UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-16704

PROVIDENCE AND WORCESTER RAILROAD COMPANY

(Exact name of registrant as specified in its charter)

Rhode Island	05-0344399
(State or other jurisdiction of incorporation or organization)	I.R.S. Employer Identification No.
75 Hammond Street, Worcester, Massachusetts	01610
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code(508) 755-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of each exchange on which registered
Not Applicable	Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

Common stock, $.50 par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of June 30, 2012, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $31,610,078 (For this purpose, all directors of the Registrant are considered affiliates.)

As of March 1, 2013, the Registrant had 4,841,955 shares of Common Stock outstanding.

Documents Incorporated by Reference—

Portions of the Registrant’s Proxy Statement for the 2013 Annual Meeting of Shareholders to be held on April 24, 2013, are incorporated by reference into Part III of this Form 10-K.

Exhibit Index—Page IV-1.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR

THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 24, 2013.

The Company’s Proxy Statement, sample proxy card and 2012 Annual Report on Form 10-K are available at: www.edocumentview.com/pwx.

Providence and Worcester Railroad Company

FORM 10-K

For the Fiscal Year Ended December 31, 2012

INDEX

		PAGE NO.
PART I
ITEM 1.	Business		I-1
ITEM 2.	Properties		I-6
ITEM 3.	Legal Proceedings		I-8
ITEM 4.	Mine Safety Disclosures		I-9
PART II
ITEM 5.	Market for Registrant’s Common Stock and Related Stockholder Matters and Issuer Purchases of Equity Securities		II-1
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		II-2
ITEM 8.	Financial Statements and Supplementary Data		II-9
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		II-31
ITEM 9A.	Controls and Procedures		II-31
ITEM 9B.	Other Information		II-32
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance		III-1
ITEM 11.	Executive Compensation		III-1
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		III-1
ITEM 13.	Certain Relationships and Related Transactions and Director Independence		III-2
ITEM 14.	Principal Accounting Fees and Services		III-2
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules		IV-1
	Signatures		IV-3

Forward-Looking Statements

The statements contained in Item 1 “Business” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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, which represent the Company’s beliefs or expectations concerning future events. The Company cautions that these statements are subject to a number of factors that could lead to actual results differing materially from those described in the forward-looking statements. You should not place undue reliance on any forward-looking statements contained within this report. Factors that could have a material impact on our operations or that could cause actual results to differ materially from our expectations include, but are not limited to: general economic and business conditions, our relationship with Class I railroads and other carriers, legislative and regulatory developments by the Surface Transportation Board (“STB”), Railroad Retirement Board or the Federal Railroad Administration (“FRA”), strikes or other work stoppages, fuel costs or supply constraints, our transportation of hazardous materials, susceptibility to severe weather conditions, acts of terrorism, our ability to obtain rail cars from other providers, competition from other modes of transportation and other rail operators and customer and contract continuation. The Company does not undertake the obligation to update forward-looking statements in response to new information, future events or otherwise.

PART I

Item 1. Business

Providence and Worcester Railroad Company (“P&W” or the “Company”) is a short-line freight railroad as defined by the American Association of Railroads (“AAR”) 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 Amtrak’s 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 and trackage rights agreements, has grown from 45 miles of track to its current system of approximately 516 miles. P&W services the largest international double-stack intermodal terminal facility in New England in Worcester, Massachusetts, a strategic location for regional transportation and distribution enterprises.

The Company transports a wide variety of commodities for its customers, including automobiles, construction aggregates, iron and steel products, chemicals and plastics (including ethanol), lumber, scrap metals, plastic resins, cement, coal, construction and demolition debris, and processed foods and edible foodstuffs, such as corn syrup and vegetable oils. Its customers include Exxon Mobil Corporation, Ford Motor Company, Frito-Lay, Inc., Global LLP, GDF SUEZ Energy North America, International Paper Company, Lehigh Cement, Cargill, Inc., Northeast Utilities, Nucor Steel, Rawson Materials, Renewable Products Marketing Group, Subaru of New England, The Dow Chemical Company, Tilcon Connecticut, Inc. and Toray Plastics (America), Inc. In 2012, P&W transported 31,725 carloads of freight and 16,113 intermodal containers. In addition, the Company generates income through the grants of temporary easements of land. P&W’s connections to multiple Class I railroads (operating revenues in excess of $378.8 million under the AAR definition), either directly or through connections with other 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. In addition, the Company’s commitment to maintaining its track and equipment to high standards enables P&W to provide fast, reliable and efficient service.

Industry Overview

General

Freight railroads are categorized in different classes by the STB and the AAR. As a result of mergers and consolidations, there are only seven Class I railroads in North America today. The Class I railroads account for a majority of North America’s rail freight business.

The freight rail industry underwent revitalization after the passage of the Staggers Rail Act in 1980 (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. Accordingly, freight rail service became more competitive with other transportation modes with respect to both quality and price.

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One result of revitalization of the industry has been the growth of regional (over 350 miles and revenue of at least $40 million) and short-line railroads, which was fueled by Class I railroads’ divestiture of certain branch lines in order to focus on their long-haul core systems. Today, there are more than 550 regional and short-line railroads. They operate in all of the 48 contiguous states comprising the continental United States, plus Alaska, account for about 30% of all rail track, employ about 10% of all rail workers and generate about 6% 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.

Regional Developments

Over the past decade, a number of development projects within the Company’s service area have been completed. Some have increased port capacity along the extensive coastline of southern New England and improved the intermodal transportation and distribution infrastructure in the region, while others have improved the Company’s connections to Class I carriers serving southern New England. These infrastructure improvements present the Company with multiple opportunities for increased business and routing options, enhancing its customers’ market access.

Quonset/Davisville

The State of Rhode Island with assistance from the federal government is continuing redevelopment efforts on a 1,000 acre portion of the former naval facility at Quonset/Davisville for an active port and industrial park that houses a number of rail-oriented industries and an auto port. Construction of a freight rail improvement project, providing additional track capacity and Phase 1 double-stack clearances on the Northeast Corridor between Quonset/Davisville and Boston Switch, the connection of the Northeast Corridor to the Company’s mainline at Central Falls, RI, was completed in October 2006. The Company handled 3,750 autoracks in 2012 and 4,074 autoracks in 2011.

Port of Providence

Infrastructure improvements undertaken by the Port of Providence and the Company in 2003, including the installation of paving, lighting and “on dock” rail, have accommodated the Company’s movement of imported coal and other products to inland markets. During 2012 and 2011, the Company moved 1,206 and 1,488 carloads of coal, respectively. The Company continues to move coal and, in 2012, also moved limestone.

The Company rehabilitated a substantial portion of its South Providence yard to facilitate handling unit trains of ethanol. This commodity is being transported by rail throughout the country and is a component of the gasoline mix available at gasoline service stations throughout southern New England. During 2012 and 2011, the Company moved 2,078 and 4,449 carloads of ethanol, respectively.

New London and Willimantic Interchanges

Through its New London and Willimantic interchanges with the New England Central Railroad (“NECR”), P&W interchanges traffic with the Canadian National Railway (“CN”) and the Canadian Pacific Railway (“CP”). With the Company’s reactivation of the Willimantic interchange in late 2007, across a route with improved overhead clearances to NECR, the Willimantic Branch became the primary interchange route to NECR and further strengthened the Company’s connections with CP via the Vermont Rail Systems’ (“VRS”) Green Mountain Gateway at Bellows Falls, Vermont and CN via East Alburg, Vermont. During 2011, the Company completed rehabilitation of 14 miles of the Willimantic Branch from Willimantic, CT to Versailles, CT with new 115 lb. rail, ties and resurfacing.

In February 2012, the Company and NECR entered into a strategic alliance establishing service across the “Great Eastern Route”. The Great Eastern Route furnishes the Company with pricing authority for service with CN, through a haulage arrangement by which NECR provides haulage for the Company between East Alburg, VT and Willimantic, CT on certain contractually-agreed commodities. The route also enhances the Company’s connection with CP.

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Railroad Operations

The Company’s rail freight system comprises approximately 516 miles of track. The Company interchanges freight traffic: with CSX Transportation (“CSXT”) at Worcester, Massachusetts and New Haven, Connecticut; with Pan Am Railways at Worcester, Massachusetts; with Pan Am Southern (“PAS”) and Norfolk Southern Railways (“NS”) via PAS at Gardner, Massachusetts; with NECR at New London and Willimantic, Connecticut; with CN via the Great Eastern Route; with CP via the NECR; and with New York and Atlantic Railroad at Fresh Pond Junction on Long Island. Through its connections, P&W links more than 80 communities on its lines. The Company operates four classification yards (areas containing tracks used to group freight cars destined for a particular industry or interchange) located in Worcester, Massachusetts, Cumberland, Rhode Island, and Plainfield and New Haven, Connecticut.

The Company is dependent upon the railroads with which it interchanges freight traffic to enable it to properly service its customers at competitive rates. Failure of any of these connecting railroads to provide adequate service at reasonable rates can result in a loss of freight customers and revenues.

By agreement with a private operator, the Company services an intermodal yard in Worcester, an area containing tracks used for the loading and unloading of containers. This yard is U.S. Customs-bonded, and international traffic must be inspected and approved by U.S. Customs officials. The intermodal yard serves primarily as a terminal for the movement of container traffic from Canada, the Far East, Southeast Asia and Europe destined for points in New England. Container ship lines utilize double-stack train service through this terminal. Intermodel traffic declined significantly beginning in 2007 and reached its lowest traffic counts in 2009. In 2012, 16,113 containers were handled which represented an improvement of 5,321 containers over 2011. P&W continues to work with the terminal operator to develop relationships with steamship lines involved in international intermodal transportation. The Company and certain Class I railroads have entered into separate Intermodal Haulage Agreements with respect to international intermodal containers to and from certain ports.

