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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(X) Annual Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 2001 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. ( )
2
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, 2002 is
$215,006,092.
7,618,926
Number of shares of Common Stock outstanding, March 1, 2002 (excluding
36,037 common stock equivalent shares)
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Document is Incorporated
Definitive Proxy Statement, dated Part III
March 19, 2002, for Annual Meeting
of Shareholders to be held on
April 26, 2002.
3
PART I
ITEM 1. BUSINESS
The Company
The Registrant, Connecticut Water Service, Inc. (referred to as "the Company",
"we" or "our") was organized in 1956 and is the parent company of four regulated
water utility companies, which generate approximately 99% of our consolidated
net income. We supply water to over 78,000 customers, or 276,000 people, in 40
towns throughout Connecticut and Massachusetts. The Company and its subsidiaries
collectively represent the largest domestic investor-owned water system in
Connecticut measured by operating revenues and utility plant investment. 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 a number of unregulated subsidiary companies and through a
joint venture formed in 1999 with a well pump service provider. These services
range from one-time contracts for a particular service to long-term arrangements
for water and wastewater system operation and management. We are also engaged in
selling and/or donating our limited excess real estate holdings that are not
necessary for our business or to protect our water sources.
Our mission is to provide high quality water service to our customers at a fair
return to our stockholders while maintaining a work environment that attracts,
retains and motivates our employees to achieve a high level of performance.
Our corporate headquarters are located at 93 West Main Street, Clinton,
Connecticut 06413. Our telephone number is 860.669.8636, and our Internet
address is www.ctwater.com.
Our Regulated Business
Our business is subject to seasonal fluctuations and weather variations. The
demand for water is generally greater during the warmer months than the cooler
months due to customers' high water consumption related to cooling systems and
various outdoor uses such as private and public swimming pools and lawn
sprinklers. Demand will vary with rainfall and temperature levels from year to
year and season to season, particularly during the warmer months.
In general, the profitability of the water utility industry is largely dependent
on the timeliness and adequacy of rates allowed by utility regulatory
commissions. In addition, profitability is affected by numerous factors over
which we have little or no control, such as costs to comply with environmental
and water quality regulations. Inflation and other factors also impact costs for
construction, materials and personnel related expenses.
Costs to comply with environmental and water quality regulations are
substantial. Since the 1974 enactment of the Safe Drinking Water Act we have
spent approximately $50,000,000 in constructing facilities and conducting
aquifer mapping necessary to comply with the requirements of the Safe Drinking
Water Act, and other federal and state regulations, of which $7,771,000 was
expended in the last five years. We are currently in compliance with current
regulations, but the regulations are subject to change. The costs to comply with
future changes
4
in state or federal regulations, which could require us to modify current
filtration facilities and/or construct new ones, or to replace any reduction of
the safe yield from any of our current sources of supply, could be substantial.
Our water companies derive their rights and franchises to operate from special
state acts that are subject to alteration, amendment or repeal and do not grant
us exclusive rights to our service areas. Our franchises are free from
burdensome restrictions, are unlimited as to time, and authorize us to sell
potable water in all the towns we now serve. There is the possibility that the
state could revoke our franchises and allow a governmental entity to take over
some or all of our systems. From time to time such legislation is contemplated.
The rates we charge our water customers are established under the jurisdiction
of and are approved by a state regulatory agency. It is our policy to seek rate
relief as necessary to enable us to achieve an adequate rate of return. The
following table shows information related to each of our water companies' most
recent general rate filing.
Date of Last Allowed Allowed
Rate Return on Return on
Decision Equity Rate Base
Barnstable 1998 12.5% 11.31%
Connecticut Water 1991 12.7% 10.74%
Crystal 1995 12.35% 10.16%
Gallup 1994 N/A(*) N/A(*)
(*) Gallup's rates were based on its net income requirement, not on a rate of
return methodology.
Our Water System(s)
Our water infrastructure consists of 27 noncontiguous water systems in the State
of Connecticut and one water system in Massachusetts. Our system, in total,
consists of 1,237 miles of water main and reservoir storage capacity of 7.0
billion gallons. The safe, dependable yield from our 122 active wells and 20
reservoirs is approximately 48 million gallons per day. Water sources vary among
the individual systems, but overall approximately 45% of the total dependable
yield comes from reservoirs and 55% from wells. Our water companies are
currently under a "Water Supply Watch" due to unusually dry weather conditions
in the fall of 2001 and this winter. As a result of these unusually dry
conditions, water levels in many of the companies' reservoirs and groundwater
wells remain below their normal levels for this time of year. While this is not
a problem now, an extended dry period could lead to increased concerns and
restricted water use this spring or summer.
We supply water, and in most cases, fire protection to all or portions of 40
towns in Connecticut and Massachusetts. The following table lists the customer
count, operating revenues and customer water consumption for each of our water
companies as of December 31, 2001.
5
Number Water Customer Water
Water Company of Revenues Consumption
customers ($000's) (millions of gallons)
Barnstable Water Company 7,116 $ 2,507 833
Connecticut Water Company 66,800 40,220 5,920
Crystal Water Company 3,616 2,038 422
Gallup Water Service 1,160 627 84
Total 78,692 $45,392 7,259
The following table breaks down the above total figures by customer class:
Number Water Customer Water
Customer Class of Revenues Consumption
customers ($000's) (millions of gallons)
Residential 69,643 $28,621 5,030
Commercial 5,759 5,941 1,471
Industrial 389 1,687 430
Public Authority 515 1,460 328
Fire Protection 1,467 7,187 0
Other (including
non-metered accounts) 919 496 0
Total 78,692 $45,392 7,259
Disposition of Property
We have established a policy of disposing of various small, discrete parcels of
land over the next several years. This excess land, which is no longer required
for water supply purposes, totals less than 400 acres as of December 31, 2001.
We must comply with many regulatory restrictions before we can dispose of public
water company property. Connecticut is continuing to encourage the protection of
open space land. Legislation was passed in 2000 creating a new Connecticut
corporate tax credit, which makes the donation of our excess land for protected
open space purposes potentially more economically beneficial than a sale of the
land. We have taken advantage of the new tax credit again in 2001 by donating
134 acres of land to the Town of Middlebury and expect to donate approximately
65 acres to two towns in 2002. The new tax credit, in combination with federal
and state charitable contribution deductions, resulted in after-tax gains from
these transactions of approximately $1,121,000 in 2001.
Competition
Our water companies face competition, presently not material, from a few private
water systems operating within, or adjacent to, their franchise areas and from
municipal and public authority systems whose service areas in some cases overlap
portions of our water companies' franchise areas.
6
Employees
As of December 31, 2001, we employed a total of 181 persons. Our employees are
not covered by collective bargaining agreements. We believe that our relations
with our employees are good.
Expansion
In February 2001 we acquired the Barnstable Holding Company ("Barnstable") which
is the parent company of the 7,200 customer Barnstable Water Company located in
Barnstable, Massachusetts and BARLACO, a real estate company owning
approximately 100 acres of residential and commercial land in Hyannis and
Barnstable, Massachusetts. The transaction was accounted for using the `pooling
of interests' accounting method, and all financial statements have been restated
to include the results of the acquired company for all periods presented.
During 2001, we acquired the Killingly Industrial Park Municipal Water System
for approximately $1.1 million. This system serves 51 residential and industrial
customers in close proximity to Crystal Water's own water system, and has
significant growth potential. In addition, we agreed to acquire a small
municipal water system in Middlebury, Connecticut. The system serves 180
residential, commercial and industrial customers in a high-growth area. Our cost
to acquire the system is estimated at $900,000, which includes the cost of
constructing a 7,700-foot main extension to connect into our existing system and
the cost of a booster pump station. The improvements are scheduled to be
completed in 2002. With a more reliable supply of quality water soon to be
available to Middlebury, we expect to see higher revenues from this system as
its customer base grows.
On February 22, 2002, the Company entered into a definitive agreement to
purchase 100% of the outstanding common stock of Unionville Water Company for
$6.3 million in our Company's common stock. The Unionville Water Company is
located in Farmington, Connecticut. It has over 5,400 customers and annual
revenues of approximately $2.4 million.
In 1999, we formed a three-year joint venture with Hungerfords, Inc., a pump
service provider with annual revenues of approximately $1.3 million, which has
been in business in Connecticut for over 75 years. If specific financial targets
are met, the Company will purchase Hungerfords in 2002.
7
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. Substantially all of the
properties owned by our Barnstable Water, Connecticut Water and Crystal Water
companies are subject to liens as security for debt. The net utility plant
balances of the water companies at December 31, 2001 are as follows:
Net Utility Plant
(000's)
Barnstable $ 6,407
Connecticut Water 183,604
Crystal 9,351
Gallup 2,968
Total $202,330
The size of each company's system(s) in terms of miles of mains is as follows:
Miles of Transmission
and Distribution Water
Mains
Barnstable Water 101
Connecticut Water 1,052
Crystal 66
Gallup 18
Total 1,237
We believe that our properties are maintained in good condition and in
accordance with current standards of good waterworks industry practice.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings. Although the results of legal
proceedings cannot be predicted with certainty, there are no pending legal
proceedings to which we or any of our subsidiaries are a party or to which any
of our properties is the subject that presents a reasonable likelihood of a
material adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the NASDAQ exchange under the symbol "CTWS". Our
quarterly high and low stock prices as reported by NASDAQ and the cash dividends
we paid during 2001 and 2000 are listed as follows:
PRICE DIVIDENDS
Period HIGH LOW PAID*
2001
First Quarter $22.66 $19.50 $.2000
Second Quarter 27.16 20.16 $.2000
Third Quarter 28.10 22.90 $.2022
Fourth Quarter 32.21 25.75 $.2022
2000
First Quarter $22.67 $18.00 $.1977
Second Quarter 20.67 17.00 $.1977
Third Quarter 23.50 17.83 $.2000
Fourth Quarter 21.83 18.67 $.2000
* Historic (Excludes the subsequent effect of the 2001 Barnstable merger
accounted for under the "pooling-of-interests" accounting method.)
