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, 1998 or
( ) Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
to .
Commission File Number 0-8084
CONNECTICUT WATER SERVICE, INC.
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-0739839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
93 WEST MAIN STREET, CLINTON, CT 06413
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (860) 669-8636 Securities
registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
NONE NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229,405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( )
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The aggregate market value of the registrant's voting Common Stock,
computed on the price of such stock at the close of business on March 1, 1999 is
$113,894,000.
4,533,103
Number of shares of Common Stock outstanding, March 1, 1999 (excluding
12,838 common stock equivalent shares)
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Document is Incorporated
-------- ------------------------
Definitive Proxy Statement, dated Part III
March 17, 1999, for Annual Meeting of
Shareholders to be held on
April 23, 1999.
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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 addition to operating its core business, CWS offers related services on a
contract basis to other water utilities, communities, and businesses. These
services range from one-time contracts for a particular service to long-term
assignments for system operations and management. CWC is also engaged in a
program of selling off its limited excess real estate holdings. 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 are held
primarily by institutional investors. The Company is a non-operating company
whose income through December 31, 1998 was derived from the earnings on the
Common Stock of CWC.
Commencing January 1, 1999 the Company established a new Subsidiary,
Connecticut Water Utility Services, Inc. (CWUS) to handle unregulated business
activities previously transacted by CWC, its regulated subsidiary. In 1998 and
prior the pre-tax income associated with the activities to be carried on by CWUS
were included in "Non- Water Sales Earnings" in the Other Income (Deductions)
section of the Consolidated Statements of Income. It also transferred the
ownership of CWC's unconsolidated subsidiary, Chester Realty, Inc. directly to
the Company. In 1999 the Company's consolidated financial statements will
encompass the Company's two new subsidiaries, (CWUS and Chester Realty) in
addition to CWC.
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Late in 1998 the Company reached agreements to acquire two smaller
water companies in Eastern Connecticut through an exchange of the Company's
common stock for the capital stock of the acquired companies. These two
companies are Gallup Water Service, Inc. headquartered in Plainfield, and
Crystal Water Utilities Corporation, headquartered in Danielson. Gallup and
Crystal have over 1,100 and 3,300 customers and annual revenues of approximately
$575,000 and $1,800,000, respectively. These two mergers are subject to approval
by the Connecticut Department of Public Utility Control and in the case of
Crystal, by the stockholders of Crystal. Assuming timely receipt of those
approvals, the mergers are expected to be finalized in 1999. Both of these
mergers are expected to qualify as tax exempt stock exchanges and are expected
to be accorded "pooling of interests" accounting treatment. The Company expects
to initially operate each of these two companies as separate subsidiaries of
Connecticut Water Service, Inc., each with its own separate rate structure.
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 rates 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 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, CWUS and Chester Realty, Inc. Substantially all of the
Company's revenues and operating income are attributable to the sale and
distribution of water by the operating regions of CWC and to CWC's related
operations. In 1998 $.09 a share or approximately 6% of the Company's total net
income came from real estate sales and non-water sales earnings. 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). See
"Business - Rates" and "Business - Regulation".
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The Company's subsidiary, Chester Realty, was organized in 1969 to
assist in the acquisition of real estate. The assets and operations of this
subsidiary are not significant. In 1999 the ownership of this Subsidiary was
transferred directly from CWC to CWS.
CWC supplies water and, in most instances, provides fire protection
through three separate operating regions in all or portions of 35 towns in
Connecticut. The service areas have an estimated total population of
approximately 223,000 based on DPUC population estimates of 3.5 people per
average household. During the twelve months ended December 31, 1998,
approximately 64% of the Company's consolidated operating revenues were received
from residential customers, 12% from commercial customers, 4% from industrial
customers, 3% from public authority customers, and 17% 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, 1998:
Utility Plant
Regions Dollars Percent
------- ------- -------
Northern $98,854,000 45%
Shoreline 68,220,000 31%
Naugatuck 52,772,000 24%
----------- ----
$219,846,000* 100%
============ ====
* Does not include $609,000 of plant held for future use.
At December 31, 1998, 63,780 customers were served by CWC. At that
date, all customers were metered except fire protection customers, 380 customers
of the Sound View Water System, acquired in 1995; and 374 customers of the Point
O'Woods Water System, acquired in 1997. The Company requires all applicants for
new service, other than customers at certain seasonal systems and fire
protection customers, to be metered.
The Company's principal office is located at 93 West Main Street,
Clinton, Connecticut 06413, and its telephone number is 860-669-8636.
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The business of CWC is subject to seasonal fluctuations and weather
variations. 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, and various outdoor uses such as private and
public swimming pools and lawn sprinklers. From year to year and season to
season particularly during the warmer months, demand will vary with rainfall and
temperature levels.
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, 1998" are
in excess of present average daily consumption. Except for requests for
voluntary conservation in the summers of 1988 and, in the Shoreline Region only,
1995, no restrictions on water use have been required in over 25 years.
Water is secured from both surface and subsurface supplies and supplied
through interconnections with other water systems. In 1998, surface sources
provided approximately 49% of the supply, well supplies provided approximately
50%, and interconnections with other systems supplied 1%. 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 Public Health (DPH) for approval. An updated
plan must be prepared every five years or as requested by the DPH. Updated plans
for each of CWC's water systems have been prepared and approved by the DPH. CWC
continues to explore and develop additional ground water supplies and study
further development of surface water sources to meet anticipated future water
requirements.
See "Business - Construction Program", "Business - Rates" and "Business
- - Regulation".
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OPERATING REGIONS
NORTHERN
The Northern Region is composed of eight separate systems, not
interconnected, as listed below:
Number of
Customers
System Towns (or Portions Thereof) Served at 12/31/98
------ ---------------------------------- -----------
Western (including Suffield, Windsor Locks, East
the former Tolland Granby, Enfield, East Windsor, South
Aquaduct System) Windsor, Vernon, Ellington, Tolland 29,282
Somers Somers 418
Crescent Lake Enfield 160
Stafford Springs Stafford 1,012
Lakewood/Lakeview Coventry 181
Nathan Hale Coventry 38
Llynwood Bolton, Vernon 75
Reservoir Heights Vernon 22
------
31,188
======
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 distribution system for Bradley
International Airport located in Windsor Locks, Suffield and East Granby,
Connecticut.
The Western System has three emergency standby inter-connections 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. During 1995 an interconnection was
completed between the Somers System and the water system of the Hazardville
Water Company in Somers to provide water to the Hazardville Water Company.
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.
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SHORELINE
The Shoreline Region is composed of eight separate systems, not
interconnected, as listed below:
Number of
Customers
System Towns (or Portions Thereof) Served at 12/31/98
------ ---------------------------------- -----------
Guilford Guilford, Old Saybrook, Westbrook,
Clinton, Madison 15,828
Chester Chester, Deep River, Essex 2,326
Chester Village West Chester 11
Sound View Old Lyme 380
Point O'Woods Old Lyme 374
Bay Mountain Griswold 105
SDC Voluntown 54
Mason's Island Stonington 176
------
19,254
======
The territory served is primarily residential with some commercial and
industry. In 1998 CWC purchased the Mason's Island system and in 1997 purchased
the Point O'Woods, Bay Mountain, and SDC water systems, all in southeastern
Connecticut. These systems increased the region's water customer base by nearly
4%.
NAUGATUCK
The Naugatuck Region is composed of four separate systems, not
interconnected, as listed below:
Number of
Customers
System Towns (or Portions Thereof) Served at 12/31/98
- ------ ---------------------------------- -----------
Central Naugatuck, City of Waterbury, Beacon
Falls, Bethany, Prospect 8,835
Terryville Plymouth, Thomaston 1,992
Thomaston Thomaston 1,222
Collinsville Canton, Avon, Burlington 1,289
------
13,338
======
The territory served is residential and industrial including a
municipality which represented approximately 7.2% of the region's 1998 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,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Customers (Average)
Residential Metered 56,839 55,799 55,404 54,727 54,464
Commercial Metered 3,953 3,977 3,953 3,906 3,827
Industrial Metered 329 359 365 368 364
Public Authorities Metered 423 474 472 470 467
Fire Protection and Other 1,855 1,806 1,403 1,373 960
------- ------- ------- ------- -------
Total 63,399 62,415 61,597 60,844 60,082
======= ======= ======= ======= =======
Production (Millions of Gallons)
Residential Metered Sales 4,006 3,974 3,862 3,988 3,874
Commercial Metered Sales 901 917 904 934 908
Industrial Metered Sales 402 451 441 446 460
Public Authorities Metered Sales 227 228 220 227 179
------- ------- ------- ------- -------
Total Metered Consumption 5,536 5,570 5,427 5,595 5,421
Fire Protection, Company Use
and Unaccounted For 691 717 612 777 808
------- ------- ------- ------- -------
Total 6,237 6,287 6,039 6,372 6,229
======= ======= ======= ======= =======
Operating Revenues (Thousands of Dollars)
Residential Metered $24,170 $24,476 $24,485 $25,147 $24,448
Commercial Metered 4,556 4,633 4,716 4,852 4,696
Industrial Metered 1,640 1,850 1,861 1,868 1,922
Public Authorities Metered 1,065 1,057 1,050 1,090 893
Fire Protection and Other Non-Metered . 6,493 6,485 6,480 6,393 6,130
------- ------- ------- ------- -------
Total $37,924 $38,501 $38,592 $39,350 $38,089
======= ======= ======= ======= =======
Average Revenue per 1,000 Gallons
Residential Metered $ 6.03 $ 6.16 $ 6.34 $ 6.31 $ 6.32
Commercial Metered $ 5.06 $ 5.05 $ 5.22 $ 5.19 $ 5.17
Industrial Metered $ 4.08 $ 4.10 $ 4.22 $ 4.19 $ 4.18
Public Authorities Metered $ 4.49 $ 4.64 $ 4.77 $ 4.80 $ 4.99
Miles of Distribution Mains
(End of Period) 1,010 1,000 980 970 955
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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 the construction program for
1999-2001, excluding plant financed by customer advances and contributions in
aid of construction, will aggregate approximately $20,000,000. Routine
improvements to water systems and equipment are approximately $13,500,000, while
the remaining $6,500,000 is comprised of individual larger projects addressing
the replacement and expansion of infrastructure, water treatment facilities, and
increased storage capacity. No significant capital expenditures are anticipated
to be required by CWUS or Chester Realty during this period.
The $20,000,000 construction expenditures for 1999 through 2001 include
approximately $3,600,000 for all known costs of studies and construction of
facilities to comply with existing SDWA and OSHA 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. The projected capital expenditures also include
$1,300,000 expected to be spent in 1999 to modify/replace equipment as part of
the Company's Year 2000 compliance program.
FINANCING
The Company and CWC expect to finance a significant portion of the
anticipated $20,000,000 construction expenditures through 2001 with net funds
generated from operations (net cash provided by operating activities less
dividends paid). Net funds generated from operations were $6,370,000,
$8,789,000, and $5,436,000, for the years 1998, 1997 and 1996, 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 short-term interim bank loans which may be
refinanced through the sale of Preferred Stock and/or long or medium-term
unsecured debt by CWC and/or the Company, and/or 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.
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The Company and CWC currently have lines of credit aggregating
$9,000,000, consisting of conventional lines of credit with four banks, which
management considers adequate at this time. As of December 31, 1998, the Company
had approximately $1,895,000 of borrowings outstanding under these lines of
credit.
