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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, 2000 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 0-8084
CONNECTICUT WATER SERVICE, INC.
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-0739839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
93 WEST MAIN STREET, CLINTON, CT 06413
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (860) 669-8636
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
NONE NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
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 twelve (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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229,405 of this chapter) 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. ( )
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The aggregate market value of the registrant's voting Common Stock,
computed on the price of such stock at the close of business on March 1, 2001 is
$150,330,000.
5,053,112
Number of shares of Common Stock outstanding, March 1, 2001 (excluding 20,139
common stock equivalent shares)
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Document is Incorporated
Definitive Proxy Statement, dated Part III
March 19, 2001, for Annual Meeting
of Shareholders to be held on
April 20, 2001.
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PART I
ITEM 1. BUSINESS
The Company
The Registrant, Connecticut Water Service, Inc. (referred to as "the Company",
"we" or "our") was organized in 1956 and is the parent company of three
regulated water utility companies, which generate approximately 99% of our
consolidated net income. We supply water to over 70,000 customers, or 246,000
people, in 39 towns throughout the State of Connecticut. The Company and its
subsidiaries collectively represent the largest domestic investor-owned water
system in Connecticut measured by operating revenues and utility plant
investment. In addition to our core regulated water business we offer related
services on a contract basis to other water utilities, communities, businesses
and homeowner associations through a number of unregulated subsidiary companies
and through a joint venture formed in 1999 with a well pump service provider.
These services range from one-time contracts for a particular service to
long-term arrangements for water and wastewater system operation and management.
We are also engaged in selling and/or donating our limited excess real estate
holdings that are not necessary for our business or to protect our water
sources.
Our mission is to provide high quality water service to our customers at a fair
return to our stockholders while maintaining a work environment that attracts,
retains and motivates our employees to achieve a high level of performance.
Our corporate headquarters are located at 93 West Main Street, Clinton,
Connecticut 06413. Our telephone number is 860.669.8636, and our Internet
address is www.ctwater.com.
Our Regulated Business
Our business is subject to seasonal fluctuations and weather variations. The
demand for water is generally greater during the warmer months than the cooler
months due to customers' high water consumption related to cooling systems and
various outdoor uses such as private and public swimming pools and lawn
sprinklers. Demand will vary with rainfall and temperature levels, from year to
year and season to season, particularly during the warmer months.
In general, the profitability of the water utility industry is largely dependent
on the timeliness and adequacy of rates allowed by utility regulatory
commissions. In addition, profitability is affected by numerous factors over
which we have little or no control, such as costs to comply with environmental
and water quality regulations. Inflation and other factors also impact costs for
construction, materials and personnel related expenses.
Costs to comply with environmental and water quality regulations are
substantial. Since the 1974 enactment of the Safe Drinking Water Act we have
spent approximately $50,000,000 in constructing facilities and conducting
aquifer mapping necessary to comply with the requirements of the Safe Drinking
Water Act, and other federal and state regulations, of which $10,647,000 was
expended in the last five years. We are currently in compliance with current
regulations, but the regulations are subject to change. The costs to comply with
future changes
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in state or federal regulations, which could require us to modify current
filtration facilities and/or construct new ones, or to replace any reduction of
the safe yield from any of our current sources of supply, could be substantial.
Our water companies derive their rights and franchises to operate from special
state acts that are subject to alteration, amendment or repeal and do not grant
us exclusive rights to our service areas. Our franchises are free from
burdensome restrictions, are unlimited as to time, and authorize us to sell
potable water in all the towns we now serve. There is the possibility that the
state could revoke our franchises and allow a governmental entity to take over
some or all of our systems. From time to time such legislation is contemplated.
The rates we charge our water customers are established under the jurisdiction
of and are approved by a state regulatory agency. It is our policy to seek rate
relief as necessary to enable us to achieve an adequate rate of return. The
following table shows information related to each of our water companies' most
recent general rate filing.
Date of Last Allowed Allowed
Rate Return on Equity Return on
Decision Rate Base
Connecticut Water 1991 12.7% 10.74%
Crystal 1995 12.35% 10.16%
Gallup 1994 N/A* N/A*
* Gallup's rates were based on its net income requirement, not on a rate of
return methodology.
Our Water System(s)
Our water infrastructure consists of 27 noncontiguous water systems, all in the
State of Connecticut. Our system, in total, consists of 1,120 miles of water
main and reservoir storage capacity of 6.9 billion gallons. The safe dependable
yield from our 29 active well fields and 19 reservoirs is approximately 45
million gallons per day. Water sources vary among the individual systems but
overall approximately 45% of the total dependable yield comes from reservoirs
and 55% from wells. Our sources of water supply are more than adequate to meet
the present demand. Except for requests for voluntary conservation in the
summers of 1988, 1995 and 1999, no restrictions on water use have been required
in over 25 years.
We supply water, and in most cases, fire protection to all or portions of 39
towns in Connecticut. The following table lists the customer count, operating
revenues and customer water consumption for each of our water companies as of
December 31, 2000.
Number of Water Customer Water
Water Company customers Revenues Consumption
($000's) (millions of gallons)
Connecticut Water Company 65,778 $ 39,047 5,613
Crystal Water Company 3,491 1,864 390
Gallup Water Service 1,175 601 79
Total 70,444 $ 41,512 6,082
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The following table breaks down the above total figures by customer class:
Number of Water Customer Water
Customer Class customers Revenues Consumption
($000's) (millions of gallons)
Residential 62,570 $26,056 4,298
Commercial 4,457 4,920 1,019
Industrial 363 1,905 483
Public Authority 531 1,294 282
Fire Protection 1,221 6,884 0
Other (including non-
metered accounts) 925 453 0
Total 70,444 $ 41,512 6,082
Disposition of Property
We have established a policy of disposing of various small, discrete parcels of
land over the next several years. This excess land, which is no longer required
for water supply purposes, totals less than 600 acres as of December 31, 2000.
We must comply with many regulatory restrictions before we can dispose of public
water company property. There is a movement in Connecticut to protect land for
open space purposes. In the extreme case, this movement could lead to a
moratorium on all water company land sales. Legislation was passed in 2000
creating a new Connecticut corporate tax credit, which makes the donation of our
excess land for protected open space purposes potentially more economically
beneficial than a sale of the land. We have taken advantage of the new tax
credit by donating 105 acres of land to the Town of Naugatuck in 2000 and 135
acres of land to the Town of Middlebury in January 2001. The new tax credit, in
combination with federal and state charitable contribution deductions, resulted
in after-tax gains from these transactions of approximately $475,000 and
$1,100,000 in 2000 and January 2001, respectively.
Competition
Our water companies face competition, presently not material, from a few private
water systems operating within, or adjacent to, their franchise areas and from
municipal and public authority systems whose service areas in some cases overlap
portions of Connecticut Water's franchise areas.
Employees
As of December 31, 2000, we employed a total of 172 persons. Our employees are
not covered by collective bargaining agreements. We believe that our relations
with our employees are good.
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Expansion into Massachusetts
In February 2001 we acquired the Barnstable Holding Company ("Barnstable") which
is the parent company of the 7,200 customer Barnstable Water Company located in
Barnstable, Massachusetts. In addition to owning a majority interest in the
water company, Barnstable owns a majority interest in BARLACO, a real estate
company owning approximately 100 acres of residential and commercial land in
Hyannis and Barnstable, Massachusetts. The transaction was valued at
approximately $6.5 million dollars and will be accounted for using the `pooling
of interests' accounting method. The Town of Barnstable and the Hyannis Fire
District have notified Barnstable that they are considering the possibility of
acquiring the Barnstable Water Company and BARLACO.
ITEM 2. PROPERTIES
The properties of our water companies consist of land, easements, rights
(including water rights), buildings, reservoirs, standpipes, dams, wells, supply
lines, treatment plants, pumping plants, transmission and distribution mains and
conduits, mains and other facilities and equipment used for the collection,
purification, storage and distribution of water. Substantially all of the
properties owned by our Connecticut Water and Crystal Water companies are
subject to liens as security for debt. The net utility plant balances of the
water companies at December 31, 2000 are as follows:
Net Utility Plant
(000's)
Connecticut Water $176,389
Crystal 8,310
Gallup 2,272
Total $186,971
The size of each company's system(s) in terms of miles of mains is as follows:
Miles of Transmission
and Distribution Water
Mains
Connecticut Water 1,037
Crystal 66
Gallup 17
Total 1,120
We believe that our properties are maintained in good condition and in
accordance with current standards of good waterworks industry practice.
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ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings. Although the results of legal
proceedings cannot be predicted with certainty, there are no pending legal
proceedings to which we or any of our subsidiaries are a party or to which any
of our properties is the subject that presents a reasonable likelihood of a
material adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the NASDAQ exchange under the symbol "CTWS". Our
quarterly high and low stock prices as reported by NASDAQ and the cash dividends
we paid during 2000 and 1999 are listed as follows:
PRICE
-------------------- DIVIDENDS
Period HIGH LOW PAID*
------- ------- ---------
2000
First Quarter $34.000 $27.000 $.29666
Second Quarter 31.000 25.500 $.29666
Third Quarter 35.250 26.750 $.30000
Fourth Quarter 32.750 28.000 $.30000
1999
First Quarter $27.750 $23.750 $.29333
Second Quarter 29.250 19.000 $.29333
Third Quarter 37.000 28.500 $.29666
Fourth Quarter 37.000 27.875 $.29666
* Historic (Excludes the subsequent effect of the 1999 Gallup and Crystal
mergers accounted for under the "pooling of interests" accounting method.)
As of March 1, 2001 there were approximately 5,000 holders of record of our
common stock.
We presently intend to pay quarterly cash dividends in the future on March 15,
June 15, September 17 and December 17 subject to our earnings and financial
condition, regulatory requirements and other factors our Board of Directors may
deem relevant.
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ITEM 6. SELECTED FINANCIAL DATA
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
(1999 - 1990 Restated)
SUPPLEMENTAL INFORMATION (UNAUDITED)
(Thousands of dollars except where indicated)
Years Ended December 31, 2000 1999 1998 1997 1996
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SELECTED FINANCIAL DATA
INCOME
Operating Revenues $ 41,512 $ 42,624 $ 40,303 $ 40,917 $ 41,013
Operating Expenses $ 30,353 $ 31,397 $ 29,543 $ 30,060 $ 30,274
Operating Income $ 11,159 $ 11,227 $ 10,760 $ 10,857 $ 10,739
Interest and Debt Expense $ 4,541 $ 4,526 $ 4,606 $ 4,602 $ 4,286
Net Income Applicable to Common Stock $ 7,925 $ 7,489 $ 7,159 $ 7,027 $ 6,884
Cash Common Stock Dividends Paid $ 5,822 $ 5,538 $ 5,401 $ 5,324 $ 5,182
Dividend Payout Ratio 73% 74% 75% 76% 75%
Weighted Average Common Shares Outstanding 4,852,694 4,845,188 4,835,721 4,824,990 4,796,577
Basic Earnings Per Average Common Share $ 1.63 $ 1.55 $ 1.48 $ 1.46 $ 1.44
Number of Shares Outstanding at Year End 4,852,667 4,847,031 4,836,856 4,828,207 4,818,696
ROE on Year End Common Equity 12.2% 12.0% 11.9% 12.0% 12.2%
Declared Common Dividends Per Share* $ 1.193 $ 1.180 $ 1.167 $ 1.153 $ 1.133
* Not restated for subsequent acquisitions
accounted for under the "pooling-of-interests"
accounting method.
