20.24 14.79 -0- .04
Fourth Quarter ....... 17.18 7.72 -0- .04
As of February 28, 2009, there were approximately 667 holders of record of the
Company's common stock.
The declaration of cash dividends on both the preferred and the common stock is
made at the discretion of the Board of Directors based on the Company's
earnings, financial condition, capital requirements and other relevant factors
and restrictions.
II-1
PERFORMANCE GRAPH
PREPARED BY BURNHAM SECURITIES INC.
FOR PROVIDENCE AND WORCESTER RAILROAD COMPANY.
5 - Year Return
Providence and Worcester Railroad Company,
U.S. Railroad Index and Russell 2000(R) Index
[GRAPHIC OMITTED]
*Compiled by Burnham Securities Inc.
- --------------------------------------------------------------------------------
Index Components: Burlington Northern Santa Fe Corp. (NYSE:BNI), CSX Corp.
(NYSE:CSX), Genesee & Wyoming Inc. (NYSE:GWR), Kansas City Southern (NYSE:KSU),
Norfolk Southern Corp. (NYSE:NSC), Pioneer Railcorp (OTCPK:PRRR), Providence and
Worcester Railroad Co. (NASDAQ:PWX), Union Pacific Corp. (NYSE:UNP).
RailAmerica, Inc., acquired and taken private on February 14, 2007, has been
removed from the index.
- --------------------------------------------------------------------------------
Fiscal Years Ended December 31
------------------------------
2003 2004 2005 2006 2007 2008
- -------------------------- ----- ----- ----- ----- ----- -----
- -------------------------- ----- ----- ----- ----- ----- -----
PWX 100.0 153.5 171.4 226.1 195.7 142.1
U.S. Railroad Index 100.0 126.4 173.6 189.1 225.5 197.9
Russell 2000 100.0 117.0 120.9 141.4 137.6 89.7
- -------------------------- ----- ----- ----- ----- ----- -----
The Russell 2000(R) Index measures the performance of small capitalization US
companies by measuring the performance of the 2,000 smallest securities in the
Russell 3000(R) Index. The U.S. Railroad Index is compiled by Burnham Securities
Inc. and includes 8 railroad-operating companies.
The Board of Directors recognizes that the market price of stock is influenced
by many factors, only one of which is issuer performance. The Company's stock
price may also be influenced by market perception, economic conditions and
government regulation. The stock price performance shown in the graph is not
necessarily an indicator of future price performance.
II-2
Item 6. Selected Financial Data
- -------------------------------
The selected financial data set forth below has been derived from the Company's
audited financial statements. The data should be read in conjunction with the
Company's audited financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other information included elsewhere in this annual report on Form 10-K.
Years Ended December 31,
2008 2007 2006 2005 2004
------- ------- ------- ------- -------
(in thousands, except per share amounts)
Income Statement Data:
Operating revenues ........ $ 29,736 $26,164 $28,451 $26,734 $24,943
Other income ............... 1,050 890 1,373 1,208 1,547
------- ------- ------- ------- -------
Total Revenues ............. 30,786 27,054 29,824 27,942 26,490
Operating expenses ......... 30,485 27,856 28,222 26,114 24,854
------- ------- ------- ------- -------
Income (loss) before income
taxes ..................... 301 (802) 1,602 1,828 1,636
Provision for income taxes
(benefit) ................. 135 (150) 560 615 631
------- ------- ------- ------- -------
Net income (loss) .......... 166 (652) 1,042 1,213 1,005
Preferred stock dividend ... 3 3 3 3 3
------- ------- ------- ------- -------
Net income (loss) available to
common shareholders ....... $ 163 $ (655) $ 1,039 $ 1,210 $ 1,002
======= ======= ======= ======= =======
Basic and diluted income
(loss) per common share ... $ .03 $ (.14) $ .23 $ .27 $ .22
======= ======= ======= ======= =======
Weighted average shares-basic 4,790 4,545 4,523 4,496 4,470
======= ======= ======= ======= =======
Weighted average
shares-diluted ............ 4,866 4,545 4,602 4,574 4,548
======= ======= ======= ======= =======
Cash dividends per share of
Common Stock .............. $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16
======= ======= ======= ======= =======
December 31,
2008 2007 2006 2005 2004
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Total assets ................ $99,010 $95,158 $95,024 $93,484 $91,582
Shareholders' equity ....... 74,797 69,675 70,624 69,845 69,027
II-3
Item 7. Management's Discussion and Analysis of Financial Condition and
- -----------------------------------------------------------------------
Results of Operations
- ---------------------
The following discussion should be read in connection with the Company's audited
financial statements and notes thereto included elsewhere in this annual report.
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 the 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, the
impairment 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 shutdowns. Second, the Company's freight volumes are susceptible
to increases and decreases due to changes in international, national and
regional economic conditions. Third, the volume of capitalized track or
recollectible projects performed by the Company's Maintenance of Way and
Communications & Signals Departments can vary significantly from year to year,
thereby impacting total operating expenses. Fourth, diesel fuel comprises a
significant portion of the Company's operating costs. As fuel prices increase
the Company attempts to recover these costs through surcharges and increased
fees; however, the Company's profitability can be impacted by changes in fuel
prices.
II-4
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 which ships construction aggregates from three
separate quarries on the Company's rail system to asphalt production plants in
Connecticut and New York, accounted for 10.0%, 13.8% and 14.8% of its operating
revenues in 2008, 2007 and 2006, respectively. The Company does not believe that
this customer will cease to be a rail shipper or will substantially decrease its
freight volume in the foreseeable future. In the event that this customer should
cease or substantially reduce its rail freight operations, management believes
that the Company could restructure its operations to reduce operating costs by
an amount sufficient to largely offset the decrease in operating revenues.
