10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED September 30, 2007 or
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o |
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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)
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Connecticut
(State or other jurisdiction of
incorporation or organization)
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06-0739839
(I.R.S. Employer Identification No.) |
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93 West Main Street, Clinton, CT
(Address of principal executive offices)
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06413
(Zip Code) |
(860) 669-8636
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date
8,358,436
Number
of shares of common stock outstanding, September 30, 2007
(Includes 67,812 common stock equivalent shares awarded under the Performance Stock Programs)
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
Financial Report
September 30, 2007 and 2006
TABLE OF CONTENTS
Page 3
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At September 30, 2007 and December 31, 2006
(Unaudited)
(In thousands)
|
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|
|
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September, 30, |
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December 31, |
|
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2007 |
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2006 |
|
ASSETS |
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|
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Utility Plant |
|
$ |
376,320 |
|
|
$ |
364,057 |
|
Construction Work in Progress |
|
|
3,113 |
|
|
|
2,755 |
|
Utility Plant Acquisition Adjustments |
|
|
(1,220 |
) |
|
|
(1,220 |
) |
|
|
|
|
|
|
|
|
|
|
378,213 |
|
|
|
365,592 |
|
Accumulated Provision for Depreciation |
|
|
(107,107 |
) |
|
|
(102,405 |
) |
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|
|
|
|
|
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Net Utility Plant |
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|
271,106 |
|
|
|
263,187 |
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|
|
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|
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|
|
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|
|
|
|
|
|
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Other Property and Investments |
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4,890 |
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4,905 |
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|
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|
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Cash and Cash Equivalents |
|
|
299 |
|
|
|
1,377 |
|
Accounts Receivable (Less Allowance, 2007 - $254; 2006 - $285) |
|
|
7,744 |
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|
5,305 |
|
Accrued Unbilled Revenues |
|
|
5,406 |
|
|
|
4,233 |
|
Materials and Supplies, at Average Cost |
|
|
1,072 |
|
|
|
900 |
|
Prepayments and Other Current Assets |
|
|
4,125 |
|
|
|
2,335 |
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|
|
|
|
|
|
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Total Current Assets |
|
|
18,646 |
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|
|
14,150 |
|
|
|
|
|
|
|
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|
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Unamortized Debt Issuance Expense |
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|
7,056 |
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|
7,398 |
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Unrecovered Income Taxes |
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|
11,147 |
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|
|
11,425 |
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Post-retirement Benefits Other Than Pension |
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|
5,677 |
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|
6,023 |
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Goodwill |
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3,608 |
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3,608 |
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Deferred Charges and Other Costs |
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7,808 |
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|
4,497 |
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|
|
|
|
|
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Total Regulatory and Other Long-Term Assets |
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|
35,296 |
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|
32,951 |
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|
|
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|
|
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|
|
|
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Total Assets |
|
$ |
329,938 |
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|
$ |
315,193 |
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CAPITALIZATION AND LIABILITIES |
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Common Stockholders Equity |
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$ |
99,737 |
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|
$ |
95,938 |
|
Preferred Stock |
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|
772 |
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|
|
772 |
|
Long-Term Debt |
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|
77,342 |
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|
|
77,347 |
|
|
|
|
|
|
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Total Capitalization |
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|
177,851 |
|
|
|
174,057 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Current Portion of Long Term Debt |
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|
7 |
|
|
|
7 |
|
Interim Bank Loans Payable |
|
|
11,486 |
|
|
|
5,250 |
|
Accounts Payable and Accrued Expenses |
|
|
7,133 |
|
|
|
6,048 |
|
Accrued Taxes |
|
|
1,254 |
|
|
|
464 |
|
Accrued Interest |
|
|
723 |
|
|
|
887 |
|
Other Current Liabilities |
|
|
347 |
|
|
|
314 |
|
|
|
|
|
|
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Total Current Liabilities |
|
|
20,950 |
|
|
|
12,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Advances for Construction |
|
|
33,351 |
|
|
|
32,183 |
|
Contributions in Aid of Construction |
|
|
47,353 |
|
|
|
47,217 |
|
Deferred Federal and State Income Taxes |
|
|
27,738 |
|
|
|
26,002 |
|
Unfunded Future Income Taxes |
|
|
6,668 |
|
|
|
7,208 |
|
Long-term Compensation Arrangements |
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|
14,451 |
|
|
|
13,933 |
|
Unamortized Investment Tax Credits |
|
|
1,576 |
|
|
|
1,623 |
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|
|
|
|
|
|
|
Total Long-Term Liabilities |
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|
131,137 |
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|
|
128,166 |
|
|
|
|
|
|
|
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Commitments and Contingencies
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total Capitalization and Liabilities |
|
$ |
329,938 |
|
|
$ |
315,193 |
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these financial statement.
