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 operates the largest double stack intermodal terminal facilities in New England in Worcester, Massachusetts, a strategic location for regional transportation and distribution enterprises.
The Company transports a wide variety of commodities for its customers, including construction aggregate, iron and steel products, chemicals, lumber, scrap metals, plastic resins, cement, coal, construction and demolition debris, processed foods and edible food stuffs, such as frozen foods, corn syrup and animal and vegetable oils. Its customers include Cargill, Inc., The Dow Chemical Company, Exxon- Mobil Corporation, Frito-Lay, Inc., Gateway Terminal, International Paper Company, Northeast Utilities, Smurfit-Stone Container Corporation and Tilcon Connecticut, Inc. In 2005, P&W transported approximately 33,000 carloads of freight and 63,000 intermodal containers. The Company also generates income through sales of properties, grants of easements and licenses and leases of land and tracks.
P&W's connections to multiple Class I railroads, either directly or through connections with regional and short-line carriers, provide the Company with a competitive advantage by allowing it to offer creative pricing and routing alternatives to its customers. In addition, the Company's commitment to maintaining its track and equipment to high standards enables P&W to provide fast, reliable and efficient service.
Industry Overview
General
Railroads are divided into three classes based on operating revenues: Class I, $289.4 million or more; Class II, $23.1 million to $289.4 million; and Class III, less than $23.1 million. As a result of mergers and consolidations, there are now only seven Class I railroads in the country. The Class I railroads handle 93% of the nation's rail freight business.
The rail freight industry underwent a revitalization after the passage of the Staggers Rail Act, which deregulated the pricing and types of services provided by railroads. As a result, railroads were able to achieve significant productivity gains and operating cost decreases while gaining pricing flexibility. Rail freight service became more competitive with other transportation modes with respect to both quality and price. The volume of freight moved by rail has risen dramatically since 1980 and profitability has improved significantly.
One result of the revitalization of the industry has been the growth of regional (over 350 miles) and short-line railroads, which has been fueled by a trend among Class I railroads to divest certain branch lines in order to focus on their long-haul core systems. There are now nearly 550 of these regional and short-line railroads. They operate in all 50 states, account for 30% of all rail track, employ 11% of all rail workers and generate about 7% of all rail revenue.
Generally, freight railroads handle two types of traffic: conventional carloads and intermodal containers used in the shipment of goods via more than one mode of transportation, e.g., by ship, rail and truck. By using a hub-and-spoke approach to shipping, multiple containers can be moved by rail to and from an intermodal terminal and then either delivered to their final destinations by truck or transferred to ship for export. Over the past decade, commodity shippers have increasingly turned to intermodal transportation principally as an alternative to long-haul trucking. The development of new intermodal technology, which allows containers to be moved by rail double stacked (i.e., stacked one on top of the other) in specially designed railcars, together with increasing highway traffic congestion and the shortage of long-haul truck drivers have contributed to this trend.
Regional Developments
There are a number of development projects underway in New England to increase port capacity along the extensive coastline and to improve the intermodal transportation and distribution infrastructure in the region. These projects present significant opportunities for the Company to increase its business.
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Quonset/Davisville
The State of Rhode Island and the federal government are progressing with the redevelopment of a 1,000 acre portion of the former Naval facility at Quonset/Davisville to a more active port and industrial park. This facility already houses a number of rail oriented industries and an auto port. Construction of a freight rail improvement project to provide additional track capacity and double stack clearance on the Northeast Corridor between Quonset/Davisville and the connection of the Corridor to the Company's main line at Central Falls, R.I commenced in 2002 at a cost of $148 million to Rhode Island and the federal government and is scheduled to be completed by the third quarter of 2006.
Massachusetts Highway Improvement Program
In 2005 work was completed on a significant expansion of the Company's bulk transload and intermodal yards in Worcester in conjunction with the Massachusetts Highway Department's $250 million project creating a direct Worcester connection to the Massachusetts Turnpike. This project adds six acres and over 4,000 feet of track storage space to the Company's transload facilities, and a major petrochemical distribution company is in the process of relocating its local plastics distribution business to Worcester in order to utilize this facility.
Middletown/Hartford Line
In cooperation with the state of Connecticut, the Company has been engaged in the restoration of the rail line extending from Middletown to Hartford, Connecticut. In April 2000, the state of Connecticut appropriated $1.85 million to fund their portion of the project (approx 70%). The restoration of this 11 mile segment is now complete and the line is in service. With a planned industrial park along this line and a new connection to other carriers in Hartford, the Company believes restoration of this line presents opportunities for future revenue growth.
New London Interchange
Through its New London interchange with the New England Central Railroad, P&W has been able to develop significant new business with the Canadian National Railway ("CN") and the Canadian Pacific Railway. P&W has worked aggressively to leverage its extensive bulk transload facilities in developing additional chemical and plastics traffic with CN and has developed a significant volume of steel traffic with CN that had previously moved via truck.
Port of Providence
The Port of Providence, in conjunction with the Company, has made investments in its infrastructure, including paving, lighting and "on dock" rail, to accommodate growth in the movement of imported coal to inland markets and to handle that product more efficiently. This is expected to be a growing source of revenue for the Company over the next few years. Approximately 350,000 tons of coal were handled through the Port of Providence in 2005.
Railroad Operations
The Company's rail freight system extends over approximately 516 miles of track. The Company interchanges freight traffic with CSX at Worcester, Massachusetts and at New Haven, Connecticut; with the Springfield Terminal Railway Company at Gardner, Massachusetts; with the New England Central Railroad at New London, Connecticut; and with the New York and Atlantic Railroad at Fresh Pond Junction on Long Island. Through its connections, P&W links more than 80 communities on its lines. It operates four classification yards (areas containing tracks used to group freight cars destined for a particular industry or interchange), located in Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield and New Haven, Connecticut.
The Company is dependent upon the railroads with which it interchanges freight traffic to enable it to properly service its customers at competitive rates. Failure of any of these connecting railroads to provide adequate service at reasonable rates can result in a loss of freight customers and revenues.
By agreement with a private operator, the Company operates two approved customs intermodal yards in Worcester. A customs intermodal yard is an area containing tracks used for the loading and unloading of containers. These yards are U.S. Customs bonded, and international traffic must be inspected and
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approved by U.S. Customs officials. The intermodal facility serves primarily as a terminal for movement of container traffic from the Far East destined for points in New England. Several major container ship lines utilize double stack train service through this terminal. P&W works closely with the terminal operator to develop and maintain strong relationships with steamship lines involved in international intermodal transportation.
Customers
The Company serves approximately 165 customers in Massachusetts, Rhode Island, Connecticut and New York. The Company's 10 largest customers account for nearly half of its operating revenues. In 2005, Tilcon Connecticut, Inc., which ships construction aggregate from three separate quarries on P&W's system to asphalt production plants in Connecticut and New York, accounted for approximately 13.3% of the Company's operating revenues. No other customer accounted for 10% or more of its total operating revenues in 2005.
Markets
The Company transports a wide variety of commodities for its customers. In recent years, chemicals and plastics and construction aggregate were the two largest commodity groups transported by the Company, constituting 31% and 16%, respectively, of conventional carload freight revenues in 2005. The following table summarizes the Company's conventional carload freight revenues by commodity group as a percentage of such revenues:
Commodity 2005 2004 2003 2002 2001 - --------- ---- ---- ---- ---- ---- Chemicals and plastics ............ 31% 32% 33% 35% 34% Construction aggregate ............ 16 15 16 20 19 Metal products .................... 14 11 10 7 7 Forest and paper products ......... 13 15 12 13 16 Food and agricultural products .... 11 11 12 12 13 Other, including coal ............. 10 9 8 5 5 Scrap metal and waste ............. 5 7 9 8 6 --- --- --- --- --- Total .......................... 100% 100% 100% 100% 100% === === === === ===
Sales and Marketing
P&W's sales and marketing staff of three people has substantial experience in pricing and marketing railroad services. The sales and marketing staff focuses on understanding and addressing the raw material requirements and transportation needs of its existing customers and businesses on its lines. The staff grows existing business by maintaining close working relationships with both customers and connecting carriers. The sales and marketing staff strives to generate new business for the Company through (i) targeting companies already on P&W's rail lines but not currently using rail services or not using them to their full capacity, (ii) working with state and local development officials, developers and real estate brokers to encourage the development of industry on the Company's rail lines and (iii) identifying and targeting the non-rail transportation of goods into and out of the region in which the Company operates. Unlike many other regional and short-line railroads, the Company is able to offer its customers creative pricing and routing alternatives because of its multiple connections to other carriers.
Safety
An important component of the Company's operating strategy is conducting safe railroad operations for the benefit and protection of employees, customers and the communities served by its rail lines. Since commencing active operations in 1973, the Company has committed significant resources to track maintenance to minimize the risk of derailments and believes its rail system is in good condition.
Safety of the Company's operations is of paramount importance for the benefit and protection of the Company's employees, customers and the communities served by its rail lines. The Company and its employees have continued to make improvements in preventing injuries while at the same time increasing operations and expanding the work force.
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Rail Traffic
Rail traffic is classified as on-line or overhead traffic. On-line traffic is traffic that originates or terminates with shippers located on a railroad. Overhead traffic passes from one connecting carrier to another and neither originates nor terminates with shippers located on a railroad. Presently, P&W is solely an on-line carrier but may provide overhead service in the future for certain rail traffic to and from Long Island.
Rail freight rates can be in various forms. Generally, customers are given a "through" rate, a single figure encompassing the rail transportation of a commodity from point of origin to point of destination, regardless of the number of carriers which handle the car. Rates are developed by the carriers based on the commodity, volume, distance and competitive market considerations. The entire freight bill is paid either to the originating carrier ("prepaid") or to the destination carrier ("collect") and divided between all carriers which handle the move. The basis for the division varies and can be based on factors (or revenue requirements) independently established by each carrier which comprise the through rate, or on a percentage basis established by division agreements among the carriers. A carrier such as P&W, which actually places the car at the customer's location and attends to the customer's daily switching requirements, receives revenue greater than an amount based simply on mileage hauled.
Employees
As of January 1, 2005, the Company had 147 full-time employees, 115 of whom are represented by three railroad labor organizations that are national in scope. The Company's employees have been represented by unions since the Company commenced independent operations in 1973.
The Company's initial agreement with the United Transportation Union covering the trainmen was unusual in the railroad industry since it provided the Company with discretion in determining crew sizes, eliminated craft distinctions and provided a guaranteed annual wage for a maximum number of hours worked. The Company's collective bargaining agreements have been in effect since February 1973 for trainmen, since May 1974 for clerical employees and dispatchers and since June 1974 for maintenance employees. These contracts do not expire but are subject to re-negotiation after the agreed-upon moratoriums. The labor agreement may next be amended at July 1, 2006 for the Brotherhood of Railroad Signalmen (maintenance), while the Transportation Communications Union (clerical) filed a notice regarding its desire for re-negotiation prior to the end of the agreed upon moratorium which ended on December 31, 2005. The Company signed an eight year agreement with the United Transportation Union (trainmen) in October 2005. The Company considers its employee and labor relations to be good.