Results of Operations
The following table sets forth the Company's operating revenues by category in
dollars and as a percentage of operating revenues:
Years Ended December 31,
-----------------------------------------------
2008 2007 2006
------------- -------------- -------------
(in thousands, except percentages)
Freight Revenues:
Conventional carloads ...... $27,113 91.2% $22,682 86.7% $23,443 82.4%
Containers ................. 1,341 4.5 2,389 9.1 3,572 12.5
Other freight-related ...... 837 2.8 774 3.0 876 3.1
Other operating revenues..... 445 1.5 319 1.2 560 2.0
------- ----- ------- ----- ------- -----
Total ..................... $29,736 100.0% $26,164 100.0% $28,451 100.0%
======= ===== ======= ===== ======= =====
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,
-----------------------------------------------
2008 2007 2006
------------- -------------- -------------
(in thousands, except percentages)
Chemicals and plastics
(including ethanol) ......... $ 9,761 36.0% $ 8,387 37.0% $ 7,759 33.1%
Construction aggregate ....... 3,389 12.5 3,840 16.9 4,359 18.6
Coal ......................... 3,281 12.1 1,818 8.0 1,651 7.0
Metal products ............... 2,793 10.3 2,132 9.4 2,488 10.6
Food and agricultural products 2,522 9.3 2,777 12.2 2,749 11.7
Forest and paper products .... 2,467 9.1 2,756 12.2 3,181 13.6
Other (including automobiles) 2,900 10.7 972 4.3 1,256 5.4
------- ----- ------- ----- ------- -----
Total ...................... $27,113 100.0% $22,682 100.0% $23,443 100.0%
======= ===== ======= ===== ======= =====
II-5
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
Years Ended December 31,
-----------------------------------------------
2008 2007 2006
------------- -------------- -------------
(in thousands, except percentages)
Salaries, wages, payroll taxes
and employee benefits ....... $15,631 52.6% $15,204 58.1% $14,945 52.5%
Casualties and insurance ..... 867 2.9 919 3.5 956 3.4
Depreciation ................. 2,941 9.9 2,884 11.0 2,829 9.9
Diesel fuel .................. 3,986 13.4 2,524 9.6 2,495 8.8
Car hire, net ................ 928 3.1 818 3.1 1,096 3.9
Purchased services, including
legal and professional fees . 2,304 7.7 2,037 7.8 1,947 6.8
Repairs and maintenance of
equipment ................... 1,993 6.7 1,711 6.5 1,943 6.8
Track and signal materials ... 1,716 5.8 2,135 8.2 2,949 10.4
Track usage fees ............. 633 2.1 615 2.4 829 2.9
Other materials and supplies.. 1,265 4.3 1,222 4.7 1,239 4.4
Other ........................ 1,894 6.4 1,833 7.0 1,891 6.6
------- ----- ------- ----- ------- -----
Total ....................... 34,158 114.9 31,902 121.9 33,119 116.4
Less capitalized and
recovered costs ........... 3,673 12.4 4,046 15.4 4,897 17.2
------- ----- ------- ----- ------- -----
Total ...................... $30,485 102.5% $27,856 106.5% $28,222 99.2%
======= ===== ======= ===== ======= =====
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Operating Revenues
Operating Revenues increased $3.6 million, or 13.7%, to $29.8 million in 2008
from $26.2 million in 2007. This increase is the net result of a $4.4 million
(19.5%) increase in conventional freight revenues, a $63,000 (8.1%) increase in
other freight-related revenues and a $126,000 (39.5%) increase in other
operating revenues partially offset by a $1.0 million (44.8%) decrease in
container freight revenues.
The increase in conventional freight revenues is attributable to a 10.2%
increase in traffic volume and an 8.4% increase in the average revenue received
per carloading. The Company's conventional carloadings increased by 3,156 to
33,953 in 2008 from 30,797 in 2007. Shipments of ethanol, coal, automobiles and
steel ingots accounted for substantially all of the increase in traffic volume.
Ethanol and automobiles are commodities which the Company began hauling during
the third quarter of 2007. These increases were somewhat offset by decreases in
shipments of construction aggregates, chemicals (other than ethanol), building
materials and certain other commodities during the year. These decreases appear
to result from the current economic downturn in the United States economy. The
increase in the average revenue received per conventional carloading is
attributable to a shift in the mix of freight hauled toward higher-rated
commodities, as well as some rate increases, including diesel fuel surcharges.
The decrease in container freight revenues is the result of a 48.3% decline in
traffic volume somewhat offset by an 8.6% increase in the average revenue
received per container. Container traffic volume decreased by 19,567 containers
to 20,938 in 2008 from 40,505 in 2007. During the second quarter of 2007 the
Company began to experience a steady decrease in the volume of its container
traffic which continued throughout 2008. Among other factors, rate increases
imposed by western rail carriers in the United States resulted in steamship
lines using "all water" routings to the East Coast for an increasingly larger
portion of container traffic, thereby significantly reducing the volume of such
traffic shipped cross-country by rail. In addition, the current economic
downturn has added to the decline in container traffic volume. The Company is
unable to predict if and when container traffic may significantly increase.
The increase in the average revenue received per container is attributable to
contractual rate adjustments based upon railroad industry cost indices as well
as a change in the mix of containers handled.
II-6
The increase in other freight-related revenues is primarily due to an increase
in secondary switching services provided to freight customers. This is directly
related to the increase in conventional traffic volume during the year.
The increase in other operating revenues reflects greater maintenance department
billings for services rendered to freight customers and outside parties.
Other Income
Other income increased by $160,000 to $1.1 million in 2008 from $890,000 in
2007. The most significant change was an increase in gains realized from the
sale of property, equipment and easements, which revenues can vary significantly
from year to year.
Operating Expenses
Operating expenses increased by $2.6 million, or 9.4%, to $30.5 million in 2008
from $27.9 million in 2007. Higher expenditures for diesel fuel accounted for
$1.5 million of this increase. This is primarily the result of significantly
higher prices for petroleum products which were in effect for most of the year.
The price of diesel fuel decreased during the fourth quarter of 2008 and such
lower prices have continued into 2009.
Provision for Income Taxes (Benefit)
The provision for income taxes for 2008 is $135,000, or 45%, of pre-tax income
compared to 19% in 2007. The rate in 2008 reflects normal nondeductible expenses
compared to a relatively small pre-tax income. The 2007 effective rate reflects
the utilization of track maintenance credits that were freed up by the operating
loss.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Operating Revenues
Operating Revenues decreased $2.3 million, or 8.0%, to $26.2 million in 2007
from $28.5 million in 2006. This decrease resulted from a $1.2 million (33.1%)
decrease in container freight revenues, a $761,000 (3.2%) decrease in
conventional freight revenues, a $102,000 (11.6%) decrease in other
freight-related revenues and a $241,000 (43.0%) decrease in other operating
revenues.
The decrease in container freight revenues is attributable to a 35.9% decline in
traffic volume partially offset by a 4.3% increase in the average revenue
received per container. Intermodal containers handled decreased by 22,678 to
40,505 in 2007 from 63,183 in 2006. Among other factors, rate increases imposed
by western rail carriers in the United States resulted in steamship lines using
"all water" routings to the East Coast for a larger portion of container
traffic, thereby significantly reducing the volume of such traffic shipped
cross-country by rail. This trend began during the second quarter of the year
and the Company is unable to predict if and when this trend will be reversed.
The increase in the average revenue received per container is primarily due to
contractual rate adjustments based upon railroad industry cost indices.
The decrease in conventional freight revenues is the result of an 8.8% reduction
in traffic volume partially offset by a 6.1% increase in the average revenue
received per carloading. The Company's conventional carloadings decreased by
2,983 to 30,797 in 2007 from 33,780 in 2006. The largest single reduction in
conventional traffic volume was construction aggregates which declined by more
than a half million dollars. Declines in other commodities were largely offset
by increases in coal, ethanol and automobiles. Shipments of these latter two
commodities commenced during the second half of the year and the Company
anticipates that they will contribute to future traffic growth. The increase in
the average revenue received per conventional carloading results from a shift in
the mix of traffic away from construction aggregates, a lower rated commodity,
as well as modest rate increases, including diesel fuel surcharges.
The decrease in other freight-related revenues is attributable to reduced
billings for demurrage charges which is related to the decrease in conventional
traffic volume.
II-7
The decrease in other operating revenues results from a reduction in maintenance
department billings. Revenues of this nature typically vary from year to year
depending upon the needs of freight customers and other outside parties.