Page 4
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At September 30, 2007 and December 31, 2006
(Unaudited)
(In thousands, except share data)
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|
|
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|
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|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Common Stockholders Equity |
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|
|
|
|
|
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Common Stock Without Par Value Authorized - 25,000,000 Shares; |
|
$ |
63,829 |
|
|
$ |
61,766 |
|
Shares Issued and Outstanding: 2007 - 8,358,436 ; 2006 - 8,270,394
Stock Issuance Expense |
|
|
(1,606 |
) |
|
|
(1,601 |
) |
Retained Earnings |
|
|
37,551 |
|
|
|
35,676 |
|
Accumulated Other Comprehensive Income |
|
|
(37 |
) |
|
|
97 |
|
|
|
|
|
|
|
|
Total Common Stockholders Equity |
|
|
99,737 |
|
|
|
95,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Preferred Stock |
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|
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Cumulative Preferred Stock of Connecticut Water Service, Inc. |
|
|
|
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|
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|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Long-Term Debt |
|
|
|
|
|
|
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|
The Connecticut Water Company |
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|
|
|
|
|
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|
Unsecured Water Facilities Revenue Refinancing Bonds |
|
|
|
|
|
|
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|
5.05% 1998 Series A, due 2028 |
|
|
9,640 |
|
|
|
9,640 |
|
5.125% 1998 Series B, due 2028 |
|
|
7,635 |
|
|
|
7,635 |
|
4.40% 2003A Series, due 2020 |
|
|
8,000 |
|
|
|
8,000 |
|
5.00% 2003C Series, due 2022 |
|
|
14,930 |
|
|
|
14,930 |
|
Var. 2004 Series Variable Rate, due 2029 |
|
|
12,500 |
|
|
|
12,500 |
|
Var. 2004 Series A, due 2028 |
|
|
5,000 |
|
|
|
5,000 |
|
Var. 2004 Series B, due 2028 |
|
|
4,550 |
|
|
|
4,550 |
|
5.00% 2005 A Series, due 2040 |
|
|
15,000 |
|
|
|
15,000 |
|
|
|
|
|
|
|
|
Total The Connecticut Water Company |
|
|
77,255 |
|
|
|
77,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unregulated Secured |
|
|
|
|
|
|
|
|
8.0% New London Trust, Due 2017 |
|
|
94 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Connecticut Water Service, Inc. |
|
|
77,349 |
|
|
|
77,354 |
|
Less Current Portion |
|
|
(7 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
Total Long-Term Debt |
|
|
77,342 |
|
|
|
77,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization |
|
$ |
177,851 |
|
|
$ |
174,057 |
|
|
|
|
|
|
|
|
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, 2007 and 2006
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Operating Revenues |
|
$ |
16,951 |
|
|
$ |
13,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
Operation and Maintenance |
|
|
7,464 |
|
|
|
6,626 |
|
Depreciation |
|
|
1,600 |
|
|
|
1,464 |
|
Income Taxes |
|
|
1,525 |
|
|
|
541 |
|
Taxes Other Than Income Taxes |
|
|
1,478 |
|
|
|
1,396 |
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
12,067 |
|
|
|
10,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Revenues |
|
|
4,884 |
|
|
|
3,319 |
|
|
|
|
|
|
|
|
|
|
Other Utility Income, Net of Taxes |
|
|
137 |
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Utility Operating Income |
|
|
5,021 |
|
|
|
3,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Deductions), Net of Taxes |
|
|
|
|
|
|
|
|
Gain on Property Transactions |
|
|
20 |
|
|
|
976 |
|
Non-Water Sales Earnings |
|
|
149 |
|
|
|
94 |
|
Allowance for Funds Used During Construction |
|
|
25 |
|
|
|
109 |
|
Other |
|
|
(366 |
) |
|
|
(200 |
) |
|
|
|
|
|
|
|
Total Other (Deductions) Income, Net of Taxes |
|
|
(172 |
) |
|
|
979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Debt Expense |
|
|
|
|
|
|
|
|
Interest on Long-Term Debt |
|
|
848 |
|
|
|
840 |
|
Other Interest Charges |
|
|
9 |
|
|
|
56 |
|
Amortization of Debt Expense |
|
|
93 |
|
|
|
93 |
|
|
|
|
|
|
|
|
Total Interest and Debt Expense |
|
|
950 |
|
|
|
989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
|
3,899 |
|
|
|
3,503 |
|
Discontinued Operations, Net of Tax of $(253) in 2006 |
|
|
|
|
|
|
215 |
|
|
|
|
|
|
|
|
Net Income |
|
|
3,899 |
|
|
|
3,718 |
|
|
|
|
|
|
|
|
|
|
Preferred Stock Dividend Requirement |
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Net Income Applicable to Common Stock |
|
$ |
3,889 |
|
|
$ |
3,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
8,285 |
|
|
|
8,200 |
|
Diluted |
|
|
8,293 |
|
|
|
8,250 |
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share: |
|
|
|
|
|
|
|
|
Basic-Continuing Operations |
|
$ |
0.47 |
|
|
$ |
0.42 |
|
Basic-Discontinued Operations |
|
|
|
|
|
|
0.03 |
|
|
|
|
|
|
|
|
Basic-Total |
|
$ |
0.47 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
Diluted-Continuing Operations |
|
$ |
0.47 |
|
|
$ |
0.42 |
|
Diluted-Discontinued Operations |
|
|
|
|
|
|
0.03 |
|
|
|
|
|
|
|
|
Diluted-Total |
|
$ |
0.47 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
Dividends Per Common Share |
|
$ |
0.2175 |
|
|
$ |
0.2150 |
|
The accompanying notes are an integral part of these financial statement.
Page 6
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
Operating Revenues |
|
$ |
44,559 |
|
|
$ |
35,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
Operation and Maintenance |
|
|
22,291 |
|
|
|
19,271 |
|
Depreciation |
|
|
4,753 |
|
|
|
4,393 |
|
Income Taxes |
|
|
3,165 |
|
|
|
841 |
|
Taxes Other Than Income Taxes |
|
|
4,322 |
|
|
|
4,053 |
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
34,531 |
|
|
|
28,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Revenues |
|
|
10,028 |
|
|
|
6,674 |
|
|
|
|
|
|
|
|
|
|
Other Utility Income, Net of Taxes |
|
|
374 |
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Utility Operating Income |
|
|
10,402 |
|
|
|
7,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Deductions), Net of Taxes |
|
|
|
|
|
|
|
|
Gain on Property Transactions |
|
|
61 |
|
|
|
1,880 |
|
Non-Water Sales Earnings |
|
|
472 |
|
|
|
397 |
|
Allowance for Funds Used During Construction |
|
|
51 |
|
|
|
334 |
|
Other |
|
|
(497 |
) |
|
|
(348 |
) |
|
|
|
|
|
|
|
Total Other Income, Net of Taxes |
|
|
87 |
|
|
|
2,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Debt Expense |
|
|
|
|
|
|
|
|
Interest on Long-Term Debt |
|
|
2,630 |
|
|
|
2,743 |
|
Other Interest Charges |
|
|
343 |
|
|
|
201 |
|
Amortization of Debt Expense |
|
|
280 |
|
|
|
328 |
|
|
|
|
|
|
|
|
Total Interest and Debt Expense |
|
|
3,253 |
|
|
|
3,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
|
7,236 |
|
|
|
6,177 |
|
Discontinued Operations, Net of Tax of $(236) in 2006 |
|
|
|
|
|
|
240 |
|
|
|
|
|
|
|
|
Net Income |
|
|
7,236 |
|
|
|
6,417 |
|
|
|
|
|
|
|
|
|
|
Preferred Stock Dividend Requirement |
|
|
29 |
|
|
|
29 |
|
|
|
|
|
|
|
|
Net Income Applicable to Common Stock |
|
$ |
7,207 |
|
|
$ |
6,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
8,256 |
|
|
|
8,178 |
|
Diluted |
|
|
8,266 |
|
|
|
8,227 |
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share: |
|
|
|
|
|
|
|
|
Basic-Continuing Operations |
|
$ |
0.87 |
|
|
$ |
0.75 |
|
Basic-Discontinued Operations |
|
|
|
|
|
|
0.03 |
|
|
|
|
|
|
|
|
Basic-Total |
|
$ |
0.87 |
|
|
$ |
0.78 |
|
|
|
|
|
|
|
|
|
|
Diluted-Continuing Operations |
|
$ |
0.87 |
|
|
$ |
0.75 |
|
Diluted-Discontinued Operations |
|
|
|
|
|
|
0.03 |
|
|
|
|
|
|
|
|
Diluted-Total |
|
$ |
0.87 |
|
|
$ |
0.78 |
|
|
Dividends Per Common Share |
|
$ |
0.6475 |
|
|
$ |
0.6400 |
|
The accompanying notes are an integral part of these financial statement.
