-----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, N/K7wPd8MlvzOaJY8AFoVBtowVXtNbqfiM+ms7issFHtV1VSl047yJOZoLeaS3s5 EKXBEEzifW7H1xLmtLacdQ== 0000914039-98-000432.txt : 19981113 0000914039-98-000432.hdr.sgml : 19981113 ACCESSION NUMBER: 0000914039-98-000432 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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-Q SEC ACT: SEC FILE NUMBER: 000-08084 FILM NUMBER: 98744864 BUSINESS ADDRESS: STREET 1: 93 W MAIN ST CITY: CLINTON STATE: CT ZIP: 06413 BUSINESS PHONE: 8606698630 MAIL ADDRESS: STREET 1: 93 WEST MAIN ST CITY: CLINTON STATE: CT ZIP: 06413 10-Q 1 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1998 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 06413-1600 (Address of principal executive offices) (Zip Code) (860) 669-8636 (Registrant's telephone number, including area code) Not Applicable (Former name, address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a count. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 4,535,813 Number of shares of common stock outstanding, October 31, 1998 2 TABLE OF CONTENTS PART I, ITEM 1: FINANCIAL STATEMENTS Consolidated Balance Sheets at September 30, 1998 and December 31, 1997 Page 3 Consolidated Statements of Capitalization at September 30, 1998 and December 31, 1997 Page 4 Consolidated Statements of Income for Three Months Ended September 30, 1998 and 1997 Page 5 Consolidated Statements of Income for Nine Months Ended September 30, 1998 and 1997 Page 6 Consolidated Statements of Retained Earnings for Three Months Ended September 30, 1998 and 1997 Page 7 Consolidated Statements of Retained Earnings for Nine Months Ended September 30, 1998 and 1997 Page 7 Consolidated Statements of Cash Flows for Nine Months Ended September 30, 1998 and 1997 Page 8 Notes to Consolidated Financial Statements Page 9-10 PART I, ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Page 11-14 PART II, ITEM 6: Exhibits and Reports on Form 8-K. Page 14-15 Signature Page Page 16 3 PART I, ITEM 1: FINANCIAL STATEMENTS Page 3 Connecticut Water Service, Inc. and Subsidiary CONSOLIDATED BALANCE SHEETS At September 30, 1998 and December 31, 1997 (In thousands)
September 30, 1998 Dec. 31, ASSETS (Unaudited) 1997 ------------ ----------- Utility Plant Utility Plant $212,051 $207,476 Construction Work in Progress 10,393 9,882 Utility Plant Acquisition Adjustments (1,255) (1,255) ------------ ----------- 221,189 216,103 Accumulated Provision for Depreciation (55,424) (52,346) ------------ ----------- Net Utility Plant 165,765 163,757 ------------ ----------- Investments 1,874 1,570 ------------ ----------- Current Assets Cash 1,009 346 Accounts Receivable (Less Allowance, 1998- $288; 1997 - $151) 5,853 4,568 Accrued Unbilled Revenues 3,125 2,684 Prepayments and Other Current Assets 1,677 758 ------------ ----------- Total Current Assets 11,664 8,356 ------------ ----------- Deferred Charges Unamortized Debt Issuance Expense 5,986 5,023 Income Taxes 8,647 8,623 Postretirement Benefits Other Than Pension 1,220 1,220 Other Costs 860 728 ------------ ----------- Total Deferred Charges 16,713 15,594 ------------ ----------- Total Assets $196,016 $189,277 ============ =========== CAPITALIZATION AND LIABILITIES Capitalization (See accompanying statements) Common Stockholders' Equity $57,677 $56,069 Preferred Stock 772 772 Long-Term Debt 62,510 54,532 ------------ ----------- Total Capitalization 120,959 111,373 ------------ ----------- Current Liabilities Interim Bank Loans Payable 5,018 8,811 Accounts Payable and Accrued Taxes and Interest 7,050 7,775 Other 2,289 2,208 ------------ ----------- Total Current Liabilities 14,357 18,794 ------------ ----------- Long-Term Liabilities Advances for Construction 15,734 15,203 Contributions in Aid of Construction 19,064 18,750 Deferred Federal Income Taxes 14,627 13,838 Unfunded Future Income Taxes 8,000 8,000 Unfunded Postretirement Benefits Other Than Pension 1,220 1,220 Unamortized Investment Tax Credits 2,055 2,099 ------------ ----------- Total Long-Term Liabilities 60,700 59,110 ------------ ----------- Total Capitalization and Liabilities $196,016 $189,277 ============ ===========
