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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-8084
CONNECTICUT WATER SERVICE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-0739839
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
93 WEST MAIN STREET, CLINTON, CT 06413
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (860) 669-8636
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NONE NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229,405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting Common Stock,
computed on the price of such stock at the close of business on March 1, 2000 is
$142,428,000.
4,828,075
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING, MARCH 1, 2000
(EXCLUDING 15,748 COMMON STOCK EQUIVALENT SHARES)
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K INTO WHICH
DOCUMENT DOCUMENT IS INCORPORATED
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Definitive Proxy Statement, dated March 18, Part III
2000, for Annual Meeting of Shareholders to be
held on April 28, 2000.
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PART I
ITEM 1. BUSINESS
a. GENERAL DEVELOPMENT OF BUSINESS
The Registrant, Connecticut Water Service, Inc. (the Company), is the
parent company of three regulated water companies, which generate over 95% of
the Company's consolidated net earnings. Our water companies supply water for
residential, commercial, industrial and municipal purposes in 39 towns
throughout the State of Connecticut. The Company and its subsidiaries represent
the second largest investor-owned water system in Connecticut measured by of
operating revenue and utility plant investment.
The Company was organized in 1956 under the General Statutes of Connecticut
as Suburban Water Service, Inc. and has been engaged in the business of
acquiring and operating water companies through controlling stock ownership. In
1975, the Company changed its name to Connecticut Water Service, Inc. after
acquiring all of the outstanding common stock of The Connecticut Water Company.
The Company is a non-operating company whose income is derived from the earnings
of its subsidiary companies. In addition to our core regulated water business,
we offer related services on a contract basis to other water utilities,
communities, businesses and homeowner associations through our unregulated
subsidiary companies and through a joint venture we formed in 1999 with a pump
service provider. These services range from one-time contracts for a particular
service to long-term assignments for system operation and management. We are
also engaged in selling off our limited excess real estate holdings.
The Company's six wholly owned subsidiary companies are:
The Connecticut Water Company (Connecticut Water)
The Gallup Water Service, Incorporated (Gallup)
The Crystal Water Company of Danielson (Crystal)
Crystal Water Utilities Corporation
Chester Realty, Inc.
Connecticut Water Utility Services, Inc.
Gallup and Crystal Water Utilities (along with its subsidiary Crystal) were
acquired in 1999. Both of these acquisitions were treated as "pooling of
interests" so all of the Company's financial statements have been restated from
what was reported in the past to include the results of the acquired companies
for all periods presented. The Company's consolidated financial statements now
encompass all six of the Company's subsidiaries.
In 1999 we formed a joint venture with Hungerfords, Inc., a pump service
provider, which has been in business in Connecticut for over 75 years.
Hungerfords installs and maintains potable water and wastewater systems for
commercial, industrial and residential customers in the state. Our three year
joint venture, named Hungerfords/Connecticut Water, will engage in a marketing
and management strategy designed to boost our two companies' presence by
collectively offering a full range of services to water users in the state. If
specific financial targets are met, our Company will purchase Hungerfords in
2002.
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b. GENERAL DESCRIPTION OF BUSINESS
The Company, a Connecticut corporation, owns all of the outstanding stock
of Connecticut Water, Gallup, Crystal Water Utilities Corporation, Chester
Realty and Connecticut Water Utility Services. The Crystal Water Utilities
Corporation owns all of the outstanding stock of the Crystal Water Company.
Substantially all of the Company's revenues and operating income are
attributable to the sale and distribution of water. In 1999 $.04 a share or
approximately 2.6% of the Company's consolidated net income came from real
estate sales and non-water sales earnings. See "Business -- Consolidated
Operating Statistics".
Connecticut Water, Crystal and Gallup are specially chartered by the
General Assembly of the State of Connecticut as public service companies. As
public service companies, their rates and operations are regulated by the
Connecticut Department of Public Utility Control (DPUC). See "Business -- Rates"
and "Business -- Regulation".
Chester Realty was organized in 1969 to assist Connecticut Water in the
acquisition of real estate. The assets and operations of this company are not
significant. In 1999 the ownership of this company was transferred directly to
the Company from Connecticut Water.
In 1999, Connecticut Water Utilities Services was established to handle our
unregulated business activities. By forming a separate company to handle these
transactions we were able to move these transactions off the books of
Connecticut Water. By removing these transactions from the oversight of the
regulated arena, this new structure should give us more flexibility in the way
we respond to changing market conditions and needs.
Crystal Water Utilities is a holding company, owning 100% of the
outstanding common stock of Crystal. In addition, it owns some rental
properties. The assets and operations of this company other than its ownership
of Crystal is not significant.
Our three water companies supply water and, in most instances, provide fire
protection in all or portions of 39 towns in Connecticut. The service areas have
an estimated total population of approximately 243,000 based on DPUC population
estimates of 3.5 people per average household. During the twelve months ended
December 31, 1999, approximately 64% of the Company's consolidated operating
revenues were received from residential customers, 12% from commercial
customers, 4% from industrial customers, 3% from public authority customers, and
17% from public fire protection and other customers.
Each of our water companies serve a separate franchise area. Rates are
different for each company. The systems of the three water companies are not
physically interconnected.
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The following table sets forth the percentage of the Company's net utility
plant for each of its water companies as of December 31, 1999:
UTILITY PLANT
COMPANY DOLLARS PERCENT
- ------- ------------ -------
Connecticut Water $172,094,000 95%
Crystal 7,779,000 4%
Gallup 1,469,000 1%
------------ ---
$181,342,000 100%
============ ===
At December 31, 1999, our three water companies served a total of 69,474
customers. At that date, all customers were metered except fire protection
customers, 402 customers of Connecticut Water's Sound View Water System,
acquired in 1995; and 379 customers of its Point O'Woods Water System, acquired
in 1997. The water companies require all applicants for new service, other than
customers at certain seasonal systems and fire protection customers, to be
metered.
The Company's principal office is located at 93 West Main Street, Clinton,
Connecticut 06413, and its telephone number is 860-669-8636.
Our business is subject to seasonal fluctuations and weather variations.
The demand for water during the warmer months is generally greater than during
the cooler months due primarily to additional requirements for water in
connection with cooling systems, and various outdoor uses such as private and
public swimming pools and lawn sprinklers. From year to year and season to
season, particularly during the warmer months, demand will vary with rainfall
and temperature levels.
The profitability of the operations of the water utility industry generally
and of our three water companies (and hence the Company) is largely dependent on
the timeliness and adequacy of the rates allowed by utility regulatory
commissions. In addition, profitability is dependent on numerous factors over
which we have little or no control, such as the quantity of rainfall and
temperature in a given period of time, and compliance with environmental and
water quality regulations. In addition, inflation and other factors beyond our
control impact the cost of construction, materials and employee costs. See
"Business -- Financing", "Business -- Rates", and "Business -- Regulation".
Water Supply
The estimated minimum dependable yields of sources of water supply for each
of our transmission and distribution systems, as set forth under
"Business -- Production Facilities as of December 31, 1999" are in excess of
present average daily consumption. Except for requests for voluntary
conservation in the summers of 1988, 1995 and 1999, no restrictions on water use
have been required in over 25 years.
Water is secured from both surface and subsurface supplies and supplied
through interconnections with other water systems. In 1999, approximately 1% of
our water was supplied through our interconnections with other companies. Of the
water supplied by our
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sources, surface sources provided approximately 50% of the supply, and well
supplies provided 50%. Studies are made periodically to determine the supply and
distribution needs. Major studies, covering a fifty-year planning period
required of all water companies supplying 1,000 or more persons, were completed
by our three water companies and submitted to the Connecticut Department of
Public Health (DPH) for approval. An updated plan must be prepared every five
years or as requested by the DPH. Updated plans for each of our water systems
have been prepared and approved by the DPH. We will continue to explore and
develop additional ground water supplies and study further development of
surface water sources in anticipation of meeting future water requirements.
See "Business -- Construction Program", "Business -- Rates" and
"Business -- Regulation".
Information on our water systems, broken down by company, and for
Connecticut Water into its three operating regions is as follows:
CONNECTICUT WATER'S NORTHERN REGION
Connecticut Water's Northern Region is composed of eight separate systems,
as listed below:
NUMBER OF
CUSTOMERS
SYSTEM TOWNS (OR PORTIONS THEREOF) SERVED AT 12/31/99
- ------ ---------------------------------- -----------
Western (including the former Tolland Suffield, Windsor Locks, East 29,878
Aquaduct System) Granby, Enfield, East Windsor,
South Windsor, Vernon, Ellington,
Tolland
Somers Somers 420
Crescent Lake Enfield 161
Stafford Springs Stafford 1,016
Lakewood/Lakeview Coventry 177
Nathan Hale Coventry 40
Llynwood Bolton, Vernon 75
Reservoir Heights Vernon 21
------
31,788
======
The territory served is primarily residential and commercial with some
industry.
Connecticut Water has entered into an agreement with the State of
Connecticut, Department of Transportation, pursuant to which Connecticut Water
operates and maintains, as part of its Western System, the State's water
distribution system for Bradley International Airport located in Windsor Locks,
Suffield and East Granby, Connecticut.
The Western System has three emergency standby interconnections with the
water system of the Metropolitan District Commission (MDC) (a public water and
sewer authority presently serving the City of Hartford and portions of
surrounding towns), one in
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South Windsor and two in Windsor Locks. The Western System also has an emergency
interconnection with the water system of the Hazardville Water Company in
Enfield. During 1995 an interconnection was completed between the Somers System
and the water system of the Hazardville Water Company in Somers to provide water
to the Hazardville Water Company.
See "Business -- Franchises" with respect to proposals that the MDC expand
its operations into the Northern Region and that MDC take over Connecticut
Water's operations in South Windsor.
CONNECTICUT WATER'S SHORELINE REGION
Connecticut Water's Shoreline Region is composed of eight separate systems,
as listed below:
NUMBER OF
CUSTOMERS
SYSTEM TOWNS (OR PORTIONS THEREOF) SERVED AT 12/31/99
- ------ ---------------------------------- -----------
Guilford Guilford, Old Saybrook, Westbrook, 16,002
Clinton, Madison
Chester Chester, Deep River, Essex 2,326
Chester Village West Chester 11
Sound View Old Lyme 402
Point O'Woods Old Lyme 379
Bay Mountain Griswold 106
SDC Voluntown 54
Mason's Island Stonington 177
------
19,457
======
The territory served is primarily residential with some commercial and
industry. In 1998 Connecticut Water purchased the Mason's Island system and in
1997 purchased the Point O'Woods, Bay Mountain, and SDC water systems, all in
southeastern Connecticut. These systems increased the region's water customer
base by nearly 4%.
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CONNECTICUT WATER'S NAUGATUCK REGION
Connecticut Water's Naugatuck Region is composed of four separate systems,
as listed below:
NUMBER OF
CUSTOMERS
SYSTEM TOWNS (OR PORTIONS THEREOF) SERVED AT 12/31/99
- ------ ---------------------------------- -----------
Central Naugatuck, City of Waterbury, 8,885
Beacon Falls, Bethany, Prospect
Terryville Plymouth, Thomaston 2,048
Thomaston Thomaston 1,276
Collinsville Canton, Avon, Burlington 1,328
------
13,537
======
The territory served is residential and industrial including a municipality
which represented approximately 7.0% of the region's 1999 revenues.
Water for the Collinsville System is supplied under an agreement with the
MDC from treatment facilities drawing from a large surface water reservoir owned
by the MDC. See "Item 2. Properties" for a description of this agreement.
CRYSTAL
Crystal Water Company is comprised of four separate systems, as listed
below:
NUMBER OF
CUSTOMERS
SYSTEM TOWNS (OR PORTIONS THEREOF) SERVED AT 12/31/99
- ------ ---------------------------------- -----------
Crystal Brooklyn, Killingly 2,294
Plainfield Plainfield 592
Thompson Thompson 474
P&A Killingly 96
-----
3,456
=====
Crystal's territory served is primarily residential and commercial with
some industry. Crystal's largest customer, a municipality, accounts for
approximately 7.5% of its operating revenue.
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GALLUP
Gallup is composed of three separate systems, as listed below:
NUMBER OF
CUSTOMERS
SYSTEM TOWNS (OR PORTIONS THEREOF) SERVED AT 12/31/99
- ------ ---------------------------------- -----------
Gallup Plainfield 1,056
Country Mobile Griswold 79
Lillibridge Plainfield 43
-----
1,178
=====
Gallup's territory served is primarily residential and commercial with some
industry. Gallup's largest customer, a municipality, accounted for approximately
11.5% of its operating revenue.
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CONSOLIDATED OPERATING STATISTICS*
Year Ended December 31,
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Customers (Average)
Residential Metered 61,608 60,745 59,834 59,503 58,749
Commercial Metered 4,323 4,301 4,316 4,277 4,224
Industrial Metered 350 377 406 411 406
Public Authorities Metered 476 495 545 543 545
Fire Protection and Other 2,188 1,937 1,686 1,138 1,108
------- ------- ------- ------- -------
Total 68,945 67,855 66,787 65,872 65,032
======= ======= ======= ======= =======
Production (Millions of
Gallons)
Residential Metered Sales 4,602 4,334 4,291 4,179 4,302
Commercial Metered Sales 1,054 983 990 973 1,008
Industrial Metered Sales 475 444 490 485 485
Public Authorities Metered
Sales 299 286 278 270 280
------- ------- ------- ------- -------
Total Metered
Consumption 6,430 6,047 6,049 5,907 6,075
Fire Protection, Company Use
and Unaccounted For 921 798 811 682 877
------- ------- ------- ------- -------
Total 7,351 6,845 6,860 6,589 6,952
======= ======= ======= ======= =======
Operating Revenues (Thousands
of Dollars)
Residential Metered $27,077 $25,495 $25,816 $25,888 $26,463
Commercial Metered 5,160 4,820 4,890 4,931 5,109
Industrial Metered 1,850 1,747 1,962 1,960 1,967
Public Authorities Metered 1,374 1,208 1,218 1,216 1,247
Fire Protection and Other
Non-Metered 7,163 7,033 7,031 7,019 6,901
------- ------- ------- ------- -------
Total $42,624 $40,303 $40,917 $41,013 $41,687
======= ======= ======= ======= =======
Average Revenue per 1,000
Gallons
Residential Metered $ 5.88 $ 5.88 $ 6.02 $ 6.19 $ 6.15
Commercial Metered $ 4.90 $ 4.90 $ 4.94 $ 5.07 $ 5.07
Industrial Metered $ 3.89 $ 3.93 $ 4.00 $ 4.04 $ 4.05
Public Authorities Metered $ 4.60 $ 4.22 $ 4.38 $ 4.50 $ 4.45
Miles of Distribution Mains
(End of Period) 1,109 1,094 1,079 1,062 1,058
- ---------------
* The numbers for years 1995 - 1998 have been restated to include the operations
of Gallup and Crystal, which were acquired in 1999.
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CONSTRUCTION PROGRAM
We annually project our capital expenditures for the upcoming three year
period. These projections are reviewed and revised from time to time to the
extent necessary to meet changing conditions, including adequacy of rate relief,
customer demand, revised construction schedules, water quality requirements,
pollution control requirements and inflation.
The current estimate of the total cost of our construction program for
2000-2002, excluding plant financed by customer advances and contributions in
aid of construction, aggregates approximately $22,500,000. Of this amount,
routine improvements to water systems and equipment total approximately
$10,500,000, while the remaining $12,000,000 is comprised of individual larger
projects addressing the replacement and expansion of infrastructure, water
treatment facilities, and increased storage capacity. No significant capital
expenditures are anticipated to be required by any of our non-utility
subsidiaries during this period.
The $22,500,000 estimate includes approximately $2,000,000 for all known
costs of studies and construction of facilities to comply with existing Safe
Drinking Water Act (SDWA) and OSHA regulations. Construction expenditures which
may be required in the future to comply with Federal and State regulations,
which have not yet been issued but which may be required due to changes to the
SDWA, are excluded.
