1.	Description of Business and Summary of Significant Accounting Policies

Description of Business

Providence and Worcester Railroad Company (“P&W” or the “Company”) is an interstate freight carrier conducting railroad operations in Massachusetts, Rhode Island, Connecticut and New York. Through its connecting carriers, it services customers located throughout North America. The Company services the largest international double-stack intermodal terminal facility in New England. P&W’s connections to multiple Class I railroads, either directly or through connections with regional and short-line carriers, provide the Company with a competitive advantage by allowing it to offer various pricing and routing alternatives to its customers.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents for purposes of classification in the balance sheets and statements of cash flows. Cash equivalents are stated at cost, which approximates fair market value.

Accounts Receivables and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount. The Company’s allowance for doubtful accounts is determined based upon historical write-offs and known customer information. The allowance for doubtful accounts represents the Company’s best estimate of the amount of probable loss on its existing accounts receivable. Account balances are charged off against the allowance for doubtful accounts when the Company determines the receivable will not be recovered.

Materials and Supplies

Materials and supplies, which consist of diesel fuel and items for the improvement and maintenance of track structure and equipment, are stated at cost, determined on a first-in, first-out basis, and are charged to expense or added to the cost of property and equipment when used.

Property and Equipment

Property and equipment, including land held for development, is stated at historical cost (including self-construction costs). Acquired railroad property is recorded at the purchased cost. Self-construction costs for track structure include material costs for ties, rail, other track materials and ballast; the cost of direct and supervisory labor, including railroad retirement taxes and employee benefits; costs for track machinery and equipment (including depreciation) and various other overhead costs. Major renewals or betterments are capitalized while routine maintenance and repairs, which do not improve or extend asset lives, are charged to expense when incurred. Costs are capitalized to the extent that they are incurred in connection with the replacement of track structure pursuant to a program of rehabilitation which results in significant future economic benefit or the construction of new track structure. A program of rehabilitation or construction of new track structure generally includes ballast, rail and other track material and ties. Costs for routine maintenance are expensed. Routine maintenance items include the sporadic replacement of ties, replacement of track structure damaged in a derailment, washout or other cause or event and the costs of general upkeep of track structure to keep it in good operating condition. Costs are capitalized or expensed depending on the facts and circumstances of each specific project. The total amount of the costs to be capitalized is based on the per unit cost for each category of expenditure (ties, rail and other track material and ballast) and the number of equivalent units installed. Costs are developed using costs incurred for materials, direct labor and overhead.

Property and equipment are carried at cost and are depreciated over their useful lives. Items included in track structures with similar physical characteristics, use, year of installation and expected life are grouped into separate asset classes and depreciated over the estimated useful life of the asset class group.

Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows:


Track structure:
Ties			40 years
Rail and other track material			67 years
Ballast			67 years
Bridges and trestles			67 years
Other			33 years
Buildings and other structures			33 to 45 years
Equipment, including rolling stock			4 to 25 years

The Company reviews property and equipment retirements each year in order to determine whether or not the estimated useful lives are reasonable. Since, in most instances, assets retired have been fully or substantially depreciated, the Company has not found it necessary, historically, to make any significant adjustments to their estimated useful lives. Retirements of track structure are recorded by removing the historical cost and related accumulated depreciation of the equivalent amount of its oldest track structures in the related asset class group. Gains or losses, if any, on sales or other dispositions are credited or charged to other income. The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When circumstances indicate that assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining lives of the assets in determining whether the carrying amounts of the assets are recoverable. If impairment exists it is measured by comparing the carrying value to the fair value. No impairments were recognized in the years presented.

Deferred Grant and other revenue

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 65% 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 ($1,080 in 2014 and $339 in 2013) and amortized into operating revenues on a straight-line basis over the estimated useful lives of the related improvements.

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.

In December 2013, the Company entered into a 25 year license for use of the Company’s right of way for utility infrastructure, in which the Company received one-half the rental payments in advance and received the other half ($750) in December 2014. The Company will amortize $60 per annum into rental income during the 25 year term which expires in December 2038.

