1
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, 1994 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 (203) 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 February 1,
1995 is $66,000,000.
2,877,899
Number of shares of Common Stock outstanding, February 1, 1995
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Document is Incorporated
-------- -----------------------------
Definitive Proxy Statement, dated Part III
March 13, 1995, for Annual Meeting
of Shareholders to be held on
April 21, 1995.
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PART I
ITEM 1. BUSINESS
a. GENERAL DEVELOPMENT OF BUSINESS
The Registrant, Connecticut Water Service, Inc. (the Company), is the
parent company of The Connecticut Water Company (CWC) which supplies water for
residential, commercial, industrial and municipal purposes in various areas in
the State of Connecticut through three operating regions. The Company and CWC
represent the second largest investor-owned water system in Connecticut in
terms of operating revenue and utility plant investment.
The Company was organized in 1956 under the General Statutes of
Connecticut as Suburban Water Service, Inc. and has been engaged in the
business of acquiring and operating water companies through controlling stock
ownership. In 1975, the Company changed its name to Connecticut Water Service,
Inc. after acquiring all of the outstanding Common Stock of CWC. CWC's First
Mortgage Bonds and Preferred Stock are held primarily by institutional
investors. The Company is a non-operating company whose income is derived from
the earnings on the Common Stock of CWC.
The profitability of the operations of the water utility industry
generally and of CWC (and hence the Company) is largely dependent on the
timeliness and adequacy of the rate relief allowed by utility regulatory
commissions. In addition, profitability is dependent on numerous factors over
which CWC has little or no control, such as the quantity of rainfall and
temperature in a given period of time, industrial demand, prevailing rates of
interest for short and long-term borrowings, energy rates, and compliance with
environmental and water quality regulations. In addition, inflation and other
factors beyond the Company's or CWC's control impact on the cost of
construction, materials and employee costs. See "Business - Financing",
"Business - Rates", and "Business -Regulation".
b. GENERAL DESCRIPTION OF BUSINESS
The Company, a Connecticut corporation, owns all of the outstanding
Common Stock of CWC. Substantially all of the Company's revenues and net
income are attributable to the sale and distribution of water by the operating
regions of CWC. See "Business - Consolidated Operating Statistics".
CWC is specially chartered by the General Assembly of the State of
Connecticut as a public service company, and the rates and operations of CWC
are regulated by the Connecticut Department of Public Utility Control (DPUC).
The Company is specifically prohibited from engaging in business or activities
which are not regulated by the DPUC. See "Business - Rates" and "Business -
Regulation".
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CWC has one subsidiary organized in 1969 to assist in the acquisition
of real estate. The assets and operations of this subsidiary are not
significant.
CWC supplies water and, in most instances, provides fire protection
through three separate operating regions in all or portions of 31 towns in
Connecticut. The service areas have an estimated total population of
approximately 211,000 based on DPUC population estimates of 3.5 people per
average household. During the twelve months ended December 31, 1994,
approximately 64% of the Company's consolidated operating revenues were
received from residential customers, 13% from commercial customers, 5% from
industrial customers, 2% from public authority customers, and 16% from public
fire protection and other customers.
Each of the operating regions serves a separate franchise area.
Rates are the same for all regions. The systems of the three operating regions
are not physically interconnected.
The following table sets forth the percentage of the Company's utility
plant in service at each of CWC's operating regions as of December 31, 1994:
Utility Plant
Regions Dollars Percent
--------- ------------ -------
Northern $ 82,380,000 45%
Shoreline 49,355,000 28%
Naugatuck 49,344,000 27%
------------ ----
$181,079,000 100%
============ ====
At December 31, 1994, 60,325 customers were served by CWC. At that
date, all customers were metered except fire protection customers. The Company
requires all applicants for new service, other than fire protection, to be
metered.
The Company's principal office is located at 93 West Main Street,
Clinton, Connecticut 06413 and its telephone number is 203-669-8636.
The business of CWC is subject to seasonal fluctuations. The demand
for water during the warmer months is generally greater than during the cooler
months due primarily to additional requirements for water in connection with
cooling systems, private and public swimming pools and lawn sprinklers.
Throughout the year, and particularly during the warmer months, demand will
vary with rainfall and temperature levels.
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WATER SUPPLY
The estimated minimum dependable yields of sources of water supply
for each of the operating regions' transmission and distribution systems, as
set forth under "Business - CWC Production Facilities as of December 31, 1994"
are in excess of present average daily consumption. Except for a request for
voluntary conservation in the summer of 1988, no restrictions on water use have
been required in the past twenty years.
Water is secured from both surface and subsurface supplies. In 1994,
surface sources provided approximately 55% of the supply, and well supplies
provided approximately 45%. Studies are made periodically to determine the
supply and distribution needs of the regions. A major study, covering a fifty
year planning period required of all water companies supplying 1,000 or more
persons, was completed in 1987 and submitted to the Connecticut Department of
Pubic Health and Addiction Services (DPHAS) for approval. An updated plan must
be prepared every five years or as requested by the DPHAS. Updated plans for
the Collinsville, Thomaston and Terryville Systems in the Naugatuck Region were
submitted in 1992. The plan for the Collinsville System was approved in 1993.
Plans for the Shoreline Region and the Naugatuck Central System were submitted
in 1993 and 1994, respectively. A plan for all Northern Region Systems will be
submitted in 1995.
See "Business - Construction Program", "Business - Rates" and
"Business - Regulation".
OPERATING REGIONS
NORTHERN
The Northern Region is composed of nine separate systems, not
interconnected, as listed below:
Number of
Customers
System Towns (or Portions Thereof) Served at 12/31/94
------ ---------------------------------- -----------
Western Suffield, Windsor Locks, East Granby, Enfield,
East Windsor, South Windsor, Vernon, Ellington,
Tolland 27,864
Somers Somers 411
Crescent Lake Enfield 157
Stafford Springs Stafford 1,005
Tolland Aqueduct Tolland 95
Lakewood/Lakeview Coventry 176
Nathan Hale Coventry 39
Llynwood Bolton, Vernon 74
Reservoir Heights Vernon 22
------
29,843
======
The territory served is primarily residential and commercial with some
industry.
CWC has entered into an agreement with the State of Connecticut,
Department of Transportation, pursuant to which CWC operates and maintains, as
part of its Western System, the State's water supply system for Bradley
International Airport located in Windsor Locks, Suffield and East Granby,
Connecticut.
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The Western System has three emergency standby interconnections with
the water system of the Metropolitan District Commission (MDC) (a public water
and sewer authority presently serving the City of Hartford and portions of
surrounding towns), one in South Windsor and two in Windsor Locks. The Western
System also has an emergency interconnection with the water system of the
Hazardville Water Company in Enfield.
See "Business - Franchises" with respect to proposals that the MDC
expand its operations into the Northern Region and that MDC take over CWC's
operations in South Windsor.
SHORELINE
The Shoreline Region is composed of three separate systems, not
interconnected, as listed below:
Number of
Customers
System Towns (or Portions Thereof) Served at 12/31/94
------ ---------------------------------- -----------
Guilford Guilford, Old Saybrook, Westbrook,
Clinton, Madison 15,387
Chester Chester, Deep River, Essex 2,275
Chester Village
West Chester 11
------
17,673
======
The territory served is primarily residential with some commercial and
industry.
NAUGATUCK
The Naugatuck Region is composed of four separate systems, not
inter-connected, as listed below:
Number of
Customers
System Towns (or Portions Thereof) Served at 12/31/94
------ ---------------------------------- -----------
Central Naugatuck, City of Waterbury, Beacon Falls,
Bethany, Prospect 8,553
Terryville Plymouth 1,907
Thomaston Thomaston, Plymouth 1,176
Collinsville Canton, Avon, Burlington 1,173
------
12,809
======
The territory served is residential and industrial including a
municipality which represented approximately 7% of the region's 1994 revenues.
Water for the Collinsville System is supplied under an agreement with
the MDC from treatment facilities drawing from a large surface water reservoir
owned by the MDC. See "Item 2. Properties" for a description of this
agreement.
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Consolidated Operating Statistics
Year Ended December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Customers (Average)
Residential Metered 54,464 53,988 53,509 53,119 52,767
Commercial Metered 3,827 3,797 3,790 3,769 3,713
Industrial Metered 364 366 323 312 316
Public Authorities Metered 467 466 429 418 434
Fire Protection and Other 960 941 915 896 858
----------- ----------- ----------- ----------- -----------
Total 60,082 59,558 58,966 58,514 58,088
=========== =========== =========== =========== ===========
Production (Millions of Gallons)
Residential Metered Sales 3,874 3,915 3,734 3,858 3,849
Commercial Metered Sales 908 918 921 968 983
Industrial Metered Sales 460 438 507 570 635
Public Authorities Metered Sales 179 179 169 160 159
----------- ----------- ----------- ----------- -----------
Total Metered Consumption 5,421 5,450 5,331 5,556 5,626
Fire Protection, Company Use
and Unaccounted For 808 756 692 619 764
----------- ----------- ----------- ----------- -----------
Total 6,229 6,206 6,023 6,175 6,390
=========== =========== =========== =========== ===========
Operating Revenues (Thousands of Dollars)
Residential Metered $24,488 $24,574 $23,541 $23,675 $20,245
Commercial Metered 4,696 4,745 4,729 4,853 4,112
Industrial Metered 1,922 1,851 2,100 2,239 2,049
Public Authorities Metered 893 903 856 836 736
Fire Protection and Other 6,130 6,058 5,964 5,769 5,159
----------- ----------- ----------- ----------- -----------
Total $38,129 $38,131 $37,190 $37,372 $32,301
=========== =========== =========== =========== ===========
Average Revenue per 1,000 Gallons
Residential Metered $6.32 $6.28 $6.30 $6.14 $5.26
Commercial Metered $5.17 $5.17 $5.13 $5.01 $4.18
Industrial Metered $4.18 $4.23 $4.14 $3.93 $3.23
Public Authorities Metered $4.99 $5.04 $5.07 $5.23 $4.63
Miles of Distribution Mains
(End of Period) 955 950 945 940 930
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CONSTRUCTION PROGRAM
The projected capital expenditures of CWC are established annually by
management and are reviewed and revised from time to time to the extent
necessary to meet changing conditions, including adequacy of rate relief,
customer demand, revised construction schedules, water quality requirements,
pollution control requirements and inflation.
The Company currently estimates that CWC's 1995-1997 construction
program, excluding plant financed by customer advances and contributions in aid
of construction and amounts representing an allowance for funds used during
construction (AFUDC), will aggregate approximately $26,000,000 which includes
routine improvements to the water distribution system of approximately
$4,500,000 each year, approximately $1,750,000 for clean-up of the Reynolds
Bridge Well Field (see "Item 3. Legal Proceedings"), and $10,250,000 for
initial construction costs of major modifications to the Rockville Water
Treatment Plant. The preliminary construction cost estimate to complete the
modifications to the Rockville Water Treatment Plant is at least $20,000,000
with an estimated completion date of 1999.
The $26,000,000 construction expenditures for 1995 through 1997,
mentioned above, includes all known costs for studies and construction of
facilities to comply with existing Safe Drinking Water Act (SDWA) regulations.
Construction expenditures which may be required in the future to comply with
Federal and State regulations, which have not yet been issued but which are
required under the SDWA, are excluded.
FINANCING
The Company and CWC expect to finance a significant portion of the
anticipated $26,000,000 construction expenditures through 1997 with net funds
generated from operations (net cash provided by operating activities less
dividends paid). Net funds generated from operations were $6,220,000,
$6,025,000, and $7,319,000 for the years 1994, 1993 and 1992, respectively (see
Consolidated Statements of Cash Flows for additional information).
Construction and other expenditures in excess of net funds generated from
operations are expected to be financed through Common Stock issued under the
Company's Dividend Reinvestment and Common Stock Purchase Plan (DRIP) and in
part financed with short-term interim bank loans which will be refinanced
through the sale of Preferred Stock and/or long or medium-term unsecured debt
by CWC and/or the Company, and the sale of First Mortgage Bonds by CWC and of
Common Stock by the Company when financial market conditions are considered
favorable by management. CWC expects to receive the proceeds of any such
financings by the Company in the form of advances or capital contributions. Up
to 75% of the total present preliminary estimate of at least $20,000,000 for
the costs of the modifications to the Rockville Water Treatment Plant are
expected to be financed through external financings.
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The Company and CWC currently have lines of credit aggregating
$9,000,000, consisting of conventional lines of credit with three banks, which
management considers adequate at this time. As of December 31, 1994, the
Company had slightly less than $3,000,000 of borrowings outstanding under these
lines of credit.
Because of changes in the Federal tax laws, the amount of new
tax-exempt debt which may be issued by, or under the authority of, the State of
Connecticut is limited. CWC has not received a tax exempt allocation since
1988. Although CWC has been able to refund all of its approximately
$43,000,000 of existing tax-exempt borrowings with tax-exempt refunding
borrowings since 1990, it is uncertain whether future tax-exempt allocations
from the State will be available to CWC or the Company. The unavailability of
tax-exempt financings will require the Company and/or CWC to issue traditional
taxable debt securities and will increase the cost of long-term debt financing.
During the period 1979 through 1988 approximately $43,000,000 of tax-exempt
long-term debt was issued by CWC to finance construction expenditures.
The Company has no legal restrictions on the issuance of its debt.
The ability of CWC to issue additional long or medium-term secured debt to
finance future construction expenditures depends in part on meeting the
applicable provisions of CWC's First Mortgage Indenture with respect to the
coverage of earnings over interest requirements. These provisions require, for
the issuance of additional First Mortgage Bonds, minimum earnings coverage
before income taxes of two times pro forma annual interest charges on such
mortgage debt. The interest coverage under this formula at year end has been:
1994 - 4.12 times interest charges, 1993 - 4.17 times, 1992 - 3.97 times, 1991
- 5.07 times, and 1990 - 5.10 times.
CWC's coverage of interest charges on all long-term debt at year end
has been: 1994 - 4.12 times interest charges, 1993 - 4.17 times, 1992 - 3.56
times, 1991 - 3.15 times, and 1990 - 2.32 times.
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CWC's Times Coverage of Annual Interest
On Long-Term Indebtedness
Year Ended December 31,
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
(Thousands of Dollars)
Utility Operating Income (a) $9,690 $10,018 $10,066 $10,435 $ 8,740
Federal and State Income Tax 4,756 4,673 4,050 3,607 2,177
State Income Tax -
Capitalization (b) (150) ( 140) (140) (120) (120)
------- ------- ------ ------- -------
Net Operating Earnings $14,296 $14,551 $13,976 $13,922 $10,797
======= ======= ======= ======= =======
Annual Interest on First
Mortgage Bonds (c) $ 3,468 $ 3,492 $ 3,524 $ 2,747 $ 2,119
======= ======= ======= ======= =======
Times Interest Coverage (d) 4.12 4.17 3.97 5.07 5.10
==== ==== ==== ==== ====
Annual Interest on Unsecured
Promissory Notes (c) -- -- 404 1,669 2,530
------- ------- ------- ------- -------
Annual Interest on Long-Term
Debt $ 3,468 $ 3,492 $ 3,928 $ 4,416 $ 4,649
======= ======= ======= ======= =======
Times Interest Coverage (e) 4.12 4.17 3.56 3.15 2.32
==== ==== ==== ==== ====
(a) Connecticut Water Service, Inc.'s utility operating income for the
years 1994 to 1990 is $9,655, $9,983, $10,033, $10,402, and $8,712,
respectively.
