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UNITED STATES
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, 2002 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
Registrant's website: www.ctwater.com
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. Yes [X] No [ ]
2
The aggregate market value of the registrant's voting Common Stock held
by non-affiliates, computed on the price of such stock at the close of business
on June 28, 2002 is $230,588,576.
7,903,053
Number of shares of Common Stock outstanding, March 3, 2003
(excluding 43,642 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 18, 2003, for Annual Meeting
of Shareholders to be held on
April 25, 2003.
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. Connecticut Water Service, Inc. is a
non-operating holding company, whose income is derived from the earnings of its
eleven wholly-owned subsidiary companies. In 2002 approximately 90% of the
Company's earnings were attributable to water activities carried out within its
five regulated water companies: The Connecticut Water Company, The Gallup Water
Service, Incorporated, The Crystal Water Company of Danielson, The Barnstable
Water Company and The Unionville Water Company. These five companies supply
water to 85,536 customers in 42 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; New England 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. In 2002, these unregulated companies, in
conjunction with the regulated water companies, contributed the remaining 10% of
CTWS's earnings through real estate transactions as well as services and
rentals.
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.
The Company's annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports will be made
available free of charge through the "INVESTOR INFO (SEC Filings)" section of
the Company's Internet website (http://www.ctwater.com) as soon as practicable
after such material is electronically filed with, or furnished to, the
Securities and Exchange Commission.
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.
4
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 security,
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 $50,400,000 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 $3,836,000 was
expended in the last five years. We are presently in compliance with current
regulations, but the regulations are subject to change at any time. The costs to
comply with future changes in state or federal regulations, which could require
us to modify existing 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*
- ------------------------------------------------------------------------------------------
Unionville 1999 12.35% N/A**
- ------------------------------------------------------------------------------------------
* Gallup's rates were based on its net income requirement, not on a rate of
return methodology.
** Unionville's rates were based on a return on equity
methodology, not a rate base methodology.
5
Our Water Systems
Our water infrastructure consists of 28 noncontiguous water systems in the State
of Connecticut and one water system in Massachusetts. Our system, in total,
consists of 1,358 miles of water main and reservoir storage capacity of 7.0
billion gallons. The safe, dependable yield from our 132 active wells and 20
reservoirs is approximately 52 million gallons per day. Water sources vary among
the individual systems, but overall approximately 42% of the total dependable
yield comes from reservoirs and 58% from wells.
We supply water, and in most cases, fire protection to all or portions of 42
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, 2002.
- -----------------------------------------------------------------------------------------------------
Number Water Customer Water
of Revenues Consumption
Water Company customers ($000's) (millions of gallons)
- -----------------------------------------------------------------------------------------------------
Barnstable Water Company 7,143 $ 2,552 872
- -----------------------------------------------------------------------------------------------------
Connecticut Water Company 67,926 40,150 5,884
- -----------------------------------------------------------------------------------------------------
Crystal Water Company 3,657 2,133 483
- -----------------------------------------------------------------------------------------------------
Gallup Water Service 1,197 634 88
- -----------------------------------------------------------------------------------------------------
Unionville Water Company* 5,613 361 91
- -----------------------------------------------------------------------------------------------------
Total 85,536 $ 45,830 7,418
- -----------------------------------------------------------------------------------------------------
* Revenue and consumption figures are for November and December 2002 only.
The following table breaks down the above total figures by customer class:
- -------------------------------------------------------------------------------------------------------------------
Water Customer Water
Number of Revenues Consumption
Customer Class customers ($000's) (millions of gallons)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Residential 75,806 $ 28,680 5,070
- -------------------------------------------------------------------------------------------------------------------
Commercial 6,176 6,036 1,501
- -------------------------------------------------------------------------------------------------------------------
Industrial 435 1,709 482
- -------------------------------------------------------------------------------------------------------------------
Public Authority 562 1,436 351
- -------------------------------------------------------------------------------------------------------------------
Fire Protection 1,641 7,434 0
- -------------------------------------------------------------------------------------------------------------------
Other (including non-metered accounts) 916 535 14
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Total 85,536 $ 45,830 7,418
- -------------------------------------------------------------------------------------------------------------------
6
Disposition of Property
We have established a policy of disposing of various small, discrete parcels of
land over the next several years. This land, which is no longer required for
water supply purposes, totaled approximately 725 acres at the beginning of
December 2002. In 2002, we donated approximately 10 acres of land to the Town of
Avon and 54.2 acres to the Town of Killingly for protected open space purposes
leaving a balance of approximately 661 acres as of December 31, 2002.
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. The new tax
credit, in combination with federal and state charitable contribution
deductions, resulted in after-tax gains from Avon and Killingly transactions of
approximately $440,000 in 2002. In January 2003, 178 acres of the remaining 661
acres was donated to the Town of Killingly for protected open space purposes.
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.
Employees
As of December 31, 2002, we employed a total of 191 persons. Our employees are
not covered by collective bargaining agreements. We believe that our relations
with our employees are good.
Expansion
In October 2002 we completed our acquisition of The Unionville Water Company in
a stock transaction valued at $6.2 million. Unionville Water serves 5,613
customers in Farmington and Avon, Connecticut. As a condition to the
acquisition, Unionville was granted a limited rate increase by the Connecticut
Department of Public Utility Control (DPUC) to recover financing and operating
costs related to a new water interconnection with a neighboring water supplier.
This rate increase will be in the form of a surcharge that will begin the date
the interconnection is placed into service. The surcharge will be subject to a
retroactive refund to ratepayers to the extent that the DPUC determines that
Unionville's revenues exceed certain levels. The interconnection will alleviate
seasonal water supply shortages that have existed in the Unionville system. The
expected in-service date of the interconnection is May 2003.
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, Crystal Water and
Unionville Water companies are subject to liens as security for debt. The net
utility plant balances of the water companies at December 31, 2002 were as
follows:
- --------------------------------------------------------------------------
Net Utility Plant
(000's)
- --------------------------------------------------------------------------
Barnstable $ 6,501
- --------------------------------------------------------------------------
Connecticut Water 192,422
- --------------------------------------------------------------------------
Crystal 9,825
- --------------------------------------------------------------------------
Gallup 3,305
- --------------------------------------------------------------------------
Unionville 17,044
- --------------------------------------------------------------------------
Total $229,097
- --------------------------------------------------------------------------
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 1,067
- --------------------------------------------------------------------
Crystal 67
- --------------------------------------------------------------------
Gallup 18
- --------------------------------------------------------------------
Unionville 105
- --------------------------------------------------------------------
Total 1,358
- --------------------------------------------------------------------
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 2002 and 2001 are listed as follows:
- ------------------------------------------------------------------------
PRICE DIVIDENDS
- ------------------------------------------------------------------------
Period HIGH LOW PAID
- ------------------------------------------------------------------------
2002
- ------------------------------------------------------------------------
First Quarter $31.00 $26.53 $.2022
- ------------------------------------------------------------------------
Second Quarter 31.09 24.00 $.2022
- ------------------------------------------------------------------------
Third Quarter 30.00 20.35 $.2050
- ------------------------------------------------------------------------
Fourth Quarter 27.12 24.05 $.2050
- ------------------------------------------------------------------------
2001
- ------------------------------------------------------------------------
First Quarter $22.67 $19.50 $.2000
- ------------------------------------------------------------------------
Second Quarter 27.16 20.16 $.2000
- ------------------------------------------------------------------------
Third Quarter 28.10 22.90 $.2022
- ------------------------------------------------------------------------
Fourth Quarter 32.21 25.75 $.2022
- ------------------------------------------------------------------------
As of March 3, 2003 there were approximately 4,976 holders of record of our
common stock.
We presently intend to pay quarterly cash dividends in 2003 on March 17, June
16, September 16 and December 15 subject to our earnings and financial
condition, regulatory requirements and other factors our Board of Directors may
deem relevant.
9
ITEM 6 - SELECTED FINANCIAL DATA
SUPPLEMENTAL INFORMATION (UNAUDITED)
Years Ended December 31, (thousands of dollars except per share
amounts and where otherwise indicated) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Operating Revenues $ 45,830 $ 45,392 $ 43,997
Operating Expenses $ 33,996 $ 34,078 $ 32,335
Operating Income $ 11,834 $ 11,314 $ 11,662
Interest and Debt Expense $ 4,534 $ 4,632 $ 4,782
Net Income Applicable to Common Stock $ 8,742 $ 8,401 $ 7,858
Cash Common Stock Dividends Paid $ 6,277 $ 6,105 $ 5,890
Dividend Payout Ratio 72% 73% 75%
Weighted Average Common Shares Outstanding 7,717,608 7,619,031 7,604,546
Basic Earnings Per Average Common Share $ 1.13 $ 1.10 $ 1.03
Number of Shares Outstanding at Year End 7,939,713 7,649,362 7,604,594
ROE on Year End Common Equity 10.9% 11.9% 11.7%
Declared Common Dividends Per Share* $ 0.814 $ 0.804 $ 0.795
CONSOLIDATED BALANCE SHEET
Common Stockholders' Equity $ 79,975 $ 70,783 $ 67,110
Long-Term Debt $ 64,734 $ 63,953 $ 66,283
Minority Interest $ -- $ -- $ 117
Preferred Stock (Consolidated, Excluding Current Maturities) $ 847 $ 847 $ 847
- ---------------------------------------------------------------------------------------------------------------------
Total Capitalization $ 145,556 $ 135,583 $ 134,357
Stockholders' Equity (Includes Preferred Stock) 56% 53% 51%
Long-Term Debt 44% 47% 49%
Net Utility Plant $ 229,097 $ 202,330 $ 193,169
Book Value - Per Common Share $ 10.07 $ 9.25 $ 8.82
OPERATING REVENUES BY
REVENUE CLASS
Residential $ 28,680 $ 28,621 $ 27,364
Commercial 6,036 5,941 5,817
Industrial 1,709 1,687 1,905
Public Authority 1,436 1,460 1,481
Fire Protection 7,434 7,187 6,960
Other (including non-metered accounts) 535 496 470
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Revenues $ 45,830 $ 45,392 $ 43,997
=====================================================================================================================
Number of Customers (Average) 82,119 78,156 77,183
Billed Consumption (Millions of Gallons) 7,418 7,259 6,911
Number of Employees 191 181 184
Years Ended December 31, (thousands of dollars except per share
amounts and where otherwise indicated) 1999 1998
- -------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Operating Revenues $ 45,171 $ 42,623
Operating Expenses $ 33,382 $ 31,302
Operating Income $ 11,789 $ 11,321
Interest and Debt Expense $ 4,720 $ 4,787
Net Income Applicable to Common Stock $ 7,780 $ 7,388
Cash Common Stock Dividends Paid $ 5,688 $ 5,519
Dividend Payout Ratio 73% 75%
Weighted Average Common Shares Outstanding 7,593,376 7,579,176
Basic Earnings Per Average Common Share $ 1.02 $ 0.97
Number of Shares Outstanding at Year End 7,596,141 7,580,879
ROE on Year End Common Equity 12.0% 11.8%
Declared Common Dividends Per Share* $ 0.787 $ 0.778
CONSOLIDATED BALANCE SHEET
Common Stockholders' Equity $ 64,915 $ 62,572
Long-Term Debt $ 67,099 $ 67,386
Minority Interest $ 142 $ 136
Preferred Stock (Consolidated, Excluding Current Maturities) $ 847 $ 847
- -------------------------------------------------------------------------------------------------
Total Capitalization $ 133,003 $ 130,941
Stockholders' Equity (Includes Preferred Stock) 49% 48%
Long-Term Debt 51% 52%
Net Utility Plant $ 187,613 $ 182,202
Book Value - Per Common Share $ 8.55 $ 8.25
OPERATING REVENUES BY
REVENUE CLASS
Residential $ 28,422 $ 26,694
Commercial 6,093 5,678
Industrial 1,850 1,747
Public Authority 1,561 1,394
Fire Protection 6,861 6,728
Other (including non-metered accounts) 384 382
- -------------------------------------------------------------------------------------------------
Total Operating Revenues $ 45,171 $ 42,623
=================================================================================================
Number of Customers (Average) 76,061 74,971
Billed Consumption (Millions of Gallons) 7,330 6,949
Number of Employees 180 189
* Not restated for acquisitions accounted for under the pooling-of-interests
accounting method.