Page 7
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended September 30, 2007 and 2006
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Net Income Applicable to Common Stock |
|
$ |
3,889 |
|
|
$ |
3,708 |
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income, net of tax |
|
|
|
|
|
|
|
|
Qualified Cash Flow Hedging Instrument Expense,
net of tax benefit of $68 in 2007; $85 in 2006 |
|
|
(107 |
) |
|
|
(127 |
) |
Minimum Pension Liability Adjustment, net of tax benefit of $1 in 2007 |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
3,781 |
|
|
$ |
3,581 |
|
|
|
|
|
|
|
|
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Net Income Applicable to Common Stock |
|
$ |
7,207 |
|
|
$ |
6,388 |
|
Other Comprehensive Income, net of tax |
|
|
|
|
|
|
|
|
Qualified Cash Flow Hedging Instrument Expense,
net of tax benefit of $91 in 2007; $13 in 2006 |
|
|
(132 |
) |
|
|
(31 |
) |
Minimum Pension Liability Adjustment, net of tax benefit of $1 in 2007 |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
7,073 |
|
|
$ |
6,357 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statement.
Page 8
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the Three Months Ended September 30, 2007 and 2006
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Balance at Beginning of Period |
|
$ |
35,462 |
|
|
$ |
35,001 |
|
Net Income Before Preferred Dividends of Parent |
|
|
3,899 |
|
|
|
3,718 |
|
|
|
|
|
|
|
|
|
|
|
39,361 |
|
|
|
38,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Declared: |
|
|
|
|
|
|
|
|
Cumulative Preferred, Class A, $.20 per share |
|
|
3 |
|
|
|
3 |
|
Cumulative Preferred, Series $.90, $.225 per
share |
|
|
7 |
|
|
|
7 |
|
Common Stock - 2007 $.2175 per share; 2006
$.215 per share |
|
|
1,800 |
|
|
|
1,763 |
|
|
|
|
|
|
|
|
|
|
|
1,810 |
|
|
|
1,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Period |
|
$ |
37,551 |
|
|
$ |
36,946 |
|
|
|
|
|
|
|
|
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Balance at Beginning of Period |
|
$ |
35,676 |
|
|
$ |
35,777 |
|
Net Income Before Preferred Dividends of Parent |
|
|
7,236 |
|
|
|
6,417 |
|
|
|
|
|
|
|
|
|
|
|
42,912 |
|
|
|
42,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Declared: |
|
|
|
|
|
|
|
|
Cumulative Preferred, Class A, $.60 per share |
|
|
9 |
|
|
|
9 |
|
Cumulative Preferred, Series $.90, $.675 per
share |
|
|
20 |
|
|
|
20 |
|
Common Stock - 2007 $.6475 per share; 2006 $.64
per share |
|
|
5,332 |
|
|
|
5,219 |
|
|
|
|
|
|
|
|
|
|
|
5,361 |
|
|
|
5,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Period |
|
$ |
37,551 |
|
|
$ |
36,946 |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
Page 9
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
7,236 |
|
|
$ |
6,417 |
|
|
|
|
|
|
|
|
|
|
Adjustments to Reconcile Net Income to Net Cash |
|
|
|
|
|
|
|
|
Operating Activities: |
|
|
|
|
|
|
|
|
Earnings from Discontinued Operations |
|
|
|
|
|
|
(240 |
) |
Gain on Sale of BARLACO Assets Held for Sale |
|
|
|
|
|
|
(921 |
) |
Deferred Revenues |
|
|
(2,867 |
) |
|
|
|
|
Allowance for Funds Used During Construction |
|
|
(101 |
) |
|
|
(360 |
) |
Depreciation (including $314 in 2007, $203 in 2006 charged to other accounts) |
|
|
5,067 |
|
|
|
4,596 |
|
Change in Assets and Liabilities: |
|
|
|
|
|
|
|
|
Increase in Accounts Receivable and Accrued Unbilled Revenues |
|
|
(3,612 |
) |
|
|
(600 |
) |
Increase in Other Current Assets |
|
|
(1,962 |
) |
|
|
(1,329 |
) |
Decrease (Increase) in Other Non-Current Items |
|
|
1,007 |
|
|
|
(1,502 |
) |
Increase (Decrease) in Accounts Payable, Accrued Expenses and
Other Current Liabilities |
|
|
2,738 |
|
|
|
(1,732 |
) |
Increase (Decrease) in Deferred Income Taxes and
Investment Tax Credits, Net |
|
|
1,427 |
|
|
|
(973 |
) |
|
|
|
|
|
|
|
Total Adjustments |
|
|
1,697 |
|
|
|
(3,061 |
) |
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Provided by Continuing Operations |
|
|
8,933 |
|
|
|
3,356 |
|
Net Cash and Cash Equivalents Provided by Discontinued Operations |
|
|
|
|
|
|
240 |
|
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Provided by Operating Activities |
|
|
8,933 |
|
|
|
3,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Company Financed Additions to Utility Plant |
|
|
(12,512 |
) |
|
|
(10,408 |
) |
Advances from Others for Construction |
|
|
(606 |
) |
|
|
(432 |
) |
|
|
|
|
|
|
|
Net Additions to Utility Plant Used in Continuing Operations |
|
|
(13,118 |
) |
|
|
(10,840 |
) |
Release of Restricted Cash |
|
|
1 |
|
|
|
2,373 |
|
Sale of Short-term Investments |
|
|
|
|
|
|
6,815 |
|
Proceeds from Sale of BARLACO Assets Held for Sale (Net of $3 in Transaction Costs) |
|
|
|
|
|
|
998 |
|
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Used in Investing Activities |
|
|
(13,117 |
) |
|
|
(654 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Net Proceeds from Interim Bank Loans |
|
|
11,486 |
|
|
|
6,250 |
|
Net Repayment of Interim Bank Loans |
|
|
(5,250 |
) |
|
|
(4,750 |
) |
Proceeds from Issuance of Common Stock |
|
|
911 |
|
|
|
1,430 |
|
Proceeds from Exercise of Stock Options |
|
|
729 |
|
|
|
148 |
|
Repayment of Long-Term Debt Including Current Portion |
|
|
(5 |
) |
|
|
(2,380 |
) |
Costs Incurred to Issue Long-Term Debt and Common Stock |
|
|
(5 |
) |
|
|
(1 |
) |
Advances from Others for Construction |
|
|
606 |
|
|
|
432 |
|
Cash Dividends Paid |
|
|
(5,366 |
) |
|
|
(5,253 |
) |
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Provided by (Used in) Financing Activities |
|
|
3,106 |
|
|
|
(4,124 |
) |
|
|
|
|
|
|
|
Net Decrease in Cash and Cash Equivalents |
|
|
(1,078 |
) |
|
|
(1,182 |
) |
Cash and Cash Equivalents at Beginning of Period |
|
|
1,377 |
|
|
|
4,439 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
299 |
|
|
$ |
