FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1999 Commission File Number 0-6028
BIRMINGHAM UTILITIES, INC.
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-0878647
230 Beaver Street, Ansonia, CT 06401
(Address of principal executive office) (Zip Code)
(Former name, former address and former fiscal year, if changes since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports; and (2)
has been subject to such filing requirements for the past 90 days.
No Yes X
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 1, 1999
Common stock, no par value 1,556,435
PAGE 2
PART I.FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BIRMINGHAM UTILITIES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
Three Months Ended March 31,
1999 1998
Operating Revenue $1,076,641 $1,006,886
Operating Expenses:
Operating Expenses 571,495 596,515
Maintenance Expenses 55,149 41,738
Depreciation 134,001 118,501
Taxes Other Than Income Taxes 73,585 79,603
Taxes on Income 47,735 7,427
Total Operating Expense 881,965 843,784
Utility Operating Income 194,676 163,102
Amortization of Prior Years'
Deferred Income on Land Dispositions
(Net of income taxes of $48,183
in 1999 and $27,044 in 1998) 85,740 38,306
Other income, net 34,291 2,251
Income before interest expense 314,707 203,659
Interest and Amortization of Debt Discount 112,802 146,849
Income from dispositions of land (net of
income taxes of $558,456 in 1998) -------- 828,286
Net income $201,905 $885,096
Retained earnings, beginning $5,219,875 $1,831,377
Dividends 155,472 129,489
Retained earnings, ending $5,266,308 $2,586,984
Earnings per share - basic* $.13 $.58
Earnings per share - diluted* $.12 $.57
Dividends per share* $.10 $.085
The accompanying notes are an integral part of these financial statements.
* Adjusted to reflect 2-for-1 stock split (see Note 5).
PAGE 3
BIRMINGHAM UTILITIES, INC.
BALANCE SHEETS
(Unaudited)
March 31, Dec. 31,
1999 1998
ASSETS:
Utility Plant $20,873,059 $20,622,907
Accumulated depreciation (6,298,681) (6,189,596)
Net Utility Plant 14,574,378 14,433,311
Current Assets:
Cash and cash equivalent 664,724 2,696,706
Accounts receivable, net of
allowance for doubtful accounts 462,230 493,165
Accrued utility revenue 355,951 361,448
Materials & supplies 116,866 62,046
Prepayments 87,925 42,643
Total current assets 1,687,696 3,656,008
Deferred Charges 435,902 377,182
Unamortized debt expense 166,420 170,481
Income taxes recoverable 414,080 414,078
Other assets 463,495 467,826
1,479,897 1,429,567
$17,741,971 $19,518,886
STOCKHOLDERS' EQUITY AND LIABILITIES
Stockholders' Equity:
*Common Stock, no par value, authorized
2,000,000 shares; issued and outstanding 3/31/99-
1,556,435 shares; 12/31/98- 1,550,316 $ 2,471,425 $2,427,752
Retained earnings 5,266,308 5,219,875
7,737,733 7,647,627
Long-term debt 4,418,000 4,418,000
Current Liabilities:
Current portion of note payable and long term debt 94,000 94,000
Accounts payable and accrued liabilities 634,259 2,456,271
Total current liabilities 728,259 2,550,271
Customers' advances for construction 1,305,499 1,261,090
Contributions in aid of construction 1,043,716 1,043,719
Regulatory liability-income taxes refundable 172,356 172,356
Deferred income taxes 1,435,981 1,391,476
Deferred income on disposition of land 900,427 1,034,347
4,857,979 4,902,988
$17,741,971 $19,518,886
The accompanying notes are an integral part of these financial statements.
* Adjusted to reflect 2-for-1 stock split (see Note 5).