BALANCE SHEET
Common Stockholders' Equity $ 64,906 $ 62,576 $ 60,374 $ 58,371 $ 56,530
Long-Term Debt $ 64,658 $ 65,399 $ 65,611 $ 58,056 $ 58,034
Preferred Stock (Consolidated, Excluding
Current Maturities) $ 772 $ 772 $ 772 $ 772 $ 772
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Total Capitalization $ 130,336 $ 128,747 $ 126,757 $ 117,199 $ 115,336
Stockholders' Equity (Includes
Preferred Stock) 50% 49% 48% 50% 50%
Long-Term Debt 50% 51% 52% 50% 50%
Net Utility Plant $ 186,971 $ 181,342 $ 175,723 $ 172,081 $ 162,186
Book Value - Per Common Share $ 13.37 $ 12.91 $ 12.48 $ 12.09 $ 11.73
OPERATING DATA
REVENUE CLASS
Residential $ 26,056 $ 27,077 $ 25,495 $ 25,816 $ 25,888
Commercial 4,920 5,160 4,820 4,890 4,931
Industrial 1,905 1,850 1,747 1,962 1,960
Public Authority 1,294 1,374 1,208 1,218 1,215
Fire Protection 6,884 6,788 6,660 6,698 6,720
Other (including non-metered accounts) 453 375 373 333 299
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Total Operating Revenues $ 41,512 $ 42,624 $ 40,303 $ 40,917 $ 41,013
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Number of Customers (Average) 70,067 68,945 67,855 66,787 65,872
Billed Consumption (Millions of Gallons) 6,082 6,430 6,047 6,049 5,907
Number of Employees 172 169 177 178 180
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
OVERVIEW
Connecticut Water Service, Inc. (the Company) is a non-operating holding
company, whose income is derived from the earnings of its seven wholly owned
subsidiary companies. Approximately 96% of the Company's earnings are
attributable to The Connecticut Water Company, the Company's largest water
utility subsidiary with approximately an additional 3% derived from the
Company's two other regulated water utility companies, The Gallup Water Service,
Incorporated and The Crystal Water Company of Danielson. These three companies
supply water to 70,444 customers in 39 towns throughout the State of
Connecticut. Each of these companies is subject to regulation by the Connecticut
Department of Public Utility Control regarding financial issues, rates, and
operating issues and to various other state and federal regulatory agencies
concerning water quality and environmental standards. In addition to its
regulated utilities, the Company owns four unregulated companies; Chester
Realty, Inc., a real estate company, Connecticut Water Utility Services, Inc.,
which provides contract water and sewer operations and other water related
services, Connecticut Water Emergency Services, Inc., a provider of drinking and
pool water by tanker truck and Crystal Water Utilities Corporation, a holding
company which owns The Crystal Water Company of Danielson and three small rental
properties. These unregulated companies currently generate 1% of the Company's
total earnings.
2000 was the Company's 10th consecutive year of increased earnings and its 31st
year of increased dividend payments.
REGULATORY MATTERS AND INFLATION
The Connecticut Water Company is the Company's largest subsidiary serving over
65,000 of the Company's 70,444 utility customers. Connecticut Water Company's
revenues, like the Company's other two regulated water companies, are based on
regulated rates that are determined in a regulatory rate proceeding. Connecticut
Water's last general rate proceeding was in 1991. The resulting rate decision
granted Connecticut Water a 12.7% allowed return on common equity and a 10.74%
allowed return on rate base.
The Company, like all other businesses, is affected by inflation, most notably
by the continually increasing costs required to maintain, improve and expand its
service capability. The cumulative effect of inflation results in significantly
higher facility replacement costs, which must be recovered from future cash
flows. The ability of the Company's water utility subsidiaries to recover this
increased investment in facilities is primarily dependent upon future rate
increases, which are subject to approval by the Connecticut Department of Public
Utility Control.
We do not presently plan to petition the DPUC for an increase in permanent rates
in 2001. Future economic and financial market conditions, coupled with
governmental regulations and fiscal policy, plus other factors which are
unpredictable and often beyond our control, will influence when we request
revisions to rates charged to our customers.
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OUTLOOK
The Company's profitability is primarily attributable to the sale and
distribution of water, the amount of which is dependent on seasonal weather
fluctuations, particularly during the summer months when water demand will vary
with rainfall and temperature levels.
We are continuing our expansion through acquisitions into 2001. In 2000 we
signed an agreement to purchase the Barnstable Holding Company ("Barnstable") in
a stock-for-stock exchange. Barnstable owns Barnstable Water Company, a
regulated water company serving over 7,200 water customers in Barnstable,
Massachusetts, and BARLACO, Inc., a separate real estate company owning
approximately 100 acres of residential and commercial land in Hyannis and
Barnstable, Massachusetts. This acquisition was completed in February of 2001.
RESULTS OF OPERATIONS
2000 COMPARED WITH 1999
During 2000 the Company acquired Connecticut Water Emergency Services, Inc.
(formerly Pugliese Construction Co., d.b.a. Howie's Water) and accounted for the
acquisition as a "pooling of interests". Financial statements have been restated
to include the results of the acquired company for all periods presented.
Net income applicable to common stock for 2000 increased from that of 1999 by
$436,000, or $.08 per average basic share. The increase in earnings is primarily
due to tax benefits of a 2000 land donation and higher earnings on non-water
sales and services.
The following are the components of the 2000 earnings increase:
- - Net Other Income (Deductions) increased $519,000:
The increase in other income is primarily due to The Connecticut Water
Company's 2000 donation of 104.6 acres of land to the Town of
Naugatuck, Connecticut. This donation resulted in a net after tax gain
of $474,000 resulting from a 50% Connecticut state tax credit in
addition to state and federal charitable contribution tax deductions.
Net non-water sales earnings increased $88,000, or 74% primarily as a
result of our continuing efforts to increase earnings through
unregulated activities. One such endeavor initiated in 2000 was our
Linebacker(SM) maintenance service program. For a small annual cost to
our customers, the Linebacker(SM) program protects them from incurring
large expenses if their service lines should break.
- - Utility Operating Income decreased $68,000:
Operating revenues decreased $1,112,000, or 2.6% in 2000 as compared to
1999. This decrease is due to fluctuations in the summer weather, which
directly affect our customers' water usage. The 1999 summer was
unusually hot and dry while the 2000 summer was cool and rainy. Lower
operation and maintenance expense partially offset the decrease in
operating revenues.
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Operation and Maintenance expenses were reduced $784,000, or 4.4% from
1999 levels due to cost containment efforts. Income taxes, classified
as operating expenses, decreased $591,000 partially due to the
decreased operating income. Depreciation and Taxes other than Income
Taxes (primarily property taxes) increased in total by $370,000
primarily as a result of the increased investment in Utility Plant.
- - Interest and Debt Expense increased $15,000:
The increase in Interest and Debt expense is primarily due to higher
interest rates on interim debt. The average weighted cost of this debt
was 7.0% in 2000 as compared with 6.8% in 1999.
1999 COMPARED WITH 1998
Net income applicable to common stock for 1999 increased from that of 1998 by
$330,000, or $.07 per basic common share, on an increased number of common
shares outstanding due primarily to the following:
- - Operating revenues increased $2,321,000:
- Metered revenues increased $2,191,000 or 6.6% due to customer
growth which increased metered revenues approximately $530,000
or 1.6% and an extremely hot, dry 1999 summer which
significantly increased our customers' water consumption.
- Non-metered revenues increased $130,000 or 1.8% primarily due
to increased Public Fire Protection revenues related to our
infrastructure additions upon which the revenues are based.
- - Operating expenses increased $1,854,000 primarily due to the following:
- Increase in Operation and Maintenance expense primarily due to
increases in both labor and benefit costs
- Increase in Depreciation expense due to higher investment in
utility plant
- Increase in Income Tax Expense primarily due to higher taxable
income
- Increase in Property Tax Expense due to our higher investment
in utility plant
- - Other income (Deductions) decreased $217,000 primarily due to lower
gains on land sales and non water sales earnings.
- - Interest and debt expense decreased $80,000 primarily from lower
average balances of interim bank loans payable outstanding throughout
1999.
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LIQUIDITY AND CAPITAL RESOURCES
Interim bank loans payable at year end 2000 were $1,150,000, approximately
$1,261,000 lower than at the end of 1999.
We consider the current $9,000,000 lines of credit with two banks adequate to
finance any expected short-term borrowing requirements that may arise from
operations during 2001. Interest expense charged on interim bank loans will
fluctuate based on financial market conditions experienced during 2001.
The Board of Directors has approved a $8,000,000 construction budget for 2001,
net of amounts to be financed by customer advances and contributions in aid of
construction. Funds provided by operating activities are expected to finance all
of this construction program given normal weather patterns and related operating
revenue billings. Refer to Note 10, Utility Plant and Construction Program, in
Notes to Consolidated Financial Statements for additional discussion of the
Company's future construction program.
FORWARD LOOKING INFORMATION
This report, including management's discussion and analysis, contains certain
forward looking statements regarding the Company's results of operations and
financial position. These forward looking statements are based on current
information and expectations, and are subject to risks and uncertainties, which
could cause the Company's actual results to differ materially from expected
results.