During the period 1979 through 1988 approximately $43,000,000 of
tax-exempt long-term debt was issued by CWC to finance construction
expenditures. In 1998 CWC refinanced its $10,000,000 1991 Series Q First
Mortgage Bonds with new tax exempt financing. In conjunction with this
refinancing, CWC issued $8,000,000 additional tax exempt financing to replace
$8,000,000 of its outstanding short-term debt. Although CWC received an
$8,000,000 tax exempt financing allocation from Connecticut in 1998, due to 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. Although CWC has
been able to refund all of its approximately $42,000,000 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.
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: 1998 - 5.16 times
interest charges, 1997 - 4.24 times, 1996 - 4.28 times, 1995 - 4.29 times, and
1994 - 4.12 times.
CWC's coverage of interest charges on all long-term debt at year end
has been: 1998 - 3.87 times interest charges, 1997 - 4.23 times, 1996 - 4.28
times, 1995 - 4.29 times, and 1994 - 4.12 times.
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CWC's Times Coverage of Annual Interest
On Long-Term Indebtedness
Year Ended December 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ ----
(Thousands of Dollars)
Utility Operating Income (a) $10,480 $10,350 $10,161 $10,053 $9,690
Federal and State Income Tax 3,980 4,486 4,812 4,950 4,756
State Income Tax -
Capitalization (b) (174) (175) (157) (150) (150)
------- ------- ------- ------- ------
Net Operating Earnings $14,286 $14,661 $14,816 $14,853 $14,296
======= ======= ======= ======= =======
Annual Interest on First
Mortgage Bonds (c) $ 2,766 $ 3,456 $ 3,458 $ 3,460 $ 3,468
======= ======= ======= ======= =======
Times Interest Coverage (d) 5.16 4.24 4.28 4.29 4.12
==== ==== ==== ==== ====
Annual Interest on Unsecured
Bonds & Promissory Notes (c) 921 9 -- -- --
------- ------- ------- ------- -----
Annual Interest on Long-Term
Debt $ 3,686 $ 3,465 $ 3,458 $ 3,460 $ 3,468
======= ======= ======= ======= =======
Times Interest Coverage (e) 3.87 4.23 4.28 4.29 4.12
==== ==== ==== ==== ====
(a) Connecticut Water Service, Inc.'s utility operating income for the years
1998 to 1994 is $ 10,304, $10,334, $10,128, $10,022, and $9,655,
respectively.
(b) Amount of minimum State income tax based on the capitalization method.
(c) Includes interest on current portion payable.
(d) Net Operating Earnings (divided by) Annual Interest on First Mortgage Bonds
per provisions of CWC's First Mortgage Indenture.
(e) Net Operating Earnings (divided by) 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:
- 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 9.375%,
Series L and 8.5%, 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, 9.5%
Preferred Stock.
- During 1997, CWC issued a $163,000 unsecured Promissory Note with a
5.5% interest rate as part of the purchase price for the Point O'Woods Water
System acquisition. The five year note requires CWC to make monthly payments of
interest and principal totaling $37,000 annually.
- During 1998, CWC issued $10,000,000, 5.05%, 1998 Series A Unsecured
Tax-Exempt Water Facilities Revenue Refinancing Bonds maturing in the year 2028,
the proceeds of which refunded CWC's 6.9% Series Q First Mortgage Bonds. In
conjunction with this refinancing CWC also issued $8,000,000 of 5.125%, 1998
Series B Unsecured Tax- Exempt Water Facilities Revenue Refinancing Bonds
maturing in the year 2028, the proceeds of which refinanced $8,000,000 of
interim bank loans.
- Because there is no CWC Preferred Stock outstanding at this time,
CWC has no effective restriction with respect to the issuance of additional
shares of its Preferred Stock.
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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,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Thousands of Dollars)
Utility Operating Income $10,480 $10,350 $10,161 $10,053 $9,690
Other Income (a) 526 212 161 243 155
------ ------ ------ ------- -------
Gross Earnings Available for
Coverage $11,006 $10,562 $10,322 $10,296 $9,845
======= ======= ======= ======= ======
Annual Interest on Funded
Debt (b) $3,687 $3,465 $3,458 $ 3,460 $3,468
Annual Dividend on Preferred
Stock (c) -- -- -- -- 2
------ ------ ------ ------- -----
Total Charges $3,687 $3,465 $3,458 $ 3,460 $ 3,470
====== ====== ====== ======= =======
Times Interest Coverage 2.99 3.05 2.98 2.97 2.83
==== ==== ==== ==== ====
(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.
In September 1998 the Company effected a three-for-two stock split. All
outstanding common stock and per share amounts in this report have been restated
to reflect this stock split.
The Company's issuances of Common Stock over the past five years are
detailed below. The $5,742,000 net proceeds from these sales were invested in
CWC in the form of capital contributions.
- The Company issued 3,702 shares of Common Stock during 1994, 3,033 shares
during 1995, 5,258 shares during 1996, 3,985 shares during 1997, and 1,955
shares during 1998, pursuant to the Company's Employee Savings 401-K Match Plan.
- The Company issued 6,092 shares of Common Stock and/or Common Stock
equivalents during 1994, 9,554 shares during 1995, 7,360 shares during 1996,
5,526 shares during 1997, and 7,281 shares during 1998, pursuant to the
Company's Performance Stock Program.
- The Company issued 50,705 shares of Common Stock during 1994, 111,580 during
1995, 131,711 during 1996, and 0 shares during 1997, and 0 shares during 1998
pursuant to its Dividend Reinvestment and Common Stock Purchase Plan (DRIP).
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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 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.
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.
CWC's last general rate increase was requested in 1990, became
effective March 25, 1991, and was based upon an allowed rate of return of 12.7%
on Common Stock equity and 10.74% on rate base. During 1997 CWC had this
decision reopened for the limited purpose of flowing through to customers cost
savings related to a reduction in CWC's state taxes and to allow the CWC to
collect FAS 106 (Postretirement Benefits other than Pension) costs in rates.
Overall CWC's rates were reduced approximately 4 1/2% in 1997 due to these
limited reopened rate proceedings. CWC presently expects that it will not file
for a general rate increase in 1999.
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.
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Under certain circumstances the DPUC, in consultation with the DPH, 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. Although there is no assurance that any other such surcharge will
be permitted, such a surcharge was permitted in 1995 when the DPUC and DPH
ordered CWC to acquire the assets and facilities of the Sound View Water Company
in Old Lyme.
In 1993 the DPUC approved regulations which would permit a water
company to apply for a limited rate adjustment to compensate for the effect of
changes in certain costs. These costs include rate changes related to the cost
of purchased water, energy, and taxes. The effects of limited reopened rate
proceedings in 1997 is discussed above. 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
Connecticut legislation dealing with the competitiveness of water rates.
FRANCHISES AND COMPETITION
The Metropolitan District Commission (MDC) is a legislatively
authorized quasi-government agency providing primarily water and sewer service
in and around the City of Hartford and adjacent to towns in CWC's Northern
Region. MDC's water rates are substantially lower than those of CWC, primarily
because MDC is a tax-exempt entity, generally serving a denser population with
older facilities. 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. 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
17
Page 17
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.
Legislation was passed in 1994 by the Connecticut General Assembly that
required 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. If the DPUC makes such a finding and also concludes that the water
company is unable or unwilling to provide service at a reasonable cost to
customers, it may order the provision of such service or revoke the franchise
held by such company. In 1995, the DPUC adopted regulations that require a
petition on a form provided by the DPUC to be signed by 50% of the residents of
a town or other political subdivision served by the company, or by 500 customers
of the company, before the DPUC would hold a hearing thereon. CWC believes that,
in light of the tax and other advantages of governmentally-owned entities which
are not available to CWC, its rates are not excessive and would vigorously
oppose any such petition.
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.
Legislation that would have had the effect of enabling the DPUC to
order a transfer to MDC of CWC's service territory in South Windsor was
introduced in the 1996 General Assembly but did not pass. Legislation has been
proposed in the 1999 General Assembly that would
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Page 18
allow the MDC to expand its service area into CWC's service area in South
Windsor. The Company has opposed, and will continue to vigorously oppose 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, 1997,
CWC's Northern Region, which includes customers in the towns mentioned above,
represented approximately 50% 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.
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.
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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.
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.
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, or
applied for, and complied with the terms of, all such requisite permits or
approvals.
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
20
Page 20
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, and have been interpreted by
DEP to require diversion permits in situations which the Company believes were
not intended by the legislation. 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 significant and adverse,
particularly on sources held for future use or acquired sources which may not
have been properly registered.
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. A new general permit and permit renewal program for water
treatment waste water discharges was adopted by DEP in 1995. Although the new
program has some stricter monitoring and reporting requirements, CWC is in
compliance with the new program and the additional costs, while increased from
the period before the program was adopted, are not substantial.
In 1984, all CWC's dams were registered with 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 were
inspected under the federal program, and, although certain modifications and
further studies were 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 has completed any necessary modifications to all but
one of the six dams. CWC believes that the future cost of such compliance at
that dam will be less than $2,000,000. These costs are included in CWC's
projected capital expenditures (see "Construction Program".)
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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 (DPH)
CWC is also subject to regulation by the Connecticut DPH 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 DPH 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 DPH 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. DPH 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 DPH's role) for the centralized planning of water supply. In
implementing this legislation, DPH 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 five of the seven management areas. CWC is
actively involved with the planning process in three of these management areas
at this time. The remaining two areas of CWC'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.
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Page 22
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 for, among
other things, certain organic and inorganic chemical contaminants, pesticides,
turbidity, microbiological contaminants, and radioactivity. The SDWA provides
that the states have primary enforcement responsibility for public drinking
water systems, as long as the states' regulations are no less stringent than
those adopted pursuant to the SDWA. The DPH has adopted regulations which are in
some cases more stringent than the Federal regulations.
The SDWA was originally enacted in 1974 with major amendments in 1986
and 1996. The original SDWA authorized EPA to establish 22 interim standards for
drinking water contaminants between 1977 and 1986. The 1986 SDWA amendments
dictated that 83 primary drinking water standards be established within three
years and an additional 25 contaminants be regulated every three years
thereafter. EPA promulgated the Surface Water Treatment Rule (SWTR), the Lead
and Copper Rule and the Total Coliform Rule (TCR) as well as establishing
standards for various volatile and synthetic organic contaminants and inorganic
contaminants pursuant to the 1986 SDWA amendments. CWC was in compliance with
each of these rules from the time they became effective and continues to be in
compliance.
At the time that the 1996 SDWA was reauthorized there were still
several schedules for establishment of various regulations required by the 1986
amendments in process. The 1996 SDWA changed these schedules. The new law also
eliminated the requirement to regulate 25 new contaminants every three years and
replace it with a requirement that the EPA consider five new contaminants for
regulation every five years. The law also changed the basis for setting
regulations to consider the costs and benefits of new regulations and to show
that new regulations improve public health.
The first regulations to be promulgated under the 1996 SDWA are the
Stage I Disinfectant and Disinfection Byproducts (D/DBP) and Interim Enhanced
Surface Water Treatment Rules. Both of these regulations were promulgated in
December 1998. The Stage II D/DBP rule is scheduled to be promulgated in 2002
while the Long Term Enhanced Surface Water Treatment Rule (LTESWTR) will be
promulgated in 2000. The Filter Backwash Recycle Rule is scheduled to be
promulgated with the LTESWTR.