Competition
The Company is the only rail carrier serving businesses located on- line. However, the Company competes with other carriers in the location of new rail-oriented businesses in the region. Certain rail competitors, including CSX Transportation and Norfolk Southern, are larger and better capitalized than the Company. The Company also competes with other modes of transportation, particularly long-haul trucking companies, for the transportation of commodities. Any improvement in the cost or quality of these alternate modes of transportation, for example, legislation granting material increases in truck size or allowable weight, could increase competition and may materially adversely affect the Company's business and results of operations. As a means of competing, P&W strives to offer greater convenience and better service than competing rail carriers and at costs lower than some competing non-rail carriers. The Company also competes by participating in efforts to attract new industry to the areas which it serves.
The Company believes that its ability to grow depends, in part, upon its ability to acquire additional connecting rail lines. In making acquisitions, P&W competes with other short-line and regional rail operators, some of which are larger and have greater financial resources than the Company.
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Governmental Regulation
The Company is subject to governmental regulation by the United States Surface Transportation Board ("the STB"), the Federal Railroad Administration ("the FRA") and other federal, state and local regulatory authorities with respect to certain rates and railroad operations, as well as a variety of health, safety, labor, environmental and other matters, all of which could potentially affect the competitive position and profitability of the Company. Additionally, the Company is subject to STB regulation and may be required to obtain STB approval prior to its acquisition of any new railroad properties. Management of the Company believes that the regulatory freedoms granted by the Staggers Rail Act have been beneficial to the Company by giving it flexibility to adjust prices and operations to respond to market forces and industry changes. However, various interests, and certain members of the United States Congress (which has jurisdiction over federal regulation of railroads), have from time to time expressed their intention to support legislation that would eliminate or reduce significant freedoms granted by the Staggers Rail Act.
Environmental Matters
The Company's railroad operations and real estate ownership are subject to extensive federal, state and local environmental laws and regulations concerning, among other things, emissions to the air, discharges to waters and the handling, storage, transportation and disposal of waste and other materials. The Company handles, stores, transports and disposes of petroleum and other hazardous substances and wastes. The Company also transports hazardous substances for third parties and arranges for the disposal of hazardous wastes generated by the Company. The Company believes that it is in material compliance with applicable environmental laws and regulations.
Internet Address and SEC Reports
We maintain a website with the address www.pwrr.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. We also include on our website our corporate governance guidelines and the charters for each of the major committees of our board of directors. In addition, we intend to disclose on our website any amendments to, or waivers from, our code of business conduct and ethics that are required to be publicly disclosed pursuant to rules of the SEC.
Item 1A.
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.
Availability of Acquisition and Growth Opportunities and Associated Risks
The Company believes that its ability to grow depends, in part, upon its ability to acquire additional connecting rail lines. There are a limited number of acquisition targets in the Company's market. In addition, in making acquisitions, the Company competes with other short- line and regional rail operators, some of which are larger and have greater financial resources than the Company. The growing competition for such acquisitions may cause an increase in acquisition prices and related costs, resulting in fewer attractive acquisition opportunities, which could materially adversely affect the Company's
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growth. No assurance can be given that the Company will be able to acquire suitable additional rail lines or that, if acquired, the Company would be able to successfully operate such additional rail lines.
Acquisitions of additional rail lines may be subject to regulatory review and approval by the Surface Transportation Board. The Company is a Class II railroad and acquisitions made by Class II railroads are subject to a requirement that employees affected by an acquisition be paid up to one year severance.
Competition
For customers located directly on line, which constitute the majority of the Company's freight business, the Company is the only rail carrier providing direct service. However, the Company competes with other freight railroads in the location of new businesses in the region. The Company also competes with other modes of transportation, particularly long-haul trucking companies. Any improvement in the cost or quality of these alternate modes of transportation, for example, legislation granting increases in truck size or allowable weight, could increase this competition and materially affect the Company's business and results of operations.
Customer Concentration
The Company's ten largest customers accounted for approximately 50% of the Company's operating revenues for 2005 with one customer accounting for more than 13%. The Company's business could be materially adversely affected if any of these customers reduces shipments of commodities transported by the Company. Although in the past the Company has been able to replace revenues lost due to a reduction in existing customers' rail service requirements, no assurance can be given that it could do so in the future.
Labor Issues
Substantially all of the Company's non-management employees are represented by national railroad labor organizations. The Company's inability to satisfactorily conclude negotiations with unions could materially adversely affect the Company's operations and financial performance. Similarly, any protracted work stoppages against the Company's connecting railroads could materially adversely affect the Company's business and results of operations. Historically, Congress has intervened in such events to avoid disruptions in interstate commerce, but there can be no assurance that it would do so in the future.
All railroad industry employees are covered by the Railroad Retirement Act and the Railroad Unemployment Insurance Act in lieu of Social Security and other federal and state unemployment insurance programs, and the Federal Employers Liability Act in lieu of state workers' compensation. Significant increases in the taxes payable pursuant to the Railroad Retirement Act would increase the Company's costs of operations.
Relationships with Other Railroads
The railroad industry in the United States is dominated by a small number of large Class I carriers that have substantial market control and negotiating leverage. A majority of the Company's carloadings is interchanged with a Class I carrier, CSX Transportation. A decision by CSX Transportation to discontinue serving routes or transporting certain commodities could materially adversely affect the Company's business.
The Company's ability to provide rail service to its customers depends in large part upon its ability to maintain cooperative relationships with all its connecting carriers with respect to, among other matters, freight rates, car supply, interchange and trackage rights. A deterioration in the operating relationships with or service provided by those connecting carriers could materially adversely affect the Company's business.
Rail Infrastructure and Availability of Government Programs
Certain of the Company's growth opportunities are contingent upon anticipated improvements to P&W's existing rail infrastructure. No assurance can be given that the Company will be able to complete such projects as planned. Unforeseen delays or other problems which prevent completion of such improvements could materially adversely affect the Company's business and results of operations. In addition, the Company has worked with federal and state agencies to improve its rail infrastructure and has been effective in obtaining federal and state financial support for such projects. However, there
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can be no assurance that such federal and state programs or funds will be available in the future or that the Company will be eligible to participate in such programs. Failure to participate in federal and state programs or to receive federal or state funding for rail infrastructure improvements would cause the Company to incur the full cost of rail infrastructure improvements and significantly increase its costs of rail maintenance.
Potential for Increased Governmental Regulation and Mandated Upgrade to Property
The Company is subject to governmental regulation by the Surface Transportation Board, the Federal Railroad Administration and other federal, state and local regulatory authorities with respect to certain rates and railroad operations, as well as a variety of health, safety, labor, environmental and other matters, all of which could potentially affect the competitive position and profitability of the Company. Management of the Company believes that the regulatory freedoms granted by the Staggers Rail Act of 1980 (the "Staggers Rail Act") have been beneficial to the Company by giving it flexibility to adjust prices and operations to respond to market forces and industry changes. However, various interests and certain members of the United States House of Representatives and Senate (which have jurisdiction over the federal regulation of railroads) have from time to time expressed their intention to support legislation that would eliminate or reduce significant freedoms granted by the Staggers Rail Act. If enacted, these proposals, or court or administrative rulings to the same effect under current law, could materially adversely affect the Company's business and results of operations.
Casualty Losses
The Company has obtained insurance coverage for losses arising from personal injury and for property damage in the event of derailments or other accidents or occurrences. The Company believes that its insurance coverage is adequate based on its experience. However, under catastrophic circumstances such as accidents involving passenger trains or spillage of hazardous materials, the Company's liability could exceed its insurance limits. The Company transports hazardous chemicals throughout its system and conducts operations on the Northeast Corridor on which there is heavy passenger traffic. Insurance is available from only a limited number of insurers, and there can be no assurance that insurance protection at the Company's current levels will continue to be available or, if available, will be obtainable on terms acceptable to the Company. Losses or other liabilities incurred by the Company which are not covered by insurance or which exceed the Company's insurance limits could materially adversely affect the Company's financial condition, liquidity and results of operation.
Environmental Matters
The Company's railroad operations and real estate ownership are subject to extensive federal, state and local environmental laws and regulations concerning, among other things, emissions to the air, discharges to waters and the handling, storage, transportation and disposal of waste and other materials. The Company transports hazardous materials and periodically uses hazardous material in its operations. While the Company believes it is in substantial compliance with all applicable environmental laws and regulations, any allegations or findings to the effect that the Company had violated such laws or regulations could materially adversely affect the Company's business and results of operations. The Company operates on properties that have been used for rail operations for over a century. There can be no assurance that historic releases of hazardous waste or materials will not be discovered, requiring remediation of Company properties, and that the cost of such remediation would not be material.
Item 1B.
Item 1B. Unresolved Staff Comments - ----------------------------------
None
Item 2.
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 main lines on which the Company operates are in FRA class 3 condition (allowing 40 m.p.h. speeds) or better. The Company intends to maintain the main line tracks which it owns in such excellent condition.
Of the approximately 516 miles of the Company's system, 306 miles, or 59%, are located in Connecticut, 95 miles, or 19%, are located in Massachusetts, 87 miles, or 17%, are located in Rhode Island and 28 miles, or 5%, are located in New York.
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Rail Facilities
P&W owns land and a building with approximately 69,500 square feet of floor space in Worcester, Massachusetts. The building houses the Company's executive and administrative offices and some of the Company's storage space. Approximately 2,600 square feet are leased to outside tenants.
The Company owns and operates three principal classification yards located in Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield, Connecticut and also operates a classification yard in New Haven, Connecticut. In addition, the Company has maintenance facilities in Putnam and Plainfield, Connecticut and in Worcester, Massachusetts. P&W believes that its executive and administrative office facilities, classification yards and maintenance facilities are adequate to support its current level of operations.
Other Properties
The Company owns or has the right to use a total of approximately 130 acres of real estate located along the principal railroad lines from downtown Providence through Pawtucket, Rhode Island. Of this amount, P&W owns approximately eight acres in Pawtucket and has a perpetual easement for railroad purposes over the remaining 122 acres.
The Company has invested nearly $12 million in the development of the South Quay, which is adjacent to 12 acres of land owned by the Company. This investment has resulted in the creation of approximately 33 acres of waterfront land which is being held for future development.