Customers

The Company serves approximately 140 customers in Massachusetts, Rhode Island, Connecticut and New York. The Company’s ten (10) largest customers account for more than half of its operating revenues. One of the Company’s customers, which ships construction aggregates from three separate quarries on the Company’s rail system to locations in Connecticut and New York, accounted for 10.8% of the Company’s freight operating revenues in 2012. Though no single customer accounted for 10% or more of its total operating revenues in 2011, revenues attributable to individual 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.

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Markets

The Company transports a wide variety of commodities for its customers. In recent years, chemicals and plastics (including ethanol), and construction aggregates were the two largest commodity groups transported by the Company, constituting 39% and 17%, respectively, of conventional carload freight revenues in 2012. The following table summarizes the Company’s conventional carload freight revenues by commodity group as a percentage of such revenues:

Commodity	2012			2011
Automobiles		11	%		10	%
Chemicals and plastics (including ethanol)		39			43
Construction aggregates		17			16
Coal		2			3
Metal products		9			10
Food and agricultural products		6			5
Forest and paper products		10			8
Other		6			5
Total		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 located 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 which have access only to a single Class I connection, the Company is able to offer its customers various 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 and believes its rail system is in good condition. The Company has an employee training program utilizing classroom instruction and video programs on topics including NORAC Operating Rules, Safety Rules, Rail Security Awareness plans and Hazardous Materials Awareness, as well as manufacturer-provided training materials. The Company and its employees continue to work to prevent injuries while at the same time expanding operations and enhancing efficiencies.

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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’s rights-of-way. Overhead traffic passes from one connecting carrier to another and neither originates nor terminates with shippers located on a railroad’s rights-of-way. Presently, with minor exceptions, P&W is solely an on-line carrier.

Freight rail rates can be in various forms. Generally, customers are given a “through” rate, a single amount encompassing the rail transportation of a commodity from point of origin to point of destination, regardless of the number of carriers which handle the car. Rates are developed by the carriers based on the commodity, volume, distance and competitive market considerations. The entire freight bill is paid either to the originating carrier (“prepaid”) or to the destination carrier (“collect”) and divided among all carriers which handle the move. The basis for the division varies and can be based on factors (or revenue requirements) independently established by each carrier which comprise the through rate, or on a percentage basis established by division agreements among the carriers. A carrier such as P&W, which actually places the car at the customer’s location and attends to the customer’s daily switching requirements, typically receives a share of revenue greater than an amount based simply on mileage hauled.

Employees

As of December 31, 2012, the Company had 147 full-time employees, 116 of whom are represented by three railroad labor organizations that are national in scope. The Company’s non-management employees have been represented by the same unions since the Company commenced independent operations in 1973.

The Company’s initial agreement with the United Transportation Union (“UTU”), now known as Sheet Metal, Air, Rail and Transportation Workers (“SMART”), covering trainmen was unusual in the railroad industry since it provided the Company with discretion in determining crew sizes, eliminated craft distinctions and provided a guaranteed annual wage for a maximum number of hours worked. The Company’s collective bargaining agreements have been in effect since February 1973 for trainmen, since May 1974 for clerical employees and dispatchers and since June 1974 for maintenance employees. These contracts do not expire but are subject to renegotiation after the agreed-upon moratoria. The Company signed eight year agreements with the UTU (trainmen) in October 2005, the Transportation Communications International Union (clerical) in August 2006 and the Brotherhood of Railroad Signalmen (maintenance) in July 2007, retroactive to prior periods. The Company considers its employee and labor relations to be good. The Company expects to commence contract negotiations with SMART in the near term.

Competition

The Company is the only rail carrier serving businesses located on-line. The Company competes with other carriers, however, in the siting of new rail-oriented businesses in the region. Certain rail competitors, including CSXT, are substantially larger and better capitalized than the Company. The Company also competes with other modes of transportation, particularly long-haul trucking companies, for the transportation of commodities, and ocean-going vessels for the transportation of containers. Any improvement in the cost or quality of these alternate modes of transportation including, for example, legislation granting material increases in truck size or allowable weight, could increase competition and may materially adversely affect the Company’s business and results of operations. As a means of competing, P&W strives to offer greater convenience and better service than competing rail carriers and at costs lower than some competing non-rail carriers. The Company also competes by participating in efforts to attract new industry to its service area.

The Company believes that its ability to grow depends, in part, upon its ability to acquire additional connecting rail lines. In making acquisitions, P&W competes with other short-line and regional rail operators, some of which are larger and have greater financial resources than the Company.

Governmental Regulation

The Company is subject to governmental regulation by the STB, the FRA, the Transportation Security Administration (the “TSA”) and other federal, state and local regulatory authorities with respect to certain rates and railroad operations, as well as a variety of health, safety, labor, environmental and other matters, all of which could potentially affect the Company’s competitive position and profitability. Additionally, the Company may be required

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to obtain STB approval prior to its acquisition of any new railroad properties. Management believes that the regulatory freedoms granted by the Staggers Rail Act have been beneficial to the Company by affording 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 compliance with applicable environmental laws and regulations.

Internet Address and SEC Reports

The Company maintains a website with the address www.pwrr.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (“SEC”). We also include on our website our corporate governance guidelines, announcements concerning quarterly dividends required by NASDAQ Stock Market, LLC (“NASDAQ”), required eXtensible Business Reporting Language (“XBRL”) files 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 Business Conduct Policy that are required to be publicly disclosed pursuant to rules of the SEC.

Item 2. Properties

Track

P&W’s rail system extends over approximately 516 miles of track, of which it owns approximately 163 miles. The Company has the right to use the remaining 353 miles pursuant to perpetual easements and long-term trackage rights agreements. Under certain of these agreements, the Company pays fees based on usage.

Virtually all of the mainlines on which the Company operates are in FRA class 3 condition. The Company intends to maintain the mainline tracks which it owns in such condition.

Of the approximately 516 miles that comprise the Company’s system, 306 miles, or 58.5%, are located in Connecticut, 95 miles, or 19%, are located in Massachusetts, 87 miles, or 17%, are located in Rhode Island and 28 miles, or 5.5%, are located in New York.

Rail Facilities

P&W owns land and a building with approximately 69,500 square feet of floor space in Worcester, Massachusetts. The building houses the Company’s executive and administrative offices and some of the Company’s storage space. Approximately 4,735 square feet is leased to an outside tenant. In addition, the Company owns various maintenance buildings and other structures related to its railroad operations.

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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 and future growth.

Other Properties

The Company owns a total of approximately 150 acres of real estate located along its principal railroad lines, including classification yards in the greater Worcester, Massachusetts area. Additionally, the Company owns or has the right to use a total of approximately 130 acres of real estate located along the principal railroad lines from downtown Providence through Pawtucket, Rhode Island. Of this acreage, P&W owns approximately eight acres in Pawtucket and has a perpetual easement for railroad purposes over the remaining 122 acres.

The Company has invested approximately $12 million in the development of the South Quay in East Providence, Rhode Island which has resulted in the creation of approximately 33 acres of waterfront land, located adjacent to a 12 acre site, also owned by the Company.

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 permanent and temporary 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 and leased by the Company as of December 31, 2012:

Description	Owned		Leased
Locomotive		30		2
Gondola		5		52
Open-Top Hopper		136		70
Flat Car		5		—
Ballast Car		30		—
Passenger Equipment		7		—
Caboose		2		—
Total		215		124

The 30 diesel electric locomotives, which include nine pre-owned 3,900 horsepower GE B39-8 locomotives acquired in 2002 and 2003, four pre-owned GE B40-8 locomotives acquired in 2004 and 2005 and three pre-owned GE B40-8W locomotives acquired in 2010, are used on a daily basis, are maintained to a high standard, comply with all FRA and AAR rules and regulations and are adequate for the needs of the Company’s freight operations. The Company leases two SD-60 locomotives. The lease commenced in 2011 and continues through March 2014. The gondolas are considered modern rail cars and are used in track maintenance and by certain P&W customers. The flat and ballast cars are used in track maintenance and, very occasionally, by certain P&W customers. The open-top hopper cars are used to support the Company’s coal traffic. Other rail freight customers use their own freight cars or obtain such equipment from other sources. The passenger equipment and cabooses are not utilized in P&W’s rail freight operations but are used on an occasional basis for Company functions, excursions and paid charter trips.

In January 2008, simultaneous with the purchase by GATX Corporation of 239,523 shares of common stock of the Company for the purchase price of $5,509,029 ($23.00/share), the Company and GATX entered into various agreements including an Exclusive Railcar Supply Agreement (the “ERSA”) for a term of five (5) years to renew automatically for successive one-year periods unless earlier terminated by either party. Under the ERSA, provided that market-competitive terms are furnished, GATX became the exclusive supplier of substantially all of P&W’s railcar needs, while various other agreements between the parties provided for the Company’s acquisition of 137 open-top hopper cars, its lease of 72 mill gondolas (reduced to 52 during 2012), and its lease of 200 automobile-carrying railcars (autoracks). The Company leases 70 aluminum open top hoppers on a per trip lease/storage

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arrangement. In 2011, the Company entered into a three year lease for 2 six-axle EMD SD-60’s for approximately $186,000 per annum. Additionally, in 2013, the Company and GATX entered into a lease/storage arrangement for 8 high-sided gondolas, whereby the Company pays GATX for its sporadic use on a per trip basis only.

