EXHIBIT 13
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2005 Annual Report / BIW Limited
Strategic Focus
Sound Growth
COMPANY PROFILE
BIW Limited (BIW or the Company), formed in 2002, is the parent company of
Birmingham Utilities, Inc. (BUI or Birmingham Utilities), founded in 1859, and
Birmingham H2O Services, Inc. (H2O Services), established in 2002. Birmingham
Utilities, a regulated public water service company, collects and distributes
water for domestic, commercial and industrial uses and fire protection in the
Naugatuck Valley towns of Ansonia, Derby and small parts of Seymour,
Connecticut. Water service is also provided for domestic and commercial use in
33 satellite water operations in 16 towns in eastern Connecticut, which form
BUI's Eastern Division. This division, which was acquired in 2003, was the
former Eastern Connecticut Regional Water Company, Inc.
H2O Services, the Company's non-regulated subsidiary, offers a consumer
protection program for residential service lines and provides water related
services to other water utilities, municipalities, contractors and individuals
throughout Connecticut.
FINANCIAL HIGHLIGHTS
The financial highlights set forth below should be read together with, and are
qualified by reference to, the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section and our audited
consolidated financial statements and accompanying notes included elsewhere in
this annual report.
(000's omitted except for
per share data) 2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Operating Revenues $9,055 $9,866 $6,408 $4,836 $4,852
Income before Interest Expense 1,341 1,085 1,253 978 1,033
Income from Land Dispositions -- -- -- 261 5,133
Net Income 659 511 820 817 5,655
Earnings Per Share - Basic .40 .31 .50 .50 3.48
Earnings Per Share - Diluted .39 .30 .49 .49 3.41
Cash Dividends Declared (per share) .68 .68 .60 .60 .58
Total Assets 32,742 30,228 28,399 22,321 22,681
Long-Term Debt 9,000 9,000 3,948 4,042 4,136
Short-Term Debt 4,755 2,255 4,799 94 94
Shareholders' Equity 11,729 12,187 12,723 12,889 13,057
CORPORATE STRUCTURE 2005
BIW Limited Parent Company
Birmingham Utilities Regulated
Eastern Division
33 Systems in Eastern Connecticut
Naugatuck Valley Division
Ansonia, Derby, and Seymour, Connecticut
Birmingham H20 Services Non-regulated
Rhodes Pump Service
Contract Operations (Eastern)
Contract Operations (Valley)
TO OUR SHAREHOLDERS
BIW Limited's earnings performance in 2005 was less than expected, and this
has perhaps overshadowed many accomplishments and actions that took place in
2005. These accomplishments and actions, we believe, will enhance the financial
strength and profitability of your Company in the years ahead.
Your Company's public utility water business, Birmingham Utilities, had
mixed earnings results in 2005. Earnings of the Ansonia based regulated
operations have declined due to a reduction in sales, increases in depreciation
expense and a decline in other income. Those declines, however, were mitigated
by a $103,000 reduction in operating expenses in 2005 compared to 2004. The
Eastern Division's regulated operations in 2005 experienced operating losses,
but the losses were significantly reduced by a $363,000 reduction in operating
expenses in 2005 versus 2004. Increased depreciation expense and higher interest
charges somewhat offset the decline in operating expenses.
The Company plans to file a request for rate relief with the Connecticut
Department of Public Utility Control ("DPUC") in 2006 for both the Ansonia and
Eastern regulated operations. General rate relief was last received by our
Eastern Division in 1997 and by our Ansonia based operation in 2003. Earlier
this year, the DPUC authorized a rate increase for the Ansonia operations to
pass through increases in purchased water costs and property taxes. It is clear
that the Company needs to recoup the investment it has made in utility plant at
both divisions and to recover all of the costs and investments required to
efficiently operate our water systems.
Operating results for our water services company, H2O Services, were also
lower than in 2004, but contributed positively to consolidated earnings in 2005.
The unregulated operations at our Eastern Division had lower revenues in 2005
due to the completion of a large construction project included in the 2004
results, coupled with the harsh winter in 2005 that suppressed business activity
throughout H2O Services.
Consolidated earnings increased in 2005 compared to 2004; however, the
final results were disappointing and lower than expected. In 2005, consolidated
net income of BIW Limited was $659,000 as compared to $511,000 in 2004 and
$820,000 in 2003. Earnings per share basic were $.40 in 2005 compared to $.31
per share basic in 2004 and $.50 per share basic in 2003. Pre-tax operating
income of the Company, which continues to grow, was $1,506,000 in 2005, compared
with $1,475,000 in 2004 and $1,407,000 in 2003. Pre-tax operating income
represents the sum of operating income of $1,194,000, $1,228,000 and $1,154,000
in 2005, 2004 and 2003, respectively, plus taxes on income of $312,000, $247,000
and $253,000. Although consolidated revenues in 2005 were $810,000 lower than in
2004, operating and maintenance expenses were $1,110,000 less than in 2004,
which more than offset significant increases in depreciation expense and
property taxes, due primarily to the Company's continuing substantial investment
in utility plant.
As stated earlier, the DPUC granted rate relief to Birmingham Utilities'
Ansonia based regulated operations to account for higher purchased water costs
and to a lesser extent higher property taxes that became effective in January of
2006. This 4.5% limited rate increase, using the statutory "Pass Through
Legislation," was needed to account for a 22%, $201,000 wholesale water rate
increase imposed on Birmingham Utilities by the South Central Regional Water
Authority ("RWA"). The Company had vigorously opposed the RWA's water rate
increase, which equated to more than four times the amount all other customers
of the RWA received. In granting the requested rate relief, the DPUC also
directed the Company to attempt to renegotiate the purchased water contract with
the RWA.
In 2006, the Company will file a general rate application with the DPUC to
increase its water service rates for both the Ansonia and Eastern Division
regulated operations. We believe the most effective and efficient method to
apply for this rate increase is to combine both divisions for ratemaking
purposes. We believe that combining the two divisions will mitigate future rate
increases for the Ansonia Division, as we see many growth opportunities in our
customer base in Eastern Connecticut while there is limited or no customer
growth in our customer base in the Naugatuck Valley towns of Ansonia and Derby.
A larger customer base that has the potential to grow further will assist in
allocating the fixed costs of the Company over a larger customer population over
time. Although we plan to file this application in the second quarter of 2006,
the full results of any future increase, if approved, will not go into effect
until the last quarter of 2006. This proposed rate increase primarily reflects
the costs of improving water quality, reliability and improving customer
service, especially in our Eastern Division, while earning a reasonable return
for our shareholders on our investment in new utility plant at both divisions.
The Company's dividend exceeded earnings in 2005 and 2004. However, over
the period 1998-2005, dividends represented approximately 50% of the utility's
earnings, which is lower than the typical 75% dividend payout ratio for
utilities. The 2006 rate case application for utility regulated operations is
intended to update the Company's rate base for current investments in both
utility divisions and enable the Company to earn a reasonable return on this
investment, which should allow us to grow the book value of the Company in the
future. Although we cannot predict the outcome of any rate proceeding, statutory
ratemaking principles require that water service rates be set to allow a utility
to recover reasonable operating and capital costs, including a reasonable return
on its investments.
We continue to keep on hold our plans to expand our Beaver Brook Reservoir
until the rate application process is completed in 2006, and then expect to
proceed with further planning and evaluation. The DPUC has stated its belief
that Birmingham Utilities should do a feasibility study for the reactivation of
the Beaver Brook water supply. This type of long-term planning, which includes
the construction of a filter plant, is important to the Company and the region,
as it will provide an additional supply of water for future growth of the
surrounding Naugatuck Valley towns.
Looking toward the future, we are optimistic about our prospects. Our
non-regulated service company remains strong and contributes annually to
earnings. We expect this to continue in the future. We continue to look to
expand these services through new contracts and other opportunities as well as
working to assure that all businesses remain profitable and efficient. We look
forward to obtaining rate relief to recover our capital investments and to
recover our operating expenses necessary to operate both regulated divisions. We
believe we have a management team in place that can direct these activities and
a qualified and dedicated workforce to carry out all of our plans. We thank you
for your confidence and support, and we look forward to serving you and keeping
you apprised of our progress in the months and years to come.
Lastly, we all were saddened at the passing of our director, Michael J.
Adanti, on July 31, 2005. Mike served the Company with distinction since 2000.
We will all miss Mike's wisdom and charm. He was not only a trusted advisor to
the Company, but also a friend to us all.
Sincerely,
Betsy Henley-Cohn
Chairwoman
John S. Tomac
President and Treasurer
BIW CONTRIBUTORS
Board of Directors
Betsy Henley-Cohn (2)
Chairwoman of the Board of Directors of the Company
Chairman and Treasurer,
Joseph Cohn & Sons, Inc.
Director, UIL Holdings Corporation
Director, Aristotle Corp.
(1995-2002);
Director, Citizens Bank of Connecticut (1997-1999);
John S. Tomac (2)
President and Treasurer of the Company
Michael J. Adanti (deceased July 31, 2005)
President Emeritus, Southern Connecticut State University
Director, Griffin Hospital
Mary Jane Burt (1,2,4)
Realtor, H. Pearce Co.
Principal, The Laurel Group
Previously, President, Burt Medical Lab 1984-1998
James E. Cohen (2,3)
Lawyer in Practice in Derby
Alvaro da Silva (1,3)
President, DSA Corp.
President, B.I.D., Inc.
(land development and home building company) Managing Partner, Connecticut
Commercial Investors, LLC (a commercial real estate and investment partnership)
Juri Henley-Cohn (2)
President, Johnson Point Productions
Themis Klarides (1,4)
Associate Attorney, Law Offices of Shawn K. Splan, Shelton;
State Representative, 114th District, Connecticut General Assembly
B. Lance Sauerteig (2,4)
Principal and President of BLS Strategic Capital, Inc. (financial and investment
advisory company) Principal and Manager of Tortoise Capital Partners, LLC (real
estate investment company) Director, Chemwerth, Inc.