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Page 23
Radionuclides, including radon, are expected to be finalized in 2000,
as is the Ground Water Disinfection Rule. Arsenic is planned to be promulgated
by 2001. A decision to regulate sulfate must be made by EPA by 2001. If the
decision is to regulate, then the final rule must be complete by 2005. Finally,
the first five contaminants that EPA must consider for regulation must be
selected in 2001. Those that are regulated will be completed by 2003.
Through December 31, 1998, the Company has expended approximately
$47,925,000 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 DPH, as
currently applied. Connecticut's aquifer protection legislation not only
requires aquifer mapping, but also requires DEP, in consultation with DPH 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 $1,500,000 on required aquifer
mapping. Although the Company cannot predict either the substance of the
regulations required by the 1996 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 although it is possible that
such regulations may require 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.
DISPOSITION OF PROPERTY
Although CWC has established a program of selling various, relatively
small, discrete parcels of land over the next several years, the total of which
is less than 350 acres, CWC has no other significant amounts of excess land
which it presently expects to sell or otherwise dispose of.
Connecticut law presently imposes the following restrictions upon the
disposition of property owned by water companies: (a) no property greater than
three acres or any portion of a large parcel or having a value of greater than
$50,000 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
DPH; (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 DPH to seek to acquire such source; (d) subject to such
acquisition opportunities by other
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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) 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 (f) 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. CWC and Chester Realty have sold property for capital gains before
income taxes totalling $474,000 in 1998 and $174,000 in 1997. Consistent with
the 1988 legislation, the DPUC requires that benefits of the gains pertaining to
property previously in the utility's rate base be allocated between the
Company's customers and its stockholders.
GENERAL
Federal and State regulations and controls concerning environmental
matters, 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 environmental concerns
including 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 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.
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EMPLOYEES
As of December 31, 1998, CWC employed 156 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.
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 twelve water filtration facilities. Information about these
facilities is contained in the following table.
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Year Treatment Capacity
Filtration Placed in (in million
Facilities 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
Windsor Locks 1988 Northern 0.30
Stewart 1989 Naugatuck 6.00
O'Bready Well 1994 Northern 0.50
Clinton Well 1997 Shoreline 1.00
CWC has an agreement with the MDC, which provides, among other things,
for the operation and maintenance by MDC of a filtration plant (completed in
1990) 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.
As of December 31, 1998, the transmission and distribution systems of
CWC consisted of approximately 1,010 miles of main, of which approximately 60
miles have been laid or acquired 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, 1994 through December 31, 1998, CWC added $47,867,000
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 $1,904,000, resulting in net
additions during the period of $45,963,000.
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CWC PRODUCTION FACILITIES AS OF DECEMBER 31, 1998
Total Dependable Greatest 1998
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
Tolland Aqueduct Wells (16) 42
--------------
20,752 9,026 (2) 8,538
-------------- ------------------ ---------------
Somers System Wells 390 121 (18) 119
-------------- ------------------ ---------------
Crescent Lake System (4) - 33 (19) 33
-------------- ------------------ ---------------
Reservoir Heights (6) - 5 (7) 4
-------------- ------------------ ---------------
Stafford Springs System
#4 Reservoir 51,000
#3 Reservoir 15,000 700
#2 Reservoir 60,000
--------------
700 629 (8) 461
-------------- ------------------ ---------------
Llynwood System Wells 30 13 (3) 9
-------------- ------------------ ---------------
Lakewood/Lakeview System Wells 49 30 (5) 23
-------------- ------------------ ---------------
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) 3,363
-------------- ------------------ ---------------
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) 585
-------------- ------------------ ---------------
Chester Village West Wells 30 13 (17) 11
-------------- ------------------ ---------------
Sound View System Wells 182 42 (17) 26
-------------- ------------------ ---------------
Point O'Woods 114 43 (19) 43
-------------- ------------------ ---------------
Bay Mountain 56 21 (19) 21
-------------- ------------------ ---------------
SDC 94 8 (19) 8
-------------- ------------------ ---------------
Masons Island (20) - - 34 (19) 34
-------------- ------------------ ---------------
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CWC PRODUCTION FACILITIES AS OF DECEMBER 31, 1998
Total Dependable Greatest 1998
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) 2,653
------------------ ----------- -----------------
Terryville System
Harwinton Ave. Reservoir (11) 14,800 50
Wells 910
------------------
960 498 (2) 458
------------------ ----------- -----------------
Thomaston System
Thomaston Reservoir (11) 93,000 310
Wells 1,080
Waterbury Interconnection (12) 864
------------------
2,254 852 (14) 350
------------------ ----------- -----------------
Collinsville System
Water Acquired by Contract (15) 650
Reservoir (distribution) 100
------------------
650 391 (3) 358
------------------ ----------- -----------------
(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) Occurred in 1995
(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. In January
1998 CWC reactivated the Reynolds Bridge wellfield and discontinued the
routine purchase of water from Waterbury.
(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.
(16) Connected to Northern Region, Western System on August 9, 1995.
(17) Occurred in 1996.
(18) Occurred in 1997.
(19) Occurred in 1998.
(20) Supplied by water purchased from Connecticut-American Water Company, Mystic
Division
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ITEM 3. LEGAL PROCEEDINGS
In November 1997, CWC settled its lawsuit against the two parties deemed
responsible for the 1992 contamination of the Thomaston System's Reynolds Bridge
well field. The settlement agreement provided CWC with funds to cover expenses
already incurred in addition to covering potential future expenses stemming from
the contamination. As a result of remediation efforts by one of the two parties,
in early 1998 CWC was able to place in service its Thomaston well field having a
dependable yield of one million gallons per day. As a result of the
contamination this well field had been taken out of service in 1992, with CWC
obtaining necessary water supplies from its Waterbury interconnection. The
settlement agreement requires one of the parties deemed responsible for the
contamination to complete remediation of the site and binds that party to
reimburse CWC for specific ongoing costs incurred in operation of this well site
as well as additional costs required to provide safe, potable water to the
customers served by this portion of its distribution system. As a result of this
settlement CWC no longer has a liability for future clean up costs. This party
is currently reimbursing CWC for certain additional costs being presently
incurred by CWC in monitoring the well field and in treating the water.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 4.1 EXECUTIVE OFFICERS OF THE COMPANY
Period Held or Term of Office
Name Age Office Prior Position Expires
---- --- ------ -------------- -------
M. T. Chiaraluce 56 President and Held position of 1999 Annual
Chief Executive President since Meeting
Officer January, 1992 and
Chief Executive
Officer position
with the Company
since July, 1992
D. C. Benoit 41 Vice President - Held current 1999 Annual
Finance, position or other Meeting
Accounting and executive position
Treasurer with the Company
since April, 1996
J. R. McQueen 56 Vice President - Held current 1999 Annual
Engineering and position or other Meeting
Planning management or
engineering
position with the
Company since
October, 1965
T. P. O'Neill 45 Vice President - Held current 1999 Annual
Operations position or other Meeting
engineering
position with the
Company since
February, 1980
M. P. Westbrook 39 Vice President - Held current 1999 Annual
Administration position or other Meeting
and Governmental management position
Affairs with the Company
since September,
1988
P. J. Bancroft 49 Assistant Held current 1999 Annual
Treasurer and position or other Meeting
Controller accounting position
with the Company
since October, 1979
M. G. DiAcri 53 Corporate Held administrative 1999 Annual
Secretary position with the Meeting
Company since
February, 1990
There are no family relationships between any of the Directors and
Executive Officers of the Company.
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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*
------ ---- --- ---------
1998:
First Quarter $23.000 $20.000 $ .29000
Second Quarter 24.000 21.420 .29000
Third Quarter 24.420 22.917 .29333
Fourth Quarter 28.375 25.000 .29333
1997:
First Quarter $20.000 $18.334 $ .28670
Second Quarter 19.667 18.334 .28670
Third Quarter 19.417 18.584 .29000
Fourth Quarter 22.667 18.917 .29000
* Restated to reflect three-for-two stock split.
As of March 1, 1999 there were approximately 5,250 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
CWC to pay dividends to the Company, 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, 1998 the retained earnings of CWC aggregated
$15,770,000. 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
$15,520,000.
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 and may also make optional
cash payments of up to $1,000 per month to purchase additional shares of Common
Stock. The Company may issue authorized but unissued shares of Common Stock to
meet the requirements of the plan, or buy the shares on the open market at its
discretion. 1,500,000 shares have been registered with the Securities and
Exchange Commission for that purpose. Under the plan, approximately 1,170,000
shares had been issued by the Company as of December 31, 1998. Since the third
quarter of 1996, the Company has been buying shares on the open market to
satisfy plan requirements.
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 43,926 shares, 8,483 of which are restricted, and 7,797 of which
are common stock equivalent shares had been issued by the Company as of December
31, 1998.
The Company has an Employee Savings 401-K Match Plan. Under the Plan
approximately 20,550 shares of Common Stock had been issued by the Company as of
December 31, 1998.
On August 12, 1998 the Company's Board of Directors authorized a new
Shareholder Rights Plan to replace the previous Rights Plan which had been
adopted in 1988 and expired on October 11, 1998. Pursuant to the new Plan, the
Board authorized a dividend distribution of one Right to purchase one
one-hundredth of a share of Series A Junior Participating Preference Stock of
the Company for each outstanding share of the Company's Common Stock. The
distribution was effected October 11, 1998.
Upon the terms of the new Shareholder Rights Plan, each Right will
entitle shareholders to buy one one-hundredth of a share of Series A Junior
Participating Preference Stock at a purchase price of $90, and the Rights will
expire October 11, 2008. The Rights will be exercisable only if a person or
group acquires 15% or more of the Company's Common Stock or announces a tender
or exchange offer for 15% or more of the Company's Common Stock. The Board will
be entitled to redeem the Rights at $0.01 per Right at any time before such
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acquisition occurs and upon certain conditions after such a position has been
acquired.
Upon the acquisition of 15% or more of the Company's Common Stock by
any person or group, each Right will entitle its holder to purchase, at the
Right's purchase price, a number of shares of the Company's Common Stock having
a market value equal to twice the Right's purchase price. In such event, Rights
held by the acquiring person will not be allowed to purchase any of the
Company's Common Stock or other securities of the Company. If, after the
acquisition of 15% or more of the Company's Common Stock by any person or group,
the Company should consolidate with or merge with and into any person and the
Company should not be the surviving company, or, if the Company should be the
surviving company and all or part of its Common Stock should be exchanged for
the securities of any other person, or if more than 50% of the assets or earning
power of the Company were sold, each Right (other than Rights held by the
acquiring person, which will become void) will entitle its holder to purchase,
at the Right's purchase price, a number of shares of the acquiring company's
common stock having a market value at that time equal to twice the Right's
purchase price.