3,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Investing and Financing Activities |
|
|
|
|
|
|
|
|
Non-Cash Contributed Utility Plant |
|
$ |
723 |
|
|
$ |
1,658 |
|
Short-term
Investment of Bond Proceeds Held in Trust |
|
$ |
|
|
|
$ |
311 |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash Paid for Continuing Operations During the Year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
3,300 |
|
|
$ |
3,663 |
|
State and Federal Income Taxes |
|
$ |
1,682 |
|
|
$ |
876 |
|
Cash Paid for Discontinued Operations During the Year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
|
|
|
$ |
|
|
State and Federal Income Taxes |
|
$ |
15 |
|
|
$ |
73 |
|
The
accompanying notes are an integral part of these financial statements.
Page 10
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
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 that are of a
normal recurring nature 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. The balance sheet at December 31, 2006
has been derived from the audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted in the United States
of America for complete financial statements. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and the notes thereto included in
the Companys latest annual report on Form 10-K for the year ended December 31, 2006 and as updated
in the Companys March 31, 2007 and June 30, 2007 Forms 10-Q.
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.
Reclassifications
Within the Consolidated Statements of Income, the Company has reclassified certain expenses and
revenues to reflect the rate treatment included in Connecticut Waters 2006 rate case. Expenses
that were excluded for rate making purposes have been included in Other Income (Deductions).
Revenues and certain interest income have been reclassified from Non-Water Sales Earnings and
interest income to Other Utility Income. These reclassifications had no effect on the Income from
Continuing Operations or Net Income, but they allow the reader to compare results between years in
a more meaningful manner.
The Companys accounting policies regarding revenue recognition by segment are as follows:
Water Activities Most of our water customers are billed quarterly, with the exception of
larger commercial and industrial customers, as well as public and private fire protection customers
who are billed monthly. Most customers, except fire protection customers, are metered. Revenues
from metered customers are based on their water usage multiplied by approved, regulated rates and
are earned when water is delivered. Public fire protection revenues are based on the length of the
water main, and number of hydrants in service and are earned on a monthly basis. Private fire
protection charges are based on the diameter of the connection to the water main. Our water
companies accrue an estimate for metered customers for the amount of revenues earned relating to
water delivered but unbilled at the end of each quarter.
Real Estate Transactions Revenues are recorded when a sale or other transaction has been
completed and title to the real estate has been transferred.
Services and Rentals Revenues are recorded when the Company has delivered the services
called for by contractual obligation.
Page 11
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
2. Pension and Other Post-Retirement Benefits
The following tables set forth the components of pension and other postretirement benefit costs for
the three and nine months ended September 30, 2007 and 2006.
Pension Benefits
Components of Net Periodic Cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months |
|
|
9 Months |
|
Period ended September 30 |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service Cost |
|
$ |
319 |
|
|
$ |
307 |
|
|
$ |
958 |
|
|
$ |
921 |
|
Interest Cost |
|
|
447 |
|
|
|
420 |
|
|
|
1,341 |
|
|
|
1,261 |
|
Expected Return on Plan Assets |
|
|
(504 |
) |
|
|
(386 |
) |
|
|
(1,512 |
) |
|
|
(1,377 |
) |
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Obligation |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
Prior Service Cost |
|
|
18 |
|
|
|
18 |
|
|
|
52 |
|
|
|
56 |
|
Net Loss |
|
|
86 |
|
|
|
123 |
|
|
|
258 |
|
|
|
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
367 |
|
|
$ |
483 |
|
|
$ |
1,099 |
|
|
$ |
1,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company made a contribution of $45,000 for plan year 2006 during the third quarter of 2007.
Other Postretirement Benefits
Components of Net Periodic Cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months |
|
|
9 Months |
|
Period ended September 30 |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service Cost |
|
$ |
163 |
|
|
$ |
179 |
|
|
$ |
488 |
|
|
$ |
449 |
|
Interest Cost |
|
|
152 |
|
|
|
141 |
|
|
|
458 |
|
|
|
364 |
|
Expected Return on Plan Assets |
|
|
(47 |
) |
|
|
(44 |
) |
|
|
(142 |
) |
|
|
(134 |
) |
Amortization of Transition
Obligation |
|
|
30 |
|
|
|
30 |
|
|
|
90 |
|
|
|
90 |
|
Recognized Net (Gain) Loss |
|
|
85 |
|
|
|
104 |
|
|
|
256 |
|
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
383 |
|
|
$ |
410 |
|
|
$ |
1,150 |
|
|
$ |
974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In its 2006 Form 10-K filed with the SEC on March 16, 2007, the Company misapplied Statement of
Financial Accounting Standards No. 158 Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (SFAS 158) related to recognition of the funded status of the pension and
post-retirement medical plans related to certain former employees. The Company reported its
adjustment to initially apply SFAS 158 of $152,000 in its Consolidated Statements of Comprehensive
Income. It should have only been reported directly to Accumulated Other Comprehensive Income in
the Capitalization and Liabilities section of the Balance Sheets; where it was correctly reported.