Director, United Aluminum Corporation
Kenneth E. Schaible (1,3)
Real Estate Developer
Previously, Senior Vice President, Webster Bank (1995-1996) President, Shelton
Savings Bank and Shelton Bancorp, Inc.
(1972-1995)
Charles T. Seccombe
Director Emeritus
Officers
Betsy Henley-Cohn
Chairwoman and CEO
John S. Tomac
President and Treasurer
John J. Keefe, Jr.
Vice President, Operations
Linda Batten
Controller and Assistant Treasurer
Henrietta Vitale
Secretary
Committees
(1) Audit Committee meets at least quarterly with management and independent
accountants to review accounting, auditing, internal control and financial
reporting and discuss the scope and results of the annual audit and quarterly
reviews of the Company's financial statements.
(2) Executive Committee reviews strategic planning alternatives, recommends to
and advises the Board of Directors on financial policy, issuance of securities
and other high priority issues.
(3) Committee on Directors makes recommendations to the Board of Directors for
Board replacements when they become available and for compensation levels for
the Board of Directors.
(4) Personnel and Pension Committee makes recommendations to the Board of
Directors regarding officers' compensation including the promotion and hiring of
officers; reviews Company fringe benefit plans other than retirement plans;
reviews the Pension Trust Fund of the Birmingham Utilities, Inc. Defined Benefit
Plan and the Retired Employee Welfare Benefit Trust for retiree medical
benefits; reviews and determines actuarial policies, investment guidelines and
selects the investment manager.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
2005 VS. 2004
The Company recorded net income of $658,786 in 2005 as compared with $511,235 in
2004. Earnings per share, basic for 2005 and 2004 were $.40 and $.31
respectively. Net income of the Birmingham Utilities segment was $466,543 in
2005 compared with $144,118 in 2004. The regulated Ansonia Division generated
net income of $659,099 in 2005 compared with $517,456 in 2004 principally due to
the reduction of operating and maintenance expenses in 2005. The regulated
Eastern Division generated a net loss of $192,556 in 2005, a significant
improvement compared to the net loss of $373,338 in 2004. Corporate
reorganization, an emphasis on efficient operations, as well as capital
improvements made since its purchase in 2003 all contributed to the reduction of
the loss. Efficient and normalized operations along with the necessity to earn
on capital investments made in recent years is the reason the Company will file
a rate relief request with the DPUC for both the regulated Ansonia and Eastern
divisions in 2006. The unregulated H2O Services segment had net income of
$192,243 in 2005 compared to $367,117 in 2004. Delays in construction operations
due to harsh weather in the first quarter of 2005 and an increased advertising
budget also contributed to the lower earnings.
OPERATING REVENUES decreased 8% in 2005 versus 2004. Slightly lower water
revenues and the absence of some large construction projects in 2005 account for
the decrease in revenues. Decreases in residential and industrial consumption in
the Ansonia Division were partially offset by residential customer growth in the
Eastern Division.
OPERATING EXPENSES decreased $1,041,021 or 16% in 2005 compared with 2004.
Decreased costs relating to a reduction in large construction projects performed
by H2O accounts for 59% or $602,965 of the decrease. Operating expenses for the
regulated Eastern Division are 32% or $362,627 lower due to operating
efficiencies achieved through personnel reorganization as well as capital
investments since its purchase in 2003.
MAINTENANCE EXPENSES also decreased $69,534 or 15% in 2005, reflecting the
benefit of the increased capital investments made in recent years. The Eastern
Division maintenance expenses decreased 28% or $49,779 also due to operating
efficiencies and improvements achieved since its purchase in 2003.
DEPRECIATION increased 18.5% or $138,802 in 2005. This is directly related to
the increased capital improvements made by the Company in 2004 and 2005. Several
of the water systems acquired in 2003 required immediate capital expenditures
which increased depreciation expense. The Company now believes capital
improvements will be able to be more systematically scheduled in the future.
TAXES OTHER THAN INCOME TAXES increased 20% or $125,053 in 2005. Capital
improvements made in recent years have increased the value of the water systems,
which results in a higher assessment upon which property taxes are calculated.
Increased mill rates in the individual towns also contributed to the increase in
expense.
TAXES ON INCOME of $312,044 recorded in 2005 are $65,517 higher than the 2004
expense of $246,527 due to an increase in operating earnings.
LAND DISPOSITIONS, when Birmingham Utilities disposes of land, any gain
recognized, net of taxes, is shared between ratepayers and shareholders 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), which represents the shareholders' immediate share of income from land
dispositions occurring in that year. There were no land sales in 2005 and 2004.
LAND DISPOSITION income is also recognized in the statement of income as a
component of net income on the line entitled "Amortization of Deferred Income on
Dispositions of Land." These amounts represent the recognition of income on
deferred land dispositions which occurred in prior years. The amortization of
deferred income on land dispositions, net of tax, was $6,425 and $11,342 in 2005
and 2004, respectively. Recognition of deferred income will continue over
various time periods depending upon the amortization period ordered by the DPUC
for each particular disposition.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) in 2005 is 30% lower than
2004. The size and scope of capital improvement projects, especially in the
Eastern Division, completed in 2005 were smaller than those undertaken in 2004.
OTHER INCOME is $143,344 lower in 2005 than in 2004. Wellpoint common stock
received as a result of the demutualization of Blue Cross/Blue Shield, the
Company's former healthcare insurance provider, accounted for $157,550 of other
income in 2004. The stock was sold in 2005 and an additional gain of $7,888 was
recorded as other income which accounts for the total variance in 2005.
OTHER EXPENSE for 2004 of $468,035 represents non-recurring expenses incurred
primarily in the fourth quarter of 2004. Expenses totaling $405,613 were related
to the exploration of strategic initiatives that were not consummated. The
remaining balance of $62,422 is expense associated with the proposed acquisition
of the NY operations from PSC that was terminated in January 2005.
INTEREST EXPENSE Of $681,876 for 2005 is $107,692 higher than the interest
expense recorded for 2004. Increased borrowings as well as rising short term
interest rates are the reason for the increase.
2004 VS. 2003
The Company recorded net income of $511,235 in 2004 as compared to $820,374 in
2003. Earnings per share, basic for 2004 and 2003 were $.31 and $.50. There was
no land sale income in 2004 and 2003 and amortization of deferred income on
dispositions of land was $11,342 in 2004 as compared to $179,172 in 2003.
OPERATING REVENUES of the Company were $9,865,576 in 2004 versus $6,408,483 in
2003. The increase is, in part, a result of $1,442,713 in utility revenues
collected for the entire year of 2004 from the regulated operations acquired in
2003 and the full year's effect of BUI's rate increase granted in August 2003.
H2O Services revenues reflect increased activity of $2,014,380, which includes
increased revenues of $1,554,344 for the entire twelve months of 2004 from the
acquired non-regulated operations.
OPERATING EXPENSES of $6,571,322 for 2004 are $2,771,387 higher than operating
expenses of $3,799,935 for 2003. Operating expenses related to the regulated
Eastern Division acquired in 2003 of $1,141,517 reflect an entire twelve months
of activity and are $789,138 higher than 2003. These expenses for the Eastern
Division are high due to the relocation of the office from Stafford Springs to
Glastonbury in July 2004 as well as the reorganization of personnel at all
levels done throughout 2004 and unexpected purchased water costs. The total of
these expenses were approximately $150,000. Operating expenses for the regulated
Ansonia Division of $3,008,270 in 2004 exceeded operating expenses of $2,718,709
for 2003 by $289,561. The increase is due to increases in property and liability
insurance, workers compensation, pension, and power or fuel related expenses in
2004. H2O Services operating expenses increased by $1,692,688 in 2004 versus
2003. The increase is in part due to both increased activity as well as the
inclusion of twelve months of activity and expenses related to the non-regulated
operations acquired in 2003.
MAINTENANCE EXPENSES of $463,295 in 2004 are $151,161 higher than maintenance
expenses of $312,134 for 2003. The additional maintenance expenses related to
the operations acquired in 2003, both regulated and non-regulated, accounts for
the variance.
DEPRECIATION of $749,114 in 2004 exceeds depreciation of $630,462 in 2003 by
$118,652. Additional depreciation in the Eastern Division due to continued plant
additions along with the inclusion of a full twelve months of activity for these
operations accounts for this increase.
TAXES OTHER THAN INCOME TAXES of $618,752 for 2004 are $180,626 higher than
taxes other than income taxes of $438,126 in 2003. Increased payroll taxes, real
estate taxes and property taxes due to the acquisition of the new operations as
well as property taxes related to utility plant additions throughout Birmingham
Utilities' service area account for this increase.
INCOME TAXES on operations of $246,527 recorded in 2004 are $5,975 lower than
the 2003 expense of $252,502 due to a decrease in operating earnings. The
Company also incurs income tax liability for gains from land transactions, both
in the year in which they occur and in the later years in which income,
previously deferred in accordance with the Department of Public Utility
Control's (DPUC) orders concerning the sharing of the gains between the
Company's shareholders and ratepayers, is recognized by the Company. Taxes
related to gains on land transactions were $8,017 in 2004 and $75,769 in 2003.
The Company's total income tax expense, including both the tax on operating
income and on land sale gains, was $254,544 in 2004 and $328,271 in 2003.
LAND DISPOSITIONS, when Birmingham Utilities disposes of land, any gain
recognized, net of taxes, is shared between ratepayers and shareholders 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), which represents the shareholders' immediate share of income from land
dispositions occurring in that year. There were no land sales in 2004 and 2003.
Land disposition income is also recognized in the statement of income 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 $11,342
and $179,172, for 2004 and 2003. Recognition of deferred income will continue
over various time periods depending upon the amortization period ordered by the
DPUC for each particular disposition.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) in 2004 of $120,279 is
$39,472 higher than the $80,807 recorded in 2003. Large ongoing capital
improvement projects throughout 2004 in the Eastern Division account for this
increase.