Equipment

P&W has a digital touch control dispatching system at its Worcester operations center permitting two-way radio contact with every train crew and maintenance vehicle on its lines and a computer-based manual block dispatching system with safety overrides to enhance dispatching and safety. The Company maintains a computer facility in Worcester with back-up computer facilities in Putnam, Connecticut to assure the Company’s ability to operate in the event of disruption of service in Worcester. The Company also has 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 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. Certain of the Company’s locomotives, which operate on the Northeast Corridor, are equipped with cab signal technology, automatic civil speed enforcement systems and positive train control.

The Company, at its Worcester Engine House, has a fifty-ton drop table to facilitate the efficient exchange of wheels on locomotives and railcars by lowering the wheels beneath the level of the Engine House floor and across to an adjacent track where exchange with a second wheel set is made. The Company has performed contracted services for other railroads and the Massachusetts Bay Transportation Authority.

Item 3. Legal Proceedings

On January 29, 2002, the Company received a “Notice of Potential Liability” from the United States Environmental Protection Agency (“EPA”) regarding an existing Superfund Site (the “Site”) that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these “Notice” letters to potentially 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 thousand) 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 has not yet been completed. 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. § 961(a) (3) of CERCLA as an “arranger” or “generator” of waste that ended up at the Site. The Company entered into a Generator Cooperation Agreement with other defendants to allocate costs in responding to this suit, and to share technical costs and information in evaluating the Plaintiffs’ claims. Although the Company does not believe it generated any waste that ended up at the Site, or that its activities caused contamination at the Site, the Company paid $45 thousand to settle this suit in March 2006.

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In addition to the litigation concerning the Superfund Site, the Company is defendant in certain lawsuits related to its operations. The Company believes it has made adequate provisions for any expected liability that may result from the disposition of pending litigation. Litigation is subject to inherent uncertainty, however, and an unfavorable outcome on any matter could materially adversely affect the Company’s business.

Item 4. Mine Safety Disclosures

Not applicable.

I-9

Part II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters and Issuer Purchases of Equity Securities

The Common Stock is quoted on the NASDAQ under the trading symbol “PWX”. The following table sets forth, for the periods indicated, the high and low sale prices per share for the Common Stock as reported on the NASDAQ. The Preferred Stock is not quoted on a market and is non-cumulative and the dividend is limited to $5 per share per annum and is convertible to 100 shares of Common Stock. 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
2011
First Quarter	$	18.21	$	15.09	$	5.00	$	.04
Second Quarter		16.86		13.75		–0–		.04
Third Quarter		15.11		10.50		–0–		.04
Fourth Quarter		13.40		11.40		–0–		.04
2012
First Quarter	$	15.20	$	11.60	$	5.00	$	.04
Second Quarter		16.16		12.51		–0–		.04
Third Quarter		13.95		12.20		–0–		.04
Fourth Quarter		14.90		13.17		–0–		.04

As of March 1, 2013, there were approximately 600 holders of record of the Company’s common stock and 8 holders of record of the Company’s Preferred Stock.

The declaration of cash dividends on both the preferred and the common stock is made at the discretion of the Board of Directors based on the Company’s earnings, financial condition, capital requirements and other relevant factors and restrictions.

II-1

Item 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.

Critical Accounting Policies and Estimates

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. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The following critical accounting policies are a subset of the Company’s significant accounting policies 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.

Property and Equipment

The Company’s rail operations are highly capital intensive. Property and equipment, including land held for development, is stated at historical cost (including self-construction costs). 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 that 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 with 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 standard cost for each category of expenditure (ties, rail and other track material and ballast) and the number of equivalent units installed. Per unit costs are developed annually using costs incurred for materials, direct labor and overhead.

Properties and equipment are carried at cost and are depreciated over their useful lives. Items included in track structures with similar physical characteristics, use, date of installation and expected life are grouped together into separate asset classes and depreciated by the estimated useful life for the asset class group. Gains or losses on sales or other dispositions of property are credited or charged to other income.

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 structures are recorded by removing the historical cost and related accumulated depreciation of its oldest track structures with the related gain or loss being charged to other income. Historically, the Company has not had any significant retirements of track infrastructure which it considers to be abnormal and not in the normal course of business.

The conclusions and ongoing evaluations of our estimated useful lives may result in future material changes in the Company’s maintenance and capital spending, as well as revisions to the useful lives of property and equipment which may affect depreciation rates and expenses.

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 an impairment exists, the impairment is measured by comparing the carrying value to the fair value. No impairments were recognized in the two years presented.

II-2

Income Taxes

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and 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.

Overview

The Company is a 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 estimated and recorded at the time shipments move onto the Company’s or the connecting carrier’s track. 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 and rental income.

The Company’s operating expenses consist of salaries and wages and related payroll taxes and employee benefits, depreciation, insurance and casualty claim expense, diesel fuel, car hire, property taxes, materials and supplies, purchased services, track usage fees and other expenses. Many of the Company’s operating expenses are of a relatively fixed nature and do not increase or decrease proportionately with increases or decreases in operating revenues unless the Company’s management were to take specific actions to restructure the Company’s operations.

When comparing the Company’s results of operations from one year to another, the following factors should be taken into consideration. First, the Company has historically experienced fluctuations in operating revenues and expenses due to unpredictable events such as one-time freight moves and customer plant expansions and shutdowns. Second, the Company’s freight volumes are susceptible to increases and decreases due to changes in international, national and regional economic conditions. Third, the volume of capitalized track or recollectible projects performed by the Company’s Maintenance of Way and Communications & Signals departments can vary significantly from year to year, thereby impacting total operating expenses. Fourth, diesel fuel comprises a significant portion of the Company’s operating costs. As fuel prices increase the Company attempts to recover these costs through surcharges and increased fees; however, the Company’s profitability can be impacted by changes in fuel prices.

The Company also generates other income through sales of properties, grants of easements and licenses. Other income or loss from the sale, condemnation, disposal of property and equipment and grants of permanent easements is recorded at the time the transaction is consummated and collectability is assured. Other income varies significantly from year to year.

One of the Company’s customers, which ships construction aggregates from three separate quarries on the Company’s rail system to locations in Connecticut and New York, accounted for 10.8% of the Company’s freight operating revenues in 2012. Though no single customer accounted for 10% or more of its total operating revenues in 2011, revenues attributable to individual 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.

II-3

Results of Operations

The following table sets forth the Company’s operating revenues, exclusive of rental revenues, by category in dollars and as a percentage of operating revenues:

	Years Ended December 31,
	2012				2011
	(in thousands, except percentages)
Freight Revenues:
Conventional carloads	$	26,669	90.7	%	$	28,692	90.5	%
Containers		1,178	4.0			751	2.4
Other freight-related		888	3.0			872	2.7
Other operating revenues		670	2.3			1,383	4.4
Total	$	29,405	100.0	%	$	31,698	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,
	2012				2011
	(in thousands, except percentages)
Automobiles	$	2,800	10.5	%	$	2,841	9.9	%
Chemicals and plastics (including ethanol)		10,428	39.1			12,452	43.4
Construction aggregates		4,454	16.7			4,619	16.1
Coal		640	2.4			717	2.5
Metal products		2,347	8.8			2,841	9.9
Food and agricultural products		1,573	5.9			1,578	5.5
Forest and paper products		2,587	9.7			2,267	7.9
Other		1,840	6.9			1,377	4.8
Total	$	26,669	100.0	%	$	28,692	100.0	%

II-4

The following table sets forth a comparison of the Company’s operating expenses expressed in dollars and as a percentage of operating revenues, exclusive of rental revenues:

	Years Ended December 31,
	2012				2011
	(in thousands, except percentages)
Salaries, wages, payroll taxes and employee benefits	$	16,539	56.2	%	$	16,160	51.0	%
Casualties and insurance		1,075	3.7			1,279	4.0
Depreciation		3,403	11.6			3,274	10.3
Diesel fuel		3,446	11.7			3,990	12.6
Car hire, net		957	3.3			1,063	3.4
Purchased services, including legal and professional fees		2,364	8.0			2,909	9.2
Repairs and maintenance of equipment		1,767	6.0			1,114	3.5
Track and signal materials		1,972	6.7			1,166	3.7
Track usage fees		971	3.3			1,169	3.7
Other materials and supplies		1,252	4.3			1,221	3.9
Other		2,284	7.8			2,227	7.0
Total		36,030	122.6			35,572	112.3
Less capitalized and recovered costs, including amounts relating to the Amtrak Agreement1		8,551	29.1			3,677	11.6
Total	$	27,479	93.5	%	$	31,895	100.7	%

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Operating Revenues

Operating Revenues decreased $2.3 million, or 7.3%, to $29.4 million in 2012 from $31.7 million in 2011. This decrease is the net result of a $2.0 million (7.1%) decrease in conventional freight revenues, a $427 thousand (56.9%) increase in container freight revenues, a $16 thousand (1.8%) increase in other freight-related revenues and a $713 thousand (51.6%) decrease in other operating revenues.