The accompanying notes are an integral part of these financial statements. 4 Page 4 Connecticut Water Service, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CAPITALIZATION At September 30, 1998 and December 31, 1997 (In thousands, except share data)
September 30, 1998 Dec. 31, (Unaudited) 1997 ---------- ----------- Common Stockholders' Equity * Common Stock Without Par Value; Authorized - 7,500,000 Shares; Shares Issued and Outstanding: 1998 - 4,535,813; 1997 - 4,526,715 $44,070 $43,928 Stock Issuance Expense (1,379) (1,349) Retained Earnings 14,986 13,490 ---------- ----------- Total Common Stockholders' Equity 57,677 56,069 ---------- ----------- Cumulative Preferred Stock of Connecticut Water Service, Inc. Series A Voting, $20 Par Value; Authorized, Issued and Outstanding 15,000 Shares, Redeemable at $21.00 Per Share 300 300 Series $.90 Non-Voting, $16 Par Value; Authorized 50,000 Shares Issued and Outstanding 29,499 Shares, Redeemable at $16.00 Per Share 472 472 ---------- ----------- Total Preferred Stock of Connecticut Water Service, Inc. 772 772 ---------- ----------- Long-Term Debt The Connecticut Water Company First Mortgage Bonds 6.9% Series Q, due 2021 0 10,000 5.875% Series R, due 2022 14,800 14,800 6.65% Series S, due 2020 8,000 8,000 5.75% Series T, due 2028 5,000 5,000 5.3% Series U, due 2028 4,550 4,550 6.94% Series V, due 2029 12,050 12,050 ---------- ----------- 44,400 54,400 ---------- ----------- Unsecured Water Facilities Revenue Refinancing Bonds 5.05% 1998 Series A, due 2028 10,000 0 5.125% 1998 Series B, due 2028 8,000 0 ---------- ----------- 18,000 0 ---------- ----------- Other 5.5% Unsecured Promissory Note 139 161 ---------- ----------- 62,539 54,561 Less Current Portion of Long-Term Debt (29) (29) ---------- ----------- Total Long-Term Debt 62,510 54,532 ---------- ----------- Total Capitalization $120,959 $111,373 ========== ===========
* Reflects three-for-two stock split as described in the accompanying Notes to Consolidated Financial Statements. The accompanying notes are an integral part of these financial statements. 5 Page 5 Connecticut Water Service, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF INCOME For the Three Months Ended September 30, 1998 and 1997 (In thousands, except share data)
1998 1997 (Unaudited) (Unaudited) ------------ ------------ Operating Revenues $11,392 $10,855 ------------ ------------ Operating Expenses Operation 3,227 3,280 Maintenance 853 447 Depreciation 935 866 Federal Income Taxes 1,575 1,400 Connecticut Corporation Business Taxes 312 380 Municipal Taxes 869 801 Payroll Taxes 106 126 ------------ ------------ Total Operating Expenses 7,877 7,300 ------------ ------------ Utility Operating Income 3,515 3,555 ------------ ------------ Other Income (Deductions) Interest 35 23 Allowance for Funds Used During Construction 108 156 Gain on Sale of Property 46 0 Non-Water Sales Earnings (2) 56 Miscellaneous Income (Deductions) (14) (15) Taxes on Other Income (10) (46) ------------ ------------ Total Other Income (Deductions) 163 174 ------------ ------------ Interest and Debt Expense Interest on Long-Term Debt 923 865 Other Interest Charges 92 168 Amortization of Debt Expense 53 32 ------------ ------------ Total Interest and Debt Expense 1,068 1,065 ------------ ------------ Net Income 2,610 2,664 Preferred Stock Dividend Requirement 10 10 ------------ ------------ Net Income Applicable to Common Stockholders $2,600 $2,654 ============ ============ Weighted Average Common Shares Outstanding * 4,536,000 4,526,000 ============ ============ Earnings Per Average Common Share * $0.57 $0.59 ============ ============ Dividends Per Common Share * $0.293 $0.290 ============ ============
* Reflects three-for-two stock split as described in the accompanying Notes to Consolidated Financial Statements. The accompanying notes are an integral part of these financial statements. 6 Page 6 Connecticut Water Service, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF INCOME For the Nine Months Ended September 30, 1998 and 1997 (In thousands, except share data)