Our water companies are subject to various federal and state regulatory agencies
concerning water quality and environmental standards. Generally, the water
industry is materially dependent on the adequacy of approved rates to allow for
a fair rate of return on the investment in utility plant. The ability to
maintain our operating costs at the lowest possible level while providing good
quality water service is beneficial to customers and stockholders. Profitability
is also dependent on the timeliness of rate relief, when necessary, and numerous
factors over which we have little or no control, such as the quantity of
rainfall and temperature, industrial demand, financing costs, energy rates, and
compliance with environmental and water quality regulations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Connecticut Water Service, Inc., and
the Notes to Consolidated Financial Statements together with the reports of
Arthur Andersen LLP are included herein on pages F-1 through F-20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
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PART III
ITEM 10. EXECUTIVE OFFICERS OF THE COMPANY
Period Held or Prior Term of Office
Name Age Office Position Expires
M. T. Chiaraluce 58 President, Chief Held position of President 2001 Annual Meeting
Executive Officer and Chairman of since January, 1992 and
the Board position of Chief Executive
Officer since July, 1992
D. C. Benoit 43 Vice President - Finance, Chief Held current position or 2001 Annual Meeting
Financial Officer and Treasurer other executive position with
the company since April, 1996
J. R. McQueen 58 Vice President - Engineering and Held current position or 2001 Annual Meeting
Planning other management or
engineering position with the
Company since October, 1965
T. P. O'Neill 47 Vice President - Operations Held current position or 2001 Annual Meeting
other engineering position
with the Company since
February, 1980
M. P. Westbrook 41 Vice President - Administration Held current position or 2001 Annual Meeting
and Government Affairs other management position
with the Company since
September, 1988
P. J. Bancroft 51 Assistant Treasurer and Controller Held current position or 2001 Annual Meeting
other accounting position
with the Company since
October, 1979
M. G. DiAcri 55 Corporate Secretary Held administrative position 2001 Annual Meeting
with the Company since
February, 1990
There are no family relationships between any of the Directors and Executive
Officers of the Company.
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ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), the information called for by Items 10,
(except for information concerning the executive officers of the Company) 11, 12
and 13 is hereby incorporated by reference from the Company's definitive proxy
statement filed on EDGAR on or about March 19, 2001. Information concerning the
executive officers of the Company is included as Item 10 of this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The report of the Company's management, the report of
independent public accountants and the Company's Consolidated
Financial Statements listed in the Index to Consolidated
Financial Statements on page F-1 hereof are filed as part of
this report, commencing on page F-2.
Page
Index to Consolidated Financial Statements &
Schedule F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the years
Ended December 31, 2000, 1999, and 1998 F-3
Consolidated Balance Sheets at December 31, 2000
and 1999 F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
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2. Financial Statement Schedules:
The following schedules of the Company are included on the attached
pages as indicated:
Page
Report of Independent Public Accountants
on Schedule S-1
Schedule II Valuation and Qualifying Accounts
and Reserves for the years ended December 31,
2000, 1999 and 1998 S-2
All other schedules provided for in the applicable accounting
regulations of the Securities and Exchange Commission have
been omitted because of the absence of conditions under which
they are required or because the required information is set
forth in the financial statements or notes thereto.
3. Exhibits:
Exhibits for Connecticut Water Service, Inc. are in the
Index to Exhibits E-1
Exhibits heretofore filed with the Securities and Exchange
Commission as indicated below are incorporated herein by
reference and made a part hereof as if filed herewith.
Exhibits marked by asterisk (*) are being filed herewith.
(b) Reports on Form 8-K:
On December 6, 2000, the Company filed a Form 8-K dated
December 6, 2000, reporting in Item 5, Other Events, that the
Company had entered into a merger agreement to acquire
Barnstable Holding Company.
On February 28, 2001, the Company filed a Form 8-K dated
February 23, 2001, reporting in Item 5, Other Events, that the
Company had completed the pending merger with Barnstable
Holding Company.
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F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
Index to Consolidated Financial Statements and Schedule F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998 F-3
Consolidated Balance Sheets at December 31, 2000, and 1999 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
Report of Independent Public Accountants on Schedule S-1
Valuation and Qualifying Accounts S-2
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F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Connecticut Water Service, Inc.:
We have audited the accompanying consolidated balance sheets of Connecticut
Water Service, Inc., (a Connecticut corporation) and Subsidiaries as of December
31, 2000 and 1999, and the related consolidated statements of income and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Connecticut Water
Service, Inc., and Subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Hartford, Connecticut
February 9, 2001
18
Connecticut Water Service, Inc. and Subsidiaries
F-3
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Restated) (Restated)
For the Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Revenues $41,512 $42,624 $40,303
-------- ---------- ----------
Operating Expenses
Operation and Maintenance 17,028 17,812 17,241
Depreciation 4,500 4,390 4,133
Income Taxes 4,417 5,008 4,089
Taxes Other Than Income Taxes 4,408 4,187 4,080
-------- ---------- ----------
Total Operating Expenses 30,353 31,397 29,543
-------- ---------- ----------
Utility Operating Income 11,159 11,227 10,760
-------- ---------- ----------
Other Income (Deductions), Net of Taxes
Gain on Property Transactions 534 97 285
Non-Water Sales Earnings 207 119 172
Allowance for Funds Used During Construction 416 435 434
Other 188 175 152
-------- ---------- ----------
Total Other Income (Deductions), Net of Taxes 1,345 826 1,043
-------- ---------- ----------
Interest and Debt Expenses
Interest on Long-Term Debt 3,926 3,943 3,918
Other Interest Charges 396 337 472
Amortization of Debt Expense 219 246 216
-------- ---------- ----------
Total Interest and Debt Expenses 4,541 4,526 4,606
-------- ---------- ----------
Net Income Before Preferred Dividends 7,963 7,527 7,197
Preferred Stock Dividend Requirement 38 38 38
-------- ---------- ----------
Net Income Applicable to Common Stock $ 7,925 $7,489 $ 7,159
======== ========== ==========
Weighted Average Common Shares Outstanding:
Basic 4,853 4,845 4,836
Diluted 4,872 4,856 4,836
Earnings Per Common Share:
Basic $ 1.63 $ 1.55 $ 1.48
Diluted $ 1.63 $ 1.54 $ 1.48
The accompanying notes are an integral part of these consolidated financial
statements.
19
Connecticut Water Service, Inc. and Subsidiaries
F-4
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
(Restated)
December 31, 2000 1999
- ---------------------------------------------------------------------------------------------------
ASSETS
Utility Plant $247,643 $240,122
Construction Work in Progress 8,225 5,804
Utility Plant Acquisition Adjustments (1,256) (1,273)
--------- ----------
254,612 244,653
Accumulated Provision for Depreciation (67,641) (63,311)
--------- ----------
Net Utility Plant 186,971 181,342
--------- ----------
Other Property and Investments 2,986 2,752
--------- ----------
Cash 262 1,020
Accounts Receivable (Less Allowance, 2000 - $197; 1999 - $455) 4,546 5,434
Accrued Unbilled Revenues 3,179 2,805
Materials and Supplies, at Average Cost 756 761
Prepayments and Other Current Assets 112 237
--------- ----------
Total Current Assets 8,855 10,257
--------- ----------
Unamortized Debt Issuance Expense 5,502 5,722
Unrecovered Income Taxes 9,040 8,843
Postretirement Benefits Other Than Pension 953 1,083
Other Costs 1,092 1,031
--------- ----------
Total Deferred Charges and Regulatory Assets 16,587 16,679
--------- ----------
Total Assets $215,399 $211,030
========= ==========
CAPITALIZATION AND LIABILITIES
Common Stockholders' Equity:
Common Stock without Par Value:
Authorized - 7,500,000 Shares - Issued and Outstanding:
2000 - 4,852,667; 1999 - 4,847,031 $ 44,893 $ 44,666
Retained Earnings 20,013 17,910
--------- ----------
Common Stockholders' Equity 64,906 62,576
Preferred Stock 772 772
Long-Term Debt 64,658 65,399
--------- ----------
Total Capitalization 130,336 128,747
--------- ----------
Interim Bank Loans Payable 1,150 2,411
Current Portion Long-Term Debt 205 194
Accounts Payable 5,769 5,163
Accrued Taxes 717 829
Accrued Interest 640 650
Other Current Liabilities 93 61
--------- ----------
Total Current Liabilities 8,574 9,308
--------- ----------
Advances for Construction 16,982 15,994
--------- ----------
Contributions in Aid of Construction 25,409 24,165
--------- ----------
Deferred Federal Income Taxes 17,894 16,743
--------- ----------
Unfunded Future Income Taxes 8,546 8,349
--------- ----------
Long-Term Compensation Arrangements 5,706 5,713
--------- ----------
Unamortized Investment Tax Credits 1,952 2,011
--------- ----------
Commitments and Contingencies
--------- ----------
Total Capitalization and Liabilities $215,399 $211,030
========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
20
Connecticut Water Service, Inc. and Subsidiaries
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Restated) (Restated)
For the Years Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income Before Preferred Dividends $ 7,963 $ 7,527 $ 7,197
-------- -------- --------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation (including $166 in 2000, $140 in 1999,
and $139 in 1998 charged to other accounts) 4,666 4,530 4,272
Change in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable and
Accrued Unbilled Revenues 514 (16) (338)
(Increase) Decrease in Other Current Assets 130 (24) (161)
(Increase) Decrease in Other Non-Current Items 48 275 (86)
Increase (Decrease) in Accounts Payable, Accrued
Expenses and Other Current Liabilities 516 714 249
Increase in Deferred Income Taxes and
Investment Tax Credits, Net 1,092 1,081 1,068
-------- -------- --------
Total Adjustments 6,966 6,560 5,004
-------- -------- --------
Net Cash Provided by Operating Activities 14,929 14,087 12,201
-------- -------- --------
Investing Activities:
Gross Additions to Utility Plant (including
Allowance For Funds Used During Construction of
$428 in 2000, $454 in 1999 and $476 in 1998) (10,376) (10,289) (7,976)
-------- -------- --------
Financing Activities:
Proceeds from Interim Bank Loans 1,150 2,411 1,895
Repayment of Interim Bank Loans (2,411) (1,895) (8,811)
Proceeds from Issuance of Long-Term Debt -- -- 18,018
Reduction of Long-Term Debt Including Current Portion (730) (442) (10,249)
Proceeds from Issuance of Common Stock 227 251 280
Advances, Contributions and Funds from
Others for Construction, Net 2,313 2,098 761
Costs Incurred to Issue Long-Term Debt and Common Stock -- -- (1,091)
Cash Dividends Paid (5,860) (5,576) (5,438)
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities (5,311) (3,153) (4,635)
-------- -------- --------
Net Increase (Decrease) in Cash (758) 645 (410)
Cash at Beginning of Year 1,020 375 785
-------- -------- --------
Cash at End of Year $ 262 $ 1,020 $ 375
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest (Net of Amounts Capitalized) $ 3,937 $ 4,488 $ 3,385
State and Federal Income Taxes $ 3,440 $ 3,660 $ 3,402
The accompanying notes are an integral part of these consolidated financial
statements.
21
F-6
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -The consolidated financial statements include the
accounts of Connecticut Water Service, Inc. an investor-owned holding company
(the Company) and its seven wholly owned subsidiaries, listed below:
The Connecticut Water Company
The Gallup Water Service, Incorporated
Crystal Water Utilities Corporation
The Crystal Water Company of Danielson
Chester Realty, Inc.