Other Income
Other income decreased by $483,000 to $890,000 in 2007 from $1.4 million in
2006. This decrease is due to a reduction in gains from the sale of property,
equipment and easements, which revenue can vary significantly from year to year.
Operating Expenses
Operating expenses decreased $366,000, or 1.3%, to $27.9 million in 2007 from
$28.2 million. The Company's operating expenses are of a fixed nature to a very
high degree and, therefore, do not fluctuate proportionally with increases or
decreases in operating revenues. The decrease in track and signal materials
expense of $814,000 was offset by a $1.0 million decrease in reimbursements
received from the states for non-capitalized crossing signals and other public
improvements.
Provision for Income Taxes (Benefit)
The Company's federal income tax benefit for 2007 was reduced by $113,000 of
railroad track maintenance credits which were utilized in 2005 and 2006. These
credits were "freed up" by carrying back a portion of the net operating loss
incurred in 2007 to those years.
Liquidity and Capital Resources
On January 10, 2008, the Company entered into an agreement with GATX Corporation
("GATX") whereby GATX acquired 239,523 newly-issued shares of the Company's
common stock (4.99%) for approximately $5.5 million which was and is being
utilized for capital improvements to enhance the Company's operations. The
Company and GATX also entered into an Exclusive Railcar Supply Agreement whereby
GATX has the exclusive right to supply the Company with railcars for certain
rail traffic on market-competitive terms. In addition, the Company exchanged 72
of its mill gondolas for 137 open-top hoppers owned by GATX. The Company is
leasing the 72 mill gondolas from GATX under operating leases for a period of up
to 7 years at minimum annual rentals of $248,000. This amount is not
significantly different from the rentals previously paid to GATX for the
open-top hoppers which have been used by the Company to transport coal.
The Company generated $832,000, $3.3 million and $3.8 million of cash from
operations in 2008, 2007 and 2006, respectively. The Company's total cash and
cash equivalents increased by $695,000 in 2008 and decreased by $1.1 million in
2007 and $810,000 in 2006. The principal utilization of cash during the
three-year period was for expenditures for property and equipment acquisitions
and improvements and payment of dividends.
During 2008, 2007 and 2006 the Company generated $583,000, $288,000 and
$863,000, respectively, from the sale 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.
The Company has a revolving line of credit of $5.0 million with its principal
bank, which line expires on May 31, 2009. 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. The Company repaid the $900,000 of borrowings
outstanding as of December 31, 2007 in January 2008 and had no advances against
this line during the year.
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 $2.6 million, $3.5 million and $3.4 million for additions and
II-8
improvements to its track structure in 2008, 2007 and 2006, respectively.
Deferred grant income of $172,000 in 2008, $520,000 in 2007 and $121,000 in 2006
financed a portion of these additions and improvements. Improvements to the
Company's track structure are made, for the most part, by the Company's
Maintenance of Way Department personnel.
In 2008, 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 $767,000, on its outstanding common stock. Continued
payment of such dividends is contingent upon the Company's continuing to have
the necessary financial resources available.
The Company is a defendant in certain lawsuits relating to casualty losses, many
of which are covered by insurance subject to a deductible. The Company believes
that adequate provision has been made in the financial statements for any
expected liabilities which may result from disposition of such lawsuits.
On January 29, 2002, the Company received a "Notice of Potential Liability" from
the United States Environmental Protection Agency ("EPA") regarding an existing
Superfund Site (the "Site") that includes the J.M. Mills Landfill in Cumberland,
Rhode Island. EPA sends these "Notice" letters to potentially responsible
parties ("PRPs") under the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its
status as an owner and/or operator because its railroad property traverses the
Site. Via these Notice letters, EPA makes a demand for payment of past costs
(identified in the letter as $762,000) 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). On December 15, 2003, the EPA issued a second "Notice of
Potential Liability" letter to the Company regarding the Site. EPA again
identified the Company as a PRP, this time because EPA "believes that [the
Company] accepted hazardous substance for transport to disposal or treatment
facilities and selected the site for disposal." The Company responded again to
EPA stating that it is interested in cooperating with EPA but that it does not
believe it has engaged in any activities that caused contamination at the Site.
The Company believes that none of its activities caused contamination at the
Site, and will contest this claim by EPA and therefore no liability has been
accrued for this matter.
In connection with the EPA claim described above, the two parties who have
committed to conduct the RI/FS at the Site filed a complaint in the U.S.
District Court of Rhode Island against the Company, in an action entitled CCL
Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with
Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L,
on December 18, 2002. The Company was one of about sixty parties named by
Plaintiffs in this suit, to recover response costs incurred in investigating and
responding to the releases of hazardous substances at the Site. Plaintiffs
alleged that the Company is liable under 42 U.S.C. ss. 961(a)(3) of CERCLA as an
"arranger" or "generator" of waste that ended up at the Site. The Company
entered into a Generator Cooperation Agreement with other defendants to allocate
costs in responding to this suit, and to share technical costs and information
in evaluating the Plaintiffs' claims. Although the Company does not believe it
generated any waste that ended up at this Site, or that its activities caused
contamination at the Site, the Company paid $45,000 to settle this suit in March
2006.
Pursuant to permits issued by the United States Department of the Army Corps of
Engineers and the Rhode Island Coastal Resources Management Council, the Company
created 33 acres of waterfront land in East Providence, Rhode Island ("South
Quay"). The permits for the property, which have been extended to December 2009
and May 2009, respectively, also allow for construction of a dock along the west
face of the South Quay. The property, which has a carrying value of $12.0
million, is adjacent to a 12 acre site also owned by the Company.
The property is located one-half mile from I-195. In 2006, the Rhode Island
Department of Transportation ("RIDOT") awarded a contract to construct
Waterfront Drive, which provides direct vehicular access from the interstate
highway system to the South Quay, which project was completed in 2007. The
planned extension by RIDOT of Waterfront Drive northward toward an industrial
area in which the Company owns two additional waterfront parcels comprising 11
acres, creating direct access to such property, is in the design stage.
II-9
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.
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 2008 and 2007. The information for each of these quarters is
unaudited but includes all normal recurring adjustments that the Company
considers necessary for a fair presentation. These results, however, are not
necessarily indicative of results for any future period.
Year Ended December 31, 2008
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating Revenues .................... $ 5,996 $ 8,094 $ 8,136 $ 7,510
Other income .......................... 119 188 617 126
------- ------- ------- -------
Total revenues ........................ 6,115 8,282 8,753 7,636
Operating expenses .................... 7,487 7,802 7,964 7,232
------- ------- ------- -------
Income (loss) before income taxes
(benefit) ............................ (1,372) 480 789 404
Provision for income taxes (benefit) (450) 160 255 170
------- ------- ------- -------
Net income (loss) ..................... $ (922) $ 320 $ 534 $ 234
------- ------- ------- -------
Basic and diluted income (loss) per
common share ......................... $ (.19) $ .07 $ .11 $ .04
------- ------- ------- -------
Year Ended December 31, 2007
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating Revenues .................... $ 5,185 $ 6,972 $ 7,296 $ 6,711
Other income .......................... 115 478 159 138
------- ------- ------- -------
Total revenues ........................ 5,300 7,450 7,455 6,849
Operating expenses .................... 7,101 6,893 7,174 6,688
------- ------- ------- -------
Income (loss) before income taxes
(benefit) ............................ (1,801) 557 281 161
Provision for income taxes (benefit) (640) 210 100 180
------- ------- ------- -------
Net income (loss) ..................... $(1,161) $ 347 $ 181 $ (19)
------- ------- ------- -------
Basic and diluted income (loss) per
common share ......................... $ (.26) $ .08 $ .04 $ .00
------- ------- ------- -------
Inflation
In recent years, inflation has not had a significant impact on the Company's
operations.
