SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] 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 0-493
CONSUMERS WATER COMPANY
(Exact name of registrant as specified in its Charter)
Maine 01-0049450
- ------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
Three Canal Plaza, Portland, ME 04101
- ------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (207) 773-6438
- ----------------------------------------------
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
The number of common shares of Consumers Water Company outstanding as of
October 23, 1996, was 8,684,331.
CONSUMERS WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
PART I ITEM I
----------------
September 30, December 31,
1996 1995
--------------- ------------
(Unaudited)
ASSETS
Property, Plant and Equipment, at cost:
Water utility plant, in service $464,159 $436,248
Less - Accumulated depreciation 81,205 74,414
-------- --------
382,954 361,834
-------- --------
Other subsidiaries 2,366 2,197
Less - Accumulated depreciation 1,517 1,307
-------- --------
849 890
-------- --------
Construction work in progress 9,632 18,067
-------- --------
Net property, plant and equipment 393,435 380,791
-------- --------
Investments, at cost 1,602 1,762
-------- --------
Current Assets:
Cash and cash equivalents 2,207 2,576
Accounts receivable, net of reserves
of $1,017 in 1996 and $848 in 1995 13,399 12,719
Unbilled revenue 8,171 7,014
Inventories 2,839 2,833
Prepayments and other 2,624 6,143
-------- --------
Total current assets 29,240 31,285
-------- --------
Other Assets:
Funds restricted for construction activity 298 287
Deferred charges and other assets 17,172 17,959
-------- --------
17,470 18,246
-------- --------
$441,747 $432,084
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CONSUMERS WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
SHAREHOLDERS' INVESTMENT
AND LIABILITIES
Capitalization:
Common Stock, $1 par value
Authorized: 15,000,000 shares
Issued: 8,681,448 shares in 1996 and
8,494,686 in 1995 $8,681 $8,495
Amounts in excess of par value 74,824 71,718
Reinvested Earnings 25,102 25,786
-------- --------
Common shareholders' investment 108,607 105,999
Preferred shareholders' investment 1,054 1,069
Minority interest 2,345 2,355
Long-term debt 161,388 162,161
-------- --------
Total capitalization 273,394 271,584
-------- --------
Contributions in Aid of Construction 70,480 67,439
-------- --------
Current Liabilities:
Notes payable 21,395 11,830
Sinking fund requirements and current
maturities 700 707
Accounts payable 4,548 6,060
Accrued taxes 4,483 7,611
Accrued interest 3,324 3,609
Accrued expenses and other 12,817 13,632
-------- --------
Total current liabilities 47,267 43,449
-------- --------
Commitments and Contingencies
Deferred Credits:
Customers' advances for construction 22,468 22,507
Deferred income taxes 23,392 22,260
Unamortized investment tax credits 4,746 4,845
-------- --------
50,606 49,612
-------- --------
$441,747 $432,084
======== ========
Book Value Per Share of Common Stock $ 12.51 $ 12.48
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
CONSUMERS WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
For the nine months ended
September 30, September 30,
1996 1995
------------ ------------
(Unaudited)
Revenue and Sales:
Water utility operations $70,397 $66,818
Other operations 10,688 9,709
-------- --------
Operating revenue 81,085 76,527
-------- --------
Costs and Expenses:
Water utility operations 47,990 45,056
Other operations 11,497 10,239
-------- --------
Operating expenses 59,487 55,295
-------- --------
Operating Income 21,598 21,232
-------- --------
Other Income and (Expense):
Interest expense (10,978) (10,366)
Construction interest capitalized 632 802
Preferred dividends and minority interest
of subsidiaries (107) (115)
Other net 313 557
--------- --------
(10,140) (9,122)
--------- --------
Earnings Before Income Taxes and Gains
(Losses) from Sales of Properties 11,458 12,110
Income Taxes 4,026 4,269
--------- ---------
Earnings from Operations:
