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| PWX > SEC Filings for PWX > Form 10-K on 25-Mar-2008 | All Recent SEC Filings |
25-Mar-2008
Annual Report
The following discussion should be read in connection with the Company's audited financial statements and notes thereto included elsewhere in this annual report.
The statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MDA") which are not historical are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward- looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions, however, that actual results could differ materially from those indicated in the MDA.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") defines critical accounting policies as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 of the Notes to Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. Management believes that the Company's policy for the evaluation of long-lived asset impairment meets the SEC definition of critical.
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When factors indicate that assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining lives of the assets in determining whether the carrying amounts of the assets are recoverable. If an impairment exists, the impairment is measured by comparing the carrying value to the fair value.
Overview
The Company is a regional freight railroad operating in Massachusetts, Rhode Island, Connecticut and New York.
The Company generates operating revenues primarily from the movement of freight in both conventional freight cars and in intermodal containers on flat cars over its rail lines. Freight revenues are recorded at the time delivery is made to the customer or the connecting carrier. Modest freight related operating revenues are derived from demurrage, switching, weighing, special train and other transportation services. Other operating revenues are derived from services rendered to freight customers and other outside parties by the Company's Maintenance of Way, Communications & Signals, and Maintenance of Equipment Departments. Operating revenues also include amortization of deferred grant income.
The Company's operating expenses consist of salaries and wages and related payroll taxes and employee benefits, depreciation, insurance and casualty claim expense, diesel fuel, car hire, property taxes, materials and supplies, purchased services, track usage fees and other expenses. Many of the Company's operating expenses are of a relatively fixed nature and do not increase or decrease proportionately with increases or decreases in operating revenues unless the Company's management were to take specific actions to restructure the Company's operations.
When comparing the Company's results of operations from one year to another, the following factors should be taken into consideration. First, the Company has historically experienced fluctuations in operating revenues and expenses due to unpredictable events such as one-time freight moves and customer plant expansions and 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. Fourth, diesel fuel comprises a significant portion of the Company's operating costs. As fuel prices increase the Company attempts to recover these costs through surcharges and increased fees; however, the Company's profitability can be impacted by changes in fuel prices.
The Company also generates income through sales of properties, grants of easements and licenses, and leases of land and tracks. Income or loss from sale, condemnation and disposal of property and equipment and grants of easements is recorded at the time the transaction is consummated and collectibility is assured. This income varies significantly from year to year.
One of the Company's customers which ships construction aggregate from three separate quarries on the Company's rail system to asphalt production plants in Connecticut and New York, accounted for 13.8%, 14.8% and 13.3% of its operating revenues in 2007, 2006 and 2005, 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 table sets forth the Company's operating revenues by category in dollars and as a percentage of operating revenues:
Years Ended December 31,
-----------------------------------------------
2007 2006 2005
------------- -------------- -------------
(in thousands, except percentages)
Freight Revenues:
Conventional carloads ....... $22,682 86.7% $23,443 82.4% $22,082 82.6%
Containers .................. 2,389 9.1 3,572 12.5 3,201 12.0
Other freight related ....... 774 3.0 876 3.1 850 3.2
Other operating revenues...... 319 1.2 560 2.0 601 2.2
------- ----- ------- ----- ------- -----
Total ...................... $26,164 100.0% $28,451 100.0% $26,734 100.0%
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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,
-----------------------------------------------
2007 2006 2005
------------- -------------- -------------
(in thousands, except percentages)
Chemicals and plastics ....... $ 8,387 37.0% $ 7,759 33.1% $ 7,441 33.7%
Construction aggregate ....... 3,840 16.9 4,359 18.6 3,745 17.0
Food and agricultural products 2,777 12.2 2,749 11.7 2,571 11.6
Forest and paper products .... 2,756 12.2 3,181 13.6 3,135 14.2
Metal products ............... 2,132 9.4 2,488 10.6 3,208 14.5
Coal ......................... 1,818 8.0 1,651 7.0 1,478 6.7
Other ........................ 972 4.3 1,256 5.4 504 2.3
------- ----- ------- ----- ------- -----
Total ...................... $22,682 100.0% $23,443 100.0% $22,082 100.0%
======= ===== ======= ===== ======= =====
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II-5