FINANCING
The Company expects to finance a significant portion of the anticipated
$22,500,000 construction expenditures through 2002 with net funds generated from
operations (net cash provided by operating activities less dividends paid). Net
funds generated from operations were $8,447,000, $6,762,000, and $9,231,000, for
the years 1999, 1998 and 1997, respectively (see Consolidated Statements of Cash
Flows for additional information). Construction and other expenditures in excess
of net funds generated from operations are expected to be financed through
short-term interim bank loans which may be refinanced through the sale of
Preferred Stock and/or long or medium-term unsecured or secured debt and/or the
sale of Common Stock when financial market conditions are considered favorable.
The Company's subsidiaries are expected to receive the proceeds of any such
financing by the Company in the form of advances or capital contributions.
We currently have lines of credit aggregating $9,000,000, consisting of
conventional lines of credit with three banks. We consider this amount adequate
at this time. As of December 31, 1999, we had $2,411,000 of borrowings
outstanding under these lines of credit plus $245,000 allocated to secure a
Letter of Credit for one of our real estate development projects.
RATES
The rates of our three water companies are established under the
jurisdiction of, and approved by, the DPUC. It is the Company's policy to seek
rate relief as necessary to enable us to achieve an adequate rate of return.
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The last general rate increase of Connecticut Water, our largest water
company, was requested in 1990 and became effective March 25, 1991 based upon an
allowed rate of return of 12.7% on common stock equity and 10.74% on rate base.
During 1997 this rate decision was reopened for the limited purpose of flowing
through to customers cost savings related to a reduction in state taxes and to
allow the water company to collect FAS 106 (Postretirement Benefits other than
Pension) costs in rates. Overall the water company's rates were reduced
approximately 4 1/2% in 1997 due to these limited reopened rate proceedings.
Crystal Water Company's last general rate increase was effective March 31,
1995 and was based upon an allowed rate of return of 12.35% on common stock
equity and 10.16% on rate base. During 1997, this rate decision was also
reopened for the limited purpose of flowing through to customers cost savings
from a reduction in state taxes. Crystal's rates were reduced 5%, effective July
1, 1997 due to this reopener.
Gallup's last general rate increase was effective January 1, 1994. Gallup's
rates were not based on rate of return or rate base methodology, but rather
based on its net income requirement. Similar to those for our other two water
companies, Gallup's rates were reduced 5%, effective July 1, 1997 to flow
through a reduction in state taxes to customers.
We do not expect to file for a general rate increase for any of our water
companies in 2000.
The DPUC allows a surcharge to be applied to rates charged by water
utilities in order to provide a current cash return on the major portion of a
water utility's Construction Work In Progress (CWIP) applicable to facilities
required by SDWA facilities. We have, in the past, been allowed to collect these
surcharges from our customers. We expect to apply for the application of similar
surcharges with respect to any major future construction projects which may be
required by the SDWA. There is no assurance that any future surcharges will be
permitted.
Under certain circumstances the DPUC, in consultation with the DPH, can
order a water company with good managerial and technical resources to acquire
the water system of another company to assure the availability and potability of
water for customers of the company to be acquired. In 1989 the DPUC promulgated
regulations permitting the DPUC to approve a surcharge to be applied to rates
charged by water utilities in order to cover the costs incurred to acquire the
other system and to make improvements as required. If appropriate, we will apply
for the application of such a surcharge with respect to any mandated water
system acquisition. Although there is no assurance that such a surcharge will be
permitted, such a surcharge was permitted in 1995 when the DPUC and DPH ordered
Connecticut Water to acquire the assets and facilities of the Sound View Water
Company in Old Lyme.
In 1993 the DPUC approved regulations which would permit a water company to
apply for a limited rate adjustment to compensate for the effect of changes in
certain costs. These costs include rate changes related to the cost of purchased
water, energy, and taxes. The effects of limited reopened rate proceedings in
1997 is discussed above. We will apply
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for the application of this type of adjustment in the future when appropriate.
There is no assurance that any such rate adjustment will be permitted.
See also "Franchises and Competition" below for a discussion of Connecticut
legislation dealing with the competitiveness of water rates.
FRANCHISES AND COMPETITION
Legislation was passed in 1994 by the Connecticut General Assembly that
required the DPUC to adopt regulations regarding whether the rates that have
been charged by a water company for a period of five consecutive years are so
excessive in comparison to the rates charged by other water companies providing
the same or similar service as to inhibit the economic development of the area
serviced by the water company or impose an unreasonable cost to the customers of
such company. If the DPUC makes such a finding and also concludes that the water
company is unable or unwilling to provide service at a reasonable cost to
customers, it may order the provision of such service or revoke the franchise
held by such company. We believe that, in light of the tax and other advantages
of governmentally-owned entities which are not available to Connecticut Water
and our two other water companies, their rates are not excessive and we would
vigorously oppose any such attempt to revoke their franchises.
The Metropolitan District Commission (MDC) is a legislatively authorized
quasi-government agency providing primarily water and sewer service in and
around the city of Hartford and within and/or adjacent to towns in Connecticut
Water's Northern Region. MDC's water rates are substantially lower than those of
Connecticut Water, primarily because MDC is a tax-exempt entity, generally
serving a denser population with fewer sources of supply and treatment
facilities. Legislation has been proposed at various times in the past 25 years
that would have the effect of permitting MDC to purchase the water company
operations of Connecticut Water in South Windsor, a town which is presently
served by both MDC and Connecticut Water. The Company has opposed and will
continue to oppose such legislation vigorously each time and to date no such
legislative proposals have passed in the General Assembly. It is not clear, at
this time, whether similar legislation will be introduced or adopted by the
General Assembly. It is also possible that any legislation in this area could be
written in a manner which would permit a similar acquisition of Connecticut
Water's water operations in towns other than South Windsor.
It is not possible at this time to assess the likelihood of any legislation
being enacted to implement these or similar recommendations or the impact of any
such legislation on our three water companies and the Company, but such impact
could be substantial. There can be no assurance that the Connecticut General
Assembly will not take action to authorize such a takeover. As of December 31,
1999, Connecticut Water's Northern Region, which includes customers in the towns
mentioned above, represented approximately 50% of Connecticut Water's utility
plant. Further, if such legislation were introduced, the amount of compensation
to be received by Connecticut Water for its assets cannot be determined at this
time.
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The issues relating to water rates and service areas for customers served
by privately-owned or publicly-owned water utilities have been studied more than
once by legislatively established task forces as well as by the Legislature's
Program Review and Investigations Committee. These studies have generally
concluded that there are reasons for the differences in rates between public and
privately owned water utilities and to date the legislature has not intervened
regarding Connecticut Water's service area.
In common with most water companies in Connecticut, our three water
companies derive their rights and franchises to operate from special acts of the
Connecticut General Assembly, which are subject to alteration, amendment or
repeal by the General Assembly and which do not grant exclusive rights to our
water companies in their respective service areas.
Subject to such power of alteration, amendment or repeal by the Connecticut
General Assembly and subject to certain approvals, permits and consents of
public authority and others prescribed by statute and by their charters, our
three water companies have, with minor exceptions, valid franchises free from
burdensome restrictions and unlimited as to time, and are authorized to sell
potable water in the towns (or parts thereof) in which water is now being
supplied.
In addition to the right to sell water as set forth above, the franchises
of our three water companies include rights and powers to erect and maintain
certain facilities on public highways and grounds, all subject to such consents
and approvals of public authority and others as may be required by law. Under
the Connecticut General Statutes, our three water companies, upon payment of
compensation, may (subject to the various requirements described under
"Business -- Regulation") take and use such lands, springs, streams or ponds, or
such rights or interests therein as the Connecticut Superior Court, upon
application, may determine is necessary to enable the affected company to supply
potable water for public or domestic use in its franchise areas.
Our water companies face competition, presently not material, from a few
private water systems operated within, or adjacent to, their franchise areas and
from municipal and public authority systems whose service areas in some cases
overlap portions of Connecticut Water's franchise areas. At the present time,
except as noted above, there are no publicly owned utilities, cooperatives or
other private utility companies competing with our water companies in the areas
now served, although within certain areas there are wells owned by individuals
or private industries.
See also "Business -- Regulation" for a description of the so-called
Connecticut Plan which is intended, among other things, to eliminate competition
among water systems.
REGULATION
DEPARTMENT OF PUBLIC UTILITY CONTROL (DPUC)
Our three water companies are subject to regulation by the Connecticut
DPUC, which has jurisdiction over rates, standards of service, accounting
procedures, issuance of
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securities, disposition of utility properties and related matters. The DPUC
consists of five Commissioners, appointed by the Governor of Connecticut with
the advice and consent of both houses of the Connecticut legislature.
The DPUC is required by law to institute management audits, to be conducted
periodically, of companies such as ours. Such audits might result in the DPUC
ordering implementation of new management practices or procedures. The DPUC has
not conducted any such audit of any of our companies.
Connecticut Water Service, the parent holding company, is not an operating
utility company. It is not a "public service company" within the meaning of the
Connecticut General Statutes and is not generally subject to regulation by the
DPUC.
DEPARTMENT OF ENVIRONMENTAL PROTECTION (DEP)
While the construction of dams, reservoirs and other facilities necessary
to the impounding, storage and withdrawal of water in connection with public
water supplies is a permitted use under the Connecticut Inland Wetlands and
Water Courses Act, our water companies are required, pursuant to other statutory
provisions, to obtain permits from the Connecticut Commissioner of Environmental
Protection (Commissioner) for the location, construction or alteration of any
dam or reservoir and to secure the approval of the Commissioner for the
diversion and use of water from any river or underground source for public use.
Various criteria must be satisfied under the respective statutes and regulations
of the Connecticut Department of Environmental Protection (DEP) in order to
obtain such permits or approvals and the Commissioner has the power to impose
such conditions as he deems reasonably necessary in connection with such permits
or approvals in order to assure compliance with such statutes. We have obtained,
or applied for, and complied with the terms of, all such requisite permits or
approvals.
Legislation was adopted in 1982 conferring upon the DEP authority to
require a permit for any new diversion of water, including both surface and
ground water, within the State of Connecticut. Any water diversion which might
be effected by us in the future would require compliance with a lengthy permit
application process and approval by the Commissioner. Our water companies have
several potential well sites which are subject to this legislation and the DEP
regulations thereunder. Such legislation requires the registration with the
Commissioner of all diversions of water maintained prior to July 1, 1982. All of
Connecticut Water and Crystal diversions have been registered, and the Gallup
diversions have a permit application pending at DEP. Although the legislation
provides that registered diversions are not subject to the permit requirement,
DEP regulations adopted in March, 1990 are being used by DEP, on a case by case
basis, to require compliance with the permit application process before some
registered diversions can be used as a source of water supply, and have been
interpreted by DEP to require diversion permits in situations which the Company
believes were not intended by the legislation. It is not possible at this time
to fully assess the impact of DEP's application of this legislation and the DEP
regulations on our water companies and their operations, but
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such impact may be significant and adverse, particularly on sources held for
future use or acquired sources which may not have been properly registered.
The Federal Clean Water Act requires permits for discharges of effluents
into navigable waters and requires that all discharges of pollutants comply with
federally approved state water quality standards. The DEP has adopted, and the
federal government has approved, water quality standards of receiving waters. A
joint Federal and State permit system has been established to ensure that
applicable effluent limitations and water quality standards are met in
connection with the construction and operation of facilities which affect or
discharge into state or interstate waters. Our water companies have received all
such requisite permits. A new general permit and permit renewal program for
water treatment waste water discharges was adopted by DEP in 1995. We are in
compliance with the new program.
All of Connecticut Water's dams were registered with the Connecticut DEP as
required by state statute.
Crystal has two dams registered with the Connecticut DEP and one small
structure that was acquired in the 1998 acquisition of the Powdrell and
Alexander Memorial Water Association, Inc. in Killingly that was not registered
by the previous owner. The DEP has issued a maintenance request for minor work
at one of the registered dams, which Crystal will complete in year 2000. Expect
for this item, there are no outstanding orders on either of the registered dams
and Crystal is taking the initial steps to register the third structure.
Gallup does not have any dams.
While we recognize that a certain degree of risk is attached to ownership
of dams in connection with our water companies' water collection systems, we
believe that all of our dams are well maintained and are structurally stable.
The DEP has promulgated regulations requiring that certain minimum flows be
maintained in various waterways within the State of Connecticut. Pursuant to
said regulations, our water companies are exempt from compliance at certain of
our facilities. However, DEP is considering making changes in the regulations.
The Company cannot predict either the substance of those changes or their impact
on the Company. However, it is possible that such changes could reduce the safe
yield of certain of our sources. The cost to restore the lost safe yield is not
now determinable but could be substantial.
DEPARTMENT OF PUBLIC HEALTH (DPH)
Our water companies are also subject to regulation by the Connecticut DPH
with respect to water quality matters. Plans for new water supply systems or
enlargement of existing water supply systems also must be submitted to the DPH
for approval.
In 1985 the Connecticut General Assembly enacted comprehensive legislation
(the so-called Connecticut Plan) designed to maximize the efficient and
effective development of the state's public water supply systems. This
legislation authorized DPH to administer procedures designed to coordinate the
comprehensive planning of public water systems. The
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legislation mandates the establishment of public water supply management areas,
with each such area having a water utility coordinating committee comprised of
representatives of the various public water systems and regional planning
agencies in the area. Each such committee is required to establish exclusive
service areas for each public water system in the area, after taking into
consideration a number of factors including existing water service areas, land
use plans, etc., optimum utilization of existing water supplies and existing
franchise rights of water companies. DPH is authorized to resolve any
disagreements among members of the respective committees. This legislation is
intended not only to promote cooperation among various water suppliers in each
management area, but also to provide (through DPH's role) for the centralized
planning of water supply. In implementing this legislation, DPH has created
seven water supply management areas and is in the process of implementing the
creation of the appropriate water utility coordinating committees. The
operations of our water companies, which cover many areas of the state, fall
within five of the seven management areas. We are actively involved with the
planning process in three of these management areas at this time. The remaining
two areas of our interest are expected to begin the planning process within the
next several years. It is not possible at this time to predict the impact on the
Company of the above described legislation, regulations and procedures, but the
Company was an active participant in moving for the adoption of this scheme, and
is presently hopeful that such centralized and cooperative planning will have a
beneficial impact on its future water supply and water supply operations.
SAFE DRINKING WATER ACT (SDWA)
Our water companies are subject to regulation of water quality under the
SDWA. The SDWA provides for the establishment of uniform minimum national
quality standards by the Federal Environmental Protection Agency (EPA), as well
as governmental authority to specify the type of treatment process to be used
for public drinking water. The EPA regulations, pursuant to the SDWA, set limits
for, among other things, certain organic and inorganic chemical contaminants,
pesticides, turbidity, microbiological contaminants, and radioactivity. The SDWA
provides that the states have primary enforcement responsibility for public
drinking water systems, so long as the states' regulations are no less stringent
than those adopted pursuant to the SDWA. The DPH has adopted regulations which
are in some cases more stringent than the Federal regulations.
The SDWA was originally enacted in 1974 with major amendments in 1986 and
1996. The original SDWA authorized EPA to establish 22 interim standards for
drinking water contaminants between 1977 and 1986. The 1986 SDWA amendments
dictated that 83 primary drinking water standards be established within three
years and an additional 25 contaminants be regulated every three years
thereafter. EPA promulgated the Surface Water Treatment Rule (SWTR), the Lead
and Copper Rule and the Total Coliform Rule (TCR) as well as establishing
standards for various volatile and synthetic organic contaminants and inorganic
contaminants pursuant to the 1986 SDWA amendments. Our water companies were in
compliance with each of these rules from the time they became effective and
continue to be in compliance.