Before Gains (Losses) from Sales
of Properties 7,432 7,841
Gains (Losses) from Sales of
Properties, Net (309) 1,098
-------- --------
Net Income $7,123 $8,939
-------- --------
Weighted Average Shares Outstanding #8,600 #8,358
Earnings per Common Share:
Before Gains (Losses) from Sales $0.86 $0.93
Total $0.82 $1.06
========= ========
Dividends Declared Per Common Share $0.90 $0.89
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
CONSUMERS WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
For the three months ended
September 30, September 30,
1996 1995
------------- -------------
(Unaudited)
Revenue and Sales:
Water utility operations $25,426 $25,414
Other operations 3,923 3,065
-------- --------
Operating revenue 29,349 28,479
-------- --------
Costs and Expenses:
Water utility operations 16,029 15,116
Other operations 4,261 3,211
-------- --------
Operating expenses 20,290 18,327
-------- --------
Operating Income 9,059 10,152
-------- --------
Other Income and (Expense):
Interest expense (3,803) (3,460)
Construction interest capitalized 236 148
Preferred dividends and minority interest
of subsidiaries (47) (48)
Other net 156 154
--------- ---------
(3,458) (3,206)
Earnings Before Income Taxes and Gains from --------- ---------
Sales of Properties 5,601 6,946
Income Taxes 1,942 2,507
--------- ---------
Earnings from Operations:
Before Gains from Sales of Properties 3,659 4,439
Gains from Sales of Properties, Net - 11
--------- ---------
Net Income $3,659 $4,450
========= =========
Weighted Average Shares Outstanding 8,654 8,416
Earnings per Common Share:
Before Gains from Sales $0.42 $0.53
Total $0.42 $0.53
========= =========
Dividends Declared Per Common Share $0.30 $0.30
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CONSUMERS WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the nine months ended
September 30,
1996 1995
----------- -----------
(Unaudited)
Operating activities:
Net income $7,123 $8,939
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,897 8,215
Deferred income taxes and investment
tax credits 1,589 1,383
(Gains) Losses on sales of properties 309 (1,098)
Changes in assets and liabilities:
Increase in accounts receivable and
unbilled revenue (1,834) (2,765)
Increase in inventories (4) (254)
Decrease in prepaid expenses 3,519 3,217
Decrease in accounts payable and
accrued expenses (4,224) (1,242)
Change in other assets, net of
change in other liabilities (1,084) (3,962)
--------- ---------
Total adjustments 7,168 3,494
--------- ---------
Net cash provided by operating activities 14,291 12,433
--------- ---------
Investing activities:
Capital expenditures (21,726) (24,270)
Payment Received on a note receivable 1,330 -
(Increase) Decrease in funds restricted for
construction activity (11) 2,220
Decrease in construction accounts payable (1,551) (857)
Net cash cost of acquisitions (595) (1,300)
Net proceeds from sales of properties 90 4,221
--------- ---------
Net cash used in investing activities (22,463) (19,986)
--------- ---------
Financing activities:
Net borrowings (repayment) of
short-term debt 9,565 (8,031)
Proceeds from issuance of long-term debt - 36,049
Repayment of long-term debt (780) (17,848)
Proceeds from issuance of stock 3,270 2,968
Advances and contributions in aid of
construction, net of repayments 3,833 3,074
Deferred taxes paid by developers on
advances and contributions in aid of
construction (309) (395)
Cash dividends paid (7,776) (7,422)
-------- --------
Net cash provided by financing activities 7,803 8,395
-------- --------
Net increase (decrease) in cash and cash
equivalents (369) 842
Cash and cash equivalents at beginning
of year 2,576 2,906
-------- --------
Cash and cash equivalents at end
of period $2,207 $3,748
======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized) $10,422 $9,880
Income taxes $ 2,087 $2,505
Non-cash investing and financing activities for the period:
Property advanced or contributed $870 $312
The accompanying notes are an integral part of these consolidated financial
statements.