The decrease in conventional freight revenues is attributable to an 11.5% decrease in traffic volume, offset by a 5.9% increase in the average revenue received per carloading. In 2012, the Company’s conventional carloadings decreased by 4,126 to 31,725 from 35,851 in 2011. Shipments of metal and chemicals and plastics (including ethanol) decreased during the year ended December 31, 2012 by approximately 38.5% and 23.9%, respectively, over prior year levels due to changing shipping patterns of ethanol on account of drought conditions during summer 2012 and the 2012 bankruptcy of an on-line scrap customer. The increase in the average revenue received per conventional carloading is largely attributable to price increases.

¹  For an explanation of the Amtrak Agreement, see Note 10 on page II-25

II-5

The increase in container freight revenues is the result of increased traffic volume and a 6.8% increase in the average revenue received per container. Container volume increased by 5,321 containers to 16,113 in 2012 from 10,792 in 2011. The increase in container traffic is primarily a result of the terminal operator located on the Company’s line obtaining an additional customer. This increase in traffic, along with improved economic conditions, contributed to the increase in the average revenue received per container.

Other operating revenues include billings for siding maintenance, signal maintenance, flagging and other services rendered to freight customers and other outside parties. The 2012 decrease was due to decreased maintenance department billings for signal maintenance.

Other Income

Other income increased by $1.3 million to $2.7 million in 2012 from $1.4 million in 2011. The Company received $2.6 million for the grant of permanent easement and $1.2 million in settlement of certain legal proceedings and with respect to the granting of a permanent easement during 2012 and 2011, respectively.

Operating Expenses

Operating expenses decreased by $4.4 million, or 13.8%, to $27.5 million in 2012 from $31.9 million in 2011. Decreases in diesel fuel expense and car hire due to decreased traffic volume resulting in reduced diesel fuel consumption, and decreases in purchased services and other expenses, accounted for $1.4 million of this decrease. Personnel costs increased due to contractually-required increases in pay rates and health care premium increases (totaling $379 thousand). Repairs and maintenance and track and signal materials increased by $1.5 million due mainly to reduced scrap material offsets and increased material demand in connection with recoverable projects. These increases were offset by $3.6 million of recoveries due to the Amtrak Agreement executed in 2012, $751 thousand of increased capital projects performed by Company personnel and $523 thousand of recoveries for primarily signal related projects.

Interest Expense

Interest expense was $202 thousand in 2012 and $110 in 2011. The increase was due to the long term debt carried by the Company for the full year of 2012. Additionally, in 2011, $70 thousand of interest expense was capitalized in conjunction with the Willimantic Branch rehabilitation project.

Provision for Income Taxes (Benefit)

The Company’s federal income tax provision for 2012 was $1.5 million. This amount approximates the Company’s expected tax rate plus a decrease in the Company’s valuation allowance against its deferred tax assets of $293 thousand (6% of the total effective tax rate).

II-6

Liquidity and Capital Resources

During 2012 and 2011, the Company generated $2.4 million and $5.9 million, respectively, of cash from operating activities.

During 2012, the Company’s cash flows used in investing activities were $943 thousand. Capital expenditures were $3.6 million, partially offset by proceeds from the sale of property, equipment and easements of $2.6 million. The Company’s expenditures for track structure replacement net of grants for the past two years were:

	Net Expenditures for Track Structure
December 31,	Replacements (In Thousands)
2011	$	7,188
2012	$	2,855

Substantially the entire mainline track owned by the Company meets FRA Class 3 standards, and the Company intends to continue to maintain this track at this level. The Company expended $2.8 million and $7.2 million for additions and improvements to its track structure in 2012 and 2011, respectively. During 2011, the Company rehabilitated 14 track miles of the Willimantic Branch from Versailles, CT to Willimantic, CT. The Company expects that on average it will continue to spend between $2 million and $3 million per year for capitalized track improvements adjusted annually for inflation. Improvements to the Company’s track structure are made, for the most part, by the Company’s Maintenance of Way Department personnel.

During 2012, the Company utilized $4.4 million of cash for financing activities. For 2012, the primary drivers of cash flows utilized in financing activities were $3.9 million for the retirement of the Company’s long term debt and $778 thousand for the payment of dividends partially offset by $75 thousand from the exercise of stock options and employee stock purchases and by $245 of deferred grant income.

In 2012, the Company paid dividends in the amount of $5 per share, aggregating $3.2 thousand, on its outstanding noncumulative preferred stock and $0.16 per share, aggregating $775 thousand, on its outstanding common stock. In January 2013, the Company declared a preferred stock dividend of $5 per share ($3.2 thousand) and a $.04 dividend per common share ($193 thousand). Continued payment of such dividends is contingent upon the Company’s continuing to have the necessary financial resources.

The Company’s revolving line of credit of $5.0 million with a commercial bank was extended through June 2015 with the same bank under the same terms and conditions. Borrowings under this line of credit are unsecured, due on demand and bear interest at either the bank’s prime rate or one and three-quarters percent over the thirty, sixty or ninety day London Interbank Offered Rate (“LIBOR”) with a LIBOR floor of one and one-quarter percent. The Company pays no commitment fee on this line and has no compensating balance requirements. The Company had no amounts outstanding under the line of credit as of December 31, 2012.

During 2012, the Company entered into an agreement with an unrelated third-party shipping customer. Under the agreement, the customer agreed to pay for certain qualified railroad track maintenance expenditures, including capital additions to the Company’s track structure. In return the Company agreed to assign railroad track miles to the shipping customer which would enable that customer to claim certain track maintenance credits pursuant to Section 45G of the Internal Revenue Code (“45G”). The Company received $1.8 million (net of related commissions and fees) for its assignment of railroad track miles under 45G for its 2012 credits. 45G was extended through December 31, 2013 and should 45G not be extended or reauthorized subsequent to 2013, the Company would no longer be able to assign its railroad track miles under 45G.

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 adversely impacted by increases in fuel prices.

II-7

Contractual Obligations and Commitments

The Company is a defendant in certain lawsuits relating to casualty losses, many of which are covered by insurance subject to a deductible. The Company believes that adequate provision has been made in the financial statements for any expected liabilities which may result from disposition of such lawsuits.

On January 29, 2002, the Company received a “Notice of Potential Liability” from the United States Environmental Protection Agency (“EPA”) regarding an existing Superfund Site (the “Site”) that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these “Notice” letters to potentially responsible parties (“PRPs”) under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). EPA identified the Company as a PRP based on its status as an owner and/or operator because its railroad property traverses the Site. Via these Notice letters, EPA makes a demand for payment of past costs (identified in the letter as $762 thousand) 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 has not yet been completed. 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 which 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. § 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 thousand 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”) investing nearly $12 million in its development. The permits for the property, which have been extended to December 2014 and December 2013, respectively, 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 one-half mile from Interstate 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. In fall 2012, the extension of Waterfront Drive northward toward an industrial area, where the Company owns two additional waterfront parcels comprising 11 acres, creating direct access to such property, was completed. RIDOT is now working to improve access from Waterfront Drive to Interstate 195.

The City of East Providence has created a waterfront redevelopment area with a zoning overlay to 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.

II-8

Item 8. Financial Statements and Supplementary Data

PROVIDENCE AND WORCESTER RAILROAD COMPANY

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		II-10
Balance Sheets as of December 31, 2012 and 2011		II-11
Statements of Operations for the Years Ended December 31, 2012 and 2011		II-12
Statements of Shareholders’ Equity for the Years Ended December 31, 2012 and 2011		II-13
Statements of Cash Flows for the Years Ended December 31, 2012 and 2011		II-14
Notes to Financial Statements		II-15

II-9

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, 2012 and 2011, and the related statements of operations, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of Providence and Worcester Railroad Company as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Stowe & Degon LLC

Westborough, Massachusetts

March 22, 2013

II-10

PROVIDENCE AND WORCESTER RAILROAD COMPANY

BALANCE SHEETS

(Dollars in Thousands Except Per Share Amounts)

	December 31,
	2012		2011
ASSETS
Current Assets:
Cash and cash equivalents	$	951	$	3,943
Accounts receivable, net of allowance for doubtful accounts of $115 in 2012 and 2011		4,461		3,570
Materials and supplies		979		842
Prepaid expenses and other current assets		445		412
Deferred income taxes		294		291
Total Current Assets		7,130		9,058
Property and Equipment, net		86,071		84,676
Land Held for Development		12,457		12,457
Total Assets	$	105,658	$	106,191
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt	$	—	$	120
Accounts payable		4,333		4,046
Current portion of deferred grant and other revenue		111		111
Accrued expenses		1,625		2,327
Total Current Liabilities		6,069		6,604
Long-Term Debt, net of current portion		—		3,821
Deferred Income Taxes		13,360		12,290
Deferred Grant and Other Revenue		10,305		10,487
Shareholders’ Equity:
Preferred stock, 10% noncumulative, $50 par value; authorized, issued and outstanding 640 shares in 2012 and 2011		32		32
Common stock, $.50 par value; authorized 15,000,000 shares; issued and outstanding 4,841,955 shares in 2012 and 4,833,012 shares in 2011		2,421		2,417
Additional paid-in capital		37,444		37,271
Retained earnings		36,027		33,269
Total Shareholders’ Equity		75,924		72,989
Total Liabilities and Shareholders’ Equity	$	105,658	$	106,191

The accompanying notes are an integral part of the financial statements.