As of March 1, 2002 there were approximately 5,000 holders of record of our
common stock.
We presently intend to pay quarterly cash dividends in 2002 on March 15, June
17, September 17 and December 16 subject to our earnings and financial
condition, regulatory requirements and other factors our Board of Directors may
deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
SUPPLEMENTAL INFORMATION (UNAUDITED)
(2001 - 1991 Restated)
SELECTED FINANCIAL DATA
Years Ended December 31, (thousands of dollars except per share
amounts and where otherwise indicated) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Operating Revenues $ 45,392 $ 43,997 $ 45,171
Operating Expenses $ 34,078 $ 32,335 $ 33,382
Operating Income $ 11,314 $ 11,662 $ 11,789
Interest and Debt Expense $ 4,632 $ 4,782 $ 4,720
Net Income Applicable to Common Stock $ 8,401 $ 7,858 $ 7,780
Cash Common Stock Dividends Paid $ 6,105 $ 5,890 $ 5,688
Dividend Payout Ratio 73% 75% 73%
Weighted Average Common Shares Outstanding* 7,619,031 7,604,546 7,593,376
Basic Earnings Per Average Common Share* $ 1.10 $ 1.03 $ 1.02
Number of Shares Outstanding at Year End* 7,649,362 7,604,594 7,596,141
ROE on Year End Common Equity 11.9% 11.7% 12.0%
Declared Common Dividends Per Share* ** $ 0.804 $ 0.795 $ 0.787
CONSOLIDATED BALANCE SHEET
Common Stockholders' Equity $ 70,783 $ 67,110 $ 64,915
Long-Term Debt $ 63,953 $ 66,283 $ 67,099
Minority Interest $ -- $ 117 $ 142
Preferred Stock (Consolidated, Excluding Current Maturities) $ 847 $ 847 $ 847
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization $ 135,583 $ 134,357 $ 133,003
Stockholders' Equity (Includes Preferred Stock) 53% 51% 49%
Long-Term Debt 47% 49% 51%
Net Utility Plant $ 202,330 $ 193,169 $ 187,613
Book Value - Per Common Share* $ 9.25 $ 8.82 $ 8.55
OPERATING REVENUES BY
REVENUE CLASS
Residential $ 28,621 $ 27,364 $ 28,422
Commercial 5,941 5,817 6,093
Industrial 1,687 1,905 1,850
Public Authority 1,460 1,481 1,561
Fire Protection 7,187 6,960 6,861
Other (including non-metered accounts) 496 470 384
- ---------------------------------------------------------------------------------------------------------------
Total Operating Revenues $ 45,392 $ 43,997 $ 45,171
- ---------------------------------------------------------------------------------------------------------------
Number of Customers (Average) 78,156 77,183 76,061
Billed Consumption (Millions of Gallons) 7,259 6,911 7,330
Number of Employees 181 184 180
Years Ended December 31, (thousands of dollars except per share
amounts and where otherwise indicated) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Operating Revenues $ 42,623 $ 43,080
Operating Expenses $ 31,302 $ 31,728
Operating Income $ 11,321 $ 11,352
Interest and Debt Expense $ 4,787 $ 4,799
Net Income Applicable to Common Stock $ 7,388 $ 7,325
Cash Common Stock Dividends Paid $ 5,519 $ 5,419
Dividend Payout Ratio 75% 74%
Weighted Average Common Shares Outstanding* 7,579,176 7,563,080
Basic Earnings Per Average Common Share* $ 0.97 $ 0.97
Number of Shares Outstanding at Year End* 7,580,879 7,567,905
ROE on Year End Common Equity 11.8% 12.1%
Declared Common Dividends Per Share* ** $ 0.778 $ 0.769
CONSOLIDATED BALANCE SHEET
Common Stockholders' Equity $ 62,572 $ 60,458
Long-Term Debt $ 67,386 $ 59,906
Minority Interest $ 136 $ 129
Preferred Stock (Consolidated, Excluding Current Maturities) $ 847 $ 847
- ---------------------------------------------------------------------------------------------
Total Capitalization $ 130,941 $ 121,340
Stockholders' Equity (Includes Preferred Stock) 48% 51%
Long-Term Debt 52% 49%
Net Utility Plant $ 182,202 $ 178,168
Book Value - Per Common Share* $ 8.25 $ 7.99
OPERATING REVENUES BY
REVENUE CLASS
Residential $ 26,694 $ 26,949
Commercial 5,678 5,661
Industrial 1,747 1,962
Public Authority 1,394 1,402
Fire Protection 6,728 6,764
Other (including non-metered accounts) 382 342
- ---------------------------------------------------------------------------------------------
Total Operating Revenues $ 42,623 $ 43,080
- ---------------------------------------------------------------------------------------------
Number of Customers (Average) 74,971 73,903
Billed Consumption (Millions of Gallons) 6,949 6,882
Number of Employees 189 190
* Reflects three-for-two common stock split as described in Note 3 in the
accompanying Notes to Consolidated Financial Statements
** Not restated for subsequent acquisitions accounted for under the
pooling-of-interests accounting method.
10
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 ten wholly owned
subsidiary companies. Approximately 99% of the Company's earnings, excluding one
time acquisition costs, are attributable to the Company's regulated water
companies: The Connecticut Water Company, The Gallup Water Service,
Incorporated, The Crystal Water Company of Danielson and The Barnstable Water
Company. These four companies supply water to 78,692 customers in 40 towns
throughout Connecticut and Massachusetts. Each of these companies is subject to
state regulation regarding financial issues, rates, and operating issues, and to
various other state and federal regulatory agencies concerning water quality and
environmental standards. In addition to its regulated utilities, the Company
owns six unregulated companies: Chester Realty, Inc., a real estate company in
Connecticut, Connecticut Water Utility Services, Inc., which provides contract
water and sewer operations and other water related services, Connecticut Water
Emergency Services, Inc., a provider of drinking and pool water by tanker truck,
Crystal Water Utilities Corporation, a holding company which owns The Crystal
Water Company of Danielson and three small rental properties, BARLACO, a real
estate company in Massachusetts, and Barnstable Holding Company, a holding
company which owns The Barnstable Water Company and BARLACO. These unregulated
companies currently generate 1% of the Company's total earnings.
2001 was the Company's 11th consecutive year of increased earnings and its 32nd
consecutive year of increased dividend payments, excluding dividends paid by
companies subsequently acquired and accounted for under the
"pooling-of-interests" method.
11
REGULATORY MATTERS AND INFLATION
The Connecticut Water Company is the Company's largest subsidiary serving over
66,800 of the Company's 78,692 utility customers. Connecticut Water Company's
revenues, like the Company's other three regulated water companies, 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.
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 state regulatory approval.
We do not presently plan to request rate relief for any of our regulated
companies. Future economic and financial market conditions, coupled with
governmental regulations and fiscal policy, plus other factors that are
unpredictable and often beyond our control, will influence when we request
revisions to rates charged to our customers.
The Company is also subject to environmental and water quality regulations.
Costs to comply with environmental and water quality regulations are
substantial. We are currently in compliance with current regulations, but the
regulations are subject to change. The costs to comply with future changes in
state or federal regulations, which could require us to modify current
filtration facilities and/or construct new ones, or to replace any reduction of
the safe yield from any of our current sources of supply, could be substantial.
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.
Our water companies are currently under a "Water Supply Watch" due to the
unusually dry weather conditions in the fall of 2001 and this winter. As a
result of these unusually dry conditions, water levels in many of the companies'
reservoirs and groundwater wells remain below their normal levels for this time
of year. While this is not a problem now, an extended dry period could lead to
increased concerns and restricted water use this spring or summer.
After the terrorist strikes on September 11, 2001, water companies have had to
increase security on their water supplies and facilities. This is resulting in
increases in operating and capital costs. These costs are typically recoverable
in a rate proceeding.
12
The Company has received regulatory approval to donate certain parcels of its
land in the period 2002 to 2004. Over the three-year period these donations are
expected to increase net earnings by approximately $2,000,000 as a result of
favorable tax treatment under Federal and Connecticut tax laws.
In February 2002, the Company entered into a definitive agreement to purchase
100% of the outstanding common stock of Unionville Water Company in exchange for
$6.3 million of our Company's common stock. The Unionville Water Company is
located in Farmington, Connecticut. It has over 5,400 customers and annual
revenues of approximately $2.4 million. The completion of the transaction is
subject to approvals by the Connecticut Department of Public Utility Control and
Unionville's shareholders and the satisfaction of other conditions.
RESULTS OF OPERATIONS
2001 COMPARED WITH 2000
On February 23, 2001, the Company acquired Barnstable Holding Company
and accounted for the acquisition as a "pooling-of-interests".
Financial statements have been restated to include the results of the
acquired company for all periods presented.
On September 7, 2001, the Company effected a three-for-two stock
split. The distribution of these shares increased the number of shares
outstanding by 2,562,052 shares. All outstanding common shares and per
share amounts in this report have been restated to reflect this stock
split. Appropriate adjustments to reflect this stock split were made
to the Company's Performance Stock Program, the Savings Plan of the
Connecticut Water Company, and the Company's Dividend Reinvestment and
Common Stock Purchase Plan.