CONSUMERS WATER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
PART I ITEM 1
A. PREPARATION OF FINANCIAL STATEMENTS
The condensed financial statements included herein have
been prepared by the registrant, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Registrant believes that the
disclosures which are made are adequate to make the information presented
not misleading, particularly when read in conjunction with the
financial statements and notes thereto included in the registrants'
latest annual report on Form 10-K. In management's opinion, the
attached interim financial statements reflect all adjustments which
are necessary for a fair statement of the results for the periods
presented. All adjustments made were of a normal and recurring nature.
B. EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of
shares and common share equivalents actually outstanding during the period.
The effect of employee stock options which are included as common share
equivalents is to increase the number of shares outstanding by 1,860 in
1996 and 21 in 1995.
C. COMMITMENTS AND CONTINGENCIES
In March, 1993, an outside contractor spilled a small amount
of mercury while working at Consumers Ohio Water Company's water
treatment plant. Several areas in an around the plant were contaminated
by the spill, although no mercury contaminated Consumers Ohio's water
supply. The cleanup was completed at a total cost of approximately
$900,000. Consumers Ohio has received $100,000 from its insurer and
is currently seeking recovery of all the cleanup costs from the
contractor. While there can be no assurances to the ultimate outcome
of Consumers Ohio's efforts to obtain such recovery, management believed
it probable that Consumers Ohio would recover cleanup costs from
the contractor and/or the contractor's insurer and deferred the cost
incurred in connection with the spill. Due to the progress of the case and
to the expected cost of the litigation, Consumers Ohio reserved $375,000
in 1995 for possible losses on this claim.
D. REVERSAL OF GAIN ON SALE
In 1994, Consumers Illinois recorded a gain, net of taxes
of $394,000 from the sale of nine acres of land. In 1996, as part of a
rate hearing, the Illinois Commerce Commission ordered Consumers Illinois
to return the gain from this sale to the customers through reduced
rates. Therefore, the gain was reversed in the second quarter of
1996. On July 17, 1996, Consumers Illinois filed in the Appellate
Court for the third District of Illinois a Notice of Appeal and
Petition for Review of the Commission's Order.
PART I ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
The following discussion and analysis sets forth certain factors relative
to the Company's financial condition at September 30, 1996 and the results
of its operations for the three months and nine months then ended as
compared to the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
CONSTRUCTION PROGRAM
Capital construction expenditures totaled $17.9 million, net of
contributions and advances, in the first nine months of 1996,
substantially all of which relates to the Company's utility
subsidiaries. Projects include $3.1 million spent on a new water
treatment plant expansion in Ohio, which is expected to cost $6.3 million
when it is completed in 1996; and many smaller projects throughout the
Company.
The Company expects capital expenditures for 1996 through 1998 to be
$92 million, net of contributions and advances. The capital
construction budget is down from the $103 million for the 1995-1997
planning period as a result of the completion of many of the improvements
required by the Safe Drinking Water Act (SDWA), the Clean Water Act (CWA),
and other regulations.
The Company has started planning a major plant upgrade at
Consumers Pennsylvania Water Company - Shenango Valley Division. This
project is expected to cost approximately $30 million when it is completed
in 2000. This upgrade of one of the Company's older water treatment plants
is required to keep it in compliance with current and future regulations
and to meet expected increases in demand. The project is still in
the planning stage. Several design and financing alternatives for this
project are still being explored.
Several of the Company's water utility subsidiaries have filed or plan to
file cases in their respective jurisdictions for recovery of and return
on capital used to fund their capital expenditure programs. Costs, which
have been prudently incurred in the judgement of the appropriate
public utility commission, have been, and are expected to continue to
be, recognized in rate setting. Given the large rate increases in
recent years, management expects the current increased scrutiny of
rate requests by the state public utility commissions to continue even with
decreasing capital construction budgets. In addition, management believes
that large rate increases may have resulted in increased water
conservation by customers in some of the areas served by the Company's
water utility subsidiaries.
FINANCING AND CAPITALIZATION
The table below shows the cash generated and used by the Company during
the first nine months of 1996.
