-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QE3Jx8Z/vkom/cnaFe24ikRsdY8kahV1HPQPTHkR7eZaSyJljbnhEGbkexgs+PRy NYHIRUtqOwt8hRN+nSJlyA== 0000914039-98-000100.txt : 19980325 0000914039-98-000100.hdr.sgml : 19980325 ACCESSION NUMBER: 0000914039-98-000100 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980324 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONNECTICUT WATER SERVICE INC / CT CENTRAL INDEX KEY: 0000276209 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 060739839 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08084 FILM NUMBER: 98571672 BUSINESS ADDRESS: STREET 1: 93 W MAIN ST CITY: CLINTON STATE: CT ZIP: 06413 BUSINESS PHONE: 2036698636 MAIL ADDRESS: STREET 1: 93 WEST MAIN ST CITY: CLINTON STATE: CT ZIP: 06413 10-K 1 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (X) Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1997 or ( ) Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . Commission File Number 0-8084 CONNECTICUT WATER SERVICE, INC. (Exact name of registrant as specified in its charter) CONNECTICUT 06-0739839 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 93 WEST MAIN STREET, CLINTON, CT 06413 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (860) 669-8636 Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which registered NONE NOT APPLICABLE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229,405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) 2 Page 2 The aggregate market value of the registrant's voting Common Stock, computed on the price of such stock at the close of business on February 27, 1998 is $93,564,000. 3,018,188 Number of shares of Common Stock outstanding, February 27, 1998 (excluding 4,959 common stock equivalent shares) DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which Document Document is Incorporated -------- ------------------------ Definitive Proxy Statement, dated Part III March 18, 1998, for Annual Meeting of Shareholders to be held on April 24, 1998.
3 Page 3 PART I ITEM 1. BUSINESS A. GENERAL DEVELOPMENT OF BUSINESS The Registrant, Connecticut Water Service, Inc. (the Company), is the parent company of The Connecticut Water Company (CWC) which supplies water for residential, commercial, industrial and municipal purposes in various areas in the State of Connecticut through three operating regions. The Company and CWC represent the second largest investor-owned water system in Connecticut in terms of operating revenue and utility plant investment. The Company was organized in 1956 under the General Statutes of Connecticut as Suburban Water Service, Inc. and has been engaged in the business of acquiring and operating water companies through controlling stock ownership. In addition to operating its core business, CWC offers related services on a contract basis to other water utilities, communities, and businesses. These services range from one-time contracts for a particular service to long-term assignments for system operations and management. CWC is also engaged in a program of selling off its limited excess real estate holdings. In 1975, the Company changed its name to Connecticut Water Service, Inc. after acquiring all of the outstanding Common Stock of CWC. CWC's First Mortgage Bonds are held primarily by institutional investors. The Company is a non-operating company whose income is derived from the earnings on the Common Stock of CWC. The profitability of the operations of the water utility industry generally and of CWC (and hence the Company) is largely dependent on the timeliness and adequacy of the rates allowed by utility regulatory commissions. In addition, profitability is dependent on numerous factors over which CWC has little or no control, such as the quantity of rainfall and temperature in a given period of time, industrial demand, prevailing rates of interest for short and long-term borrowings, energy rates, and compliance with environmental and water quality regulations. In addition, inflation and other factors beyond the Company's or CWC's control impact the cost of construction, materials and employee costs. See "Business - Financing", "Business - Rates", and "Business - -Regulation". B. GENERAL DESCRIPTION OF BUSINESS The Company, a Connecticut corporation, owns all of the outstanding Common Stock of CWC. Substantially all of the Company's revenues and net income are attributable to the sale and distribution of water by the operating regions of CWC and to CWC's related operations. See "Business - Consolidated Operating Statistics". CWC is specially chartered by the General Assembly of the State of Connecticut as a public service company, and the rates and operations of CWC are regulated by the Connecticut Department of Public Utility Control (DPUC). The Company is specifically prohibited from engaging in business or activities which are not regulated by the DPUC. See "Business - Rates" and "Business - Regulation". 4 Page 4 CWC has one subsidiary organized in 1969 to assist in the acquisition of real estate. The assets and operations of this subsidiary are not significant. CWC supplies water and, in most instances, provides fire protection through three separate operating regions in all or portions of 34 towns in Connecticut. The service areas have an estimated total population of approximately 220,000 based on DPUC population estimates of 3.5 people per average household. During the twelve months ended December 31, 1997, approximately 64% of the Company's consolidated operating revenues were received from residential customers, 12% from commercial customers, 5% from industrial customers, 3% from public authority customers, and 16% from public fire protection and other customers. Each of the operating regions serves a separate franchise area. Rates are the same for all regions. The systems of the three operating regions are not physically interconnected. The following table sets forth the percentage of the Company's utility plant in service at each of CWC's operating regions as of December 31, 1997:
Utility Plant Regions Dollars Percent ------- ------- ------- Northern $ 94,257,000 46% Shoreline 60,520,000 28% Naugatuck 50,505,000 26% ------------ ------------ $205,282,000 100% ============ ============
At December 31, 1997, 63,017 customers were served by CWC. At that date, all customers were metered except fire protection customers, 380 customers of the Sound View Water System, acquired in 1995; and 374 customers of the Point O'Woods Water System, acquired in 1997. The Company requires all applicants for new service, other than customers at certain seasonal systems and fire protection customers, to be metered. The Company's principal office is located at 93 West Main Street, Clinton, Connecticut 06413 and its telephone number is 860-669-8636. The business of CWC is subject to seasonal fluctuations. The demand for water during the warmer months is generally greater than during the cooler months due primarily to additional requirements for water in connection with cooling systems, private and public swimming pools and lawn sprinklers. Throughout the year, and particularly during the warmer months, demand will vary with rainfall and temperature levels. 5 Page 5 WATER SUPPLY The estimated minimum dependable yields of sources of water supply for each of the operating regions' transmission and distribution systems, as set forth under "Business - CWC Production Facilities as of December 31, 1997" are in excess of present average daily consumption. Except for requests for voluntary conservation in the summers of 1988 and, in the Shoreline Region only, 1995, no restrictions on water use have been required in over 25 years. Water is secured from both surface and subsurface supplies and supplied through interconnections with other water systems. In 1997, surface sources provided approximately 51% of the supply, well supplies provided approximately 47%, and interconnections with other systems supplied 2%. Studies are made periodically to determine the supply and distribution needs of the regions. A major study, covering a fifty year planning period required of all water companies supplying 1,000 or more persons, was completed in 1987 and submitted to the Connecticut Department of Pubic Health (DPH) for approval. An updated plan must be prepared every five years or as requested by the DPH. Updated plans for each of CWC's water systems have been prepared and approved by DPH. See "Business - Construction Program", "Business - Rates" and "Business - Regulation". OPERATING REGIONS NORTHERN The Northern Region is composed of eight separate systems, not interconnected, as listed below:
Number of Customers System Towns (or Portions Thereof) Served at 12/31/97 ------ ---------------------------------- ----------- Western (including Suffield, Windsor Locks, East the former Tolland Granby, Enfield, East Windsor, South Aqueduct System) Windsor, Vernon, Ellington, Tolland 28,906 Somers Somers 414 Crescent Lake Enfield 158 Stafford Springs Stafford 1,026 Lakewood/Lakeview Coventry 178 Nathan Hale Coventry 39 Llynwood Bolton, Vernon 75 Reservoir Heights Vernon 22 ------ 30,818 ======
The territory served is primarily residential and commercial with some industry. 6 Page 6 CWC has entered into an agreement with the State of Connecticut, Department of Transportation, pursuant to which CWC operates and maintains, as part of its Western System, the State's water distribution system for Bradley International Airport located in Windsor Locks, Suffield and East Granby, Connecticut. The Western System has three emergency standby interconnections with the water system of the Metropolitan District Commission (MDC) (a public water and sewer authority presently serving the City of Hartford and portions of surrounding towns), one in South Windsor and two in Windsor Locks. The Western System also has an emergency interconnection with the water system of the Hazardville Water Company in Enfield. During 1995 an interconnection was completed between the Somers System and the water system of the Hazardville Water Company in Somers to provide water to the Hazardville Water Company. See "Business - Franchises" with respect to proposals that the MDC expand its operations into the Northern Region and that MDC take over CWC's operations in South Windsor. SHORELINE The Shoreline Region is composed of seven separate systems, not interconnected, as listed below:
Number of Customers System Towns (or Portions Thereof) Served at 12/31/97 - ------ ---------------------------------- ----------- Guilford Guilford, Old Saybrook, Westbrook, Clinton, Madison 15,741 Chester Chester, Deep River, Essex 2,330 Chester Village West Chester 11 Sound View Old Lyme 380 Point O'Woods Old Lyme 374 Bay Mountain Griswold 107 SDC Voluntown 53 ------ 18,996 ======
The territory served is primarily residential with some commercial and industry. In 1997 CWC completed the purchase of the Point O'Woods, Bay Mountain, and SDC water systems, all in southeastern Connecticut. These acquisitions were approved by the DPUC in 1997. These systems increase the region's water customer base by nearly 3%. NAUGATUCK The Naugatuck Region is composed of four separate systems, not interconnected, as listed below:
Number of Customers System Towns (or Portions Thereof) Served at 12/31/97 - ------ ---------------------------------- ----------- Central Naugatuck, City of Waterbury, Beacon Falls, Bethany, Prospect 8,779 Terryville Plymouth, Thomaston 1,959 Thomaston Thomaston 1,208 Collinsville Canton, Avon, Burlington 1,257 ------ 13,203 ======
7 Page 7 The territory served is residential and industrial including a municipality which represented approximately 7.4% of the region's 1997 revenues. Water for the Collinsville System is supplied under an agreement with the MDC from treatment facilities drawing from a large surface water reservoir owned by the MDC. See "Item 2. Properties" for a description of this agreement. 8 Page 8 Consolidated Operating Statistics
Year Ended December 31, 1997 1996 1995 -------------- ------------- -------------- Customers (Average) Residential Metered 56,553 55,784 55,107 Commercial Metered 3,977 3,953 3,906 Industrial Metered 359 365 368 Public Authorities Metered 474 472 470 Fire Protection and Other 1,052 1,023 993 -------------- ------------- -------------- Total 62,415 61,597 60,844 ============== ============= ============== Production (Millions of Gallons) Residential Metered Sales 3,974 3,862 3,988 Commercial Metered Sales 917 904 934 Industrial Metered Sales 451 441 446 Public Authorities Metered Sales 228 220 227 -------------- ------------- -------------- Total Metered Consumption 5,570 5,427 5,595 Fire Protection, Company Use and Unaccounted For 717 612 777 -------------- ------------- -------------- Total 6,287 6,039 6,372 ============== ============= ============== Operating Revenues (Thousands of Dollars) Residential Metered $24,476 $24,485 $25,147 Commercial Metered 4,633 4,716 4,852 Industrial Metered 1,850 1,861 1,868 Public Authorities Metered 1,057 1,050 1,090 Fire Protection and Other Non-Metered 6,485 6,480 6,393 -------------- ------------- -------------- Total $38,501 $38,592 $39,350 ============== ============= ============== Average Revenue per 1,000 Gallons Residential Metered $6.16 $6.34 $6.31 Commercial Metered $5.05 $5.22 $5.19 Industrial Metered $4.10 $4.22 $4.19 Public Authorities Metered $4.64 $4.77 $4.80 Miles of Distribution Mains (End of Period) 1,000 980 970
Year Ended December 31, 1994 1993 -------------- -------------- Customers (Average) Residential Metered 54,464 53,988 Commercial Metered 3,827 3,797 Industrial Metered 364 366 Public Authorities Metered 467 466 Fire Protection and Other 960 941 -------------- -------------- Total 60,082 59,558 ============== ============== Production (Millions of Gallons) Residential Metered Sales 3,874 3,915 Commercial Metered Sales 908 918 Industrial Metered Sales 460 438 Public Authorities Metered Sales 179 179 -------------- -------------- Total Metered Consumption 5,421 5,450 Fire Protection, Company Use and Unaccounted For 808 756 -------------- -------------- Total 6,229 6,206 ============== ============== Operating Revenues (Thousands of Dollars) Residential Metered $24,488 $24,574 Commercial Metered 4,696 4,745 Industrial Metered 1,922 1,851 Public Authorities Metered 893 903 Fire Protection and Other Non-Metered 6,130 6,058 -------------- -------------- Total $38,129 $38,131 ============== ============== Average Revenue per 1,000 Gallons Residential Metered $6.32 $6.28 Commercial Metered $5.17 $5.17 Industrial Metered $4.18 $4.23 Public Authorities Metered $4.99 $5.04 Miles of Distribution Mains (End of Period) 955 950
9 Page 9 CONSTRUCTION PROGRAM The projected capital expenditures of CWC are established annually by management and are reviewed and revised from time to time to the extent necessary to meet changing conditions, including adequacy of rate relief, customer demand, revised construction schedules, water quality requirements, pollution control requirements and inflation. The Company currently estimates that CWC's 1998-2000 construction program, excluding plant financed by customer advances and contributions in aid of construction and amounts representing an allowance for funds used during construction (AFUDC), will aggregate approximately $20,000,000 which includes routine improvements to the water system of approximately $18,440,000 and $1,460,000 for construction costs (in addition to $6,150,000 already incurred through December 31, 1997) of an interim alternative to construction of a new Rockville Water Treatment Plant (RWTP), which has been delayed indefinitely. Said alternative involves modifications to the existing RWTP and distribution system. The new RWTP will be constructed when required by increased demand or increased Safe Drinking Water Act (SDWA) requirements. The $19,900,000 construction expenditures for 1998 through 2000, mentioned above, include approximately $4,320,000 for all known costs of studies and construction of facilities to comply with existing SDWA and OSHA regulations. Construction expenditures which may be required in the future to comply with Federal and State regulations, which have not yet been issued but which are required under the SDWA, are excluded. FINANCING The Company and CWC expect to finance a significant portion of the anticipated $20,000,000 construction expenditures through 2000 with net funds generated from operations (net cash provided by operating activities less dividends paid). Net funds generated from operations were $8,789,000, $5,436,000, and $6,070,000,for the years 1997, 1996 and 1995, respectively (see Consolidated Statements of Cash Flows for additional information). Construction and other expenditures in excess of net funds generated from operations are expected to be financed through short-term interim bank loans which may be refinanced through the sale of Preferred Stock and/or long or medium-term unsecured debt by CWC and/or the Company, and/or the sale of First Mortgage Bonds by CWC and of Common Stock by the Company when financial market conditions are considered favorable by management. CWC expects to receive the proceeds of any such financings by the Company in the form of advances or capital contributions. 10 Page 10 The Company and CWC currently have lines of credit aggregating $12,000,000, consisting of conventional lines of credit with four banks, which management considers adequate at this time. As of December 31, 1997, the Company had approximately $8,800,000 of borrowings outstanding under these lines of credit. Although CWC received an $8,000,000 tax exempt allocation in 1998, because of changes in the Federal tax laws, the amount of new tax-exempt debt which may be issued by, or under the authority of, the State of Connecticut is limited. Although CWC has been able to refund all of its approximately $42,000,000 of existing tax-exempt borrowings with tax-exempt refunding borrowings since 1990, it is uncertain whether future tax-exempt allocations from the State will be available to CWC or the Company. The unavailability of tax-exempt financings will require the Company and/or CWC to issue traditional taxable debt securities and will increase the cost of long-term debt financing. During the period 1979 through 1988 approximately $43,000,000 of tax-exempt long-term debt was issued by CWC to finance construction expenditures. CWC is in the process of refinancing its $10,000,000 1991 Series Q First Mortgage Bonds with new tax exempt financing. In conjunction with this refinancing, CWC expects to issue $8,000,000 in additional tax exempt financing to replace $8,000,000 in outstanding short-term debt. The Company has no legal restrictions on the issuance of its debt. The ability of CWC to issue additional long or medium-term secured debt to finance future construction expenditures depends in part on meeting the applicable provisions of CWC's First Mortgage Indenture with respect to the coverage of earnings over interest requirements. These provisions require, for the issuance of additional First Mortgage Bonds, minimum earnings coverage before income taxes of two times pro forma annual interest charges on such mortgage debt. The interest coverage under this formula at year end has been: 1997 - 4.24 times, 1996 - 4.28 times interest charges, 1995 - 4.29 times, 1994 - 4.12 times, and 1993 - 4.17 times. CWC's coverage of interest charges on all long-term debt at year end has been: 1997 - 4.23 times interest charges, 1996 - 4.28 times, 1995 - 4.29 times, 1994 - 4.12 times, and 1993 - 4.17 times. 11