The following table sets forth a comparison of the Company's operating expenses
expressed in dollars and as a percentage of operating revenues:
Years Ended December 31,
-----------------------------------------------
2007 2006 2005
------------- -------------- -------------
(in thousands, except percentages)
Salaries, wages, payroll taxes
and employee benefits ....... $15,204 58.1% $14,945 52.5% $14,471 54.1%
Casualties and insurance ..... 919 3.5 956 3.4 1,084 4.1
Depreciation ................. 2,884 11.0 2,829 9.9 2,764 10.3
Diesel fuel .................. 2,524 9.6 2,495 8.8 2,014 7.5
Car hire, net ................ 818 3.1 1,096 3.9 1,123 4.2
Purchased services, including
legal and professional fees . 2,037 7.8 1,947 6.8 1,564 5.9
Repairs and maintenance of
equipment ................... 1,711 6.5 1,943 6.8 1,280 4.8
Track and signal materials ... 2,135 8.2 2,949 10.4 2,428 9.1
Track usage fees ............. 615 2.4 829 2.9 827 3.1
Other materials and supplies . 1,222 4.7 1,239 4.4 1,016 3.8
Other ........................ 1,833 7.0 1,891 6.6 1,680 6.3
------- ----- ------- ----- ------- -----
Total ....................... 31,902 121.9 33,119 116.4 30,251 113.2
Less capitalized and
recovered costs ............ 4,046 15.4 4,897 17.2 4,137 15.5
------- ----- ------- ----- ------- -----
Total ...................... $27,856 106.5% $28,222 99.2% $26,114 97.7%
======= ===== ======= ===== ======= =====
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Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Operating Revenues
Operating Revenues decreased $2.3 million, or 8.0%, to $26.2 million in 2007 from $28.5 million in 2006. This decrease resulted from a $1.2 million (33.1%) decrease in container freight revenues, a $761,000 (3.2%) decrease in conventional freight revenues, a $102,000 (11.6%) decrease in other freight related revenues and a $241,000 (43.0%) decrease in other operating revenues.
The decrease in container freight revenues is attributable to a 35.9% decline in traffic volume partially offset by a 4.3% increase in the average revenue received per container. Intermodal containers handled decreased by 22,678 to 40,505 in 2007 from 63,183 in 2006. Among other factors, rate increases imposed by western rail carriers in the United States resulted in steamship lines using "all water" routings to the East Coast for a larger portion of container traffic thereby significantly reducing the volume of such traffic shipped cross-country by rail. This trend began during the second quarter of the year and the Company is unable to predict if and when this trend will be reversed. The increase in the average revenue received per container is primarily due to contractual rate adjustments based upon railroad industry cost indices.
The decrease in conventional freight revenues is the result of an 8.8% reduction in traffic volume partially offset by a 6.1% increase in the average revenue received per carloading. The Company's conventional carloadings decreased by 2,983 to 30,797 in 2007 from 33,780 in 2006. The largest single reduction in conventional traffic volume was construction aggregates which declined by more than a half million dollars. Declines in other commodities were largely offset by increases in coal, ethanol and automobiles. Shipments of these latter two commodities commenced during the second half of the year and the Company anticipates that they will contribute to future traffic growth. The increase in the average revenue received per conventional carloading results from a shift in the mix of traffic away from construction aggregates, a lower rated commodity, as well as modest rate increases, including diesel fuel surcharges.
The decrease in other freight related revenues is attributable to reduced billings for demurrage charges which is related to the decrease in conventional traffic volume.
The decrease in other operating revenues results from a reduction in maintenance department billings. Revenues of this nature typically vary from year to year depending upon the needs of freight customers and other outside parties.
Other Income
Other income decreased by $483,000 to $890,000 in 2007 from $1.4 million in 2006. This decrease is due to a reduction in gains from the sale of property, equipment and easements, which revenue can vary significantly from year to year.
Operating Expenses
Operating expenses decreased $366,000, or 1.3%, to $27.9 million in 2007 from $28.2 million. The Company's operating expenses are of a fixed nature to a very high degree and, therefore, do not fluctuate proportionally with increases or decreases in operating revenues. The decrease in track and signal materials expense of $814,000 was offset by a $1.0 million decrease in reimbursements received from the states for non-capitalized crossing signals and other public improvements.
Provision for Income Taxes (Benefit)
The Company's federal income tax benefit for 2007 was reduced by $113,000 of railroad track maintenance credits which were utilized in 2005 and 2006. These credits were "freed up" by carrying back a portion of the net operating loss incurred in 2007 to those years.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Operating Revenues
Operating Revenues increased $1.7 million, or 6.4%, to $28.4 million in 2006 from $26.7 million in 2005. This increase was the result of a $1.4 million (6.2%) increase in conventional freight revenues, a $371,000 (11.6%) increase in container freight revenues and a $26,000 (3.1%) increase in other freight related revenues, slightly offset by a $41,000 (6.8%) decrease in other operating revenues.