Net income applicable to common stock for 2001 increased from that of
2000 by $543,000, or $.07 per average basic share. The increase is
primarily due to the following:
- Net Other Income (Deductions) increased $741,000:
- The increase in Other Income is primarily due to The
Connecticut Water Company's 2001 donation of 134.1 acres of
land to the Town of Middlebury, Connecticut. This donation
resulted in a net after tax gain of $1,121,000 resulting from
a 50% Connecticut state income tax credit in addition to state
and federal charitable contribution tax deductions.
- Net Non-Water Sales Earnings increased $106,000 or 39.8%
primarily as a result of increased earnings from our
unregulated activities. A substantial amount of the increase
is due to our Linebacker(R) maintenance service program.
Initiated in 2000, for a small annual cost to our customers,
the Linebacker(R) program protects participants from
incurring large expenses when their service lines break. As of
December 31, 2001 approximately 9,600 of the Company's
customers are protected by Linebacker(R).
13
- Interest and Debt Expense decreased $150,000:
- The decrease in Interest and Debt Expense is due both to
declines in average balances of interim debt outstanding and
lower interest rates. The weighted cost of the Company's
interim debt at December 31, 2001 was 2.31% as compared with
7.25% at December 31, 2000.
- Utility Operating Income decreased $348,000:
- Operating Expenses increased $1,743,000 or 5.4% primarily due
to increased Operation and Maintenance expenses related to
increases in wages, employee benefits and maintenance costs,
an increase in Depreciation Expense due to increased
investment in utility plant, increases in Income Tax Expense
primarily due to higher taxable income, partially offset by a
decrease in other taxes primarily due to property tax rebates
and lower property tax revaluations. Higher Operating Revenues
partially offset the increase in Operating Expenses.
- Operating revenues increased $1,395,000 or 3.2% in 2001 as
compared to 2000. This increase was due to increased water
consumption brought on by a drier 2001 summer and fall plus
utility customer growth.
2000 COMPARED WITH 1999
Net income applicable to common stock for 2000 increased from that of
1999 by $78,000, or $.01 per average basic share. The increase in
earnings was primarily due to tax benefits of a 2000 land donation and
higher earnings on non-water sales and services.
The following are the components of the 2000 earnings increase:
- Net Other Income (Deductions) increased $267,000:
- The increase in other income was primarily due to The
Connecticut Water Company's 2000 donation of 104.6 acres of
land to the Town of Naugatuck, Connecticut. This donation
resulted in a net after tax gain of $474,000.
- Net Non-Water Sales Earnings increased $111,000, or 72%
primarily as a result of increased earnings from our
unregulated activities.
- Utility Operating Income decreased $127,000:
- Operating Revenues decreased $1,174,000, or 2.6% in 2000 as
compared to 1999. This decrease was due to fluctuations in the
summer weather, which directly affects our customers' water
usage. The 1999 summer was unusually hot and dry while the 2000
summer was cool and rainy. Lower Operation and Maintenance
expense partially offset the decrease in Operating Revenues.
- Operation and Maintenance expenses were reduced $856,000, or
4.4% from 1999 levels due to cost containment efforts. Income
Taxes classified as Operating Expenses decreased $578,000
partially due to the decreased Operating Income. Depreciation
and Taxes other than Income Taxes (primarily property taxes)
increased in total by $387,000 primarily as a result of the
increased investment in Utility Plant.
14
- Interest and Debt Expense increased $62,000:
- The increase in Interest and Debt Expense was primarily due to
higher interest rates on interim debt. The average weighted
cost of this debt was 7.25% in 2000 as compared with 7.01% in
1999.
LIQUIDITY AND CAPITAL RESOURCES
Interim Bank Loans Payable at year end 2001 was $1,825,000, $25,000 higher than
at the end of 2000.
We consider the current $9,000,000 line of credit with two banks adequate to
finance any expected short-term borrowing requirements that may arise from
operations during 2002. The lines of credit expire in April and May of 2002. We
expect both lines of credit to be renewed. Interest expense charged on interim
bank loans will fluctuate based on financial market conditions.
The Board of Directors has approved a $10,155,000 construction budget for 2002,
net of amounts to be financed by customer advances and contributions in aid of
construction. Funds provided by operating activities are expected to finance
this entire construction program given normal weather patterns and related
operating revenue billings. Refer to Note 11, Utility Plant and Construction
Program, in Notes to Consolidated Financial Statements for an additional
discussion of the Company's future construction program.
FORWARD LOOKING INFORMATION
This report, including management's discussion and analysis, contains certain
forward looking statements regarding the Company's results of operations and
financial position. These forward looking statements are based on current
information and expectations, and are subject to risks and uncertainties, which
could cause the Company's actual results to differ materially from expected
results.
Our water companies are subject to various federal and state regulatory agencies
concerning water quality and environmental standards. Generally, the water
industry is materially dependent on the adequacy of approved rates to allow for
a fair rate of return on the investment in utility plant. The ability to
maintain our operating costs at the lowest possible level while providing good
quality water service is beneficial to customers and stockholders. Profitability
is also dependent on the timeliness of rate relief, when necessary, and numerous
factors over which we have little or no control, such as the quantity of
rainfall and temperature, industrial demand, financing costs, energy rates, and
compliance with environmental and water quality regulations.
15
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
Arthur Andersen LLP are included herein on pages F-2 through F-22.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
16
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE COMPANY
Period Held or Prior Term of Office Expires
Name Age Office Position
M. T. Chiaraluce 59 President, Chief Held position of 2002 Annual Meeting
Executive Officer and President since January,
Chairman of the Board 1992 and position of
Chief Executive Officer
since July, 1992
D. C. Benoit 44 Vice President - Finance, Held current position or 2002 Annual Meeting
Chief Financial Officer and other executive position
Treasurer with the company since
April, 1996
J. R. McQueen 59 Vice President - Held current position or
Engineering and other management or 2002 Annual Meeting
Planning engineering position with
the Company since
October, 1965
T. P. O'Neill 48 Vice President - Held current position or
Operations other engineering 2002 Annual Meeting
position with the
Company since February,
1980
M. P. Westbrook 42 Vice President - Held current position or
Administration and other management 2002 Annual Meeting
Government Affairs position with the
Company since
September, 1988
P. J. Bancroft 52 Assistant Treasurer and Held current position or
Controller other accounting position 2002 Annual Meeting
with the Company since
October, 1979
M. G. DiAcri 56 Corporate Secretary Held administrative 2002 Annual Meeting
position with the
Company since February,
1990
There are no family relationships between any of the Directors and Executive
Officers of the Company.
17
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 to the Company's definitive proxy
statement filed on EDGAR on or about March 19, 2002. Information concerning the
executive officers of the Company is included as Item 10 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 and Schedule F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the years
Ended December 31, 2001, 2000, and 1999 F-3
Consolidated Balance Sheets at December 31, 2001
and 2000 F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6
18
2. Financial Statement Schedules:
The following schedules of the Company are included on the 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,
2001, 2000 and 1999 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 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 September 10, 2001, the Company filed a Form 8-K dated
September 10, 2001, reporting in Item 5, Other Events, that
the Company had completed a three-for-two stock split on its
common shares.
On December 3, 2001, the Company filed a Form 8-K dated
December 3, 2001, reporting in Item 5, Other Events, that the
Company had reached an preliminary agreement to acquire
Unionville Water Company in a common stock exchange
transaction.
On February 14, 2002, the Company filed a Form 8-K dated
February 13, 2002, reporting in Item 5, Other Events, that the
Company announced its earnings for the year ended December 31,
2001.
19
On February 26, 2002, the Company filed a Form 8-K dated
February 26, 2002, reporting in Item 5, Other Events, that the
Company executed a definitive merger agreement with The
Unionville Water Company to combine their respective water
utility operations in a stock-for-stock transaction valued at
approximately $6.3 million.
F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
Index to Consolidated Financial Statements and Schedule F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999 F-3
Consolidated Balance Sheets at December 31, 2001, and 2000 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6
Report of Independent Public Accountants on Schedule S-1
Valuation and Qualifying Accounts S-2
F-2
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., and Subsidiaries (a Connecticut corporation) as of December
31, 2001 and 2000, and the related consolidated statements of income and cash
flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States. 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, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
- ------------------------
Hartford, Connecticut
February 8, 2002
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Restated) (Restated)
For the Years Ended December 31, (in thousands, except per share data) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Operating Revenues $45,392 $43,997 $45,171
--------------- --------------- --------------
Operating Expenses
Operation and Maintenance 20,076 18,380 19,236
Depreciation 4,837 4,718 4,593
Income Taxes 4,777 4,579 5,157
Taxes Other Than Income Taxes 4,388 4,658 4,396
--------------- --------------- --------------
Total Operating Expenses 34,078 32,335 33,382
--------------- --------------- --------------
Utility Operating Income 11,314 11,662 11,789
--------------- --------------- --------------
Other Income (Deductions), Net of Taxes
Gain on Property Transactions 1,121 532 97
Non-Water Sales Earnings 372 266 155
Allowance for Funds Used During Construction 439 416 435
Merger Costs (352) (408) (95)
Other 177 210 157
--------------- --------------- --------------
Total Other Income (Deductions), Net of Taxes 1,757 1,016 749
--------------- --------------- --------------
Interest and Debt Expenses
Interest on Long-Term Debt 4,057 4,100 4,077
Other Interest Charges 353 460 395
Amortization of Debt Expense 222 222 248
--------------- --------------- --------------
Total Interest and Debt Expenses 4,632 4,782 4,720
--------------- --------------- --------------
Net Income Before Preferred Dividends 8,439 7,896 7,818
Preferred Stock Dividend Requirement 38 38 38
--------------- --------------- --------------
Net Income Applicable to Common Stock $8,401 $7,858 $7,780
=============== =============== ==============
Weighted Average Common Shares Outstanding:
Basic 7,619 7,605 7,593
Diluted 7,662 7,633 7,609
Earnings Per Common Share:
Basic $1.10 $1.03 $1.02
Diluted $1.10 $1.03 $1.02
The accompanying notes are an integral part of these consolidated financial
statements.