PAGE 4
BIRMINGHAM UTILITIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
Cash Flows From Operating Activities 1999 1998
Net Income $201,905 $885,096
Adjustments to reconcile net income to
net cash provided by operating activities:
Income from land dispositions -- (828,286)
Depreciation and amortization 147,884 134,985
Amortization of deferred income, net of tax (85,740) (38,306)
Increases and decreases in assets
and liabilities:
Accounts receivable and accrued utility revenue 36,432 137,818
Materials and supplies (54,818) (3,343)
Prepayments (55,282) (54,790)
Accounts payable and accrued expenses (1,822,022) (135,213)
Deferred income taxes (3,675) (3,675)
Total Adjustments (1,837,221) (790,810)
Net cash flows provided by (used in)
operating activities (1,635,316) 94,286
Cash flows from investing activities:
Proceeds from land dispositions -- 1,800,000
Net construction expenditures (230,659) (153,721)
Other assets and deferred charges, net (32,875) (71,159)
Net Cash flows from (used in)
investing activities (263,534) 1,575,120
Cash flows from financing activities:
Increase (decrease) in current note payable -- (1,373,750)
Dividends paid - net (133,132) (116,615)
Net Cash flows used in
financing activities: (133,132) (1,490,365)
Net increase in cash and cash equivalents (2,031,982) 179,041
Cash and cash equivalents, beginning 2,696,706 62,699
Cash, ending $664,724 $241,740
Supplemental disclosure of cash flow information:
Cash paid for
Interest $217,478 $254,113
Income Taxes $1,746,000 $12,600
PAGE 5
Supplemental disclosure of non-cash flow information:
The Company receives contributions of plant from
builders and developers. These contributions of
plant are reported in utility plant and in
customers' advances for construction. The
contributions are deducted from
construction expenditures by the Company.
Gross Plant, additions $275,068 $185,498
Customers' advances for construction 44,409 31,777
Capital expenditures, net. $230,659 $153,721
The accompanying notes are an integral part of these financial statements.
BIRMINGHAM UTILITIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Birmingham Utilities, Inc. is a specially chartered public service
corporation in the business of collecting and distributing water for domestic,
commercial and industrial uses and fire protection. The Company provides water
to Ansonia and Derby, Connecticut and in small parts of the contiguous Town of
Seymour with a population of approximately 31,000 people.
The Company is subject to the jurisdiction of the Connecticut Department
of Public Utility Control ("DPUC") as to accounting, financing, ratemaking,
disposal of property, the issuance of long term securities and other matters
affecting itsoperations. The Connecticut Department of Public Health (The
"Health Department" or "DPH") has regulatory powers over the Company under
state law with respect to water quality, sources of supply, and the use of
watershed land. The Connecticut Department of Environmental Protection "DEP")
is authorized to regulate the Company's operations with regard to water
pollution abatement, diversion of water from streams and rivers, safety of
dams and the location, construction and alteration of certain water
facilities. The Company's activities are also subject to regulation with
regard to environmental and other operational matters by federal, state and
local authorities, including, without limitation, zoning authorities.
The Company is subject to regulation of its water quality under the
Federal Safe Drinking Water Act ("SDWA"). The United States Environmental
Protection Agency has granted to the Health Department the primary enforcement
responsibility in Connecticut under the SDWA. The Health Department has
established regulations containing maximum limits on contaminants which have or
may have an adverse effect on health.
NOTE 1 - QUARTERLY FINANCIAL DATA
The accompanying financial statements of Birmingham Utilities, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles, without audit, except for the Balance Sheet for the period ending
December 31, 1998 which has been audited. The interim financial information
PAGE 6
conforms to the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and,
as applied in the case of rate-regulated public utilities,complies with the
Uniform System of Accounts and ratemaking practices prescribed by the
authorities. Certain information and footnote disclosures required by generally
accepted accounting principles have been omitted, pursuant to such rules and
regulations; although the Company believes that the disclosures are adequate to
make the information presented not misleading. For further information, refer
to the financial statements and accompanying footnotes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
The Company's business of selling water is to a certain extent seasonal
because water consumption normally increases during the warmer summer months.
Other factors affecting the comparability of various accounting periods include
the timing of rate increases and the timing and magnitude of property sales.
Accordingly, annualization of the results of operations for the three months
ended March 31, 1999 and March 31, 1998, would not necessarily accurately
forecast the annual results of each year.
NOTE 2 - CALCULATION OF WEIGHTED AVERAGE SHARES
OUTSTANDING-DILUTED
The following table summarizes the number of common shares used in the
calculation of earnings per share.
