UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| (Mark One) | ||
| (X) |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2003
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.
| Connecticut (State or other jurisdiction of incorporation or organization) |
06-0739839 (I.R.S. Employer Identification No.) |
|
| 93 West Main Street, Clinton, CT (Address of principal executive offices) |
06413-1600 (Zip Code) |
(860) 669-8636
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes (X) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
7,967,053
Number of shares of common stock outstanding, September 30, 2003
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
Financial Report
September 30, 2003 and 2002
TABLE OF CONTENTS
Part I, Item 1: Financial Statements |
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Consolidated Balance Sheets at September 30, 2003 |
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and December 31, 2002 |
Page 3 | ||||
Consolidated Statements of Capitalization at |
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September 30, 2003 and December 31, 2002 |
Page 4 | ||||
Consolidated Statements of Income for the Three Months |
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Ended September 30, 2003 and 2002 |
Page 5 | ||||
Consolidated Statements of Income for the Nine Months |
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Ended September 30, 2003 and 2002 |
Page 6 | ||||
Consolidated Statements of Retained Earnings for the |
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Three Months September June 30, 2003 and 2002 |
Page 7 | ||||
Consolidated Statements of Retained Earnings for the |
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Nine Months Ended September 30, 2003 and 2002 |
Page 7 | ||||
Consolidated Statements of Cash Flows for Nine Months |
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Ended September 30, 2003 and 2002 |
Page 8 | ||||
Notes to Consolidated Financial Statements |
Page 9 | ||||
Part I, Item 2: Management’s Discussion and Analysis of |
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Financial Condition and Results of Operations |
Page 12 | ||||
Part I, Item 3: Quantitative and Qualitative Disclosures |
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About Market Risk |
Page 17 | ||||
Part I, Item 4: Controls and Procedures |
Page 18 | ||||
Part II, Item 1: Legal Proceedings |
Page 18 | ||||
Part II, Item 6: Exhibits and Reports on Form 8-K |
Page 18 | ||||
Signatures Page |
Page 20 | ||||
Page 3
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At September 30, 2003 and December 31, 2002
(In thousands)
| September | |||||||||||
| 2003 | Dec. 31, | ||||||||||
| (Unaudited) | 2002 | ||||||||||
ASSETS |
|||||||||||
Utility Plant |
|||||||||||
Utility Plant |
$ | 316,054 | $ | 308,385 | |||||||
Construction Work in Progress |
8,634 | 9,592 | |||||||||
Utility Plant Acquisition Adjustments |
(1,275 | ) | (1,278 | ) | |||||||
| 323,413 | 316,699 | ||||||||||
Accumulated Provision for Depreciation |
(91,279 | ) | (87,602 | ) | |||||||
Net Utility Plant |
232,134 | 229,097 | |||||||||
Other Property and Investments |
3,621 | 3,557 | |||||||||
Current Assets |
|||||||||||
Cash |
832 | 464 | |||||||||
Accounts Receivable (Less Allowance, 2003 - $258; 2002 - $240) |
5,494 | 5,157 | |||||||||
Accrued Unbilled Revenues |
4,021 | 3,619 | |||||||||
Materials and Supplies, at Average Cost |
997 | 960 | |||||||||
Prepayments and Other Current Assets |
1,687 | 173 | |||||||||
Total Current Assets |
13,031 | 10,373 | |||||||||
Deferred Charges and Regulatory Assets |
|||||||||||
Unamortized Debt Issuance Expense |
4,910 | 5,080 | |||||||||
Unrecovered Income Taxes |
10,782 | 10,718 | |||||||||
Postretirement Benefits Other Than Pension |
846 | 846 | |||||||||
Goodwill |
3,608 | 3,608 | |||||||||
Other Costs |
1,585 | 1,520 | |||||||||
Total Deferred Charges and Regulatory Assets |
21,731 | 21,772 | |||||||||
Total Assets |
$ | 270,517 | $ | 264,799 | |||||||
CAPITALIZATION AND LIABILITIES |
|||||||||||
Capitalization (See accompanying statements) |
|||||||||||
Common Stockholders’ Equity |
$ | 82,894 | $ | 79,975 | |||||||
Preferred Stock |
847 | 847 | |||||||||
Long-Term Debt |
64,527 | 64,734 | |||||||||
Total Capitalization |
148,268 | 145,556 | |||||||||
Current Liabilities |
|||||||||||
Current Portion of Long Term Debt |
248 | 242 | |||||||||
Interim Bank Loans Payable |
10,200 | 6,950 | |||||||||
Accounts Payable, Accrued Taxes and Accrued Interest |
3,623 | 7,945 | |||||||||
Other |
479 | 341 | |||||||||
Total Current Liabilities |
14,550 | 15,478 | |||||||||
Long-Term Liabilities |
|||||||||||
Advances for Construction |
24,616 | 22,069 | |||||||||
Contributions in Aid of Construction |
43,682 | 43,373 | |||||||||
Deferred Federal Income Taxes |
21,387 | 20,633 | |||||||||
Unfunded Future Income Taxes |
9,871 | 9,871 | |||||||||
Long-term Compensation Arrangements |
6,249 | 5,877 | |||||||||
Unamortized Investment Tax Credits |
1,894 | 1,942 | |||||||||
Commitments and Contingencies
|
|||||||||||
Total Long-Term Liabilities |
107,699 | 103,765 | |||||||||
Total Capitalization and Liabilities |
$ | 270,517 | $ | 264,799 | |||||||
The accompanying notes are an integral part of these financial statements.