Page 11 CWC's Times Coverage of Annual Interest On Long-Term Indebtedness Year Ended December 31, 1997 1996 1995 1994 1993 ------ ------ ------ ------ ---- (Thousands of Dollars) Utility Operating Income (a) $10,350 $10,161 $10,053 $9,690 $10,018 Federal and State Income Tax 4,486 4,812 4,950 4,756 4,673 State Income Tax - Capitalization (b) (175) (157) (150) (150) (140) ------- ------- ------- ------- ------ Net Operating Earnings $14,661 $14,816 $14,853 $14,296 $14,551 ======= ======= ======= ======= ======= Annual Interest on First Mortgage Bonds (c) $ 3,456 $ 3,458 $ 3,460 $ 3,468 $ 3,492 ======= ======= ======= ======= ======= Times Interest Coverage (d) 4.24 4.28 4.29 4.12 4.17 ==== ==== ==== ==== ==== Annual Interest on Unsecured Promissory Notes (c) 9 -- -- -- -- ------- -------- ------- ------- ----- Annual Interest on Long-Term Debt $ 3,465 $ 3,458 $ 3,460 $ 3,468 $ 3,492 ======= ======= ======= ======= ======= Times Interest Coverage (e) 4.23 4.28 4.29 4.12 4.17 ==== ==== ==== ==== ====
(a) Connecticut Water Service, Inc.'s utility operating income for the years 1997 to 1993 is $10,334, $10,128, $10,022, $9,655, and $9,983, respectively. (b) Amount of minimum State income tax based on the capitalization method. (c) Includes interest on current portion payable. (d) Net Operating Earnings / Annual Interest on First Mortgage Bonds per provisions of CWC's First Mortgage Indenture. (e) Net Operating Earnings / Annual Interest on Long-Term Debt per provisions of CWC's First Mortgage Indenture. During 1980 and 1981 the interest costs of long-term debt increased more rapidly than earnings so that the coverage requirements prevented CWC from effecting a planned issue of Bonds in mid 1981. Similar circumstances may in the future prevent the issue of, or require a reduction in the amount of, bonds CWC otherwise would have issued or will issue. As a consequence, the Company may be required to meet an increased portion of its financing needs through sales of unsecured funded debt or of additional shares of Common Stock. Sales of Common Stock would result in a dilution of the voting power and relative equity interests of the holders of Common Stock then outstanding. 12 Page 12 During the past five years CWC has sold the following issues of long-term debt: - During June, 1993, CWC issued a $5,000,000, 5.75%, Series T, First Mortgage Bond which secures tax exempt Water Facilities Revenue Refunding Bonds maturing in 2028, the proceeds of which refunded CWC's 8.1%, $5,000,000, Promissory Note. - During September, 1993, CWC issued a $4,550,000, 5.30%, Series U, First Mortgage Bond which secures tax exempt Water Facilities Revenue Refunding Bonds maturing in 2028, the proceeds of which refunded CWC's 7.25%, $5,000,000, Series M, First Mortgage Bond. - During October, 1993, CWC issued a $8,000,000, 6.65%, Series S, First Mortgage Bond, which secures tax exempt Water Facilities Revenue Refunding Bonds maturing in 2020. The proceeds from this transaction were used to refund CWC's 8.375% (plus 1% Letter of Credit fee), Series N, $8,000,000, First Mortgage Bond. - On January 4, 1994, CWC issued a $4,050,000, 6.94%, Series V, First Mortgage Bond, maturing in 2029, the proceeds of which refunded CWC's 9.375%, Series L and 8.5%, Series O, First Mortgage Bonds. During March, 1994, an additional $8,000,000, 6.94% Series V, First Mortgage Bond was issued. The proceeds of this transaction were used to redeem CWC's $5,000,000, 10%, Series P, First Mortgage Bonds as well as all 30,000 shares of CWC's $100 par, 9.5% Preferred Stock. - During 1997, CWC issued a $163,000 unsecured Promissory Note with a 5.5% interest rate as part of the purchase price for the Point O'Woods Water System acquisition. The five year note requires CWC to make monthly payments of interest and principal totaling $37,000 annually. CWC has no restriction with respect to the issuance of additional shares of its Preferred Stock. As noted earlier in this section, CWC expects to issue $18,000,000 in tax exempt unsecured bonds in 1998. These bonds will refinance the 1991 Series Q Bonds ($10,000,000 at 6.9%) and reduce short-term debt by $8,000,000. 13 Page 13
CWC's Times Coverage of Annual Interest and Annual Preferred Stock Dividends in Accordance with Articles of General Preference Year Ended December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Thousands of Dollars) Utility Operating Income $10,350 $10,161 $10,053 $9,690 $10,018 Other Income (a) 212 161 243 155 193 ------ ------ ------ ------- ------- Gross Earnings Available for Coverage $10,562 $10,322 $10,296 $9,845 $10,211 ======= ======= ======= ====== ======= Annual Interest on Funded Debt (b) $3,465 $3,458 $3,460 $ 3,468 $3,492 Annual Dividend on Preferred Stock (c) -- -- -- 2 288 ------ ------ ------ ------ ------- Total Charges $3,465 $3,458 $3,460 $ 3,470 $ 2,780 ====== ====== ====== ======= ======= Times Interest Coverage 3.05 2.98 2.97 2.83 2.70 ==== ==== ==== ==== ====
(a) Other income, as defined by the Articles of General Preference, includes merchandising and jobbing income, interest and dividend income and miscellaneous rental income less applicable taxes. (b) Includes interest on current portion payable. (c) Includes dividends on currently redeemable shares. The Company's issuance of Common Stock over the past five years are as detailed below. The $6,543,000 net proceeds from these sales were invested in CWC in the form of capital contributions. - The Company issued 1,769 shares of Common Stock during 1993, 2,468 shares during 1994, 2,022 shares during 1995, 3,505 shares during 1996, and 2657 shares during 1997, pursuant to the Company's Employee Savings 401-K Match Plan. - The Company issued 3,074 shares of Common Stock and/or Common Stock equivalents during 1993, 4,061 shares during 1994, 6,369 shares during 1995, 4,907 shares during 1996, and 3,684 shares during 1997, pursuant to the Company's Performance Stock Program. - The Company issued 33,803 shares of Common Stock during 1993, 74,053 during 1994, 87,807 during 1995, and 36,914 shares during 1996, and 0 shares during 1997 pursuant to its Dividend Reinvestment and Common Stock Purchase Plan (DRIP). 14 Page 14 There are currently no legal limits on the amount of short-term borrowings which may be incurred by the Company or CWC. Should construction expenditures exceed management's current expectations, the Company will continue to be dependent upon its ability to issue and sell additional amounts of Common Stock, mortgage bonds of CWC and (either through the Company or CWC) Preferred Stock and long or medium-term debt to limit short-term borrowing to appropriate levels. However, the availability of these methods of financing cannot be assured. The Company believes that the sale of such additional securities will continue to depend primarily on the adequacy and timeliness of regulatory action on future rate applications of CWC, on general conditions in securities markets and on favorable market appraisal of the securities of the Company and CWC, including the Company's Common Stock. RATES The rates of CWC have been established under the jurisdiction of, and approved by, the DPUC. It is the Company's policy to seek rate relief as necessary to enable CWC to achieve an adequate rate of return. CWC's last general rate increase was requested in 1990, became effective March 25, 1991, and was based upon an allowed rate of return of 12.7% on Common Stock equity and 10.74% on rate base. During 1997 CWC had this decision reopened for the limited purpose of flowing through to customers cost savings related to a reduction in CWC's state taxes and to allow the CWC to collect FAS 106 (Postretirement Benefits other than Pension) costs in rates. Overall CWC's rates were reduced approximately 4 1/2% in 1997 due to these limited reopened rate proceedings. In 1979, the DPUC approved a surcharge to be applied to rates charged by water utilities in order to provide a current cash return on the major portion of a water utility's Construction Work In Progress (CWIP) applicable to facilities required by SDWA facilities. CWC has consistently been allowed to collect such a surcharge. CWC expects to apply for the application of similar surcharges with respect to any major future construction projects which may be required by the SDWA. There is no assurance that any future surcharges will be permitted. Under certain circumstances the DPUC, in consultation with the DPH, can order a water company with good managerial and technical resources to acquire the water system of another company to assure the availability and potability of water for customers of the company to be acquired. In 1989 the DPUC promulgated regulations permitting the DPUC to approve a surcharge to be applied to rates charged by water utilities in order to cover the costs incurred to acquire the other system and to make improvements as required. CWC expects to apply for the application of such a surcharge with respect to any mandated water system acquisition. Although there is no assurance that any other such surcharge will be permitted, such a surcharge was permitted in 1995 when the DPUC and DPH ordered CWC to acquire the assets and facilities of the Sound View Water Company in Old Lyme. 15 Page 15 In 1993 the DPUC approved regulations which would permit a water company to apply for a limited rate adjustment to compensate for the effect of changes in certain costs. These costs include rate changes related to the cost of purchased water, energy, and taxes. The effects of limited reopened rate proceedings in 1997 is discussed above. CWC expects to apply for the application of this type of adjustment in the future when appropriate. There is no assurance that any such rate adjustment will be permitted. See also "Franchises and Competition" below for a discussion of 1994 Connecticut legislation dealing with the competitiveness of water rates. FRANCHISES AND COMPETITION MDC's water rates are substantially lower than those of CWC, primarily because MDC is a tax-exempt entity, generally serving a denser population with older facilities. Legislation was proposed in the Connecticut General Assembly in 1987 which was intended to have the effect of permitting MDC to purchase the water company operations of CWC in South Windsor, a town which is presently served by both MDC and CWC. The Company opposed this legislation vigorously. The Connecticut General Assembly established a Task Force to report on various issues relating to towns served by both a privately-owned water company and a publicly-owned water company. The Task Force voted not to recommend legislation which would authorize such towns to hold referenda on consolidation and empower towns to force an investor-owned water company to sell its water system within that town to a governmentally-owned entity. It is not clear at this time whether such a proposal or similar legislation may be re-introduced and adopted by the Connecticut General Assembly. Further, even if such legislation were adopted, the amount of the compensation to be received by CWC for its assets in South Windsor, or the disposition of any such compensation, cannot be determined at this time. It is also possible that any legislation in this area could be written in a manner which would permit a similar acquisition of CWC's water operations in towns other than South Windsor. The Company has opposed, and will continue to oppose vigorously, any such proposed legislation. Legislation was passed in 1994 by the Connecticut General Assembly that required the DPUC to adopt regulations regarding whether the rates that have been charged by a water company for a period of five consecutive years are so excessive in comparison to the rates charged by other water companies providing the same or similar service as to inhibit the economic development of the area serviced by the water company or impose an unreasonable cost to the customers of such company. If the DPUC makes such a finding and also concludes that the water company is unable or unwilling to provide service at a reasonable cost to customers, it may order the provision of such service or revoke the franchise held by such company. In 1995, the DPUC adopted regulations that require a petition on a form provided by the DPUC to be signed by 50% of the residents of a town or other political subdivision served by the company, or by 500 customers of the company, before the DPUC would hold a hearing thereon. CWC believes that, in light of the tax and other advantages of governmentally-owned entities which are not available to CWC, its rates are not excessive and would vigorously oppose any such petition. 16 Page 16 In 1976, the Connecticut General Assembly created a study commission to evaluate the feasibility of expanding the water supply services of the MDC to include the towns of East Granby, East Windsor, Enfield, Somers, Suffield and Windsor Locks. These towns are in the service areas of and are served in part by CWC's Northern Region. On February 1, 1978, the study commission reported to the Governor and the General Assembly that the expansion was feasible and recommended that the General Assembly authorize the towns of East Granby, Suffield and Windsor Locks to take immediate steps to acquire water services from the MDC. It further recommended that the enabling legislation provide a mechanism for the towns of Enfield, East Windsor and Somers, after adequate technical, financial and institutional studies, to take the steps necessary to acquire water services from the MDC. The study commission made no recommendation in its report with respect to the method of implementation of any MDC expansion and did not discuss CWC's status or that of its water facilities should MDC provide such service. The General Assembly has not taken any action on the report. In 1990, CWC agreed, pursuant to the Connecticut Plan (see "Business - Regulation") that MDC would have the exclusive right to serve that part of East Granby which is not adjacent to Bradley International Airport and which is not presently being served by CWC. Legislation that would have had the effect of enabling the DPUC to order a transfer to MDC of CWC's service territory in South Windsor was introduced in the 1996 General Assembly but did not pass. The Company has opposed, and will continue to oppose, vigorously any extension of MDC water operations within its service areas and any effort to permit the takeover by any municipal or other authority of any significant portion of CWC's service areas. It is not possible at this time to assess the likelihood of any legislation being enacted to implement these or similar recommendations or the impact of any such legislation on CWC and the Company, but such impact could be substantial. There can be no assurance that the Connecticut General Assembly will not take action to authorize such a takeover. As of December 31, 1997, CWC's Northern Region, which includes customers in the towns mentioned above, represented 46% of the Company's consolidated utility plant. In common with most water companies in Connecticut, CWC derives its rights and franchises to operate from special acts of the Connecticut General Assembly, which are subject to alteration, amendment or repeal by the General Assembly and which do not grant exclusive rights to CWC in its service areas. Subject to such power of alteration, amendment or repeal by the Connecticut General Assembly and subject to certain approvals, permits and consents of public authority and others prescribed by statute and by its charter, CWC has, with minor exceptions, valid franchises free from burdensome restrictions and unlimited as to time, and is authorized to sell potable water in the towns (or parts thereof) in which water is now being supplied by CWC. 17 Page 17 In addition to the right to sell water as set forth above, the franchises of CWC include rights and powers to erect and maintain certain facilities on public highways and grounds, all subject to such consents and approvals of public authority and others as may be required by law. Under the Connecticut General Statutes, CWC, upon payment of compensation, may (subject to the various requirements described under "Business - Regulation") take and use such lands, springs, streams or ponds, or such rights or interests therein as the Connecticut Superior Court, upon application, may determine is necessary to enable CWC to supply potable water for public or domestic use in its franchise areas. CWC faces competition, presently not material, from a few private water systems operated within, or adjacent to, its franchise areas and from municipal and public authority systems whose service areas in some cases overlap portions of CWC's franchise areas. At the present time, except as noted above, there are no publicly owned utilities, cooperatives or other private utility companies competing with CWC in the areas now served, although within certain areas there are wells owned by individuals or private industries. See also "Business - Regulation" for a description of the so-called Connecticut Plan which is intended, among other things, to eliminate competition among water systems. 