Seasonality
Historically, the Company's operating revenues are lowest for the first quarter
due to the absence of construction aggregates shipments during this period and
winter weather conditions.
II-10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Cash and Cash Equivalents
As of December 31, 2008, the Company is exposed to market risks which primarily
include changes in U.S. interest rates and purchases of diesel fuel.
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. In
addition, the Company's revolving line of credit agreement provides for
borrowings which bear interest at variable rates based on either the bank's
prime rate or one and 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, 2008. The Company
believes that the effect, if any, of reasonably possible near-term changes in
interest rates on the Company's financial position, results of operations, and
cash flows should not be material.
The Company purchases in excess of one million gallons of diesel fuel each year
to operate its locomotives. The Company does not hedge its diesel fuel purchases
but has been able to mitigate the impact of increased diesel fuel prices through
the imposition of diesel fuel surcharges on the freight rates charged to
customers.
II-11
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-13
Balance Sheets as of December 31, 2008 and 2007...... II-14
Statements of Operations for the Years Ended
December 31, 2008, 2007 and 2006.................... II-15
Statements of Shareholders' Equity for the Years Ended
December 31, 2008, 2007 and 2006.................... II-16
Statements of Cash Flows for the Years Ended
December 31, 2008, 2007 and 2006.................... II-17
Notes to Financial Statements........................ II-18
II-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2008 and 2007, and the
related statements of operations, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2008. Our audits also
included the financial statement schedule listed in the Index at Item 15. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Providence and Worcester Railroad Company as
of December 31, 2008 and 2007, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2008, 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 25, 2009
II-13
PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS
(Dollars in Thousands Except Per Share Amounts)
December 31,
2008 2007
------- -------
ASSETS
Current Assets:
Cash and cash equivalents ........................... $ 876 $ 181
Accounts receivable, net of allowance for doubtful
accounts of $130 in 2008 and $150 in 2007 .......... 3,526 2,726
Materials and supplies .............................. 1,103 914
Prepaid expenses and other current assets ........... 442 90
Deferred income taxes ............................... 318 325
------- -------
Total Current Assets ............................... 6,265 4,236
Property and Equipment, net .......................... 80,787 78,964
Land Held for Development ............................ 11,958 11,958
------- -------
Total Assets ......................................... $99,010 $95,158
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Borrowings under line of credit ..................... $ -- $ 900
Accounts payable .................................... 2,418 2,809
Accrued expenses .................................... 1,460 1,511
------- -------
Total Current Liabilities .......................... 3,878 5,220
------- -------
Deferred Income Taxes ................................ 12,123 11,969
------- -------
Deferred Grant Income ................................ 8,212 8,294
------- -------
Commitments and Contingent Liabilities
Shareholders' Equity:
Preferred stock, 10% noncumulative, $50 par value;
authorized, issued and outstanding 640 shares
in 2008 and 2007 ................................... 32 32
Common stock, $.50 par value; authorized
15,000,000 shares; issued and outstanding
4,801,340 shares in 2008 and 4,552,557 shares
in 2007 ............................................ 2,401 2,276
Additional paid-in capital .......................... 36,705 31,104
Retained earnings ................................... 35,659 36,263
------- -------
Total Shareholders' Equity ......................... 74,797 69,675
------- -------
Total Liabilities and Shareholders' Equity ........... $99,010 $95,158
======= =======
The accompanying notes are an integral part of the financial statements.
II-14
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31,
2008 2007 2006
-------- -------- --------
Revenues:
Operating Revenues ...................... $29,736 $ 26,164 $ 28,451
Other Income ............................ 1,050 890 1,373
-------- -------- --------
Total Revenues ........................ 30,786 27,054 29,824
-------- -------- --------
Expenses:
Operating:
Maintenance of way and structures ...... 3,934 3,746 3,971
Maintenance of equipment ............... 4,105 3,539 3,692
Transportation ......................... 10,284 8,598 8,555
General and administrative ............. 5,064 5,205 4,544
Depreciation ........................... 2,941 2,884 2,829
Taxes, other than income taxes ......... 2,349 2,223 2,299
Car hire, net .......................... 928 818 1,095
Employee retirement plans .............. 247 228 408
Track usage fees ....................... 633 615 829
-------- -------- --------
Total Operating Expenses .............. 30,485 27,856 28,222
-------- -------- --------
Income (Loss) before Income Taxes ........ 301 (802) 1,602
Provision for Income Taxes (Benefit) ..... 135 (150) 560
-------- -------- --------
Net Income (Loss) ........................ 166 (652) 1,042
Preferred Stock Dividends ................ 3 3 3
-------- -------- --------
Net Income (Loss) Available to Common
Shareholders ............................ $ 163 $ (655) $ 1,039
======= ======= =======
Basic and Diluted Income (Loss) Per Common
Share ................................... $ .03 $ (.14) $ .23
======= ======= =======
The accompanying notes are an integral part of the financial statements.