Connecticut Water Utility Services, Inc.
Connecticut Water Emergency Services, Inc.
During 2000 the Company acquired the Pugliese Construction Co., d.b.a. Howie's
Water and accounted for the acquisition as a "pooling of interests".
Accordingly, the Company's financial statements have been restated to include
the results of the acquired company for all periods presented. Upon acquisition
the acquired company was renamed "Connecticut Water Emergency Services, Inc."
Connecticut Water, Gallup, and Crystal (our "water companies") are public water
utility companies serving more than 70,400 customers in 39 towns throughout
Connecticut.
Crystal Water Utilities Corporation is a holding company, owning the stock of
Crystal Water Company of Danielson and three small rental properties.
Chester Realty, Inc. is a real estate company whose pretax profits from land
sales are included in the "Gain on Property Transactions", category in the
"Other Income (Deductions)" section of the Consolidated Statements of Income.
Chester's pretax profits from rental of property are included in the "Other
Income (Deductions)" section of the Income Statement in the "Non-Water Sales
Earnings" category.
Connecticut Water Utility Services, Inc. is engaged in water related services
and contract operations. Its earnings are included in the "Non-Water Sales
Earnings" category in the "Other Income (Deductions)" section of the
Consolidated Statements of Income.
Connecticut Water Emergency Services, Inc. is a provider of emergency drinking
water and pool water via tanker trucks. Its net earnings are included in the
"Non-Water Sales Earnings" category in the "Other Income (Deductions)" section
of the Consolidated Statements of Income.
Intercompany accounts and transactions have been eliminated, except those
allocating costs for regulatory purposes between our regulated and non-regulated
companies.
PUBLIC UTILITY REGULATION - Our three water companies are subject to regulation
for rates and other matters by the Connecticut Department of Public Utility
Control (DPUC) and follow accounting policies prescribed by the DPUC. The
Company prepares its financial statements in accordance with accounting
principles generally accepted in the United States which includes the provisions
of Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation," (FAS 71). FAS 71 requires cost-based,
rate-regulated enterprises such as our water companies to reflect the impact of
regulatory decisions in their financial statements. The DPUC, through the rate
regulation process, can create regulatory assets that result when costs are
allowed for ratemaking purposes in a period other than the period in which the
costs would be charged to expense by an unregulated enterprise. The balance
sheets include regulatory assets and liabilities as appropriate, primarily
related to income taxes and postretirement benefits costs. The Company believes,
based on current regulatory circumstances, that the regulatory assets recorded
are probable of recovery and that its use of regulatory accounting is
appropriate and in accordance with the provisions of FAS 71.
USE OF ESTIMATES - The preparation of 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 revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
REVENUES - Generally, water customers are billed quarterly, except larger
commercial and industrial customers, and public fire protection customers, who
are billed monthly. Most customers, except fire protection customers, are
metered. Revenues from metered customers are based on their usage times approved
regulated rates. Public fire protection charges are based on the length and
diameter of the water main and number of hydrants in service. Private fire
protection charges are based on the diameter of the connection to the water
main. Our water companies accrue an estimate for the amount of revenues relating
to sales unbilled at the end of each quarter.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
22
F-7
UTILITY PLANT - Utility plant is stated at the original cost of such property
when first devoted to public service. The difference between the original cost
and the cost to our water companies is charged or credited to utility plant
acquisition adjustments. Utility plant accounts are charged with the cost of
improvements and replacements of property including an allowance for funds used
during construction. Retired or disposed of depreciable plant is charged to
accumulated provision for depreciation together with any costs applicable to
retirement, less any salvage received. Maintenance of utility plant is charged
to expense.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION - Allowance for Funds Used During
Construction (AFUDC) is the cost of funds used to finance the construction of
our water companies' utility plant. Generally, utility plant under construction
is not recognized as part of rate base for ratemaking purposes until facilities
are placed into service, and accordingly, AFUDC is charged to the construction
cost of utility plant. Capitalized AFUDC, which does not represent current cash
income, is recovered through rates over the service lives of the facilities.
In order for certain water system acquisitions made in and after 1995 not to
degrade earnings, The Connecticut Water Company has received DPUC approval to
record AFUDC on certain of its investments in these systems. Through December
31, 2000 The Connecticut Water Company has capitalized approximately $1,541,000
of AFUDC relating to financing these acquisitions.
The allowed rate of return on rate base is used to calculate AFUDC.
DEPRECIATION - Over 99.7% of the Company's depreciable plant is owned by its
three water companies. Depreciation is computed on a straight line basis at
various rates as approved by the DPUC on a company by company basis.
Depreciation allows the utility to recover the investment in utility plant over
its useful life. The overall consolidated company depreciation rates, based on
the average balances of depreciable property, were 2.0% for 2000, 2.1% for 1999
and 2.0% for 1998.
CUSTOMERS' ADVANCES FOR CONSTRUCTION AND CONTRIBUTIONS IN AID OF CONSTRUCTION
Under the terms of construction contracts with real estate developers and
others, our water companies receive advances for the costs of new main
installations. Refunds are made, without interest, as services are connected to
the main, over periods not exceeding fifteen years and not in excess of the
original advance. Unrefunded balances, at the end of the contract period, are
credited to contributions in aid of construction (CIAC) and are no longer
refundable.
INCOME TAXES - The Company provided deferred taxes for all temporary book-tax
differences using the liability method. Under the liability method, deferred
income taxes are recognized at currently enacted income tax rates to reflect the
tax effect of temporary differences between the financial reporting and tax
bases of assets and liabilities. Such temporary differences are the result of
provisions in the income tax law that either require or permit certain items to
be reported on the income tax return in a different period than they are
reported in the financial statements. To the extent such income taxes increase
or decrease future rates, an offsetting regulatory asset or liability has been
recorded in the accompanying consolidated balance sheets.
The Company believes that all deferred income tax assets will be realized in the
future. Approximately $1,200,000 of the December 31, 2000 and $1,300,000 of the
December 31, 1999 unfunded future income taxes are related to deferred Federal
income taxes. The remaining balance of the unfunded future income taxes is
related to deferred State income taxes.
Deferred Federal income taxes consist primarily of amounts that have been
provided for accelerated depreciation subsequent to 1981, as required by Federal
income tax regulations. Deferred taxes have also been provided for temporary
differences in the recognition of certain expenses for tax and financial
statement purposes as allowed by DPUC ratemaking policies.
Connecticut Corporation Business Taxes have been reflected primarily using the
flow-through method of accounting for temporary differences in accordance with
required DPUC ratemaking policies.
MUNICIPAL TAXES - Municipal taxes are expensed over the 12 month period
beginning on July 1 following the lien date, corresponding with the period in
which the municipal services are provided.
OTHER DEFERRED COSTS - In accordance with DPUC ratemaking procedures, costs
which benefit future periods, such as tank painting, are expensed over the
periods they benefit.
UNAMORTIZED DEBT ISSUANCE EXPENSE - The issuance costs of long-term debt,
including the remaining balance of issuance costs on long-term debt issues that
have been refinanced prior to maturity and related call premiums, are amortized
over the respective lives of the outstanding debt, as approved by the DPUC.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
23
F-8
EARNINGS PER SHARE - The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share for the twelve months
ended December 31, 2000, 1999, and 1998.
Twelve Months Ended 2000 1999 1998
- --------------------------------------------------------------------------------
Basic earnings per share $ 1.63 $ 1.55 $ 1.48
Dilutive effect of unexercised stock options -- (.01) --
- -------------------------------------------------------------------------------
Diluted earnings per share $ 1.63 $ 1.54 $ 1.48
- -------------------------------------------------------------------------------
Numerator (in thousands):
- --------------------------------------------------------------------------------
Basic net income $7,925 $7,489 $7,159
Diluted net income $7,925 $7,489 $7,159
Denominator (in thousands):
- --------------------------------------------------------------------------------
Basic weighted average shares outstanding 4,853 4,845 4,836
Dilutive effect of unexercised stock options 19 11 N/A
- --------------------------------------------------------------------------------
Diluted weighted average shares outstanding 4,872 4,856 4,836
- --------------------------------------------------------------------------------
RECLASSIFICATION - Certain reclassifications have been made to conform
previously reported data to the current presentation.
NOTE 2: 2000 POOLING OF INTEREST ACQUISITION
On November 9, 2000 the Company issued 8,237 shares of its common stock in
exchange for all outstanding common stock of Pugliese Construction Co., d.b.a.
Howie's Water Company. The acquired company was renamed Connecticut Water
Emergency Services, Inc. at the time of the merger.