II-11

PROVIDENCE AND WORCESTER RAILROAD COMPANY

STATEMENTS OF OPERATIONS

(Dollars in Thousands Except Per Share Amounts)

	Years Ended December 31,
	2012			2011
Operating Revenues	$	29,960		$	32,325
Operating Expenses:
Maintenance of way and structures		338			3,382
Maintenance of equipment		3,891			3,738
Transportation		10,768			11,326
General and administrative		4,532			5,178
Depreciation		3,403			3,274
Taxes, other than income taxes		2,976			2,545
Car hire, net		957			1,063
Employee retirement plans		221			220
Track usage fees		393			1,169
Total Operating Expenses		27,479			31,895
Income from operations		2,481			430
Other income, net		2,744			1,368
Interest expense		(202	)		(110	)
Income before income taxes		5,023			1,688
Provision for Income Taxes		1,487			753
Net Income		3,536			935
Preferred Stock Dividends		3			3
Net Income Available to Common Shareholders	$	3,533		$	932
Basic Earnings per Common Share	$	.73		$	.19
Diluted Earnings per Common Share	$	.72		$	.19
Weighted Average Common Shares Outstanding:
Basic		4,836			4,827
Diluted		4,907			4,898

The accompanying notes are an integral part of the financial statements.

II-12

PROVIDENCE AND WORCESTER RAILROAD COMPANY

STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in Thousands Except Per Share Amounts)

	Years Ended December 31, 2012 and 2011
					Additional					Total
	Preferred		Common		Paid-in		Retained			Shareholders’
	Stock		Stock		Capital		Earnings			Equity
Balance January 1, 2011	$	32	$	2,411	$	37,045	$	33,109		$	72,597
Issuance of 10,362 common shares for stock options exercised, employee stock purchases, and other				6		123					129
Share based compensation – options granted						103					103
Dividends paid:
Preferred stock, $5.00 per share								(3	)		(3	)
Common stock, $.16 per share								(772	)		(772	)
Net income								935			935
Balance, December 31, 2011		32	$	2,417	$	37,271	$	33,269		$	72,989
Issuance of 8,485 common shares for stock options exercised, employee stock purchases, and other				4		108					112
Share based compensation – options granted						65					65
Dividends paid:
Preferred stock, $5.00 per share								(3	)		(3	)
Common stock, $.16 per share								(775	)		(775	)
Net income								3,536			3,536
Balance, December 31, 2012	$	32	$	2,421	$	37,444	$	36,027		$	75,924

The accompanying notes are an integral part of the financial statements.

II-13

PROVIDENCE AND WORCESTER RAILROAD COMPANY

STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Years Ended December 31,
	2012			2011
Cash Flows from Operating Activities:
Net income	$	3,536		$	935
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation		3,403			3,274
Note receivable		—			60
Non-cash component of Amtrak Agreement		(1,108	)		—
Amortization of deferred income		(427	)		(274	)
Gains from sale, condemnation and disposal of property, equipment and easements, net		(2,540	)		(1,950	)
Deferred grant and other income		—			2,771
Deferred income taxes		1,067			643
Share-based compensation		102			132
Increase (decrease) in cash and cash equivalents from:
Accounts receivable		(891	)		(781	)
Materials and supplies		(137	)		(290	)
Prepaid expenses and other		(33	)		(30	)
Accounts payable and accrued expenses		(622	)		1,429
Other		—			(2	)
Net cash flows from operating activities		2,350			5,917
Cash Flows from Investing Activities:
Purchase of property and equipment		(3,553	)		(8,273	)
Proceeds from note receivable		—			384
Proceeds from sale and condemnation of property, equipment and easements		2,610			2,032
Net cash flows used in investing activities		(943	)		(5,857	)
Cash Flows from Financing Activities:
Payments under line of credit		—			(900	)
Proceeds from long-term debt		—			4,000
Payments on long-term debt		(3,941	)		(59	)
Dividends paid		(778	)		(775	)
Issuance of common shares for stock options exercised and employee stock purchases		75			100
Proceeds from deferred grant income		245			—
Net cash flows from (used in) financing activities		(4,399	)		2,366
(Decrease) Increase in Cash and Cash Equivalents		(2,992	)		2,426
Cash and Cash Equivalents, Beginning of Year		3,943			1,517
Cash and Cash Equivalents, End of Year	$	951		$	3,943
Supplemental Disclosures:
Cash paid during year for interest	$	219		$	94
Cash paid during year for income taxes, net	$	115		$	45
Capital expenditures financed through accounts payables	$	450		$	164

The accompanying notes are an integral part of the financial statements.

II-14

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(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 (“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 standard cost for each category of expenditure (ties, rail and other track material and ballast) and the number of equivalent units installed. Per unit costs are developed annually using costs incurred for materials, direct labor and overhead.

II-15

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

Properties 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 by 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 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 Income and other

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 ($245 in 2012 and $265 in 2011).

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 November 2011, the Company entered into a 25 year license for use of the Company’s right of way for installation of utility infrastructure, which the Company received the rental payments in advance. The Company will amortize $111 per annum into rental income during the 25 year term which expires in December 2036.

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.

II-16

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

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 serves approximately 140 customers in Massachusetts, Rhode Island, Connecticut and New York. The Company’s ten (10) largest customers account for more than half of its operating revenues. One of the Company’s customers, which ships construction aggregates from three separate quarries on the Company’s rail system to locations in Connecticut and New York, accounted for 10.8% of the Company’s freight operating revenues in 2012. Though no single customer accounted for 10% or more of its total operating revenues in 2011, revenues attributable to individual 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 or will substantially decrease their freight volumes in the foreseeable future.

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 provides 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:

	2012						2011
	Net Income		Shares		Per Share Amount		Net Loss		Shares		Per Share Amount
Basic Earnings per Share
Net Income available to Common Shareholders	$	3,533					$	932
Basic Earnings per share	$	3,533		4,836	$	.73	$	932		4,827	$	.19
Diluted Earnings per Share
Net Income available to Common Shareholders	$	3,533					$	932
Effect of Dilutive Securities				71						71
Diluted Earnings per Share	$	3,533		4,907	$	.72	$	932		4,898	$	.19

II-17

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

Options to purchase 64,547 and 59,621 shares of common stock were outstanding at December 31, 2012 and 2011, 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 2012 and 2011, 6,108 and 7,064 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 2012 and 2011. For 2012 and 2011, these were included in the calculation of diluted earnings per share.

Fair value of Financial Instruments

The Company applies the following three level hierarchy of valuation inputs for measuring fair value:

Level 1 – Quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.

Level 2 – Quoted prices for similar assets or liabilities in active markets or inactive markets; and valuations techniques in which all significant inputs are observable market data.

Level 3 – Valuations derived in which one or more of the significant inputs are unobservable.

The Company believes that the fair value of its financial instruments including accounts receivables and accounts and notes payable (bank facilities) approximate their respective book values at December 31, 2012 and 2011. The Company utilized Level 2 inputs.

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 2012 and 2011.

Segment Reporting

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

II-18

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

Recent Accounting Pronouncements

The Company reviews new accounting standards when issued. The Company does not believe any of the recent accounting pronouncements will have a significant impact on its financial statements.

Reclassifications

Certain amounts in the 2011 financial statements have been reclassified to conform with the 2012 presentation. Other income is now shown below income from operations on the statements of operations.

2. Share-Based Compensation

The Company has a non-qualified stock option plan (“SOP”) covering all management personnel who have a minimum of one year of service with the Company and who are not holders of a majority of either its outstanding common stock or its outstanding preferred stock. In addition, the Company’s outside directors are eligible to participate in the SOP. The Company’s stockholders have authorized 5% of the shares of common stock outstanding (242,098 shares at December 31, 2012) for issuance under the SOP. Options granted under the SOP, which are fully vested when granted, are exercisable over a ten year period at the closing market price for the Company’s common stock on the last business day of the year prior to the date the options are granted. The Company issues new common stock to satisfy stock options exercised.

The Company recognizes compensation expense for new stock option grants at fair value on the grant date, less estimated forfeitures. Stock-based employee compensation expense, net of income taxes, in the amounts of $42 and $66, has been charged against income in 2012 and 2011, respectively, for stock options granted. The Company’s policy is to estimate the fair market value of each option granted on the date of grant, the first business day in January of each year, using the Black-Scholes option pricing model, and to record the compensation expense in the year in which the grant was made. Management’s estimating requires the use of estimates that are highly subjective including items such as the expected life of the option grants, the expected stock price volatility and the expected dividend payment rate. The expected life is based upon historical experience and is estimated for each grant. The expected volatility is based upon a combination of historical and implied volatility. The expected dividend rate is based upon historical yields. The risk free rate is based upon on a zero-coupon U.S. Treasury rate at the time of grant with maturity dates that coincide with the expected life of the options.

Key assumptions used to apply the Black-Scholes option pricing model are set forth below:

	2012			2011
Average risk-free interest rate		1.52	%		2.55	%
Expected life of option grants		5.0 years			6.0 years
Expected volatility of underlying stock		101	%		92	%
Expected dividend payment rate, as a percentage of the share price on the date of grant		1.40	%		.96	%
Weighted average grant date fair value	$	7.89		$	11.93

II-19

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

The following table summarizes the stock option activity under the Company’s plan:

				Weighted Average
	Number Of Options			Exercise Price		Fair Value
Outstanding and exercisable at December 31, 2010		55,901		$	13.08
Granted		8,590			16.75	$	11.93
Exercised		(2,711	)		8.54
Expired		(2,159	)		7.13
Outstanding and exercisable at December 31, 2011		59,621		$	14.03
Granted		8,241			11.40	$	7.89
Exercised		(1,709	)		8.97
Expired		(1,606	)		6.75
Outstanding and exercisable at December 31, 2012		64,547		$	14.00

The total intrinsic value of options exercised for the years ended December 31, 2012 and 2011 totaled approximately $9 and $28, respectively, and cash proceeds from the exercise of stock options totaled approximately $14 and $23 for the years ended December 31, 2012 and 2011, respectively. The income tax benefits realized from the exercise of stock options were not material for the periods presented.