Page 4
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At September 30, 2003 and December 31, 2002
(In thousands, except share amounts)
| September 30, | ||||||||||||
| 2003 | Dec. 31, | |||||||||||
| (Unaudited) | 2002 | |||||||||||
Common Stockholders’ Equity |
||||||||||||
Common Stock Without Par Value Authorized - 15,000,000 Shares;
|
$ | 55,262 | $ | 54,661 | ||||||||
Shares Issued and Outstanding: 2003 - 7,967,053; 2002 - 7,939,713 |
||||||||||||
Stock Issuance Expense |
(1,594 | ) | (1,592 | ) | ||||||||
Retained Earnings |
29,226 | 26,906 | ||||||||||
Total Common Stockholders’ Equity |
82,894 | 79,975 | ||||||||||
Preferred Stock |
||||||||||||
Cumulative Preferred Stock of Connecticut Water Service, Inc. |
||||||||||||
Series A Voting, $20 Par Value; Authorized, Issued and
Outstanding 15,000 Shares, Redeemable at $21.00 Per Share |
300 | 300 | ||||||||||
Series $.90 Non-Voting, $16 Par Value; Authorized 50,000 Shares
|
||||||||||||
Issued and Outstanding 29,499 Shares, Redeemable at $16.00 Per Share |
472 | 472 | ||||||||||
Total Preferred Stock of Connecticut Water Service, Inc. |
772 | 772 | ||||||||||
Cumulative Preferred Stock of Barnstable Water Company
|
||||||||||||
Voting, $100 Par Value; Authorized, Issued and Outstanding
750 shares. Redeemable at $105 per share |
75 | 75 | ||||||||||
Total Preferred Stock |
847 | 847 | ||||||||||
Long-Term Debt |
||||||||||||
The Connecticut Water Company |
||||||||||||
First Mortgage Bonds |
||||||||||||
5.875% Series R, due 2022 |
14,645 | 14,645 | ||||||||||
6.65% Series S, due 2020 |
8,000 | 8,000 | ||||||||||
5.75% Series T, due 2028 |
5,000 | 5,000 | ||||||||||
5.30% Series U, due 2028 |
4,550 | 4,550 | ||||||||||
6.94% Series V, due 2029 |
12,050 | 12,050 | ||||||||||
| 44,245 | 44,245 | |||||||||||
Unsecured Water Facilities Revenue Refinancing Bonds |
||||||||||||
5.05% 1998 Series A, due 2028 |
9,625 | 9,625 | ||||||||||
5.125% 1998 Series B, due 2028 |
7,720 | 7,720 | ||||||||||
Total Connecticut Water Company |
61,590 | 61,590 | ||||||||||
Crystal Water Utilities Corporation |
||||||||||||
8.0% New London Trust, Due 2017 |
118 | 122 | ||||||||||
Crystal Water Company of Danielson |
||||||||||||
7.82% Connecticut Development Authority, Due 2020 |
473 | 483 | ||||||||||
Chester Realty |
||||||||||||
6% Note Payable, Due 2006 |
68 | 78 | ||||||||||
Barnstable Water Company |
||||||||||||
10.2% Indianapolis Life Insurance Co., Due 2011 |
1,425 | 1,525 | ||||||||||
Unionville Water Company |
||||||||||||
8.125% Farmington Savings Bank, Due 2011 |
1,101 | 1,178 | ||||||||||
Total Connecticut Water Service, Inc. |
64,775 | 64,976 | ||||||||||
Less Current Portion |
(248 | ) | (242 | ) | ||||||||
Total Long-Term Debt |
64,527 | 64,734 | ||||||||||
Total Capitalization |
$ | 148,268 | $ | 145,556 | ||||||||
The accompanying notes are an integral part of these financial statements.