(b) Amount of minimum State income tax based on the capitalization method.
(c) Includes interest on current portion payable.
(d) Net Operating Earnings / Annual Interest on First Mortgage Bonds per
provisions of CWC's First Mortgage Indenture.
(e) Net Operating Earnings / Annual Interest on Long-Term Debt per
provisions of CWC's First Mortgage Indenture.
During 1980 and 1981 the interest costs of long-term debt increased
more rapidly than earnings so that the coverage requirements prevented CWC from
effecting a planned issue of Bonds in mid 1981. Similar circumstances may in
the future prevent the issue of, or require a reduction in the amount of, bonds
CWC otherwise would have issued or will issue. As a consequence, the Company
may be required to meet an increased portion of its financing needs through
sales of unsecured funded debt or of additional shares of Common Stock. Sales
of Common Stock would result in a dilution of the voting power and relative
equity interests of the holders of Common Stock then outstanding.
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During the past five years CWC has sold the following issues of
long-term debt:
- During June, 1991, CWC issued a $10,000,000, 6.9%, Series Q, First
Mortgage Bond which secures tax exempt Water Facilities Revenue Refunding Bonds
maturing in 2021. The proceeds were used to repay CWC's tax-exempt 9.25% Water
Facilities Bonds issued in 1985.
- During August, 1992, CWC issued a $15,000,000, 5 7/8%, Series R,
First Mortgage Bond which secures tax exempt Water Facilities Revenue Refunding
Bonds maturing in 2022, the proceeds of which refunded CWC's 8%, $15,000,000,
Promissory Note.
- During June, 1993, CWC issued a $5,000,000, 5.75%, Series T, First
Mortgage Bond which secures tax exempt Water Facilities Revenue Refunding Bonds
maturing in 2028, the proceeds of which refunded CWC's 8.1%, $5,000,000,
Promissory Note.
- During September, 1993, CWC issued a $4,550,000, 5.30%, Series U,
First Mortgage Bond which secures tax exempt Water Facilities Revenue Refunding
Bonds maturing in 2028, the proceeds of which refunded CWC's 7.25%, $5,000,000,
Series M, First Mortgage Bond.
- During October, 1993, CWC issued a $8,000,000, 6.65%, Series S,
First Mortgage Bond, which secures tax exempt Water Facilities Revenue
Refunding Bonds maturing in 2020. The proceeds from this transaction were used
to refund CWC's 8 3/8% (plus 1% Letter of Credit fee), Series N, $8,000,000,
First Mortgage Bond.
- On January 4, 1994, CWC issued a $4,050,000, 6.94%, Series V, First
Mortgage Bond, maturing in 2029, the proceeds of which refunded CWC's 9 3/8%,
Series L and 8 1/2%, Series O, First Mortgage Bonds. During March, 1994, an
additional $8,000,000, 6.94% Series V, First Mortgage Bond was issued. The
proceeds of this transaction were used to redeem CWC's $5,000,000, 10%, Series
P, First Mortgage Bonds as well as all 30,000 shares of CWC's $100 par, 9 1/2%
Preferred Stock.
The Company has no restriction with respect to the issuance of
additional shares of its Preferred Stock. However, the Preferred Stock
Provisions contained in the Certificate of Incorporation of CWC require, as one
of the conditions to the issuance of additional CWC Preferred Stock, that CWC's
gross income (as defined and after income taxes) be at least 1.75 times pro
forma annual interest charges on long-term debt and annual dividend
requirements on Preferred Stock to be outstanding. On the basis of this
formula, this coverage has been at year-end: 1994 - 2.83 times, 1993 - 2.70
times, 1992 - 2.43 times, 1991 - 2.24 times, and 1990 - 1.77 times. Any
long-term debt issued by CWC would reduce the amount of Preferred Stock which
could be issued.
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CWC's Times Coverage of Annual Interest and
Annual Preferred Stock Dividends
in Accordance with Articles of General Preference
Year Ended December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Thousands of Dollars)
Utility Operating Income $9,690 $10,018 $10,066 $10,435 $ 8,740
Other Income (a) 155 193 187 144 184
------ ------- ------- ------- -------
Gross Earnings Available for
Coverage $9,845 $10,211 $10,253 $10,579 $ 8,924
====== ======= ======= ======= =======
Annual Interest on Funded
Debt (b) $3,468 $ 3,492 $3,928 $4,416 $4,649
Annual Dividend on Preferred Stock (c) 2 288 294 300 393
------ ------- ------- ------- -------
Total Charges $3,470 $ 3,780 $ 4,222 $ 4,716 $ 5,042
====== ======= ======= ======= =======
Times Interest Coverage 2.83 2.70 2.43 2.24 1.77
==== ==== ==== ==== ====
(a) Other income, as defined by the Articles of General Preference,
includes merchandising and jobbing income, interest and dividend
income and miscellaneous rental income less applicable taxes.
(b) Includes interest on current portion payable.
(c) Includes dividends on currently redeemable shares.
The Company's issuance of Common Stock over the past five years are as
detailed below. The $12,387,000 net proceeds from these sales were invested in
CWC in the form of capital contributions.
- Pursuant to an underwritten public offering, the Company sold 460,000
shares of Common Stock on October 24, 1990.
- The Company issued 39,030 shares of Common Stock during 1990, 43,247
shares during 1991, 37,868 shares during 1992, 33,803 during 1993 and 74,053
during 1994, pursuant to its DRIP.
- The Company issued 2,338 shares of Common Stock during 1992, 3,074
shares during 1993, and 4,061 shares during 1994, pursuant to the Company's
Performance Stock Program.
- The Company issued 1,769 shares of Common Stock during 1993 and 2,468
shares during 1994, pursuant to the Company's Employee Savings 401-K Match
Plan.
There are currently no legal limits on the amount of short-term
borrowings which may be incurred by the Company or CWC. Should construction
expenditures exceed management's current expectations, the Company will
continue to be dependent upon its ability to issue and sell additional amounts
of Common Stock, mortgage bonds of CWC and (either through the Company or CWC)
Preferred Stock and long or medium-term debt to limit short-term borrowing to
appropriate levels. However, the availability of these methods of financing
cannot be assured. The Company believes that the sale of such additional
securities will continue to depend primarily on the adequacy and timeliness of
regulatory action on future rate increase applications of CWC, on general
conditions in securities markets and on favorable market appraisal of the
securities of the Company and CWC, including the Company's Common Stock.
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RATES
The rates of CWC have been established under the jurisdiction of, and
approved by, the DPUC. It is the Company's policy to seek rate relief as
necessary to enable CWC to achieve an adequate rate of return.
In the most recent six years the following rate increases have been
put into effect by CWC pursuant to authorization by the DPUC:
Estimated Additional Annual Revenue
-----------------------------------
Effective Dates Requested Allowed
--------------- --------- -------
9/13/89 (a) $ 6,925,777 $5,185,069
5/30/90 (a) 564,000 552,317
3/25/91 (b) 10,067,000 6,107,948
(a) The rate increase effective September 13, 1989, was based upon an
allowed rate of return of 13.6% on Common Stock equity and 10.83% on
rate base. CWC had requested 14.5% and 11.16% respectively. An
historical test year (1988) was used to establish the original cost
rate base, which was adjusted for identified facilities expected to be
placed in service during 1989 and 1990, but otherwise excluded
construction work in progress. The rate decision directed CWC to
discontinue depreciation charges on customer advances for construction
received subsequent to January 1, 1989 and allowed CWC to recover
costs associated with funding a 501(c) VEBA Trust for that portion of
CWC's future liability for retiree medical benefits permitted by
Federal income tax regulations. The rate decision approved the
reorganization of CWC's operations from seven divisions to three
regions. The rate decision also allowed for a reopening of the rate
case to allow CWC to request an additional rate increase relating to
the completion and in service operations of specific distribution
system improvements deferred in the September 13, 1989 rate decision.
Effective May 30, 1990, the DPUC approved a 1.66%, or $552,317,
increase to reflect the completion of these improvements.
(b) The rate increase effective March 25, 1991 was based upon an allowed
rate of return of 12.7% on Common Stock equity and 10.74% on rate
base. CWC had requested 14% and 11.3% respectively. A historical test
year (12 months ended March 31, 1990) was used to establish the
original cost rate base which was adjusted for identified facilities
which were placed in service by December 31, 1990, but otherwise
excluded construction work in progress. The decision disallowed both
a proposed adjustment to revenues to reflect conservation based
declines in sales and the requested provision for a Revenue
Stabilization Clause to provide for revenues to be lost through
customer participation in the Company's residential conservation kit
program. The decision did allow recovery of certain of the
conservation kit program costs over a two year amortization period.
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In 1979, the DPUC approved a surcharge to be applied to rates charged
by water utilities in order to provide a current cash return on the major
portion of a water utility's Construction Work In Progress (CWIP) applicable to
facilities required by SDWA facilities. CWC has consistently been allowed to
collect such a surcharge. CWC expects to apply for the application of similar
surcharges with respect to any major future construction projects which may be
required by the SDWA. There is no assurance that any future surcharges will be
permitted.
Under certain circumstances the DPUC, in consultation with the DPHAS,
can order a water company with good managerial and technical resources to
acquire the water system of another company to assure the availability and
potability of water for customers of the company to be acquired. In 1989 the
DPUC promulgated regulations permitting the DPUC to approve a surcharge to be
applied to rates charged by water utilities in order to cover the costs
incurred to acquire the other system and to make improvements as required. CWC
expects to apply for the application of such a surcharge with respect to any
mandated water system acquisition. There is no assurance that any such
surcharge will be permitted.
In 1993 the DPUC approved a limited rate adjustment to compensate for
the effect of changes in certain costs for water companies. These costs
include rate changes related to the cost of purchased water, energy, and taxes.
CWC expects to apply for the application of this type of adjustment in the
future when appropriate. There is no assurance that any such rate adjustment
will be permitted.
See also "Franchises and Competition" below for a discussion of 1994
Connecticut legislation dealing with the competitiveness of water rates.
FRANCHISES AND COMPETITION
Primarily because MDC is a tax-exempt entity, MDC's water rates are
substantially lower than those of CWC. Legislation was proposed in the
Connecticut General Assembly in 1987 which was intended to have the effect of
permitting MDC to purchase the water company operations of CWC in South
Windsor, a town which is presently served by both MDC and CWC. The Company
opposed this legislation vigorously. The Connecticut General Assembly
established a Task Force to report on various issues relating to towns served
by both a privately-owned water company and a publicly-owned water company.
Although the Task Force voted not to recommend legislation which would
authorize such towns to hold referenda on consolidation and empower towns to
force an investor-owned water company to sell its water system within that town
to a governmentally-owned entity, it is not clear at this time whether such a
proposal or similar legislation may be re-introduced and adopted by the
Connecticut General Assembly. Further, even if such legislation were adopted,
the amount of the compensation to be received by CWC for its assets in South
Windsor, or the disposition of any such compensation, cannot be determined at
this time. It is also possible that any legislation in this area could be
written in a manner which would permit a similar acquisition of CWC's water
operations in towns other than South Windsor. The Company has opposed, and
will continue to oppose vigorously, any such proposed legislation.
15
Page 15
Legislation was passed in 1994 by the Connecticut General Assembly
that requires the DPUC to adopt regulations regarding whether the rates that
have been charged by a water company for a period of five consecutive years are
so excessive in comparison to the rates charged by other water companies
providing the same or similar service as to inhibit the economic development of
the area serviced by the water company or impose an unreasonable cost to the
customers of such company. The DPUC has established a docket for the adoption
of regulations pursuant to this public act. CWC is participating in this
docket and will oppose vigorously the establishment of regulations that could
have an adverse effect on the Company. There is no assurance that the Company
will be successful in this effort.
In 1976, the Connecticut General Assembly created a study commission
to evaluate the feasibility of expanding the water supply services of the MDC
to include the towns of East Granby, East Windsor, Enfield, Somers, Suffield
and Windsor Locks. These towns are in the service areas of and are served in
part by CWC's Northern Region. On February 1, 1978, the study commission
reported to the Governor and the General Assembly that the expansion was
feasible and recommended that the General Assembly authorize the towns of East
Granby, Suffield and Windsor Locks to take immediate steps to acquire water
services from the MDC. It further recommended that the enabling legislation
provide a mechanism for the towns of Enfield, East Windsor and Somers, after
adequate technical, financial and institutional studies, to take the steps
necessary to acquire water services from the MDC. The study commission made no
recommendation in its report with respect to the method of implementation of
any MDC expansion and did not discuss CWC's status or that of its water
facilities should MDC provide such service. The General Assembly has not taken
any action on the report. In 1990, CWC agreed, pursuant to the Connecticut
Plan (see "Business - Regulation") that MDC would have the exclusive right to
serve that part of East Granby which is not adjacent to Bradley International
Airport and which is not presently being served by CWC. The Company will
oppose vigorously any extension of MDC water operations within its service
areas and any effort to permit the takeover by any municipal or other authority
of any significant portion of CWC's service areas.
It is not possible at this time to assess the likelihood of any
legislation being enacted to implement these or similar recommendations or the
impact of any such legislation on CWC and the Company, but such impact could be
substantial. There can be no assurance that the Connecticut General Assembly
will not take action to authorize such a takeover. As of December 31, 1994,
CWC's Northern Region represented 45% of the Company's consolidated utility
plant.
In common with most water companies in Connecticut, CWC derives its
rights and franchises to operate from special acts of the Connecticut General
Assembly, which are subject to alteration, amendment or repeal by the General
Assembly and which do not grant exclusive rights to CWC in its service areas.
16
Page 16
Subject to such power of alteration, amendment or repeal by the
Connecticut General Assembly and subject to certain approvals, permits and
consents of public authority and others prescribed by statute and by its
charter, CWC has, with minor exceptions valid franchises free from burdensome
restrictions and unlimited as to time, and is authorized to sell potable water
in the towns (or parts thereof) in which water is now being supplied by CWC.
In addition to the right to sell water as set forth above, the
franchises of CWC include rights and powers to erect and maintain certain
facilities on public highways and grounds, all subject to such consents and
approvals of public authority and others as may be required by law. Under the
Connecticut General Statutes, CWC, upon payment of compensation, may (subject
to the various requirements described under "Business - Regulation") take and
use such lands, springs, streams or ponds, or such rights or interests therein
as the Connecticut Superior Court, upon application, may determine is necessary
to enable CWC to supply potable water for public or domestic use in its
franchise areas.
CWC faces competition, presently not material, from a few private
water systems operated within, or adjacent to, its franchise areas and from
municipal and public authority systems whose service areas in some cases
overlap portions of CWC's franchise areas. At the present time, except as
noted above, there are no publicly owned utilities, cooperatives or other
private utility companies competing with CWC in the areas now served, although
within certain areas there are wells owned by individuals or private
industries.
See also "Business - Regulation" for a description of the so-called
Connecticut Plan which is intended, among other things, to eliminate
competition among water systems.