18 Page 18 REGULATION DEPARTMENT OF PUBLIC UTILITY CONTROL (DPUC) CWC is subject to regulation by the DPUC, which has jurisdiction over rates, standards of service, accounting procedures, issuance of securities, disposition of utility properties and related matters. The DPUC consists of five Commissioners, appointed by the Governor of Connecticut with the advice and consent of both houses of the Connecticut legislature. The DPUC is required by law to institute management audits, to be conducted periodically, of companies such as CWC. Such audits might result in the DPUC ordering implementation of new management practices or procedures. The DPUC has not conducted any such audit of CWC. The Company, which is not an operating utility company, is not a "public service company" within the meaning of the Connecticut General Statutes and is not generally subject to regulation by the DPUC. DEPARTMENT OF ENVIRONMENTAL PROTECTION (DEP) While the construction of dams, reservoirs and other facilities necessary to the impounding, storage and withdrawal of water in connection with public water supplies is a permitted use under the Connecticut Inland Wetlands and Water Courses Act, CWC is required, pursuant to other statutory provisions, to obtain permits from the Connecticut Commissioner of Environmental Protection (Commissioner) for the location, construction or alteration of any dam or reservoir and to secure the approval of the Commissioner for the diversion and use of water from any river or underground source for public use. Various criteria must be satisfied under the respective statutes and regulations of the Connecticut Department of Environmental Protection (DEP) in order to obtain such permits or approvals and the Commissioner has the power to impose such conditions as he deems reasonably necessary in connection with such permits or approvals in order to assure compliance with such statutes. CWC has obtained, and complied with the terms of, all such requisite permits or approvals. Legislation was adopted in 1982 conferring upon the DEP authority to require a permit for any new diversion of water, including both surface and ground water, within the State of Connecticut. Any water diversion which might be effected by CWC in the future would require compliance by CWC with a lengthy permit application process and approval by the Commissioner. CWC has several potential well sites which are subject to this legislation and the DEP regulations thereunder. Such legislation requires the registration with the Commissioner of all diversions of water maintained prior to July 1, 1982. All of CWC diversions have been registered. Although the legislation provides that registered diversions are not subject to the permit requirement, DEP regulations adopted in March, 1990 are being used by DEP, on a case by case basis, to require compliance with the permit application process before some registered diversions can be used as a source of water supply. It is not possible at this time to fully assess the impact of DEP's application of this legislation and the DEP regulations on CWC and its operations, but such impact may be substantial, particularly on sources held for future use. 19 Page 19 The Federal Clean Water Act requires permits for discharges of effluents into navigable waters and requires that all discharges of pollutants comply with federally approved state water quality standards. The DEP has adopted, and the federal government has approved, water quality standards of receiving waters. A joint Federal and State permit system has been established to ensure that applicable effluent limitations and water quality standards are met in connection with the construction and operation of facilities which affect or discharge into state or interstate waters. CWC has received all such requisite permits. A new general permit and permit renewal program for water treatment waste water discharges was adopted by DEP in 1995. Although the new program has some stricter monitoring and reporting requirements, CWC is in compliance with the new program and the additional costs, while increased from the period before the program was adopted, are not substantial. In 1984, all CWC's dams were registered with DEP as required under Public Act 83-38. DEP is required to investigate and periodically inspect most registered dams to ensure they are safely maintained. CWC was also subject to the requirements of the National Dam Inspection Act which required the United States Army Corps of Engineers to inspect certain dams. These inspections were completed in 1981 and the Army Corps' participation ended. Six of said dams have been inspected and, although certain modifications and further studies have been required, no material problems with respect to these dams have been reported. While the Company recognizes that a certain degree of risk is attached to CWC's ownership of dams in connection with its water collection system, the Company believes that all of CWC's dams are well maintained and are structurally stable. CWC has completed any necessary modifications to all but one of the six dams. CWC believes that the future cost of such compliance at that dam will be less than $2,000,000. These costs are considered in CWC's projected capital expenditures (see "Construction Program".) The DEP has promulgated regulations requiring that certain minimum flows be maintained in various waterways within the State of Connecticut. Pursuant to said regulations, CWC is exempt from compliance at certain of its facilities. However, DEP is considering making changes in the regulations. The Company cannot predict either the substance of those changes or their impact on the Company. However, it is possible that such changes could reduce the safe yield of CWC's sources. The cost to CWC to restore the lost safe yield is not now determinable but could be substantial. 20 Page 20 DEPARTMENT OF PUBLIC HEALTH (DPH) CWC is also subject to regulation by the Connecticut DPH with respect to water quality matters. Plans for new water supply systems or enlargement of existing water supply systems also must be submitted to the DPH for approval. In 1985 the Connecticut General Assembly enacted comprehensive legislation (the so-called Connecticut Plan) designed to maximize the efficient and effective development of the state's public water supply systems. This legislation authorized DPH to administer procedures designed to coordinate the comprehensive planning of public water systems. The legislation mandates the establishment of public water supply management areas, with each such area having a water utility coordinating committee comprised of representatives of the various public water systems and regional planning agencies in the area. Each such committee is required to establish exclusive service areas for each public water system in the area, after taking into consideration a number of factors including existing water service areas, land use plans, etc., optimum utilization of existing water supplies and existing franchise rights of water companies. DPH is authorized to resolve any disagreements among members of the respective committees. This legislation is intended not only to promote cooperation among various water suppliers in each management area, but also to provide (through DPH's role) for the centralized planning of water supply. In implementing this legislation, DPH has created seven water supply management areas and is in the process of implementing the creation of the appropriate water utility coordinating committees. The operations of CWC, which cover many areas of the state, fall within five of the seven management areas. CWC is actively involved with the planning process in two of these management areas at this time. The remaining three areas of CWC's interest are expected to begin the planning process within the next several years. It is not possible at this time to predict the impact on the Company of the above described legislation, regulations and procedures, but the Company was an active participant in moving for the adoption of this scheme, and is presently hopeful that such centralized and cooperative planning will have a beneficial impact on its future water supply and water supply operations. SAFE DRINKING WATER ACT (SDWA) CWC is subject to regulation of water quality under the SDWA. The SDWA provides for the establishment of uniform minimum national quality standards by the Federal Environmental Protection Agency (EPA), as well as governmental authority to specify the type of treatment process to be used for public drinking water. The EPA regulations, pursuant to the SDWA, set limits for, among other things, certain organic and inorganic chemical contaminants, pesticides, turbidity, microbiological contaminants, and radioactivity. The SDWA provides that the states have primary enforcement responsibility for public drinking water systems, as long as the states' regulations are no less stringent than those adopted pursuant to the SDWA. The DPH has adopted regulations which are in some cases more stringent than the Federal regulations. 21 Page 21 The SDWA was originally enacted in 1974 with major amendments in 1986 and 1996. The original SDWA authorized EPA to establish 22 interim standards for drinking water contaminants between 1977 and 1986. The 1986 SDWA amendments dictated that 83 primary drinking water standards be established within three years and an additional 25 contaminants be regulated every three years thereafter. EPA promulgated the Surface Water Treatment Rule (SWTR), the Lead and Copper Rule and the Total Coliform Rule (TCR) as well as establishing standards for various volatile and synthetic organic contaminants and inorganic contaminants pursuant to the 1986 SDWA amendments. CWC was in compliance with each of these rules from the time they became effective and continues to be in compliance. At the time that the 1996 SDWA was reauthorized there were still several schedules for establishment of various regulations required by the 1986 amendments in process. The 1996 SDWA changed these schedules. The new law also eliminated the requirement to regulate 25 new contaminants every three years and replace it with a requirement that the EPA consider five new contaminants for regulation every five years. The law also changed the basis for setting regulations to consider the costs and benefits of new regulations and to show that new regulations improve public health. The current schedule for implementation of regulations under the 1996 SDWA calls for Disinfectant and Disinfection Byproducts (D/DBP) to be implemented in two stages with Stage I promulgated by November 1998 and Stage II promulgated in 2002. The Interim Enhanced Surface Water Treatment Rule (ESWTR) will be promulgated with Stage I D/DBP. The Long Term ESWTR and rules for recycling of backwash water are currently planned for 2000. Radionuclides, including radon, are expected to be finalized in 2000, as is the Ground Water Disinfection Rule. Arsenic is planned to be promulgated by 2001. A decision to regulate sulfate must be made by EPA by 2001. If the decision is to regulate, then the final rule must be complete by 2005. Finally, the first five contaminants that EPA must consider for regulation must be selected in 2001. Those that are regulated will be completed by 2003. 22 Page 22 Through December 31, 1997, the Company has expended approximately $46,200,000 in constructing facilities and conducting aquifer mapping necessary to comply with the requirements of the SDWA. CWC believes that it is in substantial compliance with regulations promulgated by the EPA and DPH, as currently applied, although portions of the costs involved in modifying the RWTP are required to enable CWC to continue to meet SDWA requirements. Connecticut's aquifer protection legislation not only requires aquifer mapping, but also requires DEP, in consultation with DPH and DPUC, to prepare guidelines for acquisition by water companies of lands surrounding public water supply wellfields. The extent to which those guidelines, not yet prepared, might lead to regulations requiring the Company to purchase additional land around its wellfields is not known at this time. The Company anticipates spending an additional $1,500,000 on required aquifer mapping. Although the Company cannot predict either the substance of the regulations required by the 1996 SDWA amendments which have not yet been promulgated or their impact on CWC, the primary impact on CWC is expected to be in the area of increased monitoring and reporting although it is possible that such regulations may require modifications to existing filtration facilities. Construction of new facilities may be required for certain groundwater sources. It is possible that costs of compliance by CWC could be substantial. DISPOSITION OF PROPERTY Although CWC has established a program of selling various, relatively small, discrete parcels of land over the next several years, the total of which is less than 350 acres, CWC has no other significant amounts of excess land which it presently expects to sell or otherwise dispose of. Connecticut law presently imposes the following restrictions upon the disposition of property owned by water companies: (a) no property greater than three acres or any portion of a large parcel or having a value of greater than $50,000 may be sold or otherwise transferred without the prior approval of the DPUC; (b) the sale, transfer and change in the use of watershed land (lands draining into a public water supply) and certain non-watershed lands which are contiguous to reservoirs and their tributaries are subject to regulation by the DPH; (c) when a water company intends to transfer or dispose of an interest in any present, potential or abandoned water supply source, other water companies which might reasonably be expected to utilize the source are given the opportunity through the DPH to seek to acquire such source; (d) subject to such acquisition opportunities by other water companies as to water supply sources, when a water company intends to transfer or dispose of an interest in three or more contiguous acres of its unimproved real property, the municipality in which such property is located, the State of Connecticut and private, nonprofit land-holding organizations have prior options to acquire such interest in the context of priorities based on intended use, with open space use being favored; (e) if the municipality or the State chooses to exercise its option, and the purchase price cannot be established 23 Page 23 by agreement, the acquisition may be accomplished by eminent domain (f) the proceeds from the sale of water company land must generally be reinvested in utility improvements or land necessary to protect water supply sources; and (g) land may be sold only if consistent with the utility's water supply plan. Legislation enacted in 1988 provides that the DPUC use an accounting treatment which equitably allocates between the utility's ratepayers and its stockholders the economic benefits of the net proceeds from the sales of land which has ever been in the utility's rate base. GENERAL Federal and State regulations and controls concerning water quality, pollution and the effluent from treatment facilities are still in the process of being developed and it is not possible to predict the scope or enforceability of regulations or standards which may be established in the future, or the cost and affect of existing and potential regulations and legislation upon any of the existing and proposed facilities and operations of CWC. Further, recent and possible future developments with respect to the identification and measurement of various elements in water supplies and concern with respect to the impact of one or more of such elements on public health may in the future require CWC to replace or modify all or portions of its various water supplies, to develop replacement supplies and/or to implement new treatment techniques. In addition, CWC anticipates that threatened and actual contamination of its water sources will become an increasing problem in the future. CWC has expended and will in the future be required to expend substantial amounts to prevent or remove said contamination or to develop alternative water supplies. See "Legal Proceedings" for a discussion of a recent contamination problem. Any of the aforesaid developments may significantly increase CWC's operating costs and capital requirements. Since the DPUC's rate setting methodology permits a utility to recover through rates prudently incurred expenses and investments in plant, based upon past DPUC practice, the Company expects that such expenditures and costs should ultimately be recoverable through rates for water service. EMPLOYEES As of December 31, 1997, CWC employed 157 full-time and part-time employees. The Company has no employees other than its officers, who are also officers of CWC and whose compensation is paid by CWC. All full-time employees of CWC who meet specified age and length of service requirements participate in an Employee's Retirement Plan which is a non-contributory trusteed pension plan and provides for a monthly income for employees at retirement. None of the employees is covered by a collective bargaining agreement. Management believes that its relationship with its employees is satisfactory. In the first quarter of 1997 CWC offered an early retirement plan to its employees who would have been 55 or older as of July 1, 1997. This offer covered 18 employees; 16 of these employees accepted this offer with retirements taking effect between July 1 and December 31, 1997. 24 Page 24 ITEM 2. PROPERTIES The properties of CWC consist of land, easements, rights (including water rights), buildings, reservoirs, standpipes, dams, wells, supply lines, treatment plants, pumping plants, transmission and distribution mains and conduits, mains and other facilities and equipment used for the collection, purification, storage and distribution of water. CWC owns its principal properties in fee, except that the Collinsville System's principal source of water supply is a water supply contract with the MDC. (See below for description of this contract.) The Company believes that CWC's properties are in good operating condition. Water mains are located, for the most part, in public streets and, in a few instances, are located on land owned by CWC in fee and land occupied under easements, most of which are perpetual and valid and sufficient for the purpose for which they are held. Although it is impractical to investigate the validity of the title to some of the easements held by CWC for distribution mains or to clear title in the cases where such distribution easement titles have been found defective, any such irregularities or defects in title which may exist do not materially impair the use of such properties in the business of CWC. Substantially all of CWC's property is subject to the lien of its Mortgage Indenture to secure CWC's First Mortgage Bonds. CWC owns twelve water filtration facilities. Information about these facilities is contained in the following table.