The combined and separate results of Connecticut Water Service and Connecticut
Water Emergency Services during the period preceding and after the merger were
as follows:
(Thousands of dollars) 2000 1999 1998
- --------------------------------------------------------------------------------
Net Income (Loss) Applicable to Common Stock
Connecticut Water Service $7,960 $7,456 $7,136
Connecticut Water Emergency Services (35) 33 23
- --------------------------------------------------------------------------------
Combined Net Income $7,925 $7,489 $7,159
- --------------------------------------------------------------------------------
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
24
F-9
NOTE 3: INCOME TAX EXPENSE
Income Tax Expense is comprised of the following:
(Thousands of dollars) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Classified as Operating Expense $ 3,870 $ 4,322 $ 3,472
Federal Classified as Other Income:
Land Sales 31 52 150
Land Donation (132) -- --
Non-Water Sales 107 78 80
Other (21) (91) (10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Federal Income Tax Expense 3,855 4,361 3,692
- ------------------------------------------------------------------------------------------------------------------------------------
State Classified as Operating Expense 547 686 617
State Classified as Other Income:
Land Sales 7 12 40
Land Donation (526) -- --
Non-Water Sales 25 16 23
Other 6 -- 10
- ------------------------------------------------------------------------------------------------------------------------------------
Total State Income Tax Expense 59 714 690
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense $ 3,914 $ 5,075 $ 4,382
- ------------------------------------------------------------------------------------------------------------------------------------
The components of the Federal and State income tax provisions are:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 2,763 $ 3,280 $ 2,624
State 59 714 690
- ------------------------------------------------------------------------------------------------------------------------------------
Total Current 2,822 3,994 3,314
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes, Net:
Federal
Investment Tax Credit (59) (61) (61)
Capitalized Interest 42 36 32
Depreciation 1,109 1,106 1,097
- ------------------------------------------------------------------------------------------------------------------------------------
Total Deferred Income Taxes, Net 1,092 1,081 1,068
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 3,914 $ 5,075 $ 4,382
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities are categorized as follows on the Consolidated
Balance Sheet:
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred Federal Income Taxes $ 17,894 $ 16,743
Unfunded Future Income Taxes 8,546 8,349
- ------------------------------------------------------------------------------------------------------------------------------------
$ 26,440 $ 25,092
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities are comprised of the following:
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation $ 22,578 $ 21,407
Other 3,862 3,685
- ------------------------------------------------------------------------------------------------------------------------------------
Net deferred income tax liability $ 26,440 $ 25,092
- ------------------------------------------------------------------------------------------------------------------------------------
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
25
F-10
The calculation of Pre-Tax Income is as follows:
2000 1999 1998
- --------------------------------------------------------------------------------
Pre-Tax Income
Net Income Before Preferred Dividends $ 7,963 $ 7,527 $ 7,197
Income Taxes 3,914 5,075 4,382
- --------------------------------------------------------------------------------
Total Pre-Tax Income $11,877 $12,602 $11,579
- --------------------------------------------------------------------------------
In accordance with required regulatory treatment, deferred income taxes are not
provided for certain timing differences. This treatment, along with other items,
causes differences between the statutory income tax rate and the effective
income tax rate. The differences between the effective income tax rate recorded
by the Company and the statutory Federal tax rate are as follows:
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Federal Statutory Income Tax Rate 34.0% 34.0% 34.0%
Tax Effect of Differences:
State Income Taxes Net of Federal Benefit:
State Income Tax Excluding Land Donation Credit 3.3% 3.7% 3.9%
Land Donation Credit (2.9%) -- --
Depreciation 1.8% 1.2% 1.5%
Charitable Contribution - Land Donation (2.1%) -- --
Pension Costs .3% .2% .4%
Debt Refinancing Costs .2% .2% (2.6%)
Non-deductible Merger Costs .6% .4% --
Bad Debt (.9%) .6% .3%
Other (1.3%) -- .3%
- -------------------------------------------------------------------------------------------------------------------
Effective Income Tax Rate 33.0% 40.3% 37.8%
- -------------------------------------------------------------------------------------------------------------------
NOTE 4: COMMON STOCK
The Company has 7,500,000 authorized shares of common stock, no par value. A
summary of the changes in the common stock accounts for the period January 1,
1998 through December 31, 2000, appears below:
Issuance
(Thousands of dollars except share amounts) Shares Amount Expense Total
- -------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1998 (restated) 4,828,207 $45,520 $(1,349) $44,171
Stock Split - fractional shares (587) -- (36) (36)
Stock and equivalents issued through
Performance Stock Program 7,281 211 -- 211
Stock issued to Employee Savings 401(k) Match Plan 1,955 69 -- 69
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 (restated) 4,836,856 45,800 (1,385) 44,415
Stock and equivalents issued through
Performance Stock Program 10,175 251 -- 251
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 (restated) 4,847,031 46,051 (1,385) 44,666
Stock and equivalents issued through
Performance Stock Program 5,636 227 -- 227
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 (1) 4,852,667 $46,278 $(1,385) $44,893
- -------------------------------------------------------------------------------------------------------------------
(1) Includes 5,221 restricted and 16,398 common stock equivalent
shares issued through the Performance Stock Program.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
26
F-11
The Company's Shareholder Rights Plan was authorized by the Board of Directors
on August 12, 1998. Pursuant to the Plan, the Board authorized a dividend
distribution of one Right to purchase one one-hundredth of a share of Series A
Junior Participating Preference Stock of the Company for each outstanding share
of the Company's common stock. The distribution was effected October 11, 1998.
Upon the terms of the Shareholder Rights Plan, each Right will entitle
shareholders to buy one one-hundredth of a share of Series A Junior
Participating Preference Stock at a purchase price of $90, and the Rights will
expire October 11, 2008. The Rights will be exercisable only if a person or
group acquires 15% or more of the Company's common stock or announces a tender
or exchange offer for 15% or more of the Company's common stock. The Board will
be entitled to redeem the Rights at $0.01 per Right at any time before such
acquisition occurs and upon certain conditions after such a position has been
acquired.
Upon the acquisition of 15% or more of the Company's common stock by any person
or group, each Right will entitle its holder to purchase, at the Right's
purchase price, a number of shares of the Company's common stock having a market
value equal to twice the Right's purchase price. In such event, Rights held by
the acquiring person will not be allowed to purchase any of the Company's common
stock or other securities of the Company. If, after the acquisition of 15% or
more of the Company's common stock by any person or group the Company should
consolidate with or merge with and into any person and the Company should not be
the surviving company, or, if the Company should be the surviving company and
all or part of its common stock should be exchanged for the securities of any
other person, or if more than 50% of the assets or earning power of the Company
were sold, each Right (other than Rights held by the acquiring person, which
will become void) will entitle its holder to purchase, at the Right's purchase
price, a number of shares of the acquiring Company's common stock having a
market value at that time equal to twice the Right's purchase price.
The Company may not pay any dividends on its common stock unless full cumulative
dividends to the preceding dividend date for all outstanding shares of Preferred
Stock of the Company have been paid or set aside for payment. All such Preferred
Stock dividends have been paid.
NOTE 5: ANALYSIS OF RETAINED EARNINGS
The summary of the changes in Retained Earnings for the period January 1, 1998
through December 31, 2000, appears below:
(Thousands of dollars) 2000 1999 1998
- --------------------------------------------------------------------------------
Balance at Beginning of Year (restated) $17,910 $15,959 $14,200
Income Before Preferred Dividends 7,963 7,527 7,197
- --------------------------------------------------------------------------------
25,873 23,486 21,397
- --------------------------------------------------------------------------------
Dividends Declared:
Cumulative Preferred, Series A, $.80 Per Share 12 12 12
Cumulative Preferred, Series $.90, $.90 Per Share 26 26 26
Common Stock:
2000 $1.20 Per Share 5,822 -- --
1999 $1.15 Per Share -- 5,538 --
1998 $1.12 Per Share -- -- 5,400
- --------------------------------------------------------------------------------
5,860 5,576 5,438
- --------------------------------------------------------------------------------
Balance at End of Year $20,013 $17,910 $15,959
- --------------------------------------------------------------------------------
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
27
F-12
NOTE 6: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each of the following financial instruments.
CASH - The carrying amount approximates fair value.
LONG-TERM DEBT - The fair value of the Company's fixed rate long-term debt is
based upon borrowing rates currently available to the Company. As of December
31, 2000 and 1999, the estimated fair value of the Company's long-term debt was
$62,588,000 and $57,324,000, respectively, as compared to the carrying amounts
of $64,658,000 and $65,399,000, respectively.
The fair values shown above have been reported to meet the disclosure
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Values of Financial Instruments" and do not purport to
represent the amounts at which those obligations would be settled.
NOTE 7: LONG-TERM DEBT
Long-Term Debt at December 31, consisted of the following:
(Thousands of dollars) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
The Connecticut Water Company
First Mortgage Bonds:
5.875% Series R, Due 2022 $14,670 $14,800
6.65% Series S, Due 2020 8,000 8,000
5.75% Series T, Due 2028 5,000 5,000
5.3% Series U, Due 2028 4,550 4,550
6.94% Series V, Due 2029 12,050 12,050
- -------------------------------------------------------------------------------------------------------------------
44,270 44,400
Unsecured Water Facilities Revenue Refinancing Bonds
5.05% 1998 Series A, Due 2028 9,770 10,000
5.125% 1998 Series B, Due 2028 7,830 8,000
- -------------------------------------------------------------------------------------------------------------------
17,600 18,000
Other
5.5% Unsecured Promissory Note, Due 2002 71 103
- -------------------------------------------------------------------------------------------------------------------
Total Connecticut Water Company 61,941 62,503
Crystal Water Utilities Corporation
8.0% Cargill Bank (formerly New London Trust), Due 2017 130 133
- -------------------------------------------------------------------------------------------------------------------
Crystal Water Company of Danielson
7.82% Connecticut Development Authority, Due 2020 507 518
8.0% Cargill Bank (formerly New London Trust), Due 2011 2,170 2,298
- -------------------------------------------------------------------------------------------------------------------
Total Crystal 2,677 2,816
Chester Realty
6% Note Payable, Due 2006 115 141
- -------------------------------------------------------------------------------------------------------------------
Total Connecticut Water Service, Inc. 64,863 65,593
Less Current Portion (205) (194)
- -------------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $64,658 $65,399
- -------------------------------------------------------------------------------------------------------------------
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
28
F-13
Principal payments required for years 2001 - 2005 are as follows:
(Thousands of dollars)
2001 - $205
2002 - $215
2003 - $214
2004 - $221
2005 - $251
Substantially all utility plant is pledged as collateral for long-term debt.
There are no mandatory sinking fund payments required on Connecticut Water
Company's outstanding First Mortgage Bonds or the Unsecured Water Facilities
Revenue Refinancing Bonds. However, the Series R First Mortgage Bonds and the
1998 Series A & B Unsecured Water Facilities Revenue Refinancing Bonds provide
for an estate redemption right whereby the estate of deceased bondholders or
surviving joint owners may submit bonds to the Trustee for redemption at par
subject to a $25,000 per individual holder and a 3% annual aggregate limitation.
The call price of the Series R bonds will reduce annually until the year 2003,
when the call price becomes 100%. Series R bonds are callable for redemption at
101.5% from September 1, 2000 through August 31, 2001, then at 101.0% from
September 1, 2001 through August 31, 2002.
The other outstanding bonds may be initially called for redemption by the
Company at the following dates and prices - Series S, December 15, 2003 at 102%;
Series T, July 1, 2003 and Series U, September 1, 2003 at 100% plus accrued
interest to the date of redemption; Series V, January 1, 2004 at 103.5%, 1998
Series A & B Unsecured Water Facilities Revenue Refinancing Bonds, March 1, 2008
at 100% plus accrued interest.
The Crystal Water Company of Danielson's loan with Cargill Bank (formerly New
London Trust), with a final maturity date of February 2011; contains a
prepayment premium of 1% of the outstanding balance during the fifth year
(February 2001) through and including the seventh year (February 2003) of the
Loan.
NOTE 8: PREFERRED STOCK
The Company's Preferred Stock at December 31, consisted of the following:
(Thousands of dollars) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Cumulative Series A Voting, $20 Par Value; Authorized Issued and
Outstanding 15,000 Shares $300 $300
Cumulative Series $.90 Non-Voting, $16 Par Value; Authorized 50,000
Shares, Issued and Outstanding 29,499 Shares 472 472
- -------------------------------------------------------------------------------------------------------------------
Total $772 $772
- -------------------------------------------------------------------------------------------------------------------
All or any part of any series of either class of the Company's issued Preferred
Stock may be called for redemption by the Company at any time. The per share
redemption prices of the Series A and Series $.90 Preferred Stock, if called by
the Company, are $21.00 and $16.00, respectively.