Page 5
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 30, 2003 and 2002
(In thousands, except per share amounts)
| 2003 | 2002 | ||||||||||
| (Unaudited) | (Unaudited) | ||||||||||
Operating Revenues |
$ | 13,673 | $ | 13,799 | |||||||
Operating Expenses |
|||||||||||
Operation and Maintenance |
5,302 | 4,933 | |||||||||
Depreciation |
1,457 | 1,233 | |||||||||
Income Taxes |
1,023 | 2,019 | |||||||||
Taxes Other Than Income Taxes |
1,285 | 1,206 | |||||||||
Total Operating Expenses |
9,067 | 9,391 | |||||||||
Utility Operating Income |
4,606 | 4,408 | |||||||||
Other Income, Net of Taxes |
|||||||||||
Gain on Property Transactions |
87 | 295 | |||||||||
Non-Water Sales Earnings |
194 | 136 | |||||||||
Allowance for Funds Used During Construction |
102 | 106 | |||||||||
Other |
25 | 30 | |||||||||
Total Other Income , Net of Taxes |
408 | 567 | |||||||||
Interest and Debt Expense
|
|||||||||||
Interest on Long-Term Debt |
979 | 968 | |||||||||
Other Interest Charges |
95 | 92 | |||||||||
Amortization of Debt Expense |
57 | 55 | |||||||||
Total Interest and Debt Expense |
1,131 | 1,115 | |||||||||
Net Income Before Preferred Dividends |
3,883 | 3,860 | |||||||||
Preferred Stock Dividend Requirement |
10 | 10 | |||||||||
Net Income Applicable to Common Stock |
$ | 3,873 | $ | 3,850 | |||||||
Weighted Average Common Shares Outstanding: |
|||||||||||
Basic |
7,963 | 7,685 | |||||||||
Diluted |
8,011 | 7,732 | |||||||||
Earnings Per Common Share: |
|||||||||||
Basic |
$ | 0.49 | $ | 0.50 | |||||||
Diluted |
$ | 0.48 | $ | 0.50 | |||||||
Dividends Per Common Share |
$ | 0.2075 | $ | 0.2050 | |||||||
The accompanying notes are an integral part of these financial statements.
Page 6
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 2003 and 2002
(In thousands, except per share amounts)
| 2003 | 2002 | ||||||||||
| (Unaudited) | (Unaudited) | ||||||||||
Operating Revenues |
$ | 35,415 | $ | 34,810 | |||||||
Operating Expenses
|
|||||||||||
Operation and Maintenance |
16,518 | 14,296 | |||||||||
Depreciation |
4,394 | 3,745 | |||||||||
Income Taxes |
1,997 | 3,728 | |||||||||
Taxes Other Than Income Taxes |
3,836 | 3,541 | |||||||||
Total Operating Expenses |
26,745 | 25,310 | |||||||||
Utility Operating Income |
8,670 | 9,500 | |||||||||
Other Income, Net of Taxes |
|||||||||||
Gain on Property Transactions |
1,030 | 437 | |||||||||
Non-Water Sales Earnings |
486 | 337 | |||||||||
Allowance for Funds Used During Construction |
341 | 327 | |||||||||
Other |
103 | 106 | |||||||||
Total Other Income, Net of Taxes |
1,960 | 1,207 | |||||||||
Interest and Debt Expense |
|||||||||||
Interest on Long-Term Debt |
2,935 | 2,922 | |||||||||
Other Interest Charges |
290 | 291 | |||||||||
Amortization of Debt Expense |
171 | 205 | |||||||||
Total Interest and Debt Expense |
3,396 | 3,418 | |||||||||
Net Income Before Preferred Dividends |
7,234 | 7,289 | |||||||||
Preferred Stock Dividend Requirement |
29 | 29 | |||||||||
Net Income Applicable to Common Stock |
$ | 7,205 | $ | 7,260 | |||||||
Weighted Average Common Shares Outstanding: |
|||||||||||
Basic |
7,953 | 7,671 | |||||||||
Diluted |
7,997 | 7,728 | |||||||||
Earnings Per Common Share: |
|||||||||||
Basic |
$ | 0.91 | $ | 0.95 | |||||||
Diluted |
$ | 0.90 | $ | 0.94 | |||||||
Dividends Per Common Share |
$ | 0.6175 | $ | 0.6094 | |||||||
The accompanying notes are an integral part of these financial statements.