Year Treatment Capacity Placed in (in million Filtration Operation Region gallons per day) Facilities Guilford Well 1965 Shoreline 0.70 Rockville 1970 Northern 5.00 Westbrook Well 1975 Shoreline 0.23 Hunt Well Field 1976 Northern 2.50 MacKenzie 1980 Shoreline 4.00 Williams 1981 Shoreline 1.00 Stafford Springs 1984 Northern 1.00 Reynolds Bridge 1986 Naugatuck 1.00 Windsor Locks 1988 Northern 0.30 Stewart 1989 Naugatuck 6.00 O'Bready Well 1994 Northern 0.50 Clinton Well 1997 Shoreline 1.00
25 Page 25 CWC has an agreement with the MDC, to provide, among other things, the operation and maintenance by MDC of a filtration plant (completed in 1990) to supply treated water for substantially all of CWC's Collinsville System, with a capacity of 650,000 gallons per day, and the provision by MDC to CWC's Collinsville System of up to 650,000 gallons per day of water from this plant meeting all applicable Federal and State requirements. CWC has paid 40% of the cost of construction of this plant and pays MDC an appropriate rate for water used by CWC in excess of 400,000 gallons per day. As of December 31, 1997, the transmission and distribution systems of CWC consisted of approximately 1,000 miles of main, of which approximately 50 miles have been laid or acquired in the past five years. On that date, approximately 75% of CWC's mains were eight-inch diameter or larger. Substantially all new main installations are cement-lined ductile iron pipe of eight-inch diameter or larger. Approximately 100 miles of the Company's pipelines are asbestos cement. From January 1, 1993 through December 31, 1997, CWC added $45,917,000 of gross plant additions (including plant financed by customer advances and contributions in aid of construction, allowance for funds used during construction and expenditures by CWC reimbursed by any other sources), and retired or sold property having a book value of $2,055,000, resulting in net additions during the period of $43,862,000. 26 Page 26 CWC PRODUCTION FACILITIES AS OF DECEMBER 31, 1997
Total Dependable Greatest 1997 Storage Yield (1) Avg. Daily Avg. Daily Capacity (thousands Delivery Delivery (thousands of gallons (thousands (thousands of gallons) per day) of gallons) of gallons) ---------- ---------- ---------- ---------- Northern Region: Western System Enfield-East Windsor System Wells 7,200 Suffield System Wells 200 South Windsor Wells 720 Ellsworth Wells 100 Lake Shenipsit 5,050,000 11,200 Talcottville Well 300 Vernon Wells 690 Windsor Locks Wells 300 Tolland Aqueduct Wells (16) 42 ---------- 20,752 9,026(2) 8,444 ---------- ---------- ---------- Somers System Wells 390 121(18) 121 ---------- ---------- ---------- Crescent Lake System (4) -- 32(7) 32 ---------- ---------- ---------- Reservoir Heights (6) -- 5(7) 4 ---------- ---------- ---------- Stafford Springs System #4 Reservoir 51,000 #3 Reservoir 15,000 700 #2 Reservoir 60,000 ---------- 700 629(8) 458 ---------- ---------- ---------- Llynwood System Wells 30 13(3) 9 ---------- ---------- ---------- Lakewood/Lakeview System Wells 49 30(5) 24 ---------- ---------- ---------- Nathan Hale System Wells 20 9(8) 5 ---------- ---------- ---------- Shoreline Region: Guilford System Killingworth & Kelseytown Reservoirs 273,000 2,300 Wells 4,540 ---------- 6,840 3,676(9) 3,518 ---------- ---------- ---------- Chester System Upper and Lower Reservoirs 176,000 Turkey Hill Reservoir - Haddam 149,000 1,200 Wilcox Reservoir - Chester 65,000 Deuse Pond - Chester 4,800 Well 190 ---------- 1,390 900(10) 661 ---------- ---------- ---------- Chester Village West Wells 30 13(17) 11 ---------- ---------- ---------- Sound View System Wells 124 42(17) 36 ---------- ---------- ----------
27 Page 27 CWC PRODUCTION FACILITIES AS OF DECEMBER 31, 1997
Total Dependable Greatest 1997 Storage Yield (1) Avg. Daily Avg. Daily Capacity (thousands Delivery Delivery (thousands of gallons (thousands (thousands of gallons) per day) of gallons) of gallons) ---------- ---------- ---------- ---------- Naugatuck Region: Central System Long Hill Reservoir 506,000 Twitchell Reservoir 1,000 Candee Reservoirs (11) 7,000 3,600 W. H. Moody Reservoir 335,000 Straitsville Reservoir 7,000 Mulberry Reservoir 50,000 Beacon Valley Brook Supply -- Meshaddock Brook Supply 300 Wells 1,000 ---------- 4,900 4,970(13) 2,743 ---------- ---------- ---------- Terryville System Harwinton Ave. Reservoir (11) 14,800 50 Wells 910 ---------- 960 498(2) 463 ---------- ---------- ---------- Thomaston System Thomaston Reservoir (11) 93,000 310 Wells 0 Waterbury Interconnection (12) 864 ---------- 1,174 852(14) 342 ---------- ---------- ---------- Collinsville System Water Acquired by Contract (15) 650 Reservoir (distribution) 100 ---------- 650 391(3) 364 ---------- ---------- ----------
(1) Dependable yield is the maximum continuous rate of withdrawal available from a source of supply without seriously depleting the source. Dependable yield is based on long-term (99% dry year) rainfall records, storage capacity and watershed area. (2) Occurred in 1988. (3) Occurred in 1989. (4) Supplied by water purchased from the Town of East Longmeadow, Massachusetts. (5) Occurred in 1994. (6) Supplied by water purchased from the Town of Manchester. (7) Occurred in 1995 (8) Occurred in 1990. (9) Occurred in 1987. (10) Occurred in 1969. (11) Reservoir held in reserve and used for emergencies only. (12) Generally used for emergencies. However, see "Item 3. Legal Proceedings" for a discussion of the contamination of the Thomaston Wells. In 1997 CWC used the Waterbury emergency water connection to purchase substantially all of its water supply requirements for the Thomaston System from the Waterbury Municipal Water Department. (13) Occurred in 1964. (14) Occurred in 1966. (15) The Collinsville System has a right to up to 650,000 gallons per day through agreement with MDC. The source is Nepaug Reservoir with a storage capacity of 9.5 billion gallons. See "Item 2. Properties" for a description of this agreement. (16) Connected to Northern Region, Western System on August 9, 1995. (17) Occurred in 1996. 28 Page 28 ITEM 3. LEGAL PROCEEDINGS In November 1997, CWC settled its lawsuit against the two parties deemed responsible for the 1992 contamination of the Thomaston System's Reynolds Bridge well field. The settlement agreement provides CWC with funds to cover expenses already incurred in addition to covering potential future expenses stemming from the contamination. As a result of remediation efforts by one of the two parties, in early 1998 CWC was able to place in service its Thomaston well field having a dependable yield of one million gallons per day. As a result of the contamination this well field had been taken out of service in 1992, with CWC obtaining necessary water supplies from its Waterbury interconnection. The settlement agreement requires one of the parties deemed responsible for the contamination to complete remediation of the site and binds that party to reimburse CWC for specific ongoing costs incurred in operation of this well site as well as additional costs required to provide safe, potable water to the customers served by this portion of its distribution system. As a result of this settlement CWC no longer has a liability for future clean up costs. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 29 Page 29 ITEM 4.1 EXECUTIVE OFFICERS OF THE COMPANY - -------- ---------------------------------
Period Held or Term of Office Name Age Office Prior Position Expires ------ --- ------- -------------- -------- M. T. Chiaraluce 55 President and Held position of 1998 Annual Chief Executive President since Meeting Officer January, 1992 and Chief Executive Officer position with the Company since July, 1992 D. C. Benoit 40 Vice President - Held current 1998 Annual Finance, position or other Meeting Accounting and executive position Treasurer with the Company since April, 1996 J. R. McQueen 55 Vice President - Held current 1998 Annual Engineering and position or other Meeting Planning management or engineering position with the Company since October, 1965 T. P. O'Neill 44 Vice President - Held current 1998 Annual Operations position or other Meeting engineering position with the Company since February, 1980 M. P. Westbrook 38 Vice President - Held current 1998 Annual Administration position or other Meeting and Governmental management position Affairs with the Company since September, 1988 P. J. Bancroft 48 Assistant Held current 1998 Annual Treasurer and position or other Meeting Controller accounting position with the Company since October, 1979 V. F. Susco, Jr. 46 Corporate Held current 1998 Annual Secretary position or other Meeting management position with the Company since May, 1978
There are no family relationships between any of the Directors and Executive Officers of the Company. 30 Page 30 Part II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded in the over-the-counter market under the symbol CTWS and is included in the NASDAQ National Market System. The following table sets forth, for the periods indicated, the high and low last sale prices of the Company's Common Stock in the over-the-counter market and the dividends paid by the Company during the two most recent calendar years. The quotations represent actual sales prices, but the sales reflected may be inter-dealer transactions which do not reflect retail mark-up, mark-down or commission. NASDAQ is the source of the quotations for all periods. Since its affiliation with CWC in 1975, the Company has paid quarterly cash dividends on its Common Stock.
Price Dividends Period High Low Paid 1997: First Quarter $30.00 $27.50 $ .43 Second Quarter 29.50 27.50 .43 Third Quarter 29.125 27.875 .435 Fourth Quarter 34.00 28.375 .435 1996: First Quarter $28.25 $26.25 $ .42 Second Quarter 27.00 25.00 .42 Third Quarter 29.50 24.75 .43 Fourth Quarter 30.50 28.50 .43
As of March 1, 1998 there were approximately 5,500 holders of record of the Company's Common Stock. Holders of Common Stock are entitled to receive such dividends as may be declared by the Board of Directors from funds legally available therefor. Future dividends of the Company will be dependent upon timely and adequate rate relief, consolidated and parent company net income, availability of cash to the Company and CWC, the financial condition of the Company and CWC, the ability of the Company and CWC to sell their securities, the requirements of the construction program of CWC and other conditions existing at the time. The Company is not permitted to pay any dividends on its Common Stock unless full cumulative dividends to the last preceding dividend date for all outstanding shares of Cumulative Preferred Stock of the Company have been paid or set aside for payment. 31 Page 31 The income of the Company is derived mainly from earnings on its equity investment in CWC. At December 31, 1997 the retained earnings of CWC aggregated $13,927,000. As a result of dividend restrictions contained in CWC's mortgage indenture and Preferred Stock provisions, the amount of cash dividends payable on CWC's common equity capital out of CWC's retained earnings was limited to $13,677,000. The Company has a Dividend Reinvestment and Common Stock Purchase Plan. Under the plan, customers and employees of CWC and holders of Common Stock who elect to participate may automatically reinvest all or specified percentages of their dividends in additional shares of Common Stock and may also make optional cash payments of up to $1,000 per month to purchase additional shares of Common Stock. The Company may issue authorized but unissued shares of Common Stock to meet the requirements of the plan, or buy the shares on the open market at its discretion. 1,500,000 shares have been registered with the Securities and Exchange Commission for that purpose. Under the plan, approximately 780,000 shares had been issued by the Company as of December 31, 1997. Since the third quarter of 1996, the Company has been buying shares on the open market to satisfy plan requirements. The Company has a Performance Stock Program that provides for an aggregate maximum of up to 50,000 shares of Common Stock of the Company to be issued as awards of restricted stock to eligible employees of CWC, conditioned on the attainment of performance goals established by the Salary Committee. Under the plan approximately 24,400 shares, 3,753 of which are restricted, and 2,781 of which are common stock equivalent shares had been issued by the Company as of December 31, 1997. The Company has an Employee Savings 401-K Match Plan. Under the Plan approximately 12,400 shares of Common Stock had been issued by the Company as of December 31, 1997. 32 Page 32 CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY SUPPLEMENTAL INFORMATION (Unaudited)
SELECTED FINANCIAL DATA (Thousands of dollars except where indicated) Years Ended December 31, 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME Operating Revenues $ 38,501 $ 38,592 $ 39,350 $ 38,129 $ 38,131 Operating Expenses $ 28,167 $ 28,464 $ 29,328 $ 28,474 $ 28,148 Operating Income $ 10,334 $ 10,128 $ 10,022 $ 9,655 $ 9,983 Interest and Debt Expense $ 4,304 $ 3,967 $ 3,946 $ 3,940 $ 4,338 Net Income Applicable to Common Stock $ 6,766 $ 6,565 $ 6,325 $ 5,842 $ 5,529 Weighted Average Common Shares Outstanding 3,016,279 2,997,337 2,918,417 2,812,456 2,769,347 Basic Earnings Per Average Common Share $ 224.00 $ 2.19 $ 2.17 $ 2.08 $ 2.00 Number of Shares Outstanding at Year End 3,018,424 3,012,083 2,966,757 2,870,559 2,789,977 ROE on Year End Common Equity 12.1% 12.1% 12.2% 12.2% 12.2% Cash Dividends Paid Per Common Share $ 1.73 $ 1.70 $ 1.68 $ 1.65 $ 1.64 Dividend Payout Ratio 77.2% 77.6% 77.4% 79.3% 82.0% BALANCE SHEET Common Stockholders' Equity $ 56,069 $ 54,395 $ 51,788 $ 47,983 $ 45,160 Long-Term Debt $ 54,532 $ 54,430 $ 54,460 $ 54,600 $ 51,600 Preferred Stock (Consolidated, Excluding Current Maturities) $ 772 $ 772 $ 772 $ 772 $ 3,748 - ----------------------------------------------------------------------------------------------------------------------------------- Total Capitalization $ 111,373 $ 109,597 $ 107,020 $ 103,355 $ 100,508 Stockholders' Equity (Includes Preferred Stock) 51% 50% 49% 47% 49% Long-Term Debt 49% 50% 51% 53% 51% Net Utility Plant $ 163,757 $ 153,898 $ 146,536 $ 140,784 $ 137,568 Book Value - Per Common Share $ 18.57 $ 18.06 $ 17.46 $ 16.72 $ 16.19 OPERATING DATA (Thousands of dollars) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- REVENUE CLASS Residential $ 24,476 $ 24,485 $ 25,147 $ 24,488 $ 24,574 Commercial 4,633 4,716 4,852 4,696 4,745 Industrial 1,850 1,861 1,868 1,922 1,851 Public Authority 1,057 1,050 1,090 893 903 Fire Protection 6,197 6,226 6,129 6,021 5,967 Other (including non-metered accounts) 288 254 264 109 91 - ----------------------------------------------------------------------------------------------------------------------------------- Total Operating Revenues $ 38,501 $ 38,592 $ 39,350 $ 38,129 $ 38,131 =================================================================================================================================== Number of Customers (Average) 62,415 61,597 60,844 60,082 59,558 Billed Consumption (Millions of Gallons) 5,556 5,427 5,595 5,421 5,450 Number of Employees 157 162 163 164 168
33 Page 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION OVERVIEW Connecticut Water Service, Inc. (the Company) is a non-operating holding company, whose income is derived from The Connecticut Water Company (the Subsidiary). The Subsidiary supplies water to over 63,000 customers in 34 towns throughout the State of Connecticut and is subject to regulation by the Connecticut Department of Public Utility Control (DPUC) regarding financial issues, rates, and operating issues; and various other state and federal regulatory agencies concerning water quality and environmental standards. The Company's 1997 consolidated net income is $6,766,000 or $2.24 a share. This is the Company's 7th consecutive year of increased earnings. The Company paid common dividends of $1.73 a share in 1997. This is the Company's 28th consecutive year of increased dividend per share payments. In 1997 the Company earned a 12.1% return on year end common equity. During the year, the Company also satisfactorily settled a lawsuit filed against parties deemed responsible for contaminating one of its well fields. REGULATORY MATTERS AND INFLATION The Subsidiary's last general rate proceeding was in 1991. The resulting rate decision granted the Subsidiary a 12.7% allowed return on common equity and a 10.74% allowed return on rate base. During 1997 this decision was reopened for the limited purposes of flowing through to customers cost savings related to a reduction in state gross earnings taxes payable by the Subsidiary and allowing the Subsidiary to collect certain costs related to postretirement benefits other than pension. The Subsidiary's rates were reduced approximately 4.5% due to the limited reopened rate proceeding. The Subsidiary's resulting reduction in revenues is expected to be offset by a corresponding reduction in its operating expenses. The Company, like all other businesses, is affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand its service capability. The cumulative effect of inflation results in significantly higher facility replacement costs which must be recovered from future cash flow. The ability of the Subsidiary to recover this increased investment in facilities is dependent upon future revenue increases which are subject to approval by the Connecticut Department of Public Utility Control. Management does not presently plan to petition the DPUC for an increase in permanent rates in 1998. Future economic and financial market conditions, coupled with governmental regulations and fiscal policy, plus other factors which are unpredictable and often beyond the control of the Subsidiary, will influence when the Subsidiary requests a revision to rates charged to its customers. 