OTHER INCOME of $205,267 for 2004 is $187,518 higher than other income of
$17,749 in 2003. Wellpoint common stock, received as a result of the
demutualization of Blue Cross/Blue Shield, our healthcare insurance provider, in
the amount of $157,550, accounts for the majority of the increase.
OTHER EXPENSE for 2004 of $468,035 represents non-recurring expenses incurred
primarily in the fourth quarter of 2004. Expenses totaling $405,613 were related
to the exploration of strategic initiatives that were not consummated. The
remaining balance of $62,422 is expense associated with the proposed acquisition
of the NY operations from PSC that was terminated in January 2005.
INTEREST EXPENSE of $574,184 for 2004 is $141,506 higher than interest expense
of $432,678 for 2003. The increase in long-term borrowings from $4,042,000 in
2003 to $9,000,000 in 2004
accounts for a portion of the increase, although this is somewhat offset by the
5.21% interest rate on the new $9,000,000 mortgage bonds as compared to 9.64% on
the $4,042,000 retired mortgage bonds. The balance of the increase is related to
short-term borrowings outstanding throughout 2004 as compared to 2003 borrowings
outstanding primarily in the fourth quarter only.
REGULATORY MATTERS AND INFLATION
Inflation, as measured by the Consumer Price Index, increased 3.4 percent, 2.4
percent, and 2.3 percent in 2005, 2004 and 2003, respectively. The regulatory
authorities allow the recovery of depreciation through revenues solely on the
basis of the historical cost of plant. The replacement cost of utility plant
would be significantly higher than the historical cost. While the regulatory
authorities give no recognition in the ratemaking process to the current cost of
replacing utility plant, the Company believes that, based on past practices,
Birmingham Utilities will continue to be allowed to earn a return on the
increased cost of their net investment when prudent replacement of facilities
actually occurs.
CRITICAL ACCOUNTING POLICIES
Preparation of the Company's financial statements 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 revenues and expenses
during the reporting period. Note 1 of the Notes to Financial Statements
includes a summary of the significant accounting policies and methods used in
the preparation of the Company's financial statements. The most significant
areas involving management's estimates and assumptions are described below.
Actual results could differ materially from management's estimates under
different assumptions or conditions.
Public Utility Regulation
The Company's accounting policies conform to the Uniform System of Accounts and
ratemaking practices prescribed by the Connecticut Department of Public Utility
Control (DPUC), and accounting principles generally accepted in the United
States of America, which include the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation," (SFAS 71). SFAS 71 requires cost based, rate regulated enterprises
to reflect the impact of regulatory decisions in their financial statements. The
DPUC, through the rate regulation process, can create regulatory assets that
result when costs are allowed for ratemaking purposes in a period after the
period in which the costs would be charged to expense by an unregulated
enterprise. The balance sheets include regulatory assets and liabilities as
appropriate, primarily related to income taxes and post retirement benefit
costs. The Company believes, based on current regulatory circumstances, that the
regulatory assets recorded are likely to be recovered and that its use of
regulatory accounting is appropriate and in accordance with the provisions of
SFAS 71.
Revenue Recognition
Birmingham Utilities recognizes revenue as customers are billed for water
consumed. Residential, commercial, and industrial customers are metered, and
revenues are based on their usage multiplied by rates approved by the DPUC. Fire
protection charges are based on the length and diameter of the water main and
the number of hydrants in service. The majority of customers are billed
quarterly, except for industrial, fire protection, and Eastern Division
customers who are billed monthly. In addition, Birmingham Utilities accrues
revenue for the estimated amount of water sold but not billed as of the balance
sheet date. Estimates are based on actual usage from the comparable period of
the previous year. Management believes that this methodology is preferable to
using the most recent quarterly billing due to the seasonality of water usage.
H2O Services bills customers and recognizes revenue from its construction
projects monthly as the services are provided. These projects are short-term in
nature, typically requiring less than one month to complete.
H2O Services bills customers and recognizes revenue from its routine maintenance
and water testing services monthly as the services are provided. Repairs are not
included in these services
and are performed on an as needed basis for an additional charge based upon the
specific nature of the necessary repair.
Land Dispositions
The net gain of each disposition, after deducting costs, expenses and taxes is
allocated between the shareholders and ratepayers by a method approved by the
DPUC based on legislation passed by the Connecticut General Assembly. The
portion of income applicable to shareholders is recognized in the year of
disposition. Income attributable to ratepayers is deferred and, for land
dispositions through 2001, amortized in a manner that reflects reduced water
revenue resulting from the sharing formula as determined by the DPUC. Income
attributable to ratepayers for land dispositions in 2002 was allocated by the
DPUC to an account stipulated as an offset to rate base for a period of 40
years.
Income Taxes
Except for accelerated depreciation since 1981 (federal only), the tax effect of
contributions in aid of construction for the period January 1, 1987 through June
12, 1996, and in 1998, 2000 and 2001, the tax effect of bargain sales of land,
for which deferred income taxes have been provided, the Company's policy is to
reflect as income tax expense the amount of tax currently payable. This method,
known as the flow-through method of accounting, is consistent with the
ratemaking policies of the DPUC, and is based on the expectation that tax
expense payments in future years will be allowed for ratemaking purposes.
The Company's deferred tax provision was determined under the liability method.
Deferred tax assets and liabilities were recognized based on differences between
the book and tax bases of assets and liabilities using presently enacted tax
rates. The provision for income taxes is the sum of the amount of income tax
paid or payable as determined by applying the provisions of enacted tax laws to
the taxable income for that year and the net change during the year in the
Company's deferred tax assets and liabilities.
The deferred tax asset related to land sales represents expected future tax
savings resulting from sales of land required to be maintained as open space at
less than market value. The Company received a charitable contribution deduction
for federal tax purposes and a tax credit for state tax purposes. Unused tax
benefits may be carried forward to reduce income taxes in future years; the
federal charitable deduction five years and the state tax credit ten years.
Utilization of these benefits is primarily subject to the extent of future
earnings of the Company, including an estimate for anticipated future rate
relief and changes to current tax rates. In addition, the federal charitable
contribution deduction is subject to an annual limitation of 10% of taxable
income and, as a result of legislation passed in 2002, the state tax credit is
now subject to an annual limitation of 70% of the amount of tax due. The Company
has established a valuation allowance for the portion of possible tax savings
not likely to be realized by the end of the carryforward periods.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error
Corrections" (SFAS 154), which supersedes Accounting Principles Bulletin (APB)
Opinion No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements." SFAS 154 changes the requirements for
the accounting for and reporting of changes in accounting principle. The
statement requires the retroactive application to prior periods' financial
statements of changes in accounting principles, unless it is impracticable to
determine either the period specific effects or the cumulative effect of the
change. SFAS 154 does not change the guidance for reporting the correction of an
error in previously issued financial statements or the change in an accounting
estimate. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154
is not expected to have a material impact on our consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" (SFAS
123R), which is a revision of SFAS No. 123 and supersedes APB No. 25,
"Accounting for Stock Issued to Employees." SFAS 123R requires employee stock
options to be valued at fair value on the date of grant, and charged to expense
in the Company's consolidated financial statements over the applicable vesting
period. We will adopt the new standard using the modified prospective method in
the first quarter of 2006. Under this method, compensation cost is recognized
beginning with the effective date for all share based payments granted after the
effective date and for all awards granted to employees prior to the effective
date that remain unvested. SFAS 123R also amends SFAS No. 95, "Statement of Cash
Flows", requiring that any excess tax benefits received upon the exercise of
options be reflected as financing cash inflows rather than operating cash
inflows. Based on current employee stock options outstanding, management
estimates that adoption of SFAS 123R will result in compensation expense related
to employee stock options of approximately $22,000 in 2006.
OUTLOOK
The Company believes that as a result of health, transportation and supply
issues in regard to the physical movement of water, deregulation of the water
industry is unlikely in the foreseeable future. Although the Company believes
deregulation is not a viable option for this industry, consolidation of the
water industry continues to be fast paced over the last five years. The
consolidation strategy has allowed many small, non-viable water systems to be
purchased by larger purveyors and for larger systems to merge in an effort to
create economies of scale. Foreign entities have also been very active in the
purchase of investor owned American water systems.
The Company believes it is prudently monitoring the economic environment in
which it operates to best take advantage of market opportunities. The
establishment of a holding company, the formation of H2O Services, and the
acquisition of the Connecticut operations from PSC, both regulated and
non-regulated, has allowed the Company to enter a market in Connecticut that is
expanding. This should allow for the growth of both the regulated and
non-regulated businesses, principally in eastern Connecticut that would create
long-term value for the Company. In addition, Birmingham Utilities will file a
rate application in 2006 that will allow the Company to earn a rate of return on
its increased rate base as a result of its prudent and efficient capital
improvement program and to recover its operating costs, especially in the newly
acquired Eastern Division.
FINANCIAL RESOURCES
During 2005, 2004 and 2003, the Company's operations generated funds available
for investment in utility plant and for use in financing activities, including
payment of dividends on common stock, of $2,029,237, $790,965 and $1,437,014
respectively (see Consolidated Statements of Cash Flows).
Net cash provided by operating activities increased $1,238,272 in 2005 as a
result of decreases in operating expenses as well as the absence of other
expenses associated with strategic initiatives that were expended in 2004.
During the 3-year period 2005, 2004 and 2003, the Company has generated
sufficient funds to meet its day-to-day operational needs, including regular
expenses, payment of dividends, and investment in normal plant replacements,
such as new services, meters and hydrants. It expects to be able to continue to
do so for the foreseeable future.
Birmingham Utilities Long-Term Capital Improvement Program will be funded by the
internal generation of funds, including rate relief, as well as the Company's
ability to raise capital from external sources. During 2005, 2004 and 2003, the
Company's additions to utility plant, net of customer advances, were $3,300,595,
$1,773,718 and $1,526,423, respectively (see Consolidated Statements of Cash
Flows and Note 17). These additions were financed primarily from internally
generated funds and borrowings on the revolving line of credit.