P&W actively manages its real estate assets in order to maximize revenues. The income from property management is derived from sales and leasing of properties and tracks and grants of easements to government agencies, utility companies and other parties for the installation of overhead or underground cables, pipelines and transmission wires as well as recreational uses such as bike paths.
Rolling Stock
The following schedule sets forth the rolling stock owned by the Company as of December 31, 2005:
Description Number ----------- ------ Locomotive .................................................. 31 Gondola ..................................................... 77 Flat Car .................................................... 5 Ballast Car ................................................. 30 Passenger Equipment ......................................... 7 Caboose ..................................................... 2 ------ Total .................................................. 152 ======
The 31 diesel electric locomotives, which include nine pre-owned 3,900 horsepower GE B39-8 locomotives acquired in 2002 and 2003 and three pre-owned GE B40-8 locomotive acquired in 2004 and 2005, are used on a daily basis, are maintained to a high standard, comply with all FRA and Association of American Railroads rules and regulations and are adequate for the needs of the Company's freight operations. The gondolas and flat cars are considered modern rail cars and are used by certain P&W customers. Other rail freight customers use their own freight cars or obtain such equipment from other sources. The ballast cars are used in track maintenance. From time to time, the Company has leased ballast cars to other adjoining railroads. The passenger equipment and caboose are not utilized in P&W's rail freight operations but are used on an occasional basis for Company functions, excursions and charter trips.
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Equipment
P&W has a state-of-the-art digital touch control dispatching system at its Worcester operations center permitting two-way radio contact with every train crew and maintenance vehicle on its lines. The system also enables each train crew to maintain radio contact with other crew members. The Company maintains a computer facility in Worcester with back-up computer facilities in Worcester and Plainfield, Connecticut to assure the Company's ability to operate in the event of disruption of service in Worcester. The Company also has state-of-the-art automatic train defect detectors at strategic locations which inspect passing trains and audibly communicate the results to train crews and dispatchers in order to protect against equipment failure en route.
The Company maintains a modern fleet of track maintenance equipment and aggressively pursues available opportunities to work with federal and state agencies for the rehabilitation of bridges, grade crossings and track. The Company's locomotives are equipped with the cab signal technology necessary for operations on the Northeast Corridor and are equipped with automatic civil speed enforcement systems which were required by the introduction of high speed passenger service on the Northeast Corridor.
Item 3.
Item 3. Legal Proceedings - -------------------------
On January 29, 2002, the Company received a "Notice of Potential Liability" from the United States Environmental Protection Agency ("EPA") regarding an existing Superfund Site that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially responsible parties ("PRPs") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its status as an owner and/or operator because its railroad property traverses the Superfund Site. Via these Notice letters, EPA makes a demand for payment of past costs (identified in the letter as $762,000) and future costs associated with the response actions taken to address the contamination at the Site, and requests PRPs to indicate their willingness to participate and resolve their potential liability at the Site. The Company has responded to EPA by stating that it does not believe it has any liability for this Site, but that it is interested in cooperating with EPA to address issues concerning liability at the Site. At this point, two other parties have already committed via a consent order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS") phase of the clean-up at the Site, which will take approximately two or more years to complete. After that, EPA will likely seek to negotiate the cost of the Remedial Design and implementation of the remedy at the Site with the PRPs it has identified via these Notice Letters (which presently includes over sixty parties, and is likely to increase after EPA completes its investigation of the identity of PRPs). The Company believes that none of its activities caused contamination at the Site, and will contest this claim by EPA and therefore no liability has been accrued for this matter.
On December 15, 2003, the EPA issued a second "Notice of Potential Liability" letter to the Company regarding the Site. EPA again identified the Company as a PRP, this time because EPA "believes that [the Company] accepted hazardous substance for transport to disposal or treatment facilities and selected the site for disposal." The Company responded again to EPA stating that it is interested in cooperating with EPA but that it does not believe it has engaged in any activities that caused contamination at the Site.
In connection with the EPA claim described above, the two parties who have committed to conduct the RI/FS at the Site filed a complaint in the U.S. District Court of Rhode Island against the Company, in an action entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L, on December 18, 2002. The Company is one of about sixty parties named thus far by Plaintiffs, who seek to recover response costs incurred in investigating and responding to the releases of hazardous substances at the Site. Plaintiffs allege that the Company is liable under 42 U.S.C. ss. 961(a)(3) of CERCLA as an "arranger" or "generator" of waste that ended up at the Site. The Company has entered into a Generator Cooperation Agreement with other defendants to allocate costs in responding to this suit, and to share technical costs and information in evaluating the Plaintiffs' claims. Although the Company does not believe it generated any waste that ended up at this Site, or that its activities caused contamination at the Site, the Company has agreed to settle this suit for $45,000 and has accrued a liability for this amount as of December 31, 2004 and 2005. A settlement agreement was finalized and the $45,000 was paid in March 2006.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - -----------------------------------------------------------
Not applicable.
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Part II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters and - -------------------------------------------------------------------------------- Issuer Purchases of Equity Securities -------------------------------------
The Common Stock is quoted on the American Stock Exchange ("AMEX") under the trading symbol "PWX". The following table sets forth, for the periods indicated, the high and low sale prices per share for the Common Stock as reported on the AMEX. Also included are dividends paid per share of Preferred Stock and Common Stock during these quarterly periods.
Common Stock ------------ Trading Prices Dividends Paid -------------- -------------- High Low Preferred Common ---- --- --------- ------ - ---- First Quarter ........ 9.75 8.89 $ 5.00 $ .04 Second Quarter ....... 10.91 9.25 -0- .04 Third Quarter ........ 11.38 9.63 -0- .04 Fourth Quarter ....... 13.50 10.75 -0- .04
- ---- First Quarter ........ 16.16 12.10 $ 5.00 $ .04 Second Quarter ....... 14.97 12.50 -0- .04 Third Quarter ........ 15.20 13.20 -0- .04 Fourth Quarter ....... 15.40 12.52 -0- .04
As of March 3, 2006, there were approximately 681 holders of record of the Company's common stock.
The declaration of cash dividends on both the preferred and the common stock is made at the discretion of the Board of Directors based on the Company's earnings, financial condition, capital requirements and other relevant factors and restrictions.
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Item 6.
Item 6. Selected Financial Data - -------------------------------
The selected financial data set forth below has been derived from the Company's audited financial statements. The data should be read in conjunction with the Company's audited financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other information included elsewhere in this annual report on Form 10-K.
Years Ended December 31, 2005 2004 2003 2002 2001 ------- ------- ------- ------- ------- (in thousands, except per share amounts) Income Statement Data: Operating revenues .......... $26,734 $24,943 $23,961 $22,868 $22,598 Other income ................ 1,208 1,547 661 877 1,003 ------- ------- ------- ------- ------- Total Revenues .............. 27,942 26,490 24,622 23,745 23,601 Operating expenses .......... 26,044 24,802 23,554 23,698 22,245 ------- ------- ------- ------- ------- Income before income taxes 1,898 1,688 1,068 47 1,356 Provision for income taxes 640 650 400 25 505 ------- ------- ------- ------- ------- Net income .................. 1,258 1,038 668 22 851 Preferred Stock dividend .... 3 3 3 3 3 ------- ------- ------- ------- -------
Net income available to common shareholders ........ $ 1,255 $ 1,035 $ 665 $ 19 $ 848 ======= ======= ======= ======= =======
Basic income per common share ...................... $ .28 $ .23 $ .15 $ -- $ .19 ======= ======= ======= ======= =======
Diluted income per common share ...................... $ .28 $ .23 $ .15 $ -- $ .19 ======= ======= ======= ======= =======
Weighted average shares--basic .............. 4,496 4,470 4,449 4,429 4,390 ======= ======= ======= ======= =======
Weighted average shares--diluted ............ 4,574 4,548 4,516 4,497 4,458 ======= ======= ======= ======= =======
Cash dividends declared on Common Stock ............... $ 720 $ 715 $ 712 $ 710 $ 702 ======= ======= ======= ======= =======
December 31, 2005 2004 2003 2002 2001 ------- ------- ------- ------- ------- (in thousands) Balance Sheet Data: Total assets ................ $93,348 $91,471 $90,619 $90,500 $89,161 Shareholders' equity ........ 70,091 69,228 68,691 68,641 69,073
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Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - -------------
The following discussion should be read in connection with the Company's audited financial statements and notes thereto included elsewhere in this annual report.
The statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MDA") which are not historical are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward- looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions, however, that actual results could differ materially from those indicated in MDA.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") defines critical accounting policies as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 of the Notes to Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. Management believes that the Company's policy for the evaluation of long-lived asset impairment meets the SEC definition of critical.
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When factors indicate that assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining lives of the assets in determining whether the carrying amounts of the assets are recoverable. If an impairment exists it is measured by comparing the carrying value to the fair value.
Overview
The Company is a regional freight railroad operating in Massachusetts, Rhode Island, Connecticut and New York.
The Company generates operating revenues primarily from the movement of freight in both conventional freight cars and in intermodal containers on flat cars over its rail lines. Freight revenues are recorded at the time delivery is made to the customer or the connecting carrier. Modest freight related operating revenues are derived from demurrage, switching, weighing, special train and other transportation services. Other operating revenues are derived from services rendered to freight customers and other outside parties by the Company's Maintenance of Way, Communications & Signals, and Maintenance of Equipment Departments. Operating revenues also include amortization of deferred grant income.
The Company's operating expenses consist of salaries and wages and related payroll taxes and employee benefits, depreciation, insurance and casualty claim expense, diesel fuel, car hire, property taxes, materials and supplies, purchased services, track usage fees and other expenses. Many of the Company's operating expenses are of a relatively fixed nature and do not increase or decrease proportionately with increases or decreases in operating revenues unless the Company's management were to take specific actions to restructure the Company's operations.
When comparing the Company's results of operations from one year to another, the following factors should be taken into consideration. First, the Company has historically experienced fluctuations in operating revenues and expenses due to unpredictable events such as one-time freight moves and customer plant expansions and shut-downs. Second, the Company's freight volumes are susceptible to increases and decreases due to changes in international, national and regional economic conditions. Third, the volume of capitalized track or recollectible projects performed by the Company's Maintenance of Way and Communications & Signals Departments can vary significantly from year to year, thereby impacting total operating expenses.
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The Company also generates income through sales of properties, grants of easements and licenses, and leases of land and tracks. Income or loss from sale, condemnation and disposal of property and equipment and grants of easements is recorded at the time the transaction is consummated and collectibility is assured. This income varies significantly from year to year.
One of the Company's customers, Tilcon Connecticut, Inc., which ships construction aggregate from three separate quarries on the Company's system to asphalt production plants in Connecticut and New York, accounted for approximately 13.3%, 12.6% and 13.3% of its operating revenues in 2005, 2004, and 2003, respectively. The Company does not believe that this customer will cease to be a rail shipper or will significantly decrease its freight volume in the foreseeable future. In the event that this customer should cease or significantly reduce its rail freight operations, management believes that the Company could restructure its operations to reduce operating costs by an amount sufficient to substantially offset the decrease in operating revenues.