34 Page 34 OUTLOOK The Company's profitability is primarily attributable to the sale and distribution of water, the amount of which is dependent on seasonal weather fluctuations, particularly during the summer months when water demand will vary with rainfall and temperature levels. Since 1996 the Company has been implementing a new Management Information System (MIS) encompassing operational and administrative applications. In addition to enhanced customer service technology and increased administrative and operational efficiencies, the new system is designed to meet the year 2000 requirements. The integration to the new system is expected to be complete and fully tested prior to the materialization of year 2000 issues. Costs of the new systems have been, and will continue to be capitalized as appropriate. Company operations not directly linked to the MIS are being evaluated and it is expected they will meet all year 2000 requirements. With the 1997 settlement of its lawsuit against parties deemed responsible for contaminating its Reynolds Bridge well field the Company, based upon all facts known at this time, does not foresee any major costs related to environmental matters. Refer to Note 9, Settlement of Contamination Lawsuit, in Notes to Consolidated Financial Statements for more information concerning this matter. RESULTS OF OPERATIONS 1997 COMPARED WITH 1996 Net income applicable to common stock for 1997 increased from that of 1996 by $201,000, or $.05 per average common share, on an increased number of common shares outstanding due primarily to the following: - Operating income increased $206,000 primarily due to increased water sales in 1997 resulting from both the hot, dry summer of 1997, compared to the cool, wet summer of 1996, as well as customer growth through acquisition and expansion within the Company's existing service territory. The elimination of the Connecticut Gross Earnings Tax for water companies on July 1, 1997 had no impact on operating income but did reduce both revenues and operating expenses by approximately $1,000,000 in 1997. - Operating revenues decreased .2% primarily due to: - the overall 4.5% rate reduction during the second half of 1997 is primarily related to the elimination of the Connecticut Gross Earnings Tax for water companies partially offset by 35 Page 35 - a 2.4% increase in the volume of water sold to customers due to the hot, dry 1997 summer weather and an increasing customer base - an increase in unmetered revenues due to higher fire protection billings plus additional unmetered customers from the Point O'Woods acquisition - Operating expenses decreased 1.0% primarily due to: - decreased tax expense primarily resulting from the July 1, 1997 elimination of the Connecticut Gross Earnings Tax partially offset by - a 1997 organizational charge reflecting charges associated with the Subsidiary's 1997 early retirement program. This charge represents the actuarially determined expense for the employees who accepted the offer of early retirement and the administrative costs related to the early retirement plan. - Other income increased $332,000, or 75% primarily due to increased land sales, non-water sales earnings and higher Allowance for Funds Used During Construction (AFUDC). - Interest expense increased $337,000, or 8.5%, primarily due to a higher average balance of interim loans outstanding in 1997 at higher average interest rates. 1996 COMPARED WITH 1995 Net income applicable to common stock for 1996 increased from that of 1995 by $240,000, or $0.02 per average common share, on an increased number of common shares outstanding due primarily to the following: - Operating income increased $106,000 as a result of a $758,000 decrease in operating revenues offset by a $864,000 decrease in operating expense. - The 1.9% decrease in operating revenues is primarily due to the extreme differences in the 1996 and 1995 summer weather. The 1996 summer was wet and cool causing customer water usage to decline, as opposed to the 1995 summer that was extraordinarily hot and dry. - The 2.9% decrease in operating expenses is primarily due to the following: - a reduction in operation expense due to lower production, treatment, and distribution expenses associated with the decline in the volume of water sold - a reduction in administrative expenses and a postponement of non-critical maintenance expenses in response to the decline in revenues due to the wet and cool summer 36 Page 36 - a greater percentage of the Subsidiary's overall labor activity being directed to capital-related projects - a lower effective tax rate in 1996 primarily associated with the flow-through adjustment related to pension costs - Other income increased $155,000 due primarily to increased AFUDC on the Subsidiary's continuing investment in utility plant. LIQUIDITY AND CAPITAL RESOURCES The Subsidiary is in the process of refinancing its Series Q, $10,000,000, 6.9% tax-exempt First Mortgage Bonds, issued in 1991. The coupon interest rate on the new bonds is expected to be approximately 5.25%. Additionally, $8 million of new tax-exempt bonds will be issued during the first quarter of 1998. The proceeds will be used to pay off interim bank loans payable. Interim bank loans payable at year end were $8,811,000, approximately $3,015,000 higher than the same time the prior year. This increase is primarily associated with financing the portion (35%) of the 1997 construction and acquisition program not funded by internally generated funds. The Company elected not to fund any of the 1997 construction expenditures with equity through its DRIP by issuing new shares of common stock, but instead provided DRIP shares through open market purchases and negotiated transactions. Management considers the current $12,000,000 line of credit with three banks are more than adequate to finance any expected short-term borrowing requirements that may arise from operations during 1998. It expects to reduce available lines of credit by at least $3 million during 1998. Interest expense charged on interim bank loans will fluctuate subject to financial market conditions experienced during the year. The Board of Directors has approved a construction budget for 1998 of $5,500,000, net of amounts to be financed by customer advances and contributions in aid of construction. Funds provided by operating activities are expected to finance all of this construction program given normal weather patterns and related operating revenue billings. Refer to Note 10, Utility Plant and Construction Program, in Notes to Consolidated Financial Statements for additional discussion for the Subsidiary's future construction program. 37 Page 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Connecticut Water Service, Inc.: We have audited the accompanying consolidated balance sheets of Connecticut Water Service, Inc. (a Connecticut corporation) and Subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Connecticut Water Service, Inc. and Subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Hartford, Connecticut February 13, 1998 38 Page 38 CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, (In thousands except per share amounts) 1997 1996 1995 - ------------------------------------------------------------------------- -------- -------- -------- Operating Revenues $ 38,501 $ 38,592 $ 39,350 -------- -------- -------- Operating Expenses Operation 13,098 12,964 13,404 Maintenance 1,952 1,664 2,026 Depreciation 3,505 3,315 3,158 Federal Income Taxes 3,661 3,878 3,925 Connecticut Corporation Business Taxes 825 934 1,025 Taxes Other Than Income Taxes 4,702 5,709 5,790 Organizational Charges 424 0 0 -------- -------- -------- Total Operating Expenses 28,167 28,464 29,328 -------- -------- -------- Utility Operating Income 10,334 10,128 10,022 -------- -------- -------- Other Income (Deductions) Interest 122 179 156 Allowance for Funds Used During Construction 575 337 52 Gain on Sale of Property 183 19 65 Non-Water Sales Earnings 174 (3) 55 Miscellaneous Income (Deductions) (65) (69) (8) Taxes on Other Income (215) (21) (33) -------- -------- -------- Total Other Income (Deductions) 774 442 287 -------- -------- -------- Interest and Debt Expenses Interest on Long-Term Debt 3,460 3,460 3,462 Other Interest Charges 656 319 296 Amortization of Debt Expense 188 188 188 -------- -------- -------- Total Interest and Debt Expenses 4,304 3,967 3,946 -------- -------- -------- Net Income Before Preferred Dividends 6,804 6,603 6,363 Preferred Stock Dividend Requirement 38 38 38 -------- -------- -------- Net Income Applicable to Common Stock $ 6,766 $ 6,565 $ 6,325 -------- -------- -------- Weighted Average Common Shares Outstanding 3,016 2,997 2,918 -------- -------- -------- Basic Earnings Per Average Common Share $ 2.24 $ 2.19 $ 2.17 -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 39 Page 39 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, (Thousands of dollars) 1997 1996 1995 - -------------------------------------------------------------- -------- -------- -------- Operating Activities: Net Income Before Preferred Dividends of Parent $ 6,804 $ 6,603 $ 6,363 -------- -------- -------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation (including $119 in 1997, $105 in 1996, and $124 in 1995 charged to other accounts) 3,624 3,420 3,282 Change in Assets and Liabilities: (Increase) Decrease in Accounts Receivable and Accrued Unbilled Revenues (686) 235 (403) (Increase) Decrease in Other Current Assets (22) (32) 811 (Increase) Decrease in Other Non-Current Items 51 (107) 7 Increase (Decrease) in Accounts Payable, Accrued Expenses and Other Current Liabilities 866 (97) 391 Increase in Deferred Income Taxes and Investment Tax Credits, Net 1,062 1,051 1,003 Recoverable Cleanup Costs (net) 2,343 (505) (449) -------- -------- -------- Total Adjustments 7,238 3,965 4,642 -------- -------- -------- Net Cash Provided by Operating Activities 14,042 10,568 11,005 -------- -------- -------- Investing Activities: Gross Additions to Utility Plant (including Allowance For Funds Used During Construction of $575 in 1997, $337 in 1996 and $52 in 1995) (13,546) (10,971) (9,198) -------- -------- -------- Financing Activities: Proceeds from Interim Bank Loans 8,811 5,795 2,646 Repayment of Interim Bank Loans (5,795) (2,646) (2,700) Proceeds from Issuance of Long-Term Debt 132 -- -- Reduction of Long-Term Debt Including Current Portion (30) (30) (140) Proceeds from Issuance of Common Stock 256 1,136 2,410 Retirement of Preferred Stock -- -- (30) Advances, Contributions and Funds from Others for Construction, Net 1,827 1,191 1,081 Costs Incurred to Issue Long-Term Debt, Preferred Stock, and Common Stock (133) -- (33) Cash Dividends Paid (5,253) (5,132) (4,935) -------- -------- -------- Net Cash Provided by (Used in) Financing Activities (185) 314 (1,701) -------- -------- -------- Net Increase (Decrease) in Cash 311 (89) 106 Cash at Beginning of Year 35 124 18 -------- -------- -------- Cash at End of Year $ 346 $ 35 $ 124 -------- -------- -------- Supplemental Disclosures of Cash Flow Information: Cash Paid During the Year for: Interest (Net of Amounts Capitalized) $ 4,370 $ 3,773 $ 3,759 State and Federal Income Taxes $ 3,425 $ 3,715 $ 4,635
The accompanying notes are an integral part of these consolidated financial statements. 40 Page 40 CONSOLIDATED BALANCE SHEETS
December 31, (Thousands of dollars) 1997 1996 - ---------------------------------------------------------------- --------- --------- ASSETS Utility Plant Utility Plant $ 207,476 $ 195,223 Construction Work in Progress 9,882 8,940 Utility Plant Acquisition Adjustments (1,255) (1,206) --------- --------- 216,103 202,957 Accumulated Provision for Depreciation (52,346) (49,059) --------- --------- Net Utility Plant 163,757 153,898 --------- --------- Investments Unconsolidated Subsidiary at Underlying Equity 138 38 Other 1,432 1,252 --------- --------- Total Investments 1,570 1,290 --------- --------- Current Assets Cash 346 35 Accounts Receivable (Less Allowance, 1997 - $126; 1996 - $140) 4,568 3,736 Accrued Unbilled Revenues 2,684 2,830 Materials and Supplies, at Average Cost 643 628 Prepayments and Other Current Assets 115 108 --------- --------- Total Current Assets 8,356 7,337 --------- --------- Deferred Charges Unamortized Debt Issuance Expense 5,023 5,212 Income Taxes 8,623 9,528 Postretirement Benefits Other Than Pension 1,220 1,036 Recoverable Clean-Up Costs 0 5,400 Other Costs 728 939 --------- --------- Total Deferred Charges 15,594 22,115 --------- --------- Total Assets $ 189,277 $ 184,640 --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. 41 Page 41
December 31, (Thousands of dollars) 1997 1996 - ---------------------------------------------------- -------- -------- CAPITALIZATION AND LIABILITIES Capitalization Common Stockholders' Equity: Common Stock $ 42,579 $ 42,456 Retained Earnings 13,490 11,939 Preferred Stock 772 772 Long-Term Debt 54,532 54,430 -------- -------- Total Capitalization 111,373 109,597 -------- -------- Current Liabilities Interim Bank Loans Payable 8,811 5,795 Accounts Payable 6,052 4,375 Accrued Taxes 1,014 1,536 Accrued Interest 709 1,255 Current Portion of Accrued Clean-Up Costs 0 300 Other 2,208 1,951 -------- -------- Total Current Liabilities 18,794 15,212 -------- -------- Accrued Clean-Up Costs 0 2,757 -------- -------- Advances for Construction 15,203 13,600 -------- -------- Contributions in Aid of Construction 18,750 18,563 -------- -------- Deferred Federal Income Taxes 13,838 12,717 -------- -------- Unfunded Future Income Taxes 8,000 9,000 -------- -------- Unfunded Postretirement Benefits Other Than Pensions 1,220 1,036 -------- -------- Unamortized Investment Tax Credits 2,099 2,158 -------- -------- Total Capitalization and Liabilities $189,277 $184,640 -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 42 Page 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION - Connecticut Water Service, Inc. (the Company) is the parent company of The Connecticut Water Company (the Subsidiary). Intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements. PUBLIC UTILITY REGULATION - The Subsidiary is subject to regulation for rates and other matters by the Connecticut Department of Public Utility Control (DPUC) and follows accounting policies prescribed by the DPUC. The Company prepares its financial statements in accordance with generally accepted accounting principles which includes the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," (FAS 71). FAS 71 requires a cost-based, rate-regulated enterprise such as the Subsidiary to reflect the impact of regulatory decisions in its financial statements. The DPUC, through the rate regulation process, can create regulatory assets that result when costs are allowed for ratemaking purposes in a period other than the period in which the costs would be charged to expense by an unregulated enterprise. In accordance with FAS 71, the Subsidiary has recorded regulatory assets or liabilities as appropriate, primarily related to income taxes and postretirement benefits costs. The specific amounts related to these items are disclosed in the consolidated balance sheets. The Subsidiary continues to be subject to cost-of-service based rate regulation by the DPUC. Based upon current regulation and recent regulatory decisions, the Company believes that its use of regulatory accounting is appropriate and in accordance with the provisions of FAS 71. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. REVENUES - The Subsidiary accrues an estimate for the amount of revenues relating to sales unbilled at the end of each quarter. Generally, all customers are billed quarterly, except larger commercial and industrial customers, and public fire protection customers, who are billed monthly. Substantially all customers, except fire protection customers, are metered. Public fire protection charges are based on the length and diameter of the water main and number of hydrants in service. Private fire protection charges are based on the diameter of the connection to the water main. 43 Page 43 UTILITY PLANT - Utility plant is stated at original cost of such property when first devoted to public service. The difference between the original cost and the cost to the Subsidiary is charged or credited to utility plant acquisition adjustments. Utility plant accounts are charged with the cost of improvements and replacements of property including an allowance for funds used during construction. Retired or disposed of depreciable plant is charged to accumulated provision for depreciation together with any costs applicable to retirement, less any salvage received. Maintenance of utility plant is charged to expense. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION - Allowance for Funds Used During Construction (AFUDC) generally represents the cost of funds used to finance the construction of the Subsidiary's utility plant. Generally, utility plant under construction is not recognized as part of the Subsidiary's rate base for ratemaking purposes until facilities are placed into service, and accordingly, the Subsidiary charges AFUDC to the construction cost of utility plant. Capitalized AFUDC, which does not represent current cash income, is recovered through rates over the service lives of the facilities. In order for certain acquisitions of failing water systems not to degrade the Subsidiary's earnings, the Subsidiary has requested that the DPUC allow it to record AFUDC on its investments in these systems. Starting with the 1995 DPUC decision which approved the Subsidiary's acquisition of the Sound View Water System, the DPUC has allowed the Subsidiary to capitalize financing costs relating to several of its acquisitions until its next general rate proceeding. Capitalized financing costs relating to these acquisitions amounted to $256,000 in 1997 and $155,000 in 1996. The Subsidiary's allowed rate of return on rate base is used to calculate AFUDC. DEPRECIATION - Depreciation is computed on a straight line basis at various rates, approved by the DPUC, estimated to be sufficient to provide for the recovery of the investment in utility plant over its useful life. Water treatment facilities are depreciated using a 2.5% composite rate, while most other utility plant is depreciated at a composite rate of 1.6%. The depreciation rates, based on the average balance of depreciable property, were 1.9% for 1997, 1996 and 1995. CUSTOMERS' ADVANCES FOR CONSTRUCTION AND CONTRIBUTIONS IN AID OF CONSTRUCTION - Under the terms of construction contracts with real estate developers and others, the Subsidiary receives advances for the costs of new main installations. Refunds are made, without interest, as services are connected to the main, over periods not exceeding fifteen years and not in excess of the original advance. Unrefunded balances, at the end of the contract period, are credited to contributions in aid of construction (CIAC) and are no longer refundable. 