The Consolidated Financial Statements for fiscal years 1992 through 2001 were
audited by Arthur Anderen LLP (Andersen) who has ceased operations. A copy of
the report previously issed by Andersen on our financial statements as of
December 31, 2001 and for the two years then ended is included elsewhere in this
Report. Such report has not been reissued by Andersen. Refer to Exhibit 23.2 for
further discussion.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
OVERVIEW
Connecticut Water Service, Inc. (the Company or CTWS) is a non-operating holding
company, whose income is derived from the earnings of its eleven wholly-owned
subsidiary companies. In 2002, approximately 90% of the Company's earnings were
attributable to water activities carried out within its five regulated water
companies: The Connecticut Water Company, The Gallup Water Service,
Incorporated, The Crystal Water Company of Danielson, The Barnstable Water
Company and The Unionville Water Company. These five companies supply water to
85,536 customers in 42 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; New England 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. In 2002, these unregulated companies, in conjunction with
the regulated water companies, contributed the remaining 10% of CTWS' earnings
through real estate transactions as well as services and rentals.
2002 was the Company's 12th consecutive year of increased earnings and its 33rd
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
67,900 of the Company's 85,536 utility customers. Connecticut Water Company's
revenues, like the Company's other four 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 at any time. 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.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in conformity with
Generally Accepted Accounting Principles in the United States of America (GAAP)
and as directed by the regulatory commissions to which the Company's
subsidiaries are subject. See Note 1 for a discussion of our significant
accounting policies. The Company believes the following policies are critical to
the presentation of its consolidated financial statements.
Public Utility Regulation - Statement of Financial Accounting Standards -
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (FAS 71), requires cost-based, rate-regulated enterprises
such as the Company's 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 costs
would be charged to expense by an unregulated enterprise. The balance sheet
includes regulatory assets and liabilities as appropriate, primarily related to
income taxes and post-retirement benefit costs. The Company believes, based on
current regulatory circumstances, that the regulatory assets recorded are likely
to be recovered and that its use of regulatory accounting is appropriate and in
accordance with the provisions of FAS 71. Material regulatory assets are earning
a return.
12
Revenue Recognition - Revenue from metered customers includes billings to
customers based on quarterly meter readings plus an estimate of water used
between the customer's last meter reading and the end of the accounting period.
The unbilled revenue amount is listed as a current asset on the balance sheet.
The amount recorded as unbilled revenue is generally higher during the summer
months when water sales are higher. Based upon historical experience, management
believes the Company's estimate of unbilled revenues is reasonable.
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.
After the terrorist strike on September 11, 2001, water companies have had to
increase security on their water supplies and facilities. This has resulted in
increases in operating and capital costs related to security, which are
typically recoverable in a rate proceeding.
The Company has received regulatory approval to donate certain parcels of its
land in the years 2003 and 2004. Over the two-year period these donations are
expected to contribute approximately $1.6 million to net income as a result of
favorable tax treatment under federal and Connecticut tax laws.
LIQUIDITY AND CAPITAL RESOURCES
The Company is not aware of demands, events or uncertainties that will result in
a decrease of liquidity or a material change in the mix or relative cost of
capital resources.
The Company does not use off-balance sheet arrangements such as securitization
of receivables or unconsolidated entities. The Company has no material lease
obligations, does not engage in trading or risk management activities and does
not have material transactions involving related parties.
Interim Bank Loans Payable at year end 2002 was $6,950,000, which is $5,125,000
higher than at the end of 2001.
We consider the current $12,500,000 lines of credit with three banks adequate to
finance any expected short-term borrowing requirements that may arise from
operations during 2003. In May 2003, $6,500,000 of the lines of credit expire
and the remaining $6,000,000 expires in May 2004. We expect the lines of credit
to be renewed. Interest expense charged on interim bank loans will fluctuate
based on financial market conditions.
During 2002, the Company incurred approximately $15.7 million of construction
expenditures. The Company financed such expenditures through internally
generated funds, customers' advances, contributions in aid of construction and
short-term borrowings.
13
The Board of Directors has approved a $9.5 million construction budget for 2003,
net of amounts to be financed by customer advances and contributions in aid of
construction. Funds primarily provided by operating activities are expected to
finance this entire construction program given normal weather patterns and
related operating revenue billings. Refer to Note 10, Utility Plant and
Construction Program, in Notes to Consolidated Financial Statements for
additional discussion of the Company's future construction program.
RESULTS OF OPERATIONS
2002 COMPARED WITH 2001
On October 31, 2002, the Company issued 249,715 shares of its common
stock in exchange for all the outstanding common stock of The
Unionville Water Company (Unionville). This acquisition was accounted
for under the purchase method of accounting; as such only the Balance
Sheet and Income Statement activity from the acquisition date forward
are included in the financial statements.
The tables below present the Income Statements and Balance Sheets
detailing the balances with and without Unionville. The narrative
following the table includes explanations of the Income Statement
variances excluding the amounts associated with Unionville.
CONDENSED BALANCE SHEETS
December 31, (in thousands) 2002 2001
------------------------------------- ---------------------
Without Without
Consolidated Unionville Unionville Unionville Variance
------------ ---------- ---------- ---------- --------
ASSETS
Net Utility Plant $229,097 $17,044 $212,053 $202,330 $ 9,723
Other Property and Investments 3,557 --- 3,557 3,334 223
Total Current Assets 10,373 881 9,492 9,423 69
Total Regulatory and Other
Long-Term Assets 21,772 5,621 16,151 16,627 (476)
---------------------------------- --------------------
Total Assets $264,799 $23,546 $241,253 $231,714 $ 9,539
================================== ====================
CAPITALIZATION AND LIABILITIES
Capitalization
Common Stockholders' Equity $ 79,975 $ 6,177 $ 73,798 $ 70,783 $ 3,015
Preferred Stock 847 --- 847 847 ---
Long-Term Debt 64,734 1,076 63,658 63,953 (295)
---------------------------------- --------------------
Total Capitalization 145,556 7,253 138,303 135,583 2,720
Current Liabilities 15,478 844 14,634 12,656 1,978
Deferred Credits 103,765 15,449 88,316 83,475 4,841
---------------------------------- --------------------
Total Capitalization and Liabilities $264,799 $23,546 $241,253 $231,714 $ 9,539
================================== ====================
14
INCOME STATEMENTS
For the years ended, December 31, (in thousands) 2002 2001
----------------------------------------- ----------------------
Without Without
Consolidated Unionville Unionville Unionville Variance
------------ ---------- ---------- ---------- --------
Operating Revenues $ 45,830 $361 $ 45,469 $ 45,392 $ 77
-------------------------------------- --------------------
Operating Expenses
Operation and Maintenance 19,531 226 19,305 20,076 (771)
Depreciation 5,187 74 5,113 4,837 276
Income Taxes 4,482 6 4,476 4,777 (301)
Taxes Other Than Income Taxes 4,796 36 4,760 4,388 372
-------------------------------------- --------------------
Total Operating Expenses 33,996 342 33,654 34,078 (424)
-------------------------------------- --------------------
Utility Operating Income 11,834 19 11,815 11,314 501
-------------------------------------- --------------------
Other Income (Deductions), Net of
Taxes
Gain on Property Transactions 440 --- 440 1,121 (681)
Non-Water Sales Earnings 444 --- 444 372 72
Allowance for Funds Used During Construction 470 8 462 439 23
Merger Costs --- --- --- (352) 352
Other 126 1 125 177 (52)
-------------------------------------- --------------------
Total Other Income (Deductions),
Net of Taxes 1,480 9 1,471 1,757 (286)
-------------------------------------- --------------------
Interest and Debt Expenses
Interest on Long-Term Debt 3,909 16 3,893 4,057 (164)
Other Interest Charges 365 --- 365 353 12
Amortization of Debt Expense 260 --- 260 222 38
-------------------------------------- --------------------
Total Interest and Debt Expenses 4,534 16 4,518 4,632 (114)
-------------------------------------- --------------------
Net Income Before Preferred 8,780 12 8,768 8,439 329
Dividends
Preferred Stock Dividend 38 --- 38 38 ---
Requirement
-------------------------------------- --------------------
Net Income Applicable to Common Stock $ 8,742 $ 12 $ 8,730 $ 8,401 $ 329
====================================== ====================
15
Net Income Applicable to Common Stock for 2002 increased from that of
2001 by $329,000, or $.03 per average basic share. The increase was
primarily due to the following:
- Utility Operating Income increased $501,000:
- Operating Expenses decreased $424,000 or 1.2%,
primarily due to the decreases in Operation and
Maintenance expenses and Income Taxes partially
offset by an increase in Depreciation and Taxes Other
Than Income Taxes. The decrease in Operation and
Maintenance expenses was primarily due to a
mark-to-market adjustment on the Company's common
stock equivalent shares outstanding of $344,000,
lower maintenance expense of $166,000 and a reduction
in labor costs of $282,000. The decrease in Income
Taxes was primarily due to book tax timing
differences. The increase in Depreciation was due to
the increased investment in Utility Plant. Taxes
Other Than Income Taxes increased primarily because
of an increase in Property Taxes due to a one-time
property tax rebate in 2001 of $192,000 as well as an
overall increase in municipal tax rates in 2002.