1998 1997 (Unaudited) (Unaudited) ------------ ------------ Operating Revenues $28,860 $29,500 ------------ ------------ Operating Expenses Operation 10,015 9,789 Maintenance 1,734 1,455 Depreciation 2,807 2,605 Federal Income Taxes 2,756 2,921 Connecticut Corporation Business Taxes 531 704 Municipal Taxes 2,550 2,424 Payroll Taxes 403 395 Connecticut Gross Earnings Tax 0 924 Organizational Charges 0 423 ------------ ------------ Total Operating Expenses 20,796 21,640 ------------ ------------ Utility Operating Income 8,064 7,860 ------------ ------------ Other Income (Deductions) Interest 89 72 Allowance for Funds Used During Construction 357 470 Gain on Sale of Property 253 170 Non-Water Sales Earnings 82 139 Miscellaneous Income (Deductions) (25) (19) Taxes on Other Income (130) (219) ------------ ------------ Total Other Income (Deductions) 626 613 ------------ ------------ Interest and Debt Expense Interest on Long-Term Debt 2,714 2,595 Other Interest Charges 343 430 Amortization of Debt Expense 154 126 ------------ ------------ Total Interest and Debt Expense 3,211 3,151 ------------ ------------ Net Income 5,479 5,322 Preferred Stock Dividend Requirement 29 29 ------------ ------------ Net Income Applicable to Common Stockholders $5,450 $5,293 ============ ============ Weighted Average Common Shares Outstanding * 4,535,000 4,524,000 ============ ============ Earnings Per Average Common Share * $1.20 $1.17 ============ ============ Dividends Per Common Share * $0.873 $0.863 ============ ============
* Reflects three-for-two stock split as described in the accompanying Notes to Consolidated Financial Statements. The accompanying notes are an integral part of these financial statements. 7 Page 7 Connecticut Water Service, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (In thousands, except share data) For the Three Months Ended September 30, 1998 and 1997
1998 1997 (Unaudited) (Unaudited) ------------ ----------- Balance at Beginning of Period $13,714 $11,986 Net Income 2,610 2,664 ------------ ----------- 16,324 14,650 ------------ ----------- Dividends Declared: * Cumulative Preferred, Class A, $.20 per share 3 3 Cumulative Preferred, Series $.90, $.225 per share 7 7 Common Stock - 1998 $.293 per share; 1997 $.290 per share 1,328 1,312 ------------ ----------- 1,338 1,322 ------------ ----------- Balance at End of Period $14,986 $13,328 ============ =========== For the Nine Months Ended September 30, 1998 and 1997 Balance at Beginning of Period $13,490 $11,939 Net Income 5,479 5,322 ------------ ----------- 18,969 17,261 ------------ ----------- Dividends Declared: * Cumulative Preferred, Class A, $.80 per share 9 9 Cumulative Preferred, Series $.90, $.90 per share 20 20 Common Stock - 1998 $.873 per share; 1997 $0.863 per share 3,954 3,904 ------------ ----------- 3,983 3,933 ------------ ----------- Balance at End of Period $14,986 $13,328 ============ ===========
* Common stock dividend per share amounts have been adjusted to reflect a three-for-two stock split as described in the accompanying Notes to Consolidated Financial Statements. The accompanying notes are an integral part of these financial statements. 8 Page 8
Connecticut Water Service, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1998 and 1997 (In thousands) 1998 1997 (Unaudited) (Unaudited) ----------- ----------- Operating Activities: Net Income Before Preferred Dividends of Parent $5,479 $5,322 ----------- ----------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation (including $95 in 1998, $88 in 1997 charged to other accounts) 2,902 2,693 Change in Assets and Liabilities: Increase in Accounts Receivable and Accrued Unbilled Revenues (1,726) (454) Decrease (Increase) in Other Current Assets (920) (926) Increase in Other Non-Current Items (307) (697) Increase (Decrease) in Accounts Payable, Accrued Expenses and Other Current Liabilities (642) (21) Increase (Decrease) in Deferred Federal Income Taxes and Investment Tax Credits, Net 745 715 ----------- ----------- Total Adjustments 52 1,310 ----------- ----------- Net Cash Provided by (Used for) Operating Activities 5,531 6,632 ----------- ----------- Investing Activities: Gross Additions to Utility Plant (including Allowance for Funds Used During Construction of $357 in 1998 and $470 in 1997) (4,971) (7,619) ----------- ----------- Financing Activities: Proceeds from Interim Bank Loans 5,018 10,611 Repayment of Interim Bank Loans (8,811) (5,795) Proceeds from Issuance of Common Stock 142 160 Proceeds from Issuance of Long-Term Debt 18,000 133 Repayment