44 Page 44 INCOME TAXES - The Company provided deferred taxes for all temporary book-tax differences using the liability method. Under the liability method, deferred income taxes are recognized at currently enacted income tax rates to reflect the tax effect of temporary differences between the financial reporting and tax bases of assets and liabilities. Such temporary differences are the result of provisions in the income tax law that either require or permit certain items to be reported on the income tax return in a different period than they are reported in the financial statements. To the extent such income taxes increase or decrease future rates, an offsetting regulatory asset and liability have been recorded in the accompanying consolidated balance sheets. The Company believes that all deferred income tax assets will be realized in the future. Approximately $500,000 of the December 31, 1997 and $1,000,000 of the 1996 unfunded future income taxes are related to deferred Federal income taxes. The remaining balance of the unfunded future income taxes is related to deferred State income taxes. Deferred Federal income taxes consist primarily of amounts that have been provided for accelerated depreciation subsequent to 1981, as required by Federal income tax regulations. Deferred taxes have also been provided for temporary differences in the recognition of certain expenses for tax and financial statement purposes as allowed by DPUC ratemaking policies. Connecticut Corporation Business Taxes have been reflected primarily using the flow-through method of accounting for temporary differences in accordance with required DPUC ratemaking policies. MUNICIPAL TAXES - Municipal taxes are expensed over the 12 month period beginning on July 1 following the lien date, corresponding with the period in which the municipal services are provided. OTHER DEFERRED COSTS - In accordance with DPUC ratemaking procedures, costs which benefit future periods, such as tank painting, are expensed over the periods they benefit. UNAMORTIZED DEBT ISSUANCE EXPENSE - The issuance costs of long-term debt, including the remaining balance of issuance costs on long-term debt issues that have been refinanced prior to maturity and related call premiums, are amortized over the respective lives of the outstanding debt, as approved by the DPUC. EARNINGS PER SHARE - Earnings per share is computed on the weighted average number of common shares outstanding during each year. FAS 128, which became effective for 1997, specifies the computation, presentation and disclosure requirements for earnings per share. The adoption of FAS 128 did not have an impact on earnings per share and the basic and fully diluted earnings per share are the same amounts. 45 Page 45 NOTE 2: INCOME TAX EXPENSE Income Tax Expense is comprised of the following:
(Thousands of dollars) 1997 1996 1995 - --------------------------------------------------------------------------------------------- Federal Classified as Operating Expense $ 3,661 $ 3,878 $ 3,925 Federal Classified as Other Income 143 30 (13) - --------------------------------------------------------------------------------------------- Total Federal Income Tax Expense 3,804 3,908 3,912 - --------------------------------------------------------------------------------------------- State Classified as Operating Expense 825 934 1,025 State Classified as Other Income 63 (27) 10 - --------------------------------------------------------------------------------------------- Total State Income Tax Expense 888 907 1,035 - --------------------------------------------------------------------------------------------- Total Income Tax Expense $ 4,692 $ 4,815 $ 4,947 ============================================================================================= The components of the Federal and State income tax provisions are: Current: Federal $ 2,742 $ 2,833 $ 2,800 State 888 907 1,035 - --------------------------------------------------------------------------------------------- Total Current 3,630 3,740 3,915 - --------------------------------------------------------------------------------------------- Deferred Income Taxes, Net: Federal Investment Tax Credit (59) (59) (59) Capitalized Interest 47 38 24 Depreciation 1,074 1,071 1,037 Advances and CIAC - 25 30 Total Deferred Income Taxes, Net 1,062 1,075 1,032 - --------------------------------------------------------------------------------------------- Total $ 4,692 $ 4,815 $ 4,947 - --------------------------------------------------------------------------------------------- ============================================================================================= The calculation of Pre-Tax Income is as follows: Pre-Tax Income Net Income Before Preferred Dividends of Parent $ 6,804 $ 6,603 $ 6,363 Income Taxes 4,692 4,815 4,947 - --------------------------------------------------------------------------------------------- Total Pre-Tax Income $11,496 $11,418 $11,310 =============================================================================================
In accordance with required regulatory treatment, deferred income taxes are not provided for certain timing differences. This treatment, along with other items, causes differences between the statutory income tax rate and the effective income tax rate. The differences between the effective income tax rate recorded by the Company and the stautory Federal tax rate are as follows:
1997 1996 1995 - --------------------------------------------------------------------------------------------- Federal Statutory Income Tax Rate 34.0% 34.0% 34.0% Tax Effect of Differences: State Income Taxes Net of Federal Benefit 5.1% 5.3% 6.0% Depreciation 1.5% 1.5% 1.5% Pension Costs .6% .6% 1.0% Other (.4%) .8% 1.2% - --------------------------------------------------------------------------------------------- Effective Income Tax Rate 40.8% 42.2% 43.7% =============================================================================================
46 Page 46 NOTE 3: COMMON STOCK The Company has 7,500,000 authorized shares of common stock, no par value. A summary of the changes in the common stock accounts for the period January 1, 1995 through December 31, 1997, appears below:
Issuance (Thousands of dollars except share amounts) Shares Amount Expense Total - ------------------------------------------- --------- -------- ------- -------- Balance, January 1, 1995 2,870,559 $40,126 $(1,183) $ 38,943 Stock issued through Dividend Reinvestment Plan 87,807 2,199 (33) 2,166 Stock issued through Performance Stock Program 6,369 160 -- 160 Stock issued to Employee Savings 401-K Match Plan 2,022 51 -- 51 --------- ------- ------- -------- Balance, December 31, 1995 2,966,757 42,536 (1,216) 41,320 Stock issued through Dividend Reinvestment Plan 36,914 940 -- 940 Stock issued through Performance Stock Program 4,907 100 -- 100 Stock issued to Employee Savings 401-K Match Plan 3,505 96 -- 96 --------- ------- ------- -------- Balance, December 31, 1996 3,012,083 43,672 (1,216) 42,456 Dividend Reinvestment Plan -- -- (133) (133) Stock and equivalents issued through Performance Stock Program 3,684 178 -- 178 Stock issued to Employee Savings 401-K Match Plan 2,657 78 -- 78 --------- ------- ------- -------- Balance, December 31, 1997 (1) 3,018,424 $43,928 $(1,349) $ 42,579 ========= ======= ======= ========
(1) Includes 3,753 restricted and 2,781 common stock equivalent shares issued through the Performance Stock Program. In 1988 the Board of Directors authorized a dividend distribution of one right to purchase Common Stock (Right) for each outstanding share of Common Stock. Each Right entitles the registered holder under certain circumstances to purchase from the Company one share of Common Stock (or substitute equity or debt securities) at an exercise price (subject to antidilution adjustments) of $50 per share, or under other circumstances, common stock or other securities or assets of an acquiring entity or of the Company. The Rights are not currently exercisable or separately transferable apart from the Common Stock. The Rights can be redeemed by the Board of Directors under certain circumstances at a price of $.01 per Right. The agreement pursuant to which the Rights were issued may be amended by the Board of Directors under certain circumstances. The Rights expire on October 11, 1998. The Company may not pay any dividends on its Common Stock unless full cumulative dividends to the preceding dividend date for all outstanding shares of Preferred Stock of the Company have been paid or set aside for payment. All such preferred stock dividends have been paid. 47 Page 47 NOTE 4: ANALYSIS OF RETAINED EARNINGS The summary of the changes in Retained Earnings for the period January 1, 1995 through December 31, 1997, appears below:
(Thousands of dollars) 1997 1996 1995 - ---------------------------------------------------- ------- ------- ------- Balance at Beginning of Year $11,939 $10,468 $ 9,040 Income Before Preferred Stock Dividends of Company 6,804 6,603 6,363 ------- ------- ------- 18,743 17,071 15,403 ------- ------- ------- Dividends Declared: Cumulative Preferred, Series A, $.80 Per Share $ 12 12 12 Cumulative Preferred, Series $.90, $.90 Per Share 26 26 26 Common Stock: 1997 $1.73 Per Share 5,215 -- -- 1996 $1.70 Per Share -- 5,094 -- 1995 $1.68 Per Share -- -- 4,897 ------- ------- ------- 5,253 5,132 4,935 ------- ------- ------- Balance at End of Year $13,490 $11,939 $10,468 ======= ======= =======
NOTE 5: FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments. CASH - The carrying amount approximates fair value. FIRST MORTGAGE BONDS - The fair value of the Company's fixed rate long-term debt is based upon borrowing rates currently available to the Company. As of December 31, 1997 and 1996, the estimated fair value of the Company's long-term debt was $61,000,000 and $55,800,000, respectively, as compared to the carrying amounts of $54,532,000 and $54,430,000, respectively. The fair values shown above have been reported to meet the disclosure requirements of Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Values of Financial Instruments" and do not purport to represent the amounts at which those obligations would be settled. 48 Page 48 NOTE 6: LONG-TERM DEBT Long-Term Debt at December 31, consisted of the following:
(Thousands of dollars) 1997 1996 - ----------------------------------------------------- -------- ------- The Connecticut Water Company First Mortgage Bonds: 6.9% Series Q, Due 2021 $ 10,000 $10,000 5.875% Series R, Due 2022 14,800 14,830 6.65% Series S, Due 2020 8,000 8,000 5.75% Series T, Due 2028 5,000 5,000 5.3% Series U, Due 2028 4,550 4,550 6.94% Series V, Due 2029 12,050 12,050 -------- ------- 54,400 54,430 Other 5.5% Unsecured Promissory Note, Due 2002 161 -- Less Current Portion (29) -- -------- ------- 132 -- Total Long-Term Debt $ 54,532 $54,430 ======== =======
Substantially all utility plant is pledged as collateral for the Subsidiary's long-term debt. There are no mandatory sinking fund payments required on the outstanding First Mortgage Bonds at December 31, 1997. However, the Series Q and R First Mortgage Bonds provide for an estate redemption right whereby the estate of deceased bondholders or surviving joint owners may submit bonds to the Trustee for redemption at par subject to a $25,000 per individual holder and a 3% annual aggregate limitation. The call price of Series Q and R bonds will reduce annually until the years 2002 and 2003, respectively, when the call prices become 100%. Series Q bonds are callable for redemption at 102.5% through July 31, 1998 then at 102% from August 1, 1998 through July 31, 1999. Series R bonds are callable for redemption at 103% through August 31, 1998 then at 102.5% from September 1, 1998 through August 31, 1999. The other outstanding bonds may be initially called for redemption by the Company at the following dates and prices - Series S, December 15, 2003 at 102%; Series T, July 1, 2003 and Series U, September 1, 2003 at 100% plus accrued interest to the date of redemption; Series V, January 1, 2004 at 103.5%. During 1997 the Subsidiary issued a $163,000, 5.5% unsecured promissory note as part of the purchase price of the Point O'Woods Water System acquisition. This 5 year note requires the Subsidiary to make monthly payments of interest and principal totalling $37,000 annually. In December 1997 the Subsidiary initiated the process of refinancing its Series Q, First Mortgage Bonds with lower interest, tax exempt, unsecured bonds, and refinancing $8,000,000 of interim bank loans with tax exempt, unsecured, long term bonds. This $18,000,000 financing and refinancing is expected to close in March or April 1998. 49 Page 49 NOTE 7: PREFERRED STOCK Preferred Stock at December 31, consisted of the following:
(Thousands of dollars) 1997 1996 - -------------------------------------------------------------------- ---- ---- Cumulative Series A Voting, $20 Par Value; Authorized Issued and Outstanding 15,000 Shares $300 $300 Cumulative Series $.90 Non-Voting, $16 Par Value; Authorized 50,000 Shares, Issued and Outstanding 29,499 Shares 472 472 ---- ---- Total $772 $772 ==== ====
All or any part of any series of either class of the Company's issued Preferred Stock may be called for redemption by the Company at any time. The per share redemption prices of the Series A and Series $.90 Preferred Stock, if called by the Company, are $21.00 and $16.00, respectively. The Company is authorized to issue 400,000 shares of an additional class of Preferred Stock, $25 par value, the general preferences, voting powers, restrictions and qualifications of which are similar to the Company's existing Preferred Stock. No shares of the $25 par value Preferred Stock have been issued. The Company is also authorized to issue 1,000,000 shares of $1 par value preference stock, junior to the Company's existing Preferred Stock in rights to dividends and upon liquidation of the Company. No shares of the preference stock have been issued. NOTE 8: BANK LINES OF CREDIT A $12,000,000 line of credit is provided by three banks. Bank commitment fees of approximately $20,000, $15,000, and $12,000 were paid in 1997, 1996, and 1995, respectively, on the lines of credit. At December 31, 1997 and 1996, the weighted average interest rates on short-term borrowings outstanding were 6.22% and 5.85%, respectively. NOTE 9: RECOVERABLE CLEAN-UP COSTS In November, 1997 the Subsidiary settled its lawsuit against the two parties alleged responsible for the 1992 contamination of its Reynolds Bridge well field in Thomaston, Connecticut. The settlement agreement provides the Subsidiary with funds to cover expenses already incurred as well as a cushion for potential future expenses stemming from the contamination. The settlement agreement requires said two parties to complete remediation of the site and binds one of the parties to reimburse the Subsidiary for specific ongoing costs incurred in operation of this well site as well as additional costs required to provide safe, potable water to the customers served by this portion of the Subsidiary's distribution system. As a result of this settlement, the Company no longer has a liability for future clean-up costs. 50 Page 50 NOTE 10: UTILITY PLANT AND CONSTRUCTION PROGRAM The components of utility plant and equipment at December 31, are as follows:
(Thousands of dollars) 1997 1996 - ------------------------------ -------- -------- Source of Supply $ 17,327 $ 15,710 Pumping 14,210 11,080 Water Treatment 38,250 35,548 Transmission and Distribution 124,105 120,244 General (including intangible) 11,390 10,465 Held for Future Use 2,194 2,176 -------- -------- Total $207,476 $195,223 ======== ========
The amounts of depreciable plant at December 31, 1997 and 1996 included in total plant were $196,286,000 and $185,733,000, respectively. The Subsidiary is engaged in a continuous construction program. The Subsidiary's estimated annual capital expenditures, net of amounts financed by customer advances and contributions in aid of construction, are expected to be $5,500,000 during 1998, $8,000,000 during 1999, and $7,600,000 in 2000. These projections include costs of refurbishing the Rockville Water Treatment Plant of $1,300,000 in 1998 and $277,000 in 1999. The projections also include $385,000 in 1998 to make improvements to the Point O'Woods Water System that the Subsidiary acquired in 1997. During the period 2001 to 2002, construction expenditures for routine improvements to the water distribution system are expected to be approximately $5,000,000 each year. NOTE 11: TAXES OTHER THAN INCOME TAXES Taxes Other than Income Taxes consist of the following:
(Thousands of dollars) 1997 1996 1995 - ---------------------------------- ------ ------ ------ Municipal Property Taxes $3,270 $3,284 $3,284 Payroll Taxes 501 495 539 Connecticut Gross Earnings Tax (A) 931 1,930 1,967 ------ ------ ------ Total $4,702 $5,709 $5,790 ====== ====== ======
(A) This tax was legislatively eliminated for water companies effective July 1, 1997. The Subsidiary's rates were correspondingly reduced at the same time. 51 Page 51 NOTE 12: PENSION AND OTHER EMPLOYEE BENEFITS PENSION - The Subsidiary has a trusteed, non-contributory defined benefit retirement plan (the Pension Plan) which covers all employees who have completed one year of service. Benefits under the Pension Plan are based on credited years of service and "average earnings", as defined in the Pension Plan. The Subsidiary's policy is to fund accrued pension costs as permitted by Federal income tax regulations. Funding of $153,000 was made for 1996. No funding was required for 1997. The table below sets forth the Pension Plan's funded status and amounts recognized in the Company's year end Balance Sheets.