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Restated)
December 31, (in thousands, except share amounts) 2001 2000
- -------------------------------------------------------------------------------------------------------------
ASSETS
Utility Plant $267,575 $257,634
Construction Work in Progress 12,761 8,359
Utility Plant Acquisition Adjustments (1,309) (1,256)
-------------- ---------------
279,027 264,737
Accumulated Provision for Depreciation (76,697) (71,568)
-------------- ---------------
Net Utility Plant 202,330 193,169
-------------- ---------------
Other Property and Investments 3,334 3,039
-------------- ---------------
Cash 102 314
Accounts Receivable (Less Allowance, 2001 - $234; 2000 - $218) 4,811 4,831
Accrued Unbilled Revenues 3,402 3,229
Materials and Supplies, at Average Cost 869 795
Prepayments and Other Current Assets 239 122
-------------- ---------------
Total Current Assets 9,423 9,291
-------------- ---------------
Unamortized Debt Issuance Expense 5,308 5,530
Unrecovered Income Taxes 8,963 9,040
Post-Retirement Benefits Other Than Pension 849 953
Other Costs 1,507 1,524
-------------- ---------------
Total Deferred Charges and Regulatory Assets 16,627 17,047
-------------- ---------------
Total Assets $231,714 $222,546
============== ===============
CAPITALIZATION AND LIABILITIES
Common Stockholders' Equity:
Common Stock without Par Value:
Authorized - 15,000,000 Shares - Issued and Outstanding:
2001 - 7,649,362; 2000 - 7,604,594 $46,342 $44,965
Retained Earnings 24,441 22,145
-------------- ---------------
Common Stockholders' Equity 70,783 67,110
Preferred Stock 847 847
Minority Interest - - 117
Long-Term Debt 63,953 66,283
-------------- ---------------
Total Capitalization 135,583 134,357
-------------- ---------------
Interim Bank Loans Payable 1,825 1,800
Current Portion of Long-Term Debt 2,205 280
Accounts Payable 6,079 5,973
Accrued Taxes 1,099 753
Accrued Interest 1,284 710
Other Current Liabilities 164 101
-------------- ---------------
Total Current Liabilities 12,656 9,617
-------------- ---------------
Advances for Construction 16,075 17,062
-------------- ---------------
Contributions in Aid of Construction 32,277 27,009
-------------- ---------------
Deferred Federal and State Income Taxes 18,902 18,165
-------------- ---------------
Unfunded Future Income Taxes 8,223 8,546
-------------- ---------------
Long-Term Compensation Arrangements 6,028 5,758
-------------- ---------------
Unamortized Investment Tax Credits 1,970 2,032
-------------- ---------------
Commitments and Contingencies
-------------- ---------------
Total Capitalization and Liabilities $231,714 $222,546
============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Restated) (Restated)
For the Years Ended December 31, (in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income Before Preferred Dividends $8,439 $7,896 $7,818
-------------- -------------- ---------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation (including $169 in 2001, $166 in 2000,
and $140 in 1999 charged to other accounts) 5,006 4,884 4,733
Change in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable and
Accrued Unbilled Revenues (153) 541 (66)
(Increase) Decrease in Other Current Assets (191) 123 (24)
(Increase) Decrease in Other Non-Current Items (45) 43 343
Increase (Decrease) in Accounts Payable, Accrued
Expenses and Other Current Liabilities 1,089 531 548
Increase in Deferred Income Taxes and
Investment Tax Credits, Net 675 1,168 1,067
-------------- -------------- ---------------
Total Adjustments 6,381 7,290 6,601
-------------- -------------- ---------------
Net Cash Provided by Operating Activities 14,820 15,186 14,419
-------------- -------------- ---------------
Investing Activities:
Gross Additions to Utility Plant (including
Allowance For Funds Used During Construction of
$439 in 2001, $428 in 2000 and $454 in 1999) (14,218) (10,542) (10,373)
-------------- -------------- ---------------
Financing Activities:
Proceeds from Interim Bank Loans 1,825 1,800 3,061
Repayment of Interim Bank Loans (1,800) (3,061) (2,490)
Reduction of Long-Term Debt Including Current Portion (405) (805) (517)
Proceeds from Issuance of Common Stock 1,392 227 251
Advances, Contributions and Funds from
Others for Construction, Net 4,332 2,310 2,097
Costs Incurred to Issue Long-Term Debt and Common Stock (15) - - - -
Cash Dividends Paid (6,143) (5,928) (5,726)
-------------- -------------- ---------------
Net Cash Provided by (Used in) Financing Activities (814) (5,457) (3,324)
-------------- -------------- ---------------
Net Increase (Decrease) in Cash (212) (813) 722
Cash at Beginning of Year 314 1,127 405
-------------- -------------- ---------------
Cash at End of Year $102 $314 $1,127
============== ============== ===============
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest (Net of Amounts Capitalized) $3,836 $4,176 $4,678
State and Federal Income Taxes $3,260 $3,580 $3,764
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -The consolidated financial statements include the
operations of Connecticut Water Service, Inc., (the Company) an investor-owned
holding company and its ten wholly owned subsidiaries, listed below:
The Connecticut Water Company (Connecticut Water)
The Gallup Water Service, Incorporated (Gallup)
Crystal Water Utilities Corporation
The Crystal Water Company of Danielson (Crystal Water)
Chester Realty, Inc.
Connecticut Water Utility Services, Inc.
Connecticut Water Emergency Services, Inc.
Barnstable Holding Company
The Barnstable Water Company (Barnstable Water)
BARLACO
During 2001 the Company acquired Barnstable Holding Company which owns The
Barnstable Water Company and BARLACO. This acquisition was accounted for as a
"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, Crystal, and Barnstable Water (our "water companies")
are public water utility companies serving 78,692 customers in 40 towns
throughout Connecticut and Massachusetts.
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 net profits from land sales
are included in the "Gain on Property Transactions" category in the "Other
Income (Deductions)" section of the Consolidated Statements of Income. Chester's
net profits from rental of property are included in the "Other Income
(Deductions)" section of the Consolidated Statements of Income in the "Non-Water
Sales Earnings" category.
Connecticut Water Utility Services, Inc. is engaged in water-related services,
including the Linebacker (R) program, 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.
Connecticut Water Emergency Services, Inc. is a provider of emergency drinking
water and pool water via tanker trucks. Its net earnings are included in the
"Non-Water Sales Earnings" category in the "Other Income (Deductions)" section
of the Consolidated Statements of Income.
Barnstable Holding Company is a holding company, owning the stock of Barnstable
Water Company and BARLACO. BARLACO is a real estate company whose net profits
from land sales are included in "Gain on Property Transactions" 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 - Three of our 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 Barnstable Water Company is subject to the regulation of the Massachusetts
Department of Telecommunications and Energy (DTE) and follows accounting
policies prescribed by the DTE. The Company prepares its financial statements in
accordance with accounting principles generally accepted in the United States
which include 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
state regulators, through the rate regulation process, can create regulatory
assets that result when costs are allowed for ratemaking purposes in a period
after the period in which the costs would be charged to expense by an
unregulated enterprise. The balance sheets include regulatory assets and
liabilities as appropriate, primarily related to income taxes and
post-retirement benefits costs. The Company believes, based on current
regulatory circumstances, that the regulatory assets recorded are likely to be
recovered and that its use of regulatory accounting is appropriate and in
accordance with the provisions of FAS 71. Material regulatory assets are earning
a return.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-7
REVENUES - Most of our water customers are billed quarterly, with the exception
of larger commercial and industrial customers, as well as 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
multiplied by 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 earned but 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 debt and equity 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, 2001, Connecticut Water has capitalized approximately $1,937,000 of AFUDC
relating to financing these acquisitions. This amount is expected to be
recovered in Connecticut Water's next rate case.
Each Company's allowed rate of return on rate base is used to calculate its
AFUDC.
DEPRECIATION - Over 99% of the Company's depreciable plant is owned by its four
water companies. Depreciation is computed on a straight-line basis at various
rates as approved by the state regulators 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 2.0% for 2001, 2.1% for 2000
and 2.1% for 1999.
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 or liability has been
recorded in the accompanying consolidated balance sheets.
The Company believes that all deferred income tax assets will be realized in the
future. Approximately $700,000 of the December 31, 2001 and $1,250,000 of the
December 31, 2000 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 twelve-month period
beginning on July 1 following the lien date, corresponding with the period in
which the municipal services are provided.
OTHER DEFERRED COSTS - In accordance with 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 state
regulators.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-8
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, 2001, 2000, and 1999.