of Long-Term Debt (10,022) 0 Advances, Contributions and Funds From Others for Construction, Net of (Refunds) 906 631 Costs Incurred to Issue Long-Term Debt, Preferred Stock, and Common Stock (1,147) (22) Cash Dividends Paid (3,983) (3,932) ----------- ----------- Net Cash Provided by (Used in) Financing Activities 103 1,786 ----------- ----------- Net Increase (Decrease) in Cash 663 799 Cash at Beginning of Period 346 35 ----------- ----------- Cash at End of Period $1,009 $834 =========== =========== Supplemental Disclosures of Cash Flow Information: Cash Paid During the Year for: Interest (Net of Amounts Capitalized) $3,198 $3,591 Income Taxes $2,370 $2,875
The accompanying notes are an integral part of these financial statements. 9 Page 9 CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated financial statements included herein have been prepared by CONNECTICUT WATER SERVICE, INC. (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for interim periods. Certain information and footnote disclosures have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. The results for interim periods are not necessarily indicative of results to be expected for the year since the consolidated earnings are subject to seasonal factors. On September 15, 1998 the Company effected a three-for-two stock split. The distribution of these shares increased the number of shares outstanding by 1,511,838 shares. All outstanding common shares and per share amounts in this report have been restated to reflect this stock split. Appropriate adjustments to reflect the stock split were made to the Company's Performance Stock Program. 2. Earnings per average common share are calculated by dividing net income applicable to common stock by the average number of shares of common stock outstanding during the respective periods as detailed on the following page: 10 Page 10 CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3 Months Ended * 12 Months Ended * ---------------- ----------------- 9/30/98 9/30/97 9/30/98 9/30/97 12/31/97 ------- ------- ------- ------- -------- Common Shares Outstanding: January 1, 1997 -- -- -- -- 4,518,125 October 1, 1997 & 1996 respectively -- -- 4,526,715 4,517,150 -- July 1, 1998 & 1997 respectively 4,535,790 4,525,652 -- -- -- Common Shares Issued: To PSP - July 1, 1996 -- -- -- -- -- To 401-K - September 30, -- -- -- -- -- 1996 To 401-K - December 31, -- -- -- 975 -- 1996 To PSP - February 14, 1997 -- -- -- 5,289 5,289 To 401-K - March 30, 1997 -- -- -- 1,015 1,015 To CSE - June 13, 1997 -- -- -- 60 60 To 401-K - June 30, 1997 -- -- -- 1,163 1,163 To CSE - September 15, -- 61 -- 61 61 1997 To 401-K - September 30, -- 1,002 -- 1,002 1,002 1997 To CSE - December 15, 1997 -- -- 57 -- 57 To 401-K- - December 31, -- -- 864 -- 864 1997 To PSP - February 18, 1998 -- -- 6,921 -- -- To CSE - March 15, 1998 -- -- 102 -- -- To 401-K - March 30, 1998 -- -- 590 -- -- To CSE - June 15, 1998 -- -- 95 -- -- To 401-K -June 30, 1998 -- -- 446 -- -- Liquidation of (587) -- (587) -- -- fractional shares To CSE - September 15, 82 -- 82 -- -- 1998 To 401-K - September 30, 1998 528 -- 528 -- -- --------- --------- --------- --------- --------- Common Shares Outstanding: September 30, 1998 & 1997 respectively 4,535,813 4,526,715 4,535,813 4,526,715 ========= ========= ========= ========= December 31, 1997 4,527,636 ========= Weighted Average Common Shares Outstanding: Days outstanding basis** 4,535,727 4,525,675 4,532,857 4,522,005 4,524,419 ========= ========= ========= ========= =========
* All share amounts reflect a three-for-two split as described in Note 1 above. ** Basic and Fully diluted are the same DRIP = Dividend Reinvestment Plan PSP = Performance Stock Program 401-K = Company contribution to employees' 401-K savings plan CSE = Common Stock Equivalents 11 Page 11 CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY PART I, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CORPORATE RESOURCES At September 30, 1998 the Company had $3,982,000 of unused lines of interim bank loan credit available. RESULTS OF OPERATIONS THE FOLLOWING FACTORS HAD A SIGNIFICANT EFFECT UPON THE COMPANY'S RESULTS OF OPERATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED WITH THE RESULTS OF OPERATION FOR THE SAME PERIOD LAST