II-15
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 2008, 2007 and 2006
Additional Share-
Preferred Common Paid-in Retained holders'
Stock Stock Capital Earnings Equity
------- ------- ------- ------- -------
Balance, January 1, 2006 .. $ 32 $ 2,254 $30,230 $37,329 $69,845
Issuance of 13,011 common shares
to fund the Company's 2007
profit sharing plan
contribution ............. 6 205 211
Issuance of 13,489 common shares
for stock options exercised,
employee stock purchases, and
other .................... 7 158 165
Conversion of 5 shares of
preferred stock into 500
shares of common stock ... -- -- --
Share-based compensation -
options granted .......... 87 87
Dividends paid:
Preferred stock, $5.00 per
share ................... (3) (3)
Common stock,
$.16 per share........... (723) (723)
Net income for the year ... 1,042 1,042
------- ------- ------- ------- -------
Balance, December 31, 2006. 32 2,267 30,680 37,645 70,624
Issuance of 9,581 common
shares to fund the
Company's 2007
profit sharing plan
contribution ............. 5 173 178
Issuance of 8,920 common
shares for stock options
exercised, employee stock
purchases, and other ..... 4 131 135
Share based compensation -
options granted .......... 120 120
Dividends paid:
Preferred stock, $5.00 per
share ................... (3) (3)
Common stock,
$.16 per share........... (727) (727)
Net loss for the year ..... (652) (652)
------- ------- ------- ------- -------
Balance, December 31, 2007. 32 2,276 31,104 36,263 69,675
Issuance of 239,523 common
shares to GATX Corporation. 120 5,389 5,509
Issuance of 9,260 common shares
for stock options exercised,
employee stock purchases, and
other .................... 5 122 127
Share based compensation -
options granted .......... 90 90
Dividends paid:
Preferred stock, $5.00 per
share ................... (3) (3)
Common stock,
$.16 per share .......... (767) (767)
Net Income for the year ... 166 166
------- ------- ------- ------- -------
Balance, December 31, 2008. $ 32 $ 2,401 $36,705 $35,659 $74,797
======= ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
II-16
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Years Ended December 31,
2008 2007 2006
------- ------- -------
Cash Flows from Operating
Activities:
Net income (loss) ........................... $ 166 $ (652) $ 1,042
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation .............................. 2,941 2,884 2,829
Amortization of deferred grant income ..... (254) (247) (240)
Profit-sharing plan contribution to be
funded with common stock ................ -- -- 178
Gains from sale, condemnation and disposal
of property, equipment and easements, net (523) (288) (766)
Deferred income taxes ..................... 161 (60) 503
Share-based compensation .................. 127 165 115
Increase (decrease) in cash and cash
equivalents from:
Accounts receivable ..................... (966) 684 (127)
Materials and supplies .................. (189) 569 171
Prepaid expenses and other .............. (352) 58 4
Accounts payable and accrued expenses ... (279) 206 77
------- ------- -------
Net cash flows from operating activities .... 832 3,319 3,786
------- ------- -------
Cash Flows from Investing Activities:
Purchase of property and equipment .......... (4,987) (5,293) (5,077)
Proceeds from sale and condemnation of
property, equipment and easements .......... 583 288 863
------- ------- -------
Net cash flows used in investing activities.. (4,404) (5,005) (4,214)
------- ------- -------
Cash Flows from Financing Activities:
Net borrowings (payments) under line of
credit ..................................... (900) 900 --
Dividends paid .............................. (770) (730) (726)
Issuance of common shares to GATX Corporation 5,509 -- --
Issuance of common shares for stock options
exercised and employee stock purchases ..... 90 90 137
Proceeds from deferred grant income ......... 338 354 207
------- ------- -------
Net cash flows from (used in) financing
activities ................................. 4,267 614 (382)
------- ------- -------
Increase (Decrease) in Cash and Cash
Equivalents ................................. 695 (1,072) (810)
Cash and Cash Equivalents, Beginning of Year . 181 1,253 2,063
------- ------- -------
Cash and Cash Equivalents, End of Year ....... $ 876 $ 181 $ 1,253
======= ======= =======
Supplemental Disclosures:
Cash paid during year for interest .......... $ -- $ 47 $ --
Cash paid (received) during year for income
taxes, net ................................. $ (73) $ -- $ 136
======= ======= =======
The accompanying notes are an integral part of the financial statements.
II-17
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(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 10.0%, 13.8% and 14.8% of the Company's
operating revenues in 2008, 2007 and 2006, respectively, and this customer
accounted for .3% and 8.2% of total accounts receivable at December 31,
2008 and 2007, 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, including rolling stock 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. No impairments were recognized in the three years presented.
Deferred Grant Income
---------------------
The Company has availed itself of various federal and state programs
administered by the states of Connecticut, Massachusetts and Rhode Island
for reimbursement of expenditures for capital improvements. In order to
receive reimbursement, the Company must submit requests for the projects,
including cost estimates. The Company receives from 70% to 100% of the
costs of such projects, which have included bridges, track structure and
public improvements. To the extent that such grant proceeds are used to
fund capital improvements to bridges and track structure, they are recorded
as deferred grant income and amortized into operating revenues on a
straight-line basis over the estimated useful lives of the related
improvements ($254 in 2008, $247 in 2007 and $240 in 2006).
II-18
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
------------
The Company provides reserves for potential payments of tax to various tax
authorities related to uncertain tax positions and other issues. Prior to
2007, these reserves were recorded when management determined that it was
probable that a loss would be incurred related to these matters and the
amount of the loss was reasonably determinable. In 2007, the Company
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. As a result, reserves recorded subsequent to adoption are based on a
determination of whether and how much of a tax benefit taken by the Company
in its tax filings or positions is "more likely than not" to be realized
following resolution of any potential contingencies related to the tax
benefit, assuming that the matter in question will be raised by the tax
authorities. Potential interest and penalties associated with such
uncertain tax positions is recorded as a component of income tax expense.
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 (Loss) per Common Share
------------------------------
Basic income (loss) per common share is computed using the weighted average
number of common shares outstanding during each year. Diluted income (loss)
per common share reflects the effect of the Company's outstanding
convertible preferred stock (using the if-converted method) and options
(using the treasury stock method), except where such items would be
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,
2008 2007 2006
--------- --------- ---------
Weighted average shares for basic ...... 4,790,005 4,545,160 4,522,763
Dilutive effect of convertible preferred
stock and options ..................... 76,114 -- 79,603
--------- --------- ---------
Weighted average shares for diluted .... 4,866,119 4,545,460 4,602,366
========= ========= =========
Options to purchase 7,410, 43,634 and 3,731 shares of common stock were
outstanding during 2008, 2007 and 2006, respectively, but were not included
in the computation of diluted (loss) earnings per common share because
their effect would be antidilutive. Shares of preferred stock convertible
into 64,000 shares of common stock were outstanding during 2007 but were
not included in the computation of the diluted loss per common share
because of their antidilutive effect.
II-19
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
Liabilities for casualty claims, legal judgments and other loss
contingencies are recorded when it is probable that an asset has been
impaired or a liability has been incurred and the amount of the loss can be
reasonably estimated. The Company does not accrue estimated legal fees for
appeals of legal judgments since we do not believe that such costs meet the
definition of a liability and thus are accruable only at such time as legal
services have been provided.
Comprehensive Income
--------------------
Comprehensive Income equals net income for 2008, 2007 and 2006.
Segment Reporting
-----------------
The Company organizes itself as one segment reporting to the chief
operating decision maker. Products and services consist primarily of
interstate freight rail services. These include the movement of freight in
both conventional freight cars and in intermodal containers on flat cars
over the Company's rail lines, as well as freight-related services such as
switching, weighing and special trains and other services rendered to
freight customers and other outside parties by the Company's Maintenance of
Way, Communications & Signals and Maintenance of Equipment Departments.
2. Share-Based Compensation
The Company has a non-qualified stock option plan ("SOP") covering all
management personnel who have a minimum of one year of service with the
Company and who are not holders of a majority of either its outstanding
common stock or its outstanding preferred stock. In addition, the Company's
outside directors are eligible to participate in the SOP. The Company's
stockholders have authorized 5% of the shares of common stock outstanding
(240,067 shares at December 31, 2008) for issuance under the SOP. Options
granted under the SOP, which are fully vested when granted, are exercisable
over a ten year period at the closing market price for the Company's common
stock on the last business day of the year prior to the date the options
are granted. The Company issues new common stock to satisfy stock options
exercised.