Page 7
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the Three Months Ended September 30, 2003 and 2002
(In thousands, except per share amounts)
| 2003 | 2002 | ||||||||
| (Unaudited) | (Unaudited) | ||||||||
Balance at Beginning of Period |
$ | 26,997 | $ | 24,764 | |||||
Net Income Before Preferred Dividends of Parent |
3,883 | 3,860 | |||||||
| 30,880 | 28,624 | ||||||||
Dividends Declared: |
|||||||||
Cumulative Preferred, Class A, $.20 per share |
3 | 3 | |||||||
Cumulative Preferred, Series $.90, $.225 per share |
7 | 7 | |||||||
Common Stock - 2003 $.2075 per share; 2002 $.2050 per share |
1,644 | 1,570 | |||||||
| 1,654 | 1,580 | ||||||||
Balance at End of Period |
$ | 29,226 | $ | 27,044 | |||||
For the Nine Months Ended September 30, 2003 and 2002
(In thousands, except per share amounts)
| 2003 | 2002 | ||||||||
| (Unaudited) | (Unaudited) | ||||||||
Balance at Beginning of Period |
$ | 26,906 | $ | 24,441 | |||||
Net Income Before Preferred Dividends of Parent |
7,234 | 7,289 | |||||||
| 34,140 | 31,730 | ||||||||
Dividends Declared: |
|||||||||
Cumulative Preferred, Class A, $.60 per share |
9 | 9 | |||||||
Cumulative Preferred, Series $.90, $.675 per share |
20 | 20 | |||||||
Common Stock - 2003 $.6175 per share; 2002 $.6094 per share |
4,885 | 4,657 | |||||||
| 4,914 | 4,686 | ||||||||
Balance at End of Period |
$ | 29,226 | $ | 27,044 | |||||
The accompanying notes are an integral part of these financial statements.
Page 8
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(In thousands)
| 2003 | 2002 | |||||||||||
| (Unaudited) | (Unaudited) | |||||||||||
Operating Activities: |
||||||||||||
Net Income Before Preferred Dividends of Parent |
$ | 7,234 | $ | 7,289 | ||||||||
Adjustments to Reconcile Net Income to Net Cash |
||||||||||||
Provided by Operating Activities: |
||||||||||||
Depreciation (including $134 in 2003, $124 in 2002 charged to other accounts) |
4,528 | 3,869 | ||||||||||
Change in Assets and Liabilities: |
||||||||||||
(Increase) Decrease in Accounts Receivable and Accrued Unbilled Revenues |
(739 | ) | (1,640 | ) | ||||||||
(Increase) Decrease in Other Current Assets |
(1,551 | ) | (1,178 | ) | ||||||||
(Increase) Decrease in Other Non-Current Items |
349 | (107 | ) | |||||||||
Increase (Decrease) in Accounts Payable, Accrued Expenses and
Other Current Liabilities |
(4,184 | ) | (3,601 | ) | ||||||||
Increase (Decrease) in Deferred Federal Income Taxes and
Investment Tax Credits, Net |
706 | 702 | ||||||||||
Total Adjustments |
(891 | ) | (1,955 | ) | ||||||||
Net Cash Provided by Operating Activities |
6,343 | 5,334 | ||||||||||
Investing Activities: |
||||||||||||
Gross Additions to Utility Plant (including Allowance for Funds
Used During Construction of $341 in 2003 and $327 in 2002) |
(7,595 | ) | (9,052 | ) | ||||||||
Financing Activities: |
||||||||||||
Proceeds from Interim Bank Loans |
10,200 | 8,656 | ||||||||||
Repayment of Interim Bank Loans |
(6,950 | ) | (1,825 | ) | ||||||||
Proceeds from Issuance of Common Stock |
599 | 695 | ||||||||||
Repayment of Long-Term Debt |
(201 | ) | (2,340 | ) | ||||||||
Advances, Contributions and Funds From Others for Construction, Net |
2,886 | 4,017 | ||||||||||
Cash Dividends Paid |
(4,914 | ) | (4,686 | ) | ||||||||
Net Cash Provided by Financing Activities |
1,620 | 4,517 | ||||||||||
Net Increase in Cash |
368 | 799 | ||||||||||
Cash at Beginning of Year |
464 | 102 | ||||||||||
Cash at End of Period |
$ | 832 | $ | 901 | ||||||||
Supplemental Disclosures of Cash Flow Information: |
||||||||||||
Cash Paid During the Year for: |
||||||||||||
Interest (Net of Amounts Capitalized) |
$ | 3,354 | $ | 3,871 | ||||||||
State and Federal Income Taxes |
$ | 1,655 | $ | 2,855 | ||||||||
The accompanying notes are an integral part of these financial statements.