17
Page 17
REGULATION
DEPARTMENT OF PUBLIC UTILITY CONTROL (DPUC)
CWC is subject to regulation by the DPUC, which has jurisdiction over
rates, standards of service, accounting procedures, issuance of securities,
disposition of utility properties and related matters. The DPUC consists of
five Commissioners, appointed by the Governor of Connecticut with the advice
and consent of both houses of the Connecticut legislature.
The DPUC is required by law to institute management audits, to be
conducted periodically, of companies such as CWC. Such audits might result in
the DPUC ordering implementation of new management practices or procedures.
The DPUC has not conducted any such audit of CWC.
The Company, which is not an operating utility company, is not a
"public service company" within the meaning of the Connecticut General Statutes
and is not generally subject to regulation by the DPUC. DPUC approval is
necessary, however, before the Company may acquire or exercise control over any
public service company. In connection with the affiliation with CWC, the
Company amended its Certificate of Incorporation to prohibit the Company and
any subsidiary of the Company from engaging, unless approved by the DPUC, in
any business or activity which is not subject to regulation by the DPUC. The
Company has no present intention of engaging, either directly or through any
subsidiary, in any business or activity which is not subject to regulation by
the DPUC. The Company is currently providing management and/or operating
services to other water supply or waste water systems through CWC. CWC is
contemplating providing these services through a new subsidiary. DPUC approval
would be required for any such activity.
DEPARTMENT OF ENVIRONMENTAL PROTECTION (DEP)
While the construction of dams, reservoirs and other facilities
necessary to the impounding, storage and withdrawal of water in connection with
public water supplies is a permitted use under the Connecticut Inland Wetlands
and Water Courses Act, CWC is required, pursuant to other statutory provisions,
to obtain permits from the Connecticut Commissioner of Environmental Protection
(Commissioner) for the location, construction or alteration of any dam or
reservoir and to secure the approval of the Commissioner for the diversion and
use of water from any river or underground source for public use. Various
criteria must be satisfied under the respective statutes and regulations of the
Connecticut Department of Environmental Protection (DEP) in order to obtain
such permits or approvals and the Commissioner has the power to impose such
conditions as he deems reasonably necessary in connection with such permits or
approvals in order to assure compliance with such statutes. CWC has obtained,
and complied with the terms of, all such requisite permits or approvals.
18
Page 18
Legislation was adopted in 1982 conferring upon the DEP authority to
require a permit for any new diversion of water, including both surface and
ground water, within the State of Connecticut. Any water diversion which might
be effected by CWC in the future would require compliance by CWC with a lengthy
permit application process and approval by the Commissioner. CWC has several
potential well sites which are subject to this legislation and the DEP
regulations thereunder. Such legislation requires the registration with the
Commissioner of all diversions of water maintained prior to July 1, 1982. All
of CWC diversions have been registered. Although the legislation provides that
registered diversions are not subject to the permit requirement, DEP
regulations adopted in March, 1990 are being used by DEP, on a case by case
basis, to require compliance with the permit application process before some
registered diversions can be used as a source of water supply. It is not
possible at this time to fully assess the impact of DEP's application of this
legislation and the DEP regulations on CWC and its operations, but such impact
may be substantial, particularly on sources held for future use.
The Federal Clean Water Act requires permits for discharges of
effluents into navigable waters and requires that all discharges of pollutants
comply with federally approved state water quality standards. The DEP has
adopted, and the federal government has approved, water quality standards of
receiving waters. A joint Federal and State permit system has been established
to ensure that applicable effluent limitations and water quality standards are
met in connection with the construction and operation of facilities which
affect or discharge into state or interstate waters. CWC has received all such
requisite permits.
In 1984, all CWC's dams were registered with the Connecticut
Department of Environmental Protection (DEP) as required under Public Act
83-38. DEP is required to investigate and periodically inspect most registered
dams to ensure they are safely maintained. CWC was also subject to the
requirements of the National Dam Inspection Act which required the United
States Army Corps of Engineers to inspect certain dams. These inspections were
completed in 1981 and the Army Corps' participation ended. Six of said dams
have been inspected and, although certain modifications and further studies
have been required, no material problems with respect to these dams have been
reported. While the Company recognizes that a certain degree of risk is
attached to CWC's ownership of dams in connection with its water collection
system, the Company believes that all of CWC's dams are well maintained and are
structurally stable. CWC believes that it will be able to comply with any
modifications to its dams that are likely to be required as a result of these
six inspections. CWC believes that the future cost of such compliance will be
less than $5,000,000. These costs are considered in CWC's projected capital
expenditures (see "Construction Program".)
19
Page 19
The DEP has promulgated regulations requiring that certain minimum
flows be maintained in various waterways within the State of Connecticut.
Pursuant to said regulations, CWC is exempt from compliance at certain of its
facilities. However, DEP is considering making changes in the regulations. The
Company cannot predict either the substance of those changes or their impact on
the Company. However, it is possible that such changes could reduce the safe
yield of CWC's sources. The cost to CWC to restore the lost safe yield is not
now determinable but could be substantial.
DEPARTMENT OF PUBLIC HEALTH AND ADDICTION SERVICES (DPHAS)
CWC is also subject to regulation by the Connecticut DPHAS with
respect to water quality matters. Plans for new water supply systems or
enlargement of existing water supply systems also must be submitted to the
DPHAS for approval.
In 1985 the Connecticut General Assembly enacted comprehensive
legislation (the so-called Connecticut Plan) designed to maximize the efficient
and effective development of the state's public water supply systems. This
legislation authorized DPHAS to administer procedures designed to coordinate
the comprehensive planning of public water systems. The legislation mandates
the establishment of public water supply management areas, with each such area
having a water utility coordinating committee comprised of representatives of
the various public water systems and regional planning agencies in the area.
Each such committee is required to establish exclusive service areas for each
public water system in the area, after taking into consideration a number of
factors including existing water service areas, land use plans, etc., optimum
utilization of existing water supplies and existing franchise rights of water
companies. DPHAS is authorized to resolve any disagreements among members of
the respective committees. This legislation is intended not only to promote
cooperation among various water suppliers in each management area, but also to
provide (through DPHAS' role) for the centralized planning of water supply. In
implementing this legislation, DPHAS has created seven water supply management
areas and is in the process of implementing the creation of the appropriate
water utility coordinating committees. The operations of CWC, which cover many
areas of the state, fall within four of the seven management areas. CWC is
actively involved with the planning process in two of these management areas at
this time. The remaining two areas of the Company's interest are expected to
begin the planning process within the next several years. It is not possible
at this time to predict the impact on the Company of the above described
legislation, regulations and procedures, but the Company was an active
participant in moving for the adoption of this scheme, and is presently hopeful
that such centralized and cooperative planning will have a beneficial impact on
its future water supply and water supply operations.
20
Page 20
SAFE DRINKING WATER ACT (SDWA)
CWC is subject to regulation of water quality under the SDWA. The
SDWA provides for the establishment of uniform minimum national quality
standards by the Federal Environmental Protection Agency (EPA), as well as
governmental authority to specify the type of treatment process to be used for
public drinking water. The EPA regulations, pursuant to the SDWA, set limits,
among other things, on certain organic and inorganic chemical contaminants,
pesticides, turbidity, microbiological contaminants, and radioactivity. The
DPHAS has adopted regulations which are in some cases more stringent than the
Federal regulations.
The 1986 SDWA amendments dictate that 83 new primary drinking water
standards be established within three years of enactment. These new standards
supersede the 22 interim standards which EPA established between 1977 and 1986.
In addition to the 83 primary standards, the SDWA amendments require that EPA
publish a list every three years of an additional 25 contaminants which it
intends to regulate in drinking water.
Although unable to meet the three year timetable required by the SDWA
amendments, EPA has actively developed the 83 drinking water standards in six
phases. Phase I, volatile organic chemicals, was promulgated in 1987 and
initial and continued monitoring of sources has taken place. Phase II, which
contains 26 synthetic organic chemicals including pesticides and seven
inorganic chemicals, was promulgated in 1991 with initial monitoring for
systems serving more than 500 people beginning in 1993. Phase IIB, the
aldicarbs, was promulgated in 1992 but implementation is currently delayed by
court order. Lead and copper, which were originally included in Phase II, were
promulgated in 1991 and monitoring for large systems (serving more than 50,000
people) and medium systems (serving 3,301 to 50,000 people) began in 1992,
small system monitoring (serving 3,300 people or less) began in July, 1993.
Phase III, radionuclides, including radon, has been proposed but promulgation
has been delayed by law and is now scheduled for the fall of 1995. Phase IV,
the Surface Water Treatment Rule, was promulgated in 1989 and became effective
June 29, 1993. Phase V, other synthetic organic chemicals and inorganic
chemicals, was promulgated in 1992 and monitoring was implemented at the same
time as Phase II. Phase VIA, disinfectants and disinfection by-products, is
EPA's first list of 25 additional compounds to be regulated. Phase VIA is
scheduled for promulgation in 1996. Phase VIB, additional organic and
inorganic compounds, is not presently scheduled.
21
Page 21
The SDWA amendments also require EPA to establish criteria and rules
which provide for filtration of surface water supplies and disinfection of all
public water supplies. The Surface Water Treatment Rule mandates filtration
for surface supplies which do not meet stringent requirements and establishes
performance criteria for the operation of filtration plants. This rule also
establishes guidelines which may redefine some public water supplies which have
traditionally been considered groundwater as surface supplies subject to the
provisions of the rule. The Company has tested its groundwater supplies.
Determination by the State as to which groundwater supplies are considered to
be under the direct influence of surface water, and therefore subject to the
Surface Water Treatment Rule, has been completed. Only one system has been so
determined as under the influence. That system, consisting of two caisson
wells, has been scheduled for replacement prior to the compliance deadline of
January 1, 1996. Connecticut has adopted the Surface Water Treatment Rule into
its regulations and does not allow for exceptions to the filtration
requirement. The draft Ground Water Disinfection Rule was published in 1992
and is currently scheduled to be proposed in 1995. This rule may require
disinfection and increased disinfection contact time to be added to groundwater
supplies.
Through December 31, 1994, the Company has expended approximately
$37,500,000 in constructing facilities and conducting aquifer mapping necessary
to comply with the requirements of the SDWA. CWC believes that it is in
substantial compliance with regulations promulgated by the EPA and DPHAS, as
currently applied. Connecticut's aquifer protection legislation not only
requires aquifer mapping, but also requires DEP, in consultation with DPHAS and
DPUC, to prepare guidelines for acquisition by water companies of lands
surrounding public water supply wellfields. The extent to which those
guidelines, not yet prepared, might lead to regulations requiring the Company
to purchase additional land around its wellfields is not known at this time.
The Company anticipates spending an additional $2,000,000 on required aquifer
mapping. Although the Company cannot predict either the substance of the
regulations required by the 1986 SDWA amendments which have not yet been
promulgated or their impact on CWC, the primary impact on CWC is expected to be
in the area of increased monitoring and reporting with the potential for
required modifications to existing filtration facilities. Construction of new
facilities may be required for certain groundwater sources. It is possible
that costs of compliance by CWC could be substantial.
22
Page 22
DISPOSITION OF PROPERTY
Connecticut law presently imposes the following restrictions upon the
disposition of property owned by water companies: (a) no property may be sold
or otherwise transferred without the prior approval of the DPUC; (b) the sale,
transfer and change in the use of watershed land (lands draining into a public
water supply) and certain non-watershed lands which are contiguous to
reservoirs and their tributaries are subject to regulation by the DPHAS; (c)
when a water company intends to transfer or dispose of an interest in any
present, potential or abandoned water supply source, other water companies
which might reasonably be expected to utilize the source are given the
opportunity through the DPHAS to seek to acquire such source; and (d) subject
to such acquisition opportunities by other water companies as to water supply
sources, when a water company intends to transfer or dispose of an interest in
three or more contiguous acres of its unimproved real property, the
municipality in which such property is located, the State of Connecticut and
private, nonprofit land-holding organizations have prior options to acquire
such interest in the context of priorities based on intended use, with open
space use being favored; (e) if the municipality or the State chooses to
exercise its option, and the purchase price cannot be established by agreement,
the acquisition may be accomplished by eminent domain and (f) the proceeds from
the sale of water company land must generally be reinvested in utility
improvements or land necessary to protect water supply sources; and land may be
sold only if consistent with the utility's water supply plan. Legislation
enacted in 1988 provides that the DPUC use an accounting treatment which
equitably allocates between the utility's ratepayers and its stockholders the
economic benefits of the net proceeds from the sales of land which has ever
been in the utility's rate base. Although CWC has plans to sell small,
discrete parcels of land, CWC has no significant amounts of excess land which
it presently expects to sell or otherwise dispose of.
23
Page 23
GENERAL
Federal and State regulations and controls concerning water quality,
pollution and the effluent from treatment facilities are still in the process
of being developed and it is not possible to predict the scope or
enforceability of regulations or standards which may be established in the
future, or the cost and affect of existing and potential regulations and
legislation upon any of the existing and proposed facilities and operations of
CWC. Further, recent and possible future developments with respect to the
identification and measurement of various elements in water supplies and
concern with respect to the impact of one or more of such elements on public
health may in the future require CWC to replace or modify all or portions of
its various water supplies, to develop replacement supplies and/or to implement
new treatment techniques. In addition, CWC anticipates that threatened and
actual contamination of its water sources will become an increasing problem in
the future. CWC has expended and will in the future be required to expend
substantial amounts to prevent or remove said contamination or to develop
alternative water supplies. See "Legal Proceedings" for a discussion of a
recent contamination problem. Any of the aforesaid developments may
significantly increase CWC's operating costs and capital requirements. Since
the DPUC's rate setting methodology permits a utility to recover through rates
prudently incurred expenses and investments in plant, based upon past DPUC
practice, the Company expects that such expenditures and costs should
ultimately be recoverable through rates for water service.
EMPLOYEES
As of December 31, 1994, CWC employed 164 full-time and part-time
employees. The Company has no employees other than its officers, who are also
officers of CWC and whose compensation is paid by CWC. All full-time employees
of CWC who meet specified age and length of service requirements participate in
an Employee's Retirement Plan which is a non-contributory trusteed pension plan
and provides for a monthly income for employees at retirement. None of the
employees is covered by a collective bargaining agreement. Management believes
that its relationship with its employees is satisfactory.
24
Page 24
ITEM 2. PROPERTIES
The properties of CWC 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. CWC owns its principal
properties in fee, except that the Collinsville System's principal source of
water supply is a water supply contract with the MDC. (See below for
description of this contract.) The Company believes that CWC's properties are
in good operating condition. Water mains are located, for the most part, in
public streets and, in a few instances, are located on land owned by CWC in fee
and land occupied under easements, most of which are perpetual and valid and
sufficient for the purpose for which they are held. Although it is impractical
to investigate the validity of the title to some of the easements held by CWC
for distribution mains or to clear title in the cases where such distribution
easement titles have been found defective, any such irregularities or defects
in title which may exist do not materially impair the use of such properties in
the business of CWC. Substantially all of CWC's property is subject to the
lien of its Mortgage Indenture to secure CWC's First Mortgage Bonds.
CWC owns ten water filtration treatment plants. Information about
these facilities is contained in the following table.