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At the time that the 1996 SDWA was reauthorized there were still several
schedules for establishment of various regulations required by the 1986
amendments in process. The 1996 SDWA changed these schedules. The new law also
eliminated the requirement to regulate 25 new contaminants every three years and
replaced it with a requirement that the EPA consider five new contaminants for
regulation every five years. The law also changed the basis for setting
regulations to consider the costs and benefits of new regulations and to show
that new regulations improve public health.
The first regulations to be promulgated under the 1996 SDWA are the Stage I
Disinfectant and Disinfection Byproducts (D/DBP) and Interim Enhanced Surface
Water Treatment Rules. Both of these regulations were promulgated in December
1998. The Stage II D/DBP rule is scheduled to be promulgated in 2002 while the
Long Term Enhanced Surface Water Treatment Rule (LTESWTR) will be promulgated in
2000. The Filter Backwash Recycle Rule is scheduled to be promulaged with the
LTESWTR.
Standards for radionuclides, including radon, are expected to be finalized
in 2000, as is the Ground Water Disinfection Rule. A standard for arsenic is
planned to be promulgated by 2001. A decision to regulate sulfate must be made
by EPA by 2001. If the decision is to regulate, then the final rule must be
complete by 2005. Finally, the first five contaminants that EPA must consider
for regulation must be selected in 2001. Those that are regulated will be
completed by 2003.
Through December 31, 1999, the Company has expended approximately
$49,275,000 in constructing facilities and conducting aquifer mapping necessary
to comply with the requirements of the SDWA of which $11,775,000 was expended
during the last 5 years. We believe that our three water companies are in
substantial compliance with regulations promulgated by the EPA and DPH, as
currently applied. Connecticut's aquifer protection legislation not only
requires aquifer mapping, but also requires DEP, in consultation with DPH and
DPUC, to prepare guidelines for acquisition by water companies of lands
surrounding public water supply wellfields. The extent to which those
guidelines, not yet prepared, might lead to regulations requiring the Company to
purchase additional land around the wellfields of its water companies is not
known at this time. The Company anticipates spending an additional $2,700,000 on
required aquifer mapping. Although the Company cannot predict either the
substance of the regulations required by the 1996 SDWA amendments which have not
yet been promulgated or their impact on us, the primary impact on our water
companies is expected to be in the area of increased monitoring and reporting,
although it is possible that such regulations may require us to make
modifications to existing filtration facilities. Construction of new facilities
may be required for certain groundwater sources. It is possible that costs of
compliance could be substantial.
DISPOSITION OF PROPERTY
Although our water companies have established a program of selling various,
relatively small, discrete parcels of land over the next several years, the
total of which is less than
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700 acres (350 owned by Connecticut Water and 350 owned by Crystal), we have no
other significant amounts of excess land which we expect to sell or otherwise
dispose of.
Connecticut law presently imposes the following restrictions upon the
disposition of property owned by water companies: (a) no property greater than
three acres or any portion of a large parcel or having a value of greater than
$50,000 may be sold or otherwise transferred without the prior approval of the
DPUC; (b) the sale, transfer and change in the use of watershed land (lands
draining into a public water supply) and certain non-watershed lands which are
contiguous to reservoirs and their tributaries are subject to regulation by the
DPH; (c) when a water company intends to transfer or dispose of an interest in
any present, potential or abandoned water supply source, other water companies
which might reasonably be expected to utilize the source are given the
opportunity through the DPH to seek to acquire such source; (d) subject to such
acquisition opportunities by other water companies as to water supply sources,
when a water company intends to transfer or dispose of an interest in three or
more contiguous acres of its unimproved real property, the municipality in which
such property is located, the State of Connecticut and private, nonprofit
land-holding organizations have prior options to acquire such interest in the
context of priorities based on intended use, with open space use being favored;
(e) the proceeds from the sale of water company land must generally be
reinvested in utility improvements or land necessary to protect water supply
sources; and (f) land may be sold only if consistent with the utility's water
supply plan. Legislation enacted in 1988 provides that the DPUC use an
accounting treatment which equitably allocates between the utility's ratepayers
and its stockholders the economic benefits of the net proceeds from the sales of
land which has ever been in the utility's rate base. Our capital gains on sales
of property before income taxes totaled $161,000 in 1999, $475,000 in 1998 and
$184,000 in 1997. Consistent with the 1988 legislation, the DPUC requires that
benefits of the gains pertaining to property previously in the utility's rate
base be allocated between the water customers and its stockholders.
There has been significant interest in recent years from environmental
groups, the communities where our excess lands are located, and certain
legislators to attempt to maintain these lands as protected open space. Thus
far, measures have focused primarily on ensuring the land sale process,
established through the DPUC and DPH regulations provides adequate notice and
opportunities for the state, municipalities and non-profit land holding
organizations to purchase the properties before they are sold for development.
Additionally, legislative initiatives have been proposed to provide tax
incentives to encourage water utilities to donate or sell these parcels at a
discount to such organizations.
Concerns have been raised recently regarding whether the sale of a large
private water company in the state with significant land holdings to an
international organization will result in accelerated disposition of their lands
and limited opportunities for acquisition for public open space. As the
attention is focused on this matter, it is possible that there may be
initiatives in this session of the General Assembly to restrict or prohibit the
sale of utility lands for a period of time until the state may further study the
issue and/or generate additional funding mechanisms to allow for purchase by the
state, towns or non-profit land holding organizations. Connecticut Water will
work vigorously to see that any such
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legislation includes measures that would effectively avoid or minimize the
impact on any immediately pending land sales. The likelihood that such measures
will be passed by the General Assembly or the impact that such legislation would
have on the Company is not clear, at this time. The impact could be significant,
however, if it had the effect of a total moratorium on water company land sales,
without exceptions that would allow for pending land sales to proceed.
GENERAL
Federal and State regulations and controls concerning environmental
matters, water quality, pollution and the effluent from treatment facilities are
still in the process of being developed and it is not possible to predict the
scope or enforceability of regulations or standards which may be established in
the future, or the cost and effect of existing and potential regulations and
legislation upon any of the existing and proposed facilities and operations of
our water companies. Further, recent and possible future developments with
respect to the identification and measurement of various elements in water
supplies and concern with respect to the impact of one or more of such elements
on public health may in the future require us to replace or modify all or
portions of our various water supplies, to develop replacement supplies and/or
to implement new treatment techniques. In addition, we anticipate that
environmental concerns including threatened and actual contamination of our
water sources will become an increasing problem in the future. We have expended
and will in the future be required to expend substantial amounts to prevent or
remove contamination or to develop alternative water supplies. Any of the
aforesaid developments may significantly increase our operating costs and
capital requirements. Since the DPUC's rate setting methodology permits
utilities to recover through rates prudently incurred expenses and investments
in plant, based upon past DPUC practice, we expect that these expenditures and
costs will ultimately be recovered through rates for water service.
EMPLOYEES
The Company has no employees and no subsidiaries have employees except for
our water companies. The following table lists the number of employees of our
water companies as of December 31, 1999:
NUMBER OF
COMPANY EMPLOYEES
- ------- ---------
Connecticut Water 157
Crystal 7
Gallup 4
---
Total 168
===
The Company's officers are also officers of Connecticut Water and their
compensation is paid by Connecticut Water. All full-time employees of
Connecticut Water and Crystal who meet specified age and length of service
requirements participate in their respective Employee's Retirement Plans which
are non-contributory trusteed pension plans providing
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for a monthly income for employees at retirement. None of the Company's
employees are covered by a collective bargaining agreement. We believe that our
relationship with our employees is satisfactory.
ITEM 2. PROPERTIES
The properties of our water companies consist of land, easements, rights
(including water rights), buildings, reservoirs, standpipes, dams, wells, supply
lines, treatment plants, pumping plants, transmission and distribution mains and
conduits, mains and other facilities and equipment used for the collection,
purification, storage and distribution of water. Our water companies own their
principal properties in fee, except that Connecticut Water's Collinsville
System's principal source of water supply is a water supply contract with the
MDC. (See below for description of this contract.) We believe that our
properties are in good operating condition. Water mains are located, for the
most part, in public streets and, in a few instances, are located on land we own
in fee and land occupied under easements, most of which are perpetual and valid
and sufficient for the purpose for which they are held. Although it is
impractical to investigate the validity of the title to some of our easements
for distribution mains or to clear title in the cases where such distribution
easement titles have been found defective, any such irregularities or defects in
title which may exist do not materially impair the use of such properties in our
business. Substantially all of Connecticut Water's property is subject to the
lien of its Mortgage Indenture securing its First Mortgage Bonds.
Connecticut Water owns twelve water filtration facilities which are listed
below. Gallup and Crystal do not have, nor require, water filtration facilities.
YEAR TREATMENT CAPACITY
FILTRATION PLACED IN (IN MILLION
FACILITIES OPERATION REGION GALLONS PER DAY)
- ---------- --------- --------- ------------------
Connecticut Water
Guilford Well 1965 Shoreline 0.70
Rockville 1970 Northern 5.00
Westbrook Well 1975 Shoreline 0.23
Hunt Well Field 1976 Northern 2.50
MacKenzie 1980 Shoreline 4.00
Williams 1981 Shoreline 1.00
Stafford Springs 1984 Northern 1.00
Reynolds Bridge 1986 Naugatuck 1.00
Windsor Locks 1988 Northern 0.30
Stewart 1989 Naugatuck 6.00
O'Bready Well 1994 Northern 0.50
Clinton Well 1997 Shoreline 1.00
Connecticut Water has an agreement with the MDC, which provides, among
other things, for the operation and maintenance by MDC of a filtration plant
(completed in
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1990) to supply treated water for substantially all of Connecticut Water's
Collinsville System, with a capacity of 650,000 gallons per day, and the
provision by MDC to the Collinsville System of up to 650,000 gallons per day of
water from this plant meeting all applicable Federal and State requirements.
Connecticut Water paid 40% of the cost to construct this plant and pays MDC an
appropriate rate for water used in excess of 400,000 gallons per day.
As of December 31, 1999, the transmission and distribution systems of our
three water companies consisted of approximately 1,109 miles of main, of which
approximately 76 miles have been laid or acquired in the past five years. On
that date, approximately 75% of our mains were eight-inch diameter or larger.
Substantially all new main installations are cement-lined ductile iron pipe of
eight-inch diameter or larger. Approximately 107 miles of our pipelines are
asbestos cement.
From January 1, 1995 through December 31, 1999, our water companies have
expended $53,793,000 on gross plant additions (including plant financed by
customer advances and contributions in aid of construction, allowance for funds
used during construction and expenditures reimbursed by any other sources), and
have retired or sold property having a book value of $2,474,000, resulting in
net additions during the period of $51,319,000.
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PRODUCTION FACILITIES AS OF DECEMBER 31, 1999
TOTAL DEPENDABLE GREATEST 1999
STORAGE YIELD(1) AVG. DAILY AVG. DAILY
CAPACITY (THOUSANDS DELIVERY DELIVERY
(THOUSANDS OF GALLONS (THOUSANDS (THOUSANDS
CONNECTICUT WATER OF GALLONS) PER DAY) OF GALLONS) OF GALLONS)
- ----------------- ----------- ----------- ----------- -----------
Northern Region:
Western System
Enfield-East Windsor System Wells 7,200
Suffield System Wells 200
South Windsor Wells 720
Ellsworth Wells 100
Lake Shenipsit 5,050,000 11,200
Talcottville Well 300
Vernon Wells 690
Windsor Locks Wells 300
Tolland Aqueduct Wells(16) 42
------
20,752 9,167(18) 9,167
------ ----- -----
Somers System Wells 390 135(18) 135
------ ----- -----
Crescent Lake System(4) -- 37(18) 37
------ ----- -----
Reservoir Heights(6) -- 5(7) 4
------ ----- -----
Stafford Springs System
#4 Reservoir 51,000
#3 Reservoir 15,000 700
#2 Reservoir 60,000
------
700 629(8) 529
------ ----- -----
Llynwood System Wells 30 13(3) 9
------ ----- -----
Lakewood/Lakeview System Wells 49 30(5) 23
------ ----- -----
Nathan Hale System Wells 20 9(8) 5
------ ----- -----
Shoreline Region:
Guilford System
Killingworth & Kelseytown Reservoirs 273,000 2,300
Wells 4,540
------
6,840 3,676(9) 3,505
------ ----- -----
Chester System
Upper and Lower Reservoirs 176,000
Turkey Hill Reservoir -- Haddam 149,000 1,200
Wilcox Reservoir -- Chester 65,000
Deuse Pond -- Chester 4,800
Well 190
------
1,390 900(10) 650
------ ----- -----
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TOTAL DEPENDABLE GREATEST 1999
STORAGE YIELD(1) AVG. DAILY AVG. DAILY
CAPACITY (THOUSANDS DELIVERY DELIVERY
(THOUSANDS OF GALLONS (THOUSANDS (THOUSANDS
CONNECTICUT WATER OF GALLONS) PER DAY) OF GALLONS) OF GALLONS)
- ----------------- ----------- ----------- ----------- -----------
Chester Village West Wells 30 13(17) 10
------ ----- -----
Sound View System Wells 182 42(17) 29
------ ----- -----
Point O'Woods 114 43(19) 21
------ ----- -----
Bay Mountain 56 21(19) 20
------ ----- -----
SDC 94 8(19) 8
------ ----- -----
Masons Island(20) -- 56(18) 56
------ ----- -----
Naugatuck Region:
Central System
Long Hill Reservoir 506,000
Twitchell Reservoir 1,000
Candee Reservoirs(11) 7,000 3,600
W. H. Moody Reservoir 335,000
Straitsville Reservoir 7,000
Mulberry Reservoir 50,000
Beacon Valley Brook Supply --
Meshaddock Brook Supply 300
Wells 1,000
------
4,900 4,970(13) 2,865
------ ----- -----
Terryville System
Harwinton Ave. Reservoir(11) 14,800 50
Wells 910
------
960 498(2) 480
------ ----- -----
Thomaston System
Thomaston Reservoir(11) 93,000 310
Wells 1,080
Waterbury Interconnection(12) 864
------
2,254 852(14) 391
------ ----- -----
Collinsville System
Water Acquired by Contract(15) 650
Reservoir (distribution) 100
------
650 403(18) 403
------ ----- -----
CRYSTAL
Crystal System 3,650 997(21) 997
------ ----- -----
Plainfield System 990 237(21) 237
------ ----- -----
Thompson System 290 177(21) 177
------ ----- -----
P&A System
Reservoir 1,500 0
Wells 86
------
86 32(21) 32
------ ----- -----
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TOTAL DEPENDABLE GREATEST 1999
STORAGE YIELD(1) AVG. DAILY AVG. DAILY
CAPACITY (THOUSANDS DELIVERY DELIVERY
(THOUSANDS OF GALLONS (THOUSANDS (THOUSANDS
OF GALLONS) PER DAY) OF GALLONS) OF GALLONS)
----------- ----------- ----------- -----------
GALLUP
Gallup System 800 309(21) 309
------ ----- -----
Country Mobile System 67 8(21) 8
------ ----- -----
Lillibridge System N/A 16(21) 16
------ ----- -----
- ---------------
(1) Dependable yield is the maximum continuous rate of withdrawal available
from a source of supply without seriously depleting the source. Dependable
yield is based on long-term (99% dry year) rainfall records, storage
capacity and watershed area.
(2) Occurred in 1988.
(3) Occurred in 1989.
(4) Supplied by water purchased from the Town of East Longmeadow,
Massachusetts.
(5) Occurred in 1994.
(6) Supplied by water purchased from the Town of Manchester.
(7) Occurred in 1995.
(8) Occurred in 1990.
(9) Occurred in 1987.
(10) Occurred in 1969.
(11) Reservoir held in reserve and used for emergencies only.
(12) Generally used for emergencies.
(13) Occurred in 1964.