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CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
SUPPLEMENTAL INFORMATION (Unaudited)
SELECTED FINANCIAL DATA
(Thousands of dollars except where indicated)
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME
Operating Revenues $37,924 $38,501 $38,592
Operating Expenses $27,620 $28,167 $28,464
Operating Income $10,304 $10,334 $10,128
Interest and Debt Expense $4,316 $4,304 $3,967
Net Income Applicable to Common Stock $6,927 $6,766 $6,565
Weighted Average Common Shares Outstanding* 4,535,150 4,524,419 4,496,006
Basic Earnings Per Average Common Share* $1.53 $1.50 $1.46
Number of Shares Outstanding at Year End* 4,536,285 4,527,636 4,518,125
ROE on Year End Common Equity 12.0% 12.1% 12.1%
Cash Dividends Paid Per Common Share* $1.167 $1.153 $1.133
Dividend Payout Ratio 76.0% 77.0% 78.0%
BALANCE SHEET
Common Stockholders' Equity $57,945 $56,069 $54,395
Long-Term Debt $62,501 $54,532 $54,430
Preferred Stock (Consolidated, Excluding Current Maturities) $772 $772 $772
- ----------------------------------------------------------------------------------------------------------------------------------
Total Capitalization $121,218 $111,373 $109,597
Stockholders' Equity (Includes Preferred Stock) 48% 51% 50%
Long-Term Debt 52% 49% 50%
Net Utility Plant $167,326 $163,757 $153,898
Book Value - Per Common Share* $12.77 $12.38 $12.04
* Reflects three-for-two stock split of September 1998.
OPERATING DATA
(Thousands of dollars except where indicated) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
REVENUE CLASS
Residential $24,170 $24,476 $24,485
Commercial 4,556 4,633 4,716
Industrial 1,640 1,850 1,861
Public Authority 1,065 1,057 1,050
Fire Protection 6,169 6,197 6,226
Other (including non-metered accounts) 324 288 254
- ----------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues $37,924 $38,501 $38,592
- ----------------------------------------------------------------------------------------------------------------------------------
Number of Customers (Average) 63,399 62,415 61,597
Billed Consumption (Millions of Gallons) 5,560 5,556 5,427
Number of Employees 156 157 162
SELECTED FINANCIAL DATA
(Thousands of dollars except where indicated)
Years Ended December 31, 1995 1994
- -----------------------------------------------------------------------------------------------------------------
INCOME
Operating Revenues $39,350 $38,129
Operating Expenses $29,328 $28,474
Operating Income $10,022 $9,655
Interest and Debt Expense $3,946 $3,940
Net Income Applicable to Common Stock $6,325 $5,842
Weighted Average Common Shares Outstanding* 4,377,626 4,218,684
Basic Earnings Per Average Common Share* $1.44 $1.38
Number of Shares Outstanding at Year End* 4,450,136 4,305,839
ROE on Year End Common Equity 12.2% 12.2%
Cash Dividends Paid Per Common Share* $1.120 $1.10
Dividend Payout Ratio 78.0% 80.0%
BALANCE SHEET
Common Stockholders' Equity $51,788 $47,983
Long-Term Debt $54,460 $54,600
Preferred Stock (Consolidated, Excluding Current Maturities) $772 $772
- -----------------------------------------------------------------------------------------------------
Total Capitalization $107,020 $103,355
Stockholders' Equity (Includes Preferred Stock) 49% 47%
Long-Term Debt 51% 53%
Net Utility Plant $146,536 $140,784
Book Value - Per Common Share* $11.64 $11.14
* Reflects three-for-two stock split of September 1998.
OPERATING DATA
(Thousands of dollars except where indicated) 1995 1994
- ----------------------------------------------------------------------------------------------------
REVENUE CLASS
Residential $25,147 $24,488
Commercial 4,852 4,696
Industrial 1,868 1,922
Public Authority 1,090 893
Fire Protection 6,129 6,021
Other (including non-metered accounts) 264 109
- -----------------------------------------------------------------------------------------------------
Total Operating Revenues $39,350 $38,129
- -----------------------------------------------------------------------------------------------------
Number of Customers (Average) 60,844 60,082
Billed Consumption (Millions of Gallons) 5,595 5,421
Number of Employees 163 164
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
OVERVIEW
Connecticut Water Service, Inc. (the Company) is a
non-operating holding company, whose income is derived primarily from The
Connecticut Water Company (the Subsidiary). The Subsidiary supplies water to
over 63,000 customers in 35 towns throughout the State of Connecticut and is
subject to regulation by the Connecticut Department of Public Utility Control
(DPUC) regarding financial issues, rates, and operating issues; and various
other state and federal regulatory agencies concerning water quality and
environmental standards.
The Company's 1998 consolidated net income is $6,927,000 or
$1.53 a share. This is the Company's 8th consecutive year of increased earnings.
The Company paid common dividends of $1.167 a share in 1998. This is the
Company's 29th consecutive year of increased dividend per share payments. In
1998, the Company earned a 12.0% return on year end common equity.
REGULATORY MATTERS AND INFLATION
The Subsidiary's last general rate proceeding was in 1991. The
resulting rate decision granted the Subsidiary a 12.7% allowed return on common
equity and a 10.74% allowed return on rate base. During 1997 this decision was
reopened for the limited purposes of flowing through to customers cost savings
related to a reduction in state gross earnings taxes payable by the Subsidiary
and allowing the Subsidiary to collect certain costs related to postretirement
benefits other than pension. The Subsidiary's rates were reduced approximately
4.5% due to the limited reopened rate proceeding. The Subsidiary's resulting
reduction in revenues was offset by a corresponding reduction in its operating
expenses.
The Company, like all other businesses, is affected by
inflation, most notably by the continually increasing costs required to
maintain, improve and expand its service capability. The cumulative effect of
inflation results in significantly higher facility replacement costs which must
be recovered from future cash flow. The ability of the Subsidiary to recover
this increased investment in facilities is dependent upon future revenue
increases which are subject to approval by the Connecticut Department of Public
Utility Control.
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Management does not presently plan to petition the DPUC for an
increase in permanent rates in 1999. 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 Subsidiary,
will influence when the Subsidiary requests a revision to rates charged to its
customers.
OUTLOOK
The Company's profitability is primarily attributable to the
sale and distribution of water, the amount of which is dependent on seasonal
weather fluctuations, particularly during the summer months when water demand
will vary with rainfall and temperature levels.
Commencing January 1, 1999 the Company established a new
Subsidiary, Connecticut Water Utility Services, Inc. (CWUS) to handle
unregulated business activities previously transacted by The Connecticut Water
Company, its regulated subsidiary. It also transferred the ownership of The
Connecticut Water Company's unconsolidated subsidiary, Chester Realty, Inc.
directly to Connecticut Water Service, Inc. In 1999 the Company's consolidated
financial statements will encompass the Company's two new subsidiaries, (CWUS
and Chester Realty) in addition to The Connecticut Water Company.
Late in 1998 the Company reached agreements to acquire two
smaller water companies in Eastern Connecticut through an exchange of the
Company's common stock for the capital stock of the acquired companies. These
two companies are Gallup Water Service, Inc., headquartered in Plainfield, and
Crystal Water Utilities Corporation, headquartered in Danielson. Gallup and
Crystal have over 1,100 and 3,300 customers and annual revenues of approximately
$575,000 and $1,800,000, respectively. These two mergers are expected to be
finalized in 1999. Both of these mergers are expected to qualify as tax exempt
stock exchanges and are expected to be accorded "pooling of interests"
accounting treatment. The Company expects to initially operate these two
companies as separate subsidiaries of Connecticut Water Service, Inc., each with
its own rate structure.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
Net income applicable to common stock for 1998 increased from
that of 1997 by $161,000, or $.03 per average common share, on an increased
number of common shares outstanding due primarily to the following:
- Other income increased $203,000, or 26%, primarily due to increased
profits from land sales.
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partially offset by
- An increase in interest and debt expense by $12,000 due to a higher
level of debt (long and short-term combined) outstanding in 1998 as
compared to 1997. Refinancing $18,000,000 of debt in 1998 at lower
interest rates minimized the overall increase in interest expense.
- A decrease in operating income of $30,000. The elimination of
the Connecticut Gross Earnings Tax for the water companies on
July 1, 1997 and the third quarter 1997 adoption of FAS 106 for
rates had no impact on operating income but did reduce both
revenues and operating expenses by approximately $775,000 in
1998 as compared to 1997. (Reduction in Gross Earnings Tax of
$930,000 less an increase of $155,000 in FAS 106 costs).
- Operating revenues decreased 1.5% primarily due to:
- The overall 4.5% rate reduction during the second half of
1997 primarily related to the elimination of the Connecticut
Gross Earnings Tax for water companies.
partially offset by
- Increase in metered revenues due to expansion of the
customer base achieved through the Company's ongoing growth
strategy.
- Higher unmetered revenues due to an increasing basis for
billing fire protection charges related to the expansion of
the water systems.
- Operating expenses decreased 2.0% primarily due to:
- The elimination of the Connecticut Gross Earnings Tax
- The 1997 Early Retirement Program
- Reduced income tax expense due to lower taxable income, a
decline in the State Corporate tax rate and utilization of
new State Corporation Tax Credits
partially offset by
- Increased operation and maintenance expense
- Increased depreciation expense
1997 COMPARED WITH 1996
Net income applicable to common stock for 1997 increased from that of
1996 by $201,000, or $0.05 per average common share, on an increased number of
common shares outstanding due primarily to the following:
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- Operating income increased $206,000 primarily due to
increased water sales in 1997 resulting from both the hot,
dry summer of 1997, compared to the cool, wet summer of 1996,
as well as customer growth through acquisition and expansion
within the Company's existing service territory. The
elimination of the Connecticut Gross Earnings Tax for water
companies on July 1, 1997 had no impact on operating income
but did reduce both revenues and operating expenses by
approximately $1,000,000 in 1997.
- Operating revenues decreased .2% primarily due to:
- The overall 4.5% rate reduction during the second half of
1997 primarily related to the elimination of the Connecticut
Gross Earnings Tax for water companies.
partially offset by
- A 2.4% increase in the volume of water sold to customers due
to the hot, dry 1997 summer weather and an increasing
customer base.
- An increase in unmetered revenues due to higher fire
protection billings plus additional unmetered customers from
the Point O'Woods acquisition.
- Operating expenses decreased 1.0% primarily due to:
- Decreased tax expense primarily resulting from July 1,
1997 elimination of the Connecticut Gross Earnings Tax.
partially offset by
- A 1997 organizational charge reflecting charges associated
with the Subsidiary's 1997 early retirement program. This
charge represents the actuarially determined expense for the
employees who accepted the offer of early retirement and the
administrative costs related to the early retirement plan.
- Other income increased $332,000, or 75% primarily due to
increased land sales, non-water sales earnings and higher
Allowance for Funds Used During Construction (AFUDC).
- Interest expense increased $337,000, or 8.5%, primarily due to a
higher average balance of interim loans outstanding in 1997 at
higher average interest rates.
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LIQUIDITY AND CAPITAL RESOURCES
Interim bank loans payable at year end 1998 were $1,895,000,
approximately $6,916,000 lower than the same time the prior year. During 1998
$8,000,000 of the Company's interim bank loans were refinanced with proceeds
from the Subsidiary's issuance of 30 year, 5.125% tax exempt unsecured bonds.
The Company elected not to fund any of the 1998 construction expenditures with
equity funding through its Dividend Reinvestment Program (DRIP) by issuing new
share of common stock, but instead provided DRIP shares through open market
purchases and negotiated transactions.
Management considers the current $9,000,000 line of credit with three
banks adequate to finance any expected short-term borrowing requirements that
may arise from operations during 1999. Interest expense charged on interim bank
loans will fluctuate subject to financial market conditions experienced during
the year.
The Board of Directors has approved a construction budget for 1999 of
$7,300,000 net of amounts to be financed by customer advances and contributions
in aid of construction. Funds provided by operating activities are expected to
finance all of this construction program given normal weather patterns and
related operating revenue billings. Refer to Note 10, Utility Plant and
Construction Program, in Notes to Consolidated Financial Statements for
additional discussion for the Subsidiary's future construction program.