The increase in conventional freight revenues results from a 1.7% increase in traffic volume and a 4.3% increase in the average revenue received per carloading. The Company's conventional carloadings increased by 577 to 33,780 in 2006 from 33,203 in 2005. Rate increases, including diesel fuel surcharges, as well as a shift in the mix of commodities hauled account for the increase in the average revenue per carloading.
The increase in container freight revenues results from an 11.1% increase in the average revenue received per container and a small (.4%) increase in traffic volume. Intermodal containers handled increased by 278 to 63,183 in 2006 from 62,905 in 2005. The increase in the average revenue received per container is attributable to contractual rate adjustments based upon railroad industry cost indices, as well as a shift in the mix of traffic toward higher rated containers.
The increase in other freight related revenues results from increased billings for demurrage and secondary switching services.
The decrease in other operating revenues reflects a decrease 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 increased by $165,000 to $1.4 million in 2006 from $1.2 million in 2005. This increase is the result of increased gains from the sale of property, equipment and easements, as well as rentals and interest income.
Operating Expenses
Operating expenses increased $2.1 million, or 8.1%, to $28.2 million in 2006 from $26.1 million in 2005. Operating expenses amounted to 99.2% of operating revenues in 2006 compared to 97.7% in 2005. Increased costs of diesel fuel, equipment repairs and maintenance and personnel expense account for a substantial portion of this increase.
Provision for Income Taxes
The Company's income tax provision for 2006 amounts to 35% of income before income taxes compared to 34% in 2005. Railroad tax maintenance credits in the amount of $36,000 were utilized to reduce the 2006 provision compared to $65,000 in 2005.
Liquidity and Capital Resources
The Company generated $3.3 million, $3.8 million and $4.9 million of cash from operations in 2007, 2006 and 2005, respectively. The Company's total cash and cash equivalents decreased by $1.1 million in 2007 and $810,000 in 2006 and increased by $328,000 in 2005. The principal utilization of cash during the three year period was for expenditures for property and equipment acquisitions and improvements and payment of dividends.
During 2007, 2006 and 2005 the Company generated $288,000, $863,000 and $691,000, respectively, from the sale of properties not considered essential for railroad operations and from the granting of easements and licenses. The Company holds various properties which could be made available for sale, lease or grants of easements and licenses. Revenues from sales of properties, easements and licenses can vary significantly from year to year.
The Company has a revolving line of credit of $5.0 million with its principal bank, which line expires on May 31, 2009. Borrowings under this line of credit are unsecured, due on demand and bear interest at either the bank's prime rate or one and one half percent over either the one or three month London Interbank Offered Rates. The Company pays no commitment fee on this line and has no compensating balance requirements. During 2007 the Company borrowed $1.2 million against this line of credit and repaid $300,000 by the end of the year. Total interest paid on these borrowings amounted to $52,000. The balance of these borrowings was subsequently repaid in full in January 2008. The Company had no advances against this line during 2006.
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 $3.5 million, $3.4 million and $2.9 million for additions and improvements to its track structure in 2007, 2006 and 2005, respectively. Deferred grant income of $520,000 in 2007, $121,000 in 2006 and $411,000 in 2005 financed a portion of these additions and improvements. Improvements to the Company's track structure are made, for the most part, by the Company's Maintenance of Way Department personnel.
In 2007, 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 $727,000, on its outstanding common stock. Continued payment of such dividends is contingent upon the Company's continuing to have the necessary financial resources available.
The Company is a defendant in certain lawsuits relating to casualty losses, many of which are covered by insurance subject to a deductible. The Company believes that adequate provision has been made in the financial statements for any expected liabilities which may result from disposition of such lawsuits.