Results of Operations
The following tableF sets forth the Company's operating revenues by category in dollars and as a percentage of operating revenues: Years Ended December 31, ----------------------------------------------- 2005 2004 2003 ------------- -------------- ------------- (in thousands, except percentages) Freight Revenues: Conventional carloads ....... $22,082 82.6% $20,705 83.0% $19,795 82.6% Containers .................. 3,201 12.0 2,778 11.1 2,953 12.3 Other freight related........ 850 3.2 836 3.4 727 3.1 Other operating revenues...... 601 2.2 624 2.5 486 2.0 ------- ----- ------- ----- ------- ----- Total ...................... $26,734 100.0% $24,943 100.0% $23,961 100.0% ======= ===== ======= ===== ======= =====
The following table sets forth conventional carload freight revenues by commodity group in dollars and as a percentage of such revenues:
Years Ended December 31, ----------------------------------------------- 2005 2004 2003 ------------- -------------- ------------- (in thousands, except percentages)
Chemicals and plastics ....... $ 6,923 31.4% $ 6,684 32.3% $ 6,463 32.7% Construction aggregate ....... 3,485 15.8 3,102 15.0 3,086 15.6 Metal products ............... 2,985 13.5 2,222 10.7 1,966 9.9 Forest and paper products .... 2,917 13.2 3,036 14.7 2,454 12.4 Food and agricultural products 2,391 10.8 2,325 11.2 2,480 12.5 Coal and other ............... 2,219 10.0 1,868 9.0 1,652 8.3 Scrap metal and waste ........ 1,162 5.3 1,468 7.1 1,694 8.6 ------- ----- ------- ----- ------- ----- Total ...................... $22,082 100.0% $20,705 100.0% $19,795 100.0% ======= ===== ======= ===== ======= =====
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The following table sets forth a comparison of the Company's operating expenses expressed in dollars and as a percentage of operating revenues:
Years Ended December 31, ----------------------------------------------- 2005 2004 2003 ------------- -------------- ------------- (in thousands, except percentages) Salaries, wages, payroll taxes and employee benefits ....... $14,401 53.9 $13,758 55.2% $13,550 56.5% Casualties and insurance ..... 1,084 4.1 1,409 5.6 1,031 4.3 Depreciation ................. 2,764 10.3 2,764 11.1 2,754 11.5 Diesel fuel .................. 2,014 7.5 1,348 5.4 1,203 5.0 Car hire, net ................ 1,123 4.2 954 3.8 753 3.1 Purchased services, including legal and professional fees . 1,564 5.8 1,357 5.4 1,313 5.5 Repairs and maintenance of equipment ................... 1,280 4.8 1,046 4.2 947 4.0 Track and signal materials ... 2,428 9.1 1,862 7.5 1,985 8.3 Track usage fees ............. 827 3.1 899 3.6 812 3.4 Other materials and supplies . 1,016 3.8 1,060 4.3 1,056 4.4 Other ........................ 1,680 6.3 1,628 6.5 1,596 6.7 ------- ----- ------- ----- ------- ----- Total ....................... 30,181 112.9 28,085 112.6 27,000 112.7 Less capitalized and recovered costs ............ 4,137 15.5 3,283 13.2 3,446 14.4 ------- ----- ------- ----- ------- ----- Total ...................... $26,044 97.4% $24,802 99.4% $23,554 98.3% ======= ===== ======= ===== ======= =====
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Operating Revenues
Operating Revenues increased $1.8 million, or 7.2%, to $26.7 million in 2005 from $24.9 million in 2004. This increase was the result of a $1.4 million (6.7%) increase in conventional freight revenues, a $423,000 (15.2%) increase in container freight revenues and a $14,000 (1.7%) increase in other freight related revenues partially offset by a $23,000 (3.7%) decrease in other operating revenues.
The increase in conventional freight revenues results from a 6.8% increase in the average revenue received per conventional carload. Conventional traffic volume decreased slightly (.1%) between years. The Company's conventional carloadings decreased by 41 to 33,203 in 2005 from 33,244 in 2004. Rate increases, including diesel fuel surcharges, and a shift in the mix of commodities hauled account for the increase in the average rate received per conventional carload. Increases in carloadings of metal products and coal were largely offset by smaller decreases in carloadings of various other commodities.
The increase in container freight revenues results from an 18.7% increase in the average revenue received per container partially offset by a 3.0% decrease in container traffic volume. Intermodal containers handled during 2005 decreased by 1,913 to 62,905 from 64,818 in 2004. The increase in the average revenue received per container is attributable to contractual rate adjustments as well as a shift in the mix of containers handled.
The increase in other freight revenues results from increased demurrage billings largely offset by decreases in secondary switching and other charges. This increased demurrage revenue offsets the increased car hire expense incurred during the year.
The decrease in other operating revenues results from an overall reduction in maintenance department billings. Revenues of this type vary from year to year depending upon the needs of freight customers and other outside parties.
Other Income
Other income decreased by $339,000 to $1.2 million in 2005 from $1.5 million in 2004. The decrease results from the fact that 2004 included a $948,000 gain realized on the disposal of a portion of a branch line which the Commonwealth of Massachusetts acquired by eminent domain during the year, whereas 2005 did not include any gains of that magnitude. Revenues of this nature typically vary from year to year.
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realized on the disposal of a portion of a branch line which the Commonwealth of Massachusetts acquired by eminent domain during the year. Revenues of this nature typically vary from year to year.
Operating Expenses
Operating expenses increased by $1.2 million, or 4.8%, to $26.0 million in 2005 from $24.8 million in 2004. Expressed as a percentage of operating revenues, however, operating expenses decreased to 97.4% in 2005 compared to 99.4% in 2004. Diesel fuel expense for the year increased by $666,000 reflecting the high cost of petroleum products in effect in 2005. Car hire expense increased by $169,000 during the year which costs were largely offset by increased demurrage revenue as previously discussed.
Provision for Income Taxes
The Company's income tax provision for 2005 amounts to 34% of income before income taxes compared to 39% in 2004. The largest component of this decrease is $65,000 of railroad tax maintenance credits which the Company was able to utilize in 2005 to reduce its current income tax provision. utilize in 2005 to reduce its current income tax provision.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Operating Revenues
Operating Revenues increased $982,000, or 4.1%, to $24.9 million in 2004 from $24.0 million in 2003. This increase was the net result of a $910,000 (4.6%) increase in conventional freight revenues, a $109,000 (15.0%) increase in other freight related revenues and a $138,000 (28.4%) increase in other operating revenues partially offset by a $175,000 (5.9%) decrease in container freight revenues.
The increase in conventional freight revenues results from a 4.1% increase in carloadings. The average revenue received per carloading increased by less than one percent between years. The Company's conventional carloadings increased by 1,296 to 33,244 in 2004 from 31,948 in 2003. The increase in carloadings was spread throughout the mix of commodities handled by the Company with no particular commodity experiencing a disproportionate increase or decrease in volume. The small increase in the average revenue per carloading reflects a slight shift in the mix of commodities from construction aggregates to higher rated commodities.
The decrease in container freight revenues results from a 1.0% decrease in traffic volume and a 4.9% decrease in the average revenue received per container. Intermodal containers handled decreased by 667 to 64,818 in 2004 from 65,485 in 2003. The decrease in the average revenue received per container results from contractual rate adjustments, as well as a shift in the mix of containers handled.
The increase in other freight related revenues is largely attributable to increased demurrage charges, secondary switching fees, weighing charges, special train charges, etc. Revenues of this nature can vary from year to year depending upon the needs of freight customers.
The increase in other operating revenues is due to maintenance department billings to freight customers and other outside parties. Revenues of this type typically vary from year to year depending upon customer requirements.
Other Income
Other income increased by $886,000 to $1.5 million in 2004 from $661,000 in 2003. This increase is the result of a $948,000 gain realized on the disposal of a portion of a branch line which the Commonwealth of Massachusetts acquired by eminent domain during the year.
Operating Expenses
Operating expenses increased $1.2 million, or 5.3%, to $24.8 million in 2004 from $23.6 million in 2003. Operating expenses as a percentage of operating revenues increased to 99.4% from 98.3% in 2003. Operating expenses in 2004 includes a $425,000 provision for casualty losses, $208,000 of which was to settle a lawsuit judgment against the Company. In addition, the Company's profit-sharing expense for 2004 was $188,000 compared to $119,000 in 2003.
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Liquidity and Capital Resources
The Company generated $4.9 million, $3.1 million and $2.4 million of cash from operations in 2005, 2004 and 2003, respectively. The Company's total cash and cash equivalents increased by $328,000 in 2005, $503,000 in 2004 and decreased by $1.7 million in 2003. The principal utilization of cash during the three year period was for expenditures for property and equipment acquisitions and payment of dividends.
During 2005, 2004 and 2003 the Company generated $691,000, $1.5 million and $237,000, respectively, from the sales and disposals of properties not considered essential for railroad operations and from the granting of easements and licenses. The Company holds various properties which could be made available for sale, lease or grants of easements and licenses. Revenues from sales of properties, easements and licenses can vary significantly from year to year.
In June 2005, the Company's principal bank renewed the Company's $3.0 million revolving line of credit for a two year period through May 31, 2005. Borrowings under this line are unsecured and bear interest at either the prime rate or one and one half per cent over either the one or three month London Interbank Offered Rates. The Company does not pay any commitment fee on this line and has no compensating balance requirements. The Company had no advances against this line of credit during 2005 and 2004.
Substantially all of the mainline track owned by the Company meets FRA Class 3 standards (permitting freight train speeds of 40 miles per hour), and the Company intends to continue to maintain this track at this level. The Company expended $2.9 million, $2.5 million and $2.5 million for track structure and bridge improvements in 2005, 2004 and 2003, respectively. Deferred grant income of $411,000 in 2005, $39,000 in 2004 and $399,000 in 2003 financed a portion of these improvements. Management estimates that $2.5 million to $3.0 million of improvements to the Company's track structure and bridges will be made in 2006, provided that sufficient funds, including grant proceeds, are available. Improvements to the Company's track structure are made, for the most part, by the Company's Maintenance of Way Department personnel.
During 2004 the Company entered into a contract for the construction of a building for its Communications and Signals Department on land which it owns in Plainfield, Connecticut. Construction costs of $44,000 were incurred under this contract through December 31, 2004. The building was completed and placed in service during 2005 at a total cost of $506,000
In 2005, the Company paid dividends in the amount of $5.00 per share, aggregating $3,000, on its outstanding noncumulative preferred stock and $0.16 per share, aggregating $721,000, on its outstanding common stock. Continued payment of such dividends is contingent upon the Company's continuing to have the necessary financial resources available.