The aggregate intrinsic value of the stock options outstanding, based on the closing stock price of the Company’s common stock as of December 31, 2012 and 2011, totaled approximately $71 and $31, respectively. The weighted average of the remaining life was five years at December 31, 2012 and 2011.

Common Stock Awards

The Company has awarded certain of its employees common stock under stock award plans. During the years ended December 31, 2012 and 2011, the Company awarded 1,735 and 1,960 shares, respectively. The compensation expense recorded for these awards was $27 and $29 for 2012 and 2011, respectively. Common stock awarded under such stock award plans vests immediately.

3. Note Receivable

In 2010, in conjunction with the settlement of certain legal proceedings with a customer, the Company accepted an unsecured promissory note in the face amount of $486, whereby the Company receives monthly installments of $10 including interest at 3.91% through January 2015, the maturity date. During the fourth quarter of 2011, the Company and the customer agreed to settle the balance due under the note for $300. The Company recorded an expense of $60 in General and Administrative expense on its 2011 Statement of Operations in conjunction with this settlement.

II-20

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

4. Property and Equipment

Property and equipment consists of the following:

A detail of the Company’s net properties are as follows:

			Accumulated			Net Book
As of December 31, 2012	Cost		Depreciation			Value
Property :
Land and land improvements	$	11,474	$	—		$	11,474
Buildings and other structures		8,442		(3,764	)		4,678
Track structures:
Rail and other track material		29,953		(6,783	)		23,170
Ballast		5,878		(1,642	)		4,236
Ties		50,922		(23,415	)		27,507
Bridges & Trestles		7,612		(2,504	)		5,108
Other		1,275		(915	)		360
Total property		115,556		(39,023	)		76,533
Equipment:
Office		417		(364	)		53
Locomotives		12,538		(7,321	)		5,217
Rail cars		2,382		(1,474	)		908
Vehicles		2,658		(2,428	)		230
Signals and crossing		1,336		(790	)		546
Track		1,551		(1,361	)		190
Other		4,619		(3,484	)		1,135
Total equipment		25,501		(17,222	)		8,279
Construction-in-process		1,259		—			1,259
Total Property and Equipment	$	142,316	$	(56,245	)	$	86,071

II-21

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

			Accumulated			Net Book
As of December 31, 2011	Cost		Depreciation			Value
Property :
Land and land improvements	$	11,460	$	—		$	11,460
Buildings and other structures		8,353		(3,587	)		4,766
Track structures:
Rail and other track material		29,230		(6,389	)		22,841
Ballast		5,767		(1,564	)		4,203
Ties		49,720		(22,472	)		27,248
Bridges & Trestles		7,094		(2,367	)		4,727
Other		1,276		(889	)		387
Total property		112,900		(37,268	)		75,632
Equipment:
Office		404		(333	)		71
Locomotives		11,790		(6,829	)		4,961
Rail cars		2,382		(1,278	)		1,104
Vehicles		2,632		(2,342	)		290
Signals and crossing		1,206		(720	)		486
Track		1,554		(1,338	)		216
Other		4,547		(3,296	)		1,251
Total equipment		24,515		(16,136	)		8,379
Construction-in-process		665		—			665
Total Property and Equipment	$	138,080	$	(53,404	)	$	84,676

Construction-in-process consisted primarily of costs associated with track and building upgrades. During 2012, the Company recorded the rail to be received in conjunction with the Amtrak Agreement as construction-in-progress.

During 2011, the Company capitalized $70 of interest during the Willimantic Branch rehabilitation. No interest amounts were capitalized during 2012.

5. Land Held for Development and Related Party Transaction

Pursuant to permits issued by the United States Department of the Army Corps of Engineers and the Rhode Island Coastal Resources Management Council, the Company created 33 acres of waterfront land in East Providence, Rhode Island (“South Quay”). The permits for the property, which have been extended to December 2014 and December 2013, respectively, 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 Company has invested approximately $12,000 in the development of the South Quay, which has resulted in the creation of approximately 33 acres of waterfront land.

II-22

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

The property is located one half-mile from Interstate 195 (“I-195”). In 2006, the Rhode Island Department of Transportation (“RIDOT”) awarded a contract for roadway improvements to provide direct vehicular access from the interstate highway system to the South Quay, which project was completed in 2007. In fall 2012, the extension 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, was completed. RIDOT is now working to improve access from Waterfront Drive to I-195.

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.

Robert Eder, who owns a majority of the Company’s Preferred Shares, with his wife, also controls Capital Properties, Inc. (“CPI”) and its subsidiaries. Pursuant to an agreement between the Company and Getty Oil Company (Eastern Operations), Inc. dated August 6, 1975, the Company has the right to relocate any portion of two pipelines located within the Company’s right of way, in East Providence, Rhode Island. The Company and CPI have supported an extension of Waterfront Drive in East Providence along the Company’s right of way which was completed in the fall of 2012. The State of Rhode Island’s plans for Waterfront Drive’s extension required a relocation of a portion of the pipelines which the Company has the right to relocate. RIDOT entered into an agreement with the Company to reimburse the Company for expenses incurred by itin relocating the pipelines up to a maximum of $159. In May, 2011 CPI’s subsidiary, Capital Terminal Company (“CTC”), entered into an agreement with the Company to act as the Company’s agent to select, direct and supervise all subcontractors subject to the Company’s approval. All invoices from contractors to CTC are submitted to the Company for approval along with a check from CTC in the amount of the invoice. The Company pays the invoice out of the funds provided by CTC. The Company is then obligated to submit the invoices to RIDOT for reimbursement under its agreement with RIDOT. When the Company receives reimbursement from RIDOT, it is obligated to pay that amount to CTC. Any shortfall in RIDOT’s reimbursement is borne by CTC. During 2011, the Company received invoices of $219, which were paid by the Company to the subcontractors out of funds received from CTC. CTC, through subcontractors, completed the pipeline relocation during 2011. At December 31, 2011, the Company recorded a receivable in the amount of $219 from RIDOT and recorded corresponding accounts payable to CTC in the same amount. The Company is obligated to CTC only to the extent it receives payment from RIDOT. At December 31, 2012, the Company has remaining a receivable from RIDOT and a payable to CTC in the amount of $22.

6. Debt

Revolving Line of Credit

The Company has a revolving line of credit facility in the amount of $5,000 from a commercial bank expiring on June 25, 2015. Borrowings under this line of credit are unsecured, due on demand and bear interest at either the bank’s prime rate or one and three-quarters percent over the thirty, sixty or ninety day London Interbank Offered Rate (“LIBOR”) with a LIBOR floor of one and one-quarter percent. The Company pays no commitment fee on this line of credit and has no compensating balance requirements. It is subject to financial and non-financial covenants including maintenance of a minimum net worth and restrictions as to the incurrence of additional indebtedness, as well as the sale or encumbrance of its assets. At December 31, 2012 and 2011, no amounts were outstanding under the line of credit.

Long-term debt

In December 2010, the Company borrowed $4,000 from the same commercial bank, in order to finance the rehabilitation of the Willimantic Branch. The loan of up to $4,000 required payments of interest only for the first six months and accruing at the bank’s prime rate. After the six month period, the loan converted to a 10 year loan with a 20 year amortization period and bears interest at the Federal Home Loan Bank of Boston 5/20 rate plus 3% (5.18% at the date of conversion). The Company has the right to prepay all or any part thereof out of internally-generated funds without penalty. The Company is subject to financial and non-financial covenants, including maintenance of minimum net worth and minimum debt service coverage.

II-23

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

The Company retired all amounts due under the loan, without penalty, during December 2012. As of December 31, 2011, the outstanding principal balance was $3,941.

The Company is in compliance with its related debt covenants as of December 31, 2012.

7. Accrued Expenses

Accrued expenses consist of the following:

	December 31,
	2012		2011
Salaries and wages	$	691	$	580
Payroll taxes		168		380
Simplified employee pension plan contributions		197		193
Legal and professional fees		75		244
Casualty loss claims		390		436
Other		104		494
	$	1,625	$	2,327

8. Other Income

Other income consists of the following:

	Years Ended December 31,
	2012		2011
Gains and losses from sale, condemnation and disposal and retirement of property, equipment and easements, net	$	2,523	$	1,250
Interest and other		221		118
	$	2,744	$	1,368

The Company received $2,605 for the grant of a permanent easement and $1,240 in settlement of certain legal proceedings and the grant of a permanent easement during 2012 and 2011, respectively.

II-24

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

9. Railroad Track Maintenance Credits:

During the fourth quarter of 2012 and during 2011, the Company entered into an agreement with an unrelated third-party shipping customer. Under the agreement, the customer agreed to pay for certain qualified railroad track maintenance expenditures, including capital additions to the Company’s track structure during 2012. In return the Company agreed to assign railroad track miles to the shipping customer which would enable that customer to claim certain track maintenance credits pursuant to section 45G of the Internal Revenue Code of 1986. For the year ended December 31, 2012, $1,800 was realized as a result of the agreements. For 2012, the credit for 45G was reauthorized during 2013 retroactive to 2012. As such, amounts due from the unrelated third-party shipper are included in accounts receivable at December 31, 2012. For the year ended December 31, 2011, $1,800 was realized as a result of the agreements. The Railroad Track Maintenance Credits were accounted for as a reduction of Operating Expenses—Maintenance of Way and Structures in the Statement of Operations.