(14) Occurred in 1966.
(15) The Collinsville System has a right to up to 650,000 gallons per day
through agreement with MDC. The source is Nepaug Reservoir with a storage
capacity of 9.5 billion gallons. See "Item 2. Properties" for a description
of this agreement.
(16) Connected to Northern Region, Western System on August 9, 1995.
(17) Occurred in 1996.
(18) Occurred in 1999.
(19) Occurred in 1998.
(20) Supplied by water purchased from Connecticut-American Water Company, Mystic
Division.
(21) Historical data before 1999 is not available.
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ITEM 3. LEGAL PROCEEDINGS
There are no pending legal matters, other than ordinary, routine litigation
incidental to the business to which the Company or any of its subsidiaries is a
party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market under
the symbol CTWS and is included in the NASDAQ National Market System. The
following table sets forth, for the periods indicated, the high and low last
sale prices of the Company's Common Stock in the over-the-counter market and the
dividends paid by the Company during the two most recent calendar years. The
quotations represent actual sales prices, but the sales reflected may be
inter-dealer transactions which do not reflect retail mark-up, mark-down or
commission. NASDAQ is the source of the quotations for all periods. Since its
affiliation with Connecticut Water in 1975, the Company has paid quarterly cash
dividends on its Common Stock.
PRICE
------------------ DIVIDENDS
PERIOD HIGH LOW PAID*
- ------ ------- ------- ---------
1999:
First Quarter $27.750 $23.750 $.29333
Second Quarter 29.250 19.000 .29333
Third Quarter 37.000 28.500 .29666
Fourth Quarter 37.000 27.875 .29666
1998:
First Quarter $23.000 $20.000 $.29000
Second Quarter 24.000 21.420 .29000
Third Quarter 24.420 22.917 .29333
Fourth Quarter 28.375 25.000 .29333
* Excluding effect of the 1999 Gallup and Crystal mergers.
As of March 1, 2000 there were approximately 5,200 holders of record of the
Company's Common Stock.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors from funds legally available therefor. Future
dividends of the Company will be dependent upon timely and adequate rate relief,
consolidated and parent company net income, availability of cash to the Company
and its subsidiaries, the financial condition of the Company and its
subsidiaries, the ability of its subsidiaries to pay
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dividends to the Company, the ability of the Company and the subsidiaries to
sell their securities, the requirements of the construction programs of our
water company subsidiaries and other conditions existing at the time.
The Company is not permitted to pay any dividends on its Common Stock
unless full cumulative dividends to the last preceding dividend date for all
outstanding shares of Cumulative Preferred Stock of the Company have been paid
or set aside for payment.
The Company has a Dividend Reinvestment and Common Stock Purchase Plan.
Under the plan, customers and employees of Connecticut Water and holders of
Common Stock who elect to participate may automatically reinvest all or
specified percentages of their dividends in additional shares of Common Stock
and may also make optional cash payments of up to $1,000 per month to purchase
additional shares of Common Stock. The Company may issue authorized but unissued
shares of Common Stock to meet the requirements of the plan, or buy the shares
on the open market at its discretion. 1,500,000 shares have been registered with
the Securities and Exchange Commission for that purpose. Under the plan,
approximately 1,170,000 shares had been issued by the Company as of December 31,
1999. Since the third quarter of 1996, the Company has been buying shares on the
open market to satisfy Plan requirements.
The Company has a Performance Stock Program that provides for shares of
Common Stock of the Company to be issued as awards of restricted stock to
eligible employees of Connecticut Water, conditioned on the attainment of
performance goals established by the Compensation Committee. Under the plan
54,104 shares, 6,088 of which are restricted, and 13,357 of which are common
stock equivalent shares had been issued by the Company as of December 31, 1999.
In 1999 the Company's shareholders approved an amendment to our Performance
Stock Program allowing the Company to issue stock options to officers and key
employees. The total number of shares authorized for both the Performance Stock
Program and the Stock Option Plan was set at 300,000 shares. In 1999, options
for 127,723 shares were granted. These options were granted at the market price
when granted which was $22.25 for 75,150 of the shares, and $33.50 for the other
52,573 shares. None of these shares were exercisable in 1999. One fifth of these
shares, or 25,544 become exercisable each year over the next five years,
starting in 2000.
The Company has an Employee Savings 401-K Match Plan for Connecticut Water
employees. Under the Plan approximately 20,550 shares of Common Stock had been
issued by the Company as of December 31, 1999.
On August 12, 1998 the Company's Board of Directors authorized a new
Shareholder Rights Plan to replace the previous Rights Plan which had been
adopted in 1988 and expired on October 11, 1998. Pursuant to the new Plan, the
Board authorized a dividend distribution of one Right to purchase one
one-hundredth of a share of Series A Junior Participating Preference Stock of
the Company for each outstanding share of the Company's Common Stock. The
distribution was effected October 11, 1998.
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Upon the terms of the new Shareholder Rights Plan, each Right will entitle
shareholders to buy one one-hundredth of a share of Series A Junior
Participating Preference Stock at a purchase price of $90, and the Rights will
expire October 11, 2008. The Rights will be exercisable only if a person or
group acquires 15% or more of the Company's Common Stock or announces a tender
or exchange offer for 15% or more of the Company's Common Stock. The Board will
be entitled to redeem the Rights at $0.01 per Right at any time before such
acquisition occurs and upon certain conditions after such a position has been
acquired.
Upon the acquisition of 15% or more of the Company's Common Stock by any
person or group, each Right will entitle its holder to purchase, at the Right's
purchase price, a number of shares of the Company's Common Stock having a market
value equal to twice the Right's purchase price. In such event, Rights held by
the acquiring person will not be allowed to purchase any of the Company's Common
Stock or other securities of the Company. If, after the acquisition of 15% or
more of the Company's Common Stock by any person or group, the Company should
consolidate with or merge with and into any person and the Company should not be
the surviving company, or, if the Company should be the surviving company and
all or part of its Common Stock should be exchanged for the securities of any
other person, or if more than 50% of the assets or earning power of the Company
were sold, each Right (other than Rights held by the acquiring person, which
will become void) will entitle its holder to purchase, at the Right's purchase
price, a number of shares of the acquiring company's common stock having a
market value at that time equal to twice the Right's purchase price.
ITEM 6. SELECTED FINANCIAL DATA
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
(1998 - 1995 RESTATED)
SUPPLEMENTAL INFORMATION (UNAUDITED)
Years Ended December 31,
SELECTED FINANCIAL DATA 1999 1998 1997 1996 1995
- ----------------------- ---------- ---------- ---------- ---------- ----------
(Thousands of dollars except where indicated)
INCOME
Operating Revenues $ 42,624 $ 40,303 $ 40,917 $ 41,013 $ 41,687
Operating Expenses $ 31,397 $ 29,543 $ 30,060 $ 30,274 $ 31,070
Operating Income $ 11,227 $ 10,760 $ 10,857 $ 10,739 $ 10,616
Interest and Debt Expense $ 4,526 $ 4,606 $ 4,602 $ 4,286 $ 4,305
Net Income Applicable to Common
Stock $ 7,456 $ 7,136 $ 7,027 $ 6,884 $ 6,608
Weighted Average Common Shares
Outstanding 4,836,951 4,827,484 4,816,753 4,788,340 4,669,960
Basic Earnings Per Average Common
Share $ 1.54 $ 1.48 $ 1.46 $ 1.44 $ 1.42
Number of Shares Outstanding at
Year End 4,838,794 4,828,619 4,819,970 4,810,459 4,742,470
ROE on Year End Common Equity 11.9% 11.8% 12.0% 12.2% 12.3%
26
28
Years Ended December 31,
SELECTED FINANCIAL DATA 1999 1998 1997 1996 1995
- ----------------------- ---------- ---------- ---------- ---------- ----------
(Thousands of dollars except where indicated)
Cash Dividends Paid Per Common
Share $ 1.145 $ 1.119 $ 1.105 $ 1.082 $ 1.061
Dividend Payout Ratio 74% 76% 76% 75% 75%
BALANCE SHEET
Common Stockholders' Equity $ 62,495 $ 60,326 $ 58,346 $ 56,520 $ 53,695
Long-Term Debt $ 65,399 $ 65,611 $ 58,056 $ 58,034 $ 58,072
Preferred Stock (Consolidated,
Excluding Current Maturities) $ 772 $ 772 $ 772 $ 772 $ 772
---------- ---------- ---------- ---------- ----------
Total Capitalization $ 128,666 $ 126,709 $ 117,174 $ 115,326 $ 112,539
Stockholders' Equity (Includes
Preferred Stock) 49% 48% 50% 50% 48%
Long-Term Debt 51% 52% 50% 50% 52%
Net Utility Plant $ 181,342 $ 175,723 $ 172,081 $ 162,186 $ 154,430
Book Value -- Per Common Share $ 12.91 $ 12.49 $ 12.11 $ 11.75 $ 11.32
OPERATING DATA 1999 1998 1997 1996 1995
- -------------- ------- ------- ------- ------- -------
(Thousands of dollars except where indicated)
REVENUE CLASS
Residential $27,077 $25,495 $25,816 $25,888 $26,463
Commercial 5,160 4,820 4,890 4,931 5,109
Industrial 1,850 1,747 1,962 1,960 1,967
Public Authority 1,374 1,208 1,218 1,215 1,247
Fire Protection 6,788 6,660 6,698 6,720 6,586
Other (including non-metered accounts) 375 373 333 299 315
------- ------- ------- ------- -------
Total Operating Revenues $42,624 $40,303 $40,917 $41,013 $41,687
======= ======= ======= ======= =======
Number of Customers (Average) 68,945 67,855 66,787 65,872 65,032
Billed Consumption (Millions of
Gallons) 6,430 6,047 6,049 5,907 6,075
Number of Employees 168 175 176 178 179
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Overview
Connecticut Water Service, Inc. (the Company) is a non-operating holding
company, whose income is derived from the earnings of its six wholly owned
subsidiary companies. Approximately 97% of the Company's earnings are
attributable to The Connecticut Water Company, the Company's largest water
utility subsidiary with approximately an additional 2% derived from the
Company's two other regulated water utility companies, The Gallup Water Service,
Incorporated and The Crystal Water Company of Danielson. These three companies
supply water to 69,416 customers in 39 towns throughout the State of
Connecticut. Each of these companies is subject to regulation by the Connecticut
Department of Public Utility Control regarding financial issues, rates, and
operating issues
27
29
and to various other state and federal regulatory agencies concerning water
quality and environmental standards. In addition to its regulated utilities, the
Company owns three unregulated companies; Chester Realty, Inc. a real estate
company, Connecticut Water Utility Services, Inc. which provides contract water
and sewer operations and other water related services and Crystal Water
Utilities Corporation, a holding company which owns The Crystal Water Company of
Danielson and 3 small rental properties. These unregulated companies currently
generate 1% of the Company's total earnings.
1999 was the Company's 9th consecutive year of increased earnings and its
30th year of increased dividend payments.
Regulatory Matters and Inflation
The Connecticut Water Company is the Company's largest subsidiary serving
64,782 of the Company's 69,416 utility customers. Connecticut Water Company's
revenues are based on regulated rates that are determined in a regulatory rate
proceeding. Connecticut Water's last general rate proceeding was in 1991. The
resulting rate decision granted Connecticut Water a 12.7% allowed return on
common equity and a 10.74% allowed return on rate base. During 1997 this
decision was reopened for the limited purposes of flowing through to customers
cost savings related to a reduction in state gross earnings taxes payable by
Connecticut Water and allowing Connecticut Water to collect certain costs
related to postretirement benefits other than pension. Connecticut Water's rates
were reduced approximately 4.5% due to the limited reopened rate proceeding.
Connecticut Water's resulting reduction in revenues was offset by a
corresponding reduction in its operating expenses.
The Company, like all other businesses, is affected by inflation, most
notably by the continually increasing costs required to maintain, improve and
expand its service capability. The cumulative effect of inflation results in
significantly higher facility replacement costs, which must be recovered from
future cash flows. The ability of the Company's water utility subsidiaries to
recover this increased investment in facilities is primarily dependent upon
future rate increases, which are subject to approval by the Connecticut
Department of Public Utility Control.
We do not presently plan to petition the DPUC for an increase in permanent
rates in 2000. Future economic and financial market conditions, coupled with
governmental regulations and fiscal policy, plus other factors which are
unpredictable and often beyond our control, will influence when we request
revisions to rates charged to our customers.
Outlook
The Company's profitability is primarily attributable to the sale and
distribution of water, the amount of which is dependent on seasonal weather
fluctuations, particularly during the summer months when water demand will vary
with rainfall and temperature levels.
We are continuing our expansion through acquisitions into 2000. In 1999 we
signed an agreement to purchase the White Sand Beach water system in Old Lyme,
Connecticut
28
30
which services 148 customers. A decision by the Department of Public Utility
Control on our application to acquire White Sand is expected in March, 2000.
RESULTS OF OPERATIONS
1999 Compared with 1998
During 1999 the Company acquired Gallup Water Service, Inc. and Crystal
Water Utilities Corporation and accounted for these acquisitions as "pooling of
interests". Financial statements have been restated to include the results of
the acquired companies for all periods presented.
Net income applicable to common stock for 1999 increased from that of 1998
by $320,000, or $.06 per average common share, on an increased number of common
shares outstanding due primarily to the following:
- Operating revenues increased $2,321,000:
-- Metered revenues increased $2,191,000 or 6.6% due to customer
growth which increased metered revenues approximately $530,000 or
1.6% and an extremely hot, dry 1999 summer which significantly
increased our customers' water consumption.
-- Non-metered revenues increased $130,000 or 1.8% primarily due to
increased Public Fire Protection revenues related to our
infrastructure additions upon which the revenues are based.
- Operating expenses increased $1,854,000 primarily due to the following:
-- Increase in Operations and Maintenance Expense primarily due to an
increase in labor and benefit costs
-- Increase in Depreciation Expense due to higher investment in
utility plant
-- Increase in Income Tax Expense primarily due to higher taxable
income
-- Increase in Property Tax Expense due to our higher investment in
utility plant
- Other income (Deductions) decreased $227,000 primarily due to lower gains
on land sales and non-water sales earnings.
- Interest and debt expense decreased $80,000 primarily from lower average
balances of interim bank loans payable outstanding throughout 1999.
1998 Compared with 1997
Net income applicable to common stock for 1998 increased from that of 1997
by $109,000, or $.02 per average common share, on an increased number of common
shares outstanding due primarily to the following:
- Other income increased $210,000, or 26%, primarily due to increased
profits from land sales
29
31
partially offset by
- An increase in interest and debt expense of $4,000 due to a higher level
of debt (long and short-term combined) outstanding in 1998 as compared to
1997. Refinancing $18,000,000 of debt in 1998 at lower interest rates
minimized the overall increase in interest expense; and
- A decrease in operating income of $97,000. The elimination of the
Connecticut Gross Earnings Tax for water companies on July 1, 1997 and
the third quarter 1997 adoption of FAS 106 for rates had no impact on
operating income but did reduce both revenues and operating expenses by
approximately $835,000 in 1998 as compared to 1997. (Reduction in Gross
Earnings Tax of $990,000 less an increase of $155,000 in FAS 106 costs).
-- Operating revenues decreased 1.5% primarily due to:
X The overall 4.5% rate reduction during the second half of 1997
primarily related to the elimination of the Connecticut Gross
Earnings Tax for water companies
partially offset by
X Increase in metered revenues due to expansion of the customer
base achieved through the Company's ongoing growth strategy;
and
X Higher unmetered revenues due to an increasing fire protection
charges related to the expansion of the water systems
-- Operating expenses decreased 1.7% primarily due to:
X The elimination of the Connecticut Gross Earnings Tax; and
X The 1997 Early Retirement Program; and
X Reduced income tax expense due to lower taxable income, a
decline in the State Corporate tax rate and utilization of new
State Corporate Tax Credits
partially offset by
X Increased operation and maintenance expense; and
X Increased depreciation expense
LIQUIDITY AND CAPITAL RESOURCES
Interim bank loans payable at year end 1999 were $2,411,000, $516,000
higher than at the end of 1998. The Company elected not to fund any of the 1999
construction expenditures with equity funding through its Dividend Reinvestment
Program (DRIP) by issuing new shares of common stock, but instead provided DRIP
shares through open market purchases and negotiated transactions.