YEAR. Net income applicable to common stock for the nine months ended September 30, 1998 increased from that of the nine months ended September 30, 1997 by $157,000, or $.03 per average common share. The increase in net income resulted from a $204,000 increase in utility operating income, a $13,000 increase in other income, partially offset by a $60,000 increase in interest expense. Operating revenues decreased $640,000 due to the reduction in revenues associated with the decrease in customers' rates effective July 1, 1997 related to the elimination of the Connecticut Gross Earnings Tax. This decrease in revenue had no impact on net income since it was matched by a reduction in operating expenses due to the elimination of these taxes. The decrease in revenues associated with this rate decrease was partially offset by increased revenues from the Company's .5% rate increase effective October 1, 1997 for increased post-retirement employee benefit costs, increased revenues from the Company's acquisition of the SDC, Bay Mountain and Masons Island water systems in 1997 and 1998, and increased public fire billings and revenues resulting from regular growth in customers. Operating expenses decreased $844,000 primarily due to the elimination of the Connecticut Gross Earnings Tax, a one-time organizational charge in 1997 relating to an early retirement program, and decreased income tax expense. The decrease in income tax expense was caused by lower pre-tax income, a book/tax timing adjustment relating to the 1998 refinancing of the Series Q First Mortgage bonds, and a reduction in the state corporation income tax rate. These expense reductions were partially offset by increases in operation, maintenance, depreciation and municipal tax expenses. THE FOLLOWING FACTORS HAD A SIGNIFICANT EFFECT UPON THE COMPANY'S RESULTS OF OPERATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED WITH THE RESULTS OF OPERATION FOR THE SAME PERIOD LAST YEAR. Net income applicable to common stock for the three months ended September 30, 1998 decreased from that of the three months ended September 30, 1997 by $69,000 or $.02 per average common share. The decrease in net income resulted from a $55,000 decrease in utility operating income, a $11,000 decrease in other income, and a $3,000 increase in interest expense. 12 Page 12 CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY Operating revenue increased $537,000 due to the dry 1998 July and August summer weather which increased customer water consumption, increased revenues from customers acquired through the Company's acquisition of the SDC, Bay Mountain and Masons Island water systems in 1997 and 1998, increased public fire billings and revenues resulting from regular growth in our customers and the .5% rate increase effective last October related to increased post-retirement employee benefit costs. Operating expenses increased $576,000 primarily due to increased maintenance costs, increased depreciation and municipal taxes resulting from the Company's increased investment in utility plant, and increased income tax expense from increased taxable income. YEAR 2000 Like many organizations, the Company is currently evaluating and responding to its exposure to the Year 2000 problem. In general terms, the problem arises from the fact that many existing computer systems and other equipment containing date-sensitive embedded technology (including non-information technology equipment and systems) use only two digits to identify a year in the date field, with the assumption that the first two digits of the year are always "19". As a result, such systems may misinterpret dates after December 31, 1999, which may result in miscalculations, other malfunctions or the total failure of such systems. Additional problems arise from the fact that the Year 2000 is a special case leap year. Because the Company is dependent upon the proper functioning of computer systems and other equipment containing date-sensitive embedded technology, a failure of such systems and equipment to be Year 2000 compliant could have a material adverse effect on the Company. If not remedied, potential risks include business interruption or shutdown, financial loss, regulatory actions and legal liability. The Company has