YEAR 2000
Like many organizations, the Company is currently evaluating and
responding to its exposure to the Year 2000 problem. In general terms, the
problem arises from the fact that many existing computer systems and other
equipment containing date-sensitive embedded technology (including
non-information technology equipment and systems) use only two digits to
identify a year in the date field, with the assumption that the first two digits
of the year are always "19". As a result, such systems may misinterpret dates
after December 31, 1999, which may result in miscalculations, other malfunctions
or the total failure of such systems. Additional problems arise from the fact
that the Year 2000 is a special case leap year. Because the Company is dependent
upon the proper functioning of computer systems and other equipment containing
date-sensitive embedded technology, a failure of such systems and equipment to
be Year 2000 compliant could have a material adverse effect on the Company. If
not remedied, potential risks include business interruption or shutdown,
financial loss, regulatory actions and legal liability.
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The Company has established a team of senior managers to address the
Year 2000 problem. This team is currently evaluating the Company's exposure to
the Year 2000 problem and is preparing a plan for managing the risks and costs
associated therewith. The DPUC has informed the Company that it will review the
readiness of nine utilities, of which the Company is one.
The Company's general process of addressing the Year 2000 problem can
be broken down into the following steps: (a) inventorying systems, equipment and
other items (including those of third parties) that potentially present a Year
2000 problem, (b) assigning priorities to identified items, (c) assessing the
Year 2000 compliance of the items determined to be material to the Company
through internal testing and outside certification,(d) repairing or replacing
items determined to be non-compliant, and (e) designing and implementing
contingency plans around items that are identified to be subject to, a Year 2000
problem but unable to be tested or otherwise determined to be compliant.
Since 1996, the Company has been implementing a new Management
Information System (MIS) encompassing operational and administrative
applications. In addition to enhanced customer service technology and increased
administrative and operational efficiencies, the new system is certified to be
Year 2000 compliant. The integration of the new system is now complete. The
costs of implementing the new system totalled approximately $2 million, which
the Company has capitalized. The Company has done preliminary internal testing
of the MIS and intends to complete its Year 2000 testing of MIS, during the
second quarter of 1999. The Company has found no indication that the MIS is not
Year 2000 compliant as certified by its software or hardware vendors.
The Company also is evaluating the Year 2000 compliance of systems
and equipment which are not linked to the MIS and is in the process of
identifying the items that could be impacted by the Year 2000 problem. The
Company expects that this inventory of items which may not be Year 2000
compliant will be completed by the end of the first quarter 1999. Once the
Company determines that an item may present a Year 2000 problem, the Company
contacts the supplier to obtain adequate assurance that it is Year 2000
compliant or determines and addresses any non-compliance. In addition, wherever
practical, the Company independently tests the item for compliance. The Company
has obtained supplier compliance certification for approximately 40% of the
items that it has inventoried as potentially non-compliant and has completed
testing or has gotten vendor certification on approximately 25% of such items.
The Company estimates that this assessment process will be completed by the end
of the first quarter of 1999, and anticipates deploying and testing all repairs
and replacements of non-compliant systems and equipment by July, 1999.
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In addition to its own systems and equipment, the Company depends
upon the proper function of computer systems and other date-sensitive equipment
of outside parties. These parties include other water companies, banks,
telecommunications service providers and electric and other utilities. The
Company has initiated communications with such parties to determine the extent
to which they are vulnerable to the Year 2000 issue and, in certain
circumstances, to coordinate joint testing. The Company has not yet received
sufficient information about their remediation plans to predict the outcome of
their efforts. If the third parties with which the Company interacts have Year
2000 problems that are not remedied, resulting problems could include the loss
of telecommunications and electrical service, the receipt of inaccurate
financial and billing-related information, and the disruption of capital flows
potentially resulting in liquidity stress.
Due to the uncertainties presented by such third party Year 2000
problems, and the possibility that, despite its efforts, the Company is
unsuccessful in preparing its internal systems and equipment for the Year
2000, the Company is developing contingency plans for dealing with the most
reasonably likely worst case scenario. Such plans include manual back-ups for
crucial automated systems, the use of electrical generators capable of
sustaining operations through a power failure, and enhanced transition-period
staffing to compensate for automation and communication failures. The Company's
assessment of its most reasonably likely worst case scenario and the exact
nature and scope of its contingency plans will be effected by the Company's
continued Year 2000 assessment and testing. The Company expects to complete such
assessment and contingency plans during the second or third quarter of 1999 and
to have all contingency systems in place and fully tested by the fourth quarter
of 1999. As the Company already has extensive disaster-contingency systems in
place, it does not believe that the cost of preparing or effecting Year 2000
contingency plans will be material.
The Company does not believe that the costs of addressing the Year
2000 problem, excluding the costs of the MIS, will be material to the Company's
financial condition. The Company anticipates spending approximately $300,000 for
effecting its Year 2000 program in 1999. The Company has funded, and expects to
continue to fund, the costs of its Year 2000 efforts through its operating cash
flow.
The costs of the Company's Year 2000 program and the timetable for
completing its Year 2000 preparations are based on current estimates, which
reflect numerous assumptions about future events, including the continued
availability of certain resources, the timing and effectiveness of third-party
remediation plans and other factors. The Company can give no assurance that
these estimates will be achieved, and actual results could differ materially
from those
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currently anticipated. In addition, there can be no assurance that the Company's
Year 2000 program will be effective or that its contingency plans will be
sufficient. Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct relevant computer software codes and
embedded technology, the results of internal and external testing and the
timeliness and effectiveness of remediation efforts of third parties.
FORWARD LOOKING INFORMATION
This report, including management's discussion and analysis, contains
certain forward looking statements regarding the Company's results of operations
and financial position. These forward looking statements are based on current
information and expectations, and are subject to risks and uncertainties, which
could cause the Company's actual results to differ materially from expected
results.
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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 of Connecticut
Water Service, Inc. (a Connecticut corporation) and Subsidiary as of December
31, 1998 and 1997, and the related consolidated statements of income and cash
flows for each of the three years in the period ended December 31, 1998. 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 consolidated 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Hartford, Connecticut
February 11, 1999
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CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, (In thousands except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Operating Revenues $37,924 $38,501 $38,592
- -------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Operation 13,783 13,098 12,964
Maintenance 2,055 1,952 1,664
Depreciation 3,854 3,505 3,315
Federal Income Taxes 3,379 3,661 3,878
Connecticut Corporation Business Taxes 601 825 934
Taxes Other Than Income Taxes 3,948 4,702 5,709
Organizational Charges -- 424 --
- -------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 27,620 28,167 28,464
- -------------------------------------------------------------------------------------------------------------------------------
Utility Operating Income 10,304 10,334 10,128
- -------------------------------------------------------------------------------------------------------------------------------
Other Income (Deductions)
Interest 139 122 179
Allowance for Funds Used During Construction 476 575 337
Gain on Sale of Property 475 183 19
Non-Water Sales Earnings 186 174 (3)
Miscellaneous Income (Deductions) (37) (65) (69)
Taxes on Other Income (262) (215) (21)
- -------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Deductions) 977 774 442
- -------------------------------------------------------------------------------------------------------------------------------
Interest and Debt Expenses
Interest on Long-Term Debt 3,636 3,460 3,460
Other Interest Charges 472 656 319
Amortization of Debt Expense 208 188 188
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest and Debt Expenses 4,316 4,304 3,967
- -------------------------------------------------------------------------------------------------------------------------------
Net Income Before Preferred Dividends 6,965 6,804 6,603
Preferred Stock Dividend Requirement 38 38 38
- -------------------------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $6,927 $6,766 $6,565
- -------------------------------------------------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding* 4,535 4,524 4,496
- -------------------------------------------------------------------------------------------------------------------------------
Basic and Fully Diluted Earnings Per Average Common Share* $1.53 $1.50 $1.46
- -------------------------------------------------------------------------------------------------------------------------------
*Reflects three-for-two stock split as described in Note 2 of the Notes to
Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, (Thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income Before Preferred Dividends $6,965 $6,804 $6,603
- ----------------------------------------------------------------------------------------------------------------------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation (including $127 in 1998, $119 in 1997,
and $105 in 1996 charged to other accounts) 3,981 3,624 3,420
Change in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable and
Accrued Unbilled Revenues (364) (686) 235
(Increase) Decrease in Other Current Assets (104) (22) (32)
(Increase) Decrease in Other Non-Current Items (67) 51 (107)
Increase (Decrease) in Accounts Payable, Accrued
Expenses and Other Current Liabilities 277 866 (97)
Increase in Deferred Income Taxes and
Investment Tax Credits, Net 1,002 1,062 1,051
Recoverable Cleanup Costs (net) -- 2,343 (505)
- ----------------------------------------------------------------------------------------------------------------------------
Total Adjustments 4,725 7,238 3,965
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 11,690 14,042 10,568
- ----------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Gross Additions to Utility Plant (including
Allowance For Funds Used During Construction of
$476 in 1998, $575 in 1997 and $337 in 1996) (7,638) (13,546) (10,971)
- ----------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from Interim Bank Loans 1,895 8,811 5,795
Repayment of Interim Bank Loans (8,811) (5,795) (2,646)
Proceeds from Issuance of Long-Term Debt 18,000 132 --
Reduction of Long-Term Debt Including Current Portion (10,030) (30) (30)
Proceeds from Issuance of Common Stock 267 256 1,136
Advances, Contributions and Funds from
Others for Construction, Net 745 1,827 1,191
Costs Incurred to Issue Long-Term Debt, Preferred Stock,
and Common Stock (1,091) (133) --
Cash Dividends Paid (5,320) (5,253) (5,132)
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (4,345) (185) 314
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash (293) 311 (89)
Cash at Beginning of Year 346 35 124
- ----------------------------------------------------------------------------------------------------------------------------
Cash at End of Year $53 $346 $35
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest (Net of Amounts Capitalized) $3,605 $4,370 $3,773
State and Federal Income Taxes $3,269 $3,425 $3,715
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED BALANCE SHEETS
December 31, (Thousands of dollars) 1998 1997
- ------------------------------------------------------------------------------------------------------------
ASSETS
Utility Plant
Utility Plant $220,455 $207,476
Construction Work in Progress 4,459 9,882
Utility Plant Acquisition Adjustments (1,253) (1,255)
- ------------------------------------------------------------------------------------------------------------
223,661 216,103
Accumulated Provision for Depreciation (56,335) (52,346)
- ------------------------------------------------------------------------------------------------------------
Net Utility Plant 167,326 163,757
- ------------------------------------------------------------------------------------------------------------
Investments
Unconsolidated Subsidiary at Underlying Equity 129 138
Other 1,771 1,432
- ------------------------------------------------------------------------------------------------------------
Total Investments 1,900 1,570
- ------------------------------------------------------------------------------------------------------------
Current Assets
Cash 53 346
Accounts Receivable (Less Allowance, 1998 - $200; 1997 - $126) 4,841 4,568
Accrued Unbilled Revenues 2,776 2,684
Materials and Supplies, at Average Cost 664 643
Prepayments and Other Current Assets 197 115
- ------------------------------------------------------------------------------------------------------------
Total Current Assets 8,531 8,356
- ------------------------------------------------------------------------------------------------------------
Deferred Charges and Regulatory Assets
Unamortized Debt Issuance Expense 5,870 5,023
Income Taxes 8,998 8,623
Postretirement Benefits Other Than Pension 1,150 1,220
Other Costs 811 728
- ------------------------------------------------------------------------------------------------------------
Total Deferred Charges and Regulatory Assets 16,829 15,594
- ------------------------------------------------------------------------------------------------------------
Total Assets $194,586 $189,277
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
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December 31, (Thousands of dollars) 1998 1997
- ------------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
Capitalization
Common Stockholders' Equity:
Common Stock $42,810 $42,579
Retained Earnings 15,135 13,490
Preferred Stock 772 772
Long-Term Debt 62,501 54,532
- ------------------------------------------------------------------------------------------------------------
Total Capitalization 121,218 111,373
- ------------------------------------------------------------------------------------------------------------
Current Liabilities
Interim Bank Loans Payable 1,895 8,811
Accounts Payable 5,857 6,052
Accrued Taxes 752 1,014
Accrued Interest 1,210 709
Other 2,442 2,208
- ------------------------------------------------------------------------------------------------------------
Total Current Liabilities 12,156 18,794
- ------------------------------------------------------------------------------------------------------------
Advances for Construction 14,746 15,203
- ------------------------------------------------------------------------------------------------------------
Contributions in Aid of Construction 19,878 18,750
- ------------------------------------------------------------------------------------------------------------
Deferred Federal Income Taxes 14,898 13,838
- ------------------------------------------------------------------------------------------------------------
Unfunded Future Income Taxes 8,500 8,000
- ------------------------------------------------------------------------------------------------------------
Unfunded Postretirement Benefits Other Than Pensions 1,150 1,220
- ------------------------------------------------------------------------------------------------------------
Unamortized Investment Tax Credits 2,040 2,099
- ------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $194,586 $189,277
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated 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.