- Operating Revenues increased $77,000 or .2% in 2002
as compared to 2001. This increase was due to the
Company's additional investment in water mains and
hydrants, which serves as the basis for Public Fire
Protection billing.
- Interest and Debt Expenses decreased $114,000:
- The decrease in Interest and Debt Expenses was
primarily due to the payoff of $2,033,000 of 8%
long-term debt in 2002 and the refinancing of the
debt with lower rate short-term debt. The weighted
cost of the Company's interim debt at December 31,
2002 was 1.77%, as compared with 2.31% at December
31, 2001.
- Other Income (Deductions), Net of Taxes:
- The decrease was primarily due to the $681,000
decrease in Gain on Property Transactions partially
offset by the $352,000 decline in Merger Costs and
the $72,000 increase in Non-Water Sales Earnings. The
decrease in Gain on Property Transactions was a
result of donating land with a higher value in 2001
than the land donated in 2002. The reduction in
Merger Costs was due to the requirement to expense
such costs under the "pooling-of-interests"
accounting treatment of the 2001 Barnstable
acquisition. A substantial amount of the increase in
Non-Water Sales Earnings was due to our
Linebacker(R) maintenance service program. As of
December 31, 2002, approximately 11,900 of the
Company's customers were protected by Linebacker(R).
16
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 was
primarily due to the following:
- Other Income (Deductions), Net of Taxes increased $741,000:
- The increase in Other Income was primarily due to The
Connecticut Water Company's 2001 donation of 134.1
acres of land to the Town of Middlebury, Connecticut.
This donation was responsible for the net after tax
gain of $1,121,000 resulting from a Connecticut state
income tax credit in addition to state and federal
charitable contribution tax deductions.
- 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 was 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).
- Interest and Debt Expenses decreased $150,000:
- The decrease in Interest and Debt Expenses was 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 Taxes 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.
17
- Operation 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.
COMMITMENTS AND CONTINGENCIES
SECURITY - Recent amendments to the Safe Drinking Water Act require all public
water systems serving over 3,300 people on an average basis to prepare
Vulnerability Assessments (VA) of their critical utility assets. The assessments
are to be completed by December 2003 and will be submitted to the U.S.
Environmental Protection Agency along with certification that certain critical
elements of the assessments are being implemented within our Emergency
Contingency Plan. The information within the VA is not subject to release to the
public and is protected from Freedom of Information inquiries. Investment in
security-related improvements is ongoing and management believes that the costs
associated with any such improvements would be chargeable for recovery in future
rate proceedings.
LAND DONATIONS TO BE MADE IN 2003 AND 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
will result in reduced federal and state income taxes totaling approximately
$1,900,000. In 2002, the first parcel consisting of approximately 54 acres was
donated for an after tax benefit of $293,000. In January 2003, the second parcel
consisting of approximately 178 acres was donated which is expected to result in
an after tax benefit of approximately $940,000. The remaining 133 acres are
scheduled to be donated in 2004, provided Connecticut tax laws continue to
provide favorable tax treatment for such donations, for an expected after tax
benefit of approximately $700,000.
REVERSE PRIVATIZATION - Our water companies derive their rights and franchises
to operate from state laws 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.
The Town of Barnstable, Massachusetts has advised the Company that it is
actively considering the acquisition of the Company's wholly-owned subsidiary,
The Barnstable Holding Company. The Town takes the position that it has the
right to acquire The Barnstable Holding Company pursuant to the provisions of
Massachusetts legislation passed in 1911. The Company has advised the Town of
Barnstable that the Company does not believe the Town has any statutory right to
acquire The Barnstable Holding Company.
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 at any time.
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
18
ones, or to replace any reduction of the safe yield from any of our current
sources of supply, could be substantial.
MORATORIUM ON LAND SALES - On December 4, 2002, the Company entered into a
Memorandum of Understanding (MOU) with the State of Connecticut Department of
Environmental Protection (DEP). The MOU provides for a voluntary two-year
moratorium on the sale of approximately 7,100 acres of undeveloped Class I, II,
and III water company lands held by the Company's Connecticut water company
subsidiaries. Class I and II water company lands, as defined by Public Health
Code regulations, are those that are within the watershed or drainage area of a
public water supply. Class III lands are those that are not located within the
watershed. Under the terms of the MOU, the DEP in cooperation with the Company's
Connecticut water companies will assess and evaluate all undeveloped Class I, II
and III land holdings to determine the desirability of the State of
Connecticut's acquiring the land for open space and to develop strategies to
fund the acquisitions of such properties in fee or by easement from the Company.
If the DEP determines that the Company's Class I, II and III land holdings are
desirable, the Company and the DEP have agreed to negotiate in good faith to
determine a price for the Company's land holdings based upon appraised values.
However, the Company is not obligated by the MOU to sell such lands to the State
of Connecticut. If the DEP determines that certain parcels of Class III land
covered by the MOU do not meet its criteria for desirable open space, the
Company can apply to the Department of Public Utility Control to sell or
otherwise dispose of the land. The Company has no intention of selling or
otherwise disposing of Class I and II lands that have an impact on drinking
water supply and water quality. The MOU does not affect the land donation to the
Town of Killingly mentioned above.
TAXES - Due to the current environment of state budget deficits, the Company and
its subsidiaries may be subject to a higher tax burden through changes in state
legislation. Also, the Company's future property tax burden may increase as
state aid to towns is decreased.
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, tax rates, and stock market trends which may affect the return
earned on pension assets, and compliance with environmental and water quality
regulations. We undertake no obligation to update or revise forward looking
statements, whether as a result of new information, future events, or otherwise.
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary market risk faced by the Company is interest rate risk. The Company
has no exposure to derivative financial instruments or financial instruments
with significant credit risk or off-balance sheet risks and is not subject in
any material respect to any currency or other commodity risk.
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. The Company's exposure to interest fluctuations is managed
at the Company and subsidiary operations levels through the use of a combination
of fixed rate long-term debt (and variable rate borrowings) under financing
arrangements entered into by the Company and its subsidiaries. The Company has
$12,500,000 current lines of credit with three banks, under which interim bank
loans payable at December 31,2002 were $6,950,000. Management believes that any
near-term change in interest rates should not materially affect the consolidated
financial position, results of operations or cash flows of the Company.
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
PricewaterhouseCoopers LLP are included herein on pages F-2 through F-25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
PREVIOUS INDEPENDENT ACCOUNTANTS
On April 26, 2002, shareholders ratified the appointment of Arthur Andersen LLP
("Arthur Andersen") as independent auditors for the fiscal year ending December
31, 2002. On June 18, 2002 the Company dismissed Arthur Andersen as the
Company's independent public accountants. The decision to dismiss Arthur
Andersen was made by the Company's Board of Directors, based upon a
recommendation of its Audit Committee.
Arthur Andersen's reports on the Company's consolidated financial statements for
each of the Company's fiscal years ended December 31, 2001 and December 31, 2000
did not contain an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended December 31, 2001 and December 31, 2000 and
through June 18, 2002, there were no disagreements with Arthur Andersen on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to Arthur Andersen's
satisfaction, would have caused Arthur Andersen to make reference to the subject
matter in connection with their report on the Company's consolidated financial
statements for such years; and there were no reportable events as defined in
Item 304(a)(1)(v) of the Regulation S-K.
20
The Company provided Arthur Andersen with a copy of the foregoing Disclosures in
June 2002 and attached as Exhibit 16 to the Company's Form 8-K filed on June 20,
2002, a copy of Arthur Andersen's response letter, dated June 19, 2002, stating
its agreement with such statements. Refer to Exhibit 23.2 for further
discussion.
NEW INDEPENDENT ACCOUNTANTS
Effective June 18, 2002, the Company retained PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year ended December 31, 2002.
During the fiscal years ended December 31, 2001 and December 31, 2000 and
through June 18, 2002, the Company did not consult PricewaterhouseCoopers LLP
with respect to the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's consolidated financial statements, or any
other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii)
of Regulation S-K.
21
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE COMPANY
Period Held or Term of Office
Name Age Office Prior Position Expires
---- --- ------ -------------- -------
M.T.Chiaraluce 60 President, Chief Held position of President 2003 Annual
Executive Officer and Chairman of since January, 1992 and Meeting
the Board position of Chief Executive
Officer since July, 1992
D.C.Benoit 45 Vice President - Finance, Chief Held current position or 2003 Annual
Financial Officer and Treasurer other executive position with Meeting
the company since April, 1996
J.R.McQueen 60 Vice President - Engineering and Held current position or 2003 Annual
Planning other management or Meeting
engineering position with the
Company since October, 1965
T.P.O'Neill 49 Vice President - Operations Held current position or 2003 Annual
other engineering position Meeting
with the Company since
February, 1980
M.P.Westbrook 43 Vice President - Administration Held current position or 2003 Annual
and Government Affairs other management position Meeting
with the Company since
September, 1988
P.J.Bancroft 53 Assistant Treasurer and Controller Held current position or 2003 Annual
other accounting position Meeting
with the Company since
October, 1979
M.G.DiAcri 57 Corporate Secretary Held administrative position 2003 Annual
with the Company since Meeting
February, 1990
There are no family relationships between any of the Directors and Executive
Officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EQUITY COMPENSATION PLAN INFORMATION- The following table provides information
about the Company's common stock that may be issued upon the exercise of options
and rights under all of the Company's existing equity compensation plans as of
December 31, 2002. The table also includes information about certain other
equity compensation plans of the Company previously adopted without stockholder
approval.
- ----------------------------------------------------------------------------------------------------------
Number of Securities to Weighted average Number of securities remaining
be issued upon exercise price of available for issuance under
exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities reflected
warrants and rights and rights in column (a))
Plan Category (a) (#) (b)($) (c) (#)
- ----------------------------------------------------------------------------------------------------------
Equity compensation plans 281,582
approved by security 235,101 $21.41
holders (1)
- ----------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security 0 N/A 374,002
holders (2)
- ----------------------------------------------------------------------------------------------------------
Total: 235,101 $21.41 655,584
- ----------------------------------------------------------------------------------------------------------
1) Includes the Company's Performance Stock Program, amended and restated
as of April 26, 2002. This plan is described in Note 13 of the Notes to the
Consolidated Financial Statements.
23
(2) Includes the Dividend Reinvestment and Common Stock Purchase Plan,
amended and restated as of November 15, 2001. Under the plan, customers and
employees of Connecticut Water and holders of Common Stock who elect to
participate may automatically reinvest all or specified percentages of their
dividends in additional shares of Common Stock and may also make optional cash
payments of up to $1,000 per month to purchase additional shares of Common
Stock. The Company may issue shares directly to the Plan's agent in order to
meet the requirements of the plan, or may direct the agent administering the
Plan on the Company's behalf to buy the shares on the open market at its
discretion. 1,200,000 shares have been registered with the Securities and
Exchange Commission for that purpose. Under the plan, 825,998 shares had been
issued by the Company as of December 31, 2002. Since the third quarter of 1996,
the Plan's agent has been buying shares on the open market to satisfy Plan
requirements.