Years Ended 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Basic earnings per share $1.10 $1.03 $1.02
Dilutive effect of unexercised stock options -- -- --
- ------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $1.10 $1.03 $1.02
==================================================================================================================
Numerator (in thousands):
- ------------------------------------------------------------------------------------------------------------------
Basic net income $8,401 $7,858 $7,780
Diluted net income $8,401 $7,858 $7,780
Denominator (in thousands):
- ------------------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 7,619 7,605 7,593
Dilutive effect of unexercised stock options 43 28 16
- ------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 7,662 7,633 7,609
==================================================================================================================
RECLASSIFICATION - Certain reclassifications have been made to conform
previously reported data to the current presentation.
NEW ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 141,
Business Combinations, which requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 and eliminates
the pooling-of-interests method. The Company adopted this standard for business
combinations after June 30, 2001.
In June 2001, the FASB issued FAS No. 142, Goodwill and Other Intangible Assets,
effective for the Company's 2002 fiscal year. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to at least annual impairment tests. Other identifiable
intangible assets will continue to be amortized over their useful lives and
reviewed for impairment in accordance with existing impairment standards. The
Company does not believe that the adoption of this statement will have a
material impact on the financial statements.
In October 2001, the FASB issued FAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets, which replaces FAS 121. FAS 144 retaines
substantially all of the requirements of FAS 121 while resolving certain
implementation issues. FAS 144 also changes accounting for discontinued
operations. FAS No. 144 is effective for fiscal year 2002. The Company does not
believe that the adoption of this statement will have a material impact on the
financial statements.
NOTE 2: 2001 POOLING OF INTERESTS ACQUISITION
On February 23, 2001 the Company issued 216,656 shares of its common stock in
exchange for all outstanding common stock of Barnstable Holding Company. The
minority interests in the Barnstable Water Company and BARLACO were also
acquired in this transaction.
The combined and separate results of Connecticut Water Service and Barnstable
Holding Company during the period preceding and after the merger were as
follows:
(In thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Applicable to Common Stock
Connecticut Water Service $8,641 $7,925 $7,489
Barnstable Holding Company (240) (67) 291
- ------------------------------------------------------------------------------------------------------------------
Combined Net Income $8,401 $7,858 $7,780
==================================================================================================================
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-9
NOTE 3: COMMON STOCK SPLIT
In September 2001 the Company effected a three-for-two common stock split. The
distribution of these shares increased the number of shares outstanding by
2,562,052 shares. In conjunction with the stock split, a cash payment was issued
to shareholders in lieu of issuance of any fractional shares. The fractional
share adjustment amounted to a reduction of shares outstanding of 752 shares,
after the split. All outstanding common shares and per share amounts in this
report have been restated to reflect the stock split. Appropriate adjustments to
reflect the stock split were made to the Company's Performance Stock Program.
NOTE 4: INCOME TAX EXPENSE
Income Tax Expense is comprised of the following:
(In thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Federal Classified as Operating Expense $4,225 $4,002 $4,448
Federal Classified as Other Income:
Land Sales -- 32 52
Land Donation (254) (132) --
Non-Water Sales 164 127 68
Other (42) (21) (65)
- ------------------------------------------------------------------------------------------------------------------
Total Federal Income Tax Expense 4,093 4,008 4,503
- ------------------------------------------------------------------------------------------------------------------
State Classified as Operating Expense 552 577 709
State Classified as Other Income:
Land Sales -- 7 12
Land Donation (1,012) (526) --
Non-Water Sales 41 29 19
Other 6 6 5
- ------------------------------------------------------------------------------------------------------------------
Total State Income Tax Expense (Benefit) (413) 93 745
==================================================================================================================
Total Income Tax Expense $3,680 $4,101 $5,248
==================================================================================================================
The components of the Federal and State income tax provisions are:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Current:
Federal $3,062 $2,853 $3,434
State (48) 80 747
- ------------------------------------------------------------------------------------------------------------------
Total Current 3,014 2,933 4,181
- ------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes, Net:
Federal
Investment Tax Credit (63) (61) (63)
Capitalized Interest 23 42 36
Depreciation 910 1,119 1,115
Other 161 55 (19)
- ------------------------------------------------------------------------------------------------------------------
Total Federal 1,031 1,155 1,069
- ------------------------------------------------------------------------------------------------------------------
State
Depreciation (1) 2 2
Other (364) 11 (4)
- ------------------------------------------------------------------------------------------------------------------
Total State (365) 13 (2)
==================================================================================================================
Total Deferred Income Taxes, Net 666 1,168 1,067
- ------------------------------------------------------------------------------------------------------------------
Total $3,680 $4,101 $5,248
==================================================================================================================
Deferred income tax liabilities are categorized as follows on the Consolidated
Balance Sheet:
2001 2000
- ---------------------------------------------------------------------------------------------------
Deferred Federal and State Income Taxes $18,902 $18,165
Unfunded Future Income Taxes 8,223 8,546
- ---------------------------------------------------------------------------------------------------
$27,125 $26,711
===================================================================================================
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-10
Deferred income tax liabilities are comprised of the following:
2001 2000
- ---------------------------------------------------------------------------------------------------
Depreciation $24,057 $23,147
Other 3,068 3,564
- ---------------------------------------------------------------------------------------------------
Net deferred income tax liability $27,125 $26,711
- ---------------------------------------------------------------------------------------------------
The calculation of Pre-Tax Income is as follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Pre-Tax Income
Net Income Before Preferred Dividends $8,439 $7,896 $7,818
Minority Interest Included (Deducted) Above -- (19) 18
Income Taxes 3,680 4,101 5,248
- ------------------------------------------------------------------------------------------------------------------
Total Pre-Tax Income $12,119 $11,978 $13,084
- ------------------------------------------------------------------------------------------------------------------
In accordance with required regulatory treatment, deferred income taxes are not
provided for certain timing differences. This treatment, along with other items,
causes differences between the statutory income tax rate and the effective
income tax rate. The differences between the effective income tax rate recorded
by the Company and the statutory Federal tax rate are as follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Federal Statutory Income Tax Rate 34.0% 34.0% 34.0%
Tax Effect of Differences:
State Income Taxes Net of Federal Benefit:
State Income Tax Excluding Land Donation Credit 3.3% 3.4% 4.0%
Land Donation Credit (5.5%) (2.9%) --
Depreciation 1.2% 1.8% 1.2%
Charitable Contribution - Land Donation (4.5%) (2.1%) --
Pension Costs .6% .3% .2%
Debt Refinancing Costs .2% .2% .2%
Non-deductible Merger Costs 1.0% 1.5% .4%
Bad Debt -- (.9%) .6%
Other .1% (1.1%) (.5%)
- ------------------------------------------------------------------------------------------------------------------
Effective Income Tax Rate 30.4% 34.2% 40.1%
- ------------------------------------------------------------------------------------------------------------------
NOTE 5: COMMON STOCK
On August 6, 2001, at a Special Meeting of the Company's shareholders, the
shareholders approved an amendment to the Company's Amended and Restated
Certificate of Incorporation increasing the number of authorized shares of no
par value common stock to 15,000,000 from 7,500,000 shares. A summary of the
changes in the common stock accounts for the period of January 1, 1999 through
December 31, 2001, appears below:
Issuance
(In thousands, except share data) Shares Amount Expense Total
- ------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1999 (restated) 7,580,880 $45,872 $(1,385) $44,487
Stock and equivalents issued through
Performance Stock Program 15,261 251 -- 251
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 (restated) 7,596,141 46,123 (1,385) 44,738
Stock and equivalents issued through
Performance Stock Program 8,453 227 -- 227
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 (restated) 7,604,594 46,350 (1,385) 44,965
Purchase Minority Interest of Barnstable
Holding Company -- 125 -- 125
Stock Split - fractional shares (752) -- (11) (11)
Stock and equivalents issued through
Performance Stock Program 5,353 457 -- 457
Stock Options Exercised 40,167 810 (4) 806
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 (1) 7,649,362 $47,742 $(1,400) $46,342
- ------------------------------------------------------------------------------------------------------------------
F-11
(1) Includes 999 restricted and 31,170 common stock equivalent shares
issued through the Performance Stock Program through December 31, 2001.
The Company's Shareholder Rights Plan was authorized by the Board of Directors
on August 12, 1998. Pursuant to the 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 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 the Company have been paid or set aside for payment. All such Preferred
Stock dividends have been paid.
NOTE 6: ANALYSIS OF RETAINED EARNINGS
The summary of the changes in Retained Earnings for the period of January 1,
1999 through December 31, 2001, appears below:
(In thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Balance, Beginning of Year (restated) $22,145 $20,177 $18,085
Income Before Preferred Stock Dividends 8,439 7,896 7,818
- ------------------------------------------------------------------------------------------------------------------
30,574 28,073 25,903
- ------------------------------------------------------------------------------------------------------------------
Dividends Declared:
Cumulative Preferred Stock, Series A, $.80 Per Share 12 12 12
Cumulative Preferred Stock, Series $.90, $.90 Per Share 26 26 26
Common Stock:
2001 $0.80 Per Share 6,105 -- --
2000 $0.77 Per Share -- 5,890 --
1999 $0.75 Per Share -- -- 5,688
- ------------------------------------------------------------------------------------------------------------------
6,143 5,928 5,726
- ------------------------------------------------------------------------------------------------------------------
Balance, End of Year $24,441 $22,145 $20,177
- ------------------------------------------------------------------------------------------------------------------
NOTE 7: 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, 2001 and 2000, the estimated fair value of the Company's long-term debt was
$62,726,000 and $64,268,000, respectively, as compared to the carrying amounts
of $63,953,000 and $66,283,000, respectively.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-12
The fair values shown above have been reported to meet the disclosure
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Values of Financial Instruments" and do not purport to
represent the amounts at which those obligations would be settled.