The Company is authorized to issue 400,000 shares of an additional class of
Preferred Stock, $25 par value, the general preferences, voting powers,
restrictions and qualifications of which are similar to the Company's existing
Preferred Stock. No shares of the $25 par value Preferred Stock have been
issued.
The Company is also authorized to issue 1,000,000 shares of $1 par value
Preference Stock, junior to the Company's existing Preferred Stock in rights to
dividends and upon liquidation of the Company. 150,000 of such shares have been
designated as "Series A Junior Participating Preference Stock". Pursuant to the
Shareholder Rights Plan, described in Note 4, the Company keeps reserved and
available for issuance one one-hundredth of a share of Series A Junior
Participating Preference Stock for each outstanding share of the Company's
common stock.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
29
F-14
NOTE 9: BANK LINES OF CREDIT
The Company has a total of $9,000,000 in lines of credit provided by two banks.
The available lines of credit as of December 31, 2000 was $7,850,000. Bank
commitment fees were approximately $24,750, $25,000, and $19,000 in 2000, 1999,
and 1998 respectively, on the lines of credit.
At December 31, 2000 and 1999, the weighted average interest rates on short-term
borrowings outstanding were 6.97% and 6.81%, respectively.
NOTE 10: UTILITY PLANT AND CONSTRUCTION PROGRAM
The components of utility plant and equipment at December 31, are as follows:
(Thousands of dollars) 2000 1999
- --------------------------------------------------------------------------------
Source of Supply $ 21,210 $ 20,805
Pumping 17,318 16,922
Water Treatment 43,574 42,864
Transmission and Distribution 150,043 144,417
General (including intangible) 15,017 14,505
Held for Future Use 481 609
- --------------------------------------------------------------------------------
Total $247,643 $240,122
- --------------------------------------------------------------------------------
The amounts of depreciable utility plant at December 31, 2000 and 1999 included
in total utility plant were $227,680,000 and $219,530,000, respectively.
Our water companies are engaged in continuous construction programs. Estimated
annual capital expenditures, net of amounts financed by customer advances and
contributions in aid of construction, are expected to be approximately
$8,000,000 during 2001, $8,250,000 during 2002, and $8,500,000 in 2003. During
the period 2004 to 2005, construction expenditures for routine improvements to
the water distribution system are expected to be approximately $5,000,000 each
year.
NOTE 11: TAXES OTHER THAN INCOME TAXES
Taxes Other than Income Taxes consist of the following:
(Thousands of dollars) 2000 1999 1998
- --------------------------------------------------------------------------------
Municipal Property Taxes $3,860 $3,644 $3,525
Payroll Taxes 548 543 555
- --------------------------------------------------------------------------------
Total $4,408 $4,187 $4,080
- --------------------------------------------------------------------------------
NOTE 12: PENSION AND OTHER POST-RETIREMENT EMPLOYEE BENEFITS
GENERAL - As of December 31, 2000 Connecticut Water Company had 159 employees,
Gallup 5, Crystal 7, and Connecticut Water Emergency Services 1 employee for a
total of 172 employees. The Company's officers are employees of Connecticut
Water Company. Employee expenses are charged between companies as appropriate.
Connecticut Water Company has a post-retirement benefit plan including pension
and post-retirement medical, dental, and life insurance. Crystal has a pension
plan, whereas at December 31, 2000, Gallup and Connecticut Water Emergency
Services did not have any post-retirement benefits plans. During 2000 the
administration of Connecticut Water's and Crystal's plans were combined. Pension
benefits were approved for Gallup employees in 2000, effective January 1, 2001.
CONNECTICUT WATER:
PENSION - Connecticut Water Company has a trusteed, non-contributory defined
benefit retirement plan (the Pension Plan) which covers all employees who have
completed one year of service. Benefits under the Pension Plan are based on
credited years of service and "average earnings", as defined in the Pension
Plan. Connecticut Water's policy is to fund accrued pension costs as permitted
by Federal income tax regulations. No funding was made for 2000 and 1999.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
30
F-15
POST-RETIREMENT BENEFITS OTHER THAN PENSION (PBOP) - In addition to providing
pension benefits, Connecticut Water provides certain medical, dental and life
insurance benefits to retired employees partially funded by a 501(c)(9)
Voluntary Employee Beneficiary Association Trust that has been approved by the
DPUC. Substantially all of Connecticut Water's employees may become eligible for
these benefits if they retire on or after age 55 with 10 years of service. The
contributions for calendar years 2000, 1999, and 1998, were $473,000 for each
year.
A deferred regulatory asset has been recorded to reflect the amount which
represents the future operating revenues expected to be recovered in customers
rates under FAS 106. In 1997 Connecticut Water requested and received approval
from the DPUC to include FAS 106 costs in customer rates. The DPUC's 1997
limited reopener of Connecticut Water's general rate proceeding allowed it to
increase customer rates $208,000 annually for FAS 106 costs. Connecticut Water's
current rates now allow for recovery of $473,000 annually for post-retirement
benefits costs other than pension.
Connecticut Water has elected to recognize the transition obligation on a
delayed basis over a period equal to the plan participants' 21.6 years of
average future service.
CONNECTICUT WATER:
PENSION BENEFITS OTHER BENEFITS
(Thousands of dollars) 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation, beginning of year $ 12,616 $ 12,557 $ 3,863 $ 3,866
Service Cost 478 504 141 173
Interest Cost 995 908 283 268
Actuarial loss/(gain) 1,750 (624) 39 (154)
Benefits paid (697) (729) (289) (290)
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 15,142 $ 12,616 $ 4,037 $ 3,863
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair Value, beginning of year $ 18,603 $ 16,915 $ 2,459 $ 2,057
Actual return on plan assets 393 2,417 (134) 181
Employer contribution -- -- 473 473
Participant's contributions N/A N/A 36 38
Benefits paid (697) (729) (289) (290)
- ------------------------------------------------------------------------------------------------------------------------------------
Fair Value, end of year $ 18,299 $ 18,603 $ 2,545 $ 2,459
- ------------------------------------------------------------------------------------------------------------------------------------
Funded Status $ 3,157 $ 5,987 $ (1,492) $ (1,404)
Unrecognized net actuarial gain (5,793) (7,917) (1,440) (1,823)
Unrecognized transition obligation (32) (65) 1,979 2,144
Unrecognized prior service cost 888 186 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Accrued Cost $ (1,780) $ (1,809) $ (953) $ (1,083)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31:
Discount rate 7.5% 7.5% 7.5% 7.5%
Expected return on plan assets 9.0% 8.0% 5.4% 5.0%
Rate of compensation increase 4.5% 4.5% N/A N/A
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
31
F-16
PENSION BENEFITS OTHER BENEFITS
(THOUSANDS OF DOLLARS) 2000 1999 1998 2000 1999 1998
- ------------------------------------------------ ------- ------- ------- ------- ------- -------
Components of net periodic benefit costs
Service cost $ 478 $ 504 $ 393 $ 141 $ 173 $ 152
Interest cost 995 908 872 283 268 262
Expected return on plan assets (1,242) (1,093) (928) (110) (94) (63)
Amortization of:
Unrecognized Net Transition Asset (32) (32) (32) 165 165 165
Unrecognized net (Gain) Loss (260) (121) (118) (135) (106) (113)
Unrecognized Prior Service Cost 32 32 32 -- -- --
FAS 88 Early Retirement Costs -- -- -- -- -- --
- ------------------------------------------------ ------- ------- ------- ------- ------- -------
Net Periodic Pension Costs (Income) $ (29) $ 198 $ 219 $ 344 $ 406 $ 403
- ------------------------------------------------ ------- ------- ------- ------- ------- -------
In determining the 1999 and 2000 accumulated post-retirement benefit obligation,
health care cost trends of 5.5% were assumed for all future years.
Assumed health care costs trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
(Thousands of dollars) INCREASE DECREASE
- -----------------------------------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 64 $ (61)
Effect on post-retirement benefit obligation $ 496 $ (462)
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - Connecticut Water provides additional
pension benefits to senior management through a supplemental executive
retirement plan. At December 31, 2000 the actuarial present value of the
projected benefit obligation was $628,000. Expense associated with this plan was
$102,000 for 2000, $76,000 for 1999, and $99,000 for 1998.
SAVINGS PLAN - The Connecticut Water Company maintains an employee savings plan
which allows participants to contribute from 1% to 15% of pre-tax compensation.
The Company matches 50 cents for each dollar contributed by the employee up to
4% of the employees' compensation. The contribution charged to expense in 2000,
1999 and 1998 was $139,000, $127,000, and $85,000, respectively.
Effective for 1999 the Plan was modified to create the possibility for an
"incentive bonus" contribution to the 401(k) plan tied to the attainment of a
specific goal or goals to be identified each year starting in 1999. If the
specific goal or goals are attained by the end of the year, all employees,
except officers and certain key employees, will receive up to an additional 1%
of their annual base salary as a direct contribution to their 401(k) account. In
1999 the goal was not met and therefore no incentive contribution was made. An
incentive bonus of .6% of base pay, or $37,000, was awarded in 2000.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
32
F-17
CRYSTAL WATER:
PENSION - Crystal has a defined benefit pension plan covering employees who have
completed six months of service and who have attained the age of 20 1/2. Accrued
pension costs and required contributions to the plan are actuarially calculated
annually taking into account the employees' service to date and their expected
future earnings. The following tables set forth the plan's funded status as of
December 31, 2000 and 1999 and the net pension cost for 2000, 1999, and 1998 of
$60,000, ($150,000), and $14,000 respectively.