10. Amtrak Agreement

On April 4, 2012, the Company and National Railroad Passenger Corporation (“Amtrak”) entered into the 2012 Settlement and Amendment Agreement (the “2012 Agreement”) which settled certain disputes between the parties and amended, in part, both an Agreement dated January 3, 1978 (the “1978 Agreement”) and an Agreement dated July 9, 1979 by and between Amtrak and the Company. Under the 1978 Agreement, Amtrak had the right to remove certain Company trackage subject to the requirement of providing replacement facilities.

Under the 2012 Agreement, Amtrak’s obligations to the Company for outstanding track capacity are satisfied in full by, among other things, Amtrak (1) granting the Company a license for railroad operations to certain Amtrak trackage located in Cranston, RI (the “Cranston Yard Trackage”) ($179), (2) delivering to the Company track materials ($684), (3) granting the Company a credit against mileage charges payable to Amtrak by the Company for freight traffic utilizing the Northeast Corridor ($2,571), and (4) cash and relief of certain outstanding obligations the Company owed to Amtrak ($2,143), with the foregoing items having an agreed aggregate value of $5,577. The 2012 Agreement also relieves Amtrak of any future obligation (a) to maintain the Cranston Yard Trackage, and (b) to replace P&W track capacity modified or eliminated by Amtrak provided that no such modification or elimination may unreasonably interfere with the continuity of tracks being used for P&W’s freight service. The 2012 Agreement also contains provisions allocating the risk of use of the Cranston Yard Trackage, establishing procedures for contesting Amtrak invoices for maintenance along the Northeast Corridor, permitting the Company to bill Amtrak for non-routine services requested by Amtrak and provided by the Company, and permitting Amtrak to deduct from its cash payment to the Company the amount of certain uncontested invoices.

The Company recorded such amounts as recoveries of related operating expenses. The Company recorded recoveries of $3,006 during the second quarter of 2012, offsetting Maintenance of Way expense. The Company recognizes the expense offset relative to track usage fees as the expenses are incurred. As such, the Company did not record any related assets or liabilities relative to the mileage credit. During 2012, the Company has recorded the following offsets to Track Usage Fees expense on the statement of operations which amounts have been deducted from the track mileage credit remaining:

	Years Ended December 31,
	2012		2011
Mileage credit available	$	2,571	$	—
Operating rights offset		577		—
Mileage credit remaining	$	1,994	$	—

II-25

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

11. Income Taxes (Benefit)

The provision for income taxes (benefit) consists of the following:

	Years Ended December 31,
	2012		2011
Current:
Federal	$	320	$	—
State		100		110
		420		110
Deferred:
Federal		1,054		674
State		13		(31	)
		1,067		643
	$	1,487	$	753

The following summarizes the estimated tax effect of temporary differences that are included in the net deferred income tax provision:

	Years Ended December 31,
	2012			2011
Depreciation	$	267		$	237
Deferred grant income		64			(887	)
Net operating loss carry forward		67			1,276
Track maintenance credit		1,016			75
AMT carry forward		—			(75	)
Contribution carry forward		—			58
Accrued casualty and other claims		26			(72	)
Accrued compensated time off and related payroll taxes		(35	)		(15	)
Share based compensation		(23	)		(37	)
Other		(22	)		(36	)
Change in valuation allowance		(293	)		119
	$	1,067		$	643

II-26

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effect of significant items comprising the Company’s net deferred income tax liability as of December 31, 2012 and 2011 are as follows:

	December 31,
	2012			2011
Deferred income tax liabilities - Differences between book and tax basis of property and equipment	$	18,309		$	18,064
Deferred income tax assets:
Deferred grant income		3,685			3,749
Net operating loss carry forwards		—			67
Track maintenance credit carry forwards		3,400			4,416
Alternative minimum tax carry forwards		75			75
Accrued casualty and other claims		138			164
Accrued compensated time off and related payroll taxes		223			188
Share based compensation		211			188
Allowance for doubtful accounts and other		76			76
		7,808			8,923
Valuation allowance		(2,565	)		(2,858	)
Net deferred income tax liability	$	13,066		$	11,999

During 2005 through 2008, the Company generated Railroad Track Maintenance Credits in the cumulative amount of $4,491. These credits may be utilized, subject to certain limitations, to offset the Company’s current federal income tax liability. Any credits not utilized in the year earned may be carried forward to offset future income tax liabilities for a period of 20 years. The Company maintains a valuation allowance on its deferred tax assets when, based upon available evidence such as the reversal of taxable temporary differences and projected future taxable income, it is more likely than not that a portion of its deferred tax assets will not be realized. Based on the Company’s earnings history, projected future taxable income and the expectation of reversing deferred tax liabilities, the Company decreased its valuation allowance. The remaining deferred tax assets are considered realizable; however, they could be reduced in the near term if estimates of future taxable income are reduced or reversing taxable temporary differences are increased.

The Company had $197 of federal net operating loss carry forwards for the year ended December 31, 2011. No federal net operating loss carry forwards remained available as of December 31, 2012.

A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows:

	Years Ended December 31,
	2012			2011
Federal statutory rate		34	%		34	%
Nondeductible expenses, state income taxes, and other		2			3
Change in valuation allowance		(6	)		8
Effective tax rate		30	%		45	%

II-27

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

The Company’s year-end rate of 30% is a significant increase from the September 2012 rate of (20%). The significant increase in tax rate in the fourth quarter is due to changes in our reversal pattern analysis based upon fourth quarter activity, such as the re-instatement of the 45G credit.

The Company is subject to U.S. federal income tax as well as income tax in the Commonwealth of Massachusetts. All U.S. federal income and Massachusetts income tax matters have been concluded through 2009.

12. Commitments and Contingent Liabilities

The Company is a defendant in certain lawsuits relating to casualty losses, many of which are covered by insurance subject to a deductible. The Company believes that adequate provision has been made in the financial statements for any expected liabilities which may result from disposition of such lawsuits.

On January 29, 2002, the Company received a “Notice of Potential Liability” from the United States Environmental Protection Agency (“EPA”) regarding an existing Superfund Site that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these “Notice” letters to potentially responsible parties (“PRPs”) under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). EPA identified the Company as a PRP based on its status as an owner and/or operator because its railroad property traverses the Site. Via these Notice letters, EPA makes a demand for payment of past costs (identified in the letter as $762 thousand) 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 which 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. § 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 thousand to settle this suit in March 2006.

II-28

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

13. Employee Benefit Plans

Defined Contribution Retirement Plans

The Company has a profit-sharing plan (“Plan”) which covers all of its employees who are members of its collective bargaining units. Contributions to the Plan are required in years in which the Company has income from “railroad operations” as defined in the Plan. Contributions are to be equal to at least 10% but not more than 15% of the greater of income before income taxes or income from railroad operations subject to a maximum contribution of $3.5 per eligible employee. Contributions to the Plan may be made in cash or in shares of the Company’s common stock valued at the closing market price for the Company’s stock on the last business day of the year prior to the date the shares are granted. No contribution was made for 2012 or 2011 since the Company did not generate income from railroad operations during those years.

The Company also has a Simplified Employee Pension plan (“SEP”) which covers substantially all employees who are not members of one of its collective bargaining units. Contributions to the SEP are discretionary and are determined annually as a percentage of each covered employee’s compensation up to the maximum amount allowable by law. Contributions accrued under the SEP amounted to $197 in 2012 and $193 in 2011 which, in each year, was less than the maximum amount allowable by law.

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan (“ESPP”) under which eligible employees may purchase registered shares of common stock at 85% of the market price for such shares. An aggregate of 200,000 shares of common stock are authorized for issuance under the ESPP which was established in 1997. Any shares purchased under the ESPP are subject to a two year lock-up. ESPP purchases amounted to 5,041 shares in 2012 and 5,691 shares in 2011.

401(k) Plan

The Company has a 401(k) Plan (“401(k)”) which covers employees who are members of a collective bargaining unit as well as management employees. Contributions to employees’ 401(k) accounts are made from individual employees’ payroll contributions. The Company is not liable for contributions, other than de minimus matching contributions for employees subject to collective bargaining agreements.

14. GATX Corporation

On January 10, 2008, the Company entered into an agreement with GATX Corporation (“GATX”) whereby GATX acquired 239,523 (approximately 4.99%) newly-issued shares of the Company’s common stock for approximately $5,500 ($23 per share) to be utilized for capital improvements to enhance the Company’s railroad lines. The parties also entered into an Exclusive Railcar Supply Agreement whereby GATX has the exclusive right to supply the Company with railcars for certain rail traffic on market-competitive terms. In addition, the Company exchanged 72 of its mill gondolas for 137 open-top hoppers owned by GATX, which exchange was accounted for as a purchase. The Company agreed to lease the 72 mill gondolas from GATX under operating leases for a period of up to 7 years at a minimum annual rental of $248 (adjusted to $163 for 2013) through January 2015. During 2012, the Company and GATX amended the lease with respect to 20 of the mill gondolas which the Company returned to GATX. All other terms and conditions remained the same and, as of December 31, 2012, the total remaining obligation under this lease was $340. Rental expense of $219 and $248 was incurred under this lease in 2012 and 2011, respectively. In addition to the lease of the gondolas, which is a fixed-rent, fixed-term lease, the Company also entered into a 7 year “per-diem” lease of 200 auto carrying railcars, for which the Company is obligated to remit car-hire revenues only. In 2012 and 2011, the car-hire earned from other railroads and remitted to GATX was approximately $3,700 and $3,000, respectively.