We consider the current $9,000,000 line of credit with three banks adequate
to finance any expected short-term borrowing requirements that may arise from
operations during 2000. Interest expense charged on interim bank loans will
fluctuate based on financial market conditions experienced during 2000.
30
32
The Board of Directors has approved a construction budget for 2000 of
$7,445,000, net of amounts to be financed by customer advances and contributions
in aid of construction. Funds provided by operating activities are expected to
finance all of this construction program given normal weather patterns and
related operating revenue billings. Refer to Note 10, Utility Plant and
Construction Program, in Notes to Consolidated Financial Statements for
additional discussion for the Company's future construction program.
Y2K DISCLOSURE
By the end of 1999, the Company had completed all the changes it considered
necessary for its systems to handle Year 2000 issues. As of February 11, 2000,
the Company is not aware of any Year 2000-related problems associated with our
internal systems or software or with the software and systems of our vendors,
distributors or suppliers. It is possible, however, that Year 2000-related
problems could arise at a later date. There are no plans at this time to perform
additional work, nor do we expect to experience any material adverse effects on
our business, financial condition or results of operations from any vendor,
distributor or supplier who may experience Year 2000 problems.
However, because the Company's continued Year 2000 compliance in calendar
2000 is in part dependent on the continued Year 2000 compliance of third
parties, there can be no assurance that the Company's efforts alone have
resolved all Year 2000 issues or that key third parties will not experience Year
2000 compliance failures as calendar year 2000 progresses.
The Company's costs associated with Year 2000 were approximately $300,000
in 1999. This cost was anticipated well in advance and was funded along with the
other costs in our 1999 Construction Program with internally generated funds.
FORWARD LOOKING INFORMATION
This report contains statements which, to the extent they are not
recitations of historical fact, constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve risks and uncertainties. Actual results may
differ materially from such forward-looking statements for reasons including,
but not limited to, changes to and development in the legislative and regulatory
environments or in environmental or water quality regulations affecting the
Company's business, the impact of competitive services on our non-regulated
operations, weather conditions, and changes in the water utility industry, as
well as such other factors as set forth in this report and in the Company's
other filings with the Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Connecticut Water Service, Inc.
and the Notes to Consolidated Financial Statements, together with the reports of
the Company's management and of Arthur Andersen LLP are included herein on page
F-1 through F-26.
31
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE COMPANY
PERIOD HELD OR TERM OF OFFICE
NAME AGE OFFICE PRIOR POSITION EXPIRES
- ---- --- ---------------- ------------------- -------------------
M. T. Chiaraluce 57 President, Chief Held position of 2000 Annual Meeting
Executive President since
Officer and January, 1992 and
Chairman of the position of Chief
Board Executive Officer
since July, 1992
D. C. Benoit 42 Vice Held current 2000 Annual Meeting
President -- position or other
Finance, Chief executive position
Financial with the Company
Officer and since April, 1996
Treasurer
J. R. McQueen 57 Vice Held current 2000 Annual Meeting
President -- position or other
Engineering and management or
Planning engineering
position with the
Company since
October, 1965
T. P. O'Neill 46 Vice Held current 2000 Annual Meeting
President -- position or other
Operations engineering
position with the
Company since
February, 1980
M. P. Westbrook 40 Vice Held current 2000 Annual Meeting
President -- position or other
Administration management position
and Government with the Company
Affairs since September,
1988
P. J. Bancroft 50 Assistant Held current 2000 Annual Meeting
Treasurer and position or other
Controller accounting position
with the Company
since October, 1979
M. G. DiAcri 54 Corporate Held administrative 2000 Annual Meeting
Secretary position with the
Company since
February, 1990
32
34
There are no family relationships between any of the Directors and
Executive Officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), the information called for by Items
10, (except for information concerning the executive officers of the Company)
11, 12, and 13 is hereby incorporated by reference from the Company's definitive
proxy statement filed by EDGAR on or about March 17, 2000. Information
concerning the executive officers of the Company is included as Item 4.1 of this
report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The report of the Company's management, the report of independent
public accountants and the Company's Consolidated Financial Statements
listed in the Index to Consolidated Financial Statements on page F-1 hereof
are filed as part of this report, commencing on page F-2.
PAGE
----
Index to Consolidated Financial Statements F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-3
Consolidated Balance Sheets at December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedules:
The following schedules of the Company are included on the attached
pages as indicated:
PAGE
----
Report of Independent Public Accountants on Schedule S-1
Schedule II Valuation and Qualifying Accounts and Reserves
for the years ended December 31, 1999, 1998 and 1997 S-2
All other schedules provided for in the applicable
accounting regulations of the Securities and Exchange Commission
have been omitted because of the absence of conditions under
which they are required or
33
35
because the required information is set forth in the financial statements
or notes thereto.
3. Exhibits:
Exhibits for Connecticut Water Service, Inc are in the Index
to Exhibits E-1
Exhibits heretofore filed with the Securities and
Exchange Commission as indicated below are
incorporated herein by reference and made a part
hereof as if filed herewith. Exhibits marked by
asterisk (*) are being filed herewith.
(b) Reports on Form 8-K:
On October 7, 1999, the Company filed a Form 8-K
dated September 29, 1999, reporting in Item 5, Other
Events, that the Company had completed the pending
merger with Crystal Water Utilities Corporation.
34
36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Index to Consolidated Financial Statements F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-3
Consolidated Balance Sheets at December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-1
37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Connecticut Water Service, Inc.:
We have audited the accompanying consolidated balance sheets of Connecticut
Water Service, Inc. (a Connecticut corporation) and Subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of income and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Connecticut
Water Service, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Hartford, Connecticut
February 11, 2000
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-2
38
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
(Restated) (Restated)
1999 1998 1997
------- ---------- ----------
(In thousands except per share
amounts)
Operating Revenues $42,624 $40,303 $40,917
------- ------- -------
Operating Expenses
Operation and Maintenance 17,812 17,241 16,272
Depreciation 4,390 4,133 3,774
Income Taxes 5,008 4,089 4,706
Taxes Other Than Income Taxes 4,187 4,080 4,884
Organizational Charges -- -- 424
------- ------- -------
Total Operating Expenses 31,397 29,543 30,060
======= ======= =======
Utility Operating Income 11,227 10,760 10,857
------- ------- -------
Other Income (Deductions)
Interest 135 152 136
Allowance for Funds Used During
Construction 454 476 575
Gain on Sale of Property 161 475 184
Non-Water Sales Earnings 170 247 215
Miscellaneous Income (Deductions) (70) (42) (69)
Taxes on Other Income (57) (288) (231)
------- ------- -------
Total Other Income (Deductions) 793 1,020 810
======= ======= =======
Interest and Debt Expenses
Interest on Long-Term Debt 3,943 3,918 3,751
Other Interest Charges 337 472 656
Amortization of Debt Expense 246 216 195
------- ------- -------
Total Interest and Debt
Expenses 4,526 4,606 4,602
======= ======= =======
Net Income Before Preferred Dividends 7,494 7,174 7,065
Preferred Stock Dividend Requirement 38 38 38
------- ------- -------
Net Income Applicable to Common Stock $ 7,456 $ 7,136 $ 7,027
------- ------- -------
Weighted Average Common Shares Outstanding:
Basic 4,837 4,827 4,816
Diluted 4,848 4,827 4,816
------- ------- -------
Earnings Per Common Share:
Basic $ 1.54 $ 1.48 $ 1.46
Diluted $ 1.54 $ 1.48 $ 1.46
------- ------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-3
39
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Restated)
1999 1998
-------- ----------
(Thousands of dollars)
ASSETS
Utility Plant $240,122 $232,120
Construction Work in Progress 5,804 4,458
Utility Plant Acquisition Adjustments (1,273) (1,273)
-------- --------
244,653 235,305
Accumulated Provision for Depreciation (63,311) (59,582)
-------- --------
Net Utility Plant 181,342 175,723
-------- --------
Other Property and Investments 2,747 2,628
-------- --------
Cash 1,013 372
Accounts Receivable (Less Allowance, 1999 -- $455;
1998 -- $315) 5,301 5,247
Accrued Unbilled Revenues 2,805 2,894
Materials and Supplies, at Average Cost 761 729
Prepayments and Other Current Assets 237 245
-------- --------
Total Current Assets 10,117 9,487
======== ========
Unamortized Debt Issuance Expense 5,722 5,968
Unrecovered Income Taxes 8,843 9,859
Postretirement Benefits Other Than Pension 1,083 1,150
Other Costs 1,031 1,140
-------- --------
Total Deferred Charges and Regulatory Assets 16,679 18,117
-------- --------
Total Assets $210,885 $205,955
======== ========
CAPITALIZATION AND LIABILITIES
Common Stockholders' Equity:
Common Stock without Par Value:
Authorized -- 7,500,000 Shares -- Issued and
Outstanding: 1999 -- 4,838,794; 1998 -- 4,828,619 $ 44,654 $ 44,403
Retained Earnings 17,841 15,923
Preferred Stock 772 772
Long-Term Debt 65,399 65,611
-------- --------
Total Capitalization 128,666 126,709
======== ========
Interim Bank Loans Payable 2,411 1,895
Current Portion Long Term Debt 194 424
Accrued Pension Benefits 1,816 1,767
Accounts Payable 5,124 4,287
Accrued Taxes 815 770
Accrued Interest 650 1,216
Other Current Liabilities 2,864 2,538
-------- --------
Total Current Liabilities 13,874 12,897
======== ========
Advances for Construction 15,994 15,273
-------- --------
Contributions in Aid of Construction 24,165 22,944
-------- --------
Deferred Federal Income Taxes 16,743 15,601
-------- --------
Unfunded Future Income Taxes 8,349 9,309
-------- --------
Unfunded Postretirement Benefits Other Than Pensions 1,083 1,150
-------- --------
Unamortized Investment Tax Credits 2,011 2,072
-------- --------
Commitments and Contingencies -- --
-------- --------
Total Capitalization and Liabilities $210,885 $205,955
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-4
40
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(Restated) (Restated)
1999 1998 1997
-------- ---------- ----------
(Thousands of dollars)
Operating Activities:
Net Income Before Preferred Dividends $ 7,494 $ 7,174 $ 7,065
-------- -------- --------
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation (including $124 in 1999, $127 in 1998, and
$119 in 1997 charged to other accounts) 4,514 4,260 3,893
Change in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable and
Accrued Unbilled Revenues 35 (298) (730)
(Increase) Decrease in Other Current Assets (24) (161) 3
(Increase) Decrease in Other Non-Current Items 292 (73) 682
Increase (Decrease) in Accounts Payable, Accrued
Expenses and Other Current Liabilities 691 233 562
Increase in Deferred Income Taxes and Investment Tax
Credits, Net 1,081 1,068 775
Recoverable Cleanup Costs (net) -- -- 2,343
-------- -------- --------
Total Adjustments 6,589 5,029 7,528
======== ======== ========
Net Cash Provided by Operating Activities 14,083 12,203 14,593
======== ======== ========
Investing Activities:
Gross Additions to Utility Plant (including Allowance For
Funds Used During Construction of $454 in 1999, $476 in
1998 and $575 in 1997) (10,289) (7,964) (14,034)
-------- -------- --------
Financing Activities:
Proceeds from Interim Bank Loans 2,411 1,895 8,811
Repayment of Interim Bank Loans (1,895) (8,811) (5,795)
Proceeds from Issuance of Long-Term Debt -- 18,018 272
Reduction of Long-Term Debt Including Current Portion (442) (10,249) (200)
Proceeds from Issuance of Common Stock 251 280 256
Advances, Contributions and Funds from Others for
Construction, Net 2,098 761 1,835
Costs Incurred to Issue Long-Term Debt, Preferred Stock,
and Common Stock -- (1,091) (133)
Cash Dividends Paid (5,576) (5,438) (5,362)
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities (3,153) (4,635) (316)
======== ======== ========
Net Increase (Decrease) in Cash 641 (408) 243
Cash at Beginning of Year 372 780 537
-------- -------- --------
Cash at End of Year $ 1,013 $ 372 $ 780
-------- -------- --------
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest (Net of Amounts Capitalized) $ 4,488 $ 3,382 $ 4,633
State and Federal Income Taxes $ 3,650 $ 3,397 $ 3,537
The accompanying notes are an integral part of these consolidated financial
statements.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-5
41
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of Connecticut Water Service, Inc. an investor-owned holding company
(the Company) and its six wholly owned subsidiaries, listed below:
The Connecticut Water Company
The Gallup Water Service, Incorporated
Crystal Water Utilities Corporation
The Crystal Water Company of Danielson
Chester Realty, Inc.
Connecticut Water Utility Services, Inc.
During 1999 the Company acquired Gallup Water Service, Inc and Crystal
Water Utilities Corporation and accounted for these acquisitions as "pooling of
interests". Accordingly, the Company's financial statements have been restated
to include the results of the acquired companies for all periods presented.
Connecticut Water, Gallup, and Crystal (our "water companies") are public
water utility companies serving more than 69,400 customers in 39 towns
throughout Connecticut.
Crystal Water Utilities Corporation is a holding company, owning the stock
of Crystal Water Company of Danielson and three small rental properties.
Chester Realty, Inc. is a real estate company whose pretax profits from
land sales are included in the "Gain on Sale of Property", category in the
"Other Income (Deductions)" section of the Consolidated Statements of Income.
Chester's pretax profits from rental of property are included in the "Other
Income (Deductions)" section of the Income Statement in the "Non-Water Sales
Earnings" category.
Connecticut Water Utility Services, Inc. is engaged in water related
services and contract operations. Its earnings are included in the "Non-Water
Sales Earnings" category in the "Other Income (Deductions)" section of the
Consolidated Statements of Income.
Intercompany accounts and transactions have been eliminated, except those
allocating costs for regulatory purposes between our regulated and non-regulated
companies.
PUBLIC UTILITY REGULATION -- Our three water companies are subject to
regulation for rates and other matters by the Connecticut Department of Public
Utility Control (DPUC) and follow accounting policies prescribed by the DPUC.
The Company prepares its financial statements in accordance with generally
accepted accounting principles which includes the provisions of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation," (FAS 71). FAS 71 requires cost-based, rate-regulated
enterprises such as our water companies to reflect the impact of regulatory
decisions in their financial statements. The DPUC, through the rate regulation
process, can create regulatory assets that result when costs are allowed for
ratemaking purposes in a period other than the period in which the costs would
be charged to expense
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-6
42
by an unregulated enterprise. The balance sheets include regulatory assets and
liabilities as appropriate, primarily related to income taxes and postretirement
benefits costs. The Company believes, based on current regulatory circumstances,
that the regulatory assets recorded are probable of recovery and that its use of
regulatory accounting is appropriate and in accordance with the provisions of
FAS 71.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from these estimates.
REVENUES -- Generally, water customers are billed quarterly, except larger
commercial and industrial customers, and public fire protection customers, who
are billed monthly. Most customers, except fire protection customers, are
metered. Revenues from metered customers are based on their usage times approved
regulated rates. Public fire protection charges are based on the length and
diameter of the water main and number of hydrants in service. Private fire
protection charges are based on the diameter of the connection to the water
main. Our water companies accrue an estimate for the amount of revenues relating
to sales unbilled at the end of each quarter.