Year Treatment Capacity
Placed in (in million
Filtration Plant Operation Region gallons per day)
---------------- --------- ------ ----------------
Guilford Well 1965 Shoreline 0.70
Rockville 1970 Northern 5.00
Westbrook Well 1975 Shoreline 0.23
Hunt Well Field 1976 Northern 2.50
MacKenzie 1980 Shoreline 4.00
Williams 1981 Shoreline 1.00
Stafford Springs 1984 Northern 1.00
Reynolds Bridge 1986 Naugatuck 1.00
Stewart 1989 Naugatuck 6.00
O'Bready Well 1994 Northern 0.50
25
Page 25
CWC has an agreement with the Metropolitan District Commission, a
public water authority serving portions of Hartford County ("MDC"), to provide,
among other things, the construction, operation and maintenance by MDC of a new
filter plant to supply treated water for substantially all of CWC's
Collinsville System, with a capacity of 650,000 gallons per day, and the
provision by MDC to CWC's Collinsville System of up to 650,000 gallons per day
of water from this plant meeting all applicable Federal and State requirements.
CWC has paid 40% of the cost of construction of this plant and pays MDC an
appropriate rate for water used by CWC in excess of 400,000 gallons per day.
The water treatment plant went into service in December, 1990 following DPHAS
approval.
As of December 31, 1994, the transmission and distribution systems of
CWC consisted of approximately 955 miles of main, of which approximately 30
miles have been laid in the past five years. On that date, approximately 75%
of CWC's mains were eight-inch diameter or larger. Substantially all new main
installations are cement-lined ductile iron pipe of eight-inch diameter or
larger. Approximately 100 miles of the Company's pipelines are asbestos
cement.
From January 1, 1990 through December 31, 1994, CWC added $30,368,000
of gross plant additions (including plant financed by customer advances and
contributions in aid of construction, allowance for funds used during
construction and expenditures by CWC reimbursed by any other sources), and
retired or sold property having a book value of $2,395,000, resulting in net
additions during the period of $27,973,000.
26
Page 26
CWC PRODUCTION FACILITIES AS OF DECEMBER 31, 1994
Total Dependable Greatest 1994
Storage Yield (1) Avg. Daily Avg. Daily
Capacity (thousands Delivery Delivery
(thousands of gallons (thousands (thousands
of gallons) per day) of gallons) of gallons)
----------- ------------ ------------ -------------
Northern Region:
Western System
Enfield-East Windsor System Wells 7,200
Suffield System Wells 200
South Windsor Wells 720
Ellsworth Wells 100
Lake Shenipsit 5,050,000 11,200
Talcottville Well 300
Vernon Wells 690
Windsor Locks Wells 300
---------
20,710 9,026 (2) 8,398
--------- --------- ---------
Somers System Wells 390 108 (3) 99
--------- --------- ---------
Crescent Lake System (4) -- 31 (5) 31
--------- --------- ---------
Reservoir Heights (6) -- 4 (7) 4
--------- --------- ---------
Stafford Springs System
#4 Reservoir 51,000 )
#3 Reservoir 15,000 ) 700
#2 Reservoir 60,000 )
---------
700 629 (8) 499
--------- --------- ---------
Tolland Aqueduct System Wells 42 25 (3) 21
--------- --------- ---------
Llynwood System Wells 30 13 (3) 9
--------- --------- ---------
Lakewood/Lakeview System Wells 49 30 (5) 30
--------- --------- ---------
Nathan Hale System Wells 20 9 (8) 5
--------- --------- ---------
Shoreline Region:
Guilford System
Killingworth & Kelseytown Reservoirs 273,000 2,300
Wells 4,540
---------
6,840 3,676 (9) 3,475
--------- --------- ---------
Chester System
Upper and Lower Reservoirs 176,000 )
Turkey Hill Reservoir - Haddam 149,000 ) 1,200
Wilcox Reservoir - Chester 65,000 )
Deuse Pond - Chester 4,800 )
Well 190
---------
1,390 900 (10) 636
--------- --------- ---------
Chester Village West Wells 30 5 (5) 5
--------- --------- ---------
27
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Total Dependable Greatest 1994
Storage Yield (1) Avg. Daily Avg. Daily
Capacity (thousands Delivery Delivery
(thousands of gallons (thousands (thousands
of gallons) per day) of gallons) of gallons)
----------- ----------- ----------- -----------
Naugatuck Region:
Central System
Long Hill Reservoir 506,000 )
Twitchell Reservoir 1,000 )
Candee Reservoirs (11) 7,000 ) 3,600
W. H. Moody Reservoir 335,000 )
Straitsville Reservoir 7,000 )
Mulberry Reservoir 50,000 )
Beacon Valley Brook Supply -- )
Meshaddock Brook Supply 300
Wells 1,000
---------
4,900 4,970 (13) 2,674
--------- --------- ---------
Terryville System
Harwinton Ave. Reservoir (11) 14,800 50
Wells 910
---------
960 498 (2) 484
--------- --------- ---------
Thomaston System
Thomaston Reservoir (11) 93,000 310
Wells 0
Waterbury Interconnection (12) 864
---------
1,174 852 (14) 378
--------- --------- ---------
Collinsville System
Water Acquired by Contract (15) 650
Reservoir (distribution) 100
---------
650 391 (3) 318
--------- --------- ---------
(1) Dependable yield is the maximum continuous rate of withdrawal available
from a source of supply without seriously depleting the source.
Dependable yield is based on long-term (99% dry year) rainfall records,
storage capacity and watershed area.
(2) Occurred in 1988.
(3) Occurred in 1989.
(4) Supplied by water purchased from the Town of East Longmeadow,
Massachusetts.
(5) Occurred in 1994.
(6) Supplied by water purchased from the Town of Manchester.
(7) First occurred in 1992.
(8) Occurred in 1990.
(9) Occurred in 1987.
(10) Occurred in 1969.
(11) Reservoir held in reserve and used for emergencies only.
(12) Generally used for emergencies. However, see "Item 3. Legal Proceedings"
for a discussion of the contamination of the Thomaston Wells. CWC
presently uses the Waterbury emergency water connection to purchase
substantially all of its water supply requirements for the Thomaston
System from the Waterbury Municipal Water Department.
(13) Occurred in 1964.
(14) Occurred in 1966.
(15) The Collinsville System has a right to up to 650,000 gallons per day
through agreement with MDC. The source is Nepaug Reservoir with a storage
capacity of 9.5 billion gallons. See "Item 2. Properties" for a
description of this agreement.
28
Page 28
ITEM 3. LEGAL PROCEEDINGS
During the latter part of 1992 it was discovered that the CWC's Reynolds Bridge
well field in Thomaston, Connecticut, was contaminated with methyl tertiary
butyl ether ("MTBE"), a gasoline additive. At this time CWC is implementing an
appropriate remediation program to clean up the well site. In 1994 legal
action was initiated against all parties deemed responsible for such
contamination in order to obtain recovery of CWC's investigation, clean-up and
water treatment and supply costs. The lawsuit is still in the discovery stage.
The magnitude of such costs is unknown at this time, but it is presently
estimated that such costs may exceed $4,700,000 of which approximately
$1,400,000 has been incurred at December 31, 1994, and $500,000 is expected to
be incurred in 1995. The clean-up process may take ten years or more to
complete. The Company has reflected the total estimated clean-up costs as a
deferred asset in the accompanying consolidated balance sheets representing
costs which management believes will be recoverable from third parties or
future ratepayers. An offsetting liability has been recorded, net of payments,
through December 31, 1994. CWC is presently purchasing water from a public
water supply system to provide service to its customers at normal levels. The
Company and its legal counsel presently believe that any such costs which are
not recovered from third parties should be allowed to be recovered through
rates charged for water service and that the ultimate resolution of this matter
will not have a material impact on the results of operations or financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
29
Page 29
ITEM 4.1 EXECUTIVE OFFICERS OF THE COMPANY
Period Held or Term of Office
Name Age Office Prior Position Expires
--------------- --- ---------------- -------------- --------------
M. T. Chiaraluce 52 President and Chief Held position of President 1995 Annual Meeting
Executive Officer since January, 1992 and
Chief Executive Officer
position with the Company
since July, 1992
W. F. Guillaume 62 Vice President - Held current position or 1995 Annual Meeting
Engineering and other executive position
Planning with the Company since
April, 1970
B. L. Lenz 55 Vice President - Held current position or 1995 Annual Meeting
Finance and Accounting other executive position
and Treasurer with the Company since
March, 1979
J. R. McQueen 52 Vice President - Held current position or 1995 Annual Meeting
Customer Service and other management or
Government Affairs engineering position with
the Company since October,
1965
K. W. Kells 51 Vice President - Design Held current position or 1995 Annual Meeting
and Construction other engineering position
with the Company since
June, 1970
V. F. Susco, Jr. 43 Vice President - Held current position or 1995 Annual Meeting
Administration and engineering position with
Secretary the Company since May, 1978
T. P. O'Neill 41 Vice President - Held current position or 1995 Annual Meeting
Operations other engineering position
with the Company since
February, 1980
P. J. Bancroft 45 Assistant Treasurer and Held current position or 1995 Annual Meeting
Controller other accounting position
with the Company since
October, 1979
There are no family relationships between any of the Directors and
Executive Officers of the Company.
30
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Part II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market
under the symbol CTWS and is included in the NASDAQ National Market System.
The following table sets forth, for the periods indicated, the high and low
last sale prices of the Company's Common Stock in the over-the-counter market
and the dividends paid by the Company during the two most recent calendar
years. The quotations represent actual sales prices, but the sales reflected
may be inter-dealer transactions which do not reflect retail mark-up, mark-down
or commission. NASDAQ is the source of the quotations for all periods. Since
its affiliation with CWC in 1975, the Company has paid quarterly cash dividends
on its Common Stock.
Price
-------------------------
Dividends
Period High Low Paid
------ ---- --- ----------
1994:
First Quarter $28.00 $25.00 $ .41
Second Quarter 26.00 22.75 .41
Third Quarter 25.00 22.75 .41
Fourth Quarter 24.75 22.75 .42
1993:
First Quarter $28.25 $25.25 $ .41
Second Quarter 29.00 26.75 .41
Third Quarter 31.875 27.25 .41
Fourth Quarter 30.75 27.00 .41
As of March 1, 1995, there were approximately 5,300 holders of record
of the Company's Common Stock.
Holders of Common Stock are entitled to receive such dividends as may
be declared by the Board of Directors from funds legally available therefor.
Future dividends of the Company will be dependent upon timely and adequate rate
relief, consolidated and parent company net income, availability of cash to the
Company and CWC, the financial condition of the Company and CWC, the ability of
the Company and CWC to sell their securities, the requirements of the
construction program of CWC and other conditions existing at the time.
The Company is not permitted to pay any dividends on its Common Stock
unless full cumulative dividends to the last preceding dividend date for all
outstanding shares of Cumulative Preferred Stock of the Company have been paid
or set aside for payment.
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The income of the Company is derived mainly from earnings on its equity
investment in CWC. At December 31, 1994, the retained earnings of CWC
aggregated $9,363,000. As a result of dividend restrictions contained in CWC's
mortgage indenture and Preferred Stock provisions, the amount of cash dividends
payable on CWC's common equity capital out of CWC's retained earnings was
limited to $9,113,000.
The terms of CWC's outstanding Preferred Stock prohibit payment of
cash dividends on CWC's Common Stock in the event of an arrearage in the
payment of cumulative dividends on the Preferred Stock. CWC is in compliance
with these Preferred Stock restrictions.
The Company has a Dividend Reinvestment and Common Stock Purchase
Plan. Under the plan, customers and employees of CWC and holders of Common
Stock who elect to participate may automatically reinvest all or specified
percentages of their dividends in additional shares of Common Stock (at a price
equal to 95% of the average market price for the five days preceding the
purchase) and may also make optional cash payments of up to $10,000 per
calendar quarter to purchase additional shares of Common Stock at 100% of said
average market price. The Company issues authorized but unissued shares of
Common Stock to meet the requirements of the plan, and 1,500,000 shares have
been registered with the Securities and Exchange Commission for that purpose.
Under the plan, approximately 655,000 shares had been issued by the Company as
of December 31, 1994
The Company has a Performance Stock Program that provides for an
aggregate maximum of up to 50,000 shares of Common Stock of the Company to be
issued as awards of restricted stock to eligible employees of CWC, conditioned
on the attainment of performance goals established by the Salary Committee.
Under the plan approximately 9,500 shares, 5,900 of which are restricted, had
been issued by the Company as of December 31, 1994.
The Company has an Employee Savings 401-K Match Plan. Under the Plan
approximately 4,000 shares of Common Stock had been issued by the Company as of
December 31, 1994.
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ITEM 6. SELECTED FINANCIAL DATA
(Not covered by Report of Independent Public Accountants)
(THOUSANDS OF DOLLARS EXCEPT WHERE INDICATED) YEARS ENDED DECEMBER 31,
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
INCOME
Operating revenues................................................ $38,129 $38,131 $37,190 $37,372 $32,301
Operating expenses................................................ $28,474 $28,148 $27,157 $26,970 $23,589
Operating Income.................................................. $9,655 $9,983 $10,033 $10,402 $8,712
Interest and debt expense......................................... $3,940 $4,338 $4,872 $5,321 $5,650
Net income applicable to common stock............................. $5,842 $5,529 $5,111 $4,839 $2,945
Weighted average common shares outstanding........................ 2,812,456 2,769,347 2,728,573 2,686,337 2,272,114
Earnings per average common share ................................ $2.08 $2.00 $1.87 $1.80 $1.30
Number of shares outstanding at year end.......................... 2,870,559 2,789,977 2,751,331 2,711,125 2,667,878
ROE on year end common equity..................................... 12.2% 12.2% 11.8% 11.7% 7.3%
Cash dividends paid per common share.............................. $1.65 $1.64 $1.61 $1.60 $1.57
Dividend payout ratio............................................. 79.3% 82.0% 86.1% 88.9% 120.8%
Interest coverage - long-term debt (a)............................ 4.1X 4.2X 3.5X 3.1X 2.3X
Effective Federal income tax rate (percentage of pre-tax income).. 38.5% 38.3% 36.7% 34.8% 35.1%
Accumulated depreciation to depreciable plant (b)................. 25.28% 24.49% 22.85% 21.25% 19.73%
CASH FLOWS
Dividends to common stockholders.................................. $4,637 $4,539 $4,391 $4,295 $3,612
Deferred income taxes and investment tax credits.................. $1,080 $994 $968 $963 $889
Depreciation...................................................... $3,236 $3,194 $3,126 $3,115 $3,009
Gross additions to utility plant.................................. $6,514 $5,688 $4,272 $5,218 $8,682
BALANCE SHEET
Net utility plant................................................. $140,784 $137,568 $135,697 $135,132 $133,103
Total capitalization.............................................. $103,355 $100,508 $98,510 $97,771 $97,615
Long-term debt.................................................... $54,600 $51,600 $51,600 $52,412 $52,953
Preferred stock (consolidated, excluding current maturities)...... $772 $3,748 $3,772 $3,869 $4,516
Book value - per common share .................................... $16.72 $16.19 $15.68 $15.30 $15.05
Capitalization ratios:
Common stockholders' equity..................................... 46% 45% 44% 42% 41%
Preferred stock................................................. 1% 4% 4% 4% 5%
Long-term debt.................................................. 53% 51% 52% 54% 54%
(a) Interest coverage represents the ratio of utility operating income plus
Federal and State income tax to annualized interest expense on
outstanding long-term debt.