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
(except for the Equity Compensation Plan information) and 13 is hereby
incorporated by reference to the Company's definitive proxy statement to be
filed on EDGAR on or about March 18, 2003. Information concerning the executive
officers of the Company is included as Item 10 of this report.
ITEM 14. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report, management,
including the Company's Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon, and as of the date of that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures were effective, in all material
respects, to ensure that information required to be disclosed in the reports the
Company files and submits under the Exchange Act is recorded, processed,
summarized and reported as and when required. Further, there were not any
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation. There were no significant deficiencies or material weaknesses
identified in the evaluation and, therefore, no corrective actions were taken.
24
PART IV
ITEM 15. 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
Reports of Independent Public Accountants F-2
Consolidated Statements of Income for the years
Ended December 31, 2002, 2001, and 2000 F-4
Consolidated Balance Sheets at December 31, 2002
and 2001 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 2002, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedules:
The following schedules of the Company are included on the
attached pages as indicated:
Reports of Independent Public Accountants
on Schedule S-1
Schedule II Valuation and Qualifying Accounts
and Reserves for the years ended December 31,
2002, 2001 and 2000 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.
25
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:
None
F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
Index to Consolidated Financial Statements and Schedule F-1
Reports of Independent Public Accountants F-2
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000 F-4
Consolidated Balance Sheets at December 31, 2002, and 2001 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7
Reports of Independent Public Accountants on Schedule S-1
Valuation and Qualifying Accounts S-2
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Connecticut Water Service, Inc.:
In our opinion, the accompanying balance sheet as of December 31, 2002 presents
fairly, in all material respects, the financial position of Connecticut Water
Service, Inc. and subsidiaries at December 31, 2002, and the results of their
operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. 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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The financial statements of Connecticut Water Service, Inc. and subsidiaries as
of December 31, 2001, and for each of the two years in the period ended December
31, 2001 were audited by other independent accountants who have ceased
operations. Those independent accountants expressed an unqualified opinion on
those financial statements in their report dated February 8, 2002.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 2003
F-3
Set forth below is a copy of a report previously issued by Arthur Andersen LLP,
in connection with the Company's filing on Form 10-K for the year ended December
31, 2001. This audit report has not been reissued by Arthur Andersen LLP in
connection with the Company's filing on Form 10-K. See Exhibit 23.2 for further
discussion.
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 F-4
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, (in thousands, except per share data) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 45,830 $ 45,392 $ 43,997
-------- -------- --------
Operating Expenses
Operation and Maintenance 19,531 20,076 18,380
Depreciation 5,187 4,837 4,718
Income Taxes 4,482 4,777 4,579
Taxes Other Than Income Taxes 4,796 4,388 4,658
-------- -------- --------
Total Operating Expenses 33,996 34,078 32,335
-------- -------- --------
Utility Operating Income 11,834 11,314 11,662
-------- -------- --------
Other Income (Deductions), Net of Taxes
Gain on Property Transactions 440 1,121 532
Non-Water Sales Earnings 444 372 266
Allowance for Funds Used During Construction 470 439 416
Merger Costs - (352) (408)
Other 126 177 210
-------- -------- --------
Total Other Income (Deductions), Net of Taxes 1,480 1,757 1,016
-------- -------- --------
Interest and Debt Expenses
Interest on Long-Term Debt 3,909 4,057 4,100
Other Interest Charges 365 353 460
Amortization of Debt Expense 260 222 222
-------- -------- --------
Total Interest and Debt Expenses 4,534 4,632 4,782
-------- -------- --------
Net Income Before Preferred Dividends 8,780 8,439 7,896
Preferred Stock Dividend Requirement 38 38 38
-------- -------- --------
Net Income Applicable to Common Stock $ 8,742 $ 8,401 $ 7,858
======== ======== ========
Weighted Average Common Shares Outstanding:
Basic 7,718 7,619 7,605
Diluted 7,771 7,662 7,633
Earnings Per Common Share:
Basic $ 1.13 $ 1.10 $ 1.03
Diluted $ 1.12 $ 1.10 $ 1.03
The accompanying notes are an integral part of these consolidated financial
statements.
DRAFT COPY
Connecticut Water Service, Inc. and Subsidiaries F-5
CONSOLIDATED BALANCE SHEETS
December 31, (in thousands, except share amounts) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Utility Plant $ 308,385 $ 267,575
Construction Work in Progress 9,592 12,761
Utility Plant Acquisition Adjustments (1,278) (1,309)
---------- ----------
316,699 279,027
Accumulated Provision for Depreciation (87,602) (76,697)
---------- ----------
Net Utility Plant 229,097 202,330
---------- ----------
Other Property and Investments 3,557 3,334
---------- ----------
Cash 464 102
Accounts Receivable (Less Allowance, 2002 - $240; 2001 - $234) 5,157 4,811
Accrued Unbilled Revenues 3,619 3,402
Materials and Supplies, at Average Cost 960 869
Prepayments and Other Current Assets 173 239
---------- ----------
Total Current Assets 10,373 9,423
---------- ----------
Unamortized Debt Issuance Expense 5,080 5,308
Unrecovered Income Taxes 10,718 8,963
Post-Retirement Benefits Other Than Pension 846 849
Goodwill 3,608 -
Other Costs 1,520 1,507
---------- ----------
Total Regulatory and Other Long-Term Assets 21,772 16,627
---------- ----------
Total Assets $ 264,799 $ 231,714
========== ==========
CAPITALIZATION AND LIABILITIES
Common Stockholders' Equity:
Common Stock Without Par Value:
Authorized - 15,000,000 Shares - Issued and Outstanding:
2002 - 7,939,713; 2001 - 7,649,362 $ 53,069 $46,342
Retained Earnings 26,906 24,441
---------- ----------
Common Stockholders' Equity 79,975 70,783
Preferred Stock 847 847
Long-Term Debt 64,734 63,953
---------- ----------
Total Capitalization 145,556 135,583
---------- ----------
Interim Bank Loans Payable 6,950 1,825
Current Portion of Long-Term Debt 242 2,205
Accounts Payable 6,539 6,079
Accrued Taxes 659 1,099
Accrued Interest 747 1,284
Other Current Liabilities 341 164
---------- ----------
Total Current Liabilities 15,478 12,656
---------- ----------
Advances for Construction 22,069 16,075
---------- ----------
Contributions in Aid of Construction 43,373 32,277
---------- ----------
Deferred Federal and State Income Taxes 20,633 18,902
---------- ----------
Unfunded Future Income Taxes 9,871 8,223
---------- ----------
Long-Term Compensation Arrangements 5,877 6,028
---------- ----------
Unamortized Investment Tax Credits 1,942 1,970
---------- ----------
Commitments and Contingencies
---------- ----------
Total Capitalization and Liabilities $ 264,799 $ 231,714
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
Connecticut Water Service, Inc. and Subsidiaries F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, (in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income Before Preferred Dividends $ 8,780 $ 8,439 $ 7,896
-------- -------- --------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation (including $164 in 2002, $169 in 2001,
and $166 in 2000 charged to other accounts) 5,351 5,006 4,884
Change in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable and
Accrued Unbilled Revenues (165) (153) 541
(Increase) Decrease in Other Current Assets 57 (191) 123
(Increase) Decrease in Other Non-Current Items (89) (45) 43
Increase (Decrease) in Accounts Payable, Accrued
Expenses and Other Current Liabilities (867) 1,089 531
Increase in Deferred Income Taxes and
Investment Tax Credits, Net 747 675 1,168
-------- -------- --------
Total Adjustments 5,034 6,381 7,290
-------- -------- --------
Net Cash Provided by Operating Activities 13,814 14,820 15,186
-------- -------- --------
Investing Activities:
Gross Additions to Utility Plant (including
Allowance For Funds Used During Construction of
$470 in 2002, $439 in 2001 and $416 in 2000) (15,691) (14,218) (10,542)
-------- -------- --------
Financing Activities:
Proceeds from Interim Bank Loans 6,950 1,825 1,800
Repayment of Interim Bank Loans (1,875) (1,800) (3,061)
Reduction of Long-Term Debt Including Current Portion (2,376) (405) (805)
Proceeds from Issuance of Common Stock 753 1,392 227
Advances, Contributions and Funds from
Others for Construction, Net 4,992 4,332 2,310
Costs Incurred to Issue Long-Term Debt and Common Stock (192) (15) --
Cash Dividends Paid (6,315) (6,143) (5,928)
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities 1,937 (814) (5,457)
-------- -------- --------
Net Increase (Decrease) in Cash 60 (212) (813)
Cash at Beginning of Year 102 314 1,127
-------- -------- --------
Cash at End of Year Excluding Cash Acquired from Puchase of
Unionville Water Company 162 102 314
Cash Acquired From Purchase of Unionville Water Company 302 - -
-------- -------- --------
Cash at End of Year $ 464 $ 102 $ 314
======== ======== ========
Non-cash Investing and Financing Activites:
Purchase of Unionville Water Company by Issuance of
Company Common Stock (see Note 2 for details) $ 6,166 $ - $ -
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest (net of amounts capitalized) $ 4,811 $ 3,836 $ 4,176
State and Federal Income Taxes $ 3,780 $ 3,260 $ 3,580
F-7
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 eleven 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.
New England Water Utility Services, Inc.
Connecticut Water Emergency Services, Inc.
Barnstable Holding Company
The Barnstable Water Company (Barnstable Water)
BARLACO
The Unionville Water Company (Unionville)
During 2002, the Company acquired The Unionville Water Company. This acquisition
was accounted for using the purchase method of business combinations.
Connecticut Water, Gallup, Crystal Water, Barnstable Water and Unionville (our
"water companies") are public water utility companies serving 85,536 customers
in 42 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 rental of
property are included in the Other Income (Deductions), Net of Taxes section of
the Consolidated Statements of Income in the Non-Water Sales Earnings category.
New England 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), Net of Taxes 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), Net of Taxes
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 the Gain on Property Transactions category in
the Other Income (Deductions), Net of Taxes 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 - Four 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 Generally Accepted Accounting Principles in the United States of
America (GAAP), which includes the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation," (FAS 71). FAS 71 requires cost-based, rate-regulated enterprises
such as our water companies to reflect the impact of regulatory decisions in
their financial statements. The 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 benefit costs. The Company believes, based on current
regulatory circumstances, that the regulatory assets recorded are likely to be
recovered and that its use of regulatory accounting is appropriate and in
accordance with the provisions of FAS 71. Material regulatory assets are earning
a return.