UTILITY PLANT -- Utility plant is stated at the original cost of such
property when first devoted to public service. The difference between the
original cost and the cost to our water companies is charged or credited to
utility plant acquisition adjustments. Utility plant accounts are charged with
the cost of improvements and replacements of property including an allowance for
funds used during construction. Retired or disposed of depreciable plant is
charged to accumulated provision for depreciation together with any costs
applicable to retirement, less any salvage received. Maintenance of utility
plant is charged to expense.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION -- Allowance for Funds Used
During Construction (AFUDC) is the cost of funds used to finance the
construction of our water companies' utility plant. Generally, utility plant
under construction is not recognized as part of rate base for ratemaking
purposes until facilities are placed into service, and accordingly, AFUDC is
charged to the construction cost of utility plant. Capitalized AFUDC, which does
not represent current cash income, is recovered through rates over the service
lives of the facilities.
In order for certain water system acquisitions made in and after 1995 not
to degrade earnings, The Connecticut Water Company has received DPUC approval to
record AFUDC on certain of its investments in these systems. Through December
31, 1999 The Connecticut Water Company has capitalized $406,000 relating to
financing these acquisitions.
The allowed rate of return on rate base is used to calculate AFUDC.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-7
43
DEPRECIATION -- Virtually all of the Company's depreciable plant is owned
by its three water companies. Depreciation is computed on a straight line basis
at various rates as approved by the DPUC on a company by company basis.
Depreciation allows the utility to recover the investment in utility plant over
its useful life. The overall consolidated company depreciation rates, based on
the average balances of depreciable property, were 2.1% for 1999, 2.0% for 1998
and 1.9% for 1997.
CUSTOMERS' ADVANCES FOR CONSTRUCTION AND CONTRIBUTIONS IN AID OF
CONSTRUCTION -- Under the terms of construction contracts with real estate
developers and others, our water companies receive advances for the costs of new
main installations. Refunds are made, without interest, as services are
connected to the main, over periods not exceeding fifteen years and not in
excess of the original advance. Unrefunded balances, at the end of the contract
period, are credited to contributions in aid of construction (CIAC) and are no
longer refundable.
INCOME TAXES -- The Company provided deferred taxes for all temporary
book-tax differences using the liability method. Under the liability method,
deferred income taxes are recognized at currently enacted income tax rates to
reflect the tax effect of temporary differences between the financial reporting
and tax bases of assets and liabilities. Such temporary differences are the
result of provisions in the income tax law that either require or permit certain
items to be reported on the income tax return in a different period than they
are reported in the financial statements. To the extent such income taxes
increase or decrease future rates, an offsetting regulatory asset and liability
have been recorded in the accompanying consolidated balance sheets.
The Company believes that all deferred income tax assets will be realized
in the future. Approximately $500,000 of the December 31, 1999 and $900,000 of
the 1998 unfunded future income taxes are related to deferred Federal income
taxes. The remaining balance of the unfunded future income taxes is related to
deferred State income taxes.
Deferred Federal income taxes consist primarily of amounts that have been
provided for accelerated depreciation subsequent to 1981, as required by Federal
income tax regulations. Deferred taxes have also been provided for temporary
differences in the recognition of certain expenses for tax and financial
statement purposes as allowed by DPUC ratemaking policies.
Connecticut Corporation Business Taxes have been reflected primarily using
the flow-through method of accounting for temporary differences in accordance
with required DPUC ratemaking policies.
MUNICIPAL TAXES -- Municipal taxes are expensed over the 12 month period
beginning on July 1 following the lien date, corresponding with the period in
which the municipal services are provided.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-8
44
OTHER DEFERRED COSTS -- In accordance with DPUC ratemaking procedures,
costs which benefit future periods, such as tank painting, are expensed over the
periods they benefit.
UNAMORTIZED DEBT ISSUANCE EXPENSE -- The issuance costs of long-term debt,
including the remaining balance of issuance costs on long-term debt issues that
have been refinanced prior to maturity and related call premiums, are amortized
over the respective lives of the outstanding debt, as approved by the DPUC.
EARNINGS PER SHARE -- The following is a reconciliation of the numerators
and denominators of the basic and diluted earnings per share for the twelve
months ended December 31, 1999, 1998, and 1997.
Twelve Months Ended
1999 1998 1997
------ ------ ------
Basic earnings per share $ 1.54 $ 1.48 $ 1.46
Dilutive effect of unexercised stock options -- -- --
------ ------ ------
Diluted earnings per share $ 1.54 $ 1.48 $ 1.46
====== ====== ======
NUMERATOR (IN THOUSANDS): 1999 1998 1997
- ------------------------- ------ ------ ------
Basic net income $7,456 $7,136 $7,027
Diluted net income $7,456 $7,136 $7,027
====== ====== ======
DENOMINATOR (IN THOUSANDS): 1999 1998 1997
- --------------------------- ------ ------ ------
Basic weighted average shares outstanding 4,837 4,827 4,816
Dilutive effect of unexercised stock options 11 N/A N/A
------ ------ ------
Diluted weighted average shares outstanding 4,848 4,827 4,816
====== ====== ======
RECLASSIFICATION -- Certain reclassifications have been made to conform
previously reported data to the current presentation.
NOTE 2: 1999 POOLING OF INTEREST ACQUISITIONS
On April 16, 1999 Gallup was acquired by the Company through the issuance
of 47,826 shares of common stock of the Company which were exchanged for all of
the outstanding common stock of Gallup.
On September 29, 1999 Crystal was acquired by the Company through the
issuance of 244,508 common stock shares of the Company which were exchanged for
all of the outstanding stock of Crystal.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
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45
The combined and separate results of Connecticut Water Service, Gallup and
Crystal during the period preceding and after the merger were as follows:
1999 1998 1997
------- ------- -------
(Thousands of dollars)
OPERATING REVENUES
Connecticut Water Service $40,087 $37,924 $38,501
Gallup 638 583 592
Crystal 1,899 1,796 1,824
------- ------- -------
Combined Operating Revenues $42,624 $40,303 $40,917
======= ======= =======
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK
Connecticut Water Service $ 7,373 $ 6,927 $ 6,766
Gallup (74) 69 32
Crystal 157 140 229
------- ------- -------
Combined Net Income $ 7,456 $ 7,136 $ 7,027
======= ======= =======
NOTE 3: INCOME TAX EXPENSE
Income Tax Expense is comprised of the following:
1999 1998 1997
------ ------ ------
(Thousands of dollars)
Federal Classified as Operating Expense $4,322 $3,472 $3,842
Federal Classified as Other Income 32 216 157
------ ------ ------
Total Federal Income Tax
Expense 4,354 3,688 3,999
------ ------ ------
State Classified as Operating Expense 686 617 864
State Classified as Other Income 25 72 65
------ ------ ------
Total State Income Tax
Expense 711 689 929
------ ------ ------
Total Income Tax
Expense $5,065 $4,377 $4,928
====== ====== ======
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
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The components of the Federal and State income tax provisions are:
1999 1998 1997
------ ------ ------
Current:
Federal $3,273 $2,620 $2,715
------ ------ ------
State 711 689 929
------ ------ ------
Total Current 3,984 3,309 3,644
------ ------ ------
Deferred Income Taxes, Net:
Federal
Investment Tax Credit (61) (61) (62)
Capitalized Interest 36 32 47
Depreciation 1,106 1,097 1,299
------ ------ ------
Total Deferred Income Taxes,
Net 1,081 1,068 1,284
------ ------ ------
Total $5,065 $4,377 $4,928
====== ====== ======
Deferred income tax liabilities are categorized as following on the
Consolidated Balance Sheet:
1999 1998
------- -------
Deferred Federal Income Taxes $16,743 $15,601
Unfunded Future Income Taxes 8,349 9,309
------- -------
$25,092 $24,910
Deferred income tax liabilities (assets) are comprised of the following:
1999 1998
------- -------
Depreciation $23,710 $23,166
Other 1,382 1,744
------- -------
Net deferred income tax liability $25,092 $24,910
======= =======
The calculation of Pre-Tax Income is as follows:
1999 1998 1997
------- ------- -------
Pre-Tax Income
Net Income Before Preferred Dividends $ 7,494 $ 7,174 $ 7,065
Income Taxes 5,065 4,377 4,928
------- ------- -------
Total Pre-Tax Income $12,559 $11,551 $11,993
======= ======= =======
In accordance with required regulatory treatment, deferred income taxes are
not provided for certain timing differences. This treatment, along with other
items, causes differences between the statutory income tax rate and the
effective income tax rate. The
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-11
47
differences between the effective income tax rate recorded by the Company and
the statutory Federal tax rate are as follows:
1999 1998 1997
---- ---- ----
Federal Statutory Income Tax Rate 34.0% 34.0% 34.0%
Tax Effect of Differences:
State Income Taxes Net of Federal Benefit 3.7% 3.9% 5.1%
Depreciation 1.2% 1.5% 1.4%
Pension Costs .2% .4% .5%
Debt Refinancing Costs .2% (2.6)% .2%
Non-deductible Merger Costs .4% 0% 0%
Other .6% .7% (.1)%
---- ---- ----
Effective Income Tax Rate 40.3% 37.9% 41.1%
==== ==== ====
NOTE 4: COMMON STOCK
The Company has 7,500,000 authorized shares of common stock, no par value.
A summary of the changes in the common stock accounts for the period January 1,
1997 through December 31, 1999, appears below:
ISSUANCE
SHARES AMOUNT EXPENSE TOTAL
--------- -------- ------- -------
(Thousands of dollars except share
amounts)
Balance, January 1, 1997 4,810,459 $45,252 $(1,216) $44,036
--------- ------- ------- -------
Dividend Reinvestment Plan -- -- (133) (133)
Stock and equivalents issued
through Performance Stock
Program 5,526 178 -- 178
Stock issued to Employee
Savings 401-K Match Plan 3,985 78 -- 78
--------- ------- ------- -------
Balance, December 31, 1997
(restated) 4,819,970 45,508 (1,349) 44,159
Stock Split -- fractional
shares (587) -- (36) (36)
Stock and equivalents issued
through Performance Stock
Program 7,281 211 -- 211
Stock issued to Employee
Savings 401-K Match Plan 1,955 69 -- 69
--------- ------- ------- -------
Balance, December 31, 1998
(restated) 4,828,619 45,788 (1,385) 44,403
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-12
48
ISSUANCE
SHARES AMOUNT EXPENSE TOTAL
--------- -------- ------- -------
(Thousands of dollars except share
amounts)
Stock and equivalents issued
through Performance Stock
Program 10,175 251 -- 251
--------- ------- ------- -------
Balance, December 31, 1999(1) 4,838,794 $46,039 $(1,385) $44,654
========= ======= ======= =======
(1) Includes 6,088 restricted and 13,357 common stock equivalent shares issued
through the Performance Stock Program.
On August 12, 1998 the Board and Directors authorized a new Shareholder
Rights Plan. Pursuant to the new Plan, the Board authorized a dividend
distribution of one Right to purchase one one-hundredth of a share of Series A
Junior Participating Preference Stock of the Company for each outstanding share
of the Company's common stock. The distribution was effected October 11, 1998.
Upon the terms of the new Shareholder Rights Plan, each Right will entitle
shareholders to buy one one-hundredth of a share of Series A Junior
Participating Preference Stock at a purchase price of $90, and the Rights will
expire October 11, 2008. The Rights will be exercisable only if a person or
group acquires 15% or more of the Company's common stock or announces a tender
or exchange offer for 15% or more of the Company's common stock. The Board will
be entitled to redeem the Rights at $0.01 per Right at any time before such
acquisition occurs and upon certain conditions after such a position has been
acquired.
Upon the acquisition of 15% or more of the Company's common stock by any
person or group, each Right will entitle its holder to purchase, at the Right's
purchase price, a number of shares of the Company's common stock having a market
value equal to twice the Right's purchase price. In such event, Rights held by
the acquiring person will not be allowed to purchase any of the Company's common
stock or other securities of the Company. If, after the acquisition of 15% or
more of the Company's common stock by any person or group the Company should
consolidate with or merge with and into any person and the Company should not be
the surviving company, or, if the Company should be the surviving company and
all or part of its common stock should be exchanged for the securities of any
other person, or if more than 50% of the assets or earning power of the Company
were sold, each Right (other than Rights held by the acquiring person, which
will become void) will entitle its holder to purchase, at the Right's purchase
price, a number of shares of the acquiring Company's common stock having a
market value at that time equal to twice the Right's purchase price.
The Company may not pay any dividends on its common stock unless full
cumulative dividends to the preceding dividend date for all outstanding shares
of Preferred Stock of
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-13
49
the Company have been paid or set aside for payment. All such Preferred Stock
dividends have been paid.
NOTE 5: ANALYSIS OF RETAINED EARNINGS
The summary of the changes in Retained Earnings for the period January 1,
1997 through December 31, 1999, appears below:
1999 1998 1997
------- ------- -------
(Thousands of dollars)
Balance at Beginning of Year (restated) $15,923 $14,187 $12,484
Income Before Preferred Dividends 7,494 7,174 7,065
------- ------- -------
23,417 21,361 19,549
======= ======= =======
Dividends Declared:
Cumulative Preferred, Series A, $.80 Per Share 12 12 12
Cumulative Preferred, Series $.90, $.90 Per
Share 26 26 26
Common Stock:
1999 $1.15 Per Share 5,538 -- --
1998 $1.12 Per Share -- 5,400 --
1997 $1.11 Per Share -- -- 5,324
------- ------- -------
5,576 5,438 5,362
------- ------- -------
Balance at End of Year $17,841 $15,923 $14,187
======= ======= =======
NOTE 6: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each of the following financial instruments.
CASH -- The carrying amount approximates fair value.
LONG-TERM DEBT -- The fair value of the Company's fixed rate long-term debt
is based upon borrowing rates currently available to the Company. As of December
31, 1999 and 1998, the estimated fair value of the Company's long-term debt was
$57,324,000 and $69,350,000, respectively, as compared to the carrying amounts
of $65,399,000 and $65,611,000, respectively.
The fair values shown above have been reported to meet the disclosure
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Values of Financial Instruments" and do not purport to
represent the amounts at which those obligations would be settled.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
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50
NOTE 7: LONG-TERM DEBT
Long-Term Debt at December 31, consisted of the following:
1999 1998
------- -------
(Thousands of
dollars)
The Connecticut Water Company
First Mortgage Bonds:
5.875% Series R, Due 2022 $14,800 $14,800
6.65% Series S, Due 2020 8,000 8,000
5.75% Series T, Due 2028 5,000 5,000
5.3% Series U, Due 2028 4,550 4,550
6.94% Series V, Due 2029 12,050 12,050
------- -------
44,400 44,400
------- -------
Unsecured Water Facilities Revenue Refinancing Bonds
5.05% 1998 Series A, Due 2028 10,000 10,000
5.125% 1998 Series B, Due 2028 8,000 8,000
------- -------
18,000 18,000
------- -------
Other
5.5% Unsecured Promissory Note, Due 2002 103 132
------- -------
Total Connecticut Water Company 62,503 62,532
------- -------
Crystal Water Utilities Corporation
8.0% New London Trust, Due 2017 $ 133 $ 137
------- -------
Crystal Water Company of Danielson
6.25% Farmer's Home Administration, Due 2015 -- 18
7.82% Connecticut Development Authority, Due 2020 518 528
8.0% New London Trust, Due 2011 2,298 2,416
------- -------
Total Crystal 2,816 2,962
------- -------
Gallup Water Service
9.58% Citizens Bank, Due 1999 $ -- $ 255
------- -------
Chester Realty
6% Note Payable, Due 2006 $ 141 $ 149
------- -------
Total Connecticut Water Service, Inc. 65,593 66,035
------- -------
Less Current Portion (194) (424)
------- -------
Total Long-Term Debt $65,399 $65,611
======= =======
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-15
51
Principal payments required for years 2000 - 2004 are as follows:
2000 -- $194,000
2001 -- $209,000
2002 -- $225,000
2003 -- $204,000
2004 -- $220,000
Substantially all utility plant is pledged as collateral for long-term
debt.