On January 29, 2002, the Company received a "Notice of Potential Liability" from the United States Environmental Protection Agency ("EPA") regarding an existing Superfund Site that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially responsible parties ("PRPs") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its status as an owner and/or operator because its railroad property traverses the Superfund Site. Via these Notice letters, EPA makes a demand for payment of past costs (identified in the letter as $762,000) and future costs associated with the response actions taken to address the contamination at the Site, and requests PRPs to indicate their willingness to participate and resolve their potential liability at the Site. The Company has responded to EPA by stating that it does not believe it has any liability for this Site, but that it is interested in cooperating with EPA to address issues concerning liability at the Site. At this point, two other parties have already committed via a consent order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS") phase of the clean-up at the Site, which will take approximately two or more years to complete. After that, EPA will likely seek to negotiate the cost of the Remedial Design and implementation of the remedy at the Site with the PRPs it has identified via these Notice Letters (which presently includes over sixty parties, and is likely to increase after EPA completes its investigation of the identity of PRPs). The Company believes that none of its activities caused contamination at the Site, and will contest this claim by EPA and therefore no liability has been accrued for this matter.
On December 15, 2003, the EPA issued a second "Notice of Potential Liability" letter to the Company regarding the Site. EPA again identified the Company as a PRP, this time because EPA "believes that the Company accepted hazardous substance for transport to disposal or treatment facilities and selected the
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site for disposal." The Company responded again to EPA stating that it is interested in cooperating with EPA but that it does not believe it has engaged in any activities that caused contamination at the Site.
In connection with the EPA claim described above, the two parties who have committed to conduct the RI/FS at the Site filed a complaint in the U.S. District Court of Rhode Island against the Company, in an action entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L, on December 18, 2002. The Company is one of about sixty parties named thus far by Plaintiffs, who seek to recover response costs incurred in investigating and responding to the releases of hazardous substances at the Site. Plaintiffs allege that the Company is liable under 42 U.S.C. ss. 961(a)(3) of CERCLA as an "arranger" or "generator" of waste that ended up at the Site. The Company has entered into a Generator Cooperation Agreement with other defendants to allocate costs in responding to this suit, and to share technical costs and information in evaluating the Plaintiffs' claims. Although the Company does not believe it generated any waste that ended up at this Site, or that its activities caused contamination at the Site, the Company has agreed to settle this suit for $45,000 and has accrued a liability for this amount as of December 31, 2004 and 2005. A settlement agreement was finalized and the $45,000 was paid in March 2006.
Land Held for Development
Pursuant to permits issued by the United States Department of the Army Corps of Engineers ("ACE") and the Rhode Island Coastal Resources Management Council ("CRMC"), the Company created 33 acres of waterfront land in East Providence, Rhode Island ("South Quay"). The permits for the property, both of which have been extended to 2009, also allow for construction of a dock along the west face of the South Quay. The property is adjacent to a 12 acre site also owned by the Company.
The property is located a half mile from I-195. In 1999, the Rhode Island Department of Transportation entered into a contract for engineering services to undertake roadway improvements to provide direct vehicular access from the interstate highway system to the South Quay. The project is anticipated to be substantially complete by 2007.
The City of East Providence has created a large waterfront redevelopment area with a zoning overlay that would encourage development of offices, hotels, restaurants, shops, marinas, apartments and other "clean" employment. The Company has been cooperating with the City of East Providence in these efforts. In addition, the State of Rhode Island is moving forward with the plan, described above, that will provide a direct connection from I-195 to the South Quay.
Selected Quarterly Financial Data
Historically the Company has experienced lower operating revenues in the first quarter of the year. The following table sets forth selected financial data for each quarter of 2005 and 2004. The information for each of these quarters is unaudited but includes all normal recurring adjustments that the Company considers necessary for a fair presentation. These results, however, are not necessarily indicative of results for any future period.
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Year Ended December 31, 2005 -------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands, except per share amounts) Operating Revenues .................... $ 5,640 $ 6,588 $ 7,449 $ 7,057 Other income .......................... 195 164 133 716 ------- ------- ------- ------- Total revenues ........................ 5,835 6,752 7,582 7,773 Operating expenses .................... 6,205 6,435 6,475 6,929 ------- ------- ------- ------- Income (loss) before income taxes (benefits) ........................... (370) 317 1,107 844 Provision for income taxes (benefits) ........................... (115) 110 405 240 ------- ------- ------- ------- Net income (loss) ..................... $ (255) $ 207 $ 702 $ 604 ------- ------- ------- -------
Basic income (loss) per common share ................................ $ (.06) $ .05 $ .16 $ .13 ------- ------- ------- -------
Diluted income (loss) per common share ................................ $ (.06) $ .05 $ .16 $ .13 ------- ------- ------- -------
Year Ended December 31, 2004 -------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands, except per share amounts) Operating Revenues .................... $ 5,067 $ 6,493 $ 7,036 $ 6,347 Other income .......................... 121 142 1,169 115 ------- ------- ------- ------- Total revenues ........................ 5,188 6,635 8,205 6,462 Operating expenses .................... 5,875 6,293 6,193 6,441 ------- ------- ------- ------- Income (loss) before income taxes (benefits) ........................... (687) 342 2,012 21 Provision for income taxes (benefits) ........................... (225) 120 715 40 ------- ------- ------- ------- Net income (loss) ..................... $ (462) $ 222 $ 1,297 $ (19) ------- ------- ------- -------
Basic income (loss) per common share ................................ $ (.10) $ .05 $ .29 $ -- ------- ------- ------- -------
Diluted income (loss) per common share ................................ $ (.10) $ .05 $ .28 $ -- ------- ------- ------- -------
Inflation
In recent years, inflation has not had a significant impact on the Company's operations.
Seasonality
Historically, the Company's operating revenues are lowest for the first quarter due to the absence of construction aggregate shipments during this period and to winter weather conditions.
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Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement on Financial Accounting Standards No. 123R, "Share-Based Payment." ("SFAS No. 123R"). This Statement is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), and supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB No. 25"), and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share- based payment transactions. The Statement requires entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). In April 2005 the Securities and Exchange Commission issued a revision to SFAS No. 123R and the effective date for this pronouncement is the first annual reporting period that begins after June 15, 2005, although earlier adoption is encouraged.
Effective January 1, 2006, we adopted the provisions of SFAS No. 123R using the statement's modified-prospective transition method. Adoption of SFAS No. 123R will not affect the Company's cash flows or financial position, but it will reduce periodically reported income and earnings per share. We previously applied the intrinsic value based method prescribed in APB Opinion No. 25 in accounting for employee stock-based compensation. Going forward, we will recognize stock-based compensation costs ratably over the service period. This statement also amends SFAS No. 95, "Statement of Cash Flows", to require that excess tax benefits be reflected as financing cash inflows rather than operating cash inflows. In March 2005, the SEC issued Staff Accounting Bulletin, or SAB No. 107 regarding the Staff's interpretation of SFAS No. 123R. This interpretation provides the Staff's views regarding interactions between SFAS No. 123R and certain SEC rules and regulations and provides interpretations of the valuation of share- based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS No. 123R and investors and users of the financial statements in analyzing the information provided. We will follow the guidance prescribed in SAB No. 107 in connection with our adoption of SFAS No. 123R. The impact of the adoption of SFAS No. 123R and SAB No. 107 is estimated to result in a compensation charge for 2006 which is not material.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------
Cash and Equivalents
As of December 31, 2005, the Company is exposed to market risks which primarily include changes in U.S. interest rates.
The Company invests cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less. In addition, the Company's revolving line of credit agreement provides for borrowings which bear interest at variable rates based on either prime rate or one and one half percent over either the one or three month London Interbank Offered Rates. The Company had no borrowings outstanding pursuant to the revolving line of credit agreement at December 31, 2005. The Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company's financial position, results of operations, and cash flows should not be material.
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Item 8.
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
PROVIDENCE AND WORCESTER RAILROAD COMPANY
Page ---- Report of Independent Registered Public Accounting Firm................................................ II-12
Balance Sheets as of December 31, 2005 and 2004...... II-13
Statements of Income for the Years Ended December 31, 2005, 2004 and 2003................................. II-14
Statements of Shareholders' Equity for the Years Ended December 31, 2005, 2004 and 2003.................... II-15
Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003.................... II-16
Notes to Financial Statements........................ II-17
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Report of Independent Registered Public Accounting Firm - -------------------------------------------------------
To the Board of Directors and Shareholders of Providence and Worcester Railroad Company Worcester, Massachusetts
We have audited the accompanying balance sheets of Providence and Worcester Railroad Company (the "Company") as of December 31, 2005 and 2004, and the related statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness on the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Providence and Worcester Railroad Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Boston, Massachusetts March 24, 2006
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PROVIDENCE AND WORCESTER RAILROAD COMPANY BALANCE SHEETS (Dollars in Thousands Except Per Share Amounts)
December 31, 2005 2004 ------- ------- ASSETS Current Assets: Cash and cash equivalents ............................. $ 2,063 $ 1,735 Accounts receivable, net of allowance for doubtful accounts of $175 in 2005 and $125 in 2004.... 3,202 3,564 Materials and supplies ................................ 1,654 1,889 Prepaid expenses and other current assets ............. 152 239 Deferred income taxes ................................. 193 212 ------- ------- Total Current Assets ................................. 7,264 7,639
Property and Equipment, net ............................ 74,126 71,874 Land Held for Development .............................. 11,958 11,958 ------- ------- Total Assets ........................................... $93,348 $91,471 ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities: Accounts payable ...................................... $ 1,905 $ 1,679 Accrued expenses ...................................... 1,471 1,284 ------- ------- Total Current Liabilities ............................ 3,376 2,963 ------- ------- Profit-Sharing Plan Contribution ....................... 211 188 ------- ------- Deferred Income Taxes .................................. 11,530 11,129 ------- ------- Deferred Grant Income .................................. 8,140 7,963 ------- -------
Commitments and Contingencies (Note 8)
Shareholders' Equity: Preferred stock, 10% noncumulative, $50 par value; authorized, issued and outstanding 645 shares in 2005 and 2004 .............................. 32 32 Common stock, $.50 par value; authorized 15,000,000 shares; issued and outstanding 4,507,056 shares in 2005 and 4,481,007 shares in 2004 .............................................. 2,254 2,241 Additional paid-in capital ............................ 30,230 29,914 Retained earnings ..................................... 37,575 37,041 ------- ------- Total Shareholders' Equity ........................... 70,091 69,228 ------- ------- Total Liabilities and Shareholders' Equity ............. $93,348 $91,471 ======= =======
The accompanying notes are an integral part of the financial statements.