NOTE 8: LONG-TERM DEBT
Long-Term Debt at December 31, consisted of the following:
(In thousands) 2001 2000
- ------------------------------------------------------------------------------------------------------------------
The Connecticut Water Company
First Mortgage Bonds:
5.875% Series R, Due 2022 $14,670 $14,670
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
- ------------------------------------------------------------------------------------------------------------------
44,270 44,270
Unsecured Water Facilities Revenue Refinancing Bonds
5.05% 1998 Series A, Due 2028 9,705 9,770
5.125% 1998 Series B, Due 2028 7,770 7,830
- ------------------------------------------------------------------------------------------------------------------
17,475 17,600
Other
5.5% Unsecured Promissory Note, Due 2002 37 71
- ------------------------------------------------------------------------------------------------------------------
Total Connecticut Water Company 61,782 61,941
Crystal Water Utilities Corporation
8.0% Westbank (formerly Cargill Bank), Due 2017 126 130
- ------------------------------------------------------------------------------------------------------------------
Crystal Water Company of Danielson
7.82% Connecticut Development Authority, Due 2020 495 507
8.0% Westbank (formerly Cargill Bank), Due 2011 2,033 2,170
- ------------------------------------------------------------------------------------------------------------------
Total Crystal Water Company of Danielson 2,528 2,677
Chester Realty
6% Note Payable, Due 2006 97 115
- ------------------------------------------------------------------------------------------------------------------
Barnstable Water Company
10.2% Indianapolis Life Insurance, Due 2011 1,625 1,700
- ------------------------------------------------------------------------------------------------------------------
Total Connecticut Water Service, Inc. 66,158 66,563
Less Current Portion (2,205) (280)
- ------------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $63,953 $66,283
- ------------------------------------------------------------------------------------------------------------------
The Company's principal payments required for years 2002 - 2006 are as follows:
(In thousands)
2002 - $ 2,205
2003 - $ 139
2004 - $ 142
2005 - $ 156
2006 - $ 123
Substantially all utility plant is pledged as collateral for long-term debt.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-13
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 and 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
101.0% from September 1, 2001 through August 31, 2002.
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 and B Unsecured Water Facilities Revenue Refinancing Bonds, March 1,
2008 at 100% plus accrued interest.
The Crystal Water Company of Danielson's loan with Westbank (formerly Cargill
Bank), with a final maturity date of February 2011; contains a prepayment
premium of 1% of the outstanding balance during the fifth year (February 2001)
through and including the seventh year (February 2003) of the Loan. As of
December 31, 2001 the Company intends to prepay this note in 2002.
Barnstable Water Company's note payable has been unconditionally guaranteed by
the Company. The note agreement with Indianapolis Life Insurance Company
requires the Company to meet certain financial covenants, restricts the
Company's ability to incur additional debt unless certain financial tests are
met, restricts liens to secure additional long-term borrowings, restricts the
type of investments that the Company can purchase and contains a significant
prepayment premium. The Company was in compliance with the restrictive covenants
at December 31, 2001.
NOTE 9: PREFERRED STOCK
The Company's Preferred Stock at December 31, consisted of the following:
(In thousands, except share data) 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Connecticut Water Service, Inc.
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
- ------------------------------------------------------------------------------------------------------------------
772 772
Barnstable Water Company
6% Cumulative, $100 Par Value; Authorized, Issued and
Outstanding 750 Shares 75 75
- ------------------------------------------------------------------------------------------------------------------
Total Preferred Stock $847 $847
==================================================================================================================
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
Shareholder Rights Plan, described in Note 5, 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.
Barnstable Water Company paid Preferred Dividends of $4,500 in 2001, 2000 and
1999. These Dividends are included in the Other category of the Other Income
(Deductions) section of the Income Statement. These preferred shareholders have
1/10 of a common vote for matters related to Barnstable Water Company.
NOTE 10: BANK LINES OF CREDIT
The Company has a total of $9,000,000 in lines of credit provided by two banks.
The lines of credit expire in April and May of 2002. We expect both lines of
credit to be renewed. The total available on the lines of credit as of December
31, 2001 was $7,175,000. Bank commitment fees associated with the lines of
credit were approximately $22,500, $24,750, and $25,000 in 2001, 2000, and 1999
respectively.
At December 31, 2001 and 2000, the weighted average interest rates on short-term
borrowings outstanding were 2.31% and 7.25%, respectively.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-14
NOTE 11: UTILITY PLANT AND CONSTRUCTION PROGRAM
The components of utility plant and equipment at December 31, are as follows:
(In thousands) 2001 2000
- ---------------------------------------------------------------------------------------------------
Land $ 9,404 $ 9,340
Source of Supply 17,087 16,090
Pumping 20,331 19,134
Water Treatment 44,585 44,173
Transmission and Distribution 159,924 153,370
General (including intangible) 15,784 15,046
Held for Future Use 460 481
- ---------------------------------------------------------------------------------------------------
Total $267,575 $257,634
- ---------------------------------------------------------------------------------------------------
The amounts of depreciable utility plant at December 31, 2001 and 2000 included
in total utility plant were $249,775,000 and $237,149,000, 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 approximately
$10,155,000 during 2002, $9,124,000 during 2003, and $9,403,000 in 2004. During
the period 2005 to 2006, construction expenditures for routine improvements to
the water distribution system are expected to be approximately $8,000,000 each
year.
NOTE 12: TAXES OTHER THAN INCOME TAXES
Taxes Other than Income Taxes consist of the following:
(In thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Municipal Property Taxes $3,788 $4,070 $3,817
Payroll Taxes 600 588 579
- ------------------------------------------------------------------------------------------------------------------
Total $4,388 $4,658 $4,396
- ------------------------------------------------------------------------------------------------------------------
NOTE 13: PENSION AND OTHER POST-RETIREMENT EMPLOYEE BENEFITS
GENERAL - As of December 31, 2001, Connecticut Water Company had 161 employees,
Gallup 4, Crystal 6, Connecticut Water Emergency Services 1, and Barnstable
Water Company 9, for a total of 181 employees. The Company's officers are
employees of The Connecticut Water Company. Employee expenses are charged
between companies as appropriate.
ALL COMPANIES EXCLUDING BARNSTABLE:
PENSION - The Company and certain of its subsidiaries have noncontributory
defined benefit pension plans covering qualified employees. In general, the
Company's policy is to fund accrued pension costs as permitted by Federal income
tax and ERISA regulations. No funding was made for 2001. In 2000, a funding of
$105,000 was made.
POST-RETIREMENT BENEFITS OTHER THAN PENSION (PBOP) - In addition to providing
pension benefits, the subsidiary company, The Connecticut Water Company 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 The Connecticut Water
Company'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
2001, 2000, and 1999, were $473,100 for each year.
A deferred regulatory asset has been recorded to reflect the amount which
represents the future operating revenues expected to be recovered in customer
rates under FAS 106. In 1997, The Connecticut Water Company requested and
received approval from the DPUC to include FAS 106 costs in customer rates. The
DPUC's 1997 limited reopener of The Connecticut Water Company's general rate
proceeding allowed it to increase customer rates $208,000 annually for FAS 106
costs. The Connecticut Water Company's current rates now allow for recovery of
$473,100 annually for post-retirement benefit costs other than pension.
The Connecticut Water Company has elected to recognize the transition obligation
on a delayed basis over a period equal to the plan participants' 21.6 years of
average future service.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-15
The following tables set forth the funded status of the Company's retirement
plans and post-retirement health care benefits at December 31, the latest
valuation date:
PENSION BENEFITS OTHER BENEFITS
(In thousands) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation, beginning of year $ 16,119 $ 13,505 $ 4,037 $ 3,863
Service Cost 582 528 190 141
Interest Cost 1,163 1,060 276 283
Plan Participant Contributions N/A N/A 40 37
Plan Amendments 16 -- -- --
Actuarial loss/(gain) 387 1,723 (43) 2
Benefits paid (928) (697) (329) (289)
- -----------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 17,339 $ 16,119 $ 4,171 $ 4,037
- -----------------------------------------------------------------------------------------------------------------
Change in Plan Assets:
Fair Value, beginning of year $ 19,218 $ 19,367 $ 2,545 $ 2,459
Actual return on plan assets (120) 443 (45) (134)
Employer contribution -- 105 473 473
Participants' contributions N/A N/A 40 36
Benefits paid (928) (697) (329) (289)
- -----------------------------------------------------------------------------------------------------------------
Fair Value, end of year $ 18,170 $ 19,218 $ 2,684 $ 2,545
- -----------------------------------------------------------------------------------------------------------------
Funded Status $ 831 $ 3,099 $ (1,487) $ (1,492)
Unrecognized net actuarial gain (3,780) (6,039) (1,175) (1,440)
Unrecognized transition obligation 22 (8) 1,814 1,979
Unrecognized prior service cost 1,122 1,207 N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Accrued Cost $ (1,805) $ (1,741) $ (848) $ (953)
- -----------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31:
Discount rate 7.25% 7.5% 7.25% 7.5%
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-16
PENSION BENEFITS OTHER BENEFITS
(IN THOUSANDS) 2001 2000 1999 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit costs
Service cost $582 $528 $552 $190 $141 $173
Interest cost 1,163 1,060 1,018 276 283 268
Expected return on plan assets (1,397) (1,306) (1,210) (128) (110) (94)
Amortization of:
Unrecognized net transition asset (30) (30) (30) 165 165 165
Unrecognized net (gain)/loss (356) (269) (144) (135) (135) (106)
Unrecognized prior service cost 101 48 47 -- -- --
Settlement (gain)/loss -- -- (185) -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Net Periodic Pension Costs $63 $31 $48 $368 $344 $406
- -----------------------------------------------------------------------------------------------------------------------
In determining the 2001 accumulated post-retirement benefit obligation, health
care cost trends were assumed to be 8.5% grading 0.5% per year to 4%. In
comparison, the 2000 health care cost trends were assumed to be 5.5%.