[S] [C] [C]
Three Months Ended
3/31/99 3/31/98
Weighted average shares outstanding
for earnings per share, basic 1,557,406 1,523,404
Incremental shares from assumed
conversion of stock options 62,066 29,210
Weighted average shares outstanding
for earnings per share, diluted 1,619,472 1,552,614
NOTE 3 - RATE MATTERS
On January 21, 1998, the DPUC granted the Company a 4.1% water service
rate increase designed to provide a $177,260 annual increase in water service
revenues and a 12.16% return on common equity. New rates became effective on
February 1, 1998.
NOTE 4 - LAND SALES
On January 21, 1998, the Company sold to the City of Derby, Connecticut,
145 acres of land in Derby, Connecticut for $1,800,000. The total gain from
the sale amounted to $910,306 of which $81,983 was deferred and will be
recognized over a 3-year period, as approved by the DPUC.
PAGE 7
On April 29, 1998, the Company sold 2.9 acres of land in Woodbridge,
Connecticut for the development of a single-family home for $96,000. The total
gain from the sale amounted to $28,955 of which $9,243 was deferred and will be
recognized over a 10-year period as approved by the DPUC.
The Company also sold, on November 23, 1998, 229 acres of land in
Seymour and Oxford, Connecticut to the Town of Seymour. This parcel was sold
below market value, and as a result, the transaction was classified as a bargain
sale for income tax purposes. The net gain from the sale amounted to $1,010,209
of which $90,965 was deferred and will be recognized over a 3-year period as
approved by the DPUC. As a result of the bargain sale, the net gain also
includes tax deductions of $177,064 of which $98,900 will be carried forward to
reduce the Company's tax liability in subsequent years.
On December 3, 1998, the Company sold 515 acres of land in Oxford and
Seymour, Connecticut to The Trust for Public Land for $3,220,000. The Trust
for Public Land, in turn, simultaneously sold the property to the Town of
Oxford for the same price. This parcel was also sold below market value, and
therefore, the transaction was classified as a bargain sale for income tax
purposes. The net gain from the sale amounted to $1,743,998 of which $157,037
was deferred and will be recognized over a 3-year period as approved by the
DPUC. As a result of the bargain sale, the net gain includes tax deductions of
$329,274 of which $184,100 will be carried forward to reduce the Company 's tax
liability in subsequent years.
In 1997, the Company had entered into a contract to sell 245 acres of
land in Seymour, Connecticut to M/1 Homes by December 31, 1998 for a purchase
price of $3,950,000. Because M/1 Homes had been unable to secure various land
use approvals for the part of its development plan that included construction
of an 18-hole golf course, it has amended its development plan. The delays
caused by, among other things, the modified development plan, resulted in
M/1 Homes requesting that the Company extend the closing deadline beyond the
original December 31, 1998 date. The Company and M/1 Homes recently agreed to
a contract amendment extending the closing date to June 30, 1999 and providing
for certain other modifications to the agreement. The amended agreement
contemplates, instead of a golf course, the dedication by M/1 Homes of over
50% (approximately 130 acres) of the acreage included in the transaction for
open space purposes. Among other things, the modified agreement also provides
for a $70,000 increase in the purchase price to $4,020,000, of which $2,370,000
will be payable at the closing, and the $1,650,000 balance within one year from
the closing. Payment of the deferred portion of the purchase price will be
secured by a first mortgage in favor of the Company on a portion of the
property. The original 1997 agreement had been approved by the DPUC, and the
amendment also must be so approved. The Company has applied to the DPUC for
such approval but cannot predict whether or not the DPUC will grant it. The
Company knows of no reason, however, why such approval should not be granted.
The agreement may also be terminated by M/1 Homes if it does not obtain all
required land use approvals, such as local site plan and inland wetlands
approvals, by the scheduled closing date. The Company cannot predict whether
or not M/1 Homes will be able to obtain all of the required approvals. In the
event the DPUC approves the amendment and M/1 Homes terminates the agreement
because of its inability to obtain the required approvals, the Company is
PAGE 8
entitled to retain the $100,000 deposit made toward the purchase price by
M/1 Homes.
NOTE 5 - STOCK SPLIT
On January 11, 1999, the Company filed with the DPUC an Application for
Approval to Issue approximately 780,000 additional shares of common stock in
conjunction with a 2-for-1 stock split. The stock split which had been
approved by the Board of Directors in December, 1998, and by the DPUC on
February 26, 1999. The stock split became effective on March 31, 1999 with
respect to shares held of record on March 18, 1999. All financial information
contained in Form 10-Q has been adjusted to reflect the impact of the common
stock split.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Management's Discussion and Analysis of the Results of Operations and
Financial Condition contained in the Company's Annual Report in Form 10K for
the year ended December 31, 1998, should be read in conjunction with the
comments below.