In January 2004, Birmingham Utilities filed an application with the DPUC for
approval of the issuance of First Mortgage Bonds in the principal amount of
$9,000,000. In March 2004, the DPUC approved BUI's request to issue the new
bonds. In April 2004, BUI issued First Mortgage Bonds in the principal amount of
$9,000,000. The bonds carry an interest rate of 5.21%. Interest is payable
semi-annually on the fifteenth day of April and October. The bonds are due in
April 2011 and are secured by a lien on all utility property. The proceeds from
the bond issue were used to repay the $4,042,000 outstanding principal of the
existing Mortgage Bonds, which carried an interest rate of 9.64%, and repay
$4,280,000 of short-term debt used to fund the purchase of the Connecticut
regulated and non-regulated operations from PSC.
The Mortgage Indenture limits the issuing of additional First Mortgage Bonds and
the payment of dividends. Under the dividend limitation, approximately
$7,100,000 was available to pay dividends at December 31, 2005 after the
quarterly dividend payment made on that date. It does not, however, restrict the
issuance of either long-term or short-term debt, which is either unsecured or
secured with liens subject to the lien of the Mortgage Indenture.
Note Payable consists of a $7,000,000 unsecured line of credit expiring in April
2006. During the revolving period, Birmingham Utilities can choose between
variable rate options of 30, 60, 90 or 180-day LIBOR plus 100 basis points or
prime. BUI is required to pay interest only during the revolving period. The
principal is payable in full at maturity. The line of credit requires the
maintenance of certain financial ratios and net worth of $7,500,000. Borrowings
of $4,755,000 were outstanding on the line of credit at December 31, 2005.
Birmingham Utilities' 2006 Capital Budget of $1,800,000 is two-tiered. The first
tier, consisting of typical capital improvements made each year for services,
hydrants and meters is budgeted for $600,000 and is expected to be financed
primarily with internally generated funds.
The second tier of the 2006 Capital Budget consists of replacements and
betterments, which are part of Birmingham Utilities' Long-Term Capital
Improvement Program and includes $1,200,000 of budgeted plant additions. Plant
additions from this part of the capital budget will be financed with internally
generated funds and short-term borrowings. 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.
The Company believes that through the use of short-term borrowing and internally
generated funds, it can generate sufficient capital to support its 5-year
capital budget currently estimated at approximately $10,300,000. Internally
generated funds in part are dependent on the extent of future rate relief.
Future rate relief will be a necessary component in the process of funding this
5-year capital program.
The Company maintains a common stock Dividend Reinvestment Plan (the Plan)
pursuant to which shareholders are entitled to purchase up to 140,000 new shares
of the Company's common stock by applying to the purchase price of the new
shares cash dividends which otherwise would be issued by the Company with
respect to its existing common stock. The Plan provides that the purchase price
for the new shares will be their fair market value at the time of the purchase.
Dividends reinvested totaled $84,836 and $79,748 in 2005 and 2004, respectively.
The Company purchases shares in the open market to satisfy its dividend
reinvestment obligations.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Company does not utilize off-balance sheet arrangements and has no
contractual obligations with any unconsolidated entities. The following table
summarizes the Company's future contractual cash obligations as of December 31,
2005:
Less than More than
Total 1 year 1-3 years 4-5 years 5 years
----------- --------- ---------- ---------- -----------
Debt obligations
Series F Mortgage Bonds $ 9,000,000 $ 9,000,000
Interest on Series F
Mortgage Bonds 2,578,950 468,900 937,800 937,800 234,450
Note Payable (1) 4,755,000 4,755,000
Purchase Obligations
Regional Water Authority 9,060,000 906,000 1,812,000 1,812,000 4,530,000
Other Obligations
Capital Budget (2) 4,203,000 600,000 1,320,000 1,260,000 1,023,000
Operating Lease 197,750 56,500 113,000 28,250
Defined Benefit Pension 125,000 125,000
Total $29,919,700 $6,911,400 $4,182,800 $4,038,050 $14,787,450
(1) Short-term borrowings at a variable interest rate
(2) Includes only Tier 1 additions
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information regarding our equity compensation plans
as of December 31, 2005:
Number of securities
remaining available
Number of securities for future
to be issued upon Weighted-average issuance
exercise of exercise price of under equity
Plan Category outstanding options outstanding options compensation plans
Equity compensation
plans approved by
security holders 62,500 $14.73 73,000
Total 62,500 $14.73 73,000
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has certain exposures to market risk related to changes in interest
rates. The Company has an outstanding revolving credit agreement, under which
there were borrowings of $4,755,000 at December 31, 2005. The revolving credit
agreement bears interest at variable rates based on current LIBOR indices. The
Company is not subject in any material respect to currency or other commodity
risk.
FORWARD LOOKING INFORMATION
Forward looking statements in this report, including, without limitation,
statements relating to the Company's plans, strategies, objectives, intentions,
and expectations, are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward looking statements are
based on current information and involve known and unknown risks and
uncertainties, which could cause the Company's actual results to differ
materially from expected results.
These factors include, among others, the adequacy of rates approved by the DPUC,
weather conditions, changes in governmental regulations affecting water quality,
success of operating initiatives, changes in business strategy, as well as
general economic and business conditions.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
BIW Limited
Ansonia, Connecticut
We have audited the accompanying consolidated balance sheets of BIW Limited and
subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of income and retained earnings and cash flows for each of the three
years in the period ended December 31, 2005. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 BIW Limited and
subsidiaries as of December 31, 2005 and 2004 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles generally accepted in
the United States of America.
March 13, 2006
Shelton, Connecticut
CONSOLIDATED BALANCE SHEETS
December 31,
2005 2004
------------ ------------
ASSETS
Utility plant $ 38,736,311 $ 35,261,167
Accumulated depreciation (9,978,362) (9,213,681)
------------ ------------
28,757,949 26,047,486
------------ ------------
Other property, net 529,837 419,700
------------ ------------
Current assets:
Accounts receivable, net of allowance
for doubtful accounts (2005, $232,000;
2004, $149,000) 1,193,815 1,338,362
Accrued utility and other revenue 552,125 560,563
Materials and supplies 386,946 312,638
Prepayments and other current assets 44,821 195,329
------------ ------------
Total current assets 2,177,707 2,406,892
------------ ------------
Deferred charges 137,007 137,007
Unamortized debt expense 333,444 391,932
Regulatory asset - income taxes recoverable 473,851 437,501
Other assets 332,225 387,725
------------ ------------
1,276,527 1,354,165
------------ ------------
$ 32,742,020 $ 30,228,243
------------ ------------
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' equity:
Common stock, no par value; authorized
5,000,000 shares:
issued and outstanding (2005, 1,662,079
shares; 2004, 1,657,542 shares) $ 2,987,704 $ 2,975,972
Retained earnings 8,740,825 9,211,403
------------ ------------
11,728,529 12,187,375
------------ ------------
Long-term debt 9,000,000 9,000,000
------------ ------------
Current liabilities:
Note payable 4,755,000 2,255,000
Accounts payable and accrued liabilities 669,212 799,382
------------ ------------
Total current liabilities 5,424,212 3,054,382
------------ ------------
Customers' advances for construction 438,631 491,950
Contributions in aid of construction 3,101,165 2,803,914
Regulatory liability - income taxes refundable 119,340 126,913
Deferred income taxes 2,929,554 2,554,657
Deferred income on dispositions of land 589 9,052
Commitments and contingent liabilities
(Note 15)
------------ ------------
6,589,279 5,986,486
------------ ------------
$ 32,742,020 $ 30,228,243
------------ ------------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
December 31,
2005 2004 2003
---------- ---------- ----------
Operating revenues:
Residential and commercial $5,380,969 $5,330,329 $4,154,641
Industrial 117,786 201,687 134,290
Fire protection 954,694 952,472 799,079
Public authorities 117,619 108,662 91,674
Other 275,106 275,075 245,828
Service operations 2,209,299 2,997,351 982,971
---------- ---------- ----------
9,055,473 9,865,576 6,408,483
---------- ---------- ----------
Operating expenses:
Operating expenses 5,530,301 6,571,322 3,799,935
Maintenance expenses 393,761 463,295 312,134
Depreciation 887,916 749,114 630,462
Taxes other than income taxes 743,805 618,752 438,126
Taxes on income 312,044 246,527 252,502
---------- ---------- ----------
7,867,827 8,649,010 5,433,159
---------- ---------- ----------
1,187,646 1,216,566 975,324
---------- ---------- ----------
Amortization of deferred income on
dispositions of land (net of income
taxes of $3,500 in 2005, $8,017 in
2004, and $75,769 in 2003) 6,425 11,342 179,172
---------- ---------- ----------
Operating income 1,194,071 1,227,908 1,154,496
---------- ---------- ----------
Allowance for funds used during
construction 84,668 120,279 80,807
Other income 61,923 205,267 17,749
Other expense -- 468,035 --
---------- ---------- ----------
Income before interest expense 1,340,662 1,085,419 1,253,052
Interest expense 681,876 574,184 432,678
---------- ---------- ----------
Net income 658,786 511,235 820,374
Retained earnings, beginning of year 9,211,403 9,822,197 9,984,068
Dividends 1,129,364 1,122,029 982,245
---------- ---------- ----------
Retained earnings, end of year $8,740,825 $9,211,403 $9,822,197
Earnings per share, basic $ .40 $ .31 $ .50
---------- ---------- ----------
Earnings per share, diluted $ .39 $ .30 $ .49
---------- ---------- ----------
Dividends per share $ .68 $ .68 $ .60
---------- ---------- ----------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2005 2004 2003
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 658,786 $ 511,235 $ 820,374
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,033,593 889,942 700,011
Amortization of deferred income (6,425) (11,342) (179,172)
Deferred income taxes 328,936 143,582 435,525
Allowance for funds used during construction (84,668) (120,279) (80,807)
Change in assets and liabilities:
(Increase) decrease in accounts receivable and
accrued revenues 152,985 (420,380) (172,078)
(Increase) in materials and supplies (74,308) (32,319) (45,292)
(Increase) decrease in prepayments and
other current assets 150,508 107,153 (286,376)
Increase (decrease) in accounts payable
and accrued liabilities (130,170) (276,627) 244,829
----------- ----------- -----------
Net cash provided by operating activities 2,029,237 790,965 1,437,014
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures - utility plant (3,544,527) (2,111,381) (1,689,324)
Capital expenditures - other property (125,932) (31,022) (7,178)
Sales of utility plant 46,611 69,869 54,000
Cash paid for acquisition -- (335,217) (4,315,856)
Sale of investments -- -- 737,141
Increase in deferred charges and other assets (34,332) (334,231) (521,895)
Customer advances 243,932 337,663 162,901
----------- ----------- -----------
Net cash used in investing activities (3,414,248) (2,404,319) (5,580,211)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt -- 9,000,000 --
Repayment of long-term debt -- (4,042,000) (94,000)
Borrowings under line of credit 2,500,000 -- 4,705,000
Repayments on line of credit -- (2,450,000) --
Exercise of stock options 14,375 78,765 --
Dividends paid (1,129,364) (1,122,029) (982,245)
----------- ----------- -----------
Net cash provided by financing activities 1,385,011 1,464,736 3,628,755
----------- ----------- -----------
Net decrease in cash and cash equivalents -- (148,618) (514,442)
Cash and cash equivalents, beginning of year -- 148,618 663,060
----------- ----------- -----------
Cash and cash equivalents, end of year $ -- $ -- $ 148,618
----------- ----------- -----------
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES
Description of Business
BIW Limited (BIW or the Company) is the parent company of Birmingham Utilities,
Inc. and its wholly-owned subsidiary Eastern Connecticut Regional Water Company,
Inc. (Eastern Division), (collectively BUI or Birmingham Utilities), a regulated
public water service company that provides water service to customers in various
cities and towns in Connecticut and Birmingham H2O Services, Inc. (H2O
Services), which provides water related services to other water utilities,
municipalities, contractors and individuals throughout Connecticut.