Assumed health care cost 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
(In thousands) INCREASE DECREASE
- -------------------------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 72 $ (59)
Effect on post-retirement benefit obligation $ 468 $ (396)
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - Connecticut Water provides additional
pension benefits to senior management through a supplemental executive
retirement plan. At December 31, 2001 the actuarial present value of the
projected benefit obligation was $729,000. Expense associated with this plan was
$93,000 for 2001, $102,000 for 2000, and $76,000 for 1999.
SAVINGS PLAN - The Company and certain of its subsidiaries 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 employee's compensation. The contribution charged to
expense in 2001, 2000 and 1999 was $150,000, $139,000, and $127,000,
respectively.
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. If the specific goal or goals
are attained by the end of the year, all employees, except officers and certain
key employees, will receive up to 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. An incentive bonus of .6% of
base pay, or $41,000 and $37,000, was awarded in 2001 and 2000, respectively.
BARNSTABLE WATER:
PENSION - Barnstable 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. Contributions of $55,000 were made in both 2001 for the 2000 plan year and
in 2000 for the 1999 plan year. The Company expects to make a contribution of
approximately $45,000 for the 2001 plan year in 2002.
POST-RETIREMENT BENEFITS OTHER THAN PENSION (PBOP) - In addition to providing
pension benefits, Barnstable Water provides certain health care benefits to
eligible retired employees. The Company has incurred annual expenses for PBOP of
$12,000, $11,000 and $14,000 for 2001, 2000 and 1999, respectively. The
Company's PBOP currently is not funded.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-17
BARNSTABLE WATER:
PENSION BENEFITS OTHER BENEFITS
(In thousands) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation, beginning of year $ 1,347 $ 1,305 $ 86 $ 78
Service Cost 32 32 4 3
Interest Cost 98 102 6 6
Actuarial loss/(gain) (12) (16) (10) 2
Benefits paid (84) (76) (3) (3)
- ----------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 1,381 $ 1,347 $ 83 $ 86
- ----------------------------------------------------------------------------------------------------------------
Change in Plan Assets:
Fair Value, beginning of year $ 1,301 $ 1,422 $ -- $ --
Actual return on plan assets (99) (100) 3 --
Employer contribution 55 55 -- --
Participants' contributions N/A N/A -- --
Benefits paid (84) (76) (3) --
- ----------------------------------------------------------------------------------------------------------------
Fair Value, end of year $ 1,173 $ 1,301 $ -- $ --
- ----------------------------------------------------------------------------------------------------------------
Funded Status $ (208) $ (46) $ (83) $ (86)
Unrecognized net actuarial (gain)/loss 152 (41) 54 (48)
Unrecognized transition obligation 39 49 76 --
Unrecognized prior service cost 31 37 -- 82
- ----------------------------------------------------------------------------------------------------------------
Prepaid/(Accrued) Cost $ 14 $ (1) $ (61) $ (52)
- ----------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31:
Discount rate 7.25% 7.5% 7.25% 7.5%
Expected return on plan assets 8.0% 8.0% N/A N/A
Rate of compensation increase 4.5% 4.5% N/A N/A
PENSION BENEFITS OTHER BENEFITS
(IN THOUSANDS) 2001 2000 1999 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit costs
Service cost $ 32 $ 32 $ 27 $ 4 $ 3 $ 4
Interest cost 98 102 97 6 6 7
Expected return on plan assets (105) (116) (100) -- -- --
Amortization of:
Unrecognized net transition asset 10 10 10 6 6 6
Unrecognized net (gain) loss -- (8) (4) (4) (4) (3)
Unrecognized prior service cost 6 6 6 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net Periodic Pension Costs (Income) $ 41 $ 26 $ 36 $ 12 $ 11 $ 14
- ---------------------------------------------------------------------------------------------------------------------
In determining the 2001 accumulated post-retirement benefit obligation, health
care cost trends were assumed to be 8.5% grading 0.5% per year to 4%. In
comparison, the 2000 health care cost trends were assumed to be 5.5%.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-18
NOTE 14: STOCK-BASED COMPENSATION PLAN
The Company has two components to its Stock-Based Compensation Plan (the Plan):
The Stock Option Program (SOP) and the Performance Stock Program (PSP). In total
under the Plan there are 450,000 shares authorized and 85,060 shares available
at December 31, 2001.
STOCK OPTION PROGRAM - In 1999 the Company's shareholders approved an amendment
to its PSP to permit the issuance of stock options to officers and key
employees. The Company accounts for this 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 SOP been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation FAS 123." Under FAS 123, the Company would have been required to
value such options at fair value and record such amounts in the financial
statements as compensation expense.
2001 2000
---- ----
Net income (in thousands):
As reported $8,401 $7,858
Pro forma $8,137 $7,676
Earnings Per Share:
As reported $1.10 $ 1.03
Pro forma $1.07 $ 1.01
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 years
ended December 31, 2001 and 2000.
2001 2000
---- ----
Expected life (years) 9.40 9.85
Risk-free interest rate (percentage) 5.07 5.12
Volatility (percentage) 27.36 32.01
Dividend yield 2.70 3.90
Options begin to become exercisable one year from the date of grant. Vesting
period range between one to five years.
The per share weighted average fair value for stock options granted during 2001
and 2000 were $8.67 and $5.87 respectively.
For the Years Ended December 31,
--------------------- --------------------- ----------------------
2001 2000 1999
--------------------- --------------------- ----------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
--------------------- --------------------- ----------------------
Options:
Outstanding, beginning of year 236,228 $18.39 191,586 $17.92 -- $ --
Granted 33,750 22.99 44,642 21.64 191,586 17.92
Terminated -- -- -- -- -- --
Exercised (40,167) 16.22 -- -- -- --
--------------------- --------------------- ----------------------
Outstanding, end of year 229,811 20.18 236,228 18.39 191,586 17.92
--------------------- --------------------- ----------------------
Exercisable, end of year 47,630 $19.94 38,319 $17.92 -- $ --
--------------------- --------------------- ----------------------
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-19
Options exercised during 2001 ranged in price from $14.83 per share to $27.95
per share. The following table summarizes the price ranges of the options
outstanding and options exercisable as of December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
SHARES LIFE (YEARS) PRICE SHARES PRICE
------------------------------------- ----------------------
RANGE OF PRICES:
$ 14.00 - $ 19.99 80,217 7.3 $ 14.83 12,583 $ 14.83
$ 20.00 - $ 25.99 115,844 8.3 21.61 35,047 21.78
$ 26.00 - $ 31.99 33,750 9.9 27.95 -- --
------------------------------------- ----------------------
229,811 8.2 $ 20.18 47,630 $ 19.94
===================================== ======================
PERFORMANCE STOCK PROGRAM - Under the Company's PSP, 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
the PSP were $349,000, $227,000 and $216,000, for 2001, 2000 and 1999,
respectively.
NOTE 15: SEGMENT REPORTING
Our Company operates principally in three segments: water activities, real
estate transactions and services and rentals. The water segment is comprised of
our core regulated water activities to supply water to our customers. Our real
estate transactions segment involves selling or donating for income tax benefits
our limited excess real estate holdings. Our services and rentals segment
provides services on a contract basis and leases 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-20
Interest
Expense
and
Preferred
Other Dividend
Operating Other Income (net of Income Net
(In thousands) Revenues Depreciation Expenses (Deductions) AFUDC) Taxes Income
- ----------------------------------------------------------------------------------------------------------------------
For the year ended
December 31, 2001
Water Activities $45,392 $ 4,837 $24,402 $(273) $ 4,231 $ 4,741 $ 6,908
Real Estate Transactions -- -- 145 -- -- (1,266) 1,121
Services and Rentals 2,431 15 1,839 -- -- 205 372
- ----------------------------------------------------------------------------------------------------------------------
Total $47,823 $ 4,852 $26,386 $(273) $ 4,231 $ 3,680 $ 8,401
======================================================================================================================
For the year ended
December 31, 2000
Water Activities $43,997 $4,718 $23,058 $(228) $4,369 $4,564 $7,060
Real Estate Transactions 166 -- 253 -- -- (619) 532
Services and Rentals 2,394 13 1,936 -- 23 156 266
- ----------------------------------------------------------------------------------------------------------------------
Total $46,557 $4,731 $25,247 $(228) $4,392 $4,101 $7,858
======================================================================================================================
For the year ended
December 31, 1999
Water Activities $45,171 $4,593 $23,627 $(48) $4,278 $5,097 $7,528
Real Estate Transactions 447 -- 286 -- -- 64 97
Services and Rentals 1,969 32 1,669 -- 26 87 155
- ----------------------------------------------------------------------------------------------------------------------
Total $47,587 $4,625 $25,582 $(48) $4,304 $5,248 $7,780
======================================================================================================================
At December 31 (in thousands) 2001 2000
-----------------------
Total Plant and Other Investments:
Water $204,750 $195,379
Non-water 914 829
-----------------------
205,664 196,208
=======================
Other Assets:
Water 25,630 25,901
Non-water 420 437
-----------------------
26,050 26,338
-----------------------
Total Assets $231,714 $222,546
=======================
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-21
NOTE 16: COMMITMENTS AND CONTINGENCIES
POTENTIAL FUTURE LAND DONATIONS, 2002 - 2004 - On January 31, 2001 we signed an
agreement to donate to the Town of Killingly, Connecticut approximately 365
acres of unimproved land for protected open space purposes. This land donation
will be broken down into three different parcels with one of the parcels being
donated each year from 2002 through 2004. Under current tax law, these donations
in total will result in reduced federal and state income taxes of approximately
$2,000,000. On March 1, 2001 we signed an agreement to donate to the Town of
Avon, Connecticut approximately 10 acres in 2002 of unimproved land for
protected open space purposes. The necessary town and state approvals have been
obtained. Under current tax law, the donation will result in reduced federal and
state income taxes of approximately $162,000.