PUBLIC UTILITY REGULATION - The Subsidiary is subject to regulation for rates
and other matters by the Connecticut Department of Public Utility Control (DPUC)
and follows accounting policies prescribed by the DPUC. The Company prepares its
financial statements in accordance with generally accepted accounting principles
which includes the provisions of Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation," (FAS 71). FAS
71 requires a cost-based, rate-regulated enterprise such as the Subsidiary to
reflect the impact of regulatory decisions in its financial statements. The
DPUC, through the rate regulation process, can create regulatory assets that
result when costs are allowed for ratemaking purposes in a period other than the
period in which the costs would be charged to expense by an unregulated
enterprise.
In accordance with FAS 71, the Subsidiary has recorded regulatory assets or
liabilities as appropriate, primarily related to income taxes and postretirement
benefits costs. The specific amounts related to these items are disclosed in the
consolidated balance sheets. The Company believes, based on current regulatory
circumstances, that regulatory assets are probable of recovery.
The Subsidiary continues to be subject to cost-of-service based rate regulation
by the DPUC. Based upon current regulation and recent regulatory decisions, the
Company believes that its use of regulatory accounting is appropriate and in
accordance with the provisions of FAS 71.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
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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. Substantially 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 - Allowance for Funds Used During
Construction (AFUDC) generally represents the 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.
In order for certain acquisitions of failing water systems not to degrade the
Subsidiary's earnings, the Subsidiary has requested that the DPUC allow it to
record AFUDC on its investments in these systems. Starting with the 1995 DPUC
decision which approved the Subsidiary's acquisition of the Sound View Water
System, the DPUC has allowed the Subsidiary to capitalize financing costs
relating to several of its acquisitions until its next general rate proceeding.
Capitalized financing costs relating to these acquisitions amounted to $354,000
in 1998 and $256,000 in 1997.
The Subsidiary's allowed rate of return on rate base is used to calculate AFUDC.
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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 is depreciated at a composite rate of 1.6%. The depreciation
rates, based on the average balance of depreciable property, were 2.0% for 1998,
and 1.9% for 1997 and 1996.
CUSTOMERS' ADVANCES FOR CONSTRUCTION AND CONTRIBUTIONS IN AID OF CONSTRUCTION -
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.
INCOME TAXES - The Company provided deferred taxes for all temporary book-tax
differences using the liability method. Under the liability method, deferred
income taxes are recognized at currently enacted income tax rates to reflect the
tax effect of temporary differences between the financial reporting and tax
bases of assets and liabilities. Such temporary differences are the result of
provisions in the income tax law that either require or permit certain items to
be reported on the income tax return in a different period than they are
reported in the financial statements. To the extent such income taxes increase
or decrease future rates, an offsetting regulatory asset and liability have been
recorded in the accompanying consolidated balance sheets.
The Company believes that all deferred income tax assets will be realized in the
future. Approximately $900,000 of the December 31, 1998 and $500,000 of the 1997
unfunded future income taxes are related to deferred Federal income taxes. The
remaining balance of the unfunded future income taxes is related to deferred
State income taxes.
Deferred Federal income taxes consist primarily of amounts that have been
provided for accelerated depreciation subsequent to 1981, as required by Federal
income tax regulations. Deferred taxes have also been provided for temporary
differences in the recognition of certain expenses for tax and financial
statement purposes as allowed by DPUC ratemaking policies.
Connecticut Corporation Business Taxes have been reflected primarily using the
flow-through method of accounting for temporary differences in accordance with
required DPUC ratemaking policies.
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MUNICIPAL TAXES - Municipal taxes are expensed over the 12 month period
beginning on July 1 following the lien date, corresponding with the period in
which the municipal services are provided.
OTHER DEFERRED COSTS - In accordance with DPUC ratemaking procedures, costs
which benefit future periods, such as tank painting, are expensed over the
periods they benefit.
UNAMORTIZED DEBT ISSUANCE EXPENSE - The issuance costs of long-term debt,
including the remaining balance of issuance costs on long-term debt issues that
have been refinanced prior to maturity and related call premiums, are amortized
over the respective lives of the outstanding debt, as approved by the DPUC.
EARNINGS PER SHARE - Earnings per share is computed on the weighted average
number of common shares outstanding during each year. Basic and fully diluted
earnings per share are the same amounts.
RECLASSIFICATION - Certain reclassifications have been made to conform
previously reported data to the current presentation.
NOTE 2: STOCK SPLIT
In September 1998 the Company effected a three-for-two stock split. The
distribution of these shares increased the number of shares outstanding by
1,511,838 shares. In conjunction with the stock split, a cash payment was issued
to shareholders in lieu of issuance of any fractional shares. The fractional
share adjustment amounted to a reduction in shares outstanding of 587 shares,
post split. All outstanding common shares and per share amounts in this report
have been restated to reflect this stock split. Appropriate adjustments to
reflect the stock split were made to the Company's Performance Stock Program.
NOTE 3: INCOME TAX EXPENSE
Income Tax Expense is comprised of the following:
(Thousands of dollars) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Federal Classified as Operating Expense $ 3,379 $ 3,661 $ 3,878
Federal Classified as Other Income 193 143 30
- -------------------------------------------------------------------------------------------------------------------
Total Federal Income Tax Expense 3,572 3,804 3,908
- -------------------------------------------------------------------------------------------------------------------
State Classified as Operating Expense 601 825 934
State Classified as Other Income 69 63 (27)
- -------------------------------------------------------------------------------------------------------------------
Total State Income Tax Expense 670 888 907
- -------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense $ 4,242 $ 4,692 $ 4,815
==================================================================================================================
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The components of the Federal and State income tax provisions are:
Current:
Federal $ 2,571 $ 2,742 $ 2,833
State 670 888 907
- -------------------------------------------------------------------------------------------------------------------
Total Current 3,241 3,630 3,740
- -------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes, Net:
Federal
Investment Tax Credit (59) (59) (59)
Capitalized Interest 32 47 38
Depreciation 1,028 1,074 1,071
Advances and CIAC -- -- 25
- -------------------------------------------------------------------------------------------------------------------
Total Deferred Income Taxes, Net 1,001 1,062 1,075
- -------------------------------------------------------------------------------------------------------------------
Total $ 4,242 $ 4,692 $ 4,815
The calculation of Pre-Tax Income is as follows:
Pre-Tax Income
Net Income Before Preferred Dividends of Parent $ 6,965 $ 6,804 $ 6,603
Income Taxes 4,242 4,692 4,815
Total Pre-Tax Income $11,207 $11,496 $11,418
In accordance with required regulatory treatment, deferred income taxes are not
provided for certain timing differences. This treatment, along with other items,
causes differences between the statutory income tax rate and the effective
income tax rate. The differences between the effective income tax rate recorded
by the Company and the statutory Federal tax rate are as follows:
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Federal Statutory Income Tax Rate 34.0% 34.0% 34.0%
Tax Effect of Differences:
State Income Taxes Net of Federal Benefit 3.9% 5.1% 5.3%
Depreciation 1.4% 1.5% 1.5%
Pension Costs .5% .6% .6%
Debt Refinancing Costs (2.7%) .2% .2%
Other .8% (.6%) .6%
- -------------------------------------------------------------------------------------------------------------------
Effective Income Tax Rate 37.9% 40.8% 42.2%
===================================================================================================================
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NOTE 4: COMMON STOCK
The Company has 7,500,000 authorized shares of common stock, no par value. A
summary of the changes in the common stock accounts for the period January 1,
1996 through December 31, 1998, appears below:
Issuance
(Thousands of dollars except share amounts) Shares* Amount Expense Total
- -------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1996 4,450,136 $4,536 $(1,216) $41,320
Stock issued through Dividend Reinvestment Plan 55,371 940 -- 940
Stock issued through Performance Stock Program 7,361 100 -- 100
Stock issued to Employee Savings 401-K Match Plan 5,257 96 -- 96
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 4,518,125 43,672 (1,216) 42,456
Dividend Reinvestment Plan -- -- (133) (133)
Stock and equivalents issued through
Performance Stock Program 5,526 178 -- 178
Stock issued to Employee Savings 401-K Match Plan 3,985 78 -- 78
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 4,527,636 43,928 (1,349) 42,579
Stock Split (587)* -- (36) (36)
Stock and equivalents issued through
Performance Stock Program 7,281 211 -- 211
Stock issued to Employee Savings 401-K Match Plan 1,955 56 -- 56
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998(1) 4,536,285 $44,195 $(1,385) $42,810
===================================================================================================================
(1) Includes 8,483 restricted and 7,797 common stock equivalent shares issued
through the Performance Stock Program.
* Reflects three-for-two stock split as described in Note 2.
On August 12, 1998 the Board and Directors authorized a new Shareholder Rights
Plan to replace the previous Rights Plan which had been adopted in 1988 and
expired on October 11, 1998. Pursuant to the new Plan, the Board authorized a
dividend distribution of one Right to purchase one one-hundredth of a share of
Series A Junior Participating Preference Stock of the Company for each
outstanding share of the Company's Common Stock. The distribution was effected
October 11, 1998.
Upon the terms of the new Shareholder Rights Plan, each Right will entitle
shareholders to buy one one-hundredth of a share of Series A Junior
Participating Preference Stock at a purchase price of $90, and the Rights will
expire October 11, 2008. The Rights will be exercisable only if a person or
group acquires 15% or more of the Company's Common Stock or announces a tender
or exchange offer for 15% or more of the Company's Common Stock. The Board will
be entitled to redeem the Rights at $0.01 per Right at any time before such
acquisition occurs and upon certain conditions after such a position has been
acquired.