CAPITAL RESOURCES AND LIQUIDITY
Completion of the Company's Long Term Capital Improvement Program is
dependent upon the Company's ability to raise capital from external sources,
including, for the purpose of this analysis, proceeds from the sale of the
Company's holdings of excess land. For the three months ended March 31, 1999
and 1998, the Company's additions to utility plant, net of customer advances,
cost $230,659 and $153,721, respectively. (see Statement of Cash Flows).
These additions were financed primarily from external sources, namely proceeds
from land sales.
The Company has outstanding $4,418,000 principal amount of Mortgage
Bonds, due September 1, 2011, issued under its Mortgage Indenture. The
Mortgage Indenture limits the issuing of additional First Mortgage Bonds and
the payment of dividends. It does not, however, restrict the issuance of
either long term or short term debt which is either unsecured or secured with
liens subordinate to the lien of the Mortgage Indenture. The Company also had
a $1,500,000 secured, term loan which was repaid in full on November 23, 1998.
Principal and interest payments were made monthly up to the time of repayment.
In 1998, the Company converted a $600,000 working capital line of credit
and a $1,500,000 secured line of credit to a two-year $2,100,000 revolving
line of credit. In June, 2000, the Company will have the option to convert any
outstanding balance to a six-year term note with principal payments based on a
20-year amortization schedule, with a balloon payment at the end of the
six-year term. The revolving line of credit is secured by a lien subordinate
to the lien of the Mortgage Bond Indenture) on all of the Company's utility
property other than its excess land available for sale. There were no
borrowings outstanding on the revolving line of credit on March 31, 1999.
PAGE 9
The Company may choose among several interest rate options on the
revolving line of credit: variable options of 30- or 90-day LIBOR plus 100
basis points, or prime. The term loan interest rate options consist of a fixed
rate at the bank's cost of funds plus 100 basis points, or a variable rate of
the prime rate or 90 day LIBOR plus 100 basis points which is reset every 90
days.
The Company's 1999 Capital Budget of $1,800,000 is two-tiered. The first
tier consists of typical capital improvements made each year for services,
hydrants and meters, is budgeted for $550,000 in 1999, and is expected to be
financed primarily with internally generated funds.
The second tier of the 1999 Capital Budget consists of replacements and
betterments which are part of the Company's Long Term Capital Improvement
Program and includes $1,250,000 of budgeted plant additions. Plant additions
from this part of the 1999 budget may require use of the Company's line of
credit. Second tier plant additions can be, and portions of it are expected to
be, deferred to future years if funds are not available for their construction
in 1999.
As of March 31, 1999, the Company has approximately 960 acres of excess
land available for sale, of which 245 acres is currently under contract,
consisting of land currently classified as Class III, non-watershed land under
the statutory classification system for water company lands. The Company
believes that by selling these excess lands it can generate sufficient equity
capital to support its 5 year capital budget, currently estimated at
$10,000,000. Such land dispositions are subject to approval by the DPUC.
Proceeds from the sale of land are recorded asrevenue at the time of closing
and portions of the gains are deferred and amortized over various times as
stipulated by the DPUC.
Year 2000 Compliance
The Company is currently evaluating its exposure to the Year 2000
problem and is taking steps to be Year 2000 compliant. In general terms, the
problem arises from the fact that many existing computer systems and other
equipment containing date-sensitive embedded technology 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.
The Company's existing billing and accounting software are currently in
the process of being upgraded to comply with all Year 2000 related issues.
Management anticipates its computer systems will be fully compliant by the
end of the second quarter of 1999.
The Company also is evaluating the Year 2000 compliance of systems and
Equipment which are not linked to billing and accounting software and has
identified items that could be impacted by the Year 2000 problem. For the
items identified as possibly presenting a Year 2000 problem, the Company has
contacted suppliers, where possible, to obtain adequate assurance that it is
Year 2000 compliant or is in the process of determining and addressing any
PAGE 10
noncompliance. In addition, wherever practical, the Company is independently
testing such items for compliance.
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.