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PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF INCOME (Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 2005 2004 2003 -------- -------- --------
Revenues: Operating Revenues ........................... $26,734 $24,943 $23,961 Other Income ................................. 1,208 1,547 661 -------- -------- -------- Total Revenues ............................. 27,942 26,490 24,622 -------- -------- --------
Expenses: Operating: Maintenance of way and structures ........... 3,739 3,404 3,639 Maintenance of equipment .................... 2,886 2,627 2,421 Transportation .............................. 7,892 7,335 6,701 General and administrative .................. 4,333 4,205 3,876 Depreciation ................................ 2,764 2,764 2,754 Taxes, other than income taxes .............. 2,045 2,209 2,258 Car hire, net ............................... 1,123 954 753 Employee retirement plans ................... 435 405 340 Track usage fees ............................ 827 899 812 -------- -------- -------- Total Operating Expenses ................... 26,044 24,802 23,554 -------- -------- --------
Income before Income Taxes .................... 1,898 1,688 1,068
Provision for Income Taxes .................... 640 650 400 -------- -------- --------
Net Income .................................... 1,258 1,038 668
Preferred Stock Dividends ..................... 3 3 3 -------- -------- --------
Net Income Available to Common Shareholders ... $ 1,255 $1,035 $ 665 ======= ======= =======
Basic and Diluted Income Per Common Share ..... $ .28 $ .23 $ .15 ======= ======= =======
The accompanying notes are an integral part of the financial statements.
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PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 2005, 2004 and 2003 Additional Share- Preferred Common Paid-in Retained holders' Stock Stock Capital Earnings Equity ------- ------- ------- ------- ------- Balance, January 1, 2003 . $ 32 $ 2,222 $29,619 $36,768 $68,641
Issuance of 14,114 common shares for stock options exercised, employee stock purchases, and other .... 7 90 97 Dividends paid: Preferred stock, $5.00 per share .................. (3) (3) Common stock, $.16 per share (712) (712) Net income for the year .. 668 668 ------- ------- ------- ------- ------- Balance, December 31, 2003. 32 2,229 29,709 36,721 68,691
Issuance of 12,628 common shares to fund the Company's 2003 profit sharing plan contribution ............ 6 113 119 Issuance of 10,885 common shares for stock options exercised, employee stock purchases, and other .... 6 92 98 Dividends paid: Preferred stock, $5.00 per share .................. (3) (3) Common stock, $.16 per share (715) (715) Net income for the year .. 1,038 1,038 ------- ------- ------- ------- ------- Balance, December 31, 2004 32 2,241 29,914 37,041 69,228
Issuance of 13,980 common shares to fund the Company's 2004 profit sharing plan contribution ............ 7 181 188 Issuance of 12,069 common shares for stock options exercised, employee stock purchases, and other .... 6 135 141 Dividends paid: Preferred stock, $5.00 per share .................. (3) (3) Common stock, $.16 per share (721) (721) Net income for the year .. 1,258 1,258 ------- ------- ------- ------- ------- Balance, December 31, 2005 $ 32 $ 2,254 $30,230 $37,575 $70,091 ======= ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
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PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF CASH FLOWS (Dollars in Thousands)
Years Ended December 31, 2005 2004 2003 ------- ------- ------- Cash Flows from Operating Activities: Net income ................................... $ 1,258 $1,038 $ 668 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation ............................... 2,764 2,764 2,754 Amortization of deferred grant income ...... (234) (229) (224) Profit-sharing plan contribution to be funded with common stock ................. 211 188 119 Gains from sale, condemnation and disposal of property, equipment and easements, net ........................... (691) (1,081) (206) Deferred income taxes ...................... 420 850 295 Other, net ................................. 32 7 32 Increase (decrease) in cash and equivalents from: Accounts receivable ...................... 422 118 (559) Materials and supplies ................... 235 (118) (137) Prepaid expenses and other ............... 87 -- 297 Accounts payable and accrued expenses .... 405 (396) (604) ------- ------- ------- Net cash flows from operating activities ..... 4,909 3,141 2,435 ------- ------- ------- Cash Flows from Investing Activities: Purchase of property and equipment ........... (5,011) (3,659) (4,127) Proceeds from sale and condemnation of property, equipment and easements ........... 691 1,488 237 Proceeds from deferred grant income .......... 351 156 427 ------- ------- ------- Net cash flows used in investing activities (3,969) (2,015) (3,463) ------- ------- ------- Cash Flows from Financing Activities: Dividends paid ............................... (724) (718) (715) Issuance of common shares for stock options exercised and employee stock purchases ...... 112 95 87 ------- ------- ------- Net cash flows used in financing activities .. (612) (623) (628) ------- ------- ------- Increase (Decrease) in Cash and Cash Equivalents .................................. 328 503 (1,656) Cash and Cash Equivalents, Beginning of Year .. 1,735 1,232 2,888 ------- ------- ------- Cash and Cash Equivalents, End of Year ........ $ 2,063 $ 1,735 $ 1,232 ======= ======= =======
Supplemental Disclosures: Cash paid during year for income taxes ....... $ -- $ -- $ 35 ======= ======= =======
The accompanying notes are an integral part of the financial statements.
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PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Dollars in Thousands Except Per Share Amounts)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business -----------------------
Providence and Worcester Railroad Company (the "Company") is an interstate freight carrier conducting railroad operations in Massachusetts, Rhode Island, Connecticut and New York. Through its connecting carriers, it services customers located throughout North America.
One customer accounted for 13.3%, 12.6% and 13.3% of the Company's operating revenues in 2005, 2004 and 2003, respectively.
Cash and Cash Equivalents -------------------------
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents for purposes of classification in the balance sheets and statements of cash flows. Cash equivalents are stated at cost, which approximates fair market value.
Materials and Supplies ----------------------
Materials and supplies, which consist of items for the improvement and maintenance of track structure and equipment, are stated at cost, determined on a first-in, first-out basis, and are charged to expense or added to the cost of property and equipment when used.
Property and Equipment ----------------------
Property and equipment, including land held for development, is stated at historical cost (including self-construction costs). Acquired railroad property is recorded at the purchased cost. Major renewals or betterments are capitalized while routine maintenance and repairs, which do not improve or extend asset lives, are charged to expense when incurred. Gains or losses on sales or other dispositions are credited or charged to income. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows:
Track structure 20 to 67 years Buildings and other structures 33 to 45 years Equipment 4 to 25 years
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When factors indicate that assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining lives of the assets in determining whether the carrying amounts of the assets are recoverable. If an impairment exists it is measured by comparing the carrying value to the fair value.
Deferred Grant Income ---------------------
The Company has availed itself of various federal and state programs administered by the states of Connecticut, Massachusetts and Rhode Island for reimbursement of expenditures for capital improvements. In order to receive reimbursement, the Company must submit requests for the projects, including cost estimates. The Company receives from 70% to 100% of the costs of such projects, which have included bridges, track structure and public improvements. To the extent that such grant proceeds are used to fund capital improvements to bridges and track structure, they are recorded as deferred grant income and amortized into operating revenues on a straight-line basis over the estimated useful lives of the related improvements ($234 in 2005, $229 in 2004 and $224 in 2003).
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Grant proceeds utilized to finance public improvements, such as grade crossings and signals, are recorded as a direct offset to the cost of the improvements, which are not capitalized.
Revenue Recognition -------------------
Freight revenues are recorded at the time delivery is made to the customer or the connecting carrier.
Other freight related revenues and other operating revenues are recorded at the time the services are rendered to the customer.
Gain or loss from sale, condemnation and disposal of property and equipment and easements is recorded at the time the transaction is consummated and collectibility is assured.
Income Taxes ------------
Deferred income taxes are recorded based on the differences between the financial statement and tax basis of assets and liabilities. Such deferred income taxes are also adjusted to reflect changes in the U.S. tax laws when enacted and changes in state tax rates. Valuation allowances are recorded against deferred tax assets that are not expected to be realized.
Income per Common Share -----------------------
Basic income per common share is computed using the weighted average number of common shares outstanding during each year. Diluted income per common share reflects the effect of the Company's outstanding convertible preferred stock and options (using the treasury stock method), except where such items would be antidilutive.
A reconciliation of weighted average shares used for the basic computation and that used for the diluted computation is as follows:
Years Ended December 31, 2005 2004 2003 --------- --------- ---------
Weighted average shares for basic ...... 4,495,683 4,470,332 4,448,627 Dilutive effect of convertible preferred stock and options ..................... 77,975 77,278 67,050 --------- --------- --------- Weighted average shares for diluted .... 4,573,658 4,547,610 4,515,677 ========= ========= =========
Options to purchase 5,029, 11,110 and 118,517 shares of common stock were outstanding during 2005, 2004 and 2003, respectively, but were not included in the computation of diluted earnings per common share because their effect would be antidilutive.
Use of Estimates ----------------
The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The Company's principal estimates include the allowance for doubtful accounts, useful lives of properties, accrued liabilities including health insurance claims and legal and other contingencies, and income taxes.
o The Company has a self funded medical plan with stop-loss insurance which covers all of its full time employees. Medical claims are paid from a claims fund which the Company contributes to monthly. The estimated liability for unpaid claims incurred is adjusted at the end
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of each reporting period based upon historical experience modified by actual claim payments made through the date the financial statements are issued.
o Liabilities for casualty claims, legal judgments and other loss contingencies are recorded when it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. The Company does not accrue estimated legal fees for appeals of legal judgments since we do not believe that such costs meet the definition of a liability and thus are accruable only at such time as legal services have been provided.
Stock Based Compensation ------------------------
The Company accounts for stock-based compensation awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had the Company used the fair value method to value compensation, as set forth in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Company's net income and net income per share would have been reported as follows:
Years Ended December 31, 2005 2004 2003 ------- ------- ------- Net income (loss) available to common shareholders: As reported ............................. $ 1,255 $ 1,035 $ 665 Less impact of stock option expense, net of tax effects ..................... 42 40 38 ------- ------- ------- Pro forma ............................... $ 1,213 $ 995 $ 627 ======= ======= ======= Basic income per share: As reported ............................. $ .28 $ .23 $ .15 Less impact of stock option expense, net of tax effects ..................... .01 .01 .01 ------- ------- ------- Pro forma ............................... $ .27 $ .22 $ .14 ======= ======= ======= Diluted income per share: As reported ............................. $ .28 $ .23 $ .15 Less impact of stock option expense, net of tax effects .................... .01 .01 .01 ------- ------- ------- Pro forma ............................... $ .27 $ .22 $ .14 ======= ======= =======
The fair value of options on their grant date is measured using the Black/Scholes option pricing model. The estimated weighted average fair value of options granted during 2005, 2004 and 2003 were $ . , $5.24, and $4.49, respectively. Key assumptions used to apply this pricing model are as follows:
2005 2004 2003 --------- --------- --------- Average risk-free interest rate 3.94% 3.90% 3.62% Expected life of option grants 7.0 years 7.0 years 7.0 years Expected volatility of underlying stock 65% 70% 73% Expected dividend payment rate, as a percentage of the share price on the date of grant 1.19% 1.80% 2.06%
Comprehensive Income --------------------
Comprehensive Income equals net income for 2005, 2004 and 2003.