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Upon the acquisition of 15% or more of the Company's Common Stock by any person
or group, each Right will entitle its holder to purchase, at the Right's
purchase price, a number of shares of the Company's Common Stock having a market
value equal to twice the Right's purchase price. In such event, Rights held by
the acquiring person will not be allowed to purchase any of the Company's Common
Stock or other securities of the Company. If, after the acquisition of 15% or
more of the Company's Common Stock by any person or group the Company should
consolidate with or merge with and into any person and the Company should not be
the surviving company, or, if the Company should be the surviving company and
all or part of its Common Stock should be exchanged for the securities of any
other person, or if more than 50% of the assets or earning power of the Company
were sold, each Right (other than Rights held by the acquiring person, which
will become void) will entitle its holder to purchase, at the Right's purchase
price, a number of shares of the acquiring Company's Common Stock having a
market value at that time equal to twice the Right's purchase price.
The Company may not pay any dividends on its Common Stock unless full cumulative
dividends to the preceding dividend date for all outstanding shares of Preferred
Stock of the Company have been paid or set aside for payment. All such Preferred
Stock dividends have been paid.
NOTE 5: ANALYSIS OF RETAINED EARNINGS
The summary of the changes in Retained Earnings for the period January 1, 1996
through December 31, 1998, appears below:
(Thousands of dollars) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Year $13,490 $ 11,939 $ 10,468
Income Before Preferred Dividends 6,965 6,804 6,603
- -------------------------------------------------------------------------------------------------------------------
20,455 18,743 17,071
- -------------------------------------------------------------------------------------------------------------------
Dividends Declared:
Cumulative Preferred, Series A, $.80 Per Share $ 12 12 12
Cumulative Preferred, Series $.90, $.90 Per Share 26 26 26
Common Stock*:
1998 $1.167 Per Share 5,282 -- --
1997 $1.153 Per Share -- 5,215 --
1996 $1.133 Per Share -- -- 5,094
- -------------------------------------------------------------------------------------------------------------------
5,320 5,253 5,132
- -------------------------------------------------------------------------------------------------------------------
Balance at End of Year $15,135 $13,490 $11,939
===================================================================================================================
* Reflects three-for-two stock split as described in Note 2.
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NOTE 6: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each of the following financial instruments.
CASH - The carrying amount approximates fair value.
LONG-TERM DEBT - The fair value of the Company's fixed rate long-term debt is
based upon borrowing rates currently available to the Company. As of December
31, 1998 and 1997, the estimated fair value of the Company's long-term debt was
$65,400,000 and $61,000,000, respectively, as compared to the carrying amounts
of $62,501,000 and $54,532,000, respectively.
The fair values shown above have been reported to meet the disclosure
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Values of Financial Instruments" and do not purport to
represent the amounts at which those obligations would be settled.
NOTE 7: LONG-TERM DEBT
Long-Term Debt at December 31, consisted of the following:
(Thousands of dollars) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
The Connecticut Water Company
First Mortgage Bonds:
6.9% Series Q, Due 2021 $0 $10,000
5.875% Series R, Due 2022 14,800 14,800
6.65% Series S, Due 2020 8,000 8,000
5.75% Series T, Due 2028 5,000 5,000
5.3% Series U, Due 2028 4,550 4,550
6.94% Series V, Due 2029 12,050 12,050
- -------------------------------------------------------------------------------------------------------------------
44,400 54,400
Unsecured Water Facilities Revenue Refinancing Bonds
5.05% 1998 Series A, Due 2028 $10,000 --
5.125% 1998 Series B, Due 2028 8,000 --
- -------------------------------------------------------------------------------------------------------------------
18,000 --
Other
5.5% Unsecured Promissory Note, Due 2002 132 61
Less Current Portion (31) (29)
- -------------------------------------------------------------------------------------------------------------------
101 132
Total Long-Term Debt $62,501 $54,532
===================================================================================================================
Substantially all utility plant is pledged as collateral for the Subsidiary's
long-term debt.
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There are no mandatory sinking fund payments required on the outstanding First
Mortgage Bonds or the Unsecured Water Facilities Revenue Refinancing Bonds at
December 31, 1998. However, the Series R First Mortgage Bonds and the 1998
Series A & B Unsecured Water Facilities Revenue Refinancing Bonds provide for an
estate redemption right whereby the estate of deceased bondholders or surviving
joint owners may submit bonds to the Trustee for redemption at par subject to a
$25,000 per individual holder and a 3% annual aggregate limitation.
The call price of the Series R bonds will reduce annually until the year 2003,
when the call prices become 100%. Series R bonds are callable for redemption at
102.5% through August 31, 1999 then at 102% from September 1, 1999 through
August 31, 2000.
The other outstanding bonds may be initially called for redemption by the
Company at the following dates and prices - Series S, December 15, 2003 at 102%;
Series T, July 1, 2003 and Series U, September 1, 2003 at 100% plus accrued
interest to the date of redemption; Series V, January 1, 2004 at 103.5%, 1998
Series A & B Unsecured Water Facilities Revenue Refinancing Bonds, March 1, 2008
at 100% plus accrued interest.
During 1997 the Subsidiary issued a $163,000, 5.5% unsecured promissory note as
part of the purchase price of the Point O'Woods Water System acquisition. This
5-year note requires the Subsidiary to make monthly payments of interest and
principal totalling $37,000 annually.
In 1998 the Subsidiary refinanced its Series Q, First Mortgage Bonds with 5.05%
1998 Series A Unsecured, Tax-Exempt Water Facilities Revenue Refinancing Bonds,
and refinanced $8,000,000 of interim bank loans with 5.125% tax exempt, 1998
Series B Unsecured Water Facilities Revenue Refinancing Bonds.
NOTE 8: PREFERRED STOCK
Preferred Stock at December 31, consisted of the following:
(Thousands of dollars) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Cumulative Series A Voting, $20 Par Value; Authorized Issued and
Outstanding 15,000 Shares $300 $300
Cumulative Series $.90 Non-Voting, $16 Par Value; Authorized 50,000
Shares, Issued and Outstanding 29,499 Shares 472 472
- -------------------------------------------------------------------------------------------------------------------
Total $772 $772
===================================================================================================================
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All or any part of any series of either class of the Company's issued Preferred
Stock may be called for redemption by the Company at any time. The per share
redemption prices of the Series A and Series $.90 Preferred Stock, if called by
the Company, are $21.00 and $16.00, respectively.
The Company is authorized to issue 400,000 shares of an additional class of
Preferred Stock, $25 par value, the general preferences, voting powers,
restrictions and qualifications of which are similar to the Company's existing
Preferred Stock. No shares of the $25 par value Preferred Stock have been
issued.
The Company is also authorized to issue 1,000,000 shares of $1 par value
Preference Stock, junior to the Company's existing Preferred Stock in rights to
dividends and upon liquidation of the Company. 150,000 of such shares have been
designated as "Series A Junior Participating Preference Stock". Pursuant to the
new Shareholder Rights Plan, described in Note 4, the Company keeps reserved and
available for issuance one one-hundredth of a share of Series A Junior
Participating Preference Stock for each outstanding share of the Company's
Common Stock.
NOTE 9: BANK LINES OF CREDIT
A $9,000,000 line of credit is provided by three banks. The unused lines of
credit as of December 31, 1998 totalled $7,105,000. Bank commitment fees of
approximately $19,000, $20,000, and $15,000 were paid in 1998, 1997, and 1996,
respectively, on the lines of credit.
At December 31, 1998 and 1997, the weighted average interest rates on short-term
borrowings outstanding were 5.82% and 6.22%, respectively.
NOTE 10: UTILITY PLANT AND CONSTRUCTION PROGRAM
The components of utility plant and equipment at December 31, are as follows:
(Thousands of dollars) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Source of Supply $19,214 $ 17,327
Pumping 15,286 14,210
Water Treatment 42,020 38,250
Transmission and Distribution 129,741 124,105
General (including intangible) 13,585 11,390
Held for Future Use 609 2,194
- -------------------------------------------------------------------------------------------------------------------
Total $220,455 $207,476
===================================================================================================================
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The amounts of depreciable plant at December 31, 1998 and 1997 included in total
plant were $208,803,000 and $196,286,000, 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 $7,300,000
during 1999, $6,675,000 during 2000, and $6,400,000 in 2001. During the period
2002 to 2003, construction expenditures for routine improvements to the water
distribution system are expected to be approximately $5,000,000 each year.
NOTE 11: TAXES OTHER THAN INCOME TAXES
Taxes Other than Income Taxes consist of the following:
(Thousands of dollars) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Municipal Property Taxes $3,450 $3,270 $3,284
Payroll Taxes 498 501 495
- -------------------------------------------------------------------------------------------------------------------
Connecticut Gross Earnings Tax (A) -- 931 1,930
Total $3,948 $4,702 $5,790
- -------------------------------------------------------------------------------------------------------------------
(A) This tax was legislatively eliminated for water companies effective July 1,
1997. The Subsidiary's rates were correspondingly reduced at the same time.
NOTE 12: PENSION 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. Funding of $159,000 was made for 1998. No funding was
required for 1997.
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 1998,
1997, and 1996 were $473,000, $317,000, and $265,000, respectively.
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A deferred regulatory asset has been recorded to reflect the amount which
represents the future operating revenues expected to be recovered in customers
rates under FAS 106. In 1997 the Subsidiary requested and received approval from
the DPUC to include FAS 106 costs in customer rates. The DPUC's 1997 limited
reopener of the Subsidiary's general rate proceeding allowed the Subsidiary to
increase customer rates $208,000 annually for FAS 106 costs. The Subsidiary's
current rates now allow for recovery of $473,000 annually for postretirement
benefits costs other than pension.
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.
PENSION BENEFITS OTHER BENEFITS
(Thousand of Dollars) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year $ 11,472 $ 9,414 $ 3,907 $ 3,197
Service Cost 392 392 152 164
Interest Cost 872 740 262 272
Actuarial loss/(gain) 541 1,375 (321) 529
Benefits paid (720) (449) (134) (255)
BENEFIT OBLIGATION, END OF YEAR $ 12,557 $ 11,472 $ 3,866 $ 3,907
- ------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair Value, beginning of year $ 14,851 $ 12,681 $ 1,558 $ 1,290
Actual return on plan assets 2,625 2,619 130 152
Employer contribution 159 -- 473 317
Participant's contributions N/A N/A 30 54
Benefits paid (720) (449) (134) (255)
- ------------------------------------------------------------------------------------
FAIR VALUE, END OF YEAR $ 16,915 $ 14,851 $ 2,057 $ 1,558
Funded Status $ 4,358 $ 3,379 $ (1,809) $ (2,349)
Unrecognized net actuarial gain (6,090) (5,050) (1,650) (1,345)
Unrecognized transition obligation (97) (129) 2,309 2,474
Unrecognized prior service cost 218 250 N/A N/A
- ------------------------------------------------------------------------------------
ACCRUED BENEFIT (COST) $ (1,611) $ (1,550) $ (1,150) $ (1,220)
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PENSION BENEFITS OTHER BENEFITS
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31
Discount rate 7.0% 7.25% 7.0% 7.25%
Expected return on plan assets 8.0% 8.0% 5.0% 5.0%
Rate of compensation increase 4.5% 4.5% N/A N/A
PENSION BENEFITS OTHER BENEFITS
(Thousands of Dollars) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COSTS
Service cost $ 393 $ 392 $152 $164
Interest cost 872 740 262 272
Expected return on plan assets (928) (835) (63) (54)
Amortization of:
Unrecognized Net Transition Asset (32) (32) 165 165
Unrecognized net (Gain) Loss (118) (190) (113) (127)
Unrecognized Prior Service Cost 32 32 ---- ---
- -------------------------------------------------------------------------------------------------------------------
Subtotal 219 107 403 420
- -------------------------------------------------------------------------------------------------------------------
FAS88 Early Retirement Costs -- 366 -- 81
- -------------------------------------------------------------------------------------------------------------------
Net Periodic Pension Costs $219 $473 $403 $501
===================================================================================================================
In determining the accumulated postretirement benefit obligation, health care
cost trends of 6% were assumed for 1998, grading down to 5.5% in 1999 and after.