Due to the uncertainties presented by such third party Year 2000
problems, and the possibility that, despite its efforts, the Company may be
unsuccessful in preparing its internal systems and equipment for the Year 2000,
the Company is developing working plans for dealing with its most reasonably
likely worst-case scenario, many of which are contained in the Company's
approved Emergency Contingency Plan. The Company's assessment of its most
reasonably likely worst-case scenario and the exact nature and scope of its
contingency plans will be affected by the Company's continued Year 2000
assessment. The Company expects to complete such assessment and contingency
planning during the third quarter of 1999, and to have all contingency systems
in place and fully tested by the fourth quarter of 1999. Costs to meet Year
2000 compliance are not expected to have a material impact on the Company's
financial position or results of operations.
Results of Operations for the Three Months Ended March 31, 1999 and 1998.
Net Income
Net Income for the three months ended March 31, 1999 was $201,915
compared with $885,096 for the same 1998 period. The sale of property in
January of 1998 in Derby, Connecticut, to the City of Derby, contributed
$828,286 to net income in the first quarter of 1998. There were no comparable
land sales in 1999.
Operating Revenues
Operating Revenues for the first three months of 1999 of $1,076,641 are
$69,755 higher than operating revenues of $1,006,886 for the first three months
of 1998. Increased water consumption in 1999 from all classes of customers and
the effects of an over-all four percent water service rate increase that became
effective February 1, 1998, accounts for this increase.
Operating and Maintenance Expenses
Operating and Maintenance Expenses for the first three months of 1999
are $11,606 below the comparable 1998 period. Decreased purchased water costs,
payroll and casualty insurance expense are largely offset by increased main
maintenance expense and purchased power costs.
Depreciation Expense
Depreciation expense for the first three months of 1999 is $15,500
higher than the comparable 1998 period due to depreciation expense relating to
general plant additions.
PAGE 11
Taxes Other Than Income Taxes
Taxes Other Than Income Taxes for the three month period ended March
31, 1999 is $6,019 lower than the comparable 1998 period. Decreased payroll
taxes in 1999 as a result of lower wages and a decrease in the state
unemployment tax rate account for this decline.
Other Income
Other Income for the first three months of 1999 is $32,040 ahead of the
comparable 1998 period. Investment interest income recorded in the first
quarter of 1999 as a result of the Company's temporary cash investments
accounts for the increase.
Land Dispositions
When the Company disposes of land, any gain recognized, net of tax, is
shared between rate payers and stockholders based upon a formula approved by
the DPUC. The impact of land dispositions is recognized in two places on the
statement of income.
The statement of income reflects income from the disposition of Land
(net of taxes) of $828,287 for the three months ended March 31, 1998. That
amount represents the sale of 145 acres of land to the City of Derby, CT on
January 21, 1998. That amount represents the stockholders' immediate share of
income from the land sales. The net gain totaled $910,306, including the
deferred portion. The DPUC's October 22, 1997 Decision approving the Derby
sale provided for a 3-year amortization period, as 75% of this parcel has been
dedicated as open space. There were no property sales in the first quarter of
1999.
Land disposition income is also recognized in the financial statements
as a component of operating income on the line entitled "Amortization of
Deferred Income on Dispositions of Land." These amounts represent the
recognition of income deferred on land dispositions which occurred in prior
years. The amortization of deferred income on land dispositions net of tax,
was $85,740 and $38,306 for the three months ended March 31, 1999 and 1998,
respectively.
Recognition of deferred income will continue over time periods ranging
from three to fifteen years, depending upon the amortization period ordered by
the DPUC for each particular disposition.
PART II. OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Financial Data Schedule filed herewith.
(b) Report on Form 8-K, dated February 26, 1999 was filed with respect to
Registrant's net earnings for the twelve months ended December 31, 1998
and with respect to the approval of the Registrant's Updated Water Supply
Plan the Connecticut Department of Health.
PAGE 12
(c) Report on Form 8-K, dated December 11, 1998 was filed with respect to the
Registrant's completed sales of excess water company lands to the Towns
of Oxford and Seymour, CT and with respect to the Registrant's
announcement of a 2 for 1 stock split for all outstanding shares of the
Registrant's Common Stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIRMINGHAM UTILITIES, INC.
Registrant
Date: /s/
John S. Tomac, President