(Thousands of dollars) 1997 1996 - -------------------------------------------------- -------- -------- Actuarial Present Value of Benefit Obligations: Vested Benefit Obligation $ 9,857 $ 7,243 Accumulated Benefit Obligation 10,052 7,500 Projected Benefit Obligation 11,472 9,414 Pension Plan Assets at Fair Value, Primarily Equity Securities and U.S. Bonds 14,851 12,681 Projected Benefit Obligation (11,472) (9,414) -------- -------- Pension Plan Assets in Excess of (Under) Projected Benefit Obligation 3,379 3,267 Add (Deduct): Unrecognized Net Gain From Past Experience Different From That Assumed and Effects of Changes in Assumptions (5,050) (4,465) Unrecognized Net Transition Asset at January 1, 1986 Being Recognized Over 15 Years (129) (162) Unrecognized Prior Service Cost 250 282 -------- -------- Prepaid (Accrued) Pension Cost as of December 31 $ (1,550) $ (1,078) ======== ========
Net periodic pension cost included the following components:
(Thousands of dollars) 1997 1996 1995 - ---------------------------------------------- ------- ------- ------- Service Cost-Benefits Earned During the Period $ 392 $ 463 $ 383 Interest Cost on Projected Benefit Obligation 740 737 668 Actual Return on Pension Plan Assets (2,670) (1,718) (2,493) Deferred Investment Gain (Loss) 1,835 958 1,801 Amortization of: Unrecognized Net Transition Asset (32) (32) (32) Unrecognized Net (Gain) Loss 32 32 (114) Unrecognized Prior Service Cost (190) (64) 32 ------- ------- ------- Subtotal 107 376 245 FAS 88 Early Retirement Costs 366 0 0 ------- ------- ------- Total $ 473 $ 376 $ 245 ======= ======= =======
52 Page 52 The actuarial present value of the projected benefit obligation was determined based on the following assumptions:
1997 1996 1995 ---- ---- ---- Weighted Average Discount Rate 7.25% 7.75% 7.25% Rate of Increase in Future Compensation Levels 4.5 % 4.5% 5.3% The Long-Term Expected Rate of Return on Plan Assets Used in the Determination of Pension Costs 8.0 % 8.0% 8.0%
The weighted average discount rate assumption is based on the return provided by high quality fixed income investments at year end. This discount rate assumption will likely change annually. The wage rate assumption and the rate of return on plan assets are more long-term assumptions which may be revised to reflect changes in economic conditions. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - The Subsidiary provides additional pension benefits to senior management through a supplemental executive retirement plan. At December 31, 1997 the actuarial present value of the projected benefit obligation was $465,000. Expense associated with this plan was $99,000 for 1997, $115,000 for 1996, and $181,000 for 1995. POSTRETIREMENT BENEFITS OTHER THAN PENSION (PBOP) - In addition to providing pension benefits, the Subsidiary provides certain medical, dental and life insurance benefits to retired employees partially funded by a 501(c)(9) Voluntary Employee Beneficiary Association Trust (VEBA) that has been approved by the DPUC. Substantially all of the Subsidiary's employees may become eligible for these benefits if they retire from the Company on or after age 55 with 10 years of service with the Subsidiary. The contributions for calendar years 1997, 1996, and 1995 were $317,000, $265,000, and $250,000, respectively. A deferred regulatory asset has been recorded to reflect the amount which represents the future operating revenues expected to be recovered in customers rates under FAS 106. In 1997 the Subsidiary requested and received approval from the DPUC to include FAS 106 costs in customer rates. The DPUC's 1997 limited reopener of the Subsidiary's general rate proceeding allowed the Subsidiary to increase customer rates $208,000 annually for FAS 106 costs. The Subsidiary's current rates now allow for recovery of $473,000 annually for postretirement benefits costs other than pension. The Company has elected to recognize the transition obligation on a delayed basis over a period equal to the plan participants' 21.6 years of average future service. 53 Page 53 The table below sets forth the PBOP plans' funded status and unfunded amounts recognized in the Company's 1997 and 1996 year end Balance Sheets.
(Thousands of dollars) 1997 1996 - ---------------------------------------------------- ------- ------- Accumulated Postretirement Benefit Obligation (APBO): Current Retirees $(2,400) $(1,928) Active Employees Fully Eligible for Benefits (740) (704) Other Active Employees (767) (565) ------- ------- Total (3,907) (3,197) Fair Value of Assets 1,558 1,290 ------- ------- APBO in Excess of Fair Value of Assets (2,349) (1,907) ------- ------- Unrecognized Amounts: Transition Obligation 2,474 2,638 Net Loss (Gain) (1,345) (1,767) ------- ------- Total 1,129 871 ------- ------- Unfunded PBOP at December 31 $ 1,220 $ 1,036 ======= =======
Net periodic PBOP costs include the following components:
(Thousands of dollars) 1997 1996 1995 - --------------------------------------------------------------- ----- ----- ----- Service Cost - Benefits Attributed to Service During the Period $ 164 $ 175 $ 150 Interest Cost 272 235 249 Actual Return on Assets (217) (133) (182) Amortization of Transition Obligation 165 165 165 Amortization of Losses (Gains) (127) (133) (97) Deferral of Asset (Loss) Gain During the Year 163 87 140 ----- ----- ----- Net Periodic PBOP Costs 420 396 425 FAS88 Early Retirement Costs 81 -- -- ----- ----- ----- Total PBOP Cost $ 501 $ 396 $ 425 ===== ====== =====
The actuarial present value of the projected benefit obligation was determined based on the following assumptions:
1997 1996 1995 ---- ---- ---- Weighted Average Discount Rate 7.25 % 7.75% 7.25% Expected Long-Term After Tax Return on PBOP Assets 5.0 % 5.0 % 5.0 %
In determining the accumulated postretirement benefit obligation, health care cost trends of 7% were assumed for 1997, grading down to 6% in 1998 and 5.5% in 1999 and after. Health care cost trend rates have a significant effect on the accumulated postretirement benefit obligation and net periodic cost. A one-percentage-point increase in the assumed health care cost trend rates would increase the accumulated postretirement benefit obligation at December 31, 1997 by $453,000 and would increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $62,000. Accordingly, subsequent changes would increase or decrease the regulatory assets and liabilities discussed above. 54 Page 54 SAVINGS PLAN - The Subsidiary maintains an employee savings plan which allows participants to contribute from 1% to 10% of pre-tax compensation. The Subsidiary matches either 25 or 50 cents for each dollar contributed by the employee up to 3% of the employees' compensation depending on the Company's earnings per average common share (EPS). If EPS in the prior year exceeds 110% of dividends paid per common share, the applicable percentage is 50%; otherwise, the match is 25%. The Subsidiary's contribution charged to expense in 1997, 1996 and 1995 was $78,000, $78,000 and $71,000, respectively, in each case based on a 50% match. PERFORMANCE STOCK PROGRAM - The Company has a Performance Stock Program whereby restricted shares of Common Stock may be awarded annually to Officers of the Subsidiary. When the goals established by the Compensation Committee have been attained, the restrictions on the stock are removed. Amounts charged to expense pursuant to this plan were $173,000, $100,000, and $160,000 for 1997, 1996 and 1995, respectively. NOTE 13: QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for the years ended December 31, 1997 and 1996 appears below:
Net Income Earnings Utility Applicable to Per Average Operating Revenues Operating Income Common Stock Common Share - ---------------------------------------------------------------------------------------------------------------------------------- (Thousands of dollars except per share amounts) 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- First Quarter $ 9,012 $ 9,087 $ 2,249 $ 2,070 $1,448 $1,178 $ 0.48 $ 0.40 Second Quarter 9,633 9,276 2,056 2,085 1,191 1,215 0.39 0.41 Third Quarter 10,855 10,981 3,555 3,425 2,654 2,533 0.88 0.84 Fourth Quarter 9,001 9,248 2,474 2,548 1,473 1,639 0.49 0.54 ------- ------- ------- ------- ------ ------ ------ ------ Year $38,501 $38,592 $10,334 $10,128 $6,766 $6,565 $ 2.24 $ 2.19
ITEM 9. DISAGREEMENTS ON ACCOUNTING AT FINANCIAL DISCLOSURE None. 55 Page 55 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to General Instruction G(3), the information called for by Items 10, (except for information concerning the executive officers of the Company) 11, 12, and 13 is hereby incorporated by reference from the Company's definitive proxy statement filed by EDGAR on or about March 18, 1998. Information concerning the executive officers of the Company is included as Item 4.1 of this report. 56 Page 56 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) Documents filed as part of this report: (1)Consolidated Financial Statements: Page Number in this Report -------------- Report to Independent Auditors.........................................37 Consolidated Statements of Income - December 31, 1997, 1996 and 1995.......................38 Consolidated Statements of Cash Flows - December 31, 1997, 1996 and 1995.......................39 Consolidated Balance Sheets - December 31, 1997 and 1996..........................40-41 Notes to Consolidated Financial Statements..........................42-54 (2) Financial Statement Schedules for the years ended December 31, 1997, 1996 and 1995: Report of Independent Public Accountants on Schedules Schedule II - Valuation and Qualifying Accounts All other schedules provided for in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because of the absence of conditions under which they are required or because the required information is set forth in the financial statements or notes thereto. (3)Exhibits: Exhibits heretofore filed with the Securities and Exchange Commission as indicated below are incorporated herein by reference and made a part hereof as if filed herewith. Exhibits marked by asterisk (*) are being filed herewith. 57 Page 57 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1 Certificate of Incorporation of Connecticut Water Service, Inc. amended and restated September 15, 1988.(Exhibit 3.1 to Form 10-K for year ended December 31, 1989) 3.2 Certificate Amending Certificate of Incorporation of Connecticut Water Service, Inc. creating $25 par value Preferred Stock dated September 5, 1989. (Exhibit 3.1a to Form 10-K for year ended December 31, 1989) 3.3 By-Laws, as amended, of Connecticut Water Service, Inc. as amended January 18, 1995. (Exhibit 3.3 to Form 10-K for year ended December 31, 1994) 3.4 Charter of The Connecticut Water Company and amendments thereto (Certificate of Incorporation) through November 13, 1960. (Exhibit 3.2 to Registration Statement No. 2-61843) 3.5 Articles of General Preferences, Voting Powers, Restrictions and Qualifications of the Preferred Stock of The Connecticut Water Company. (Exhibit 3.3 to Registration Statement No. 2-61843) 3.6 Certificate Amending Certificate of Incorporation of The Connecticut Water Company effective May 4, 1970 increasing authorized Preferred Stock. (Exhibit 3.4 to Registration Statement No. 2-61843) 3.7 Resolutions of stockholders of The Connecticut Water Company adopted November 14, 1960 creating Preferred Stock, 5 7/8% Series. (Exhibit 3.5 to Registration Statement No. 2-61843) 3.8 Certificate Amending Certificate of Incorporation of The Connecticut Water Company dated May 8, 1965 creating Preferred Stock, 4 3/4% Series. (Exhibit 3.6 to Registration Statement No. 2-61843) 3.9 Certificate Amending Certificate of Incorporation of The Connecticut Water Company dated June 20, 1968 creating Preferred Stock, 7% Series. (Exhibit 3.6 to Registration Statement No. 2-61843) 3.10 Purchase Agreement dated May 20 1968 with respect to sale of Preferred Stock, 7% Series, including Common Stock dividend restriction in Section 6(e) thereof of The Connecticut Water Company (Exhibit 3.8 to Registration Statement No. 2-61843) 3.11 Certificate Amending Certificate of Incorporation of The Connecticut Water Company dated April 10, 1975. (Exhibit 3.9 to Registration Statement No. 2-54353) 58 Page 58 3.12 Certificate Amending Certificate of Incorporation of The Connecticut Water Company dated December 22, 1980, creating Preferred Stock, 12 1/2% Series. (Exhibit 2(k) to Form 10-K for the year ended December 31, 1980) 3.13 Purchase Agreement dated December 1, 1980 with respect to sale of Preferred Stock, 12 1/2% Series. (Exhibit 2(1) to Form 10-K for the year ended December 31, 1980) 3.14 Resolution of The Connecticut Water Company Board of Directors creating Preferred Stock, 9 1/2% Series dated March 30, 1989. (Exhibit 3.13 to Form 10-K for year ended December 31, 1989) 3.15 Purchase Agreement with respect to sale of Preferred Stock, 9 1/2% Series dated March 1, 1989. (Exhibit 3.14 to Form 10-K for year ended December 31, 1989) 3.16 Certificate Amending Certificate of Incorporation by Action of Board of Directors and Shareholders of The Connecticut Water Company to reduce Director's Liability dated November, 1989. (Exhibit 3.15 to Form 10-K for year ended December 31, 1989) 4.1 Indenture of Mortgage and Deed of Trust from The Connecticut Water Company to The Connecticut Bank and Trust Company, Trustee, dated as of June 1, 1956. (Exhibit 4.3(a) to Registration Statement No. 2-61843) 4.2 Supplemental Indentures thereto dated as of (i) February 1, 1958 (Exhibit 4.3(b) (i) to Registration Statement No. 2-61843) (ii) September 1, 1962 (Exhibit 4.3(b) (ii) to Registration Statement No. 2-61843) (iii) January 1, 1966 (Exhibit 4.3(b) (iii) to Registration Statement No. 2-61843) (iv) July 1, 1966 (Exhibit 4.3(b) (iv) to Registration Statement No. 2-61843) (v) January 1, 1971 (Exhibit 4.3(b) (v) to Registration Statement No. 2-61843) (vi) September 1, 1974 (Exhibit 4.3(b) (vi) to Registration Statement No. 2-61843) (vii) December 1, 1974 (Exhibit 4.3(b) (vii) to Registration Statement No. 2-61843) (viii) January 1, 1976 (Exhibit 4(b) to Form 10-K for the year ended 12/31/76) (ix) January 1, 1977 (Exhibit 4(b) to Form 10-K for the year ended 12/31/76) (x) September 1, 1978 (Exhibit 2.12(b) (x) to Registration Statement No. 2-66855) (xi) December 1, 1978 (Exhibit 2.12(b) (xi) to Registration Statement No. 2-66855) (xii) June 1, 1979 (Exhibit 2.12(b) (xii) to Registration Statement No. 2-66855) (xiii) December 1, 1983 (Exhibit 4.2 (xiii) to Form 10-K for the year ended 12/31/83) (xiv) January 1, 1987 (Exhibit 4.2 (xiv) to Form 10-K for the year ended 12/31/86) 59 Page 59 (xv) May 1, 1989 (Exhibit 4.2 (xv) to Form 10-K for year ended 12/31/89) (xvi) June 1, 1991 (Exhibit 4.2 (xvi) to Form 10-K for year ended 12/31/91) (xvii) August 1, 1992 (Exhibit 4.2 (xvii) to Form 10-K for year ended 12/31/92) (xviii) October 1, 1993 (Exhibit 4.2 (xviii) to Form 10-K for year ended 12/31/93) (xix) June 1, 1993 (Exhibit 4.2 (xix) to Form 10-K for year ended 12/31/93) (xx) September 1, 1993 (Exhibit 4.2 (xx) to Form 10-K for year ended 12/31/93) (xxi) December 1, 1993 (Exhibit 4.2 (xxi) to Form 10-K for year ended 12/31/93) (xxii) March 1, 1994 (Exhibit 4.2 (xxii) to Form 10-K for year ended 12/31/94) 4.3 Loan Agreement dated as of October 1, 1993, between the Connecticut Development Authority and The Connecticut Water Company. (Exhibit 4.3 to Form 10-K for year ended December 31, 1993) 4.4 Loan Agreement dated as of June 1, 1993, between the Connecticut Development Authority and The Connecticut Water Company. (Exhibit 4.4 to Form 10-K for year ended December 31, 1993) 4.5 Loan Agreement dated as of September 1, 1993, between the Connecticut Development Authority and The Connecticut Water Company. (Exhibit 4.5 to Form 10-K for year ended December 31, 1993) 4.6 Loan Agreement dated as of June 1, 1991, between the Connecticut Development Authority and The Connecticut Water Company. (Exhibit 4.10 to Form 10-K for year ended December 31, 1991) 4.7 Loan Agreement dated as of August 1, 1992 between the Connecticut Development Authority and The Connecticut Water Company. (Exhibit 4.10 to Form 10-K for the year ended December 31, 1992) 4.8 Bond Purchase Agreement dated as of December 1, 1993. (Exhibit 4.8 to Form 10-K for year ended December 31, 1993) 10.1 Pension Plan Fiduciary Liability Insurance for The Connecticut Water Company Employees' Retirement Plan and Trust, The Connecticut Water Company Tax Credit Employee Stock Ownership Plan, as Amended and Restated, Savings Plan of The Connecticut Water Company and The Connecticut Water Company VEBA Trust Fund. (Exhibit 10.1 to Registration Statement No. 2-74938) 60 Page 60 10.2 Directors and Officers Liability and Corporation Reimbursement Insurance. (Exhibit 10.2 to Registration Statement No. 2-74938) 10.3 Directors Deferred Compensation Plan, effective as of January 1, 1980, as amended as of March 20, 1981. (Exhibit 10.3 to Registration Statement No. 2-74938) 10.4 The Connecticut Water Company Deferred Compensation Agreement dated December 1, 1984. (Exhibit 10.4 to Form 10-K for the year ended December 31, 1984) 10.5 The Connecticut Water Company Deferred Compensation Agreement dated January 1, 1989. (Exhibit 10.5 to Form 10-K for the year ended December 31, 1988) 10.6 The Connecticut Water Company Supplemental Executive Retirement Agreement with William C. Stewart. (Exhibit 10.6a to Form 10-K for year ended December 31, 1991 10.7 The Connecticut Water Company Supplemental Executive Retirement Agreement with Marshall T. Chiaraluce. (Exhibit 10.6b to Form 10-K for year ended December 31, 1991) 10.8 The Connecticut Water Company Supplemental Executive Retirement Agreement - standard form for other officers. (Exhibit 10.6c to Form 10-K for year ended December 31, 1991) 10.9 Savings Plan of The Connecticut Water Company, amended and restated effective as of January 1, 1996. 