The Company has concluded that the postretirement welfare plans benefits will be considered
actuarially equivalent to the benefits provided by Medicare Part D. The Company does not intend to
apply for the government subsidy for postretirement prescription drug benefits, because the costs
associated with the administration of Medicare Part D would have outweighed the benefits received
by the Company. Therefore, the impact of the subsidy on the plans liabilities is not reflected in
the September 30, 2007 disclosure.
Page 12
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
3. Earnings per Share
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 (diluted shares include the effect of unexercised stock options):
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
2007 |
|
|
2006 |
|
Common Shares Outstanding |
|
|
|
|
|
|
|
|
End of Period: |
|
|
8,358,436 |
|
|
|
8,254,816 |
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding: |
|
|
|
|
|
|
|
|
Days Outstanding Basis |
|
|
|
|
|
|
|
|
Basic |
|
|
8,284,883 |
|
|
|
8,200,162 |
|
|
|
|
|
|
|
|
Diluted |
|
|
8,293,133 |
|
|
|
8,249,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share from Continuing Operations |
|
$ |
0.47 |
|
|
$ |
0.42 |
|
Dilutive Effect of Unexercised Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share from Continuing Operations |
|
$ |
0.47 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30 |
|
2007 |
|
|
2006 |
|
Weighted Average Shares Outstanding: |
|
|
|
|
|
|
|
|
Days Outstanding Basis |
|
|
|
|
|
|
|
|
Basic |
|
|
8,255,788 |
|
|
|
8,178,054 |
|
|
|
|
|
|
|
|
Diluted |
|
|
8,265,547 |
|
|
|
8,227,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share from Continuing Operations |
|
$ |
0.87 |
|
|
$ |
0.75 |
|
Dilutive Effect of Unexercised Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share from Continuing Operations |
|
$ |
0.87 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
4. New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurement (SFAS 157). SFAS 157 provides a single
definition of fair value, a framework for measuring fair value, and requires additional disclosure
about the use of fair value to measure assets and liabilities. SFAS 157 is effective for fiscal
years beginning after November 15, 2007; as such we will be required to adopt SFAS 157 in the first
quarter of 2008. The Company is currently evaluating the impact the adoption of SFAS 157 will have
on our consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, Fair Value
Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement
No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective of SFAS 159 is to reduce both the complexity in
accounting for financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS 159 is effective for fiscal years beginning after
November 15, 2007; as such we will be required to adopt SFAS 159 in the first quarter of 2008. We
are currently in the process of assessing the provisions of SFAS 159 and determining how the
elective application of these fair value measurements would affect our current accounting policies
and procedures. While we are still evaluating the impact this statement will have on our
consolidated financial statements, we currently believe that the impact will not be material.
Page 13
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
5. Segment Reporting
The Company operates principally in three business segments: Water Activities, Real Estate
Transactions, and Services and Rentals. Financial data for the segments is as follows (in
thousands):
Three Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax |
|
|
Income from |
|
|
|
|
|
|
|
Pre-tax |
|
|
Expense |
|
|
Continuing |
|
Segment |
|
Revenues |
|
|
Income |
|
|
(Benefit) |
|
|
Operations |
|
Water Activities |
|
$ |
17,218 |
|
|
$ |
5,224 |
|
|
$ |
1,494 |
|
|
$ |
3,730 |
|
Real Estate
Transactions |
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
20 |
|
Services and Rentals |
|
|
1,210 |
|
|
|
238 |
|
|
|
89 |
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,428 |
|
|
$ |
5,462 |
|
|
$ |
1,563 |
|
|
$ |
3,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax |
|
|
Income Tax |
|
|
Income from |
|
|
|
|
|
|
|
Income |
|
|
Expense |
|
|
Continuing |
|
Segment |
|
Revenues |
|
|
(Loss) |
|
|
(Benefit) |
|
|
Operations |
|
Water Activities |
|
$ |
13,624 |
|
|
$ |
3,045 |
|
|
$ |
612 |
|
|
$ |
2,433 |
|
Real Estate Transactions |
|
|
|
|
|
|
(1 |
) |
|
|
(977 |
) |
|
|
976 |
|
Services and Rentals |
|
|
1,012 |
|
|
|
165 |
|
|
|
71 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,636 |
|
|
$ |
3,209 |
|
|
$ |
(294 |
) |
|
$ |
3,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from |
|
|
|
|
|
|
|
Pre-tax |
|
|
Income Tax |
|
|
Continuing |
|
Segment |
|
Revenues |
|
|
Income |
|
|
Expense |
|
|
Operations |
|
Water Activities |
|
$ |
45,306 |
|
|
$ |
9,820 |
|
|
$ |
3,117 |
|
|
$ |
6,703 |
|
Real Estate
Transactions |
|
|
92 |
|
|
|
68 |
|
|
|
7 |
|
|
|
61 |
|
Services and Rentals |
|
|
3,197 |
|
|
|
770 |
|
|
|
298 |
|
|
|
472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
48,595 |
|
|
$ |
10,658 |
|
|
$ |
3,422 |
|
|
$ |
7,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax |
|
|
Income from |
|
|
|
|
|
|
|
Pre-tax |
|
|
Expense |
|
|
Continuing |
|
Segment |
|
Revenues |
|
|
Income |
|
|
(Benefit) |
|
|
Operations |
|
Water Activities |
|
$ |
35,969 |
|
|
$ |
4,820 |
|
|
$ |
920 |
|
|
$ |
3,900 |
|
Real Estate Transactions |
|
|
1,002 |
|
|
|
573 |
|
|
|
(1,307 |
) |
|
|
1,880 |
|
Services and Rentals |
|
|
3,067 |
|
|
|
670 |
|
|
|
273 |
|
|
|
397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
40,038 |
|
|
$ |
6,063 |
|
|
$ |
(114 |
) |
|
$ |
6,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Revenues shown in Water Activities above consist of revenues from water customers of
$16,951,000 and $13,346,000 for the three months ended September 30, 2007 and 2006, respectively.
Additionally, there were revenues associated with utility plant leased to others of $267,000 and
$278,000 for the three months ended September 30, 2007 and 2006, respectively. The Revenues shown
in Water Activities above consist of revenues from water customers of $44,559,000 and $35,232,000
for the nine months ended September 30, 2007 and 2006,
Page 14
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
respectively. Additionally, there were revenues associated with utility plant leased to others of
$747,000 and $737,000 for the nine months ended September 30, 2007 and 2006, respectively.