Principles of Consolidation
The consolidated financial statements include the accounts of BIW Limited and
its wholly-owned subsidiaries Birmingham Utilities and H2O Services. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Public Utility Regulation
Birmingham Utilities' accounting policies conform to the Uniform System of
Accounts and ratemaking practices prescribed by the Connecticut Department of
Public Utility Control (DPUC), and accounting principles generally accepted in
the United States of America, which include the provisions of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71). SFAS 71 requires cost based, rate regulated
enterprises to reflect the impact of regulatory decisions in their financial
statements. The DPUC, through the rate regulation process, can create regulatory
assets that result when costs are allowed for ratemaking purposes in a period
after the period in which the costs would be charged to expense by an
unregulated enterprise. The balance sheets include regulatory assets and
liabilities as appropriate, primarily related to income taxes and post
retirement benefit costs. The Company believes, based on current regulatory
circumstances, that the regulatory assets recorded are likely to be recovered
and that its use of regulatory accounting is appropriate and in accordance with
the provisions of SFAS 71.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported revenues
and expenses during the reporting period. Actual results could vary from those
estimates.
Utility Plant
Utility plant of Birmingham Utilities is stated at the original cost of the
property when placed in service. The costs of additions to utility plant and the
costs of renewals and betterments are capitalized. The cost of repairs and
maintenance is charged to income. Upon retirement of depreciable utility plant
in service, accumulated depreciation is charged with the book cost of the
property retired and the cost of removal, and is credited with the salvage value
and any other amounts recovered.
Depreciation
For financial statement purposes, Birmingham Utilities provides for depreciation
using the straight-line method, at rates approved by the DPUC. The rates used
are intended to distribute the cost of depreciable properties over their
estimated service lives. For income tax purposes, BUI provides for depreciation
utilizing straight-line and accelerated methods. The overall depreciation rates
were 2.3% for 2005, 2.1% for 2004, and 2.3% for 2003.
Other Property
Other property is stated at cost and consists of property and equipment of H2O
Services, the Company's non-regulated subsidiary. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and overnight investment
accounts in banks. From time to time, the Company has on deposit at financial
institutions cash balances that exceed federal deposit insurance limitations.
The Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on cash and cash equivalents.
Allowance for Funds Used During Construction
An allowance for funds used during construction (AFUDC) is made by applying the
last allowed rate of return on rate base granted to Birmingham Utilities by the
DPUC to construction projects exceeding $10,000 and requiring more than one
month to complete. AFUDC represents the net cost, for the period of
construction, of borrowed funds used for construction purposes and a reasonable
rate on other funds used. AFUDC represents a non-cash credit to income. Utility
plant under construction is not recognized as part of BUI's rate base for
ratemaking purposes until facilities are placed into service. Accordingly, BUI
capitalizes AFUDC as a portion of the construction cost of utility plant until
it is completed. Capitalized AFUDC is recovered through water service rates over
the service lives of the facilities.
Revenue Recognition
Birmingham Utilities recognizes revenue as customers are billed for water
consumed. Residential, commercial, and industrial customers are metered, and
revenues are based on their usage multiplied by rates approved by the DPUC. Fire
protection charges are based on the length and diameter of the water main and
the number of hydrants in service. The majority of customers are billed
quarterly, except for industrial, fire protection, and Eastern Division
customers, who are billed monthly. In addition, Birmingham Utilities accrues
revenue for the estimated amount of water sold but not billed as of the balance
sheet date.
H2O Services bills customers and recognizes revenue from its construction
projects monthly as the services are provided. These projects are short-term in
nature, typically requiring less than one month to complete.
H2O Services bills customers and recognizes revenue from its routine maintenance
and water testing services monthly as the services are provided. Repairs are not
included in these services and are performed on an as needed basis for an
additional charge based upon the specific nature of the necessary repair.
Advances for Construction/Contributions in Aid of Construction
Birmingham Utilities receives cash advances from developers and customers to
finance construction of new water main extensions. These advances are refunded
over a 10-year contract period as services are connected to the main. Any
unrefunded balances are reclassified to "Contributions in aid of Construction"
and are no longer refundable. Utility plant funded by advances and contributions
is excluded from rate base for regulatory purposes.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, trade accounts receivable, and
trade accounts payable approximates their fair values due to their short-term
nature. The carrying amount of the note payable approximates fair value based on
market conditions for debt of similar terms and maturity. The fair value of
long-term debt is estimated by discounting the future cash flows using current
borrowing rates for similar types and maturity of debt. The estimated fair value
of Birmingham Utilities' long-term debt at December 31, 2005 was approximately
$8,212,000.
Income Taxes
Except for accelerated depreciation since 1981 (federal only), the tax effect of
contributions in aid of construction for the period January 1, 1987 through June
12, 1996, and in 1998, 2000, and 2001, the tax effect of bargain sale of land,
for which deferred income taxes have been provided, the Company's policy is to
reflect as income tax expense the amount of tax currently payable. This method,
known as the flow-through method of accounting, is consistent with the
ratemaking policies of the DPUC, and is based on the expectation that tax
expense payments in future years will be allowed for ratemaking purposes.
The Company's deferred tax provision was determined under the liability method.
Deferred tax assets and liabilities are recognized based on differences between
the book and tax bases of assets and liabilities using presently enacted tax
rates. The provision for income taxes is the sum of the amount of income tax
paid or payable as determined by applying the provisions of enacted tax laws to
the taxable income for that year and the net change during the year in the
Company's deferred tax assets and liabilities.
In addition, the Company is required to record an additional deferred tax
liability for temporary differences not previously recognized. This additional
deferred tax liability totaled $354,500 at December 31, 2005 and $310,600 at
December 31, 2004. Management believes that these deferred taxes will be
recovered through the ratemaking process. Accordingly, the Company has recorded
an offsetting regulatory asset and regulatory liability.
Stock Based Compensation
The Company applies Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123) to account for its stock
option plans. As permitted by SFAS 123, the Company has chosen to continue to
apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25) and, accordingly, no compensation cost has been
recognized for stock options in the financial statement. The Company will adopt
SFAS 123R in the first quarter of 2006. Based on current employee stock options
outstanding, management estimates that adoption of SFAS 123R will result in
compensation expense related to employee stock options of approximately $22,000
in 2006.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS 123:
2005 2004 2003
-------- -------- --------
Net income: As reported $658,786 $511,235 $820,374
Pro forma $621,561 $472,403 $774,834
Earnings per share, basic: As reported $ .40 $ .31 $ .50
Pro forma $ .37 $ .29 $ .47
Earnings per share, diluted: As reported $ .39 $ .30 $ .49
Pro forma $ .37 $ .28 $ .46
Compensated Absences
Company policy and practice does not provide for any accumulated but unused
vacation, sick time or any other compensated absences to be carried over beyond
the year-end.
Land Dispositions
Birmingham Utilities has essentially disposed of its surplus land not required
for utility operations. The net gain of each disposition, after deducting costs,
expenses and taxes is allocated between the shareholders and ratepayers by a
method approved by the DPUC based on legislation passed by the Connecticut
General Assembly. The portion of income applicable to shareholders is recognized
in the year of disposition. Income attributable to ratepayers is deferred and,
for land
dispositions through 2001, amortized in a manner that reflects reduced
water revenue resulting from the sharing formula as determined by the DPUC.
Income attributable to ratepayers for land
dispositions in 2002 was allocated by the DPUC to an account stipulated as an
offset to rate base for a period of 40 years.
Unamortized Debt Expense
Costs related to the issuance of debt are capitalized and amortized over the
term of the related indebtedness. Birmingham Utilities has received permission
from the DPUC to amortize the costs associated with debt previously outstanding
over the term of the new indebtedness.