On January 29, 2002, the Company received a "Notice of Potential Liability" from the United States Environmental Protection Agency ("EPA") regarding an existing Site that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially responsible parties ("PRPs") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its status as an owner and/or operator because its railroad property traverses the Site. Via these Notice letters, EPA makes a demand for payment of past costs (identified in the letter as $762,000) and future costs associated with the response actions taken to address the contamination at the Site, and requests PRPs to indicate their willingness to participate and resolve their potential liability at the Site. The Company has responded to EPA by stating that it does not believe it has any liability for this Site, but that it is interested in cooperating with EPA to address issues concerning liability at the Site. At this point, two other parties have already committed via a consent order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS") phase of the clean-up at the Site, which will take approximately two or more years to complete. After that, EPA will likely seek to negotiate the cost of the Remedial Design and implementation of the remedy at the Site with the PRPs it has identified via these Notice Letters (which presently includes over sixty parties, and is likely to increase after EPA completes its investigation of the identity of PRPs). On December 15, 2003, the EPA issued a second "Notice of Potential Liability" letter to the Company regarding the Site. EPA again identified the Company as a
PRP, this time because EPA "believes that the Company accepted hazardous substance for transport to disposal or treatment facilities and selected the site for disposal." The Company responded again to EPA stating that it is interested in cooperating with EPA but that it does not believe it has engaged in any activities that caused contamination at the Site. The Company believes that none of its activities caused contamination at the Site, and will contest this claim by EPA and therefore no liability has been accrued for this matter.
In connection with the EPA claim described above, the two parties who have committed to conduct the RI/FS at the Site filed a complaint in the U.S. District Court of Rhode Island against the Company, in an action entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L, on December 18, 2002. The Company was one of about sixty parties named by Plaintiffs, in this suit, to recover response costs incurred in investigating and responding to the releases of hazardous substances at the Site. Plaintiffs alleged that the Company is liable under 42 U.S.C. ss. 961(a)(3) of CERCLA as an "arranger" or "generator" of waste that ended up at the Site. The Company entered into a Generator Cooperation Agreement with other defendants to allocate costs in responding to this suit, and to share technical costs and information in evaluating the Plaintiffs' claims. Although the Company does not believe it generated any waste that ended up at this Site, or that its activities caused contamination at the Site, the Company paid $45,000 to settle this suit in March 2006.
Pursuant to permits issued by the United States Department of the Army Corps of Engineers and the Rhode Island Coastal Resources Management Council, the Company created 33 acres of waterfront land in East Providence, Rhode Island ("South Quay"). The permits for the property, 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, which has a carrying value of $12.0 million, is adjacent to a 12 acre site also owned by the Company.
The property is located a half mile from I-195. In 2006, the Rhode Island Department of Transportation ("RIDOT") awarded a contract to construct Waterfront Drive, which provides direct vehicular access from the interstate highway system to the South Quay, which project was completed in 2007. The planned extension by RIDOT of Waterfront Drive northward toward an industrial area in which the Company owns two additional waterfront parcels comprising 11 acres, creating direct access to such property, is in the design stage.
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.
On January 10, 2008, subsequent to year-end, the Company entered into an agreement with GATX Corporation ("GATX") whereby GATX acquired 239,523 newly issued shares of the Company's common stock (4.99%) for approximately $5.5 million which is to be utilized for capital improvements to enhance the Company's operations. The Company and GATX also entered into an Exclusive Railcar Supply Agreement whereby GATX has the exclusive right to supply the Company with railcars for certain rail traffic on market-competitive terms to be determined by the two parties. In addition, the Company exchanged 72 of its mill gondolas for 137 open-top hoppers owned by GATX. The Company agreed to lease the 72 mill gondolas from GATX under operating leases for a period of up to 7 years at minimum annual rentals of $248,000. This amount is not significantly different from the rentals previously paid to GATX for the open-top hoppers which have been used by the Company to transport coal.
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 2007 and 2006. The information for each of these quarters is unaudited but includes all normal recurring adjustments that the Company considers necessary for a fair presentation. These results, however, are not necessarily indicative of results for any future period.
II-9
Year Ended December 31, 2007
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating Revenues .................... $ 5,185 $ 6,972 $ 7,296 $ 6,711
Other income .......................... 115 478 159 138
------- ------- ------- -------
Total revenues ........................ 5,300 7,450 7,455 6,849
Operating expenses .................... 7,101 6,893 7,174 6,688
------- ------- ------- -------
Income (loss) before income taxes
(benefit) ............................ (1,801) 557 281 161
Provision for income taxes
(benefit) ............................ (640) 210 100 180
------- ------- ------- -------
Net income (loss) ..................... $(1,161) $ 347 $ 181 $ (19)
------- ------- ------- -------
Basic and diluted income (loss) per
common share ......................... $ (.26) $ .08 $ .04 $ .00
------- ------- ------- -------
Year Ended December 31, 2006
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