Cash was generated from:
Dollars in millions
Operations $ 17.9
Common stock issued 3.3
Proceeds from sale of properties .1
Increase in short-term debt 9.5
---------
Total Cash Generated $ 30.8
---------
Cash was used for:
Capital expenditures, net of Contributions
and Advances $ (17.9)
Repayment of long-term debt (.8)
Payment of dividends (7.8)
Net change in working capital (3.6)
Other (1.1)
--------
Total Cash Used $ (31.2)
--------
Decrease in Cash $ ( .4)
========
Water utilities require higher equity ratios to maintain favorable debt
ratings due to the recognition by Standard & Poor's rating system
of additional risk of the SDWA requirements and the uncertainty of
future regulatory treatment of the cost of these requirements. This,
coupled with the size of the Company's capital expenditure program, makes
it likely that the Company will return to the equity market again in the
next few years. The Company anticipates continuing to fund its immediate
cash flow needs with short-term lines of credit until a subsidiary's
short-term debt level is high enough to warrant placement of long-term debt,
generally, in the $4-$6 million range. The Company's subsidiaries had
unused lines of credit available at September 30, 1996 of $64.8 million.
In addition, the Company has two revolving credit agreements totaling
$25 million. These agreements were renewed during the third quarter and
are now committed until mid-1998. At September 30, 1996, $15.8 million was
outstanding, which is recorded as long-term debt on the balance sheet.
These borrowings were used primarily to provide equity infusions to the
subsidiaries. In addition, the Company is using funds generated through its
dividend reinvestment program. The dividend reinvestment program has
generated $2.7 million in new equity through September, 1996. In addition to
short-term debt, the Company's water utility subsidiaries plan to continue
to use tax-exempt,long-term debt financing in appropriate situations.
ACQUISITIONS AND DISPOSITIONS
Over the past five years, the Company has acquired eight water
systems including two small systems in the third quarter of 1996. One of
the systems is located in Maine and has 420 customers. The other is
located in Pennsylvania and has 1,150 customers. The Company currently has
no material acquisitions pending, however, the Company has agreed to
purchase an additional small system in Maine. Management
anticipates continuing the acquisition policy of recent years.
The Company has sold four divisions with customers totaling
approximately 15,000 under the threat of eminent domain in the last
several years. The gain on these sales totaled over $7 million. The
Company is working with the local communities in its service areas in
an effort to prevent future eminent domain proceedings.
OTHER
In March, 1993, an outside contractor spilled a small amount of mercury
while working at Consumers Ohio Water's water treatment plant. Several
areas in and around the plant were contaminated by the spill, although
no mercury contaminated Consumers Ohio Water's water supply. The cleanup
has been completed at a total cost of approximately $900,000. Consumers
Ohio Water has received $100,000 from its insurer and is currently
seeking recovery of all the cleanup costs from the contractor. While
there can be no assurances to the ultimate outcome of Consumers Ohio
Water's efforts to obtain such recovery, management believed it probable
that Consumers Ohio Water would recover cleanup costs from the
contractor and/or the contractor's insurer and, therefore, deferred the
costs incurred in connection with the spill. Due to the progress of the
case to date and to the expected cost of the litigation, Consumers
Ohio reserved $375,000 in 1995 for possible losses on this claim.
RESULTS OF OPERATIONS
Nine Months, 1996 versus Nine Months, 1995
UTILITY REVENUE
Utility revenues increased $3,579,000 or 5.4% compared to the first
nine months of 1995, primarily due to $4.4 million in rate increases offset
by $0.9 million in decreased consumption due primarily to a wet summer in 1996
following a dry summer in 1995. During 1996, the Company has settled six
rate cases allowing for total annual revenues of $2.9 million.
Currently, there are two rate cases pending in which $2.1 million of
additional revenue is sought.
UTILITY OPERATING EXPENSES
Water utility operating expenses increased approximately $2,934,000 or
6.5%. Expenses are up due primarily to increased depreciation of $958,000
and increased property taxes of $778,000 due to increased property balances.
The remainder of the increase is due to increased operating expenses at
the new treatment plant at the Roaring Creek Division in Pennsylvania,
which went on line in May 1995, and normal expense increases.