Assets (by segment):
Total Plant and Other Investments:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
Water |
|
$ |
275,347 |
|
|
$ |
267,395 |
|
Non-Water |
|
|
649 |
|
|
|
697 |
|
|
|
|
|
|
|
|
|
|
|
275,996 |
|
|
|
268,092 |
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
Water |
|
|
49,009 |
|
|
|
43,716 |
|
Non-Water |
|
|
4,933 |
|
|
|
3,385 |
|
|
|
|
|
|
|
|
|
|
|
53,942 |
|
|
|
47,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
329,938 |
|
|
$ |
315,193 |
|
|
|
|
|
|
|
|
6. Income Taxes
In June 2006, the FASB issued interpretation No. 48, Accounting for Uncertainty in Income Taxes,
an Interpretation of FASB Statement No. 109 (FIN 48), which became effective for the Company as of
January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial statements. Under FIN 48, we must
recognize the tax benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a greater than 50% likelihood of being
realized upon ultimate resolution. The reassessment of our tax positions in accordance with FIN 48
did not have an impact on our results of operations, financial condition or liquidity. From time
to time, the Company is assessed interest and penalties by taxing authorities. In those cases, the
charges would appear on the Other line item on the Income Statement. There were no such charges
for the nine month period ended September 30, 2007. Additionally, there were no accruals relating
to interest or penalties as of September 30, 2007. The Company remains subject to examination by
federal authorities for the 2005 and 2006 tax years and by state authorities for the tax years 2003
through 2006.
The Companys effective income tax rates for the first nine months of 2007 and 2006 were 32.1% and
negative 1.9%, respectively. The statutory income tax rates during the same periods were 39%. In
determining its effective income tax rate for interim periods the Company projects its book and tax
timing differences for the complete year and reflects the expected impact on its overall effective
income tax rate. The primary timing difference causing the effective rate to be lower than the
statutory rate during 2007 is the planned pension contribution that is greater than its FAS 87
pension expense. The primary timing difference causing the effective rate to be lower than the
statutory rate during 2006 was the bargain sale of land and the favorable outcome of an Internal
Revenue Service audit of federal tax returns for fiscal years 2002 2004 which allowed the Company
to reverse tax reserves related to land sales completed during those years.
Page 15
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
Part I, Item 2: Managements Discussion and Analysis of Financial Condition and Results of
Operations
Regulatory Matters and Inflation
During the three months ended September 30, 2007, there were no material changes under this
subheading to any items previously disclosed by the Company in its Annual Report on Form 10-K for
the period ended December 31, 2006.
On June 19, 2007, the State of Connecticut adopted legislation which permits regulated water
companies to recapture money spent on eligible infrastructure improvements without a full rate case
proceeding. The Connecticut Department of Utility Control (DPUC) may authorize regulated water
companies to use a rate adjustment mechanism, such as a water infrastructure and conservation
adjustment (WICA), for eligible projects completed and in service for the benefit of the customers.
Regulated water companies may only charge customers such an adjustment to the extent allowed by the
DPUC based on a water companys infrastructure assessment report, as approved by the DPUC and upon
semiannual filings which reflect plant additions consistent with such report. The Company does not
expect to be able to take advantage of the WICA mechanism until at least the first quarter of 2009.
On June 29, 2007, the Company announced that its principal operating subsidiary, The Connecticut
Water Company (CWC) and its unregulated subsidiary, New England Water Utility Services, Inc.
(NEWUS) have entered into definitive purchase agreements to acquire the regulated water utility
assets of Eastern Connecticut Regional Water Company, Inc. (Eastern), a wholly-owned subsidiary of
Birmingham Utilities, Inc. (Birmingham), and the unregulated assets of Birmingham H20 Services Inc.
(H20). The agreements call for CWC and NEWUS to pay a combined $3.5 million for the assets
acquired. Eastern, H20 and Birmingham are wholly-owned subsidiaries of BIW Ltd. (AMEX: BIW), a
water utility holding company based in Ansonia, Connecticut. On July 13, CWC, Birmingham, and
Eastern filed a joint application with the DPUC for approval of these transactions. A draft
decision approving these transactions was issued by the DPUC on October 23, 2007; the final
decision is scheduled for release on November 14, 2007. The Company expects that these
transactions will be completed in the first quarter of 2008.
Critical Accounting Policies and Estimates
The Company maintains its accounting records in accordance with accounting principles generally
accepted in the United States of America and as directed by the DPUC to which the Companys
regulated water utility subsidiary is subject. Significant accounting policies employed by the
Company, including the use of estimates, were presented in the Notes to Consolidated Financial
Statements of the Companys Annual Report on Form 10-K.
Critical accounting policies are those that are the most important to the presentation of the
Companys financial condition and results of operations. The application of such accounting
policies requires managements most difficult, subjective, and complex judgments and involves
uncertainties and assumptions. The Companys most critical accounting policies pertain to public
utility regulation related to Financial Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulations (SFAS 71), revenue recognition, and pension plan accounting. Each of
these accounting policies and the application of critical accounting policies and estimates was
discussed in the Companys Annual Report on Form 10-K for the year ended December 31,
Page 16
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
2006. There were no significant changes in the application of critical accounting policies or
estimates during the third quarter of 2007.
Management must use informed judgments and best estimates to properly apply these critical
accounting policies. Because of the uncertainty in these estimates, actual results could differ
from estimates used in applying the critical accounting policies. The Company is not aware of any
reasonably likely events or circumstances which would result in different amounts being reported
that would materially affect its financial condition or results of operations.
Outlook
The following modifies and updates the Outlook section of the Companys 2006 Form 10-K annual
report filed on March 16, 2007, first quarter Form 10-Q filed on May 7, 2007 and second quarter
Form 10-Q filed on August 8, 2007.
The Companys earnings and profitability are primarily dependent upon 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. The Companys
earnings and profitability in future years will also depend upon a number of other factors, such as
the ability to maintain our operating costs at lower levels, customer growth in the Companys core
regulated water utility business, additional growth in revenues attributable to non-water sales
operations, and the timing and adequacy of rate relief when requested, from time to time, by our
regulated water company.
The Company believes that these factors and those described in detail in Commitments and
Contingencies in Item 7 of its Annual Report on Form 10-K may have significant impact, either
alone or in the aggregate, on the Companys earnings and profitability in fiscal years 2007 and
beyond. Please also review carefully the risks and uncertainties described below under the heading
Forward Looking Information.