USE OF ESTIMATES - The preparation of financial statements in conformity with
Generally Accepted Accounting Principles in the United States of America (GAAP),
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-8
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. In the case of acquisitions, 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, 2002, Connecticut Water has capitalized approximately $2,333,000 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 five
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 rate, based on
the average balances of depreciable property, was 1.9% for 2002, 2.0% for 2001
and 2.1% for 2000.
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 provides income tax expense for its utility
operations in accordance with the regulatory accounting policies of the
applicable jurisdictions (Connecticut and Massachusetts). The Connecticut DPUC
requires the flow-through method of accounting for most state tax temporary
differences as well as for certain federal temporary differences.
The Company computed deferred tax reserves for all temporary book-tax
differences using the liability method prescribed in SFAS 109. 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. Deferred
tax liabilities that have not been reflected in tax expense due to regulatory
treatment are described as unfunded future income taxes, and are expected to be
recoverable in future years' rates.
The Company believes that all deferred income tax assets will be realized in the
future. The majority of all unfunded future income taxes relate 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.
MUNICIPAL TAXES - Municipal taxes are generally 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.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-9
STOCK OPTIONS - The Company has a Stock-Based Compensation Plan with two
components: the Performance Stock Program and the Stock Option Program, which
are described more fully in Note 13. Statement of Financial Accounting Standard
(SFAS) No. 123 "Accounting for Stock-Based Compensation," encourages entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB opinion No. 25 "Accounting for Stock
Issued to Employees" and provide pro forma net income and pro forma earnings per
share disclosures for employee stock grants as if the fair-value-based method
defined in SFAS No. 123 had been applied.
The Company accounts for its Stock Option Program under the recognition and
measurement principles of APB No. 25. As such, no compensation cost related to
the Stock Option Program is reflected in Net Income, as all options under this
program had an exercise price equal to market value of the underlying common
stock on the date of grant. The following table illustrates the effect on Net
Income and Earnings Per Share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to the Stock Option Program.
Year Ended December 31
----------------------
2002 2001 2000
---- ---- ----
(in thousands, except for per share data)
Net income, as reported $ 8,742 $ 8,401 $ 7,858
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects (218) (264) (182)
------- ------- --------
Pro forma net income $ 8,524 $ 8,137 $ 7,676
======= ======= ========
Earnings per share:
Basic - as reported $ 1.13 $ 1.10 $ 1.03
======= ======= ========
Basic - pro forma $ 1.10 $ 1.07 $ 1.01
======= ======= ========
Diluted - as reported $ 1.12 $ 1.10 $ 1.03
======= ======= ========
Diluted - pro forma $ 1.10 $ 1.06 $ 1.01
======= ======= ========
Under the Company's Performance Stock Program, restricted shares of Common Stock
may be awarded annually to officers and key employees. To the extent that the
goals established by the Compensation Committee have been attained, the
restrictions on the stock are removed. Amounts charged to expense pursuant to
the Performance Stock Program were $201,000, $349,000 and $227,000, for 2002,
2001 and 2000, respectively. These amounts are included in Net Income, as
reported.
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.
GOODWILL - The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" (FAS 142), effective
January 1, 2002. SFAS 142 requires that goodwill no longer be amortized on a
ratable basis. In accordance with SFAS 142, goodwill must be allocated to
reporting units and reviewed for impairment at least annually. The Company
utilized a discounted cash flow approach, incorporating its most recent business
plan forecasts in the performance of the annual goodwill impairment test.
SFAS 142 also requires that recognizable intangible assets be amortized over
their useful lives and tested for impairment. Intangible assets with indefinite
useful lives should be reviewed for impairment. The Company has concluded a
review of intangible assets, and no adjustment was deemed necessary effective
with the adoption of SFAS 142.
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, 2002, 2001, and 2000.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-10
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.13 $ 1.10 $ 1.03
Dilutive effect of unexercised stock options .01 -- --
- ------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.12 $ 1.10 $ 1.03
======================================================================================================
Numerator (in thousands):
- ------------------------------------------------------------------------------------------------------
Basic net income $ 8,742 $ 8,401 $ 7,858
Diluted net income $ 8,742 $ 8,401 $ 7,858
Denominator (in thousands):
- ------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 7,718 7,619 7,605
Dilutive effect of unexercised stock options 53 43 28
- ------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 7,771 7,662 7,633
======================================================================================================
RECLASSIFICATION - Certain reclassifications have been made to conform
previously reported data to the current presentation.
NEW ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Accounting Standard
Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations"
(FAS 143). FAS 143 provides the accounting requirements for retirement
obligations associated with tangible long-lived assets. FAS 143 is effective for
fiscal years beginning after June 15, 2002, and early adoption is permitted.
This accounting pronouncement is not expected to have a significant impact on
our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections." SFAS 145
rescinds and amends certain previous standards related primarily to debt and
leases. The most substantive amendment requires sale-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. The provisions of SFAS 145 related to the
rescission of SFAS 4 are effective for financial statements issued for fiscal
years beginning after May 15, 2002 and will be effective for the Company
commencing with 2003. The provisions of SFAS 145 are effective for transactions
occurring after May 15, 2002. All other provisions of SFAS 145 are effective for
financial statements issued on or after May 15, 2002. This accounting
pronouncement is not expected to have a significant impact on our financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3. This SFAS requires that a liability
for a cost associated with an exit or disposal activity be recorded at fair
value when the liability is incurred. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. This accounting
pronouncement is not expected to have a significant impact on our financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting
for Stock-Based Compensation," and provides alternative methods of transition
for an entity that voluntarily changes to the fair-value based method of
accounting for stock-based compensation. It also amends the disclosure
provisions of that statement. The disclosure provisions of this statement are
effective for financial statements issued for fiscal years ending after December
15, 2002. The Company does not currently plan to change to the fair-value method
of accounting for its stock-based compensation.
NOTE 2: 2002 PURCHASE ACQUISITION
On October 31, 2002, the Company issued 249,715 shares of its common stock in
exchange for all the outstanding common stock of The Unionville Water Company
(Unionville). The exchange ratio was approximately 4.16 shares of the Company's
common stock for each outstanding share of Unionville stock. The transaction was
valued at approximately $6.2 million. This acquisition was accounted for under
the purchase method of accounting, and as such the balances and income statement
activity from the acquisition date forward are included in the financial
statements. As a result, goodwill of $3.6 million was recorded and allocated to
our water segment. There were no other intangible assets identified as part of
the acquisition.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-11
The Company will operate Unionville as a wholly-owned subsidiary. Unionville
serves over 5,600 customers in Farmington and Avon, Connecticut. As a condition
of the acquisition, Unionville was granted permission by the DPUC to impose a
limited rate increase to recover financing and operating costs related to a new
water interconnection with a neighboring water supplier, once the
interconnection is placed in service. The expected in-service date of the
interconnection is May, 2003. The approximate 30% rate increase will be
reflected in Unionville's customers' bills as a surcharge that will be subject
to a retroactive refund to ratepayers to the extent that the DPUC determines
that Unionville's revenues exceed certain levels. As part of its decision, the
DPUC has limited the conditions upon which Unionville may seek a rate increase
prior to September 1, 2005.
Unionville is planning to fund a major portion of the construction costs of the
interconnection mentioned above with a State Revolving Fund Loan.
The tables below presents the Condensed Balance Sheet detailing the Unionville
balances on October 31, 2002.
UNIONVILLE
CONDENSED BALANCE SHEET
October 31, 2002 (in thousands)
(Unaudited)
Before Acquisition After Acquisition
ASSETS
Net Utility Plant $ 16,448 $ 16,448
Total Current Assets 782 782
Goodwill --- 3,608
Total Regulatory and Other Long-Term Assets 2,021 2,021
-------- --------
Total Assets $ 19,251 $ 22,859
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization
Common Stockholders' Equity $ 2,558 $ 6,166
Long-Term Debt 1,194 1,194
-------- --------
Total Capitalization 3,752 7,360
Current Liabilities 577 577
Deferred Credits 14,922 14,922
-------- --------
Total Capitalization and Liabilities $ 19,251 $ 22,859
======== ========
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-12
NOTE 3: INCOME TAX EXPENSE
Income Tax Expense for the years ended December 31, is comprised of the
following:
(in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Federal Classified as Operating Expense $ 4,065 $ 4,225 $ 4,002
Federal Classified as Other Income:
Land Sales -- -- 32
Land Donation (105) (254) (132)
Non-Water Sales 276 164 127
Other (52) (42) (21)
- ------------------------------------------------------------------------------------------------------
Total Federal Income Tax Expense 4,184 4,093 4,008
- ------------------------------------------------------------------------------------------------------
State Classified as Operating Expense 417 552 577
State Classified as Other Income:
Land Sales (1) -- 7
Land Donation (360) (1,012) (526)
Non-Water Sales 54 41 29
Other (18) 6 6
- ------------------------------------------------------------------------------------------------------
Total State Income Tax Expense (Benefit) 92 (413) 93
- ------------------------------------------------------------------------------------------------------
Total Income Tax Expense $ 4,276 $ 3,680 $ 4,101
======================================================================================================
The components of the Federal and State income tax provisions are:
2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Current:
Federal $ 2,835 $ 3,062 $ 2,853
State 192 (48) 80
- ------------------------------------------------------------------------------------------------------
Total Current 3,027 3,014 2,933
- ------------------------------------------------------------------------------------------------------
Deferred Income Taxes, Net:
Federal
Investment Tax Credit (63) (63) (61)
Capitalized Interest 23 23 42
Depreciation 798 910 1,119
Other 591 161 55
- ------------------------------------------------------------------------------------------------------
Total Federal 1,349 1,031 1,155
- ------------------------------------------------------------------------------------------------------
State
Depreciation - (1) 2
Other (100) (364) 11
- ------------------------------------------------------------------------------------------------------
Total State (100) (365) 13
- ------------------------------------------------------------------------------------------------------
Total Deferred Income Taxes, Net 1,249 666 1,168
- ------------------------------------------------------------------------------------------------------
Total $ 4,276 $ 3,680 $ 4,101
======================================================================================================
Deferred income tax liabilities are categorized as follows on the Consolidated
Balance Sheet:
2002 2001
- ------------------------------------------------------------------------------------
Deferred Federal and State Income Taxes $ 20,921 $ 18,902
Unfunded Future Income Taxes 7,471 8,223
- ------------------------------------------------------------------------------------
Net Deferred Income Tax Liability $ 28,392 $ 27,125
====================================================================================
Deferred income tax liabilities are comprised of the following:
2002 2001
- ------------------------------------------------------------------------------------
Depreciation $ 27,125 $ 24,057
Other 1,267 3,068
- ------------------------------------------------------------------------------------
Net Deferred Income Tax Liability $ 28,392 $ 27,125
====================================================================================
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-13
The calculation of Pre-Tax Income is as follows:
2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Pre-Tax Income
Net Income Before Preferred Dividends $ 8,780 $ 8,439 $ 7,896
Minority Interest Included (Deducted) Above -- -- (19)
Income Taxes 4,276 3,680 4,101
- ------------------------------------------------------------------------------------------------------
Total Pre-Tax Income $ 13,056 $ 12,119 $ 11,978
======================================================================================================
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:
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
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 2.3% 3.3% 3.4%
Land Donation Credit (1.8%) (5.5%) (2.9%)
Depreciation .5% 1.2% 1.8%
Charitable Contribution - Land Donation (1.7%) (4.5%) (2.1%)
Pension Costs (.7%) .6% .3%
Debt Refinancing Costs .2% .2% .2%
Non-deductible Merger Costs -- 1.0% 1.5%
Bad Debt -- -- (.9%)
Common Stock Equivalents -- 1.1% .3%
Other -- (1.0%) (1.4%)
- ---------------------------------------------------------------------------------------------------------------
Effective Income Tax Rate 32.8% 30.4% 34.2%
===============================================================================================================
NOTE 4: COMMON STOCK
The Company has 15,000,000 authorized shares of common stock, no par value. A
summary of the changes in the common stock accounts for the period January 1,
2000 through December 31, 2002, appears below:
Issuance
(in thousands, except share data) Shares Amount Expense Total
- ------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 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 7,604,594 46,350 (1,385) 44,965
Stock and equivalents issued through
Performance Stock Program 5,353 457 -- 457
Purchase Minority Interest of Barnstable
Holding Company -- 125 -- 125
Stock Split - fractional shares (752) -- (11) (11)
Stock Options Exercised 40,167 810 (4) 806
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 7,649,362 47,742 (1,400) 46,342
Purchase Unionville Water Company 249,715 6,166 (190) 5,976
Stock and equivalents issued through
Performance Stock Program 6,672 21 -- 21
Stock Options Exercised 33,964 732 (2) 730
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 (1) 7,939,713 $ 54,661 $ (1,592) $ 53,069
==================================================================================================================
(1) Includes 700 restricted and 37,108 common stock equivalent shares
issued through the Performance Stock Program through December 31, 2002.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-14
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 affected 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 5: ANALYSIS OF RETAINED EARNINGS
The summary of the changes in Retained Earnings for the period January 1, 2000
through December 31, 2002, appears below:
(in thousands, except per share data) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Balance, Beginning of Year $ 24,441 $ 22,145 $ 20,177
Income Before Preferred Stock Dividends 8,780 8,439 7,896
- ---------------------------------------------------------------------------------------------------------
33,221 30,584 28,073
- ---------------------------------------------------------------------------------------------------------
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:
2002 $0.81 Per Share 6,277 -- --
2001 $0.80 Per Share -- 6,105 --
2000 $0.77 Per Share -- -- 5,890
- ---------------------------------------------------------------------------------------------------------
6,315 6,143 5,928
- ---------------------------------------------------------------------------------------------------------
Balance, End of Year $ 26,906 $ 24,441 $ 22,145
=========================================================================================================
NOTE 6: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each of the following financial instruments.