Page 9
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements included herein have been prepared by CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for interim periods. Certain information and footnote disclosures have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K.
The results for interim periods are not necessarily indicative of results to be expected for the year since the consolidated earnings are subject to seasonal factors.
2. The Company has a Stock Option Program. 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.
| Three Months Ended | |||||||||
| September 30 | |||||||||
| 2003 | 2002 | ||||||||
| (in thousands, except for per share data) | |||||||||
Net income, as reported |
$ | 3,873 | $ | 3,850 | |||||
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects |
(64 | ) | (55 | ) | |||||
Pro forma net income |
$ | 3,809 | $ | 3,795 | |||||
Earnings per share: |
|||||||||
Basic – as reported |
$ | 0.49 | $ | 0.50 | |||||
Basic – pro forma |
$ | 0.48 | $ | 0.49 | |||||
Diluted – as reported |
$ | 0.48 | $ | 0.50 | |||||
Diluted – pro forma |
$ | 0.48 | $ | 0.49 | |||||
Page 10
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
| Nine Months Ended | |||||||||
| September 30 | |||||||||
| 2003 | 2002 | ||||||||
| (in thousands, except for per share data) | |||||||||
Net income, as reported |
$ | 7,205 | $ | 7,260 | |||||
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects |
(207 | ) | (164 | ) | |||||
Pro forma net income |
$ | 6,998 | $ | 7,096 | |||||
Earnings per share: |
|||||||||
Basic – as reported |
$ | 0.91 | $ | 0.95 | |||||
Basic – pro forma |
$ | 0.88 | $ | 0.93 | |||||
Diluted – as reported |
$ | 0.90 | $ | 0.94 | |||||
Diluted – pro forma |
$ | 0.88 | $ | 0.92 | |||||
3. Earnings per average common share are calculated by dividing net income applicable to common stock by the average number of shares of common stock outstanding during the respective periods as detailed below:
| 3 Months Ended | 9 Months Ended | ||||||||||||||||||
| 09/30/03 | 09/30/02 | 09/30/03 | 09/30/02 | ||||||||||||||||
Common Shares Outstanding: |
|||||||||||||||||||
End of period: |
7,967,053 | 7,689,716 | 7,967,053 | 7,689,716 | |||||||||||||||
Weighted Average Shares
Outstanding: |
|||||||||||||||||||
Days outstanding basis |
|||||||||||||||||||
Basic |
7,963,264 | 7,685,013 | 7,952,824 | 7,671,192 | |||||||||||||||
Fully Diluted |
8,011,298 | 7,732,204 | 7,996,713 | 7,727,911 | |||||||||||||||
4. In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”, an Interpretation of ARB No. 51. FIN 46 establishes accounting, reporting and disclosure requirements for companies that currently hold unconsolidated investments in Variable Interest Entities (“VIEs”). Depending on the nature of the interest, reporting of a VIE could be satisfied by disclosure or full consolidation. FIN 46 applies immediately to VIEs created or acquired after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to VIEs that were previously created or acquired before February 1, 2003. The Company does not hold interests in any VIEs, and does not expect the adoption of FIN 46 to have a material effect on its combined financial statements.