(b) Year end depreciable plant
OPERATING DATA 1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
REVENUE CLASS (Thousands of dollars)
Residential....................................................... $24,488 $24,574 $23,541 $23,675 $20,245
Commerical........................................................ 4,696 4,745 4,729 4,823 4,112
Industrial........................................................ 1,922 1,851 2,100 2,239 2,049
Public authority.................................................. 893 903 856 836 736
Fire protection................................................... 6,021 5,967 5,881 5,691 5,083
Other............................................................. 109 91 83 108 76
--------- --------- --------- --------- ---------
Total operating revenues........................................ $38,129 $38,131 $37,190 $37,372 $32,301
========= ========= ========= ========= =========
Number of customers (average)..................................... 60,082 59,558 58,966 58,514 58,088
Production (millions of gallons).................................. 6,229 6,206 6,023 6,175 6,390
Number of employees............................................... 164 168 179 177 204
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto.
LIQUIDITY AND CAPITAL RESOURCES
During 1994 our Dividend Reinvestment and Common Stock Purchase Plan (DRIP)
provided over $1,700,000 of new equity capital including approximately $750,000
of new equity from the over 750 customers participating in the Customer Stock
Purchase Plan (CSPP), a recent amendment to the DRIP. These customers acquired
common shares near the market price low for the year. The decline in market
price during 1994 generally reflects the interest rate sensitivity of utility
common stocks whereby the stock market price will decline when long-term
interest rates rise.
Utility plant additions were financed through cash provided by operating
activities and funds received from others. Seasonal cash requirements were
provided through interim bank borrowings.
Interim bank loans payable at year end were approximately $1,250,000 lower than
last year. Management considers the current $9,000,000 line of credit with
three banks adequate to finance expected short-term borrowing requirements that
may arise from operations during 1995. Interest expense charged on interim
bank loans will fluctuate subject to financial market conditions experienced
during the year.
Management continued to reduce the Subsidiary's cost of capital through the
issuance of $12,050,000, 6.94%, First Mortgage Bonds, the proceeds of which
were used to refinance higher cost First Mortgage Bonds as well as the
$3,000,000, 9 1/2%, Preferred Stock issue.
A 12.5% return on average common equity was achieved again this year.
Likewise, for the second consecutive year interest coverage, the ratio of
utility operating income plus Federal and State income tax to annualized
interest expense on outstanding long-term debt, exceeded 4.0 times coverage.
RATE RELIEF AND INFLATION
The Subsidiary's last rate increase was effective March 25, 1991. That rate
decision included a 12.7% allowed return on common equity and a 10.74% allowed
return on rate base. Future economic and financial market conditions, coupled
with governmental regulations and fiscal policy, plus other factors which are
unpredictable and often beyond the control of the Company, will influence when
future rate relief will be required. Construction expenditures mandated to
comply with the amendments to the 1986 Safe Drinking Water Act (SDWA) will also
affect water rates charged to customers.
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A Construction Work in Progress (CWIP) rate surcharge calculated at the
utility's last allowed return on rate base, applied to 90% of construction
expenditures for new facilities mandated by the SDWA, is available to provide a
cash return on the Subsidiary's mandated SDWA construction expenditures. The
Subsidiary has collected a CWIP surcharge in the past and expects to receive
approval of a similar surcharge with respect to any future significant SDWA
projects.
Likewise, the Department of Public Utility Control (DPUC) is currently
authorized to approve an acquisition surcharge when it determines, in
consultation with the Department of Public Health and Addiction Services
(DPHAS), that a distressed water system should, or must, be acquired by a
stockholder owned water company so as to assure the availability and potability
of water and the provision of water at adequate volume and pressure to the
customers served by the distressed water system. This surcharge is based on
the acquisition costs and construction improvements necessary to rehabilitate
the acquired water company's system and is calculated in a manner similar to
the CWIP surcharge. The Subsidiary has previously not requested or received
approval of such an acquisition surcharge. Although the Subsidiary is now
requesting an acquisition surcharge in connection with its probable acquisition
of a distressed water company and intends to apply for approval of an
acquisition surcharge with respect to any other mandated water company
acquisition, there is no assurance that the DPUC will permit such a surcharge.
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 capacity. The cumulative effect of inflation results in
significantly higher facility replacement costs which must be recovered from
future cash flow. The ability of the Company to recover this increased
investment in facilities is dependent upon future revenue increases which are
subject to approval by the DPUC.
Management does not presently plan to petition the DPUC for an increase in
permanent rates or to implement a CWIP surcharge in 1995.
OUTLOOK FOR 1995
The Company's profitability is attributable to the sale and distribution of
water, the amount of which is dependent on seasonal weather fluctuations
throughout the year and particularly during the summer months when water demand
will vary with rainfall and temperature levels.
The Board of Directors has approved a $5,750,000 construction budget for 1995.
Funds provided by operating activities, given normal weather patterns and
related operating revenue billings, are expected to finance this construction
program. Refer to Note 14, Utility Plant and Construction Program, in Notes to
Consolidated Financial Statements for additional discussion of the Subsidiary's
future construction program. The improvements to the Killingworth Reservoir,
mentioned in last year's "Outlook", have been delayed due to environmental and
other regulatory requirements and are not included in the current three year
projection of construction costs.
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Through December 31, 1994, the Company has incurred approximately $1,400,000 in
its effort to clean up the Reynolds Bridge Well Field (RBWF) contaminated with
MTBE, a gasoline additive. Additional expenditures of approximately $500,000
related to this clean-up effort are expected to be incurred in 1995. Refer to
Note 13, Recoverable Contamination Clean-Up Costs, for additional discussion of
RBWF clean-up costs. Management believes that these costs and future related
costs should be recovered from the responsible parties.
The DPUC is expected to mandate the takeover of a distressed water system in
1995. This water system, with over 400 customers, will cost the Company
approximately $1,300,000 to acquire and require approximately $1,500,000 of
water system improvements over the next three years. The related rate impact
on these customers is unknown at this time. However, the Company has requested
that an acquisition surcharge be implemented on the customers of the distressed
water system. A decision from the Department of Public Utility Control is
expected in March or April, 1995. The outcome of this mandated acquisition is
not expected to have a material impact on the Company's future financial
results.
The present dividend rate of $.42 per quarter, if maintained (subject to Board
of Directors' approval) represents an annual common stock dividend rate of
$1.68 per share.
The RBWF clean-up costs, plus the acquisition and improvement costs of the
distressed water system, in the amounts mentioned above, may be financed by a
combination of interim bank debt and common equity proceeds received through
the DRIP.
RESULTS OF OPERATIONS
1994 COMPARED WITH 1993
Net income applicable to common stock for 1994 increased from that of 1993 by
$313,000, or $.08 per average common share on an increased number of common
shares outstanding providing a 12.2% return on year end common equity for the
second consecutive year.
This improvement to net income resulted from a $398,000 decrease in interest
and debt expense, a $217,000 decline in preferred stock dividends of the
Subsidiary, and a $26,000 increase in other income and deductions, partially
offset by a $328,000 decrease in operating income.
The decrease in interest and debt expense and preferred dividends is primarily
due to the refinancing of 10%, 9 3/8%, and 8 1/2% First Mortgage Bonds and a 9
1/2% Preferred Stock issue with 6.94% First Mortgage Bonds in 1994, in addition
to the interest savings from the refinancings completed in 1993. Details of
these transactions are provided in Notes 7 and 8, Preferred Stock and Long-Term
Debt, in Notes to the Consolidated Financial Statements. The increase in other
income and deductions is primarily due to increased Allowance For Funds Used
During Construction.
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Operating revenues were virtually the same as the prior year. Last year the
Subsidiary experienced an unusually hot and dry summer that increased
residential customers' water consumption. This year residential and commercial
consumption both dropped 1% from 1993 levels while industrial consumption
increased 5%. Fire protection and other revenues also increased by
approximately $75,000.
Details of the $326,000, or 1.2% increase in operating expense includes the
following:
Increase in expenses:
- Maintenance Expense - The expense savings from the debt refinancings
provided an opportunity to implement planned preventative maintenance
and non-critical repairs to our utility plant . . . . . . . . $177,000
- Income Taxes - Higher taxable income is the primary reason for this
increase. Refer to Notes 9 and 10, Federal Income Tax and Connecticut
Corporation Business Tax Expense, in Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . $ 83,000
- Operation Expense - These expenses increased in total only 1/2% from
last year. Cost reduction and efficiencies offset the 4% average wage
increase granted to employees . . . . . . . . . . . . . . . . $ 65,000
- Depreciation Expense - Primarily due to utility plant placed in
service during 1994 and 1993 . . . . . . . . . . . . . . . . $ 49,000
- Payroll Taxes - Reflects the increase in FICA, Medicare, and State
Unemployment taxable wage bases and a higher State Unemployment tax
rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,000
Decrease in expenses:
- Municipal Taxes - Reflects lower assessed valuations following
revaluation in several towns . . . . . . . . . . . . . . . . $ 71,000
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1993 COMPARED WITH 1992
Net income applicable to common stock for 1993 increased from that of 1992 by
$418,000, or $.13 per average common share on an increased number of common
shares outstanding.
This improvement resulted from a $534,000 decrease in interest and debt expense
partially offset by a $50,000 decrease in operating income and a $66,000
decrease in other income and deductions.
The $457,000 decrease in long-term debt expense reflects the refinancings of
long-term debt through the issuance of Series R, T and U First Mortgage Bonds
completed in 1992 and 1993. Additional details of these transactions are
provided in Note 8, Long-Term Debt in Notes to Consolidated Financial
Statements. The $77,000 decrease in other interest reflects a lower average
balance of interim loans outstanding in 1993 at reduced interest rates.
Operating revenues increased $941,000, or 2.5%, primarily due to a dry, hot
1993 summer season (as compared to a wet, cool 1992 summer) which increased
residential customers' water consumption by approximately 4%, partially offset
by a 14% decline in water volume consumed by industrial customers.
The $991,000 increase in operating expense is primarily due to increased income
and gross revenue taxes, $669,000 (principally due to higher taxable income),
increased maintenance expense, $319,000 (due primarily to implementation of
planned preventative maintenance and non-critical repairs to utility plant),
increase in depreciation expense, $125,000, partially offset by a net reduction
of $122,000 in all other expenses such as operation expenses and municipal
property taxes.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 and consolidated
statements of capitalization of Connecticut Water Service, Inc. (a Connecticut
corporation) and Subsidiary as of December 31, 1994, 1993 and 1992, and the
related consolidated statements of income and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Connecticut Water Service,
Inc. and Subsidiary as of December 31, 1994, 1993 and 1992, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As discussed in Notes 1 and 2 to the financial statements, effective January 1,
1993, the Company changed its methods of accounting for income taxes and
postretirement benefits other than pensions.
/s/ Arthur Andersen LLP
Hartford, Connecticut
February 10, 1995
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CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS 1994 1993 1992
------ --------- --------- ---------
(THOUSANDS OF DOLLARS)
Utility Plant
Utility Plant.......................................................... $181,079 $176,308 $171,820
Construction Work in Progress.......................................... 3,369 2,596 1,617
Utility Plant Acquisition Adjustments.................................. (1,206) (1,206) (1,196)
--------- --------- ---------
183,242 177,698 172,241
Accumulated Provision for Depreciation................................. (42,458) (40,130) (36,544)
--------- --------- ---------
Net Utility Plant.................................................... 140,784 137,568 135,697
--------- --------- ---------
Investments
Unconsolidated Subsidiary at Underlying Equity......................... 35 35 35
Other.................................................................. 846 727 614
--------- --------- ---------
Total Investments.................................................... 881 762 649
--------- --------- ---------
Current Assets
Cash................................................................... 18 44 60
Accounts Receivable (Less Allowance,
1994 - $149; 1993 - $166; 1992 - $256)............................... 3,599 3,425 3,861
Accrued Unbilled Revenues.............................................. 2,800 2,798 2,841
Materials and Supplies, at Average Cost................................ 651 681 827
Prepayments and Other Current Assets................................... 864 255 323
--------- --------- ---------
Total Current Assets................................................. 7,932 7,203 7,912
--------- --------- ---------
Deferred Charges
Unamortized Debt Issuance Expense...................................... 5,587 5,111 4,315
Taxes Recoverable Through Future Rates................................. 9,200 10,000 --
Postretirement Benefits Other Than Pension Recoverable
Through Future Rates................................................. 757 640 --
Recoverable Contamination Clean-Up Costs............................... 4,700 912 200
Prepaid Income Taxes on Contributions in Aid of Construction........... 450 439 443
Other Costs............................................................ 950 445 480
--------- --------- ---------
Total Deferred Charges............................................... 21,644 17,547 5,438
--------- --------- ---------
Total Assets....................................................... $171,241 $163,080 $149,696
========= ========= =========
The accompanying notes are an integral part of these financial statements.
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CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
CAPITALIZATION AND LIABILITIES 1994 1993 1992
------------------------------ --------- --------- ---------
(THOUSANDS OF DOLLARS)
Capitalization (See Accompanying Statements)
Common Stockholders' Equity............................................ $47,983 $45,160 $43,138
Preferred Stock........................................................ 772 772 772
Preferred Stock with Mandatory Redemption Provisions................... -- 2,976 3,000
Long-Term Debt ........................................................ 54,600 51,600 51,600
--------- --------- ---------
Total Capitalization................................................. 103,355 100,508 98,510
--------- --------- ---------
Current Liabilities
Interim Bank Loans Payable............................................. 2,700 3,950 4,983
Current Portion of Long-Term Debt...................................... -- -- 150
Current Portion of Preferred Stock..................................... 30 30 102
Accounts Payable....................................................... 4,219 2,574 1,771
Accrued Taxes.......................................................... 1,810 1,466 1,787
Accrued Interest....................................................... 1,250 1,196 1,135
Accrued Recoverable Contamination Clean-Up Costs....................... 500 -- --
Other.................................................................. 1,544 1,263 1,082
--------- --------- ---------
Total Current Liabilities............................................ 12,053 10,479 11,010
--------- --------- ---------
Accrued Recoverable Contamination Clean-Up Costs......................... 2,811 -- --
--------- --------- ---------
Advances for Construction................................................ 12,099 11,584 11,995
--------- --------- ---------
Contributions in Aid of Construction..................................... 18,145 18,128 17,434
--------- --------- ---------
Deferred Federal Income Taxes............................................ 10,547 9,408 8,355
--------- --------- ---------
Unfunded Future Income Taxes............................................. 9,200 10,000 --
--------- --------- ---------
Unfunded Postretirement Benefits Other Than Pension...................... 757 640 --
--------- --------- ---------
Unamortized Investment Tax Credits....................................... 2,274 2,333 2,392
--------- --------- ---------
Total Capitalization and Liabilities............................... $171,241 $163,080 $149,696
========= ========= =========
The accompanying notes are an integral part of these financial statements.