PREPAYMENT OF NOTE - On January 30, 2002 Crystal Water Company paid off its
long-term 8% fixed rate note to Westbank with short-term 2.205% variable rate
borrowing on the Company's line of credit. The payment of approximately
$2,063,000 included a prepayment penalty of approximately $20,000. The note was
paid off to release the lien on the land scheduled to be donated to the Town of
Killingly in the years 2002 through 2004.
HUNGERFORDS - In 1999, we formed a three-year joint venture with Hungerfords,
Inc., a pump service provider, which has been in business in Connecticut for
over 75 years. If specific financial targets are met, the Company will purchase
Hungerfords in the second half of 2002.
UNIONVILLE - In late 2001, we signed a letter of intent with Unionville Water
Company, located in Farmington, Connecticut to purchase Unionville by exchanging
Company stock with a value of approximately $6.3 million for all outstanding
Unionville stock. In February 2002 the Company entered into a definitive
agreement with Unionville that is subject to approval by shareholders of
Unionville and regulatory agencies.
REVERSE PRIVATIZATION - Our water companies derive their rights and franchises
to operate from State law that are subject to alteration, amendment or repeal
and do not grant permanent exclusive rights to our service areas. Our franchises
are free from burdensome restrictions, are unlimited as to time, and authorize
us to sell potable water in all towns we now serve. There is the possibility
that states could revoke our franchises and allow a governmental entity to take
over some or all of our systems. From time to time such legislation is
contemplated.
ENVIRONMENTAL AND WATER QUALITY REGULATION - The Company is subject to
environmental and water quality regulations. Costs to comply with environmental
and water quality regulations are substantial. We are currently in compliance
with current regulations, but the regulations are subject to change. The costs
to comply with future changes in state or federal regulations, which could
require us to modify current filtration facilities and/or construct new ones, or
to replace any reduction of the safe yield from any of our current sources of
supply, could be substantial.
CONSTRUCTION - Our water companies' estimated capital expenditures for 2002 are
$10,155,000. These capital expenditures are net of amounts financed by customer
advances and contributions in aid of construction. These expenditures are
expected to be financed primarily with internally generated funds.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-22
NOTE 17: QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 2001 and 2000
appears below:
(In thousands, except for per share data)
Net Income Basic Earnings Per
Utility Applicable to Average
Operating Revenues Operating Income Common Stock Common Share
2001 2000 2001 2000 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
First Quarter $ 10,228 $ 10,225 $ 2,465 $ 2,549 $ 2,275 $ 1,542 $0.30 $ 0.20
Second Quarter 10,974 10,834 2,851 2,867 1,914 1,876 0.25 0.25
Third Quarter 13,538 12,353 3,887 3,775 2,945 2,678 0.39 0.35
Fourth Quarter 10,652 10,585 2,111 2,471 1,267 1,762 0.16 0.23
------------------------------------------------------------------------------------------
Year $ 45,392 $ 43,997 $ 11,314 $ 11,662 $ 8,401 $ 7,858 $1.10 $ 1.03
==========================================================================================
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
E-1
EXHIBIT
NUMBER DESCRIPTION
3.1 Certificate of Incorporation of Connecticut Water Service,
Inc. amended and restated as of April, 1998. (Exhibit 3.1 to
Form 10-K for the year ended 12/31/98).
3.2 By-Laws, as amended, of Connecticut Water Service, Inc. as
amended and restated as of August 12, 1999. (Exhibit 3.2 to
Form 10-K for the year ended 12/31/99).
3.3 Certification of Incorporation of The Connecticut Water
Company effective April, 1998. (Exhibit 3.3 to Form 10-K for
the year ended 12/31/98).
3.4* Certificate of Amendment to the Certificate of Incorporation
of Connecticut Water Service, Inc. dated August 6, 2001.
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)
E-2
(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)
(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. (Exhibit 4.8 to Form 10-K for the year ended
12/21/98).
4.9 Loan Agreement dated as of April 19, 1990 between the
Connecticut Development Authority and The Crystal Water
Company of Danielson. (Exhibit 4.9 to Form 10.K for the year
ended 12/31/99).
4.10 Loan Agreement dated as of February 9, 1996 between New
London Trust, F.S.B. and The Crystal Water Company of
Danielson. (Exhibit 4.10 to Form 10-K for the year ended
12/31/99).
E-3
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. (Exhibit 10.5 to
Form 10-K for the year ended 12/31/99).
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 Amended Supplemental Executive
Retirement Agreement with Marshall T. Chiaraluce dated
August 1, 1999. (Exhibit 10.7.2 to Form 10-K for the year
ended 12/31/99).
10.7.2* The Connecticut Water Company Supplemental Executive
Retirement Agreement with Michele G. DiAcri dated February
28, 2000.
10.8 The Connecticut Water Company Amended Supplemental Executive
Retirement Agreement - standard form for other officers,
dated August 1, 1999. (Exhibit 10.8.2 to Form 10-K for the
year ended 12/31/99).
E-4
10.9* Amended and restated employment agreement between The
Connecticut Water Company and Connecticut Water Service,
Inc. with Officers, amended and restated as of May 9, 2001:
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.
(Exhibit 10.10 to Form 10-K for the year ended 12/31/99).
10.11 Employment and Consulting Agreement between Roger Engle and
Crystal Water Company of Danielson dated September 29, 1999.
(Exhibit 10.11 to Form 10-K for the year ended 12/31/99).
10.12* Savings Plan of The Connecticut Water Company, amended and
restated effective as of October 1, 2000.
10.13 The Connecticut Water Company Employees' Retirement Plan as
amended and restated as of January 1, 1997. (Exhibit 10.11
to Form 10-K for the year ended 12/31/98).
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)
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)
E-5
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,
amended and restated as of November 15, 2001. (Exhibit 99.1
to post-effective amendment filed on December 5, 2001 to
Form S-3, Registration Statement No. 33-53211).
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)
10.26* Loan Agreement dated as of February 15, 1991 between
Indianapolis Life Insurance Company and The Barnstable Water
Company.
10.27* Guaranty Agreement by Connecticut Water Service, Inc. and
Second Amendment to Note Agreement of Barnstable Water
Company dated as of February 23, 2001.
10.28* Employment Agreement between George Wadsworth and The
Barnstable Water Company dated February 23, 2001.
10.29* Separation Agreement between George Wadsworth, The
Connecticut Water Service, Inc. and The Barnstable Water
Company dated December 14, 2001.
24.1* Consent of Arthur Andersen LLP
99* Temporary Note 3T to Article 3 of Regulation S-X
- ----------
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.
16
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
- ----------------------------
Marshall T. Chiaraluce Director, President Chairman March 22, 2002
(Principal Executive Officer) of the Board, and Chief
Executive Officer
/s/ David C. Benoit
- ----------------------------
David C. Benoit Vice President - Finance, March 22, 2002
(Principal Financial and Accounting Officer) Chief Financial Officer and
Treasurer
17
/s/ Harold E. Bigler, Jr. Director March 6, 2002
- ----------------------------
Harold E. Bigler, Jr.
/s/ Roger Engle Director March 8, 2002
- ----------------------------
Roger Engle
/s/ Mary Ann Hanley Director March 10, 2002
- ----------------------------
Mary Ann Hanley
/s/ Marcia Hincks Director March 12, 2002
- ----------------------------
Marcia Hincks
/s/ David A. Lentini Director March 8, 2002
- ----------------------------
David A. Lentini
/s/ Ronald D. Lengyel Director March 14, 2002
- ----------------------------
Ronald D. Lengyel
/s/ Robert F. Neal Director March 7, 2002
- ----------------------------
Robert F. Neal
/s/ Arthur C. Reeds Director March 6, 2002
- ----------------------------
Arthur C. Reeds
/s/ Lisa J. Tibdaue Director March 7, 2002
- ----------------------------
Lisa J. Thibdaue
/s/ Donald B. Wilbur Director March 8, 2002
- ----------------------------
Donald B. Wilbur
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
We have audited, in accordance with accounting principles generally accepted in
the United States, the financial statements of Connecticut Water Service, Inc.
included in this Form 10-K, and have issued our report thereon dated February 8,
2002. 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
consolidated 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 8, 2002
S-2
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
- ----------- --------- ------ ------------ -------
Allowance for Uncollectible
Accounts
Year Ended December 31, 2001 $218 $171 $155 $234
==== ==== ==== ====
Year Ended December 31, 2000 $476 $216 $474 $218
==== ==== ==== ====
Year Ended December 31, 1999 $336 $171 $ 31 $476
==== ==== ==== ====
(1) Amounts charged off as uncollectible after deducting recoveries.
EXHIBITS
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR
ENDED DECEMBER 31, 2001