The Company recognizes compensation expense for new stock option grants at
fair value on the grant date and recognizes this expense over the requisite
service period for awards expected to vest. Stock-based employee
compensation expense, net of income taxes, in the amounts of $58, $77 and
$56, have been charged against income in 2008, 2007 and 2006, respectively,
for stock options granted. The Company's policy is to estimate the fair
market value of each option granted on the date of grant, the first
business day in January of each year, using the Black-Scholes option
pricing model, and record the compensation expense on a straight-line basis
over the year in which the grant was made.
II-20
Key assumptions used to apply the Black-Scholes option pricing model are
set forth below:
2008 2007 2006
--------- --------- ---------
Average risk-free interest rate 3.7% 4.68% 4.32%
Expected life of option grants 6.0 years 7.0 years 7.0 years
Expected volatility of underlying stock 75% 87% 88%
Expected dividend payment rate, as a
percentage of the share price on the
date of grant .96% .82% 1.07%
Weighted average grant date fair value $10.55 $14.39 $10.70
The following table summarizes the stock option activity under the
Company's plan for 2008:
Weighted Average
----------------
Number of Exercise Fair
Options Price Value
------ ------ ------
Outstanding and exercisable at
December 31, 2007................... 43,634 12.62
Granted ........................... 8,380 16.72 $10.55
Exercised ......................... (2,009) 8.69
Expired ........................... (3,387) 18.18
------ ------ ------
Outstanding and exercisable at
December 31, 2008 ................ 46,618 $13.13
====== ====== ======
The total intrinsic value of options exercised for the years ended December
31, 2008, 2007 and 2006 totaled approximately $14, $14 and $76
respectively, and cash proceeds from the exercise of stock options totaled
approximately $17, $21 and $67 for the years ended December 31, 2008, 2007
and 2006, respectively. The income tax benefits realized from the exercise
of stock options was not material for the periods presented.
The aggregate intrinsic value of the stock options outstanding, based on
the closing stock price of the Company's common stock as of December 31,
2007 and 2006, totaled approximately $174 and $342, respectively. The
aggregate intrinsic value as of December 31, 2008 was a negative $53.
Common Stock Awards
-------------------
The Company has awarded certain of its employees common stock under stock
award plans. During the years ended December 31, 2008, 2007 and 2006, the
Company awarded 1,970, 2,575 and 1775 shares, respectively. The
compensation expense recorded for these awards was $37, $45 and $28 for
2008, 2007 and 2006, respectively.
II-21
3. Property and Equipment
Property and equipment consists of the following: December 31,
December 31,
2008 2007
------- -------
Land and improvements, excluding land held
for development .............................. $11,952 $11,587
Track structure .............................. 81,515 78,840
Buildings and other structures ............... 8,462 8,612
Equipment .................................... 24,503 26,780
------- -------
126,432 125,819
Less accumulated depreciation ................ 45,645 46,855
------- -------
Total property and equipment, net ............ $80,787 $78,964
======= =======
4. Land Held for Development
Pursuant to permits issued by the United States Department of the Army
Corps of Engineers and the Rhode Island Coastal Resources Management
Council, the Company created 33 acres of waterfront land in East
Providence, Rhode Island ("South Quay"). The permits for the property,
which have been extended to December 2009 and May 2009, respectively, also
allow for construction of a dock along the west face of the South Quay. The
property, which has a carrying value of $11,958, is adjacent to a 12 acre
site also owned by the Company.
The property is located one half-mile from I-195. In 2006, the Rhode Island
Department of Transportation awarded a contract for roadway improvements to
provide direct vehicular access from the interstate highway system to the
South Quay, which project was completed in 2007. The planned extension by
RIDOT of Waterfront Drive northward toward an industrial area in which the
Company owns two additional waterfront parcels comprising 11 acres,
creating direct access to such property, is in the design stage.
The City of East Providence has created a waterfront redevelopment area
with a zoning overlay that would encourage development of offices, hotels,
restaurants, shops, marinas, apartments and other "clean" employment. The
Company has been cooperating with the City of East Providence in these
efforts.
5. Revolving Line of Credit
The Company has a revolving line of credit with its principal bank in the
amount of $5,000 expiring May 31, 2009. 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. During the second
quarter of 2007, the Company borrowed $1,200 under this line and repaid
$300 during the fourth quarter leaving an outstanding balance of $900 at
December 31, 2007. This balance was repaid in full in January 2008.
Interest expense of $52 was incurred during 2007 and is included in general
and administrative expense.
II-22
6. Accrued Expenses
Accrued expenses consist of the following: December 31,
December 31,
2008 2007
------- -------
Salaries and wages ....................... $ 486 $ 540
Payroll taxes ............................ 142 134
Simplified employee pension plan
contributions ............................ 232 209
Legal and professional fees .............. 178 138
Casualty loss claims ..................... 280 308
Other .................................... 142 182
------- -------
$ 1,460 $ 1,511
======= =======
7. Other Income
Other income consists of the following: Years Ended December 31,
2008 2007 2006
------ ------ ------
Gains from sale, condemnation and
disposal of property, equipment and
easements, net ...................... $ 523 $ 288 $ 766
Rentals and license fees under various
operating leases .................... 494 577 547
Interest ............................. 33 25 60
------ ------ ------
$1,050 $ 890 $1,373
====== ====== ======
8. Income Taxes (Benefit)
The provision for income taxes (benefit) consists of the following:
Years Ended December 31,
2008 2007 2006
------ ------ ------
Current:
Federal .......................... $ (44) $ (90) $ 51
State ............................ 18 -- 6
------ ------ ------
(26) (90) 57
Deferred, Federal and State ....... 161 (60) 503
------ ------ ------
$ 135 $ (150) $ 560
====== ====== ======
II-23
The following summarizes the estimated tax effect of temporary differences
that are included in the net deferred income tax provision:
Years Ended December 31,
2008 2007 2006
----- ----- -----
Depreciation ........................... $ 423 $ 495 $ 508
Deferred grant income .................. 29 (96) 42
Net operating loss carry forward ....... (278) (362) --
Contribution carry forward ............. 12 (75) --
Accrued casualty and other claims ...... 9 1 21
Accrued compensated time off and related
payroll taxes ......................... (10) 12 (39)
Share based compensation ............... (32) (42) (31)
Allowance for doubtful accounts ........ 8 7 2
----- ----- -----
$ 161 $ (60) $ 503
===== ===== =====
In 2005 through 2008 the Company generated Railroad Track Maintenance
Credits in the cumulative amount of $4,491. These credits may be utilized,
subject to certain limitations, to offset the Company's current federal
income tax liability. Any credits not utilized in the year earned may be
carried forward to offset future income tax liabilities for a period of 20
years. None of these credits have been utilized to date and, therefore,
such unused credits constitute deferred income tax assets. Such assets,
however, have been fully reserved since their future realization is not
assured.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant items comprising the Company's net deferred income
tax liability as of December 31, 2008 and 2007 are as follows:
December 31,
2008 2007
------- -------
Deferred income tax liabilities -
Differences between book and tax basis
of property and equipment ............... $15,846 $15,423
------- -------
Deferred income tax assets:
Deferred grant income ................... 2,915 2,944
Net operating loss carry forward ........ 640 362
Contribution carry forward .............. 63 75
Accrued casualty and other claims ....... 100 109
Accrued compensated time off and related
payroll taxes .......................... 172 162
Share based compensation ................ 105 73
Allowance for doubtful accounts and other 46 54
------- -------
4,041 3,779
------- -------
Net deferred income tax liability ........ $11,805 $11,644
======= =======
At December 31, 2008, the Company had federal net operating loss
carryforwards of $1,983, which begin to expire in 2025.