NOTE 2
ACQUISITION
On October 31, 2003, Birmingham Utilities purchased from AquaAmerica, formerly
the Philadelphia Suburban Corporation (PSC), for $4,651,000 all of the issued
and outstanding shares of common stock of Eastern Connecticut Regional Water
Company, Inc., and H2O Services purchased certain non-regulated assets
consisting largely of operating maintenance agreements with various unregulated
water supply systems located in eastern Connecticut and Rhodes Pump Service,
Inc. located in Guilford, Connecticut. The purchase price was initially funded
through borrowings on BUI's existing line of credit and then refinanced through
the issuance of long-term debt in April 2004.
The acquisition has been accounted for in accordance with Statement of Financial
Accounting Standards No. 141, "Business Combinations." Accordingly, the cost of
the acquisition was allocated to the assets acquired and liabilities assumed
based on estimates of their respective fair values at the date of acquisition.
The following table summarizes the final purchase price allocation:
Utility plant $2,731,200
Construction in process 1,594,400
Other property 385,000
Accounts receivable 414,200
Materials and supplies 119,500
Total assets acquired 5,244,300
Accounts payable and accrued liabilities (240,200)
Contributions in aid of construction (353,100)
Total liabilities assumed (593,300)
Fair value of net assets acquired $4,651,000
The Company's consolidated income statement includes the operations of the
acquired entities from October 31, 2003, the date of acquisition.
NOTE 3
UTILITY PLANT
December 31,
2005 2004
----------- -----------
Pumping, treatment and distribution $30,471,044 $27,841,087
Source of supply 4,235,169 3,805,160
General plant 3,610,710 3,293,588
Organization 41,510 30,219
38,358,433 34,970,054
Construction in process 377,878 291,113
$38,736,311 $35,261,167
NOTE 4
OTHER ASSETS
December 31, Regulatory
2005 2004 Recovery Period
-------- -------- ---------------
Regulatory assets:
Deferred post retirement benefits $128,189 $144,725 10 Years
Various deferred costs and charges 153,818 154,921 3-15 Years
Non-regulatory assets:
Various deferred costs and charges 50,218 88,079
$332,225 $387,725
NOTE 5
NOTE PAYABLE
Note Payable consists of a $7,000,000 unsecured line of credit expiring in April
2006. During the revolving period, Birmingham Utilities can choose between
variable rate options of 30, 60, 90 or 180-day LIBOR plus 100 basis points or
prime. BUI is required to pay interest only during the revolving period. The
principal is payable in full at maturity. The line of credit requires the
maintenance of certain financial ratios and net worth of $7,500,000. Borrowings
of $4,755,000 were outstanding on the line of credit at December 31, 2005.
NOTE 6
LONG-TERM DEBT
December 31,
2005 2004
---------- ----------
First mortgage bonds, Series F. 5.21%, $9,000,000 $9,000,000
due April 15, 2011
In January 2004, Birmingham Utilities filed an application with the DPUC for
approval of the issuance of First Mortgage Bonds in the principal amount of
$9,000,000. In March 2004, the DPUC approved BUI's request to issue the new
bonds. In April 2004, BUI issued First Mortgage Bonds in the principal amount of
$9,000,000. The bonds carry an interest rate of 5.21%. Interest is payable
semi-annually on the fifteenth day of April and October. The bonds are secured
by a lien on all utility property. The proceeds from the bond issue were used to
repay the $4,042,000 outstanding principal of the existing Mortgage Bonds, which
carried an interest rate of 9.64%, and repay $4,280,000 of short-term debt used
to fund the purchase of the Connecticut regulated and non-regulated operations
from PSC.
The Mortgage Indenture limits the issuing of additional First Mortgage Bonds and
the payment of dividends. Under the dividend limitation, approximately
$7,100,000 was available to pay dividends at December 31, 2005 after the
quarterly dividend payment made on that date. It does not, however, restrict the
issuance of either long-term or short-term debt, which is either unsecured or
secured with liens subject to the lien of the Mortgage Indenture.
NOTE 7
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
December 31,
2005 2004
--------- ---------
Accounts payable $ 367,541 $ 487,054
Accrued liabilities:
Interest 79,453 79,453
Taxes 83,729 9,468
Pension 133,215 165,468
Other 5,274 57,939
$ 669,212 $ 799,382
NOTE 8
TAXES OTHER THAN INCOME TAXES
December 31,
2005 2004 2003
--------- --------- ---------
Municipal $ 524,700 $ 441,373 $ 302,972
Payroll 219,105 177,379 135,154
$ 743,805 $ 618,752 $ 438,126
NOTE 9
INCOME TAXES
The provisions for taxes on income for the years ended December 31, 2005, 2004
and 2003 consist of:
2005 2004 2003
--------- --------- ---------
Current:
Federal $ -- $ -- $(220,000)
State 11,700 69,246 52,677
Deferred:
Federal:
Accelerated depreciation 85,184 723,981 434,525
Operating loss carryforward 229,860 (532,000) --
Income on land disposition 3,327 7,620 72,019
Investment tax credit (14,700) (14,700) (14,700)
State 173 397 3,750
$ 315,544 $ 254,544 $ 328,271
State deferred income taxes relate solely to timing differences in the
recognition of income related to land dispositions.
A reconciliation of the income tax expense at the federal statutory tax rate of
34 percent to the effective rate follows:
2005 2004 2003
--------- --------- ---------
Federal income tax at statutory rates $ 331,272 $ 260,365 $ 390,542
Increase (decrease) resulting from:
State income tax, net of federal benefit 7,836 45,964 37,242
Rate case expense 6,225 14,565 (28,610)
Pension expense 3,088 5,031 (34,159)
Other, net (18,177) (56,681) (22,044)
Investment tax credit (14,700) (14,700) (14,700)
Total provision for income taxes 315,544 254,544 328,271
Taxes related to land dispositions (3,500) (8,017) (75,769)
Operating provision for taxes $ 312,044 $ 246,527 $ 252,502
Deferred tax liabilities (assets) were comprised of the following:
2005 2004
---------- ----------
Depreciation $3,489,598 $3,352,772
Investment tax credits 231,661 246,361
Other 220,758 220,492
Gross deferred tax liabilities 3,942,017 3,819,625
Land sales (2,221,707) (2,252,506)
Operating loss carryforward (335,840) (565,700)
Other (174,655) (193,801)
Gross deferred tax assets (2,732,202) (3,012,007)
Valuation allowance 1,719,739 1,747,039
Net deferred tax assets (1,012,463) (1,264,968)
Total deferred income taxes $2,929,554 $2,554,657
At December 31, 2005, the Company had approximately $987,000 of net operating
loss carryforwards to offset federal taxable income through 2024.
The deferred tax asset related to land sales represents expected future tax
savings resulting from sales of land required to be maintained as open space at
less than market value. The Company received a charitable contribution deduction
for federal tax purposes and a tax credit for state tax purposes. Unused tax
benefits may be carried forward to reduce income taxes in future years; the
federal charitable deduction five years and the state tax credit ten years.
Utilization of these benefits is primarily subject to the extent of future
earnings of the Company, including an estimate for anticipated future rate
relief and changes to current tax rates. In addition, the federal charitable
contribution deduction is subject to an annual limitation of 10% of taxable
income and, as a result of legislation passed in 2002, the state tax credit is
now subject to an annual limitation of 70% of the amount of tax due. The Company
has established a valuation allowance for the portion of possible tax savings
not likely to be realized by the end of the carryforward periods.
NOTE 10
RELATED PARTY TRANSACTIONS
The Company has paid legal and consulting fees to firms whose partners are
directors and shareholders of the Company. During the years ended December 31,
2005, 2004 and 2003, fees paid amounted to $4,505, $4,663, and $8,445,
respectively.
NOTE 11
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company continuously monitors the creditworthiness of its customers and has
established an allowance for amounts that may be uncollectible in the future
based on current economic conditions, historical payment and bad debt write-off
experience, and any specific customer related collection issues.
Allowance for doubtful accounts includes the following components:
December 31,
2005 2004 2003
-------- -------- --------
Allowance for doubtful accounts, beginning $149,000 $ 87,000 $ 40,000
Provision 93,431 93,353 71,420
Recoveries 2,434 1,334 2,268
Charge-offs (12,865) (32,687) (26,688)
Allowance for doubtful accounts, ending $232,000 $149,000 $ 87,000
NOTE 12
EMPLOYEE BENEFITS
The Company has a 401(k) Plan. Employees are allowed to contribute a percentage
of salary, based on certain parameters. The Company matches 100% of employee
contributions up to 6% of total compensation. Company matching contributions to
the 401(k) Plan were $121,024, $114,140 and $66,213, in 2005, 2004 and 2003,
respectively.
The employment contract of the Company's former President required accounting
for benefits payable in accordance with SFAS 106. The accumulated present value
of future benefits was recognized during his term of service to the Company,
which ended on October 1, 1998. The liability recorded at December 31, 2005 and
2004 was $95,824 and $106,165, respectively. At December 31, 2005, an amount of
$128,189 has been included in other assets relating to a regulatory asset for
costs that were approved in the Company's rate case. This amount will be paid
out to the former president's surviving spouse.
The Company has a noncontributory defined benefit plan that covers employees of
Birmingham Utilities, excluding Eastern Division and H2O Services employees. The
benefits are primarily based on years of service and the employee's
compensation. Pension expense includes the amortization of a net transition
obligation over a 23-year period. The Company's funding policy is to make annual
contributions in an amount that approximates what was allowed for ratemaking
purposes consistent with ERISA funding requirements. Contributions are intended
to provide not
only for benefits attributed to service to date, but also for those expected to
be earned in the future. The expected pension contribution for 2006, based upon
2005 market performance and current conditions, is estimated by management to be
$125,000.