Based on the Companys current projections, the Company believes that its Net Income from
Continuing Operations for the year 2007 will increase from the levels reported for 2006, primarily
as a result of Connecticut Waters 22.3% rate increase that was approved by the Connecticut DPUC
effective January 1, 2007. During 2007 and subsequent years, the ability of the Company to
maintain and increase its Net Income from Continuing Operations will principally depend upon the
effect on the Company of the factors described above in this Outlook section, those factors
described in the section entitled Commitments and Contingencies in Item 7 of the Companys Annual
Report on Form 10-K and the risks and uncertainties described in Forward Looking Information
below.
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.
Interim Bank Loans Payable at September 30, 2007 were approximately $11,486,000. The Company
currently maintains an aggregate of $21 million in lines of credit with three banks. The Company
recently increased these lines because of an increased construction spending program and recently
announced acquisitions. The lines of credit have lives that range from 12 to 29 months, which
expire throughout 2008 and 2009. We expect to renew the lines as they expire. Interest expense
charged on interim bank loans will fluctuate based on market interest rates.
Page 17
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
The Company is currently in the process of negotiating additional fixed-rate, long-term borrowings
from the Connecticut Development Authority (CDA) to fund ongoing and planned capital improvement
projects. The Company is finalizing the specifics of the offering, which is anticipated to be
completed during the fourth quarter of 2007.
The Company offers a dividend reinvestment plan (DRIP) to all shareholders, whereby shareholders
can opt to have dividends directly reinvested into additional shares of the Company. During the
nine months ended September 30, 2007 and 2006, the shareholders reinvested $911,000 and $1,430,000,
respectively, as part of the DRIP.
From 1999 through 2003, the Company issued stock options to certain employees of the Company. For
the nine months ended September 30, 2007 and 2006, the Company received $729,000 and $148,000 in
proceeds related to stock options that were exercised.
Results of Operations
The following factors had a significant effect upon the Companys Net Income for the three months
ended September 30, 2007 as compared with the Net Income for the same period last year.
Income from Continuing Operations for the three months ended September 30, 2007 increased from that
of the prior year by $396,000, which increased earnings from continuing operations per basic and
diluted average common share by $0.05 to $0.47.
This increase in income was broken down by business segment as follows:
|
|
|
|
|
|
|
Increase/(Decrease) |
|
Business Segment |
|
in Income |
|
Water Activities |
|
$ |
1,297,000 |
|
Real Estate Transactions |
|
|
(956,000 |
) |
Services and Rentals |
|
|
55,000 |
|
|
|
|
|
Total |
|
$ |
396,000 |
|
|
|
|
|
The increase in the Water Activity segments net income was primarily due to the net effects of
variances listed below:
|
|
an increase of approximately $3.6 million in Operating Revenue primarily due to the rate
increase effective as of January 1, 2007. The largest driver of the increase in Operating
Revenue was an increase of $2.0 million in revenues from residential customers. |
Page 18
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
|
|
a $0.8 million increase in Operation and Maintenance expense primarily due to the following
expense increases: |
|
|
|
|
|
Labor |
|
$ |
199,000 |
|
Purchased Water |
|
|
163,000 |
|
Employee Benefit Costs |
|
|
104,000 |
|
Vehicle |
|
|
98,000 |
|
Outside Services |
|
|
85,000 |
|
Rate Case Costs Amortization |
|
|
60,000 |
|
Chemicals |
|
|
47,000 |
|
Utility Costs |
|
|
46,000 |
|
Other |
|
|
36,000 |
|
|
|
|
|
Total |
|
$ |
838,000 |
|
|
|
|
|
|
|
Labor and Employee Benefit Costs increased in 2007 by a combined
$303,000 due to normal wage increases. Employee Benefit Costs have
also increased due to higher costs related to the health and welfare
plan offered to employees and retirees. Additionally, the Companys
purchased water costs have increased primarily due to increases in the
rates charged to the Company by other water utilities. |
|
|
|
an increase in operating income tax expense of $984,000 primarily due
to higher pre-tax income and a higher effective income tax rate in
2007. |
During the third quarter of 2006, the Company received a benefit in its Real Estate Segment from
the reversal of tax reserves of $976,000 upon the completion of an Internal Revenue Service (IRS)
audit of the Companys 2002 2004 tax years. As a result of the audit, there was no need to
adjust the Companys 2002 2004 tax liability and, consequently, the Company eliminated tax
reserves related to those tax years. Upon completion of the 2006 tax return in September 2007, the
Company received an additional tax benefit relating to the 2006 BARLACO land sale transaction of
approximately $20,000. While there will continue to be Real Estate transactions during 2007 and
beyond, the Company does not expect its Real Estate Transactions segment to generate as much income
in the remainder of 2007 as it had in years past.
The following factors had a significant effect upon the Companys Net Income for the nine months
ended September 30, 2007 as compared with the Net Income for the same period last year.
Income from Continuing Operations for the nine months ended September 30, 2007 increased from that
of the prior year by $1,059,000, which increased earnings from continuing operations per basic and
diluted average common share by $0.12 to $0.87.