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CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
DECEMBER 31,
1994 1993 1992
--------- --------- ---------
Common Stockholders' Equity (THOUSANDS OF DOLLARS)
Common Stock Without Par Value; Authorized -
7,500,000 Shares;
Shares Issued and Outstanding: 1994 - 2,870,559;
1993 - 2,789,977; 1992 - 2,751,331................................. $40,126 $38,218 $37,186
Stock Issuance Expense............................................... (1,183) (1,150) (1,150)
Retained Earnings.................................................... 9,040 8,092 7,102
--------- --------- ---------
Total Common Stockholders' Equity................................ 47,983 45,160 43,138
--------- --------- ---------
Cumulative Preferred Stock of
Connecticut Water Service, Inc.
Series A Voting, $20 Par Value; Authorized,
Issued and Outstanding 15,000 Shares............................... 300 300 300
Series $.90 Non-Voting, $16 Par Value;
Authorized 50,000 Shares, Issued and
Outstanding 29,499 Shares.......................................... 472 472 472
--------- --------- ---------
Total Preferred Stock of
Connecticut Water Service, Inc.................................. 772 772 772
--------- --------- ---------
Cumulative Preferred Stock of The Connecticut
Water Company, with Mandatory Redemption
Provisions, Voting, $100 Par Value; Authorized
50,000 Shares, Issued and Outstanding:
SHARES
--------------------------
SERIES 1994 1993 1992
------------- -------- ------- -------
4 3/4% 300 600 900 30 60 90
5 7/8% 0 0 400 -- -- 40
7% 0 0 320 -- -- 32
9 1/2% 0 30,000 30,000 -- 3,000 3,000
Stock Issuance Expense............................................... -- (54) (60)
--------- --------- ---------
30 3,006 3,102
Less Current Portion of Preferred Stock............................. 30 30 102
--------- --------- ---------
Total Preferred Stock of
The Connecticut Water Company................................... -- 2,976 3,000
--------- --------- ---------
Long-Term Debt
The Connecticut Water Company
First Mortgage Bonds
9 3/8% Series L, due 1997......................................... -- 1,800 1,875
7 1/4% Series M, due 2004......................................... -- -- 4,625
8 3/8% Series N, due 1993......................................... -- -- 8,000
8 1/2% Series O, due 1999......................................... -- 2,250 2,250
10% Series P, due 2004......................................... -- 5,000 5,000
6.9% Series Q, due 2021......................................... 10,000 10,000 10,000
5 7/8% Series R, due 2022......................................... 15,000 15,000 15,000
6.65% Series S, due 2020......................................... 8,000 8,000 --
5 3/4% 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 -- --
--------- --------- ---------
54,600 51,600 46,750
8.1% Unsecured Promissory Note, due 2008............................. -- -- 5,000
--------- --------- ---------
54,600 51,600 51,750
Less Current Portion of Long-Term Debt............................... -- -- 150
--------- --------- ---------
Total Long-Term Debt............................................. 54,600 51,600 51,600
--------- --------- ---------
Total Capitalization........................................... $103,355 $100,508 $98,510
========= ========= =========
The accompanying notes are an integral part of these financial statements.
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CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
1994 1993 1992
--------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Operating Revenues....................................................... $38,129 $38,131 $37,190
--------- --------- ---------
Operating Expenses
Operation.............................................................. 12,929 12,864 12,950
Maintenance............................................................ 1,970 1,793 1,474
Depreciation........................................................... 3,086 3,037 2,912
Federal Income Taxes................................................... 3,769 3,710 3,163
Connecticut Corporation Business Taxes................................. 987 963 887
Taxes Other Than Income Taxes.......................................... 5,733 5,781 5,771
--------- --------- ---------
Total Operating Expenses.......................................... 28,474 28,148 27,157
--------- --------- ---------
Utility Operating Income................................................. 9,655 9,983 10,033
--------- --------- ---------
Other Income (Deductions)
Interest............................................................... 100 105 113
Allowance for Funds Used During Construction........................... 89 71 108
Preferred Stock Dividends of Subsidiary................................ (73) (290) (296)
Other.................................................................. 23 (29) 75
Taxes on Other Income.................................................. 26 65 (12)
--------- --------- ---------
Total Other Income (Deductions)................................... 165 (78) (12)
--------- --------- ---------
Interest and Debt Expense
Interest on Long-Term Debt............................................. 3,457 3,855 4,340
Other Interest Charges................................................. 295 273 350
Amortization of Debt Expense........................................... 188 210 182
--------- --------- ---------
Total Interest and Debt Expense................................... 3,940 4,338 4,872
--------- --------- ---------
Net Income Before Preferred Dividends.................................... 5,880 5,567 5,149
Preferred Stock Dividend Requirement..................................... 38 38 38
--------- --------- ---------
Net Income Applicable to Common Stockholders............................. $5,842 $5,529 $5,111
========= ========= =========
Weighted Average Common Shares Outstanding............................... 2,812 2,769 2,729
========= ========= =========
Earnings Per Average Common Share........................................ $2.08 $2.00 $1.87
========= ========= =========
The accompanying notes are an integral part of these financial statements.
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CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1994 1993 1992
--------- --------- ---------
(THOUSANDS OF DOLLARS)
Operating Activities:
Net Income Before Preferred Dividends of Parent........................ $5,880 $5,567 $5,149
--------- --------- ---------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation (including $150 in 1994, $157 in 1993 and
$214 in 1992 charged to other accounts)............................ 3,236 3,194 3,126
Change in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable and
Accrued Unbilled Revenues........................................ (176) 479 744
(Increase) Decrease in Other Current Assets........................ (579) 214 172
(Increase) Decrease in Other Non-Current Items..................... (870) (570) 207
Increase (Decrease) in Accounts Payable, Accrued
Expenses and Other Current Liabilities........................... 2,324 724 1,382
Increase (Decrease) in Deferred Income Taxes and
Investment Tax Credits, Net...................................... 1,080 994 968
--------- --------- ---------
Total Adjustments.............................................. 5,015 5,035 6,599
--------- --------- ---------
Net Cash Provided by Operating Activities...................... 10,895 10,602 11,748
--------- --------- ---------
Investing Activities:
Gross Additions to Utility Plant (including
Allowance for Funds Used During Construction of
$89 in 1994, $71 in 1993 and $108 in 1992)........................... (6,514) (5,688) (4,272)
--------- --------- ---------
Financing Activities:
Proceeds from Interim Bank Loans....................................... 2,700 3,950 4,983
Repayment of Interim Bank Loans........................................ (3,950) (4,983) (6,413)
Proceeds from Issuance of Long-Term Debt............................... 12,050 17,550 15,000
Reduction of Long-Term Debt Including Current Portion.................. (9,050) (17,700) (17,001)
Proceeds from Issuance of Common Stock................................. 1,908 1,032 930
Retirement of Preferred Stock.......................................... (3,030) (102) (102)
Charges Related to Redemption of Subsidiary's 9 1/2% Series
Preferred Stock...................................................... (257) -- --
Advances, Contributions and Funds From
Others for Construction, Net......................................... 594 906 1,182
Costs Incurred to Issue Long-Term Debt, Preferred
Stock, and Common Stock............................................. (697) (1,006) (1,690)
Cash Dividends Paid.................................................... (4,675) (4,577) (4,429)
--------- --------- ---------
Net Cash Provided by (Used in) Financing Activities............ (4,407) (4,930) (7,540)
--------- --------- ---------
Net Increase (Decrease) in Cash.......................................... (26) (16) (64)
Cash at Beginning of Year................................................ 44 60 124
--------- --------- ---------
Cash at End of Year...................................................... $18 $44 $60
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest (Net of Amounts Capitalized)................................ $3,698 $4,189 $5,035
State and Federal Income Taxes....................................... $3,480 $3,945 $2,270
The accompanying notes are an integral part of these financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - Connecticut Water Service, Inc. (the Company) is the parent
company of The Connecticut Water Company (the Subsidiary). Intercompany
accounts and transactions have been eliminated in the accompanying consolidated
financial statements.
REGULATION - The Subsidiary's accounting policies conform to the Uniform System
of Accounts prescribed by the State of Connecticut Department of Public Utility
Control (DPUC) and to generally accepted accounting principles.
REVENUES - The Subsidiary accrues an estimate for the amount of revenues
relating to sales unbilled at the end of each quarter. Generally, all
customers are billed quarterly, except larger commercial and industrial
customers, and public fire protection customers, who are billed monthly. All
customers, except fire protection customers, are metered. 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.
UTILITY PLANT - Utility plant is stated at original cost of such property when
first devoted to public service. The difference between the original cost and
the cost to the Subsidiary 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 - The Allowance for Funds Used
During Construction (AFUDC) represents the estimated cost of funds used to
finance the construction of the Subsidiary's utility plant. Generally, utility
plant under construction is not recognized as part of the Subsidiary's rate
base for ratemaking purposes until facilities are placed into service, and
accordingly, the Subsidiary charges AFUDC 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. The AFUDC
rate applied by the Subsidiary was 10.74% for all years reported.
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DEPRECIATION - Depreciation is computed on a straight line basis at various
rates, approved by the DPUC, estimated to be sufficient to provide for the
recovery of the investment in utility plant over its useful life. Water
treatment facilities are depreciated using a 2.5% composite rate while most
other utility plant items use a composite rate of 1.64%. The provisions for
depreciation based on the average balance of depreciable property were 2.0% for
1994, 1993 and 1992.
CUSTOMERS' ADVANCES FOR CONSTRUCTION AND CONTRIBUTIONS IN AID OF CONSTRUCTION
AND RELATED PREPAID INCOME TAXES - Under the terms of construction contracts
with real estate developers and others, the Subsidiary receives 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. Advances and CIAC received from
developers subsequent to 1986 are taxable to the Subsidiary for income tax
purposes when received. The DPUC allows partial recovery of this tax from real
estate developers and other third parties. The tax collected from third
parties is discounted by the present value of the tax depreciation benefits.
The difference between the tax paid by the Subsidiary and the tax collected is
recorded as a prepaid tax asset. This will be recovered through future tax
depreciation deductions.
INCOME TAXES - Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes", which requires the use of the liability method in accounting for income
taxes. 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 are recoverable or
payable through future rates, an offsetting regulatory asset and liability have
been recorded in the accompanying Consolidated Balance Sheets. Since the
offsetting deferred asset and liability have no cash flow implications, there
is no impact shown on the Company's Cash Flow Statements.
The Company believes that all deferred income tax assets will be realized in
the future. Approximately $1,500,000 and $2,575,000, respectively, of the
December 31, 1994 and 1993 Unfunded Future Income Taxes is related to deferred
Federal income taxes. The remaining $7,700,000 and $7,425,000, respectively,
of the Unfunded Future Income Taxes on the balance sheet at December 31, 1994
and 1993, is related to deferred State income taxes.
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Prior years' financial statements have not been restated for the adoption of
SFAS 109.
Deferred Federal income taxes have been provided for Federal investment tax
credits and 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. The total of these
"Deferred Federal Income Taxes" are listed separately on the balance sheet from
the Unfunded Future Income Taxes which arose from the implementation of SFAS
109.
Connecticut Corporation Business Tax (CCBT) has been reflected using the
flow-through method of accounting for all tax accounting timing 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
benefiting 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 life of the outstanding debt, as approved by the
DPUC.
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NOTE 2: PENSION COST AND OTHER EMPLOYEE BENEFITS
PENSION - The Subsidiary 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. The Subsidiary's policy is to fund accrued pension costs as permitted by
Federal income tax regulations. No funding was permitted for 1994 and 1993.
The table below sets forth the Pension Plan's funded status and amounts
recognized in the Company's year end Balance Sheets.
1994 1993 1992
------ ------ ------
(Thousands of dollars)
Actuarial present value of benefit obligations:
Vested benefit obligation . . . . . . . . . . . . . . . . . . . . $ 6,044 $ 6,776 $ 5,355
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . 6,322 6,909 5,431
Projected benefit obligation . . . . . . . . . . . . . . . . . . . 8,184 9,568 7,694
Pension Plan assets at fair value, primarily
equity securities and U.S. bonds . . . . . . . . . . . . . . . . . 8,825 9,412 8,753
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . (8,184) (9,568) (7,694)
------- ------- -------
Pension Plan assets in excess of (under) projected
benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . 641 (156) 1,059
Add (Deduct):
Unrecognized net gain from past experience
different from that assumed and effects
of changes in assumptions . . . . . . . . . . . . . . . . . . . (1,768) (534) (1,791)
Unrecognized net transition asset at January 1,
1986 being recognized over 15 years . . . . . . . . . . . . . . (226) (259) (291)
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . 347 388 421
------- ------- -------
Prepaid (accrued) pension cost as of December 31 . . . . . . . . . $(1,006) $ (561) $ (602)
======= ======= =======
Net periodic pension cost for 1994, 1993, and 1992 included the following
components:
Service cost-benefits earned during the period . . . . . . . . . . . . $ 469 $ 388 $ 331
Interest cost on projected benefit obligation . . . . . . . . . . . . . 631 618 578
Actual return on Pension Plan assets . . . . . . . . . . . . . . . . . 144 (796) (696)
Deferred investment gain (loss) . . . . . . . . . . . . . . . . . . . . (813) 117 114
Amortization of:
Unrecognized net transition asset . . . . . . . . . . . . . . . . . . (32) (32) (32)
Unrecognized net (gain) loss . . . . . . . . . . . . . . . . . . . . 14 (89) (106)
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . 32 33 33
------- ------- -------
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . $ 445 $ 239 $ 222
======= ======= =======
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The actuarial present value of the projected benefit obligation was
determined based on the following assumptions:
1994 1993 1992
---- ---- ----
Weighted average discount rate . . . . . . 7.75% 6.5% 8.0%
and
Rate of increase in future
compensation levels. . . . . . . . . . . . 5.3% 5.3% 6.6%
The long-term expected rate of return
on plan assets used in the determination
of pension costs . . . . . . . . . . . . . . 8.0% 8.5% 8.0%
The weighted average discount rate assumption is based on the return
provided by high quality fixed income investments at year end. This rate of
return assumption will more than likely change annually. The wage rate
assumption and the rate of return on plan assets are longer out-looking
assumptions which may be revised to reflect changes in economic conditions.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - The Subsidiary provides additional
pension benefits to senior management through a supplemental executive
retirement plan. At December 31, 1994 the actuarial present value of the
projected benefit obligation was $190,000. Expense associated with this plan
was $72,000 for 1994, $123,000 for 1993, and $95,000 for 1992.
POSTRETIREMENT BENEFITS OTHER THAN PENSION (PBOP) - In addition to providing
pension benefits, the Subsidiary provides certain medical, dental and life
insurance benefits to retired employees partially funded by a 501(c)(9)
Voluntary Employee Beneficiary Association Trust (VEBA) that has been approved
by the DPUC. Substantially all of the Subsidiary's employees may become
eligible for these benefits if they retire from the Company on or after age 55
with 10 years of service with the Subsidiary. The contributions for calendar
years 1994, 1993, and 1992 were $250,000, $250,000, and $345,000, respectively
and were deductible by the Subsidiary for Federal Income Tax purposes.
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The Financial Accounting Standards Board (FASB) issued new standards of
accounting for postretirement health care benefits (SFAS 106) which the Company
adopted in 1993. A deferred regulatory asset has been recorded on the
Company's books to reflect the amount which represents the future operating
revenues expected to be collected in customer rates when the associated
liabilities become payable, including appropriate income and gross earnings
taxes. The Company believes that the deferred asset recorded from the adoption
of this statement will be recovered in the future through the ratemaking
process as the DPUC has issued decisions for other water companies authorizing
rate recovery of SFAS 106 expense and has allowed the recording of a regulatory
asset for the portion of the costs to be recovered through future rates. Since
the offsetting deferred asset and liability have no cash flow implications,
there is no impact shown on the Company's cash flow statements.