II-24
A reconciliation of the U.S. federal statutory rate to the effective tax
rate is as follows:
Years Ended December 31,
2008 2007 2006
---- ---- ----
Federal statutory rate .............. 34% (34%) 34%
Railroad track maintenance credits .. -- 14 (2)
Non deductible expenses, state income
taxes, and other ................... 4 1 3
Other ............................... 7 -- --
---- ---- ----
Effective tax rate .................. 45% (19%) 35%
==== ==== ====
The Company is subject to U.S. federal income tax as well as income tax in
the Commonwealth of Massachusetts. All U.S. federal income and
Massachusetts income tax matters have been concluded through 2006.
9. Commitments and Contingent Liabilities
The Company is a defendant in certain lawsuits relating to casualty losses,
many of which are covered by insurance subject to a deductible. The Company
believes that adequate provision has been made in the financial statements
for any expected liabilities which may result from disposition of such
lawsuits.
On January 29, 2002, the Company received a "Notice of Potential Liability"
from the United States Environmental Protection Agency ("EPA") regarding an
existing Superfund Site that includes the J.M. Mills Landfill in
Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially
responsible parties ("PRPs") under the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA"). EPA identified the
Company as a PRP based on its status as an owner and/or operator because
its railroad property traverses the Site. Via these Notice letters, EPA
makes a demand for payment of past costs (identified in the letter as $762)
and future costs associated with the response actions taken to address the
contamination at the Site, and requests PRPs to indicate their willingness
to participate and resolve their potential liability at the Site. The
Company has responded to EPA by stating that it does not believe it has any
liability for this Site, but that it is interested in cooperating with EPA
to address issues concerning liability at the Site. At this point, two
other parties have already committed via a consent order with EPA to pay
for the Remedial Investigation/Feasibility Study ("RI/FS") phase of the
clean-up at the Site, which will take approximately two or more years to
complete. After that, EPA will likely seek to negotiate the cost of the
Remedial Design and implementation of the remedy at the Site with the PRPs
it has identified via these Notice letters (which presently includes over
sixty parties, and is likely to increase after EPA completes its
investigation of the identity of PRPs). On December 15, 2003, the EPA
issued a second "Notice of Potential Liability" letter to the Company
regarding the Site. EPA again identified the Company as a PRP, this time
because EPA "believes that [the Company] accepted hazardous substance for
transport to disposal or treatment facilities and selected the site for
disposal." The Company responded again to EPA stating that it is interested
in cooperating with EPA but that it does not believe it has engaged in any
activities that caused contamination at the Site. The Company believes that
none of its activities caused contamination at the Site, and will contest
this claim by EPA and, therefore, no liability has been accrued for this
matter.
In connection with the EPA claim described above, the two parties who have
committed to conduct the RI/FS at the Site filed a complaint in the U.S.
District Court of Rhode Island against the Company, in an action entitled
CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al
(consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et
al), C.A. No. 01-496/L, on December 18, 2002. The Company was one of about
sixty parties named by Plaintiffs, in this suit, to recover response costs
incurred in investigating and responding to the releases of hazardous
substances at the Site. Plaintiffs alleged that the Company is liable under
42 U.S.C. ss. 961(a)(3) of CERCLA as an "arranger" or "generator" of waste
that ended up at the Site. The Company entered into a Generator Cooperation
Agreement with other defendants to allocate costs in responding to this
suit, and to share technical costs and information in evaluating the
Plaintiffs' claims. Although the Company does not believe it generated any
waste that ended up at this Site, or that its activities caused
II-25
contamination at the Site, the Company paid $45 to settle this suit in
March 2006.
10. Employee Benefit Plans
Defined Contribution Retirement Plans
-------------------------------------
The Company has a deferred profit-sharing plan ("Plan") which covers all of
its employees who are members of its collective bargaining units.
Contributions to the Plan are required in years in which the Company has
income from "railroad operations" as defined in the Plan. Contributions are
to be equal to at least 10% but not more than 15% of the greater of income
before income taxes or income from railroad operations subject to a maximum
contribution of $3.5 per eligible employee. Contributions to the Plan may
be made in cash or in shares of the Company's common stock valued at the
closing market price for the Company's stock on the last business day of
the year prior to the date the options are granted. Contributions accrued
under this Plan amounted to $178 in 2006. No contribution was made for 2008
or 2007 since the Company did not generate income from railroad operations
during those years. The Company made its 2006 contribution in newly-issued
shares of its common stock.
The Company also has a Simplified Employee Pension plan ("SEP") which
covers substantially all employees who are not members of one of its
collective bargaining units. Contributions to the SEP 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 SEP amounted to $232 in 2008, $208 in 2007 and $212 in
2006 which, in each year, was less than the maximum amount allowable by
law.
Employee Stock Purchase Plan
----------------------------
The Company has an Employee Stock Purchase Plan ("ESPP") under which
eligible employees may purchase registered shares of common stock at 85% of
the market price for such shares. An aggregate of 200,000 shares of common
stock are authorized for issuance under the ESPP which was established in
1997. Any shares purchased under the ESPP are subject to a two year
lock-up. ESPP purchases amounted to 5,281 shares in 2008, 4,492 shares in
2007 and 4,376 shares in 2006.
11. GATX Corporation
On January 10, 2008, the Company entered into an agreement with GATX
Corporation ("GATX") whereby GATX acquired 239,523 (approximately 4.99%)
newly-issued shares of the Company's common stock for approximately $5.5
million to be utilized for capital improvements to enhance the Company's
railroad lines. The parties also entered into an Exclusive Railcar Supply
Agreement whereby GATX has the exclusive right to supply the Company with
railcars for certain rail traffic on market-competitive terms. In addition,
the Company exchanged 72 of its mill gondolas for 137 open-top hoppers
owned by GATX, which exchange was accounted for as a purchase. The Company
agreed to lease the 72 mill gondolas from GATX under operating leases for a
period of up to 7 years at a minimum annual rental of $248 through January
2015. Rental expense of $241 was incurred under this lease in 2008 leaving
a maximum total commitment of $1,493 as of December 31, 2008.
12. Preferred Stock
The Company's $50 par value preferred stock is convertible at any time at
the option of the holder of the preferred stock into 100 shares of common
stock. The noncumulative stock dividend is fixed by the Company's Charter
at an annual rate of $5.00 per share, out of funds legally available for
the payment of dividends.
The holders of preferred stock and holders of common stock are entitled to
one vote per share, voting as separate classes, upon matters voted on by
shareholders. The holders of common stock elect one third of the Board of
Directors; the voters of preferred stock elect the remainder of the Board.