Page 11
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
5. The Company has filed its 2002 Income Tax Returns and has adjusted its tax expense and reassessed its need for tax reserves resulting in lower tax expense in 2003.
| 9/30/03 | 9/30/02 | ||||||||||
Federal Statutory Income Tax Rate: |
34.0 | % | 34.0 | % | |||||||
Tax Effect of Differences: |
|||||||||||
State Income Taxes Net of Federal Benefit: |
|||||||||||
State Income Tax Excluding Land Donation Credit |
3.0 | % | 2.7 | % | |||||||
Land Donation Credit |
(8.5 | %) | (3.3 | %) | |||||||
Change in Estimate of Prior Year Income Tax Expense |
(3.5 | %) | — | % | |||||||
Charitable Contribution – Land Donation |
(2.9 | %) | (0.9 | %) | |||||||
Change in Estimate of Prior Year Income Tax Expense |
(7.0 | %) | — | % | |||||||
Pension |
(0.4 | %) | (0.9 | %) | |||||||
Other |
1.2 | % | 0.8 | % | |||||||
| 15.9 | % | 32.4 | % | ||||||||
Page 12
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
| Part I, Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Regulatory Matters and Inflation
During the quarter ended September 30, 2003, there were no changes to any items previously disclosed by the Company in its Annual Report on Form 10-K for the period ended December 31, 2002.
Critical Accounting Policies
The Company maintains its accounting records in accordance with accounting principles generally accepted in the United States of America and as directed by the regulatory commissions to which certain of the Company’s subsidiaries are subject. Management believes that the following accounting policies may involve a higher degree of complexity and judgment.
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.
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 the 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 benefits costs. The Company believes, based on current regulatory circumstances, that the regulatory assets recorded are likely to be recovered and that its use of regulatory accounting is appropriate and in accordance with the provisions of FAS 71. Material regulatory assets are earning a return.
Liquidity and Capital Resources
The Company is not aware of demands, events or uncertainties that will result in a fluctuation 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.
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. At September 30, 2003, $10,200,000 was drawn down on these lines of credit.
In May 2003, $9,500,000 lines of credit with two banks were renewed until May 2004. The third bank extended the current $3,000,000 line of credit until December 31, 2003. The Company expects to renegotiate and renew the line of credit with the third bank in December 2003.
Interest expense charged on interim bank loans will fluctuate based on financial market conditions.
Page 13
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
Refinancing of Long-Term Debt
On October 30, 2003 Connecticut Water Company, the principal operating subsidiary of the Company, refinanced a portion of its existing bond indebtedness. Connecticut Water Company borrowed $22.93 million in sale proceeds from the issuance of Water Facilities Refunding Revenue Bonds by the Connecticut Development Authority. The bonds were sold in two series with the following terms:
| 2003 A Series: $8,000,000 (Non-AMT) | 4.40 | % | Maturing 12/15/2020 | |||
| 2003 C Series: $14,930,000 (AMT) | 5.00 | % | Maturing 09/01/2022 |
The proceeds of the transaction will be used to redeem the Series R and Series S first mortgage bonds of Connecticut Water Company and pay for a portion of the expenses associated with the issuance.
Corporate Credit Rating
In September 2003, the Company received an “A” corporate credit rating from Standard & Poor’s. Connecticut Water Company, the Company’s largest subsidiary, also received an “A” corporate credit rating. Standard & Poor’s stated that the outlook for both entities is stable.
Results of Operations
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 following tables present the Income Statements detailing the balances with and without Unionville for the three and nine months ended September 30, 2003.
Page 14
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
INCOME STATEMENTS
For the 3 Months ended September 30, (in thousands)