Revenue Recognition and Concentration of Credit Risk

Freight revenues are estimated and recorded at the time shipments move onto the Company’s tracks or the connecting carrier’s tracks. Due to the short time of delivery to customers or the connecting carriers, freight revenues recognized at the time shipments move onto the Company’s tracks is not materially different from the revenue recognition of freight revenues as shipments progress. Freight revenues are recorded net of any unloading allowances or other fees.

Other freight-related and operating revenues are recorded at the time services are rendered to the customer.

Gain or loss from sale, condemnation and disposal of property and equipment and easements is recorded at the time the transaction is consummated and collectability is assured.

The Company’s ten (10) largest customers account for more than half of its operating revenues. One of the Company’s customers, which mines construction aggregates from two active quarries on the Company’s rail system and ships to locations in Connecticut and New York, accounted for more than 10% of the Company’s freight operating revenues in 2014 and 2013. Additionally, in 2013, revenues attributable to individual ethanol shippers served by Motiva Enterprises LLC, which operates a petroleum blending and storage terminal located in Providence, Rhode Island on the Company’s lines accounted for more than 10% of the Company’s operating revenues. The Company does not believe that these customers will cease to be rail shippers in the foreseeable future; however, the Company does not control the quantities these companies will ship by rail.

Income Taxes

Deferred taxes are provided on a liability method, whereby deferred tax assets are recognized for deductible temporary differences, operating losses and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the dates of enactment. Valuation allowances are established when it is estimated that it is more likely than not that the deferred tax asset will not be realized.

Certain provisions of ASC 740 Income Taxes prescribe a recognition threshold and the measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in the tax return, and provide guidance on reporting for uncertain tax positions. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company has not accrued any interest or penalties.

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 (using the if-converted method) and options (using the treasury stock method), except where such items would be anti-dilutive.

A reconciliation of weighted average shares used for the basic computation and that used for the diluted computation is as follows:


	2014						2013
	Net Income		Shares		Per Share Amount		Net Income		Shares		Per Share Amount
Basic Earnings per Share
Net Income available to Common Shareholders	$	3,168					$	1,418

Basic Earnings per share	$	3,168		4,855	$	.65	$	1,418		4,845	$	.29


Diluted Earnings per Share

Net Income available to Common Shareholders	$	3,168					$	1,418

Preferred stock dividends		3						3

Effect of Dilutive Securities				75						77

Diluted Earnings per Share	$	3,171		4,930	$	.64	$	1,421		4,922	$	.29

Options to purchase 63,285 and 67,082 shares of common stock were outstanding at December 31, 2014 and 2013, respectively. Certain options were not included in the calculation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common stock and would be anti-dilutive. For 2014 and 2013, 11,445 and 12,591 shares, respectively, relating to the options were included in the calculation of diluted earnings per share. Shares of preferred stock convertible into 64,000 shares of common stock were outstanding during 2014 and 2013. For 2014 and 2013, these were included in the calculation of diluted earnings per share.

Use of Estimates

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Liabilities for casualty claims, legal judgments and other loss contingencies are recorded when it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. It is the position of the Company not to accrue estimated legal fees for appeals of legal judgments since such costs do not meet the definition of a liability and thus are accruable only at such time as legal services have been provided.

Comprehensive Income

Comprehensive Income equals net income for 2014 and 2013.

Segment Reporting

The Company organizes itself as one segment reporting to the chief operating decision maker. Products and services consist primarily of interstate freight rail services. These include the movement of freight in both conventional freight cars and in intermodal containers on flat cars over the Company’s rail lines, as well as freight-related services such as switching, weighing and special trains and other services rendered to freight customers and other outside parties by the Company’s Maintenance of Way and Maintenance of Equipment Departments.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. ASU 2014-09 anticipates companies using more judgment and estimates than under the current guidance. ASU 2014-09 is effective for annual and interim periods beginning on or after December 31, 2016. ASU 2014-09 permits the use of retrospective application to period presented or a cumulative effect transition adjustment. The Company is currently evaluating the impact of adopting this new guidance on its financial statements and related disclosures.