established a team of senior managers to address the Year 2000 problem. This team is currently evaluating the Company's exposure to the year 2000 problem and is preparing a plan for managing the risks and costs associated therewith. It is anticipated that this plan will be completed during the fourth quarter of this year. The Connecticut Department of Public Utility Control has informed the Company that it will review the readiness of nine utilities, of which the Company is one. The Company's general process of addressing the Year 2000 problem can be broken down into the following steps: (a) inventorying systems, equipment and other items (including those of third parties) that potentially present a Year 2000 problem, (b) assigning priorities to identified items, (c) assessing the Year 2000 compliance of the items determined to be material to the Company through internal testing and outside certification, (d) repairing, replacing or preparing for the failure of material items that are determined to be non-compliant, (e) testing repaired or replaced items, and (f) designing and implementing contingency plans. 13 Page 13 CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY 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 be Year 2000 compliant. The integration of the new system is 95% complete and is expected to be completed during the first quarter of 1999. The costs of implementing the new system will total approximately $2 million, which the company is capitalizing. The hardware and software vendors for the MIS have certified its components as being Year 2000 compliant. In addition, the Company has completed preliminary Year 2000 testing on the MIS and found it to be compliant. The Company intends to perform additional Year 2000 testing once the system is completed. Such testing is expected to be completed during the second quarter of 1999. The Company also is evaluating the Year 2000 compliance of systems and equipment which are not linked to the MIS and is currently in the process of identifying the items that could be impacted by the Year 2000 problem. The Company expects that this inventory of items which may not be Year 2000 compliant will be completed in the fourth quarter of 1998. Once the Company determines that an item may present a Year 2000 problem, the Company contacts the supplier to obtain adequate assurance that it is Year 2000 compliant or determine and address any noncompliance. In addition, wherever practical, the Company independently tests the item for compliance. The Company has obtained supplier compliance certification for approximately 15% of the items that it has inventoried as potentially non-compliant and has completed testing of approximately 15% of such items. The Company estimates that this assessment process will be completed in the first quarter of 1999, and anticipates deploying and testing all repairs and replacements of non-compliant systems and equipment by June, 1999. In addition to its own systems and equipment, the Company depends upon the proper function of computer systems and other date-sensitive equipment of outside parties. These parties include other water companies, banks, telecommunications service providers and electric and other utilities. The Company has initiated communications with such parties to determine the extent to which they are vulnerable to the Year 2000 issue and, in certain circumstances, to coordinate joint testing. The Company has not yet received sufficient information about their remediation plans to predict the outcome of their efforts. If the third parties with which the Company interacts have Year 2000 problems that are not remedied, resulting problems could include, the loss of telecommunications and electrical service, the receipt of inaccurate financial and billing-related information, and the disruption of capital flows potentially resulting in liquidity stress. Due to the uncertainties presented by such third party Year 2000 problems, and the possibility that, despite its efforts, the Company is unsuccessful in preparing its internal systems and equipment for the Year 2000, the Company is developing contingency plans for dealing with the most reasonably likely worst case scenario. Such plans include manual back-ups for