| 2003 | 2002 | |||||||||||||||||||||||
| Consolidated | Unionville | Without Unionville | Without Unionville | Variance | ||||||||||||||||||||
Operating Revenues |
$ | 13,673 | $ | 757 | $ | 12,916 | $ | 13,799 | $ | (883 | ) | |||||||||||||
Operating Expenses |
||||||||||||||||||||||||
Operation and Maintenance |
5,302 | 482 | 4,820 | 4,933 | (113 | ) | ||||||||||||||||||
Depreciation |
1,457 | 130 | 1,327 | 1,233 | 94 | |||||||||||||||||||
Income Taxes |
1,023 | 30 | 993 | 2,019 | (1,026 | ) | ||||||||||||||||||
Taxes Other Than Income Taxes |
1,285 | 50 | 1,235 | 1,206 | 29 | |||||||||||||||||||
Total Operating Expenses |
9,067 | 692 | 8,375 | 9,391 | (1,016 | ) | ||||||||||||||||||
Utility Operating Income |
4,606 | 65 | 4,541 | 4,408 | 133 | |||||||||||||||||||
Other Income (Deductions), Net of
Taxes |
||||||||||||||||||||||||
Gain on Property Transactions |
87 | — | 87 | 295 | (208 | ) | ||||||||||||||||||
Non-Water Sales Earnings |
194 | 4 | 190 | 136 | 54 | |||||||||||||||||||
Allowance for Funds Used During
Construction |
102 | — | 102 | 106 | (4 | ) | ||||||||||||||||||
Other |
25 | — | 25 | 30 | (5 | ) | ||||||||||||||||||
Total Other Income(Deductions),
Net of Taxes |
408 | 4 | 404 | 567 | (163 | ) | ||||||||||||||||||
Interest and Debt Expenses |
||||||||||||||||||||||||
Interest on Long-Term Debt |
979 | 23 | 956 | 968 | (12 | ) | ||||||||||||||||||
Other Interest Charges |
95 | (3 | ) | 98 | 92 | 6 | ||||||||||||||||||
Amortization of Debt Expense |
57 | — | 57 | 55 | 2 | |||||||||||||||||||
Total Interest and Debt
Expenses |
1,131 | 20 | 1,111 | 1,115 | (4 | ) | ||||||||||||||||||
Net Income Before Preferred
Dividends |
3,883 | 49 | 3,834 | 3,860 | (26 | ) | ||||||||||||||||||
Preferred Stock Dividend
Requirement |
10 | — | 10 | 10 | — | |||||||||||||||||||
Net Income Applicable to Common
Stock |
$ | 3,873 | $ | 49 | $ | 3,824 | $ | 3,850 | $ | (26 | ) | |||||||||||||
Page 15
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
INCOME STATEMENTS
For the 9 Months ended, September 30, (in thousands)
| 2003 | 2002 | |||||||||||||||||||||||
| Consolidated | Unionville | Without Unionville | Without Unionville | Variance | ||||||||||||||||||||
Operating Revenues |
$ | 35,415 | $ | 1,816 | $ | 33,599 | $ | 34,810 | $ | (1,211 | ) | |||||||||||||
Operating Expenses |
||||||||||||||||||||||||
Operation and Maintenance |
16,518 | 1,193 | 15,325 | 14,296 | 1,029 | |||||||||||||||||||
Depreciation |
4,394 | 368 | 4,026 | 3,745 | 281 | |||||||||||||||||||
Income Taxes |
1,997 | 12 | 1,985 | 3,728 | (1,743 | ) | ||||||||||||||||||
Taxes Other Than Income Taxes |
3,836 | 154 | 3,682 | 3,541 | 141 | |||||||||||||||||||
Total Operating Expenses |
26,745 | 1,727 | 25,018 | 25,310 | (292 | ) | ||||||||||||||||||
Utility Operating Income |
8,670 | 89 | 8,581 | 9,500 | (919 | ) | ||||||||||||||||||
Other Income (Deductions), Net of
Taxes |
||||||||||||||||||||||||
Gain on Property Transactions |
1,030 | — | 1,030 | 437 | 593 | |||||||||||||||||||
Non-Water Sales Earnings |
486 | 13 | 473 | 337 | 136 | |||||||||||||||||||
Allowance for Funds Used During
Construction |
341 | 36 | 305 | 327 | (22 | ) | ||||||||||||||||||
Other |
103 | 1 | 102 | 106 | (4 | ) | ||||||||||||||||||
Total Other Income (Deductions),
Net of Taxes |
1,960 | 50 | 1,910 | 1,207 | 703 | |||||||||||||||||||
Interest and Debt Expenses |
||||||||||||||||||||||||
Interest on Long-Term Debt |
2,935 | 70 | 2,866 | 2,922 | (56 | ) | ||||||||||||||||||
Other Interest Charges |
290 | — | 290 | 291 | (1 | ) | ||||||||||||||||||
Amortization of Debt Expense |
171 | — | 170 | 205 | (35 | ) | ||||||||||||||||||
Total Interest and Debt
Expenses |
3,396 | 70 | 3,326 | 3,418 | (92 | ) | ||||||||||||||||||
Net Income Before Preferred
Dividends |
7,234 | 69 | 7,165 | 7,289 | (124 | ) | ||||||||||||||||||
Preferred Stock Dividend
Requirement |
29 | — | 29 | 29 | — | |||||||||||||||||||
Net Income Applicable to Common
Stock |
$ | 7,205 | $ | 69 | $ | 7,136 | $ | 7,260 | $ | (124 | ) | |||||||||||||
Page 16
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
The following factors had a significant effect upon the Company’s net income for the three months ended September 30, 2003 as compared with the net income for the same period last year.