CASH - Cash and cash equivalents consist of highly liquid instruments with
original maturities at the time of purchase of three months or less. 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, 2002 and 2001, the estimated fair value of the Company's long-term debt was
$71,979,000 and $62,726,000, respectively, as compared to the carrying amounts
of $64,734,000 and $63,953,000, respectively.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-15
The fair values shown above have been reported to meet the disclosure
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Values of Financial Instruments" and do not purport to
represent the amounts at which those obligations would be settled.
NOTE 7: LONG-TERM DEBT
Long-Term Debt at December 31, consisted of the following:
(in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------------
The Connecticut Water Company
First Mortgage Bonds:
5.875% Series R, Due 2022 $ 14,645 $ 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
- ------------------------------------------------------------------------------------------------------------------
44,245 44,270
Unsecured Water Facilities Revenue Refinancing Bonds
5.05% 1998 Series A, Due 2028 9,625 9,705
5.125% 1998 Series B, Due 2028 7,720 7,770
- ------------------------------------------------------------------------------------------------------------------
17,345 17,475
Other
5.5% Unsecured Promissory Note, Due 2002 -- 37
- ------------------------------------------------------------------------------------------------------------------
Total Connecticut Water Company 61,590 61,782
Crystal Water Utilities Corporation
8.0% Westbank , Due 2017 122 126
- ------------------------------------------------------------------------------------------------------------------
Crystal Water Company of Danielson
7.82% Connecticut Development Authority, Due 2020 483 495
8.0% Westbank, Due 2011 - 2,033
- ------------------------------------------------------------------------------------------------------------------
Total Crystal Water Company of Danielson 483 2,528
Chester Realty
6% Note Payable, Due 2006 78 97
- ------------------------------------------------------------------------------------------------------------------
Barnstable Water Company
10.2% Indianapolis Life Insurance, Due 2011 1,525 1,625
- ------------------------------------------------------------------------------------------------------------------
Unionville Water Company
8.125% Farmington Savings Bank, Due 2011 1,178 --
- ------------------------------------------------------------------------------------------------------------------
Total Connecticut Water Service, Inc. 64,976 66,158
Less Current Portion (242) (2,205)
- ------------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $ 64,734 $ 63,953
==================================================================================================================
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-16
The Company's principal payments required for years 2003 - 2007 are as follows:
(In thousands)
2003 - $ 242
2004 - $ 254
2005 - $ 277
2006 - $ 254
2007 - $ 267
Substantially all utility plant is pledged as collateral for long-term debt.
There are no mandatory sinking fund payments required on Connecticut Water
Company's outstanding First Mortgage Bonds or the Unsecured Water Facilities
Revenue Refinancing Bonds. However, the Series R First Mortgage Bonds and the
1998 Series A 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.
In 2003, the Series R bonds call price will be reduced to 100%.
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.
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, 2002 and 2001.
Unionville Water Company's term note with Farmington Savings Bank requires
monthly payments of principal and interest. The note bears a fluctuating
interest rate. The interest rate is adjusted on each 60-month anniversary date
from the effective date of May 1, 1996. On the anniversary date (Interest Change
Date) the interest rate shall be increased or decreased to a rate determined by
adding 2.5 percentage points to the most recent Federal Home Loan Bank of Boston
Long-Term, Regular, 5 year, Fixed Rate Mortgage Rate (Index), available 45 days
prior to the Interest Change Date, rounded to the next highest one-eighth of one
percentage point. Unionville may prepay the principal balance outstanding under
the note without penalty for the thirty days preceding each Interest Change Date
upon 30 days prior written notice to the bank. Prepayment made at any other time
requires a prepayment penalty, which is 110% of the present value of the
difference between the interest on the amount prepaid for the remaining term to
the next Interest Change Date, as determined by the Current Index and the
interest on the same amount for the remaining term to the next Interest Change
Date, as determined by the Index in effect for that maturity on the day the
prepayment is made.
NOTE 8: PREFERRED STOCK
The Company's Preferred Stock at December 31, consisted of the following:
(in thousands, except share data) 2002 2001
- ------------------------------------------------------------------------------------------------------------------
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.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-17
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 2002, 2001 and
2000. These dividends are included in the Other category of the Other Income
(Deductions) section of the Consolidated Statements of Income. These preferred
shareholders have 1/10 of a common vote for matters related to Barnstable Water
Company.
NOTE 9: BANK LINES OF CREDIT
The Company has a total of $12,500,000 in lines of credit provided by three
banks. In May 2003, $6,500,000 of the lines of credit expire and the remaining
$6,000,000 expires in May 2004. We expect the lines of credit to be renewed. The
total available on the lines of credit as of December 31, 2002 was $5,550,000.
Bank commitment fees associated with the lines of credit were approximately
$30,000, $22,500, and $24,750 in 2002, 2001, and 2000 respectively.
At December 31, 2002 and 2001, the weighted average interest rates on short-term
borrowings outstanding were 1.77% and 2.31%, respectively.
NOTE 10: UTILITY PLANT AND CONSTRUCTION PROGRAM
The components of utility plant and equipment at December 31, are as follows:
(in thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------
Land $ 9,770 $ 9,404
Source of Supply 18,059 17,087
Pumping 23,841 20,331
Water Treatment 46,692 44,585
Transmission and Distribution 191,603 159,924
General (including intangible) 17,955 15,784
Held for Future Use 465 460
- ---------------------------------------------------------------------------------------------------
Total $ 308,385 $ 267,575
===================================================================================================
The amounts of depreciable utility plant at December 31, 2002 and 2001 included
in total utility plant were $276,150,000 and $249,775,000, 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
$9,502,000 during 2003, $9,806,000 during 2004, and $10,263,000 in 2005. During
the years 2006 and 2007, construction expenditures for routine improvements to
the water distribution system are expected to be approximately $8,000,000 each
year.
NOTE 11: TAXES OTHER THAN INCOME TAXES
Taxes Other than Income Taxes consist of the following:
(in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Municipal Property Taxes $ 4,149 $ 3,788 $ 4,070
Payroll Taxes 647 600 588
- ------------------------------------------------------------------------------------------------------------------
Total $ 4,796 $ 4,388 $ 4,658
==================================================================================================================
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-18
NOTE 12: PENSION AND OTHER POST-RETIREMENT EMPLOYEE BENEFITS
GENERAL - As of December 31, 2002, Connecticut Water Company had 161 employees,
Gallup 5, Crystal 7, Connecticut Water Emergency Services 1, Barnstable Water
Company 8, and Unionville 9 for a total of 191 employees. The Company's officers
are employees of The Connecticut Water Company. Employee expenses are charged
between companies as appropriate. Effective December 31, 2002, the Connecticut
Water Company Pension Plan and the Barnstable Water Company Pension Plan merged.
All Companies excluding Barnstable and Unionville:
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 Employee Retirement Income Security Act of 1974 regulations.
Contributions of approximately $669,000 were made for 2002. No contribution was
made in 2001.
POST-RETIREMENT BENEFITS OTHER THAN PENSION (PBOP) - In addition to providing
pension benefits, a 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 contribution for calendar years 2002
and 2001 was $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.