crucial automated systems, the use of electrical generators capable of sustaining operations through a power failure, and enhanced transition-period staffing to compensate for automation and communication failures. The Company's assessment of its most reasonably likely worst case scenario and the exact nature and scope of its contingency plans will be effected by the Company's continued Year 2000 assessment and testing. The Company expects to complete such assessment and contingency plans during the first quarter of 1999 and to have all contingency systems in place and fully tested by the fourth quarter of 1999. As the Company already has extensive disaster-contingency systems in place, it does not believe that the cost of preparing or effecting Year 2000 contingency plans will be material. 14 Page 14 CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY The Company does not believe that the costs of addressing the Year 2000 problem, excluding the costs of the MIS, will be material to the Company's financial condition. It has not budgeted separately for such costs for 1998. The Company anticipates spending approximately $300,000 for effecting its Year 2000 program in 1999. The Company has funded, and expects to continue to fund, the costs of its Year 2000 efforts through operating cash flow. The costs of the Company's year 2000 program and the timetable for completing its Year 2000 preparations are based on current estimates, which reflect numerous assumptions about future events, including the continued availability of certain resources, the timing and effectiveness of third-party remediation plans and other factors. The Company can give no assurance that these estimates will be achieved, and actual results could differ materially from those currently anticipated. In addition, there can be no assurance that the Company's Year 2000 program will be effective or that its contingency plans will be sufficient. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct relevant computer software codes and embedded technology, the results of internal and external testing and the timeliness and effectiveness of remediation efforts of third parties. FORWARD LOOKING INFORMATION This report, including management's discussion and analysis, contains certain forward looking statements regarding the Company's results of operations and financial position. These forward looking statements are based on current information and expectations, and are subject to risks and uncertainties which could cause the Company's actual results to differ materially from expected results. PART II, ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION 3.1 The Certificate of Amendment of Certificate of Incorporation with Respect to Series A Junior Participating Preference Stock of the Company. (Incorporated herein by reference, Exhibit 3 to the current report on Form 8-K filed by the Company on September 25, 1998) 3.2 The Company's Amended and Restated Certificate of Incorporation (Incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 15 Page 15 CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY RIDER 14A 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed the following reports on Form 8-K during the quarter ended September 30, 1998, both of which related to the Company's newly adopted Shareholders Rights Plan: Current report on Form 8-K dated August 13, 1998, filed on August 18, 1998, reporting item 5 (Other Information) and Item 7 (Financial Statements and Exhibits) Current report on Form 8-K dated August 12, 1998, filed on August 13, 1998, reporting Item 5 (Other Information) and Item 7 (Financial Statements and Exhibits) 16 Page 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Connecticut Water Service, Inc. (Registrant) Date: November 12, 1998 By /s/ David C. Benoit David C. Benoit Vice President - Finance Date: November 12, 1998 By: /s/ Peter J. Bancroft Peter J. Bancroft Controller and Assistant Treasurer EX-27 2 EX-27
OPUR1 1,000 9-MOS SEP-30-1998 JAN-01-1998 SEP-30-1998 PER-BOOK 165,765 1,874 11,664 16,713 0 196,016 42,691 0 14,986 57,677 0 772 44,400 5,018 0 0 0 0 0 0 70,039 196,016 11,392 1,887 5,990 7,877 3,515 163 3,678 1,068 2,610 10 2,600 3,954 0 5,531 0.57 0.57
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