II-26
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
Item 9A. (T) Controls and Procedures
- ------------------------------------
Management's Report Regarding the Effectiveness of Disclosure Controls and
Procedures
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, have conducted an evaluation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934 (the "Exchange Act")). Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of the period covered by this annual report,
the Company's disclosure controls and procedures were effective.
Management's Report Regarding the Effectiveness of Internal Controls and
Procedures
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. The Company's internal control over financial reporting
includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate as a result of changes in conditions, or that the
degree of compliance with the applicable polices and procedures may deteriorate.
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, has conducted an evaluation of the Company's
internal control over financial reporting as of the end of the period covered by
this annual report based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Such evaluation included reviewing the documentation of the
Company's internal controls, evaluating the design effectiveness of the internal
controls and testing their operating effectiveness.
Based on such evaluation, the Company's management has concluded that as of the
end of the period covered by this annual report, the Company's internal control
over financial reporting was effective.
Item 9B. Other Information
- --------------------------
None.
II-27
PART III
Item 10. Directors, Executive Officers and Corporate Governance
- ---------------------------------------------------------------
For information with respect to the directors of the Company, see Pages 2
through 7 and 9 through 12 of the Company's definitive proxy statement for the
2009 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 76 Chairman 1980
P. Scott Conti 51 President 2005
David F. Fitzgerald 58 Vice President 2005
Frank K. Rogers 47 Vice President 2005
Robert J. Easton 65 Treasurer 1988
Marie A. Angelini 50 Secretary 2007
Any officer elected or appointed by the Company's Board of Directors may be
removed at any time by the affirmative vote of a majority of the Board of
Directors. Mr. Conti served as Vice President from March 1999 until his election
as President in 2005. Upon joining the Company in 1988, he served as Engineering
Manager through December 1997, and then as Chief Engineer from 1998 until March
1999. Mr. Fitzgerald joined the Company in 1973 and served as Superintendent of
Transportation prior to his promotion to Vice President in 2005. Mr. Rogers
joined the Company in 1994 and served as Director of Marketing prior to his
promotion to Vice President in 2005. Ms. Angelini joined the Company in 2005 and
served as Assistant General Counsel prior to her promotion to General Counsel
and election as Secretary in 2007.
The Company has adopted a written code of ethics that applies to all of its
employees including its Chief Executive Officer and its Chief Financial Officer.
A copy of the Company's code of ethics, entitled "Business Conduct Policy," is
available on the Company's website at http://www.pwrr.com, and/or may be
obtained without charge by contacting:
Investor Relations
Attention: Wendy Lavely
Providence and Worcester Railroad Company
75 Hammond Street
Worcester, Massachusetts 01610
(800) 447-2003
Internet Address: http://www.pwrr.com; wlavely@pwrr.com
Item 11. Executive Compensation
- -------------------------------
See pages 7 and 9 through 16 of the Company's definitive proxy statement for the
2009 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 8 and 9 of the Company's definitive proxy statement for the 2009
annual meeting of its shareholders, which pages are incorporated herein by
reference.
III-1
The following table sets forth information as of the end of the Company's most
recently completed fiscal year with respect to compensation plans (including
individual compensation arrangements) under which equity securities of the
Company are authorized for issuance.
Number of Securities Number of
To be Issued Upon Weighted Average Securities
Exercise of Exercise Price of Remaining
Outstanding Options Outstanding Options Available For
Plan Category Warrants and Rights Warrants and Rights Future Issuance
------------- -------------------- ------------------- ---------------
Equity compensation
plans approved
by security holders .. 46,618 $13.13 291,435
Equity compensation
plans not approved by
security holders ..... N/A N/A 182,010
Total ................ 46,618 $13.13 473,445
Item 13. Certain Relationships and Related Transactions and Director
- --------------------------------------------------------------------------------
Independence
- ------------
See pages 2 and 17 of the Company's definitive proxy statement for the 2009
annual meeting of its shareholders which pages are incorporated herein by
reference.
Item 14. Principal Accounting Fees and Services
- -----------------------------------------------
See pages 17 and 18 of the Company's definitive proxy statement for the 2009
annual meeting of its shareholders which pages are incorporated herein by
reference.
III-2
PART IV
Item 15. Exhibits and Financial Statement Schedules
- ---------------------------------------------------
(a) (1) All financial statements:
An index of financial statements is included in Item 8, page II-12 of
this annual report.
(2) Financial Statement schedule:
Schedule II Valuation and Qualifying Accounts........Page IV-3
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or the notes thereto.
(3) Listing of Exhibits.
(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) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
(32) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Not applicable.
(c) Exhibits (annexed).
Financial Statement Schedule. See item (a) (2) above.
IV-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROVIDENCE AND WORCESTER RAILROAD COMPANY
/s/ Robert H. Eder
------------------
By Robert H. Eder
Chief Executive Officer
Dated: March 25, 2009
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 25, 2009
Robert H. Eder Officer
and Chairman
(Principal
Executive Officer)
/s/ P. Scott Conti
________________________ President and March 25, 2009
P. Scott Conti Director
(Chief Operating
Officer)
/s/ Robert J. Easton
________________________ Treasurer March 25, 2009
Robert J. Easton (Principal financial
officer and principal
accounting officer)
/s/ Richard W. Anderson
________________________ Director March 25, 2009
Richard W. Anderson
Richard W. Anderson
/s/ Frank W. Barrett
________________________ Director March 25, 2009
Frank W. Barrett
/s/ J. Joseph Garrahy
________________________ Director March 25, 2009
J. Joseph Garrahy
/s/ John J. Healy
________________________ Director March 25, 2009
John J. Healy
IV-2
SCHEDULE II
PROVIDENCE AND WORCESTER RAILROAD COMPANY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(IN THOUSAND DOLLARS)
Column A Column B Column C Additions Column D Column E
-------- -------- ------------------ -------- --------
(1) (2)
Balance Charged to Charged to Balance
at costs and other at end
Description beginning expenses accounts of
of period describe Deductions period
Allowance for doubtful
accounts:
Year ended
December 31, 2008..... $150 $ 6 $ 26 $130
==== ==== ==== ====
Year ended
December 31, 2007..... $175 $ 0 $ 25 $150
==== ==== ==== ====
Year ended
December 31, 2006..... $175 $ 0 $ 0 $175
==== ==== ==== ====
IV-3
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos.
333-65937, 333-65949, and 333-21617 each on Form S-8 of our report dated March
25, 2009, 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, 2008.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 25, 2009
EXHIBIT 31.1
Providence and Worcester Railroad Company
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, ROBERT H. EDER, certify that:
1. I have reviewed this annual report on Form 10-K of Providence and Worcester
Railroad Company;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15 (e)) 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 25, 2009
/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 25, 2009
/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, 2008, as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Robert H. Eder, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. sec. 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 25, 2009
In connection with the Annual Report of Providence and Worcester Railroad
Company (the Company) on form 10-K for the year ended December 31, 2008, as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Robert J. Easton, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. sec. 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 25, 2009