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) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation, beginning of year $ 17,339 $ 16,119 $ 4,171 $ 4,037
Service Cost 686 582 223 190
Interest Cost 1,249 1,163 309 276
Plan Participant Contributions -- -- 47 40
Plan Amendments -- 16 -- --
Actuarial loss/(gain) 1,816 387 1,184 (43)
Benefits paid (688) (928) (427) (329)
Merger of plans 1,527 -- -- --
- -----------------------------------------------------------------------------------------
Benefit obligation, end of year $ 21,929 $ 17,339 $ 5,507 $ 4,171
- -----------------------------------------------------------------------------------------
Change in Plan Assets:
Fair Value, beginning of year $ 18,170 $ 19,218 $ 2,684 $ 2,545
Actual return on plan assets (1,484) (120) (185) (45)
Employer contribution 669 -- 473 473
Participants' contributions -- -- 47 40
Benefits paid (688) (928) (427) (329)
Merger of plans 1,075 -- -- --
- -----------------------------------------------------------------------------------------
Fair Value, end of year $ 17,742 $ 18,170 $ 2,592 $ 2,684
- -----------------------------------------------------------------------------------------
Funded Status $ (4,187) $ 831 $ (2,915) $ (1,487)
Unrecognized net actuarial (gain) loss 1,669 (3,780) 420 (1,175)
Unrecognized transition obligation 48 22 1,649 1,814
Unrecognized prior service cost 1,045 1,122 -- --
- -----------------------------------------------------------------------------------------
Accrued Cost $ (1,425) $ (1,805) $ (846) $ (848)
- -----------------------------------------------------------------------------------------
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-19
Weighted-average assumptions as of December 31:
Discount rate 6.5% 7.25% 6.5% 7.25%
Expected return on plan assets 8.0% 8.0% 5.0% 5.0%
Rate of compensation increase 4.5% 4.5% -- --
PENSION BENEFITS OTHER BENEFITS
(IN THOUSANDS) 2002 2001 2000 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit costs
Service cost $ 686 $ 582 $ 528 $ 223 $ 190 $ 141
Interest cost 1,249 1,163 1,060 309 276 283
Expected return on plan assets (1,448) (1,397) (1,306) (141) (128) (110)
Amortization of:
Unrecognized net transition asset 2 (30) (30) 165 165 165
Unrecognized net (gain)/loss (252) (356) (269) (84) (135) (135)
Unrecognized prior service cost 102 101 48 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Net Periodic Pension and Post Retirement
Benefit Costs $ 339 $ 63 $ 31 $ 472 $ 368 $ 344
- -------------------------------------------------------------------------------------------------------------------------
In determining the 2002 and 2001 accumulated post-retirement benefit obligation,
health care cost trends were assumed to be 8.5% grading 0.5% per year to 4%.
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 $ 76 $ (62)
Effect on post-retirement benefit obligation $ 661 $ (557)
- -------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - Connecticut Water provides additional
pension benefits to senior management through a supplemental executive
retirement plan. At December 31, 2002 the actuarial present value of the
projected benefit obligation was $788,000. Expense associated with this plan was
$108,000 for 2002, $93,000 for 2001, and $102,000 for 2000.
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 plus for those age 50 and older catch-up contributions as allowed
by law. The Company matches 50 cents for each dollar contributed by the employee
up to 4% of the employee's compensation. The Company contribution charged to
expense in 2002, 2001 and 2000 was $161,000, $150,000, and $139,000,
respectively.
The Plan creates 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 eligible 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. For 2002, $30,000 was awarded as an incentive bonus of .4%
of base pay. 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 approximately $74,000 were made in 2002, of which
approximately $30,000 was for the 2002 plan year and approximately $44,000 was
for the 2001 plan year. A contribution of $55,000 was made in 2001 for the 2000
plan year. The Barnstable Water
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-20
Company Pension Plan was merged with The Connecticut Water Pension Plan on
December 31, 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, $12,000 and $11,000 for 2002, 2001 and 2000, respectively. The
Company's PBOP currently is not funded.
Barnstable Water: PENSION BENEFITS OTHER BENEFITS
(in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation, beginning of year $ 1,381 $ 1,347 $ 83 $ 86
Service Cost 19 32 2 4
Interest Cost 96 98 7 6
Actuarial loss/(gain) 114 (12) 10 (10)
Benefits paid (83) (84) (4) (3)
Merger of plans (1,527) -- -- --
- --------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ -- $ 1,381 $ 98 $ 83
- --------------------------------------------------------------------------------------------------------------
Change in Plan Assets:
Fair Value, beginning of year $ 1,173 $ 1,301 $ -- $ --
Actual return on plan assets (89) (99) -- --
Employer contribution 74 55 4 3
Participants' contributions -- -- -- --
Benefits paid (83) (84) (4) (3)
Merger of plans (1,075) -- -- --
- --------------------------------------------------------------------------------------------------------------
Fair Value, end of year $ -- $ 1,173 $ -- $ --
- --------------------------------------------------------------------------------------------------------------
Funded Status $ (--) $ (208) $ (98) $ (83)
Unrecognized net actuarial (gain)/loss -- 152 (41) (54)
Unrecognized transition obligation -- 39 70 76
Unrecognized prior service cost -- 31 -- --
- --------------------------------------------------------------------------------------------------------------
Prepaid/(Accrued) Cost $ -- $ 14 $ (69) $ (61)
- --------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31:
Discount rate 6.5% 7.25% 6.5% 7.25%
Expected return on plan assets 8.0% 8.0% -- --
Rate of compensation increase 4.5% 4.5% -- --
PENSION BENEFITS OTHER BENEFITS
(IN THOUSANDS) 2002 2001 2000 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
Components of net periodic benefit costs
Service cost $ 19 $ 32 $ 32 $ 2 $ 4 $ 3
Interest cost 96 98 102 7 6 6
Expected return on plan assets (95) (105) (116) -- -- --
Amortization of:
Unrecognized net transition asset 11 10 10 6 6 6
Unrecognized net (gain) loss -- -- (8) (3) (4) (4)
Unrecognized prior service cost 6 6 6 -- -- --
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-21
- --------------------------------------------------------------------------------------------------------------
Net Periodic Pension and Post Retirement
Benefit Costs (Income) $ 37 $ 41 $ 26 $12 $ 12 $ 11
- --------------------------------------------------------------------------------------------------------------
In determining the 2002 and 2001 accumulated post-retirement benefit obligation,
health care cost trends were assumed to be 8.5% grading 0.5% per year to 4%.
Unionville Water:
PENSION - Unionville Water Company has a non-contributory defined contribution
pension plan (the Pension Plan) which covers all employees who have completed
one year of service. Unionville provides a contribution to the plan based upon
10% of the participant's annual payroll. The Unionville contribution charged to
expense for the two-month period ended December 31, 2002 was $9,000.
NOTE 13: 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 were 700,000 shares authorized and 281,582 shares available
for grant at December 31, 2002.
STOCK OPTION PROGRAM (SOP) - As part of the Company's SOP, stock options are
permitted to be issued 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 are shown in Note 1.
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, 2002, 2001 and 2000.
2002 2001 2000
---- ---- ----
Expected life (years) 6.00 9.40 9.85
Risk-free interest rate (percentage) 3.09 5.07 5.12
Volatility (percentage) 30.00 27.36 32.01
Dividend yield 3.13 2.70 3.90
Options begin to become exercisable one year from the date of grant. Vesting
periods range from one to five years.
The per share weighted average fair value of stock options granted during 2002,
2001 and 2000 was $5.82, $8.67 and $5.87 respectively.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-22
For the Years Ended December 31,
-------------------- --------------------- --------------------
2002 2001 2000
-------------------- --------------------- --------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
------ -------- ------- -------- ------- --------
Options:
Outstanding, beginning of year 229,811 $ 20.18 236,228 $ 18.39 191,586 $ 17.92
Granted 39,254 25.78 33,750 22.99 44,642 21.64
Terminated -- -- -- -- -- --
Exercised (33,964) 18.12 (40,167) 16.22 -- --
------- ------- -------- -------- ------- -------
Outstanding, end of year 235,101 21.41 229,811 20.18 236,228 18.39
======= ======= ======== ======== ======= =======
Exercisable, end of year 71,581 $ 20.74 47,630 $ 19.94 38,319 $ 17.92
======= ======== ======== ======== ======== =======
Options exercised during 2002 ranged in price from $14.83 per share to $22.33
per share. The following table summarizes the price ranges of the options
outstanding and options exercisable as of December 31, 2002:
------------------------------------- ----------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
SHARES LIFE (YEARS) PRICE SHARES PRICE
------------------------------------- ---------------------
RANGE OF PRICES:
$ 13.00 - $ 17.99 62,575 6.3 $ 14.83 17,487 $ 14.83
$ 18.00 - $ 22.99 99,522 7.3 21.60 45,657 21.68
$ 23.00 - $ 27.99 73,004 9.5 26.78 8,437 27.95
------------------------------------- ----------------------
235,101 7.7 $ 21.41 71,581 $ 20.74
===================================== ======================
NOTE 14: 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-23
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, 2002
Water Activities $ 45,830 $ 5,187 $ 24,326 $ 127 $ 4,104 $ 4,482 $ 7,858
Real Estate Transactions 5 -- 32 -- -- (467) 440
Services and Rentals 2,928 20 2,186 -- -- 278 444
- ----------------------------------------------------------------------------------------------------------------------
Total $ 48,763 $ 5,207 $ 26,544 $ 127 $ 4,104 $ 4,293 $ 8,742
======================================================================================================================
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
======================================================================================================================
At December 31 (in thousands) 2002 2001
--------- -----------
Total Plant and Other Investments:
Water $ 231,676 $ 204,750
Non-water 978 914
--------- -----------
232,654 205,664
--------- -----------
Other Assets:
Water 31,761 25,630
Non-water 384 420
--------- -----------
32,145 26,050
--------- -----------
Total Assets $ 264,799 $ 231,714
========= ===========
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-24
NOTE 15: COMMITMENTS AND CONTINGENCIES
LAND DONATIONS TO BE MADE IN 2003 AND 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
will result in reduced federal and state income tax benefits totaling
approximately $1,900,000. In 2002, the first parcel consisting of approximately
54 acres was donated for an after tax benefit of $293,000. In January 2003, the
second parcel consisting of approximately 178 acres was donated which is
expected to result in an after tax benefit of approximately $900,000. The
remaining 133 acres are scheduled to be donated in 2004, provided Connecticut
tax laws continue to provide favorable tax treatment for such donations, for an
expected after tax benefit of approximately $700,000.
HUNGERFORDS - In July 2002, the Company decided not to purchase Hungerfords as
provided in the July, 1999 Joint Venture Agreement entered into by both
companies. Certain financial targets to be achieved by Hungerfords, which would
have provided the basis to complete the purchase, were not achieved. The
Company's decision not to purchase Hungerfords had no material financial impact.
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.
The Town of Barnstable, Massachusetts has advised the Company that it is
actively considering the acquisition of the Company's wholly-owned subsidiary,
The Barnstable Holding Company. The Town takes the position that it has the
right to acquire The Barnstable Holding Company pursuant to the provisions of
Massachusetts legislation passed in 1911. The Company has advised the Town of
Barnstable that the Company does not believe the Town has any statutory right to
acquire The Barnstable Holding Company.