Segment Reporting -----------------
The Company organizes itself as one segment reporting to the chief operating decision maker. Products and services consist primarily of interstate freight rail services. These include the movement of freight in both conventional freight cars and in intermodal containers on flat cars over the Company's rail lines, as well as freight related services such as switching, weighing and special trains and other services rendered to
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freight customers and other outside parties by the Company's Maintenance of Way, Communications & Signals and Maintenance of Equipment Departments.
Recently Issued Financial Accounting Standards ----------------------------------------------
In December 2004, the Financial Accounting Standards Board issued Statement on Financial Accounting Standards No. 123R, "Share-Based Payment." ("SFAS No. 123R"). This Statement is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), and supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB No. 25"), and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). In April 2005 the Securities and Exchange Commission issued a revision to SFAS No. 123R and the effective date for this pronouncement is the first annual reporting period that begins after June 15, 2005, although earlier adoption is encouraged.
Effective January 1, 2006, we adopted the provisions of SFAS No. 123R using the statement's modified-prospective transition method. Adoption of SFAS No. 123R will not affect the Company's cash flows or financial position, but it will reduce periodically reported income and earnings per share. We previously applied the intrinsic value based method prescribed in APB Opinion No. 25 in accounting for employee stock-based compensation. Going forward, we will recognize stock-based compensation costs ratably over the service period. This statement also amends SFAS No. 95, "Statement of Cash Flows", to require that excess tax benefits be reflected as financing cash inflows rather than operating cash inflows. In March 2005, the SEC issued Staff Accounting Bulletin, or SAB No. 107 regarding the Staff's interpretation of SFAS No. 123R. This interpretation provides the Staff's views regarding interactions between SFAS No. 123R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS No. 123R and investors and users of the financial statements in analyzing the information provided. We will follow the guidance prescribed in SAB No. 107 in connection with our adoption of SFAS No. 123R. The impact of the adoption of SFAS No. 123R and SAB No. 107 is estimated to result in a compensation charge for 2006 which is not material.
2. Property and Equipment
Property and equipment consists of the following: December 31, 2005 2004 ------- ------- Land and improvements .................... $10,938 $10,609 Track structure .......................... 70,445 67,368 Buildings and other structures ........... 8,363 7,916 Equipment ................................ 26,052 25,577 ------- ------- 115,798 111,470 Less accumulated depreciation ............ 41,672 39,596 ------- ------- Total property and equipment, net......... $74,126 $71,874 ======= =======
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3. Land Held for Development
Pursuant to permits issued by the United States Department of the Army Corps of Engineers ("ACE") and the Rhode Island Coastal Resources Management Council ("CRMC"), the Company created 33 acres of waterfront land in East Providence, Rhode Island ("South Quay"). The permits for the property, both of which have been extended to 2009, also allow for construction of a dock along the west face of the South Quay. The property is adjacent to a 12 acre site also owned by the Company with a carrying value of $11,958.
The property is located a half mile from I-195. In 1999, the Rhode Island Department of Transportation entered into a contract for engineering services to undertake roadway improvements to provide direct vehicular access from the interstate highway system to the South Quay. The project is anticipated to be substantially complete by 2007.
The City of East Providence has created a waterfront redevelopment area with a zoning overlay that would encourage development of offices, hotels, restaurants, shops, marinas, apartments and other "clean" employment. The Company has been cooperating with the City of East Providence in these efforts. In addition, the State of Rhode Island is moving forward with the plan, described above, that will provide a direct connection from I-195 to the South Quay.
4. Revolving Line of Credit
The Company has a revolving line of credit with its principal bank in the amount of $3,000 expiring May 31, 2007. Borrowings under this line of credit are unsecured, due on demand and bear interest at either the bank's prime rate or one and one half percent over either the one or three month London Interbank Offered Rates. The Company pays no commitment fee on this line and has no compensating balance requirements. There were no loans outstanding under the line at any time during 2005 or 2004.
5. Accrued Expenses
Accrued expenses consist of the following: December 31,
2005 2004 ------- ------- Simplified employee pension plan contributions ........................ $ 229 $ 210 Health insurance plan claims ......... 375 150 Casualty loss claims ................. 370 473 Other ................................ 497 451 ------- ------- $ 1,471 $ 1,284 ======= =======
6. Other Income
Other income consists of the following: Years Ended December 31,
2005 2004 2003 ------ ------ ------
Gains from sale, condemnation and disposal of property, equipment and easements, net ...................... $ 691 $1,081 $ 206 Rentals and license fees under various operating leases ............ 486 454 443 Interest ............................. 31 12 12 ------ ------ ------ $1,208 $1,547 $ 661 ====== ====== ======
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Gains from sale, condemnation and disposal of property, equipment and easements for 2004 includes a $948,000 gain realized on the disposal of a portion of a branch line which the Commonwealth of Massachusetts acquired by eminent domain.
7. Income Taxes
The provision for income taxes consists of the following:
Years Ended December 31, 2005 2004 2003 ------ ------ ------
Current: Federal .......................... $ 202 $ (210) $ 105 State ............................ 18 10 -- ------ ------ ------ 220 (200) 105 Deferred, Federal and State ....... 420 850 295 ------ ------ ------ $ 640 $ 650 $ 400 ====== ====== ======
The following summarizes the estimated tax effect of temporary differences that are included in the net deferred income tax provision:
Years Ended December 31, 2005 2004 2003 ----- ----- -----
Depreciation ........................... $ 462 $ 462 $ 431 Deferred grant income .................. (63) 68 (62 Gains from sale, condemnation and disposal of property and equipment..... -- 348 (8) Accrued casualty and other claims ...... 37 (14) (74) Other .................................. (16) (14) 8 ----- ----- ----- $ 420 $ 850 $ 295 ===== ===== =====
In 2005 the Company generated Railroad Track Maintenance Credits in the amount of $1,124. These credits may be utilized, subject to certain limitations, to offset the Company's current federal income tax liability. Any credits not utilized in the year earned may be carried forward to offset future income tax liabilities for a period of 20 years. The Company utilized $65 of these credits to reduce its current federal income tax liability in 2005. The unused credits, in the amount of $1,059 constitute deferred income tax assets. Such assets, however, have been fully reserved since their future realization is not assured.
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes anFd the amounts used for income tax purposes. The tax effects of significant items comprising the Company's net deferred income tax liability as of December 31, 2005 and 2004 are as follows:
December 31, 2005 2004 ------- ------- Deferred income tax liabilities - Differences between book and tax basis of property and equipment ....................... $14,420 $13,956 ------- ------- Deferred income tax assets: Deferred grant income ........................... 2,890 2,827 Accrued casualty and other claims ............... 131 168 Allowance for doubtful accounts and other........ 62 44 ------- ------- 3,083 3,039 ------- -------
Net deferred income tax liability ................ $11,337 $10,917 ======= =======
A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows:
Years Ended December 31, 2005 2004 2003 ---- ---- ---- Federal statutory rate ....................... 34% 34% 34% Depreciation of properties acquired from bankrupt railroads having a tax basis in excess of cost ........................... (1) (2) (6) Railroad track maintenance credits ........... (3) -- -- Non deductible expenses, state income taxes, etc .................................. 4 7 9 ---- ---- ---- Effective tax rate ........................... 34% 39% 37% ==== ==== ====
8. Commitments and Contingencies
The Company is a defendant in certain lawsuits relating to casualty losses, many of which are covered by insurance subject to a deductible. The Company believes that adequate provision has been made in the financial statements for any expected liabilities which may result from disposition of such lawsuits.
On January 29, 2002, the Company received a "Notice of Potential Liability" from the United States Environmental Protection Agency ("EPA") regarding an existing Superfund Site that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially responsible parties ("PRPs") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its status as an owner and/or operator because its railroad property traverses the Superfund Site. Via these Notice letters, EPA makes a demand for payment of past costs (identified in the letter as $762) and future costs associated with the response actions taken to address the contamination at the Site, and requests PRPs to indicate their willingness to participate and resolve their potential liability at the Site. The Company has responded to EPA by stating that it does not believe it has any liability for this Site, but that it is interested in cooperating with EPA to address issues concerning liability at the Site. At this point, two other parties have already committed via a consent order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS") phase of the clean-up at the Site, which will take approximately two or more years to complete. After that, EPA will likely seek to negotiate the cost of the Remedial Design and implementation of the remedy at the Site with the PRPs it has identified via these Notice Letters (which presently includes over sixty parties, and is likely to increase after EPA completes its investigation of the identity of PRPs). The Company believes that none
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of its activities caused contamination at the Site, and will contest this claim by EPA and therefore no liability has been accrued for this matter.
On December 15, 2003, the EPA issued a second "Notice of Potential Liability" letter to the Company regarding the Site. EPA again identified the Company as a PRP, this time because EPA "believes that [the Company] accepted hazardous substance for transport to disposal or treatment facilities and selected the site for disposal." The Company responded again to EPA stating that it is interested in cooperating with EPA but that it does not believe it has engaged in any activities that caused contamination at the Site.
In connection with the EPA claim described above, the two parties who have committed to conduct the RI/FS at the Site filed a complaint in the U.S. District Court of Rhode Island against the Company, in an action entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01- 496/L, on December 18, 2002. The Company is one of about sixty parties named thus far by Plaintiffs, who seek to recover response costs incurred in investigating and responding to the releases of hazardous substances at the Site. Plaintiffs allege that the Company is liable under 42 U.S.C. ss. 961(a)(3) of CERCLA as an "arranger" or "generator" of waste that ended up at the Site. The Company has entered into a Generator Cooperation Agreement with other defendants to allocate costs in responding to this suit, and to share technical costs and information in evaluating the Plaintiffs' claims. Although the Company does not believe it generated any waste that ended up at this Site, or that its activities caused contamination at the Site, the Company has agreed to settle this suit for $45 and has accrued a liability for this amount as of December 31, 2004and 2005. A settlement agreement was finalized and the $45 was paid in March 2006.