For SFAS 106, the Company 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.
Prior years' financial statements have not been restated for the adoption of
SFAS 106.
During 1993, three changes in the Company's policy of providing PBOP's
provisions were adopted effective January 1, 1994 and are reflected in the
Accumulated Postretirement Benefit Obligation (APBO) as of December 31, 1993.
These changes are summarized below:
- Participants retiring on or after January 1, 1994 will contribute
20% of the annual medical premium for medical coverage.
- Active employees will be eligible to participate at age 45.
- Participants hired on or after January 1, 1994 will receive full
PBOP benefits after 30 years of service. Benefits will be prorated
for less than 30 years of service.
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The table below sets forth the PBOP plan's funded status and unfunded amounts
recognized in the Company's 1994 and 1993 year end Balance Sheets.
1994 1993
---- ----
(Thousands of dollars)
Accumulated Postretirement Benefit Obligation (APBO):
Current retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,757) $(2,345)
Active employees fully eligible for benefits . . . . . . . . . . . . . . . . (401) (354)
Other active employees . . . . . . . . . . . . . . . . . . . . . . . . . . . (784) (1,145)
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,942) (3,844)
Fair value of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901 836
------- -------
APBO in excess of fair value of assets . . . . . . . . . . . . . . . . . . . . . . (2,041) (3,008)
------- -------
Unrecognized amounts:
Transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,968 2,616
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,684) (248)
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,284 2,368
------- -------
Unfunded PBOP at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 757 $ 640
======= =======
Net periodic PBOP costs include the following components:
Service cost - benefits attributed to service
during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158 $ 273
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 429
Actual return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) (24)
Amortization of transition obligation . . . . . . . . . . . . . . . . . . . . . . . 165 221
Amortization of Losses (Gains) . . . . . . . . . . . . . . . . . . . . . . . . . . (128) --
Deferral of asset (loss) gain during the year . . . . . . . . . . . . . . . . . . . (29) (9)
------- -------
Net Periodic PBOP Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 366 $ 890
======= =======
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation for 1994 was 7.75% and 6.5% for 1993. The
expected long-term after tax return on PBOP assets was 5% for both 1994 and
1993.
In determining the accumulated postretirement benefit obligation, two sets of
medical cost trend rates were used; for retired employees prior to age 65 and
for retirees age 65 and over. Health care cost trends of 14% and 10%,
respectively, were assumed for 1994, grading down over the years to 5.5% in
1999 and after.
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The health care cost trend rate has a significant effect on the accumulated
postretirement benefit obligation and net periodic cost. A
one-percentage-point increase in the assumed health care cost trend rates would
increase the accumulated postretirement benefit obligation at December 31, 1994
by $300,000 and would increase the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year then ended
by $50,000. Accordingly, subsequent changes would increase or decrease the
regulatory assets and liabilities discussed above.
SAVINGS PLAN - The Subsidiary maintains an employee savings plan which allows
participants to contribute from 1% to 10% of pre-tax compensation. Beginning
January 1, 1993 the Subsidiary matches either 25 or 50 cents for each dollar
contributed by the employee up to 3% of the employees' compensation depending
on the Company's earnings per average common share (EPS). If EPS in the prior
year exceeds 110% of dividends paid per common share, the applicable percentage
is 50%; otherwise the match is 25%. The Subsidiary's contribution charged to
expense in 1994 and 1993 was $60,000 and $47,000, respectively, in each case
based on a 50% match.
PERFORMANCE STOCK PROGRAM - The Company has a Performance Stock Program whereby
restricted shares of Common Stock may be awarded annually to Officers of the
Subsidiary. When 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 $120,000, $66,000 and $25,000 for 1994, 1993
and 1992, respectively.
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NOTE 3: COMMON STOCK
The summary of the changes in the common stock accounts for the period January
1, 1992 through December 31, 1994, appears below:
COMMON STOCK
----------------------------------------
ISSUANCE
SHARES AMOUNT EXPENSE
------ ------ -------
(THOUSANDS OF DOLLARS)
Balance, January 1, 1992 . . . . . . . . . . . . . . . . . . 2,711,125 $36,256 $1,148
Stock issued through Dividend Reinvestment Plan . . . 37,868 905 2
Stock issued through Performance Stock Program . . . . 2,338 25 --
--------- ------- ------
Balance, December 31, 1992 . . . . . . . . . . . . . . . . . 2,751,331 37,186 1,150
Stock issued through Dividend Reinvestment Plan . . . 33,803 916 --
Stock issued through Performance Stock Program . . . . 3,074 66 --
Stock issued to Employee Savings 401-K Match Plan . . 1,769 50 --
--------- ------- -------
Balance, December 31, 1993 . . . . . . . . . . . . . . . . . 2,789,977 38,218 1,150
STOCK ISSUED THROUGH DIVIDEND
REINVESTMENT PLAN (1) . . . . . . . . . . . . . . . . 74,053 1,728 33
STOCK ISSUED THROUGH
PERFORMANCE STOCK PROGRAM . . . . . . . . . . . . . . 4,061 120 --
STOCK ISSUED TO EMPLOYEE SAVINGS 401-K MATCH PLAN . . 2,468 60 --
--------- ------- -------
BALANCE, DECEMBER 31, 1994 (2) . . . . . . . . . . . . . . . 2,870,559 $40,126 $ 1,183
========= ======= =======
(1) Includes approximately 33,000 shares issued through the Customer Stock
Purchase Plan, a 1994 amendment to the Dividend Reinvestment Plan.
(2) Includes 5,847 restricted shares issued through the Performance Stock
Program.
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NOTE 4: COMMON STOCK RIGHTS PLAN
In 1988 the Board of Directors authorized a dividend distribution of one right
to purchase Common Stock (Right) for each outstanding share of Common Stock.
Each Right entitles the registered holder under certain circumstances to
purchase from the Company one share of Common Stock (or substitute equity or
debt securities) at an exercise price (subject to antidilution adjustments) of
$50 per share, or under other circumstances, common stock or other securities
or assets of an acquiring entity or of the Company. The Rights are not
currently exercisable or separately transferable apart from the Common Stock.
The Rights can be redeemed by the Board of Directors under certain
circumstances at a price of $.01 per Right. The Agreement pursuant to which
the Rights were issued may be amended by the Board of Directors under certain
circumstances. The Rights expire on October 11, 1998.
NOTE 5: ANALYSIS OF RETAINED EARNINGS
The summary of the changes in Retained Earnings for the period January 1, 1992
through December 31, 1994, appears below:
1994 1993 1992
---- ---- ----
(THOUSANDS OF DOLLARS)
Balance at beginning of year . . . . . . . . . . . . . . . . $ 8,092 $ 7,102 $ 6,382
Income before preferred stock dividends of Company . . . . . 5,880 5,567 5,149
------- ------- -------
13,972 12,669 11,531
------- ------- -------
Charges Related to Redemption of Subsidiary's 9 1/2% Series
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . 257 -- --
------- ------- -------
Dividends declared:
Cumulative preferred, Series A, $.80 per share . . . . . 12 12 12
Cumulative preferred, Series $.90, $.90 per share . . . . 26 26 26
Common stock:
1994 $1.65 per share . . . . . . . . . . . . . . . . . . 4,637 -- --
1993 $1.64 per share . . . . . . . . . . . . . . . . . . -- 4,539 --
1992 $1.61 per share . . . . . . . . . . . . . . . . . . -- -- 4,391
------- ------- -------
4,675 4,577 4,429
------- ------- -------
Balance at end of year . . . . . . . . . . . . . . . . . . . $ 9,040 $ 8,092 $ 7,102
======= ======= =======
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NOTE 6: RESTRICTIONS ON DIVIDENDS
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.
The income of the Company is derived mainly from the earnings of its
Subsidiary. At December 31, 1994, the retained earnings of the Subsidiary
aggregated $9,363,000. Restrictions contained in the Subsidiary's mortgage
indenture limit the amount of cash dividends payable on the Subsidiary's Common
Stock to $9,113,000. The terms of the Subsidiary's outstanding Preferred Stock
prohibit payment of cash dividends on the Subsidiary's Common Stock in the
event of an arrearage in the payment of cumulative dividends on the preferred
stock. The Subsidiary is in compliance with the preferred stock restrictions.
NOTE 7: PREFERRED STOCK
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 price of the Series A and Series $.90 Preferred Stock, if called by
the Company, is $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 generally similar to the Company's
existing Preferred Stock. No shares of the $25 par value Preferred Stock have
been issued to date.
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. No shares of the preference
stock have been issued.
The Subsidiary redeemed all 30,000 shares of the $100 par, 9 1/2% Series
Preferred Stock during March, 1994 with the proceeds received from the Series
V, First Mortgage Bond that was issued on that date. (See Note 8 - Long-Term
Debt)
In 1995, the remaining $30,000 balance, or 300 shares at par, of the 4 3/4%
Series Preferred Stock will be redeemed in accordance with the sinking fund
provisions.
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NOTE 8: LONG-TERM DEBT
In June, 1993, the Subsidiary issued a $5,000,000, 5 3/4%, Series T, First
Mortgage Bond, which secures tax exempt Water Facilities Revenue Refunding
Bonds maturing June 1, 2028, the proceeds of which were used to redeem the
Subsidiary's $5,000,000, 8.1% unsecured promissory note on July 6, 1993.
In September, 1993, the Subsidiary issued a $4,550,000, 5.3%, Series U, First
Mortgage Bond, which secures tax exempt Water Facilities Revenue Refunding
Bonds maturing September 1, 2028, the proceeds of which were used to redeem the
$4,550,000, 7 1/4% Series M, First Mortgage Bond on October 4, 1993.
In October, 1993, the Subsidiary issued an $8,000,000, 6.65%, Series S, First
Mortgage Bond, which secures tax exempt Water Facilities Revenue Refunding
Bonds maturing in 2020, the proceeds of which were used to refund the
$8,000,000, 8 3/8% (plus 1% letter of credit fee), Series N, First Mortgage
Bond that matured December 15, 1993.
On January 4, 1994, the Subsidiary issued a $4,050,000, 6.94%, Series V, First
Mortgage Bond, maturing January, 2029, the proceeds of which were used to
redeem the 9 3/8%, Series L and 8 1/2%, Series O, First Mortgage Bonds. During
March, 1994, an additional $8,000,000, 6.94%, Series V, First Mortgage Bond
was issued. The proceeds of this transaction were used to redeem the
$5,000,000, 10%, Series P, First Mortgage Bonds as well as all 30,000 shares of
the Subsidiary's $100 par, 9 1/2% Preferred Stock.
Substantially all utility plant is pledged as collateral for the Subsidiary's
long-term debt.
There are no mandatory sinking fund payments required on the outstanding First
Mortgage Bonds at December 31, 1994. However, Series Q and R First Mortgage
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.
56
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NOTE 9: FEDERAL INCOME TAX EXPENSE
The following is an analysis of the consolidated Federal income tax provision
and a reconciliation of the consolidated expected Federal income tax, at the
statutory Federal income tax rate, to the actual tax expense:
1994 1993 1992
---- ---- ----
(THOUSANDS OF DOLLARS)
Charged to operations:
Current provision . . . . . . . . . . . . . . . . . . . . . . . . . . $2,563 $2,581 $2,047
------ ------ ------
Deferred tax:
Investment tax credit - amortization . . . . . . . . . . . . . . . (18) (19) (18)
Capitalized interest - net . . . . . . . . . . . . . . . . . . . . 24 28 32
Depreciation - net . . . . . . . . . . . . . . . . . . . . . . . . 1,115 1,025 994
Advances and CIAC - net . . . . . . . . . . . . . . . . . . . . . 85 95 108
------ ------ ------
Total deferred tax . . . . . . . . . . . . . . . . . . . . . . 1,206 1,129 1,116
------ ------ ------
Total charged to operations . . . . . . . . . . . . . . . . . . 3,769 3,710 3,163
------ ------ ------
Charged to other income:
Current provision . . . . . . . . . . . . . . . . . . . . . . . . . . -- (30) 29
Deferred investment tax credit - amortization . . . . . . . . . . . (39) (40) (40)
------ ------ ------
Total charged to other income . . . . . . . . . . . . . . . . . (39) (70) (11)
------ ------ ------
Total Federal income tax expense . . . . . . . . . . . . . . $3,730 $3,640 $3,152
====== ====== ======
Pre-tax income before preferred stock dividends of
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,683 $9,497 $8,597
====== ====== ======
Computed tax expense at 34% . . . . . . . . . . . . . . . . . . . . . . . $3,292 $3,229 $2,923
Increase (reduction) in taxes resulting from
"flow through" accounting for:
Excess of book over tax depreciation . . . . . . . . . . . . . . . 163 156 129
Property taxes deducted for tax less than
expense per books . . . . . . . . . . . . . . . . . . . . . . . 74 181 178
Customer conservation program costs . . . . . . . . . . . . . . . -- -- 113
Issuance expense of refunded debt issues
deducted for tax in excess of expense
per books . . . . . . . . . . . . . . . . . . . . . . . . . . . (27) (85) (236)
Pension costs deducted for tax less than (in
excess of) expense per books . . . . . . . . . . . . . . . . . 149 121 (22)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 38 67
------ ------ ------
Total Federal income tax expense . . . . . . . . . . . . . . $3,730 $3,640 $3,152
====== ====== ======
Effective tax rate (% of pre-tax income) . . . . . . . . . . . . . . . . 38.5% 38.3% 36.7%
==== ==== ====
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NOTE 10: CONNECTICUT CORPORATION BUSINESS TAX EXPENSE
The following is an analysis of the consolidated Connecticut Corporation
Business tax expense and a reconciliation of the consolidated expected tax at
the statutory rate to the actual tax expense:
1994 1993 1992
---- ---- ----
(THOUSANDS OF DOLLARS)
Charged to operations:
Current provision . . . . . . . . . . . . . . . . . . . . . . . . . . $ 987 $ 963 $ 887
Charged to other income:
Current provision . . . . . . . . . . . . . . . . . . . . . . . . . . -- (12) 9
------- ------ ------
Total Connecticut Corporation
Business tax expense . . . . . . . . . . . . . . . . . . . . $ 987 $ 951 $ 896
======= ====== ======
Pre-tax income before preferred stock
dividends of Subsidiary . . . . . . . . . . . . . . . . . . . . . . . $10,670 $10,448 $9,493
======= ======= ======
Computed tax expense at 11.5% . . . . . . . . . . . . . . . . . . . . . . $ 1,227 $ 1,202 $ --
Computed tax expense at 12.65% . . . . . . . . . . . . . . . . . . . . . -- -- 1,201
Increase (reduction) in taxes resulting from "flow
through" accounting for:
Excess of tax over book depreciation . . . . . . . . . . . . . . . . (367) (348) (394)
Other timing differences . . . . . . . . . . . . . . . . . . . . . . 127 97 89
------- ------- ------
Total Connecticut Corporation Business tax
expense . . . . . . . . . . . . . . . . . . . . . . . . . . $ 987 $ 951 $ 896
======= ======= ======
Effective tax rate (% of pre-tax income) . . . . . . . . . . . . . . . . 9.3% 9.1% 9.4%
=== === ===
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NOTE 11: TAXES OTHER THAN INCOME TAXES
Taxes Other than Income Taxes consist of the following:
1994 1993 1992
------ ------ ------
(THOUSANDS OF DOLLARS)
Municipal property taxes . . . . . . . . . . . . . . . . . . . . . . . $3,331 $3,402 $3,456
Payroll taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496 473 455
Connecticut gross earnings tax . . . . . . . . . . . . . . . . . . . . 1,906 1,906 1,860
------ ------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,733 $5,781 $5,771
====== ====== ======
NOTE 12: LINES OF CREDIT
During 1994 bank lines of credit were reduced to $9,000,000 relative to the
construction program. The unused lines of credit at December 31, 1994 was
$6,300,000, which is similar to the previous two years. Commitment fees of
approximately $14,000, $20,000, and $34,000 were paid in 1994, 1993, and 1992,
respectively, on the lines of credit.