In March 2011, the Company entered into a three year lease for 2 six-axle EMD SD-60 locomotives for approximately $186 per annum.

Subsequent to year end, the Company entered into a lease/storage arrangement for 8 high-sided gondolas, whereby the Company pays GATX for its sporadic use on a per trip basis only.

II-29

PROVIDENCE AND WORCESTER RAILROAD COMPANY

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012, 2011

(Dollars in Thousands Except Per Share Amounts)

15. Preferred Stock

The Company’s $50 par value preferred stock is convertible at any time at the option of the holder of the preferred stock into 100 shares of common stock. The noncumulative stock dividend is fixed by the Company’s Charter at an annual rate of $5.00 per share, out of funds legally available for the payment of dividends.

The holders of preferred stock and holders of common stock are entitled to one vote per share, voting as separate classes, upon matters voted on by shareholders. The holders of common stock elect one-third of the Board of Directors; the voters of preferred stock elect the remainder of the Board.

16. Subsequent Event

Subsequent to year end, the Company and an unrelated third party entered into a 25 year extension of a license agreement. The Company received $926 in January 2013 for the 25 year term. Revenues under this agreement will be recognized by the Company ratably over the 25 year term.

II-30

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Management’s Report Regarding the Effectiveness of Disclosure Controls and Procedures

Our management with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a–15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.

Management’s Evaluation Regarding the Effectiveness of Internal Controls and Procedures

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate as a result of changes in conditions, or that the degree of compliance with the applicable polices and procedures may deteriorate.

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the Company’s internal control over financial reporting as of the end of the period covered by this annual report based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Such evaluation included reviewing the documentation of the Company’s internal controls, evaluating the design and operating effectiveness of key financial reporting controls and reviewing our overall control environment. Based on such evaluation, the Company’s management has concluded that as of the end of the period covered by this annual report, the Company’s internal control over financial reporting was effective.

Management’s annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.

II-31

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None.

II-32

PART III

Item 10. Directors, Executive Officers and Corporate Governance

For information with respect to the directors of the Company, see pages 2 through 8 and 10 of the Company’s definitive proxy statement for the 2013 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		80	Chairman	1980
P. Scott Conti		55	President	2005
David F. Fitzgerald		62	Vice President	2005
Frank K. Rogers		51	Vice President	2005
Daniel T. Noreck		41	Treasurer	2010
Marie A. Angelini		54	Secretary	2007

Any officer elected or appointed by the Company’s Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Mr. Eder has served as Chairman of the Company since 1980. Mr. Eder also served as President of the Company from December 1966 until 1980. Mr. Conti served as Vice President from March 1999 until his election as President in 2005. Upon joining the Company in 1988, he served as Engineering Manager through December 1997, and then as Chief Engineer from 1998 until March 1999. Mr. Fitzgerald joined the Company in 1973 and served as Superintendent of Transportation prior to his promotion to Vice President in 2005. Mr. Rogers joined the Company in 1994 and served as Director of Marketing prior to his promotion to Vice President in 2005. Mr. Noreck joined the Company in September 2010 as Treasurer. Ms. Angelini joined the Company in 2005 and served as Assistant General Counsel prior to her promotion to General Counsel and election as Secretary in 2007.

The Company has adopted a written code of ethics that applies to all of its employees including its Chief Executive Officer and its Chief Financial Officer. A copy of the Company’s code of ethics, entitled “Business Conduct Policy,” is available on the Company’s website at http://www.pwrr.com, and/or may be obtained without charge by contacting:

Investor Relations

Attention: Wendy Lavely

Providence and Worcester Railroad Company

75 Hammond Street

Worcester, Massachusetts 01610

(800) 447-2003

Internet Address: http://www.pwrr.com; wlavely@pwrr.com

Item 11. Executive Compensation

See pages 7 and 12 through 14 of the Company’s definitive proxy statement for the 2013 annual meeting of its shareholders, which pages are incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

See page 10 of the Company’s definitive proxy statement for the 2013 annual meeting of its shareholders, which pages are incorporated herein by reference.

III-1

The following table sets forth information as of the end of the Company’s most recently completed fiscal year with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.

	Number of Securities
	To be Issued Upon		Weighted Average
	Exercise of		Exercise Price of		Number of Securities
	Outstanding Options		Outstanding Options		Remaining Available For
Plan Category	Warrants and Rights		Warrants and Rights		Future Issuance
Equity compensation plans approved by security holders		64,547	$	14.00		253,995
Equity compensation plans not approved by security holders		N/A		N/A		181,395
Total		64,547	$	14.00		435,390

Item 13. Certain Relationships and Related Transactions and Director Independence

See pages 2, 5-6, 10 and 14 of the Company’s definitive proxy statement for the 2013 annual meeting of its shareholders which pages are incorporated herein by reference.

Robert Eder, who owns a majority of the Company’s Preferred Shares, with his wife, also controls Capital Properties, Inc. (“CPI”) and its subsidiaries. Pursuant to an agreement between the Company and Getty Oil Company (Eastern Operations), Inc. dated August 6, 1975, the Company has the right to relocate any portion of two pipelines located within the Company’s right of way, in East Providence, Rhode Island. The Company and CPI have supported an extension of Waterfront Drive in East Providence along the Company’s right of way which was completed in the fall of 2012. The State of Rhode Island’s plans for Waterfront Drive’s extension required a relocation of a portion of the pipelines which the Company has the right to relocate. The Rhode Island Department of Transportation (“RIDOT”) entered into an agreement with the Company to reimburse the Company for expenses incurred by us in relocating the pipelines up to a maximum of $159. In May, 2011 CPI’s subsidiary, Capital Terminal Company (“CTC”), entered into an agreement with the Company to act as the Company’s agent to select, direct and supervise all subcontractors subject to the Company’s approval. All invoices from contractors to CTC are submitted to the Company for approval along with a check from CTC in the amount of the invoice. The Company pays the invoice out of the funds provided by CTC. The Company is then obligated to submit the invoices to RIDOT for reimbursement under its agreement with RIDOT. When the Company receives reimbursement from RIDOT, it is obligated to pay that amount to CTC. Any shortfall in RIDOT’s reimbursement is borne by CTC. During 2011, the Company received invoices of $219, which were paid by the Company to the subcontractors out of funds received from CTC. CTC, through subcontractors, completed the pipeline relocation during 2011. At December 31, 2011, the Company recorded a receivable in the amount of $219 from RIDOT and has recorded corresponding accounts payable to CTC in the same amount. The Company is obligated to CTC only to the extent it receives payment from RIDOT. At December 31, 2012, the Company has remaining a receivable from RIDOT and a payable to CTC in the amount of $22.

Item 14. Principal Accounting Fees and Services

See pages 14-15 of the Company’s definitive proxy statement for the 2013 annual meeting of its shareholders which pages are incorporated herein by reference.

III-2

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)	(1)	All financial statements: An index of financial statements is included in Item 8, page II-9 of this annual report.
	(3)	Listing of Exhibits.
		3.1	Articles of Incorporation, as amended, incorporated by reference from the Company’s Registration Statement on Form S-1, Registration No. 333-46433
		3.2	By-laws, as amended, incorporated by reference from the Company’s Registration Statement on Form S-8, Registration No. 333-02975
		10.1	Business Loan Agreement dated June 25, 2009 between the Registrant and Commerce Bank & Trust Company, incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009
		10.2	Common Stock Purchase Agreement dated January 10, 2008 between the Registrant and GATX Corporation, incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008
		10.3	Exclusive Railcar Supply Agreement dated January 10, 2008 between the Registrant and GATX Corporation, incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008
		10.4	Registration Rights Agreement dated January 10, 2008 between the Registrant and GATX Corporation, incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008
		10.5	Non-Qualified Stock Option Plan (incorporated by reference from the Company’s Registration Statement on Form S-1 Registration No. 33-46433)
		23	Consent of Independent Registered Public Accounting Firm.
		31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		32	Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		101†	The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on March 22, 2013, formatted in eXtensible Business Reporting Language:
			Balance Sheets as of December 31, 2012 and 2011;
			Statements of Operations for the years ended December 31, 2012 and 2011;
			Statements of Shareholders’ Equity for the years ended December 31, 2012 and 2011;
			Statements of Cash Flows for the years ended December 31, 2012 and 2011; and
			Notes to Financial Statements.
		†	This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C.78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Company specifically incorporates it by reference.

IV-1

(b) Not applicable.

(c) Exhibits (annexed).

IV-2

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PROVIDENCE AND WORCESTER RAILROAD COMPANY

                        /s/ Robert H. Eder                        

By Robert H. Eder

Chief Executive Officer

Dated: March 22, 2013

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 Robert H. Eder	Chairman of the Board (Chief Executive Officer)		March 22, 2013
/s/ P. Scott Conti P. Scott Conti	President and Director (Chief Operating Officer)		March 22, 2013
/s/ Daniel T. Noreck Daniel T. Noreck	Treasurer (Principal financial officer and principal accounting officer)		March 22, 2013
/s/ Richard W. Anderson Richard W. Anderson	Director		March 22, 2013
/s/ Frank W. Barrett Frank W. Barrett	Director		March 22, 2013
/s/ John J. Healy John J. Healy	Director		March 22, 2013
/s/ James C. Garvey James C. Garvey	Director		March 22, 2013

IV-3