OTHER OPERATIONS - REVENUE AND EXPENSE
Other operating revenues increased $979,000 or 10.1%, while other
operating expenses increased $1,258,000 or 12.3%. Consumers
Applied Technologies (CAT) has begun work on three new water meter
installation contracts, which are expected to generate $4.9 million in
revenue over the life of the projects. In addition, CAT has increased
sales in corrosion engineering work which provides higher margins than
its meter installation operations. CAT continues to operate at a
loss, however. It lost $619,000 in the first nine months of 1996 compared
to a loss of $455,000 in the first nine months of 1995.
OTHER
Gains (losses) from sale of properties is down $1,407,000 in the first
nine months of 1996 compared to the same period in 1995. In 1996, the
Company reversed the gain previously taken on property sold in Illinois
as a result of action taken by the Illinois Commerce Commission and
recorded small gains from land sales in Pennsylvania and Ohio, while in
1995 the company recorded gains on the sale of the Damariscotta Division
for Consumers Maine Water Company and the sale by Consumers Ohio Water
Company of its Girard Lake Property.
Third Quarter, 1996 versus Third Quarter, 1995
UTILITY REVENUE
Given the seasonality of the Company's business, third quarter results
usually have a significant impact on the Company's profitability.
Although the Company had higher plant balances in 1996, utility revenue
increased only $12,000 for the three months ended September 30, 1996,
compared to the same period in 1995, due primarily to $0.9 million in
rate increases almost entirely offset by a decrease in sales primarily due
to a wet summer in 1996 compared to a dry summer in 1995.
UTILITY OPERATING EXPENSES
Water utility operating expenses increased approximately $913,000 or
6.0% in the three months ended September 30, 1996, as compared to the
same period in 1995. Expenses are up due primarily to increased
depreciation of $329,000, increased property taxes of $335,000 due to
the increased property balances, and other normal increases.
OTHER OPERATIONS - REVENUE AND EXPENSE
Other operating revenues increased $858,000 or 28.0%, while other
operating expenses increased $1,050,000 or 32.7%. CAT has begun work
on three new water installation contracts, which are expected to
generate $4.9 million in revenue over the life of the projects.
Increases in the revenue from the meter installation projects were
offset by lower sales in CAT's environmental engineering business line
in the three months ended September 30, 1996, compared to the same
period in 1995.
PART II
Item 1. Legal Proceedings.
(a) Candlewick Treatment Plant Litigation.
As previously reported in the Company's Form 10-K for the
year ended December 31, 1995, the Candlewick Lake Association,
Inc. (the "Association"), an association of owners of lots within
a lake community development served by the Consumers Illinois
Wastewater Treatment Plant, had filed a complaint alleging that
effluent from the Consumers Illinois Plant had interfered with and
damaged the recreational use of Candlewick Lake. On October 25, 1996,
Consumers Illinois entered into an agreement with the Association in
which the Association agreed to dismiss its action against Consumers
Illinois Water Company without prejudice to refile its suit. Pursuant
to the terms of the settlement agreement, Consumers Illinois agreed to
cooperate in a study of water quality of Candlewick Lake and the
possible change in the discharge point for Consumers Illinois'
Wastewater Treatment Plant.
The settlement agreement with the Association does not
affect the complaint filed in the Circuit Court of the 17th
Judicial Court of Illinois in boone County, Illinois against the
Company and Consumers Illinois Water Company by the State of
Illinois alleging violation of the effluent discharge standards
of various state and federal environmental regulations at the
Candlewick Treatment Plant.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27. Financial Data Schedule is submitted herewith as Exhibit 27.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
September 30, 1996.
SIGNATURES
Pursuant to the requirements 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.
CONSUMERS WATER COMPANY
(Registrant)
10/25/96 /s/ Peter L. Haynes
- ------------------------- -----------------------
Date Peter L. Haynes
Chief Executive Officer
10/25/96 /s/ John F. Isacke
- ------------------------- -----------------------
Date John F. Isacke
Chief Financial Officer
EXHIBIT INDEX
27. Financial Data Schedule is submitted herewith as Exhibit 27.