(Thousands of dollars) 2000 1999
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations $ 605 $ 576
Projected benefit obligation for salary increase 372 313
- --------------------------------------------------------------------------------
Projected benefit obligation 977 889
Plan assets at fair value 918 764
- --------------------------------------------------------------------------------
Unfunded (overfunding) projected benefits 59 125
Unrecognized gain / (loss) 246 243
Unrecognized prior service cost (319) (334)
Unrecognized transition obligation (25) (27)
- --------------------------------------------------------------------------------
Accrued (Prepaid) Pension Costs $ (39) $ 7
- --------------------------------------------------------------------------------
Weighted-average assumptions as of December 31:
Discount rate 7.5% 7.5%
Expected return on plan assets 9.0% 8.0%
Rate of compensation increase 4.5% 4.5%
- --------------------------------------------------------------------------------
Crystal Water:
(Thousands of dollars) 2000 1999 1998
- --------------------------------------------------------------------------------
Service costs $ 50 $ 48 $ 49
Interest cost of benefit obligation 65 110 73
Return on assets (64) (117) (96)
Amortization of unrecognized (gain) / loss (9) (23) (15)
Amortization of prior service cost 16 15 1
Amortization of transition asset 2 2 2
Settlement (gain)/loss -- (185) --
- --------------------------------------------------------------------------------
Net pension (income) cost $ 60 $(150) $ 14
- --------------------------------------------------------------------------------
NOTE 13: STOCK BASED COMPENSATION PLANS
INCENTIVE OPTIONS -
In 1999 the Company's shareholders approved an amendment to its Performance
Stock Program to permit the issuance of stock options to officers and key
employees. The Company accounts for the plan under APB Opinion No. 25, under
which no compensation cost has been recognized in the Consolidated Statements of
Income. On a pro forma basis, the Company's net income and earnings per share
would have been the following amounts had compensation cost for the plan been
determined consistent with SFAS No. 123, "Accounting for Stock Based
Compensation FAS 123." Under FAS 123, the Company would have been required to
value such options and record such amounts in the financial statements as
compensation expense.
(In thousands of dollars, except per share data) 2000 1999
Net income:
As reported $7,925 $7,489
Pro forma $7,779 $7,376
Earnings Per Share:
As reported $ 1.63 $ 1.55
Pro forma $ 1.60 $ 1.52
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
33
F-18
For purposes of this calculation, the Company arrived at the fair value of each
stock grant at the date of grant by using the Black Scholes Option Pricing model
with the following weighted average assumptions used for grants for the years
ended December 31, 2000 and 1999.
2000 1999
------ ------
Expected life (years) 8 8
Interest rate (percentage) 5.12 6.45
Volatility (percentage) 27.19 25.89
Dividend yield 3.9 3.7
Options begin to become exercisable one year from the date of grant.
Number of Number of Exercise
Options Options Price Per
Exercisable Granted Share
Balance at January 1, 1999 -- -- N/A
Granted April 23, 1999 15,031 75,150 $ 22.25
Granted December 8, 1999 10,511 52,573 $ 33.50
------ -------
Balance at December 31, 1999 25,542 127,723
Granted December 6, 2000 -- 29,761 $30.625
------ -------
Balance at December 31, 2000 25,542 157,484
------ ------- -------
No options were terminated or exercised in 2000 and 1999.
The per share weighted average fair value for stock options granted during 2000
and 1999 were $7.49 and $7.36, respectively.
PERFORMANCE STOCK PROGRAM - Under the Company's Performance Stock Program,
restricted shares of Common Stock may be awarded annually to officers and key
employees. To the extent that the goals established by the Compensation
Committee have been attained, the restrictions on the stock are removed. Amounts
charged to expense pursuant to this plan were $227,000, $216,000, and $170,000,
for 2000, 1999, and 1998, respectively.
NOTE 14: SEGMENT REPORTING
Our Company operates principally in three segments: water activities, real
estate sales and services/rentals. The water segment is comprised of our core
regulated water activities to supply water to our customers. Our real estate
sales segment involves the selling off of our limited excess real estate
holdings. Our services and rentals segment is comprised of providing services on
a contract basis and leasing certain of our properties to others. The accounting
policies of each reportable segment are the same as those described in the
summary of significant accounting policies. Financial data for reportable
segments is as follows:
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
34
F-19
Interest
Expense
and
Preferred
Other Dividend
Operating Other Income (net of Income Net
(In thousands) Revenues Depreciation Expenses (Deductions) AFUDC) Taxes Income
- ------------------------------- ----------- --------------- ----------- -------------- ------------ --------- ---------
Year ended
December 31, 2000
Water Activities $41,512 $4,500 $21,459 $161 $4,128 $4,402 $7,184
Real Estate Transactions 144 -- 230 -- -- (620) 534
Services/Rentals 2,320 13 1,945 -- 23 132 207
- ------------------------------- ----------- --------------- ----------- -------------- ------------ --------- ---------
Total $43,976 $4,513 $23,634 $161 $4,151 $3,914 $7,925
- ------------------------------- ----------- --------------- ----------- -------------- ------------ --------- ---------
Year ended
December 31, 1999
Water Activities $42,624 $4,390 $21,999 $65 $4,084 $4,943 $7,273
Real Estate Transactions 447 -- 286 -- -- 64 97
Services/Rentals 1,902 32 1,657 -- 26 68 119
- ------------------------------- ----------- --------------- ----------- -------------- ------------ --------- ---------
Total $44,973 $4,422 $23,942 $65 $4,110 $5,075 $7,489
- ------------------------------- ----------- --------------- ----------- -------------- ------------ --------- ---------
Year ended
December 31, 1998
Water Activities $40,303 $4,133 $21,321 $110 $4,168 $4,089 $6,702
Real Estate Transactions 710 -- 235 -- -- 190 285
Services/Rentals 1,331 33 1,023 -- -- 103 172
- ------------------------------- ----------- --------------- ----------- -------------- ------------ --------- ---------
Total $42,344 $4,166 $22,579 $110 $4,168 $4,382 $7,159
- ------------------------------- ----------- --------------- ----------- -------------- ------------ --------- ---------
At December 31,
(in thousands)
2000 1999
----------- ----------
Total Plant and Other Investments
Water $189,181 $183,310
Non-water 776 784
----------- ----------
189,957 184,094
----------- ----------
Other Assets
Water 24,474 24,535
Non-water 968 2,402
----------- ----------
25,442 26,936
----------- ----------
Total Assets $215,399 $211,030
----------- ----------
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
35
F-20
NOTE 15: SUBSEQUENT EVENTS (UNAUDITED)
BARNSTABLE ACQUISITION - In February 2001 we completed the acquisition of the
Barnstable Holding Company. We exchanged 216,656 shares of our common stock for
all outstanding shares of Barnstable's common stock. The transaction was valued
at approximately $6,500,000 based on the market value of our common stock on
February 23, 2001. Barnstable is the parent company of a regulated water utility
company, Barnstable Water Company located in Barnstable, Massachusetts serving
approximately 7,200 customers. In addition, Barnstable Holding Company owns
BARLACO, a real estate company which owns approximately 100 acres of residential
and commercial land in Hyannis and Barnstable, Massachusetts. This merger will
be accounted for as "pooling-of-interests."
LAND DONATION, JANUARY 2001 - On January 18, 2001 we donated 135 acres of
undeveloped land to the Town of Middlebury, Connecticut for open space purposes.
This donation will reduce our 2001 federal and state income tax expense by
approximately $1,100,000.
POTENTIAL FUTURE LAND DONATIONS, 2002 - 2004 - On January 31, 2001 we signed an
agreement to donate to the Town of Killingly, Connecticut approximately 340
acres of unimproved land for protected open space purposes. This agreement must
receive town and state regulatory approvals before the land can be transferred.
The proposed land donation would be broken down into three different parcels
with one of the parcels being donated each year 2002 through 2004. Under current
tax law, these donations in total would result in reduced federal and state
income taxes of approximately $2,000,000, if approved and completed as proposed.
NOTE 16: QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 2000 and 1999
appears below:
(In thousands except for per share data)
Net Income Basic Earnings Per
Utility Applicable to Average
Operating Revenues Operating Income Common Stock Common Share
2000 1999 2000 1999 2000 1999 2000 1999
---------- ----------- ----------- ----------- ----------- ----------- ---------- ----------
First Quarter $ 9,728 $ 9,450 $ 2,447 $ 2,414 $1,532 $1,514 $0.32 $0.31
Second Quarter 10,213 10,233 2,772 2,765 1,849 1,823 0.38 0.38
Third Quarter 11,532 12,892 3,645 3,763 2,677 2,727 0.55 0.56
Fourth Quarter 10,039 10,049 2,295 2,285 1,867 1,425 0.38 0.30
---------- ----------- ----------- ----------- ----------- ----------- ---------- ----------
Year $41,512 $42,624 $11,159 $11,227 $7,925 $7,489 $1.63 $1.55
---------- ----------- ----------- ----------- ----------- ----------- ---------- ----------
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
36
E-1
EXHIBIT
NUMBER DESCRIPTION
3.1 Certificate of Incorporation of Connecticut Water Service, Inc. amended
and restated as of April, 1998. (Exhibit 3.1 to Form 10-K for the year
ended 12/31/98).
3.2 By-Laws, as amended, of Connecticut Water Service, Inc. as amended and
restated as of August 12, 1999. (Exhibit 3.2 to Form 10-K for the year
ended 12/31/99).
3.3 Certification of Incorporation of The Connecticut Water Company
effective April, 1998. (Exhibit 3.3 to Form 10-K for the year ended
12/31/98).
4.1 Indenture of Mortgage and Deed of Trust from The Connecticut Water
Company to The Connecticut Bank and Trust Company, Trustee, dated as of
June 1, 1956. (Exhibit 4.3(a) to Registration Statement No. 2-61843)
4.2 Supplemental Indentures thereto dated as of
(i) February 1, 1958 (Exhibit 4.3(b) (i) to Registration Statement
No. 2-61843)
(ii) September 1, 1962 (Exhibit 4.3(b) (ii) to
Registration Statement No. 2-61843)
(iii) January 1, 1966 (Exhibit 4.3(b) (iii) to Registration
Statement No. 2-61843)
(iv) July 1, 1966 (Exhibit 4.3(b) (iv) to Registration
Statement No. 2-61843)
(v) January 1, 1971 (Exhibit 4.3(b) (v) to Registration
Statement No. 2-61843)
(vi) September 1, 1974 (Exhibit 4.3(b) (vi) to
Registration Statement No. 2-61843)
(vii) December 1, 1974 (Exhibit 4.3(b) (vii) to
Registration Statement No. 2-61843)
(viii) January 1, 1976 (Exhibit 4(b) to Form 10-K for the
year ended 12/31/76)
(ix) January 1, 1977 (Exhibit 4(b) to Form 10-K for the
year ended 12/31/76)
(x) September 1, 1978 (Exhibit 2.12(b) (x) to
Registration Statement No. 2-66855)
(xi) December 1, 1978 (Exhibit 2.12(b) (xi) to
Registration Statement No. 2-66855)
(xii) June 1, 1979 (Exhibit 2.12(b) (xii) to Registration
Statement No. 2-66855)
(xiii) December 1, 1983 (Exhibit 4.2 (xiii) to Form 10-K for
the year ended 12/31/83)
(xiv) January 1, 1987 (Exhibit 4.2 (xiv) to Form 10-K for
the year ended 12/31/86)
(xv) May 1, 1989 (Exhibit 4.2 (xv) to Form 10-K for year
ended 12/31/89)
37
E-2
(xvi) June 1, 1991 (Exhibit 4.2 (xvi) to Form 10-K for year
ended 12/31/91)
(xvii) August 1, 1992 (Exhibit 4.2 (xvii) to Form 10-K for
year ended 12/31/92)
(xviii) October 1, 1993 (Exhibit 4.2 (xviii) to Form 10-K for
year ended 12/31/93)
(xix) June 1, 1993 (Exhibit 4.2 (xix) to Form 10-K for year
ended 12/31/93)
(xx) September 1, 1993 (Exhibit 4.2 (xx) to Form 10-K for
year ended 12/31/93)
(xxi) December 1, 1993 (Exhibit 4.2 (xxi) to Form 10-K for
year ended 12/31/93)
(xxii) March 1, 1994 (Exhibit 4.2 (xxii) to Form 10-K for
year ended 12/31/94)
4.3 Loan Agreement dated as of October 1, 1993, between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.3
to Form 10-K for year ended December 31, 1993)
4.4 Loan Agreement dated as of June 1, 1993, between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.4
to Form 10-K for year ended December 31, 1993)
4.5 Loan Agreement dated as of September 1, 1993, between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.5
to Form 10-K for year ended December 31, 1993)
4.6 Loan Agreement dated as of August 1, 1992 between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.10
to Form 10-K for the year ended December 31, 1992)
4.7 Bond Purchase Agreement dated as of December 1, 1993. (Exhibit 4.8 to
Form 10-K for year ended December 31, 1993)
4.8 Loan Agreement dated as of March 9, 1998 between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.8
to Form 10-K for the year ended 12/21/98).