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 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 2003,
2004 and 2005 are $9.5 million, $9.8 million and $10.3 million respectively.
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.
MORATORIUM ON LAND SALES - On December 4, 2002, the Company entered into a
Memorandum of Understanding (MOU) with the State of Connecticut Department of
Environmental Protection (DEP). The MOU provides for a voluntary two-year
moratorium on the sale of approximately 7,100 acres of undeveloped Class I, II,
and III water company lands held by the Company's Connecticut water company
subsidiaries. Class I and II water company lands, as defined by Public Health
Code regulations, are those that are within the watershed or drainage area of a
public water supply. Class III lands are those that are not located within the
watershed. Under the terms of the MOU, the DEP in cooperation with the Company's
Connecticut water companies will assess and evaluate all undeveloped Class I, II
and III land holdings to determine the desirability of the State of
Connecticut's acquiring the land for open space and to develop strategies to
fund the acquisitions of such properties in fee or easement from the Company. If
the DEP determines that the Company's Class I, II and III land holdings are
desirable, the Company and the DEP have agreed to negotiate in good faith to
determine a price for the Company's land holdings based upon appraised values.
However, the Company is not obligated by the MOU to sell such lands to the State
of Connecticut. If the DEP determines that certain parcels of Class III land
covered by the MOU do not meet its criteria for desirable open space, the
Company can apply to the Department of Public Utility Control to sell or
otherwise dispose of the land. The Company has no intention of selling or
otherwise disposing of Class I and II lands that have an impact on drinking
water supply and water quality. The MOU does not affect the land donation to the
Town of Killingly mentioned above.
SECURITY - Recent amendments to the Safe Drinking Water Act require all public
water systems serving over 3,300 people on an average basis to prepare
Vulnerability Assessments (VA) of their critical utility assets. The assessments
are to be completed by December 2003 and will be submitted to the U.S.
Environmental Protection Agency along with certification that certain critical
elements of the assessments are being implemented within our Emergency
Contingency Plan. The information within the VA is not subject to release to the
public and is protected from Freedom of Information inquiries. Investment in
security-related improvements is ongoing and management believes that the costs
associated with any such improvements would be chargeable for recovery in future
rate proceedings.
TAXES - Due to the current environment of state budget deficits, the Company and
its subsidiaries may be subject to a higher tax burden through changes in state
legislation. Also, the Company's future property tax burden may increase as
state aid to towns is decreased.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-25
NOTE 16: QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 2002 and 2001
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
2002 2001 2002 2001 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
First Quarter $ 10,284 $ 10,228 $ 2,499 $ 2,465 $ 1,544 $ 2,275 $ 0.20 $ 0.30
Second Quarter 10,727 10,974 2,593 2,851 1,866 1,914 0.24 0.25
Third Quarter 13,799 13,538 4,408 3,887 3,850 2,945 0.50 0.39
Fourth Quarter 11,020 10,652 2,334 2,111 1,482 1,267 0.19 0.16
--------------------------------------------------------------------------------------
Year $ 45,830 $ 45,392 $ 11,834 $ 11,314 $ 8,742 $ 8,401 $ 1.13 $ 1.10
======================================================================================
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. (Exhibit 3.4 to
Form 10-K for the year ended 12/31/01).
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
4.11* Loan Agreement dated as of April 11, 1991 between Farmington Savings
Bank and The Unionville Water Company.
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 April 22, 1994.
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 The Connecticut Water Company Supplemental Executive Retirement
Agreement with Marshall T. Chiaraluce dated December 16, 1991. (Exhibit
10.6b to the Form 10-K for year ended 12/31/91).
10.7.1 The Connecticut Water Company First 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. (Exhibit
10.7.2 to Form 10-K for the year ended 12/31/01).
10.8 The Connecticut Water Company Supplemental Executive Retirement
Agreement - standard form for other officers, dated December 4, 1991.
(Exhibit 10.6b to Form 10-K for the year ended 12/31/91).
E-4
10.8.1 The Connecticut Water Company First 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).
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. (Exhibit 10.9 to Form 10-K for the year
ended 12/31/01).
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
10.9.1* Employment agreement between The Connecticut Water Company and
Connecticut Water Service, Inc. with Kevin T. Walsh, amended and
restated as of January 9, 2002.
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. (Exhibit 10.12 to Form 10-K for the
year ended 12/31/01).
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).
10.13.1* First amendment, dated August 16, 2000 to the amended and restated
Connecticut Water Company Employees' Retirement Plan effective January
1, 1997.
10.13.2* Second amendment, dated November 14, 2000 to the amended and restated
Connecticut Water Company Employees' Retirement Plan effective January
1, 1997.
10.13.3* Third amendment, dated November 14, 2001 to the amended and restated
Connecticut Water Company Employees' Retirement Plan effective January
1, 1997.
E-5
10.13.4* Fourth amendment, dated August 14, 2002 to the amended and restated
Connecticut Water Company Employees' Retirement Plan effective January
1, 1997.
10.13.5* Fifth amendment, dated August 14, 2002 to the amended and restated
Connecticut Water Company Employees' Retirement Plan effective January
1, 1997.
10.14 Water Supply Agreement dated June 13, 1994, between The Connecticut
Water Company and the Hazardville Water Company. (Exhibit 10.15 to Form
10-K for year ended December 31, 1994).
10.15 November 4, 1994 Amendment to Agreement dated December 11, 1957 between
The Connecticut Water Company (successor to the Thomaston Water
Company) and the City of Waterbury. (Exhibit 10.16 to Form 10-K for
year ended December 31, 1994).
10.16 Contract between The Connecticut Water Company and The Rockville Water
and Aqueduct Company dated as of January 1, 1976. (Exhibit 9(b) to Form
10-K for the year ended December 31, 1975).
10.17 Agreement dated August 13, 1986 between The Connecticut Water Company
and the Metropolitan District. (Exhibit 10.14 to Form 10-K for the year
ended December 31, 1986).
10.18 Report of the Commission to Study the Feasibility of Expanding the
Water Supply Services of the Metropolitan District. (Exhibit 14 to
Registration Statement No. 2-61843).
10.19 Plan of Merger dated December 18, 1978 of Broad Brook Water Company,
The Collinsville Water Company, The Rockville Water and Aqueduct
Company, The Terryville Water Company and The Thomaston Water Company
with and into The Connecticut Water Company. (Exhibit 13 to Form 10-K
for the year ended December 31, 1978).
10.20 Bond Exchange Agreements between Connecticut Water Service, Inc., The
Connecticut Water Company Bankers Life Company and Connecticut Mutual
Life Insurance Company dated October 23, 1978. (Exhibit 14 to Form 10-K
for the year ended December 31, 1978).
10.21 Dividend Reinvestment and Common Stock Purchase Plan, 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).
E-6
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 26,
2002. (Exhibit A to Proxy Statement dated March 19, 2002).
10.26 Loan Agreement dated as of February 15, 1991 between Indianapolis Life
Insurance Company and The Barnstable Water Company. (Exhibit 10.26 to
Form 10-K for the year ended 12/31/01).
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. (Exhibit 10.27 to Form 10-K for the year ended
12/31/01).
10.28 Employment Agreement between George Wadsworth and The Barnstable Water
Company dated February 23, 2001. (Exhibit 10.28 to Form 10-K for the
year ended 12/31/01).
10.29 Separation Agreement between George Wadsworth, The Connecticut Water
Service, Inc. and The Barnstable Water Company dated December 14, 2001.
(Exhibit 10.29 to Form 10-K for the year ended 12/31/01).
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Explanation concerning absence of current written consent of Arthur
Andersen LLP.
99.1* Certification of Marshall T. Chiaraluce, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2* Certification of David C. Benoit, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
* = filed herewith
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.
25
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 18, 2003
(Principal Executive Officer) of the Board, and Chief
Executive Officer
/s/ David C. Benoit
- --------------------
David C. Benoit Vice President - Finance, March 17, 2003
(Principal Financial and Accounting Officer) Chief Financial Officer and
Treasurer
26
/s/ Roger Engle Director March 4, 2003
- ---------------
Roger Engle
/s/ Mary Ann Hanley Director March 4, 2003
- -------------------
Mary Ann Hanley
/s/ Marcia Hincks Director March 6, 2003
- -----------------
Marcia Hincks
/s/ Mark G. Kachur Director March 11, 2003
- ------------------
Mark G. Kachur
/s/ David A. Lentini Director March 11, 2003
- --------------------
David A. Lentini
/s/ Ronald D. Lengyel Director March 4, 2003
- ---------------------
Ronald D. Lengyel
/s/ Robert F. Neal Director March 4, 2003
- ------------------
Robert F. Neal
/s/ Arthur C. Reeds Director March 3, 2003
- -------------------
Arthur C. Reeds
/s/ Lisa J. Thibdaue Director March 5, 2003
- --------------------
Lisa J. Thibdaue
/s/ Carol P. Wallace Director March 3, 2003
- --------------------
Carol P. Wallace
/s/ Donald B. Wilbur Director March 5, 2003
- --------------------
Donald B. Wilbur
27
RULE 13a-14 CERTIFICATION
FORM 10-K
CERTIFICATIONS
I, Marshall T. Chiaraluce, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of The
Connecticut Water Service, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer(s) and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ Marshall T. Chiaraluce
- ---------------------------
Marshall T. Chiaraluce
Chief Executive Officer
March 18, 2003
28
RULE 13a-14 CERTIFICATION
FORM 10-K
CERTIFICATIONS
I, David C. Benoit, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of The
Connecticut Water Service, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer(s) and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ David C. Benoit
- --------------------
David C. Benoit
Chief Financial Officer
March 17, 2003
S-1
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT
SCHEDULES
To the Board of Directors and Stockholders of
Connecticut Water Service, Inc.:
Our audit of the December 31, 2002 consolidated financial statements referred to
in our report dated February 12, 2003 appearing in this Annual Report on Form
10-K of Connecticut Water Service, Inc. also included an audit of December 31,
2002 financial statement schedule listed in Item 15(a)(2) of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. The 2001 and 2000
consolidated financial statement schedule information of the Company was audited
by other independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on that financial statement
schedule information in their report dated February 8, 2002.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 2003
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP. This report applies to
supplemental Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2001 and December 31, 2000. Refer to Exhibit 23.2 for further
discussion.
REPORT OF PREDECESSOR AUDITOR (ARTHUR ANDERSEN LLP) ON FINANCIAL STATEMENT
SCHEDULES
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, 2002 $234 $165 $159 $240
==== ==== ==== ====
Year Ended December 31, 2001 $218 $171 $155 $234
==== ==== ==== ====
Year Ended December 31, 2000 $476 $216 $474 $218
==== ==== ==== ====
(1) Amounts charged off as uncollectible after deducting recoveries.