9. Employee Benefit Plans
Stock Option Plan -----------------
The Company has a non-qualified stock option plan ("SOP") covering all management personnel who have a minimum of one year of service with the Company and who are not holders of a majority of either its outstanding common stock or its outstanding preferred stock. In addition, the Company's outside directors are eligible to participate in the SOP. The SOP has authorized 50,000 common shares or 5% of the shares of common stock outstanding, whichever is greater (225,353 shares at December 31, 2005). Options granted under the SOP, which are fully vested when granted, are exercisable over a ten year period at the market price for the Company's common stock as of the date the options are granted.
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Changes in stock options outstanding are as follows: Weighted Average ---------------- Number Exercise Fair of shares Price Value ------ ------ ------ Outstanding at January 1, 2003 .... 48,759 $ 9.35
Granted ........................... 8,270 7.75 $ 4.49 Exercised ......................... (2,344) 7.21 Expired ........................... (3,379) 7.34 ------ ------ ------ Outstanding and exercisable at December 31, 2003................. 51,306 9.32
Granted ........................... 8,340 8.89 $ 5.24 Exercised ......................... (3,242) 8.04 Expired ........................... (10,181) 8.68 ------ ------ ------ Outstanding and exercisable at December 31, 2004................. 46,223 9.47
Granted ........................... 8,260 13.49 $ 8.02 Exercised ......................... (4,006) 10.35 Expired ........................... (5,809) 8.95 ------ ------ ------ Outstanding and exercisable at December 31, 2005................. 44,668 $10.20 ====== ====== ======
The following table sets forth information regarding options at December 31, 2005:
Weighted Average Range of Number ---------------- Number Exercise Currently Exercise Remaining of Options Prices Exercisable Price Life (in years) --------- ---------- ---------- ---------- ----------- 28,773 $6.88 - 8.84 28,773 $7.71 6 15,895 12.38 - 18.38 15,895 14.72 6
Defined Contribution Retirement Plans -------------------------------------
The Company has a deferred profit-sharing plan ("Plan") which covers all of its employees who are members of its collective bargaining units. Contributions to the Plan are required in years in which the Company has income from "railroad operations" as defined in the Plan. Contributions are to be equal to at least 10% but not more than 15% of the greater of income before income taxes or income from railroad operations subject to a maximum contribution of $3.5 per eligible employee. Contributions to the Plan may be made in cash or in shares of the Company's common stock valued at the closing market price on the day contributed. Contributions accrued under this Plan amounted to $211 in 2005, $188 in 2004 and $119 in 2003. The Company made its 2003 and 2004 contributions and intends to make its 2005 contribution in newly issued shares of its common stock.
The Company also has a Simplified Employee Pension Plan ("SEPP") which covers substantially all employees who are not members of one of its collective bargaining units. Contributions to the SEPP are discretionary and are determined annually as a percentage of each covered employee's compensation up to the maximum amount allowable by law. Contributions accrued under the SEPP amounted to $208 in 2005, $203 in 2004 and $204 in 2003 which, in each year, was less than the maximum amount allowable by law.
Employee Stock Purchase Plan ----------------------------
The Company has an Employee Stock Purchase Plan ("ESPP") under which eligible employees may purchase registered shares of common stock at 85% of the market price for such shares. An aggregate of 200,000 shares of common stock are authorized for issuance under the ESPP which was established in
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1997. Any shares purchased under the ESPP are subject to a two year lock-up. ESPP purchases amounted to 5,928 shares in 2005, 7,439 shares in 2004 and 10,665 shares in 2003.
10. Preferred Stock
The Company's $50 par value preferred stock is convertible into 100 shares of common stock at the option of the shareholder. The noncumulative stock dividend is fixed by the Company's Charter at an annual rate of $5.00 per share, out of funds legally available for the payment of dividends.
The holders of preferred stock and holders of common stock are entitled to one vote per share, voting as separate classes, upon matters voted on by shareholders. The holders of common stock elect one third of the Board of Directors; the voters of preferred stock elect the remainder of the Board.
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Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure - --------------------
None.
Item 9A.
Item 9A. Controls and Procedures - --------------------------------
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the year covered by this annual report. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Treasurer. Based upon that evaluation, the Chief Executive Officer and the Treasurer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
There was no significant change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal year that has materially affected, or is reasonably likely to affect, the Company's internal control over financial reporting.
Item 9B.
Item 9B. Other Information - --------------------------
None.
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PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -----------------------------------------------------------
For information with respect to the directors of the Company, see Pages 3 through 6 of the Company's definitive proxy statement for the 2005 annual meeting of its shareholders, which pages are incorporated herein by reference.
The following are the executive officers of the Company:
Date of First Name Age Position Election to Office - ---- --- -------- ------------------ Robert H. Eder 73 Chairman 1980 P. Scott Conti 48 President 2005 David F. Fitzgerald 55 Vice President 2005 Frank K. Rogers 44 Vice President 2005 Robert J. Easton 62 Treasurer 1988 Mary A. Tanona 48 Secretary 2000
Any officer elected or appointed by the Company's Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Mr. Conti served as Vice President from 1999 until his election as President in 2005. Prior to that he served first as Engineering Manager and then Chief Engineer after joining the Company in 1988. Mr. Fitzgerald joined the Company in 1973 and served as Superintendent of Transportation prior to his election as Vice President in 2005. Mr. Rogers joined the Company in 1994 and served as Director of Marketing prior to his election as Vice President in 2005. Ms. Tanona joined the Company as Assistant General Counsel and Assistant Secretary in 1999 and was named secretary and General Counsel in 2000. Prior to joining the Company she was Associate General Counsel of Arbor National Commercial Mortgage Corporation in Boston.
The Company has adopted a written code of ethics that applies to all of its employees including its Chief Executive Officer and its Chief Financial Officer. A copy of the Company's code of ethics, entitled "Business Conduct Policy," is available on the Company's website at http://www.pwrr.com, and/ or may be obtained without charge by contacting:
Investor Relations Attention: Wendy Lavely Providence and Worcester Railroad Company 75 Hammond Street Worcester, Massachusetts 01610 (800) 447-2003 Internet Address: http://www.pwrr.com; wlavely@pwrr.com
Item 11.
Item 11. Executive Compensation - -------------------------------
See pages 6 through 10 of the Company's definitive proxy statement for the 2006 annual meeting of its shareholders, which pages are incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and - --------------------------------------------------------------------------- Related Stockholder Matters - ---------------------------
See pages 12 and 13 of the Company's definitive proxy statement for the 2006 annual meeting of its shareholders, which pages are incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------
See page 5 of the Company's definitive proxy statement for the 2006 annual meeting of its shareholders which page is incorporated herein by reference.
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Item 14.
Item 14. Principal Accountant Fees and Services - -----------------------------------------------
See pages 14 and 15 of the Company's definitive proxy statement for the 2006 annual meeting of its shareholders which pages are incorporated herein by reference.
Item 15.
Item 15. Exhibits and Financial Statement Schedules - ---------------------------------------------------
(a) (1) All financial statements:
An index of financial statements is included in Item 8, page II- 11 of this annual report
(2) Financial Statement schedule:
Schedule II Valuation and Qualifying AccountsPage........ III-4
All other schedules are omitted because they are not applicable or not required, or because the required information is shown either in the financial statements or the notes thereto.
(3) Listing of Exhibits.
(10A)Material Contracts (incorporated by reference to Exhibit 10 to the registration statement of the Registrant on Form 10, to the Non-Qualified Stock Option Plan and Employee Stock Purchase Plan of the Registrant on Forms S-8 and to the registration statements of the Registrant on Form S-1).
(23) Consent of Independent Registered Public Accounting Firm
(31) Certifications Pursuant to Section 302 of The Sarbanes-Oxley Act of
(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
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SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PROVIDENCE AND WORCESTER RAILROAD COMPANY
/s/ Robert H. Eder ------------------
By Robert H. Eder Chief Executive Officer Dated: March 24, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Robert H. Eder ________________________ Chief Executive March 24, 2006 Robert H. Eder Officer and Chairman (Principal Executive Officer) /s/ P. Scott Conti ________________________ President and March 24, 2006 P. Scott Conti Director (Chief Operating Officer) /s/ Robert J. Easton ________________________ Treasurer March 24, 2006 Robert J. Easton (Principal financial officer and principal accounting officer) /s/ Richard W. Anderson ________________________ Director March 24, 2006 Richard W. Anderson /s/ Frank W. Barrett ________________________ Director March 24, 2006 Frank W. Barrett /s/ J. Joseph Garrahy ________________________ Director March 24, 2006 J. Joseph Garrahy
III-3
SCHEDULE II
PROVIDENCE AND WORCESTER RAILROAD COMPANY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 (IN THOUSAND DOLLARS)
Column A Column B Column C Additions Column D Column E -------- -------- ------------------ -------- -------- (1) (2) Balance Charged to Charged to Balance at costs and other at end Description beginning expenses accounts Deductions of of period describe (A) period Allowance for doubtful accounts: Year ended December 31, 2005..... $125 $ 50 $ 0 $175 ==== ==== ==== ==== Year ended December 31, 2004..... $125 $ 8 $ 8 $125 ==== ==== ==== ==== Year ended December 31, 2003..... $125 $125 ==== ====
(A) Bad debts written off.
III-4
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statement Nos. 333-65937, 333-65949, and 333-21617 of Providence and Worcester Railroad Company on Form S-8 of our report dated March , 2006 relating to the financial statements and financial statement schedule of Providence and Worcester Railroad Company, appearing in this Annual Report on Form 10-K of Providence and Worcester Railroad Company for the year ended December 31, 2005.
/s/ Deloitte & Touche LLP
Boston, Massachusetts March 24, 2006
EXHIBIT 31.1
Providence and Worcester Railroad Company Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, ROBERT H. EDER, certify that:
I, ROBERT H. EDER, certify that:
1. I have reviewed this annual report on Form 10-K of Providence and Worcester Railroad Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on our evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
DATE: March 24, 2006 /s/ Robert H. Eder By: ______________________________ Robert H. Eder Chairman of the Board and Chief Executive Officer
EXHIBIT 31.2
Providence and Worcester Railroad Company Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, ROBERT J. EASTON certify that:
1. I have reviewed this annual report on Form 10-K of Providence and Worcester Railroad Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on our evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
DATE: March 24, 2006 /s/ Robert J. Easton By: ______________________________ Robert J. Easton Treasurer and Principal Financial Officer
EXHIBIT 32
PROVIDENCE AND WORCESTER RAILROAD COMPANY CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Providence and Worcester Railroad Company (the Company) on form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Robert H. Eder, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Robert H. Eder
_____________________________ Robert H. Eder, Chairman of the Board and Chief Executive Officer March 24, 2006
In connection with the Annual Report of Providence and Worcester Railroad Company (the Company) on form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Robert J. Easton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Robert J. Easton
_____________________________ Robert J. Easton, Treasurer and Chief Financial Officer March 24, 2006