Net income applicable to common stock for the three months ended September 30, 2003 increased from that of September 30, 2002 by $23,000. Despite the increase in net earnings, basic earnings per share were $0.01 lower than the same period last year due to an increased number of common shares outstanding. The major cause of the 278,000 share increase was the 250,000 common shares issued in October, 2002 to acquire The Unionville Water Company. Excluding Unionville’s Net Income, Net Income applicable to common stock decreased by $26,000 (See Page 14) . This decrease resulted from a $163,000 decrease in Net Other Income (Deductions) partially offset by a $133,000 increase in Utility Operating Income and a $4,000 decrease in Interest and Debt Expense
The decrease in Net Other Income (Deductions) was due to a decline in Gain on Property Transactions in 2003 vs. 2002. This decrease was partially offset by an increase in non-water sales earnings in 2003 vs. 2002.
The increase in Utility Operating Income reflects lower Operating and Maintenance Expenses as well as lower Income Tax Expense in 2003. The decline in Income Tax Expense in 2003 was associated with; book/tax timing differences, lower pre-tax Net Income and a reduction in estimated tax liabilities associated with non-current periods. These expense decreases were partially offset by lower Operating Revenues stemming from reduced customer water consumption directly associated with a rainy and cool summer in 2003.
The following factors had a significant effect upon the Company’s net income for the nine months ended September 30, 2003 as compared with the net income for the same period last year.
Net income applicable to common stock for the nine months ended September
30, 2003 decreased from that of September 30, 2002 by $55,000,
or $0.04 per basic weighted average share. Excluding
Unionville’s Net Income, Net Income
applicable to common stock decreased by $124,000 (See Page 15) which resulted from a $919,000
decrease in Utility Operating Income partially offset by a $703,000 increase in
Net Other Income (Deductions) and a $92,000 decrease in Interest and Debt
Expense
The decrease in Utility Operating Income was primarily due to the following:
| - | a $1,211,000 decrease in Operating Revenue due to reduced water consumption because of a rainy spring and summer. | ||
| - | a $1,029,000 increase in Operation and Maintenance Expense primarily due to increased wages, increases in pension and insurance expense, and an increase in maintenance expense related to numerous main breaks in the first quarter of 2003. | ||
| - | a $281,000 increase in Depreciation expense. | ||
| - | a $141,000 increase in Taxes Other Than Income Taxes (primarily property taxes), |
| Partially offset by | |||
| - | a $1,743,000 decrease in Income Tax Expense partially due to a lower 2003 effective income tax rate due to book/tax timing differences, lower pre-tax Net Income and a reduction in estimated tax liabilities associated with non-current periods. | ||
Page 17
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
The major reason for the $703,000 higher Net Other Income (Deductions) was a January 2003 donation of approximately 178 acres of land to the town of Killingly, Connecticut which resulted in a net after tax gain of approximately $943,000. Additionally, the sale of an office building produced an after tax gain of $87,000. Non-water sales earnings increased by $136,000 primarily due to increased profits from the Company’s Linebacker service line maintenance program, antenna leases and operation and maintenance contracts.
Commitments and Contingencies
During the quarter ended September 30, 2003, there were no changes to any items previously disclosed by the Company in its Annual Report on Form 10-K for the period ended December 31, 2002.
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.
Part I, Item 3: 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 September 30, 2003 were $10,200,000. 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.
Page 18
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
Part I, Item 4: Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934) as of September 30, 2003. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to the Company, including our consolidated subsidiary, and was made known to them by others within those entities, particularly during the period when this report was being prepared.
No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II, Item 1: 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.
Part II, Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-K.
| 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). | |
| 31.1 | Certification of Marshall T. Chiaraluce, Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
Page 19
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
| Exhibit | ||
| Number | Description | |
| 31.2 | Certification of David C. Benoit, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | |
| 32.1 | Certifications of Marshall T. Chiaraluce, Chief Executive Officer and David C. Benoit, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (b) | Reports on Form 8-K |
| There have been no Form 8-K filed during the quarterly period ended September 30, 2003. |
Page 20
SIGNATURES PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Connecticut Water Service, Inc. | ||
|
(Registrant) |
||
| Date: November 12, 2003 | By /s/ David C. Benoit | |
|
|
||
|
David C. Benoit Vice President - Finance |
||
| Date: November 12, 2003 |
By: /s/ Peter J. Bancroft
|
|
|
Peter J. Bancroft Assistant Treasurer |