There are no mandatory sinking fund payments required on Connecticut Water
Company's outstanding First Mortgage Bonds or the Unsecured Water Facilities
Revenue Refinancing Bonds. However, the Series R First Mortgage Bonds and the
1998 Series A & B Unsecured Water Facilities Revenue Refinancing Bonds provide
for an estate redemption right whereby the estate of deceased bondholders or
surviving joint owners may submit bonds to the Trustee for redemption at par
subject to a $25,000 per individual holder and a 3% annual aggregate limitation.
The call price of the Series R bonds will reduce annually until the year
2003, when the call price becomes 100%. Series R bonds are callable for
redemption at 102% from September 1, 1999 through August 31, 2000, then at
101.5% from September 1, 2000 through August 31, 2001.
The other outstanding bonds may be initially called for redemption by the
Company at the following dates and prices -- Series S, December 15, 2003 at
102%; Series T, July 1, 2003 and Series U, September 1, 2003 at 100% plus
accrued interest to the date of redemption; Series V, January 1, 2004 at 103.5%,
1998 Series A & B Unsecured Water Facilities Revenue Refinancing Bonds, March 1,
2008 at 100% plus accrued interest.
In 1998 Connecticut Water Company's Series Q, First Mortgage Bonds were
refinanced with 5.05% 1998 Series A Unsecured, Tax-Exempt Water Facilities
Revenue Refinancing Bonds. Also Connecticut Water Company's $8,000,000 interim
bank loans were refinanced with 5.125% tax exempt, 1998 Series B Unsecured Water
Facilities Revenue Refinancing Bonds.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-16
52
NOTE 8: PREFERRED STOCK
The Company's Preferred Stock at December 31, consisted of the following:
1999 1998
---- ----
(Thousands
of dollars)
Cumulative Series A Voting, $20 Par Value; Authorized
Issued and Outstanding 15,000 Shares $300 $300
Cumulative Series $.90 Non-Voting, $16 Par Value;
Authorized 50,000 Shares, Issued and Outstanding
29,499 Shares 472 472
---- ----
Total $772 $772
==== ====
All or any part of any series of either class of the Company's issued
Preferred Stock may be called for redemption by the Company at any time. The per
share redemption prices of the Series A and Series $.90 Preferred Stock, if
called by the Company, are $21.00 and $16.00, respectively.
The Company is authorized to issue 400,000 shares of an additional class of
Preferred Stock, $25 par value, the general preferences, voting powers,
restrictions and qualifications of which are similar to the Company's existing
Preferred Stock. No shares of the $25 par value Preferred Stock have been
issued.
The Company is also authorized to issue 1,000,000 shares of $1 par value
Preference Stock, junior to the Company's existing Preferred Stock in rights to
dividends and upon liquidation of the Company. 150,000 of such shares have been
designated as "Series A Junior Participating Preference Stock". Pursuant to the
new Shareholder Rights Plan, described in Note 4, the Company keeps reserved and
available for issuance one one-hundredth of a share of Series A Junior
Participating Preference Stock for each outstanding share of the Company's
common stock.
NOTE 9: BANK LINES OF CREDIT
The Company has a total of $9,000,000 in lines of credit provided by three
banks. The available lines of credit as of December 31, 1999 was $6,335,000. In
addition to the $2,411,000 of interim borrowing against these lines of credit,
an additional $254,000 has been allocated to secure a Letter of Credit for one
of the Company's real estate development projects. Bank commitment fees were
approximately $25,000, $19,000, and $20,000 in 1999, 1998, and 1997,
respectively, on the lines of credit.
At December 31, 1999 and 1998, the weighted average interest rates on
short-term borrowings outstanding were 6.81% and 5.82%, respectively.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
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53
NOTE 10: UTILITY PLANT AND CONSTRUCTION PROGRAM
The components of utility plant and equipment at December 31, are as
follows:
1999 1998
-------- --------
(Thousands of
dollars)
Source of Supply $ 20,805 $ 20,028
Pumping 16,922 16,041
Water Treatment 42,864 42,194
Transmission and Distribution 144,417 139,022
General (including intangible) 14,505 14,226
Held for Future Use 609 609
-------- --------
Total $240,122 $232,120
======== ========
The amounts of depreciable plant at December 31, 1999 and 1998 included in
total plant were $219,530,000 and $213,897,000, respectively.
Our water companies are engaged in continuous construction programs.
Estimated annual capital expenditures, net of amounts financed by customer
advances and contributions in aid of construction, are expected to be $7,445,000
during 2000, $8,204,000 during 2001, and $7,203,000 in 2002. During the period
2003 to 2004, construction expenditures for routine improvements to the water
distribution system are expected to be approximately $5,000,000 each year.
NOTE 11: TAXES OTHER THAN INCOME TAXES
Taxes Other than Income Taxes consist of the following:
1999 1998 1997
------ ------ ------
(Thousands of dollars)
Municipal Property Taxes $3,644 $3,525 $3,338
Payroll Taxes 543 555 555
Connecticut Gross Earnings Tax(A) -- -- 991
------ ------ ------
Total $4,187 $4,080 $4,884
====== ====== ======
(A) The Connecticut Gross Earnings Tax was legislatively eliminated for water
companies effective July 1, 1997. The rates of our three water companies
were correspondingly reduced at the same time.
NOTE 12: PENSION AND OTHER POST-RETIREMENT EMPLOYEE BENEFITS
GENERAL -- As of December 31, 1999 Connecticut Water had 157 employees,
Gallup 4, and Crystal 7 for a total of 168 employees. The Company's officers are
employees of Connecticut Water Company. Employee expenses are charged between
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-18
54
companies as appropriate. Connecticut Water Company has a post-retirement
benefit plan including pension and post-retirement medical, dental, and life
insurance. Crystal has a pension plan, whereas Gallup does not have any
post-retirement benefits plans.
Connecticut Water:
PENSION -- Connecticut Water Company has a trusteed, non-contributory
defined benefit retirement plan (the Pension Plan) which covers all employees
who have completed one year of service. Benefits under the Pension Plan are
based on credited years of service and "average earnings", as defined in the
Pension Plan. Connecticut Water's policy is to fund accrued pension costs as
permitted by Federal income tax regulations. No funding was made for 1999.
Funding of $159,000 was made for 1998.
POST-RETIREMENT BENEFITS OTHER THAN PENSION (PBOP) -- In addition to
providing pension benefits, Connecticut Water provides certain medical, dental
and life insurance benefits to retired employees partially funded by a 501(c)(9)
Voluntary Employee Beneficiary Association Trust that has been approved by the
DPUC. Substantially all of Connecticut Water's employees may become eligible for
these benefits if they retire on or after age 55 with 10 years of service. The
contributions for calendar years 1999, 1998, and 1997 were $473,000, $473,000,
and $317,000, respectively.
A deferred regulatory asset has been recorded to reflect the amount which
represents the future operating revenues expected to be recovered in customers
rates under FAS 106. In 1997 Connecticut Water requested and received approval
from the DPUC to include FAS 106 costs in customer rates. The DPUC's 1997
limited reopener of Connecticut Water's general rate proceeding allowed it to
increase customer rates $208,000 annually for FAS 106 costs. Connecticut Water's
current rates now allow for recovery of $473,000 annually for post-retirement
benefits costs other than pension.
Connecticut Water has elected to recognize the transition obligation on a
delayed basis over a period equal to the plan participants' 21.6 years of
average future service.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
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PENSION BENEFITS OTHER BENEFITS
CONNECTICUT WATER: 1999 1998 1999 1998
- ------------------ ------- ------- ------- -------
(Thousands of Dollars)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year $12,557 $11,472 $ 3,866 $ 3,907
Service Cost 504 392 173 152
Interest Cost 908 872 268 262
Actuarial loss/(gain) (624) 541 (154) (321)
Benefits paid (729) (720) (290) (134)
------- ------- ------- -------
BENEFIT OBLIGATION, END OF YEAR $12,616 $12,557 $ 3,863 $ 3,866
======= ======= ======= =======
CHANGE IN PLAN ASSETS
Fair Value, beginning of year $16,915 $14,851 $ 2,057 $ 1,558
Actual return on plan assets 2,417 2,625 181 130
Employer contribution -- 159 473 473
Participant's contributions N/A N/A 38 30
Benefits paid (729) (720) (290) (134)
------- ------- ------- -------
FAIR VALUE, END OF YEAR $18,603 $16,915 $ 2,459 $ 2,057
======= ======= ======= =======
Funded Status $ 5,987 $ 4,358 $(1,404) $(1,809)
Unrecognized net actuarial (gain) (7,917) (6,090) (1,823) (1,650)
Unrecognized transition obligation (65) (97) 2,144 2,309
Unrecognized prior service cost 186 218 N/A N/A
------- ------- ------- -------
ACCRUED BENEFIT (COST) $(1,809) $(1,611) $(1,083) $(1,150)
======= ======= ======= =======
PENSION BENEFITS OTHER BENEFITS
1999 1998 1999 1998
------- ------- ------- -------
Weighted-average assumptions as of
December 31
Discount rate 7.5% 7.0% 7.5% 7.0%
Expected return on plan assets 8.0% 8.0% 5.0% 5.0%
Rate of compensation increase 4.5% 4.5% N/A N/A
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-20
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PENSION BENEFITS OTHER BENEFITS
1999 1998 1997 1999 1998 1997
------- ----- ----- ----- ----- -----
(Thousands of Dollars)
COMPONENTS OF NET PERIODIC
BENEFIT COSTS
Service cost $ 504 $ 393 $ 392 $ 173 $ 152 $ 164
Interest cost 908 872 740 268 262 272
Expected return on plan assets (1,093) (928) (835) (94) (63) (54)
Amortization of:
Unrecognized Net Transition
Asset (32) (32) (32) 165 165 165
Unrecognized net (Gain) Loss (121) (118) (190) (106) (113) (127)
Unrecognized Prior Service
Cost 32 32 32 -- -- --
FAS 88 Early Retirement Costs -- -- 366 -- -- 81
------- ----- ----- ----- ----- -----
Net Periodic Pension Costs $ 198 $ 219 $ 473 $ 406 $ 403 $ 501
======= ===== ===== ===== ===== =====
In determining the 1998 accumulated post-retirement benefit obligation,
health care cost trends of 6% were assumed for 1998, grading down to 5.5% in
1999 and after. For the 1999 accumulated post-retirement benefit obligation, the
rate of 5.5% was assumed for all years.
Assumed health care costs trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
------------------ ------------------
(Thousands of Dollars)
Effect on total of service and
interest cost components $ 67 $ (63)
Effect on postretirement
benefit obligation $475 $(442)
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN -- Connecticut Water provides
additional pension benefits to senior management through a supplemental
executive retirement plan. At December 31, 1999 the actuarial present value of
the projected benefit obligation was $503,000. Expense associated with this plan
was $76,000 for 1999, $99,000 for 1998 and 1997.
SAVINGS PLAN -- The Connecticut Water Company maintains an employee savings
plan which allows participants to contribute from 1% to 15% of pre-tax
compensation. The Company matches 50 cents for each dollar contributed by the
employee up to 4% of the employees' compensation. The contribution charged to
expense in 1999, 1998 and 1997 was $127,000, $85,000 and $78,000, respectively.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-21
57
Effective for 1999 the Plan was modified to create the possibility for an
"incentive bonus" contribution to the 401(k) plan tied to the attainment of a
specific goal or goals to be identified each year starting in 1999. If the
specific goal or goals are attained by the end of the year, all employees,
except officers and certain key employees, will receive an additional 1% of
their annual base salary as a direct contribution to their 401(k) account. In
1999 the goal was not met and therefore no incentive contribution was made.
Crystal Water:
PENSION -- Crystal has a defined benefit pension plan covering employees
who have completed six months of service and who have attained the age of
20 1/2. Accrued pension costs and required contributions to the plan are
actuarially calculated annually taking into account the employees' service to
date and their expected future earnings. The following tables set forth the
plan's funded status as of December 31, 1999 and 1998 and the net pension cost
for 1999, 1998 and 1997 of ($150,000), $14,000 and $27,000 respectively.
1999 1998
----- -------
(Thousands of
Dollars)
Actuarial present value of benefit obligations $ 576 $ 1,008
Projected benefit obligation for salary increase 313 367
Projected benefit obligation 889 1,375
Plan assets at fair value 764 1,503
Unfunded (overfunding) projected benefits 125 (128)
Unrecognized gains/(loss) 243 663
Unrecognized prior service cost (334) (350)
Unrecognized transition obligation (27) (29)
----- -------
Accrued pension costs $ 7 $ 156
----- -------
1999 1998
----- -------
Weighted-average assumptions as of December 31
Discount rate 7.5% 8.0%
Expected return on plan assets 8.0% 8.0%
Rate of compensation increase 4.5% 5.0%
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-22
58
Crystal Water:
1999 1998 1997
------ ----- -----
(Thousands of Dollars)
Service costs $ 48 $ 49 $ 44
Interest cost of benefit obligation 110 73 63
Return on assets (117) (96) (73)
Amortization of unrecognized gain/loss (23) (15) (9)
Amortization of prior service cost 15 1 --
Amortization of transition asset 2 2 2
Settlement (gain)/loss (185) -- --
----- ---- ----
Net pension (gain) cost $(150) $ 14 $ 27
NOTE 13: STOCK BASED COMPENSATION PLANS
INCENTIVE OPTIONS --
In 1999 the Company's shareholders approved an amendment to its Performance
Stock Program to permit the issuance of stock options to officers and key
employees. The Company accounts for the plan under APB Opinion No. 25, under
which no compensation cost has been recognized in the Consolidated Statements of
Income. On a pro forma basis, the Company's net income and earnings per share
would have been the following amounts had compensation cost for the plan been
determined consistent with SFAS No. 123, "Accounting for Stock Based
Compensation." Under SFAS No. 123, the Company would have been required to value
such options and record such amounts in the financial statements as compensation
expense.
1999
------
Net income (in thousands of dollars):
As reported $7,456
Pro forma $6,589
Earnings Per Share:
As reported $ 1.54
Pro forma $ 1.36
For purposes of this calculation, the Company arrived at the fair value of
each stock grant at the date of grant by using the Black Scholes Option Pricing
model with the following weighted average assumptions used for grants for the
year ended December 31, 1999; risk-free interest rate of 5.5%; estimated period
to exercise of 8 years; expected volatility of 25.89 percent and a dividend
yield of 3.7 percent.
At December 31, 1999, options which have been granted are not exercisable.
The options begin to become exercisable in 2000, one year from the dates of the
grants.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-23
59
NUMBER OF NUMBER OF
OPTIONS OPTIONS
EXERCISABLE GRANTED
AS OF AS OF PRICE PER
12/31/99 12/31/99 SHARE
----------- --------- -------------
Balance at January 1, 1999 -- -- N/A
Granted April 23, 1999 -- 75,150 $ 22.25
Granted December 8, 1999 -- 52,573 $ 33.50
-- -------
Balance at December 31, 1999 -- 127,723 $22.25-$33.50
== =======
Weighted average fair values of options granted in 1999 was $6.78.
PERFORMANCE STOCK PROGRAM -- Under the Company's Performance Stock Program,
restricted shares of Common Stock may be awarded annually to officers and key
employees. To the extent that the goals established by the Compensation
Committee have been attained, the restrictions on the stock are removed. Amounts
charged to expense pursuant to this plan were $216,000, $170,000, and $173,000
for 1999, 1998 and 1997, respectively.
NOTE 14: SEGMENT REPORTING
Our Company operates principally in three segments: water activities, real
estate sales and services/rentals. The water segment is comprised of our core
regulated water activities to supply water to our customers. Our real estate
sales segment involves the selling off our limited excess real estate holdings.