Assumed health care costs trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
(Thousands of Dollars) INCREASE DECREASE
- -------------------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost
components $ 60 $ (56)
Effect on postretirement benefit obligation $ 446 $ (421)
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - The Subsidiary provides additional
pension benefits to senior management through a supplemental executive
retirement plan. At December 31, 1998 the actuarial present value of the
projected benefit obligation was $423,000. Expense associated with this plan was
$99,000 for 1998, $99,000 for 1997, and $115,000 for 1996.
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SAVINGS PLAN - The Subsidiary maintains an employee savings plan which, prior to
January 1, 1999, allowed participants to contribute from 1% to 10% of pre-tax
compensation. The Subsidiary matched 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
exceeded 110% of dividends paid per common share, the applicable percentage was
50%; otherwise, the match was 25%. The Subsidiary's contribution charged to
expense in 1998, 1997 and 1996 was $85,000, $78,000 and $78,000, respectively,
in each case based on a 50% match.
Effective January 1, 1999 the Plan was modified to increase the maximum amount
the employees can contribute to 15% of their pre-tax compensation subject to IRS
limitations; increase the match to $.50 for each dollar contributed by the
employee up to 4% of their compensation; eliminate the tie in to the Company's
earnings and dividend levels; and create the possibility for a new "incentive
bonus" contribution to the 401(k) plan tied to the attainment of a specific goal
or goals to be identified each year starting in 1999. If the specific goal or
goals are attained by the end of the year, all employees, except officers and
certain key employees, will receive an additional 1% of their annual base salary
as a direct contribution to their 401(k) account.
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 $170,000, $173,000, and $100,000 for 1998, 1997 and
1996, respectively.
NOTE 13: QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 1998 and 1997
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)
1998 1997 1998 1997 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
First Quarter $8,672 $9,012 $2,304 $2,249 $1,380 $1,448 $0.31 $0.32
Second Quarter 8,796 9,633 2,245 2,056 1,470 1,191 0.32 0.26
Third Quarter 11,392 10,855 3,515 3,555 2,600 2,654 0.57 0.59
Fourth Quarter 9,064 9,001 2,240 2,474 1,477 1,473 0.33 0.33
- ----------------------------------------------------------------------------------------------------------------------------------
Year $37,924 $38,501 $10,304 $10,334 $6,927 $6,766 $1.53 $1.50
*Reflects three-for-two stock split as described in Note 2.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AT 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 17, 1999. 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................................. 43
Consolidated Statements of Income -
December 31, 1998, 1997 and 1996............... 44
Consolidated Statements of Cash Flows -
December 31, 1998, 1997 and 1996............... 45
Consolidated Balance Sheets -
December 31, 1998 and 1997..................... 46-47
Notes to Consolidated Financial Statements..................... 48-61
(2) Financial Statement Schedules for the years ended December 31, 1998,
1997 and 1996:
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.
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EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1* Certificate of Incorporation of Connecticut Water Service,
Inc. amended and restated as of April, 1998.
3.2* By-Laws, as amended, of Connecticut Water Service, Inc. as
amended and restated as of April, 1998.
3.3* Certification of Incorporation of The Connecticut Water
Company effective April, 1998.
4.1 Indenture of Mortgage and Deed of Trust from The Connecticut
Water Company to The Connecticut Bank and Trust Company,
Trustee, dated as of June 1, 1956. (Exhibit 4.3(a) to
Registration Statement No. 2-61843)
4.2 Supplemental Indentures thereto dated as of
(i) February 1, 1958 (Exhibit 4.3(b) (i) to
Registration Statement No. 2-61843)
(ii) September 1, 1962 (Exhibit 4.3(b) (ii) to
Registration Statement No. 2-61843)
(iii) January 1, 1966 (Exhibit 4.3(b) (iii) to
Registration Statement No. 2-61843)
(iv) July 1, 1966 (Exhibit 4.3(b) (iv) to
Registration Statement No. 2-61843)
(v) January 1, 1971 (Exhibit 4.3(b) (v) to
Registration Statement No. 2-61843)
(vi) September 1, 1974 (Exhibit 4.3(b) (vi) to
Registration Statement No. 2-61843)
(vii) December 1, 1974 (Exhibit 4.3(b) (vii) to
Registration Statement No. 2-61843)
(viii) January 1, 1976 (Exhibit 4(b) to Form 10-K
for the year ended 12/31/76)
(ix) January 1, 1977 (Exhibit 4(b) to Form 10-K
for the year ended 12/31/76)
(x) September 1, 1978 (Exhibit 2.12(b) (x) to
Registration Statement No. 2-66855)
(xi) December 1, 1978 (Exhibit 2.12(b) (xi) to
Registration Statement No. 2-66855)
(xii) June 1, 1979 (Exhibit 2.12(b) (xii) to
Registration Statement No. 2-66855)
(xiii) December 1, 1983 (Exhibit 4.2 (xiii) to Form
10-K for the year ended 12/31/83)
(xiv) January 1, 1987 (Exhibit 4.2 (xiv) to Form
10-K for the year ended 12/31/86)
(xv) May 1, 1989 (Exhibit 4.2 (xv) to Form 10-K
for year
65
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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 (Exhibit 4.2 (xxii) to Form 10-K for
year ended 12/31/94)
4.3 Loan Agreement dated as of October 1, 1993, between the
Connecticut Development Authority and The Connecticut Water
Company. (Exhibit 4.3 to Form 10-K for year ended
December 31, 1993)
4.4 Loan Agreement dated as of June 1, 1993, between the
Connecticut Development Authority and The Connecticut Water
Company. (Exhibit 4.4 to Form 10-K for year ended
December 31, 1993)
4.5 Loan Agreement dated as of September 1, 1993, between the
Connecticut Development Authority and The Connecticut Water
Company. (Exhibit 4.5 to Form 10-K for year ended
December 31, 1993)
4.6 Loan Agreement dated as of August 1, 1992 between the
Connecticut Development Authority and The Connecticut Water
Company. (Exhibit 4.10 to Form 10-K for the year ended
December 31, 1992)
4.7 Bond Purchase Agreement dated as of December 1, 1993.
(Exhibit 4.8 to Form 10-K for year ended December 31, 1993)
4.8* Loan Agreement dated as of March 9, 1998 between the
Connecticut Development Authority and The Connecticut Water
Company.
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10.1 Pension Plan Fiduciary Liability Insurance for The
Connecticut Water Company Employees' Retirement Plan and
Trust, The Connecticut Water Company Tax Credit Employee
Stock Ownership Plan, as Amended and Restated, Savings Plan
of The Connecticut Water Company and The Connecticut Water
Company VEBA Trust Fund. (Exhibit 10.1 to Registration
Statement No. 2-74938)
10.2 Directors and Officers Liability and Corporation
Reimbursement Insurance. (Exhibit 10.2 to Registration
Statement No. 2-74938)
10.3 Directors Deferred Compensation Plan, effective as of
January 1, 1980, as amended as of March 20, 1981. (Exhibit
10.3 to Registration Statement No. 2-74938)
10.4 The Connecticut Water Company Deferred Compensation
Agreement dated December 1, 1984. (Exhibit 10.4 to Form
10-K for the year ended December 31, 1984)
10.5 The Connecticut Water Company 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* The Connecticut Water Company Employment Agreements with
Officers, amended and restated as of December 15, 1998.
a) Marshall T. Chiaraluce
b) Michele G. DiAcri
c) James R. McQueen
d) David C. Benoit
e) Peter J. Bancroft
f) Maureen P. Westbrook
g) Terrance P. O'Neill
10.10* Savings Plan of The Connecticut Water Company, amended and
restated effective as of January 1, 1999
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10.11* The Connecticut Water Company Employees' Retirement Plan as
amended and restated as of January 1, 1997
10.12 Water Supply Agreement dated June 13, 1994, between The
Connecticut Water Company and the Hazardville Water Company.
(Exhibit 10.15 to Form 10-K for year ended December 31,
1994)
10.13 November 4, 1994 Amendment to Agreement dated December 11,
1957 between The Connecticut Water Company (successor to the
Thomaston Water Company) and the City of Waterbury.
(Exhibit 10.16 to Form 10-K for year ended December 31,
1994)
10.14 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)
10.15 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)
10.16 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)
10.17 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)
10.18 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)
10.19 Dividend Reinvestment and Common Stock Purchase Plan as
amended. (Registration Statement No. 33-53211 as amended)
10.20 Contract for Supplying Bradley International Airport.
(Exhibit 10.21 to Form 10-K for the year ended December 31,
1984)
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10.21 Report of South Windsor Task Force. (Exhibit 10.23 to Form
10-K for the year ended December 31, 1987)
10.22 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)
10.23 Performance Stock Program. (Registration Statement No.
33-49058.)
24.1 * Consent of Arthur Andersen LLP
27.0 * Financial Data Schedule
- ----------
Note: Exhibits 10.1 through 10.11, 10.22 and 10.23 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 1998.
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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 Director and March 19, 1999
- --------------------------- President and
Marshall T. Chiaraluce Chief Executive
(Principal Executive Officer) Officer
/s/ David C. Benoit Vice President - March 19, 1999
- ------------------------------ Finance,
David C. Benoit Accounting, and
(Principal Financial and Treasurer
Accounting Officer)
70
Page 70
/s/ Francis E. Baker, Jr. Director March 09, 1999
- --------------------
Francis E. Baker, Jr.
/s/ Harold E. Bigler, Jr. Director March 11, 1999
- ---------------------
Harold E. Bigler, Jr.
/s/Astrid T. Hanzalek Director March 04, 1999
- ---------------------
Astrid T. Hanzalek
/s/ Frederick E. Hennick Director March 05, 1999
- ---------------------
Frederick E. Hennick
/s/ Marcia L. Hincks Director March 09, 1999
- ---------------------
Marcia L. Hincks
Director March 09, 1999
/s/ Rudolph E. Luginbuhl
- ---------------------
Rudolph E. Luginbuhl
Director March 12, 1999
/s/ Harvey G. Moger
- ---------------------
Harvey G. Moger
Director March 05, 1999
/s/ Robert F. Neal
- ---------------------
Robert F. Neal
Director March 12, 1999
/s/ Warren C. Packard
- ---------------------
Warren C. Packard
Director March 12, 1999
/s/ Donald B. Wilbur
- ---------------------
Donald B. Wilbur
71
SCHEDULES
72
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 11, 1999. 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 11, 1999
73
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, 1998 $126 $161 $87 $200
==== ==== === ====
Year Ended December 31, 1997 $140 $135 $149 $126
==== ==== ==== ====
Year Ended December 31, 1996 $164 $128 $152 $140
==== ==== ==== ====
(1) Amounts charged off as uncollectible after deducting recoveries
74
EXHIBITS
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR
ENDED DECEMBER 31, 1998
24.1 Consent of Arthur Andersen LLP
27.0 Financial Data Schedule