At December 31, 1994, 1993, and 1992, the weighted average interest rate on
short-term borrowings outstanding were 6.32%, 3.38%, and 4.03%, respectively.
NOTE 13: RECOVERABLE CONTAMINATION CLEAN-UP COSTS
During the latter part of 1992 it was discovered that the Subsidiary's Reynolds
Bridge well field in Thomaston, Connecticut, was contaminated with methyl
tertiary butyl ether (MTBE), a gasoline additive. At this time the Subsidiary
is implementing an appropriate remediation program to clean up the well site.
In 1994 legal action was initiated by the Company against all parties deemed
responsible for such contamination in order to obtain recovery of the
Subsidiary's investigation, clean-up and water treatment and supply costs. The
lawsuit is still in the discovery stage. The magnitude of such costs is
unknown at this time, but it is presently estimated that such costs may exceed
$4,700,000 of which approximately $1,400,000 has been incurred at December 31,
1994, and $500,000 is expected to be incurred in 1995. The clean-up process
may take ten years or more to complete. The Company has reflected the total
estimated clean-up costs as a deferred asset in the accompanying consolidated
balance sheets representing costs which management believes will be recoverable
from third parties or through future rates. A related liability has been
recorded representing expected future clean-up costs. The offsetting deferred
asset and short and long-term liabilities have no cash flow implications,
therefore, no impact is shown on the Company's cash flow statement. The
Subsidiary is presently purchasing water from a public water supply system to
provide service to its customers at normal levels. The Company and its legal
counsel presently believe that any such costs which are not recovered from
third parties should be allowed to be recovered through rates charged for water
service and that the ultimate resolution of this matter will not have a
material impact on the results of operations or financial condition of the
Company.
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NOTE 14: UTILITY PLANT AND CONSTRUCTION PROGRAM
The components of utility plant and equipment are as follows:
1994 1993 1992
-------- -------- --------
(THOUSANDS OF DOLLARS)
Source of Supply . . . . . . . . . . . . . . . . . . . . . $ 14,814 $ 13,562 $ 13,062
Pumping . . . . . . . . . . . . . . . . . . . . . . . . . . 10,039 9,980 9,644
Water Treatment . . . . . . . . . . . . . . . . . . . . . . 35,147 35,335 34,885
Transmission and Distribution . . . . . . . . . . . . . . . 110,425 108,127 105,480
General (including intangible) . . . . . . . . . . . . . . 8,726 8,747 8,194
Held for Future Use . . . . . . . . . . . . . . . . . . . . 1,928 557 555
-------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . $181,079 $176,308 $171,820
======== ======== ========
The amounts of depreciable plant at December 31, 1994, 1993, and 1992, included
in total plant were $167,944,000, $163,848,000, and $159,941,000, respectively.
The Subsidiary is engaged in a continuous construction program. The
Subsidiary's estimated annual capital expenditures, net of amounts financed by
customer advances and contributions in aid of construction, are expected to be
$5,750,000 during 1995 and $6,600,000 during 1996, increasing to $11,850,000 in
1997. The 1997 projection includes engineering and initial construction phases
for the modifications to the Rockville Water Treatment Plant which are
anticipated to be completed by 1999. A preliminary construction cost estimate
for this project is at least $20,000,000. During the period 1998 to 2000
construction expenditures for routine improvements to the water distribution
system are expected to be approximately $5,000,000 each year.
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NOTE 15: 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 AND TEMPORARY CASH INVESTMENTS - The carrying amount approximates fair
value.
FIRST MORTGAGE BONDS - 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, 1994 and 1993, the estimated fair value of the Company's
long-term debt was $47,600,000 and $59,100,000, respectively, as compared to
the carrying amounts of $54,600,000 and $51,600,000, 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 16: QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 1994 and
1993 appears below:
NET INCOME EARNINGS
UTILITY APPLICABLE TO PER AVERAGE
OPERATING REVENUES OPERATING INCOME COMMON STOCK COMMON SHARE
------------------ ------------------- ---------------- ---------------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Quarter 1994 1993 1994 1993 1994 1993 1994 1993
------- ------ ------ ------ ------ ------ ------ ----- -----
First............... $ 8,864 $ 8,760 $ 2,111 $ 2,132 $1,099 $1,012 $ .39 $ .37
Second.............. 9,201 9,099 2,008 2,154 1,077 995 .38 .36
Third............... 11,022 11,230 3,467 3,501 2,518 2,372 .90 .86
Fourth.............. 9,042 9,042 2,069 2,196 1,148 1,150 .41 .41
------- ------- ------- ------- ------ ------ ----- -----
Year............. $38,129 $38,131 $ 9,655 $9,983 $5,842 $5,529 $2.08 $2.00
======= ======= ======= ====== ====== ====== ===== =====
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 by EDGAR on or about March 13, 1995.
Information concerning the executive officers of the Company is included as
Item 4.1 of this report.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(A) Documents filed as part of this report:
(1) Consolidated Financial Statements:
Page Number
in this Report
--------------
Report to Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 38
Consolidated Balance Sheets -
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . 39-40
Consolidated Statements of Capitalization -
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . 41
Consolidated Statements of Income -
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . 42
Consolidated Statements of Cash Flows -
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . 43
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 44-60
(2) Financial Statement Schedules for the years ended December 31,
1994, 1993 and 1992:
Report of Independent Public Accountants on Schedules
Schedule II - Valuation and Qualifying Accounts
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 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.
63
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EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of Connecticut Water Service, Inc. amended and restated September 15, 1988.(Exhibit
3.1 to Form 10-K for year ended December 31, 1989)
3.2 Certificate Amending Certificate of Incorporation of Connecticut Water Service, Inc. creating $25 par value
Preferred Stock dated September 5, 1989. (Exhibit 3.1a to Form 10-K for year ended December 31, 1989)
3.3 * By-Laws, as amended, of Connecticut Water Service, Inc. as amended January 18, 1995.
3.4 Charter of The Connecticut Water Company and amendments thereto (Certificate of Incorporation) through November 13,
1960. (Exhibit 3.2 to Registration Statement No. 2-61843)
3.5 Articles of General Preferences, Voting Powers, Restrictions and Qualifications of the Preferred Stock of The
Connecticut Water Company. (Exhibit 3.3 to Registration Statement No. 2-61843)
3.6 Certificate Amending Certificate of Incorporation of The Connecticut Water Company effective May 4, 1970 increasing
authorized Preferred Stock. (Exhibit 3.4 to Registration Statement No. 2-61843)
3.7 Resolutions of stockholders of The Connecticut Water Company adopted November 14, 1960 creating Preferred Stock, 5
7/8% Series. (Exhibit 3.5 to Registration Statement No. 2-61843)
3.8 Certificate Amending Certificate of Incorporation of The Connecticut Water Company dated May 8, 1965 creating
Preferred Stock, 4 3/4% Series. (Exhibit 3.6 to Registration Statement No. 2-61843)
3.9 Certificate Amending Certificate of Incorporation of The Connecticut Water Company dated June 20, 1968 creating
Preferred Stock, 7% Series. (Exhibit 3.6 to Registration Statement No. 2-61843)
3.10 Purchase Agreement dated May 20 1968 with respect to sale of Preferred Stock, 7% Series, including Common Stock
dividend restriction in Section 6(e) thereof of The Connecticut Water Company (Exhibit 3.8 to Registration
Statement No. 2-61843)
3.11 Certificate Amending Certificate of Incorporation of The Connecticut Water Company dated April 10, 1975. (Exhibit
3.9 to Registration Statement No. 2-54353)
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3.12 Certificate Amending Certificate of Incorporation of The Connecticut Water Company dated December 22, 1980,
creating Preferred Stock, 12 1/2% Series. (Exhibit 2(k) to Form 10-K for the year ended December 31, 1980)
3.13 Purchase Agreement dated December 1, 1980 with respect to sale of Preferred Stock, 12 1/2% Series. (Exhibit 2(1)
to Form 10-K for the year ended December 31, 1980)
3.14 Resolution of The Connecticut Water Company Board of Directors creating Preferred Stock, 9 1/2% Series dated
March 30, 1989. (Exhibit 3.13 to Form 10-K for year ended December 31, 1989)
3.15 Purchase Agreement with respect to sale of Preferred Stock, 9 1/2% Series dated March 1, 1989. (Exhibit 3.14 to
Form 10-K for year ended December 31, 1989)
3.16 Certificate Amending Certificate of Incorporation by Action of Board of Directors and Shareholders of The
Connecticut Water Company to reduce Director's Liability dated November, 1989. (Exhibit 3.15 to Form 10-K for year
ended December 31, 1989)
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)
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(xv) May 1, 1989 (Exhibit 4.2 (xv) to Form 10-K for year ended 12/31/89)
(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
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 June 1, 1991, between the Connecticut Development Authority and The Connecticut Water
Company. (Exhibit 4.10 to Form 10-K for year ended December 31, 1991)
4.7 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)
4.8 Bond Purchase Agreement dated as of December 1, 1993. (Exhibit 4.8 to Form 10-K for year ended December 31, 1993)
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)
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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 Deferred Compensation Agreement dated January 1, 1989. (Exhibit 10.5 to Form 10-K
for the year ended December 31, 1988)
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 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)
10.8 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)
10.9 Savings Plan of The Connecticut Water Company, amended and restated effective as of January 1, 1989.
10.10 Amendment to The Connecticut Water Company Savings Plan, adopted August 19, 1992. (Exhibit 10.10 to Form 10-K for
the year ended December 31, 1992)
10.11 Second Amendment to The Connecticut Water Company Savings Plan, adopted August 19, 1992. (Exhibit 10.11 to Form
10-K for the year ended December 31, 1992)
10.12 Third Amendment to The Connecticut Water Company Savings Plan, adopted August 18, 1993. (Exhibit 10.12 to Form 10-K
for year ended December 31, 1993)
10.13 * Amendment to The Connecticut Water Company Savings Plan, adopted November 16, 1994.
10.14 * The Connecticut Water Company Employees' Retirement Plan as amended and restated as of January 1, 1994.
10.15 * Water Supply Agreement dated June 13, 1994, between The Connecticut Water Company and the Hazardville Water
Company.
10.16 * Memorandum of Agreement dated December 11, 1957 between The Connecticut Water Company (successor to the Thomaston
Water Company) and the City of Waterbury.
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10.17 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)
10.18 Agreement dated August 13, 1986 between The Connecticut Water Co. and the Metropolitan District. (Exhibit 10.14 to
Form 10-K for the year ended December 31, 1986)
10.19 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)
10.20 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)
10.21 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)
10.22 Dividend Reinvestment and Common Stock Purchase Plan as amended. (Registration Statement No. 33-53211 as amended)
10.23 Contract for Supplying Bradley International Airport. (Exhibit 10.21 to Form 10-K for the year ended December 31,
1984)
10.24 Report of South Windsor Task Force. (Exhibit 10.23 to Form 10-K for the year ended December 31, 1987)
10.25 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)
10.26 Performance Stock Plan. (Registration Statement No.
33-49058.)
24.1 * Consent of Arthur Andersen LLP
----------
Note: Exhibits 10.1 through 10.14 set forth each management contract
or compensatory plan or arrangement required to be filed as an
exhibit to this Form-10K.
(b) No reports on Form 8-K were filed during the
last quarter of 1994.
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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 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
------------------------------
Marshall T. Chiaraluce Director and March 22, 1995
(Principal Executive Officer) President and Chief Executive
Officer
/s/ Bertram L. Lenz
------------------------------
Bertram L. Lenz Director and Vice President - March 22, 1995
(Principal Financial and Finance and Accounting, and
Accounting Officer) Treasurer
/s/ William F. Guillaume Director and Vice President - March 22, 1995
------------------------------ Engineering and Planning
William F. Guillaume
69
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/S/ Francis E. Baker
------------------------------ Director March 11, 1995
Francis E. Baker, Jr.
/S/ Harold E. Bigler
------------------------------ Director March 11, 1995
Harold E. Bigler, Jr.
/S/ Astrid T. Hanzalek Director March 7, 1995
------------------------------
Astrid T. Hanzalek
/S/ Frederick E. Hennick Director March 4, 1995
------------------------------
Frederick E. Hennick
/S/ Marcia L. Hincks Director March 7, 1995
-------------------------------
Marcia L. Hincks
Director March , 1995
------------------------------
William C. Lichtenfels
/S/ Rodolph E. Lunginbuhl Director March 6, 1995
------------------------------
Rudolph E. Lunginbuhl
/S/ Harvey G. Moger Director March 6, 1995
------------------------------
Harvey G. Moger
/S/ Robert F. Neal Director March 6, 1995
------------------------------
Robert F. Neal
/S/ Warren C. Packard Director March 6, 1995
------------------------------
Warren C. Packard
/S/ Donald B. Wilbur Director March 6, 1995
------------------------------
Donald B. Wilbur
70
SCHEDULES
71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
We have audited, in accordance with generally accepted auditing standards, the
financial statements of Connecticut Water Service, Inc. included in this Form
10-K, and have issued our report thereon dated February 10, 1995. As discussed
in Notes 1 and 2 to the financial statements, effective January 1, 1993, the
Company changed its methods of accounting for income taxes and postretirement
benefits other than pension. 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 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 10, 1995
72
CONNECTICUT WATER SERVICE, INC. and SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Additions Deductions Balance
Beginning Charged to From End of
Description of Year Income Reserves (1) Year
------------------------------------ --------- --------- ------------ ------
(Thousands of Dollars)
Allowance for Uncollectible Accounts
Year Ended December 31, 1994 $166 $115 $132 $149
==== ==== ==== ====
Year Ended December 31, 1993 $256 $189 $279 $166
==== ==== ==== ====
Year Ended December 31, 1992 $355 $196 $295 $256
==== ==== ==== ====
(1) Amounts charged off as uncollectible after deducting recoveries
73
EXHIBITS
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR
ENDED DECEMBER 31, 1994
3.3 By-Laws as Amended January 18, 1995
4.2 (xxii) 22nd Supplemental Bond Indenture
10.13 Amendment to Savings Plan
10.14 Amendment to Retirement Plan
10.15 Water Supply Agreement Between CWC and
Hazardville Water Company
10.16 Agreement Between CWC and City of Waterbury
24.1 Consent of Arthur Andersen LLP