4.9 Loan Agreement dated as of April 19, 1990 between the Connecticut
Development Authority and The Crystal Water Company of Danielson.
(Exhibit 4.9 to Form 10.K for the year ended 12/31/99).
4.10 Loan Agreement dated as of February 9, 1996 between New London Trust,
F.S.B. and The Crystal Water Company of Danielson. (Exhibit 4.10 to
Form 10-K for the year ended 12/31/99).
38
E-3
10.1 Pension Plan Fiduciary Liability Insurance for The Connecticut Water
Company Employees' Retirement Plan and Trust, The Connecticut Water
Company Tax Credit Employee Stock Ownership Plan, as Amended and
Restated, Savings Plan of The Connecticut Water Company and The
Connecticut Water Company VEBA Trust Fund. (Exhibit 10.1 to
Registration Statement No. 2-74938)
10.2 Directors and Officers Liability and Corporation Reimbursement
Insurance. (Exhibit 10.2 to Registration Statement No. 2-74938)
10.3 Directors Deferred Compensation Plan, effective as of January 1, 1980,
as amended as of March 20, 1981. (Exhibit 10.3 to Registration
Statement No. 2-74938)
10.4 The Connecticut Water Company Deferred Compensation Agreement dated
December 1, 1984. (Exhibit 10.4 to Form 10-K for the year ended
December 31, 1984)
10.5 The Connecticut Water Company Amended and Restated Deferred
Compensation Agreement dated May 14, 1999. (Exhibit 10.5 to Form 10-K
for the year ended 12/31/99).
a. Marshall T. Chiaraluce
b. David C. Benoit
c. James R. McQueen
d. Kenneth W. Kells
10.6 The Connecticut Water Company Supplemental Executive Retirement
Agreement with William C. Stewart. (Exhibit 10.6a to Form 10-K for year
ended December 31, 1991)
10.7.1 The Connecticut Water Company Supplemental Executive Retirement
Agreement with Marshall T. Chiaraluce. (Exhibit 10.6b to Form 10-K for
year ended December 31, 1991)
10.7.2 The Connecticut Water Company Amended Supplemental Executive Retirement
Agreement with Marshall T. Chiaraluce dated August 1, 1999. (Exhibit
10.7.2 to Form 10-K for the year ended 12/31/99).
10.7.3* The Connecticut Water Company Supplemental Executive Retirement
Agreement with Michele G. Diacri dated February 28, 2000.
10.8.1 The Connecticut Water Company Supplemental Executive Retirement
Agreement - standard form for other officers. (Exhibit 10.6c to Form
10-K for year ended December 31, 1991)
10.8.2 The Connecticut Water Company Amended Supplemental Executive Retirement
Agreement - standard form for other officers, dated August 1, 1999.
(Exhibit 10.8.2 to Form 10-K for the year ended 12/31/99).
39
E-4
10.9 The Connecticut Water Company Employment Agreements with Officers,
amended and restated as of November 18, 1999. (Exhibit 10.9 to Form
10-K for the year ended 12/31/99).
a) Marshall T. Chiaraluce
b) Michele G. DiAcri
c) James R. McQueen
d) David C. Benoit
e) Peter J. Bancroft
f) Maureen P. Westbrook
g) Terrance P. O'Neill
10.10 Employment and Consulting Agreement between Richard L. Mercier and
Gallup Water Service, Inc. dated April 15, 1999. (Exhibit 10.10 to Form
10-K for the year ended 12/31/99).
10.11 Employment and Consulting Agreement between Roger Engle and Crystal
Water Company of Danielson dated September 29, 1999. (Exhibit 10.11 to
Form 10-K for the year ended 12/31/99).
10.12 Savings Plan of The Connecticut Water Company, amended and restated
effective as of January 1, 1999. (Exhibit 10.10 to Form 10-K for the
year ended 12/31/98).
10.12.1* Savings Plan of The Connecticut Water Company, amended and restated
effective as of October 1, 2000.
10.13 The Connecticut Water Company Employees' Retirement Plan as amended and
restated as of January 1, 1997. (Exhibit 10.11 to Form 10-K for the
year ended 12/31/98).
10.14 Water Supply Agreement dated June 13, 1994, between The Connecticut
Water Company and the Hazardville Water Company. (Exhibit 10.15 to Form
10-K for year ended December 31, 1994)
10.15 November 4, 1994 Amendment to Agreement dated December 11, 1957 between
The Connecticut Water Company (successor to the Thomaston Water
Company) and the City of Waterbury. (Exhibit 10.16 to Form 10-K for
year ended December 31, 1994)
10.16 Contract between The Connecticut Water Company and The Rockville Water
and Aqueduct Company dated as of January 1, 1976. (Exhibit 9(b) to Form
10-K for the year ended December 31, 1975)
10.17 Agreement dated August 13, 1986 between The Connecticut Water Company
and the Metropolitan District. (Exhibit 10.14 to Form 10-K for the year
ended December 31, 1986)
40
E-5
10.18 Report of the Commission to Study the Feasibility of Expanding the
Water Supply Services of the Metropolitan District. (Exhibit 14 to
Registration Statement No. 2-61843)
10.19 Plan of Merger dated December 18, 1978 of Broad Brook Water Company,
The Collinsville Water Company, The Rockville Water and Aqueduct
Company, The Terryville Water Company and The Thomaston Water Company
with and into The Connecticut Water Company. (Exhibit 13 to Form 10-K
for the year ended December 31, 1978)
10.20 Bond Exchange Agreements between Connecticut Water Service, Inc., The
Connecticut Water Company Bankers Life Company and Connecticut Mutual
Life Insurance Company dated October 23, 1978. (Exhibit 14 to Form 10-K
for the year ended December 31, 1978)
10.21 Dividend Reinvestment and Common Stock Purchase Plan as amended.
(Registration Statement No. 33-53211 as amended)
10.22 Contract for Supplying Bradley International Airport. (Exhibit 10.21 to
Form 10-K for the year ended December 31, 1984)
10.23 Report of South Windsor Task Force. (Exhibit 10.23 to Form 10-K for the
year ended December 31, 1987)
10.24 Trust Agreement for The Connecticut Water Company Welfare Benefits Plan
(VEBA) dated January 1, 1989. (Exhibit 10.21 to Form 10-K for year
ended December 31, 1989)
10.25 Performance Stock Program, as amended and restated as of April 23,
1999. (Exhibit A to CTWS Proxy Statement dated March 17, 1999)
24.1* Consent of Arthur Andersen LLP
- ----------
Note: Exhibits 10.1 through 10.13, 10.24 and 10.25 set forth each management
contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form-10K.
41
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONNECTICUT WATER SERVICE, INC.
Registrant
By /s/ Marshall T. Chiaraluce
----------------------------
Marshall T. Chiaraluce
President, Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of Connecticut
Water Service, Inc. in the capacities and on the dates indicated.
Signature Title Date
/s/ Marshall T. Chiaraluce Director, President Chairman March 12, 2001
- ----------------------------------------- of the Board, and Chief
Marshall T. Chiaraluce Executive Officer
(Principal Executive Officer)
/s/ David C. Benoit Vice President - Finance, March 12, 2001
- ----------------------------------------- Chief Financial Officer and
David C. Benoit Treasurer
(Principal Financial and Accounting Officer)
42
17
/s/ Harold E. Bigler, Jr. Director March 12, 2001
- ------------------------------------------
Harold E. Bigler, Jr.
/s/ Roger Engle Director March 13, 2001
- ------------------------------------------
Roger Engle
/s/ Mary Ann Hanley Director March 15, 2001
- ------------------------------------------
Mary Ann Hanley
/s/ Marcia Hincks Director March 13, 2001
- ------------------------------------------
Marcia Hincks
/s/ Ronald D. Lengyel Director March 12, 2001
- ------------------------------------------
Ronald D. Lengyel
/s/ Robert F. Neal Director March 10, 2001
- ------------------------------------------
Robert F. Neal
/s/ Arthur C. Reeds Director March 12, 2001
- ------------------------------------------
Arthur C. Reeds
/s/ Lisa J. Thibdaue Director March 12, 2001
- ------------------------------------------
Lisa J. Thidbaue
/s/ Donald B. Wilbur Director March 12, 2001
- ------------------------------------------
Donald B. Wilbur
43
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
We have audited, in accordance with accounting principles generally accepted in
the United States, the financial statements of Connecticut Water Service, Inc.
included in this Form 10-K, and have issued our report thereon dated February 9,
2001. Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in the accompanying index to
consolidated financial statements and schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Hartford, Connecticut
February 9, 2001
44
S-2
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO FROM END OF
DESCRIPTION OF YEAR INCOME RESERVES (1) YEAR
- ----------- --------- ---------- ------------ -------
Allowance for Uncollectible
Accounts
Year Ended December 31, 2000 $455 $216 $ 474 $197
==== ==== ====== ====
Year Ended December 31, 1999 $315 $171 $ 31 $455
==== ==== ====== ====
Year Ended December 31, 1998 $147 $162 $ (6) $315
==== ==== ====== ====
(1) Amounts charged off as uncollectible after deducting recoveries.
45
EXHIBITS
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR
ENDED DECEMBER 31, 2000
24.1 Consent of Arthur Andersen LLP