This increase in income was broken down by business segment as follows:
|
|
|
|
|
|
|
Increase/(Decrease) |
|
Business Segment |
|
in Income |
|
Water Activities |
|
$ |
2,803,000 |
|
Real Estate Transactions |
|
|
(1,819,000 |
) |
Services and Rentals |
|
|
75,000 |
|
|
|
|
|
Total |
|
$ |
1,059,000 |
|
|
|
|
|
Page 19
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
The increase in the Water Activity segments net income was primarily due to the net effects of
variances listed below:
|
|
an increase of approximately $9.3 million in Operating Revenue
primarily due the rate increase effective as of January 1, 2007. The
largest driver of the increase in Operating Revenue was an increase of
$4.7 million in revenues from residential customers. |
|
|
|
a $3.0 million increase in Operation and Maintenance expense primarily
due to the following expense increases: |
|
|
|
|
|
Labor |
|
$ |
730,000 |
|
Employee Benefit Costs |
|
|
433,000 |
|
Purchased Water |
|
|
404,000 |
|
Utility Costs |
|
|
297,000 |
|
Vehicle |
|
|
274,000 |
|
Rate Case Cost Amortization |
|
|
209,000 |
|
Outside Services |
|
|
203,000 |
|
Employee Training |
|
|
73,000 |
|
Office Space Rental |
|
|
71,000 |
|
Other |
|
|
326,000 |
|
|
|
|
|
Total |
|
$ |
3,020,000 |
|
|
|
|
|
|
|
Labor and Employee Benefit Costs increased in 2007 by a combined
$1,163,000 due to normal wage increases and a compensation adjustment
for hourly employees during 2006. Since the increase to hourly
employees was not in effect for the full year for 2006, the increase
is more fully seen in 2007. Employee Benefit Costs have also
increased due to higher costs related to the health and welfare plan
offered to employees and retirees. Additionally, the Companys
purchased water costs have increased primarily due to increases in the
rates charged to the Company by other water utilities. |
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an increase in operating income tax expense of $2,324,000 primarily
due to higher pre-tax income and a higher effective income tax rate in
2007. |
In 2006, the Company sold land for $1.0 million. A portion of land sales were treated as
charitable contributions. The Company filed its 2006 corporate income tax return with a charitable
contribution related to the bargain sale. As such, the Company recorded both a net tax benefit
relating to the bargain sale and an after tax profit on the sale of the land for the period ended
June 30, 2006. The total profit on the land sale and tax benefit associated with the bargain sale
was approximately $900,000. Additionally, during the third quarter of 2006, the Company received a
benefit from the reversal of tax reserves of $976,000 upon the completion of an IRS audit of the
Companys 2002 2004 tax years. As a result of the audit, there was no need to adjust the
Companys 2002 2004 tax liability and, consequently, the Company eliminated tax reserves related
to those tax years. In 2007, there was a minor transaction generating approximately $41,000 of
income during the nine months ended September 30, 2007. Additionally, upon completion of the 2006
tax return, the Company received an additional tax benefit relating to the 2006 BARLACO land sale
transaction of approximately $20,000 during the nine months ending September 30, 2007. While there
will continue to be Real Estate transactions during 2007 and beyond, the Company does not expect
its Real Estate Transactions segment to generate as much income in the remainder of 2007 as it had
in years past.
Page 20
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
Commitments and Contingencies
There were no material changes under this subheading to any of the other items previously disclosed
by the Company in its Annual Report on Form 10-K for the period ended December 31, 2006 and as
updated in the Companys March 31, 2007 and June 30, 2007 Forms 10-Q.
Forward-Looking Information
This report, including managements discussion and analysis, contains certain forward-looking
statements regarding the Companys 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 Companys actual results to differ materially from
expected results.
Regulated water companies, including The Connecticut Water Company, 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 to be sought from,
and granted by, the DPUC, when necessary, and numerous factors over which we have little or no
control, such as the quantity of rainfall and temperature, customer demand and related conservation
efforts, 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.
From time to time, the Company may acquire other regulated and/or unregulated water companies.
Profitability on these acquisitions is often dependant on the successful integration of these
companies, including the previously announced acquisition of Eastern Connecticut Regional Water
Company, Inc. and Birmingham H20 Services Inc. The profitability of our other revenue sources is
subject to the amount of land we have available for sale and/or donation, the demand for the land,
the continuation of the current state tax benefits relating to the donation of land for open space
purposes, regulatory approval of land dispositions, the demand for telecommunications antenna site
leases, and the successful extensions and expansion of our service contract work. 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 exposure to
derivative financial instruments through an interest rate swap agreement. The Company has no other
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 Companys 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, variable long-term debt and
short-term variable borrowings under financing arrangements entered into by the Company and its
subsidiaries and its use of the interest rate swap agreement discussed below. The Company has
$21,000,000 of variable rate lines of credit with three banks, under which the interim bank loans
payable at September 30, 2007 were approximately $11,486,000.
Page 21
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
During March 2004, The Connecticut Water Company entered into a five-year interest rate swap
transaction in connection with the refunding of its First Mortgage Bonds (Series V). The swap
agreement provides for The Connecticut Water Companys exchange of floating rate interest payment
obligations for fixed rate interest payment obligations on a notional principal amount of
$12,500,000. The purpose of the interest rate swap is to manage the Companys exposure to
fluctuations in prevailing interest rates. The Company does not enter into derivative financial
contracts for trading or speculative purposes and does not use leveraged instruments.
Management does not believe that changes in interest rates will have a material effect on income or
cash flow during the next twelve months, although there can be no assurances that interest rates
will not significantly change.
Part I, Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2007, management, including the Companys Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in Rule 13a-15(e)). 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
Securities Exchange Act of 1934 is (i) recorded, processed, summarized, and reported within the
time periods specified in the SECs rules and forms, and (ii) accumulated and communicated to
management, including the Companys Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding disclosure to be made within the time periods
specified in the SECs rules and forms.
Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
Because of its inherent limitation, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with policies or procedures may deteriorate.
Part II, Item 1: Legal Proceedings
We are involved in various legal proceedings from time to time. 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 1A: Risk Factors
Information regarding risk factors appeared in Item 1A of Part I of our Report on Form 10-K for the
fiscal year ended December 31, 2006. There have been no material changes to our risk factors
Page 22
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
Part II, Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
No stock repurchases were made during the quarter ended September 30, 2007.
Part II, Item 6: Exhibits
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Exhibit |
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Number |
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Description |
3.1
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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). |
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3.2
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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). |
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3.3
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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). |
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3.4
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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). |
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3.5
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Certificate of Amendment to the Amended and Restated Certificate of Incorporation of
Connecticut Water Service, Inc. dated April 23, 2004. (Exhibit 3.5 to Form 10-Q for the
quarter ended March 31, 2003). |
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10.1
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Asset Purchase Agreement between The Connecticut Water Company and the Eastern Connecticut
Regional Water Company, Inc., dated as of June 29, 2007 (Exhibit 99.1 to Form 8-K filed on
July 3, 2007). |
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10.2
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Asset Purchase Agreement between New England Water Utility Services, Inc. and Birmingham H2O
Services Inc., dated as of June 29, 2007 (Exhibit 99.2 to Form 8-K filed on July 3, 2007). |
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31.1*
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Rule 13a-14 Certification of Eric W. Thornburg, Chief Executive Officer. |
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31.2*
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Rule 13a-14 Certification of David C. Benoit, Chief Financial Officer. |
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32*
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Certification of Eric W. Thornburg, Chief Executive Officer, and David C.
Benoit, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
Page 23
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
SIGNATURE
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.
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Connecticut Water Service, Inc.
(Registrant) |
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Date: November 7, 2007
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By:
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/s/ David C. Benoit
David C. Benoit
Vice President Finance and
Chief Financial Officer, on behalf
the Registrant and as Principal
Financial Officer
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