In addition, the Company provides certain health care and life insurance
benefits for retired employees of Birmingham Utilities and their spouses,
excluding Eastern Division and H2O Services employees. Generally, the plan
provides for Medicare wrap-around coverage plus life insurance based on a
percentage of each participant's final salary. Substantially all of BUI's
employees may become eligible for these benefits if they reach retirement age
while working for the Company. The Company's obligation for postretirement
benefits must be fully accrued by the date that the employee attains full
eligibility for benefits. The Company has elected to recognize the unfunded
accumulated postretirement benefit obligation over 20 years. The Company's
funding policy is to contribute amounts annually to a benefit trust and pay
directly all current retiree premiums. The Company has established tax effective
funding vehicles for such retirement benefits in the form of a qualified
Voluntary Employee Beneficiary Association (VEBA) trust. The Company funded the
VEBA trust with tax deductible contributions of $25,000 in 2005, 2004, and 2003.
The Company uses a January 1 measurement date for its defined benefit and
postretirement medical benefit plans.
Benefit Obligations and Funded Status
The following provides a reconciliation of benefit obligations, plan assets and
funded status of the plans.
Other
Pension Benefits Postretirement Benefits
2005 2004 2005 2004
----------- ----------- ----------- -----------
Change in Benefit Obligation:
Benefit obligation, beginning of year $ 1,349,283 $ 1,291,199 $ 594,376 $ 561,422
Service cost 67,194 58,032 28,625 27,414
Interest cost 107,628 97,145 41,255 37,833
Actuarial loss (gain) 11,732 (58,071) 8,097 (9,604)
Benefits paid (31,333) (39,022) (26,228) (22,689)
Benefit obligation, end of year $ 1,504,504 $ 1,349,283 $ 646,125 $ 594,376
Change in Plan Assets:
Fair value, beginning of year 937,321 806,085 522,938 460,731
Actual return on plan assets 76,163 70,258 40,872 37,207
Employer contribution 136,500 100,000 25,000 25,000
Benefits paid (31,333) (39,022) -- --
Fair value, end of year 1,118,651 937,321 588,810 522,938
Funded Status (385,853) (411,962) (57,315) (71,438)
Unrecognized net actuarial gain (loss) 211,811 204,331 (69,251) (79,871)
Unrecognized transition obligation 35,229 41,101 177,646 203,024
Unrecognized prior service cost 70,396 75,566 -- --
Prepaid (accrued) benefit cost $ (68,417) $ (90,964) $ 51,080 $ 51,715
At December 31, 2005 the defined benefit pension plan had plan assets in excess
of the accumulated benefit obligation as summarized in the following table:
Projected benefit obligation $1,504,504
Accumulated benefit obligation $1,063,994
Fair value of plan assets $1,118,651
Net Periodic Benefit Cost
Net periodic pension and other postretirement benefit costs recognized in the
Consolidated Statements of Income include the following components:
Pension Benefits Other Postretirement Benefits
2005 2004 2003 2005 2004 2003
--------- --------- --------- --------- --------- ---------
Service cost $ 67,194 $ 58,032 $ 59,517 $ 28,625 $ 27,414 $ 27,818
Interest cost 107,628 97,145 92,630 41,255 37,833 35,947
Expected return on plan assets (76,918) (68,133) (63,291) (42,015) (37,025) (29,096)
Amortization of unrecognized
transition obligation 5,872 5,872 5,872 25,378 25,378 25,378
Amortization of unrecognized
prior service cost 5,170 5,170 5,170 -- -- --
Recognized net actuarial loss (gain) 5,007 5,122 5,243 (1,141) (2,754) --
Net periodic benefit cost $ 113,953 $ 103,208 $ 105,141 $ 52,102 $ 50,846 $ 60,047
Assumptions
Weighted average assumptions used are as follows:
Other
Pension Benefits Postretirement Benefits
2005 2004 2003 2005 2004 2003
---- ---- ---- ---- ---- ----
Discount rate 8% 8% 8% 7% 7% 7%
Expected return on plan assets 8% 8% 8% 8% 8% 8%
Rate of compensation increase 4% 4% 5% -- -- --
To determine the expected return on plan assets, the Company first examined
actual historical rates of return for the various asset classes. The Company
then determined a long-term projected return on plan assets based on expected
returns over the next five to 10 years.
The Company's defined benefit plan provides a retirement benefit based on 1.3%
of average monthly compensation multiplied by the number of years of service.
For measurement purposes, a 6% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2005 and was assumed to remain at
that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost $12,013 $(10,516)
Effect on postretirement benefit obligation $84,298 $(78,002)
Plan Assets
The following table sets forth the weighted average asset allocations for the
Company's pension plan assets:
Defined Benefit Plan Welfare Benefit VEBA Trust
2005 2004 2005 2004
---- ---- ---- ----
Equity Securities 69% 66% 67% 67%
Debt Securities 29% 30% 32% 32%
Cash 2% 4% 1% 1%
100% 100% 100% 100%
The investments in the defined benefit plan and the retirement welfare benefit
trust have a target allocation of 65% equities and 35% fixed income and cash.
The equities portion is in established mutual funds that invest in large
capitalization companies. The fixed income portion is split
between U.S. Government bonds and investment grade corporate bonds. Any
remaining cash is invested in FDIC insured money market accounts.
Estimated Future Benefits Payments
The following benefit payments are expected to be paid:
Pension Benefits
----------------
2006 $ 31,095
2007 30,140
2008 29,128
2009 28,058
2010 26,934
2011-2015 $326,205
NOTE 13
OTHER EXPENSE
Other expense represents non-recurring expenses incurred primarily in the fourth
quarter of 2004. Expenses totaling $405,613 were related to the exploration of
strategic initiatives that were not consummated. The remaining balance of
$62,422 is expense associated with the proposed acquisition of the NY operations
from PSC that was terminated in January 2005 (See Note 21).
NOTE 14
EARNINGS PER SHARE SUPPLEMENTAL INFORMATION
The following table summarizes the number of common shares used in the
calculation of earnings per share:
2005 2004 2003
--------- --------- ---------
Weighted average shares outstanding
for earnings per share, basic 1,660,407 1,647,303 1,637,076
Incremental shares from assumed
conversion of stock options 16,220 26,894 31,822
Weighted average shares outstanding
for earnings per share, diluted 1,676,627 1,674,197 1,668,898
NOTE 15
COMMITMENTS AND CONTINGENT LIABILITIES
Management Agreement
Birmingham Utilities maintains an agreement with the City of Derby (the City),
pursuant to which BUI manages the water system owned by the City. BUI is
responsible for costs of maintenance and improvements. Amounts collected from
customers, net of expenses, are retained by BUI.
Capital Budget
Management has budgeted $1,800,000 for capital expenditures in 2006, $600,000 of
which is expected to be necessary to meet its service obligations for the coming
year.
Purchase Commitment
Birmingham Utilities has an agreement with South Central Connecticut Regional
Water Authority (Authority) to purchase water. This agreement provides for a
minimum purchase of 600 million gallons of water annually. Charges to expense
were $740,747, $699,138 and $699,952, for the years 2005, 2004 and 2003,
respectively. The purchase price is based on the Authority's wholesale rate. At
December 31, 2005, this rate was $1,510 per million gallons. This agreement
expires December 31, 2015 but provides for two ten-year extensions at BUI's
option.
Operating Lease
H2O Services leases its operating facility in Glastonbury under a non-cancelable
operating lease expiring in June 2009. The lease requires monthly rental
payments of $4,700. In addition, the
lease provides for annual increases based on the Consumer Price Index and H2O
Services is obligated to pay its pro rata share of operating costs, as defined.
NOTE 16
EQUITY
Common Stock
Number
of Shares Amount
--------- ----------
Balance, January 1, 2004 1,637,076 $2,900,913
Stock issued through Key Employee and
Non-Employee Director Stock Option Plans 20,466 78,765
Amortization of stock plan costs -- (3,706)
Balance, December 31, 2004 1,657,542 $2,975,972
Stock issued through Key Employee and
Non-Employee Director Stock Option Plans 4,537 14,375
Amortization of stock plan costs -- (2,643)
Balance, December 31, 2005 1,662,079 $2,987,704
Stock Option Plans
The Company has four stock option plans which include two non-employee director
stock option plans (director plans) and two key employee incentive stock option
plans (employee plans). The first director and employee plans were adopted in
1994 and subsequently approved by the Company's shareholders and the DPUC in
1995; 80,000 and 70,000 shares, respectively, were authorized under these two
plans. The second employee plan was adopted in 1998 and approved by the
Company's shareholders and the DPUC in 1999; 60,000 shares were authorized under
this plan. The second director plan was adopted in 2000 and approved by the
Company's shareholders and DPUC in 2001; 60,000 shares were authorized under
this plan.
The following table summarizes the transactions with respect to the Company's
stock option plans for the three years ended December 31, 2005:
Granted Exercisable
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- -------- --------- --------
Outstanding at January 1, 2003 78,918 $10.91 62,668 $9.45
Granted 7,500 18.08
Outstanding at December 31, 2003 86,418 $11.53 72,668 $10.37
Granted 5,000 19.23
Exercised (24,178) 6.50
Outstanding at December 31, 2004 67,240 $13.92 58,490 $13.19
Granted 2,500 19.90
Exercised (7,240) 8.94
Outstanding at December 31, 2005 62,500 $14.73 57,500 $14.74
The fair value of each option grant is established on the date of grant using
the Black-Scholes option pricing model, consistent with the method stipulated by
SFAS 123. The fair value per option was estimated using the following
assumptions:
2005 2004 2003
-------- -------- --------
Expected option term 10 years 10 years 10 years
Risk-free interest rate 4.3% 4.6% 4.4%
Expected dividend yield 3.5% 3.5% 3.3%
Expected volatility factor 33.0% 34.1% 35.5%
Fair value per option $5.89 $5.98 $5.98
Dividend Reinvestment Plan
The Company has a dividend reinvestment plan, which provides for the issuance
and sale of up to 140,000 shares of the Company's authorized but un-issued
common stock to its shareholders who elect to reinvest cash dividends on the
Company's existing shares. Shares under the plan will be purchased at their fair
market value price on the date of the dividends to be invested in the new
shares. The Company purchases shares in the open market to satisfy its dividend
reinvestment obligations.