Our services and rentals segment is comprised of providing services on a
contract basis and leasing certain of our properties to others. The accounting
policies of each reportable segment are the same as those described in the
summary of significant accounting policies. Financial data for reportable
segments is as follows:
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-24
60
INTEREST
EXPENSE
AND
PREFERRED
OTHER OTHER DIVIDEND
OPERATING INCOME (NET OF INCOME NET
REVENUES DEPRECIATION EXPENSES (DEDUCTIONS) AFUDC) TAXES INCOME
-------- ------------ --------- ------------ --------- ------ ------
(In thousands)
Year ended December
31, 1999
Water Activities $42,624 $4,390 $21,999 $ 65 $4,084 $4,943 $7,273
Real Estate Sales 447 286 0 0 64 97
Services/Rentals 1,410 16 1,224 0 26 58 86
------- ------ ------- ---- ------ ------ ------
Total $44,481 $4,390 $23,509 $ 65 $4,110 $5,065 $7,456
======= ====== ======= ==== ====== ====== ======
Year ended December
31, 1998
Water Activities $40,303 $4,133 $21,321 $110 $4,168 $4,089 $6,702
Real Estate Sales 710 235 0 0 190 285
Services/Rentals 1,073 21 805 0 0 98 149
------- ------ ------- ---- ------ ------ ------
Total $42,086 $4,154 $22,361 $110 $4,168 $4,377 $7,136
======= ====== ======= ==== ====== ====== ======
Year ended December
31, 1997
Water Activities $40,917 $3,774 $21,580 $ 58 $4,065 $4,768 $6,788
Real Estate Sales 349 165 0 0 74 110
Services/Rentals 1,091 18 858 0 0 86 129
------- ------ ------- ---- ------ ------ ------
Total $42,357 $3,792 $22,603 $ 58 $4,065 $4,928 $7,027
======= ====== ======= ==== ====== ====== ======
AT DECEMBER 31
1999 1998
-------- --------
(In thousands)
Total Plant and Other Investments $183,310 $177,550
Water 779 801
-------- --------
Non-water 184,089 178,351
======== ========
Other Assets 26,246 27,465
Water 550 139
-------- --------
Non-water 26,796 27,604
-------- --------
Total Assets $210,885 $205,955
======== ========
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-25
61
NOTE 15: QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 1999 and
1998 appears below:
BASIC
EARNINGS PER
NET INCOME AVERAGE
OPERATING UTILITY APPLICABLE TO COMMON
REVENUES OPERATING INCOME COMMON STOCK SHARE
----------------- ----------------- --------------- -------------
1999 1998 1999 1998 1999 1998 1999 1998
------- ------- ------- ------- ------ ------ ----- -----
(Thousands of dollars except per share amounts)
First Quarter $ 9,450 $ 9,240 $ 2,414 $ 2,404 $1,510 $1,419 $0.31 $0.30
Second Quarter 10,233 9,383 2,765 2,363 1,811 1,529 0.37 0.32
Third Quarter 12,892 12,020 3,763 3,639 2,716 2,658 0.56 0.55
Fourth Quarter 10,049 9,660 2,285 2,354 1,419 1,530 0.30 0.31
------- ------- ------- ------- ------ ------ ----- -----
Year $42,624 $40,303 $11,227 $10,760 $7,456 $7,136 $1.54 $1.48
======= ======= ======= ======= ====== ====== ===== =====
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-26
62
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of Connecticut Water Service, Inc.
amended and restated as of April, 1998.
3.2* By-Laws, as amended, of Connecticut Water Service, Inc. as amended
and restated as of August 12, 1999.
3.3 Certification of Incorporation of The Connecticut Water Company
effective April, 1998.
4.1 Indenture of Mortgage and Deed of Trust from The Connecticut Water
Company to The Connecticut Bank and Trust Company, Trustee, dated as
of June 1, 1956. (Exhibit 4.3(a) to Registration Statement No.
2-61843)
4.2 Supplemental Indentures thereto dated as of
(i) February 1, 1958 (Exhibit 4.3(b) (i) to Registration
Statement No. 2-61843)
(ii) September 1, 1962 (Exhibit 4.3(b) (ii) to Registration
Statement No. 2-61843)
(iii) January 1, 1966 (Exhibit 4.3(b) (iii) to Registration
Statement No. 2-61843)
(iv) July 1, 1966 (Exhibit 4.3(b) (iv) to Registration Statement
No. 2-61843)
(v) January 1, 1971 (Exhibit 4.3(b) (v) to Registration
Statement No. 2-61843)
(vi) September 1, 1974 (Exhibit 4.3(b) (vi) to Registration
Statement No. 2-61843)
(vii) December 1, 1974 (Exhibit 4.3(b) (vii) to Registration
Statement No. 2-61843)
(viii) January 1, 1976 (Exhibit 4(b) to Form 10-K for the year
ended 12/31/76)
(ix) January 1, 1977 (Exhibit 4(b) to Form 10-K for the year
ended 12/31/76)
(x) September 1, 1978 (Exhibit 2.12(b) (x) to Registration
Statement No. 2-66855)
(xi) December 1, 1978 (Exhibit 2.12(b) (xi) to Registration
Statement No. 2-66855)
(xii) June 1, 1979 (Exhibit 2.12(b) (xii) to Registration
Statement No. 2-66855)
(xiii) December 1, 1983 (Exhibit 4.2 (xiii) to Form 10-K for the
year ended 12/31/83)
(xiv) January 1, 1987 (Exhibit 4.2(xiv) to Form 10-K for the year
ended 12/31/86)
(xv) May 1, 1989 (Exhibit 4.2 (xv) to Form 10-K for year ended
12/31/89)
(xvi) June 1, 1991 (Exhibit 4.2 (xvi) to Form 10-K for year ended
12/31/91)
(xvii) August 1, 1992 (Exhibit 4.2 (xvii) to Form 10-K for year
ended 12/31/92)
E-1
63
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
(xviii) October 1, 1993 (Exhibit 4.2 (xviii) to Form 10-K for year
ended 12/31/93)
(xix) June 1, 1993 (Exhibit 4.2 (xix) to Form 10-K for year ended
12/31/93)
(xx) September 1, 1993 (Exhibit 4.2 (xx) to Form 10-K for year
ended 12/31/93)
(xxi) December 1, 1993 (Exhibit 4.2 (xxi) to Form 10-K for year
ended 12/31/93)
(xxii) March 1, 1994 (Exhibit 4.2 (xxii) to Form 10-K for year
ended 12/31/94)
4.3 Loan Agreement dated as of October 1, 1993, between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.3
to Form 10-K for year ended December 31, 1993)
4.4 Loan Agreement dated as of June 1, 1993, between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.4
to Form 10-K for year ended December 31, 1993)
4.5 Loan Agreement dated as of September 1, 1993, between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.5
to Form 10-K for year ended December 31, 1993)
4.6 Loan Agreement dated as of August 1, 1992 between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit
4.10 to Form 10-K for the year ended December 31, 1992)
4.7 Bond Purchase Agreement dated as of December 1, 1993. (Exhibit 4.8 to
Form 10-K for year ended December 31, 1993)
4.8 Loan Agreement dated as of March 9, 1998 between the Connecticut
Development Authority and The Connecticut Water Company.
4.9* Loan Agreement dated as of April 19, 1990 between the Connecticut
Development Authority and The Crystal Water Company of Danielson.
4.10* Loan Agreement dated as of February 9, 1996 between New London Trust,
F.S.B. and The Crystal Water Company of Danielson.
10.1 Pension Plan Fiduciary Liability Insurance for The Connecticut Water
Company Employees' Retirement Plan and Trust, The Connecticut Water
Company Tax Credit Employee Stock Ownership Plan, as Amended and
Restated, Savings Plan of The Connecticut Water Company and The
Connecticut Water Company VEBA Trust Fund. (Exhibit 10.1 to
Registration Statement No. 2-74938)
10.2 Directors and Officers Liability and Corporation Reimbursement
Insurance. (Exhibit 10.2 to Registration Statement No. 2-74938)
10.3 Directors Deferred Compensation Plan, effective as of January 1,
1980, as amended as of March 20, 1981. (Exhibit 10.3 to Registration
Statement No. 2-74938)
10.4 The Connecticut Water Company Deferred Compensation Agreement dated
December 1, 1984. (Exhibit 10.4 to Form 10-K for the year ended
December 31, 1984)
10.5* The Connecticut Water Company Amended and Restated Deferred
Compensation Agreement dated May 14, 1999
E-2
64
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
a) Marshall T. Chiaraluce
b) David C. Benoit
c) James R. McQueen
d) Kenneth W. Kells
10.6 The Connecticut Water Company Supplemental Executive Retirement
Agreement with William C. Stewart. (Exhibit 10.6a to Form 10-K for
year ended December 31, 1991)
10.7.1 The Connecticut Water Company Supplemental Executive Retirement
Agreement with Marshall T. Chiaraluce. (Exhibit 10.6b to Form 10-K
for year ended December 31, 1991)
10.7.2* The Connecticut Water Company Amended Supplemental Executive
Retirement Agreement with Marshall T. Chiaraluce dated August 1,
1999.
10.8.1 The Connecticut Water Company Supplemental Executive Retirement
Agreement -- standard form for other officers. (Exhibit 10.6c to Form
10-K for year ended December 31, 1991)
10.8.2* The Connecticut Water Company Amended Supplemental Executive
Retirement Agreement -- standard form for other officers, dated
August 1, 1999.
10.9* The Connecticut Water Company Employment Agreements with Officers,
amended and restated as of November 18, 1999
a) Marshall T. Chiaraluce
b) Michele G. DiAcri
c) James R. McQueen
d) David C. Benoit
e) Peter J. Bancroft
f) Maureen P. Westbrook
g) Terrance P. O'Neill
10.10* Employment and Consulting Agreement between Richard L. Mercier and
Gallup Water Service, Inc. dated April 15, 1999.
10.11* Employment and Consulting Agreement between Roger Engle and Crystal
Water Company of Danielson dated September 29, 1999.
10.12 Savings Plan of The Connecticut Water Company, amended and restated
effective as of January 1, 1999.
10.13 The Connecticut Water Company Employees' Retirement Plan as amended
and restated as of January 1, 1997.
10.14 Water Supply Agreement dated June 13, 1994, between The Connecticut
Water Company and the Hazardville Water Company. (Exhibit 10.15 to
Form 10-K for year ended December 31, 1994)
10.15 November 4, 1994 Amendment to Agreement dated December 11, 1957
between The Connecticut Water Company (successor to the Thomaston
Water Company) and the City of Waterbury. (Exhibit 10.16 to Form 10-K
for year ended December 31, 1994)
E-3
65
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.16 Contract between The Connecticut Water Company and The Rockville
Water and Aqueduct Company dated as of January 1, 1976. (Exhibit 9(b)
to Form 10-K for the year ended December 31, 1975)
10.17 Agreement dated August 13, 1986 between The Connecticut Water Company
and the Metropolitan District. (Exhibit 10.14 to Form 10-K for the
year ended December 31, 1986)
10.18 Report of the Commission to Study the Feasibility of Expanding the
Water Supply Services of the Metropolitan District. (Exhibit 14 to
Registration Statement No. 2-61843)
10.19 Plan of Merger dated December 18, 1978 of Broad Brook Water Company,
The Collinsville Water Company, The Rockville Water and Aqueduct
Company, The Terryville Water Company and The Thomaston Water Company
with and into The Connecticut Water Company. (Exhibit 13 to Form 10-K
for the year ended December 31, 1978)
10.20 Bond Exchange Agreements between Connecticut Water Service, Inc., The
Connecticut Water Company Bankers Life Company and Connecticut Mutual
Life Insurance Company dated October 23, 1978. (Exhibit 14 to Form
10-K for the year ended December 31, 1978)
10.21 Dividend Reinvestment and Common Stock Purchase Plan as amended.
(Registration Statement No. 33-53211 as amended)
10.22 Contract for Supplying Bradley International Airport. (Exhibit 10.21
to Form 10-K for the year ended December 31, 1984)
10.23 Report of South Windsor Task Force. (Exhibit 10.23 to Form 10-K for
the year ended December 31, 1987)
10.24 Trust Agreement for The Connecticut Water Company Welfare Benefits
Plan (VEBA) dated January 1, 1989. (Exhibit 10.21 to Form 10-K for
year ended December 31, 1989)
10.25 Performance Stock Program, as amended and restated as of April 23,
1999. (Exhibit A to CTWS Proxy Statement dated March 17, 1999)
24.1* Consent of Arthur Andersen LLP
27.0* Financial Data Schedule
- ---------------
Note: Exhibits 10.1 through 10.13, 10.24 and 10.25 set forth each management
contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form-10K.
E-4
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONNECTICUT WATER SERVICE, INC.
Registrant
By /s/ MARSHALL T. CHIARALUCE
--------------------------------------
Marshall T. Chiaraluce
President, Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Connecticut Water
Service, Inc. in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MARSHALL T. CHIARALUCE Director, President Chairman of the February 28, 2000
- ------------------------------------- Board, and Chief Executive Officer
Marshall T. Chiaraluce
(Principal Executive Officer)
/s/ DAVID C. BENOIT Vice President -- Finance, Chief February 25, 2000
- ------------------------------------- Financial Officer and Treasurer
David C. Benoit
(Principal Financial and
Accounting Officer)
67
SIGNATURE TITLE DATE
--------- ----- ----
/s/ FRANCIS E. BAKER, JR. Director February 25, 2000
- -------------------------------------
Francis E. Baker, Jr.
/s/ HAROLD E. BIGLER, JR. Director February 28, 2000
- -------------------------------------
Harold E. Bigler, Jr.
/s/ MARY ANN HANLEY Director February 25, 2000
- -------------------------------------
Mary Ann Hanley
/s/ MARCIA L. HINCKS Director February 25, 2000
- -------------------------------------
Marcia L. Hincks
/s/ RONALD D. LENGYEL Director February 25, 2000
- -------------------------------------
Ronald D. Lengyel
/s/ RUDOLPH E. LUGINBUHL Director February 25, 2000
- -------------------------------------
Rudolph E. Luginbuhl
/s/ HARVEY G. MOGER Director February 25, 2000
- -------------------------------------
Harvey G. Moger
/s/ ROBERT F. NEAL Director February 25, 2000
- -------------------------------------
Robert F. Neal
/s/ WARREN C. PACKARD Director February 24, 2000
- -------------------------------------
Warren C. Packard
/s/ ARTHUR C. REEDS Director February 24, 2000
- -------------------------------------
Arthur C. Reeds
/s/ DONALD B. WILBUR Director February 25, 2000
- -------------------------------------
Donald B. Wilbur
68
SCHEDULES
69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Connecticut Water Service, Inc. included in this
Form 10-K, and have issued our report thereon dated February 11, 2000. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in the accompanying index to financial statements and
schedule is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
---------------------------------------
Hartford, Connecticut
February 11, 2000
S-1
70
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO FROM END OF
DESCRIPTION OF YEAR INCOME RESERVES(1) YEAR
- ----------- --------- ---------- ------------ -------
(Thousands of Dollars)
Allowance for Uncollectible
Accounts
Year Ended December 31, 1999 $315 $171 $ 31 $455
==== ==== ==== ====
Year Ended December 31,
1998(2) $147 $162 $ (6) $315
==== ==== ==== ====
Year Ended December 31,
1997(2) $162 $134 $149 $147
==== ==== ==== ====
- ---------------
(1) Amounts charged off as uncollectible after deducting recoveries
(2) Restated
S-2
71
EXHIBITS
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR
ENDED DECEMBER 31, 1999
24.1 Consent of Arthur Andersen LLP
27.0 Financial Data Schedule
72
EXHIBIT 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 33-53211 and 33-394525.
/s/ ARTHUR ANDERSEN LLP
---------------------------------------
Hartford, Connecticut
March 07, 2000