10.10* First Amendment to The Connecticut Water Company Savings Plan, adopted November 12, 1997 10.11 The Connecticut Water Company Employees' Retirement Plan as amended and restated as of September 1, 1996. 10.12* Special Early Retirement Benefit of The Connecticut Water Company Employees' Retirement Plan, adopted March 5, 1997 10.13* First Amendment to The Connecticut Water Company Employees' Retirement Plan, adopted March 2, 1998. 10.14 Water Supply Agreement dated June 13, 1994, between The Connecticut Water Company and the Hazardville Water Company. (Exhibit 10.15 to Form 10-K for year ended December 31, 1994) 10.15 November 4, 1994 Amendment to Agreement dated December 11, 1957 between The Connecticut Water Company (successor to the Thomaston Water Company) and the City of Waterbury. (Exhibit 10.16 to Form 10-K for year ended December 31, 1994) 61 Page 61 10.16 Contract between The Connecticut Water Company and The Rockville Water and Aqueduct Company dated as of January 1, 1976. (Exhibit 9(b) to Form 10-K for the year ended December 31, 1975) 10.17 Agreement dated August 13, 1986 between The Connecticut Water Co. and the Metropolitan District. (Exhibit 10.14 to Form 10-K for the year ended December 31, 1986) 10.18 Report of the Commission to Study the Feasibility of Expanding the Water Supply Services of the Metropolitan District. (Exhibit 14 to Registration Statement No. 2-61843) 10.19 Plan of Merger dated December 18, 1978 of Broad Brook Water Company, The Collinsville Water Company, The Rockville Water and Aqueduct Company, The Terryville Water Company and The Thomaston Water Company with and into The Connecticut Water Company. (Exhibit 13 to Form 10-K for the year ended December 31, 1978) 10.20 Bond Exchange Agreements between Connecticut Water Service, Inc., The Connecticut Water Company Bankers Life Company and Connecticut Mutual Life Insurance Company dated October 23, 1978. (Exhibit 14 to Form 10-K for the year ended December 31, 1978) 10.21 Dividend Reinvestment and Common Stock Purchase Plan as amended. (Registration Statement No. 33-53211 as amended) 10.22 Contract for Supplying Bradley International Airport. (Exhibit 10.21 to Form 10-K for the year ended December 31, 1984) 10.23 Report of South Windsor Task Force. (Exhibit 10.23 to Form 10-K for the year ended December 31, 1987) 10.24 Trust Agreement for The Connecticut Water Company Welfare Benefits Plan (VEBA) dated January 1, 1989. (Exhibit 10.21 to Form 10-K for year ended December 31, 1989) 10.25 Performance Stock Program. (Registration Statement No. 33-49058.) 24.1 * Consent of Arthur Andersen LLP 27.0 * Financial Data Schedule - ---------- 62 Page 62 Note: Exhibits 10.1 through 10.11, 10.24 and 10.25 set forth each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form-10K. (b) No reports on Form 8-K were filed during the last quarter of 1997. 63 Page 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONNECTICUT WATER SERVICE, INC. Registrant By /s/ Marshall T. Chiaraluce ---------------------------- Marshall T. Chiaraluce President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Connecticut Water Service, Inc. in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Marshall T. Chiaraluce - ------------------------------ Marshall T. Chiaraluce Director and March 20, 1998 (Principal Executive Officer) President and Chief Executive Officer /s/ David C. Benoit - ------------------------------ David C. Benoit Vice President - March 19, 1998 (Principal Financial and Finance, Accounting Officer) Accounting, and Treasurer 64 Page 64 /s/ Francis E. Baker, Jr. - -------------------------- Director March 6, 1998 Francis E. Baker, Jr. /s/ Harold E. Bigler, Jr. - -------------------------- Director March 13, 1998 Harold E. Bigler, Jr. /s/Astrid T. Hanzalek - -------------------------- Director March 14, 1998 Astrid T. Hanzalek /s/ Frederick E. Hennick - -------------------------- Director March 12, 1998 Frederick E. Hennick /s/ Marcia L. Hincks - -------------------------- Director March 10, 1998 Marcia L. Hincks /s/ William C. Lichtenfels - -------------------------- Director March 6, 1998 William C. Lichtenfels /s/ Rudolph E. Luginbuhl - -------------------------- Director March 10, 1998 Rudolph E. Luginbuhl /s/ Harvey G. Moger - -------------------------- Director March 10, 1998 Harvey G. Moger /s/ Robert F. Neal - -------------------------- Director March 9, 1998 Robert F. Neal /s/ Warren C. Packard - -------------------------- Director March 14, 1998 Warren C. Packard /s/ Donald B. Wilbur - -------------------------- Director March 14, 1998 Donald B. Wilbur 65 SCHEDULES 66 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE We have audited, in accordance with generally accepted auditing standards, the financial statements of Connecticut Water Service, Inc. included in this Form 10-K, and have issued our report thereon dated February 13, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index to financial statements and schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Hartford, Connecticut February 13, 1998 67 CONNECTICUT WATER SERVICE, INC. and SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Additions Deductions Balance Beginning Charged to From End of Description of Year Income Reserves (1) Year ------------- --------- ---------- ------------ ------- (Thousands of Dollars) Allowance for Uncollectible Accounts Year Ended December 31, 1997 $140 $135 $149 $126 ==== ==== ==== ==== Year Ended December 31, 1996 $164 $128 $152 $140 ==== ==== ==== ==== Year Ended December 31, 1995 $149 $137 $122 $164 ==== ==== ==== ====
(1) Amounts charged off as uncollectible after deducting recoveries EX-10.10 2 EX-10.10 FIRST AMENDMENT 1 EXHIBIT 10.10 FIRST AMENDMENT TO THE CONNECTICUT WATER COMPANY SAVINGS PLAN, ADOPTED NOVEMBER 12, 1997 Effective as of January 1, 1998 1. Section 2.27 of the Savings Plan of The Connecticut Water Company (the "Plan") is hereby amended to read in its entirety as follows: "2.27 'Entry Date' shall mean the January 1, April 1, July 1 and October 1 of each Plan Year." 2. Section 6.2(a) of the Plan is hereby amended to read in its entirety as follows: "(a) The Employer shall contribute to the Trust Fund with respect to a Plan Year, as an Employer Contribution, an amount equal to the Applicable Percentage (determined as hereinafter provided) of each Participant's Employee Salary Deferral Contribution made pursuant to Section 5.1 hereof not exceeding three percent (3%) of Compensation. A Participant may elect that such Employer Contributions shall be paid to the Trustee in the form of cash or shares of Company Stock and cash in lieu of fractional shares. Such election shall be made, or may be changed, at such time, in such manner and in such form as the Committee may prescribe through uniform and nondiscriminatory rules. In the absence of such an election, Employer Contributions shall be paid in the form of shares of Company Stock and cash in lieu of fractional shares. Contributions made in the form of Company Stock and cash in lieu of fractional shares shall be determined as follows: (i) as of the last business day of each Calendar Quarter, the amount of the Employer Contribution with respect to Employee Salary Deferral Contributions made since the last business day of the preceding Calendar Quarter shall be determined, and such amount shall be expressed in the form of whole shares of Company Stock based on the average of bid and asked prices per share on the last business day of the Calendar Quarter and cash; (ii) the number of whole shares determined in (i) and the amount of cash representing any fractional share shall be contributed to the Company Stock Fund as soon as practicable following the end of the Calendar Quarter and such contributions shall be 2 -2- allocated to each Participant's Employer Contribution Account. For purposes of this Section 6.2(a), the Applicable Percentage for a Plan Year shall be determined as follows: (i) if "earnings per average common share" with respect to Company Stock, as reported for the prior Plan Year, exceed one hundred and ten percent (110%) of "dividends paid per common share" with respect to Company Stock, as reported for the prior Plan Year, the Applicable Percentage shall be fifty percent (50%); and (ii) if "earnings per average common share" with respect to Company Stock, as reported for the prior Plan Year, do not exceed one hundred and ten percent (110%) of "dividends paid per common share" with respect to Company Stock, as reported for the prior Plan Year, the Applicable Percentage shall be twenty-five percent (25%)." 3. Section 7.2 of the Plan is hereby amended to read in its entirety as follows: "7.2 Allocation of Contributions to Investment Funds. Once each Calendar Quarter, a Participant may elect how contributions to his Account, excluding Employer Contributions made in shares of Company Stock and cash in lieu of fractional shares in accordance with Section 6.2(a) hereof, shall be allocated among the available Investment Funds. Allocations to Investment Funds shall be in 10% increments. Such elections shall be made at such time, in such manner and in such form as the Committee may prescribe through uniform and nondiscriminatory rules. In the absence of any such investment election by a Participant, contributions shall be invested in that Investment Fund which invests in short-term, fixed income investments such as bank certificates of deposition, commercial paper, and treasury bills." 4. Section 7.4 of the Plan is hereby amended to read in its entirety as follows: "7.4 Company Stock Fund. All Employer Contributions made in shares of Company Stock and cash in lieu of fractional shares in accordance with Section 6.2(a) hereof, together with earnings thereon, shall at all times be invested in the Company Stock Fund." 5. Subsections 4(iii) and (iv) of the Participant Loan Program for the Plan are hereby amended to read in their entirety as follows: "(iii) A Participant may have no more than one (1) loan outstanding from the Plan at any time; provided, however, that a Participant may be granted a second loan on the condition that the first loan outstanding will be immediately repaid from the proceeds of the second loan. 3 -3- (iv) Except as described in (iii) above, a Participant must wait at least one full calendar quarter between the payoff of one loan and the granting of another loan." EX-10.12 3 EX-10.12 1 EXHIBIT 10.12 SPECIAL EARLY RETIREMENT BENEFIT OF THE CONNECTICUT WATER COMPANY EMPLOYEES' RETIREMENT PLAN, ADOPTED MARCH 5, 1997 APPENDIX B SPECIAL EARLY RETIREMENT BENEFIT B.1 Eligibility A special early retirement benefit, as set forth in Section B.2 hereof, shall be offered to all eligible Participants. For purposes of this Appendix B, the term 'Eligible Participant' shall mean each Participant who as of July 1, 1997 (a) will have completed ten (10) or more years of Credited Service, and (b) will have attained the age of fifty-five (55). Each such Eligible Participant will be offered the special early retirement benefit described in Section B.2 and may make a written election during an election period beginning on March 15, 1997 and ending at 4:30 P.M. on April 30, 1997 to retire between July 1, 1997 through December 31, 1997 and receive such special early retirement benefit commencing as of said date; provided, however, that such Eligible Participant either electing or declining to retire and receive the special early retirement benefit described in Section B.2 may revoke said decision during the period beginning on May 1, 1997 and ending at 4:30 P.M. on May 7, 1997, after which date such decision shall be irrevocable. B.2 Special Early Retirement Benefit (a) Each Eligible Participant who, pursuant to Section B.1, has elected to retire and receive the special early retirement benefit shall be credited with an additional five (5) years of Credited Service for purposes of the calculation of the benefit under Articles IV, V and VI. 2 -2- (b) Each Eligible Participant who, pursuant to Section B.1, has elected to retire and receive the special early retirement benefit and whose retirement occurs prior to attainment of age sixty-two (62) shall also receive an additional benefit of $500 each month ending with the month in which such Eligible Participant attains age sixty-two (62), or, if earlier, dies. The benefit described in this subsection (b) shall not be provided to an Eligible Participant who is age sixty-two (62) or older as of the date of commencement of his Retirement Income and no benefits shall be payable to any Contingent Annuitant with respect to the benefit described in this subsection (b) following an Eligible Participant's death regardless of the form in which such Eligible Participant's Retirement Income is being paid. EX-10.13 4 EX-10.13 1 EXHIBIT 10.13 FIRST AMENDMENT TO THE CONNECTICUT WATER COMPANY EMPLOYEES' RETIREMENT PLAN, ADOPTED MARCH 2, 1998 Effective as of January 1, 1998 Article VIII of the Connecticut Water Company Employees' Retirement Plan (the "Plan") is hereby amended to read in its entirety as follows: "ARTICLE VIII DISABILITY 8.1 Eligibility and Disability Determination. If a medical examiner selected by the Employer certifies that an Employee who has completed 5 years of Credited Service is mentally or physically disabled for further performance of duty and that such disability is likely to be permanent, such that the Employee is considered eligible for full disability benefits under the provisions of the Social Security Act, this Employee shall be eligible for the monthly benefit described below. 8.2 Disability Benefit. The monthly income of an Employee who becomes eligible for a monthly benefit in accordance with Section 8.1 shall equal the Basic Retirement Income as determined in Section 4.2 based on his Average Earnings and his Credited Service as 2 -2- of his Termination Date reduced by the Early Retirement Percentage Factor from Subsection 5.2(b) applicable to the number of complete years by which the commencement of payment of his Retirement Income precedes his attainment of age 65, with a Percentage Factor of .72 if the commencement of payment of his Retirement Income precedes his attainment of age 65 by more than 9 complete years. Notwithstanding the foregoing to the contrary, effective January 1, 1998, the monthly income of an Employee who becomes eligible for a monthly benefit in accordance with Section 8.1, and with respect to whom the sum of his age and Credited Service as of his Termination Date is equal to or greater than 80, shall equal his Basic Retirement Income as determined in Section 4.2 based on his Average Earnings and his Credited Service as of his Termination Date unreduced for commencement prior to his attainment of age 65. 8.3 Form and Commencement of Payments. An Employee who becomes eligible for a monthly benefit in accordance with Section 8.1 may elect to receive such benefit commencing on the first day of any month following his Termination Date; provided, however, that no payments shall be made under this Article VIII while the Employee is receiving disability benefits from the Employer's long-term disability plan. Such benefit shall be paid in the form provided in Section 4.3. 8.4 Reemployment. If a former Employee is reemployed by the Employer after commencing to receive benefits under this Article VIII, payment of the Employee's benefits will be 3 -3- suspended and benefits will continue to accrue under this Plan as described in Article IV when all of the following have occurred: (a) The Employee has been rehired by the Employer; (b) The Employee is credited with 40 or more Hours of Service in a month; and (c) The Employee has elected to resume participation in the Plan. Benefit payments suspended as provided above will recommence as of the Employee's subsequent retirement and will be determined as provided in Article IV. The Employee's accrued benefit, however, will be offset by the Actuarial Equivalent of any amount of the Employee's prior accrued benefit previously distributed to him. An Employee whose benefits are suspended as provided above shall receive the notification required by applicable law and regulations on the suspension of benefits. EX-24.1 5 EX-24.1 1 Exhibit 24.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-53211. /s/ Arthur Andersen LLP Hartford, Connecticut March 23, 1998 EX-27 6 EX-27
OPUR1 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 PER-BOOK 163,757 1,570 8,356 15,594 0 189,277 42,579 0 13,490 56,069 0 772 54,532 8,811 0 0 0 0 0 0 69,093 189,277 38,501 4,486 23,681 28,167 10,334 774 11,108 4,304 6,804 38 6,766 5,215 3,460 14,042 2.24 2.24
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