NOTE 17
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH FINANCING
ACTIVITIES
Cash paid for interest for the years ended 2005, 2004, and 2003 was $629,299,
$569,786 and $415,453, respectively.
Cash paid for income taxes for the years ended 2005, 2004 and 2003 was $22,020,
$30,013 and $40,926, respectively.
Birmingham Utilities receives contributions of utility plant from developers.
These contributions are reported in utility plant and in customers' advances for
construction. The contributions are deducted from construction expenditures to
determine cash expenditures by BUI.
December 31,
2005 2004 2003
---------- ---------- ----------
Gross plant additions $3,544,527 $2,111,381 $1,689,324
Customers' advances for construction (243,932) (337,663) (162,901)
$3,300,595 $1,773,718 $1,526,423
NOTE 18
SEGMENT INFORMATION
The Company has identified regulated water operations (Birmingham Utilities) and
unregulated service operations (H2O Services) as its two reportable segments for
the purposes of applying Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
Birmingham Utilities collects and distributes water to domestic, commercial and
industrial customers. H2O Services offers a consumer protection program for
residential service lines and provides water related services to other water
utilities, municipalities, contractors, and individuals including water system
design and construction, water main installation and repairs, hydrant
installation and repairs, leak surveys, service line piercing, pulling and
moling, backflow device testing, residential and commercial well pump
installations and repairs and filtration installations and repairs. The
accounting policies of each reportable segment are the same as those described
in Note 1.
Financial data for reportable segments follows:
Operating Operating Taxes on Interest Net Total Deferred
Revenues Expenses Depreciation Income Expense Income Assets Tax Liability
----------- ----------- ----------- ----------- ----------- ----------- ----------- -------------
For the year ended
December 31, 2005
Birmingham Utilities $ 6,846,174 $ 3,711,731 $ 872,121 $ 203,956 $ 650,705 $ 466,543 $31,124,117 $ 2,929,554
H2O Services $ 2,209,299 $ 1,818,570 $ 15,795 $ 108,088 31,171 $ 192,243 1,617,903
Total Consolidated $ 9,055,473 $ 5,530,301 $ 887,916 $ 312,044 $ 681,876 $ 658,786 $32,742,020 $ 2,929,554
For the year ended
December 31, 2004
Birmingham Utilities $ 6,868,225 $ 4,149,787 $ 749,114 $ 58,940 $ 553,072 $ 144,118 $26,422,560 $ 2,554,657
H2O Services 2,997,351 2,421,535 -- 187,587 21,112 367,117 3,805,683
Total Consolidated $ 9,865,576 $ 6,571,322 $ 749,114 $ 246,527 $ 574,184 $ 511,235 $30,228,243 $ 2,554,657
For the year ended
December 31, 2003
Birmingham Utilities $ 5,425,512 $ 3,071,088 $ 630,462 $ 162,902 $ 432,678 $ 670,946 $26,873,658 $ 2,397,034
H2O Services 982,971 728,847 -- 89,600 149,428 1,525,811
----------- ----------- ----------- ----------- ----------- ----------- ----------- -------------
Total Consolidated $ 6,408,483 $ 3,799,935 $ 630,462 $ 252,502 $ 432,678 $ 820,374 $28,399,469 $ 2,397,034
NOTE 19
QUARTERLY FINANCIAL DATA
(Unaudited)
Operating Operating Net Earnings Per Share
Revenues Income Income(loss) Basic Diluted
---------- ---------- --------- ----- -------
2005 First Quarter $1,968,436 $ 174,108 $ 54,193 $ .03 $ .03
Second Quarter 2,589,002 536,708 377,736 $ .23 $ .23
Third Quarter 2,343,862 404,418 304,004 $ .18 $ .18
Fourth Quarter 2,154,173 78,837 (77,147) $(.04) $(.05)
---------- ---------- --------- ----- -------
Total $9,055,473 $1,194,071 $ 658,786 $ .40 $ .39
2004 First Quarter $2,111,457 $ 270,535 $ 201,885 $ .12 $ .12
Second Quarter 2,426,300 324,626 238,742 $ .15 $ .14
Third Quarter 2,704,104 354,971 265,272 $ .16 $ .16
Fourth Quarter 2,623,715 277,776 (194,664) $(.12) $(.12)
---------- ---------- --------- ----- -------
Total $9,865,576 $1,227,908 $ 511,235 $ .31 $ .30
NOTE 20
WATER SERVICE RATE INCREASE
In October 2005, the Ansonia Division of Birmingham Utilities filed an
application with the DPUC for a 4.4%, $258,655 water service rate increase to
account specifically for increases in purchased water costs and property taxes.
This limited rate filing is allowed under Section 16-32c of the Connecticut
General Statutes. The DPUC granted the Company's request in its entirety in
January 2006.
In August 2003, the DPUC granted Birmingham Utilities a 27.74 percent water
service rate increase designed to provide a $1,264,178 annual increase in
revenues and a 10.5 percent return on common equity. This rate increase does not
apply to the Eastern Division.
NOTE 21
TERMINATION OF PURCHASE AGREEMENT
In May 2003, Birmingham Utilities entered into a Purchase Agreement with PSC to
purchase all of the issued and outstanding shares of common stock of five small
regulated water companies located in eastern New York. The purchase price for
the New York operations was expected to be $1,000,000 subject to certain
adjustments based on changes in rate base and working capital. These adjustments
would not have increased the purchase price by more than $450,000. Applications
for regulatory approval were filed with the New York State Public Service
Commission (NY Commission) in July 2003. A decision was expected in 2004. During
the regulatory approval process, it became apparent that significant capital
costs would be required upon completion of the transaction. In January 2005,
Birmingham Utilities and PSC, citing continued delays on the part of the NY
Commission, mutually agreed that they no longer wished to pursue this
transaction.
SOURCES OF SUPPLY
Wells
Located in Derby and Seymour with a safe daily yield of 3.0 million gallons per
day (MGD) and 69 wells located in 16 towns in Eastern CT that service 30
satellite water systems.
Interconnections
Two interconnections with the South Central Regional Water Authority at the
border of Orange and Derby (the Grassy Hill Interconnection) and near the border
of Seymour and Ansonia (the Woodbridge Interconnection). Annual purchases of
water contracted at a minimum of 600 million gallons a year. Safe daily yield of
interconnection - 5.0 MGD.
Emergency Supply
Beaver Brook Reservoir System - 2.1 MGD surface water supply.
Customer Base and Demand
11,459 customers, 97% residential and commercial Water delivered in 2005 - 1.24
Billion Gallons Average daily demand - 3.39 MGD.
Maximum daily demand in 2005 - 4.37 MGD. Total safe daily yield - 8.0 MGD.
Workforce
On March 1, 2006, the Company maintained a workforce of 43 full-time and 3
part-time employees, none of whom are affiliated with any union.
Regulation
Birmingham Utilities is subject to the jurisdiction of the following agencies:
Connecticut Department of Public Utility Control (DPUC)
Matters related to ratemaking, financing, accounting, disposal of property,
issuance of long-term debt and securities and other operational matters.
Connecticut Department of Public Health (DPH) Water quality, sources of supply
and use of watershed land.
Connecticut Department of Environmental Protection (DEP)
Water quality, pollution abatement, diversion of water from streams and rivers,
safety of dams and location, construction and alteration of certain water
facilities. Birmingham Utilities is also 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 DPH the primary enforcement
responsibility in Connecticut under the SDWA. The DPH has established
regulations containing maximum limits on contaminants, which have or may have an
adverse effect on health.
SHAREHOLDER INFORMATION
Independent Registered Public Accounting Firm
Dworken, Hillman, LaMorte & Sterczala, P.C.
Shelton, Connecticut
General Counsel
Wiggin and Dana LLP
New Haven, Connecticut
Registrar and Transfer Agent
American Stock Transfer
& Trust Company
59 Maiden Lane
New York, New York 10007
Stock Market Listing: AMEX
Under the Symbol: BIW
Website
www.buiweb.com
- --------------
MARKET INFORMATION
Market For the Company's Common Stock and Related Security Holder Matters
As of December 31, 2005, there were approximately 410 record holders of the
Company's common stock. Approximately 64% of the Company's stock is held in
"nominee" or "street" name. The Company's common stock trades on the American
Stock Exchange under the symbol "BIW". The following table sets forth the
dividend record for the Company's common stock and the range of bid prices for
the last two calendar years. The stock prices are based upon American Stock
Exchange records provided to the Company. The prices given are retail prices.
Birmingham Utilities' Mortgage Bond Indenture under which its First Mortgage
Bonds are issued contains provisions that limit the dividends BUI may pay under
certain circumstances.
High Low Dividend Paid
2005 ------ ------ -------------
First Quarter $20.58 $18.80 $.17
Second Quarter 20.65 17.70 .17
Third Quarter 20.05 18.72 .17
Fourth Quarter 19.70 17.55 .17
High Low Dividend Paid
2004 ------ ------ -------------
First Quarter $21.85 $18.90 $.17
Second Quarter 20.25 18.75 .17
Third Quarter 20.10 17.70 .17
Fourth Quarter 19.65 18.43 .17
On written request, the Company will furnish to any shareholder a copy of its
most recent annual report to the Securities and Exchange Commission on Form 10K,
without charge, including the financial statements and schedules thereto. Such
requests should be addressed to Henrietta Vitale, Secretary, BIW Limited, P.O.
Box 426, Ansonia, CT 06401-0426 or e-mail: hvitale@buwater.com. All Securities
and Exchange Commission filings are also available on our website
www.buiweb.com.
- ---------------
BIW Limited
230 Beaver Street
PO Box 426
Ansonia, CT 06401-0426
203 735.1888