SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 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 0-493
CONSUMERS WATER COMPANY
(Exact name of registrant as specified in its Charter)
Maine 01-0049450
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
Three Canal Plaza, Portland, ME 04101
- ------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (207) 773-6438
- --------------------------------
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 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
The number of common shares of Consumers Water Company outstanding as of
May 12, 1997 was 8,809,214.
Consumers Water Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
March 31, December 31,
1997 1996
----------------------------
(Unaudited)
ASSETS
Property, Plant and Equipment, at cost:
Plant in service $480,431 $476,067
Less - Accumulated depreciation 86,502 83,833
-----------------------------
393,929 392,234
-----------------------------
Construction work in progress 11,993 12,567
----------------------------
NET PROPERTY, PLANT AND EQUIPMENT 405,922 404,801
-----------------------------
ASSETS OF DISCONTINUED OPERATIONS, NET 3,453 5,213
-----------------------------
INVESTMENTS, AT COST 1,708 1,706
-----------------------------
CURRENT ASSETS:
Cash and cash equivalents 2,854 1,775
Accounts receivable, net of reserves
of $901 in 1997 and $982 in 1996 8,187 8,971
Unbilled revenue 4,840 5,015
Inventories 2,172 2,054
Prepayments and other 5,568 6,848
-----------------------------
TOTAL CURRENT ASSETS 23,621 24,663
-----------------------------
OTHER ASSETS:
Funds restricted for construction activity 1,923 2,380
Deferred charges and other assets 16,775 17,219
-----------------------------
18,698 19,599
-----------------------------
$453,402 $455,982
=============================
SHAREHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION:
Common Stock, $1 par value
Authorized: 15,000,000 shares
Issued: 8,804,752 shares in 1997 and
8,732,202 in 1996 $8,805 $8,732
Amounts in excess of par value 77,004 75,686
Reinvested Earnings 18,879 21,597
------------------------------
104,688 106,015
Preferred shareholders' investment 1,048 1,054
Minority interest 2,346 2,352
Long-term debt 173,017 172,917
------------------------------
TOTAL CAPITALIZATION 281,099 282,338
------------------------------
CONTRIBUTIONS IN AID OF CONSTRUCTION 73,711 73,208
------------------------------
CURRENT LIABILITIES:
Notes payable 19,730 17,354
Sinking fund requirements and
current maturities 642 645
Accounts payable 2,615 5,871
Accrued taxes 7,399 8,103
Accrued interest 3,621 3,873
Dividends payable 2,667 2,629
Accrued expenses 10,083 10,395
------------------------------
TOTAL CURRENT LIABILITIES 46,757 48,870
------------------------------
COMMITMENTS AND CONTINGENCIES
DEFERRED CREDITS:
Customers' advances for construction 22,510 22,378
Deferred income taxes 24,679 24,506
Unamortized investment tax credits 4,646 4,682
------------------------------
51,835 51,566
------------------------------
$453,402 $455,982
==============================
BOOK VALUE PAR SHARE OF COMMON STOCK $11.89 $12.14
==============================
The accompanying notes are an integral part of these consolidated financial
statements.
Consumers Water Company and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except per Share Amounts)
(Unaudited)
For the three months ended
March 31, March 31,
(In Thousands Except Per Share Amounts) 1997 1996
----------------------------
Operating Revenue $22,931 $21,902
Costs and Expenses: ----------------------------
Operations and maintenance $10,637 $10,330
Depreciation $2,851 $2,453
Taxes other than income $3,122 $2,993
----------------------------
Total Operating Expenses 16,610 15,776
----------------------------
OPERATING INCOME 6,321 6,126
----------------------------
OTHER INCOME AND (EXPENSE):
Interest expense (3,731) (3,541)
Construction interest capitalized 116 186
Preferred dividends and minority
interest of subsidiaries (29) (29)
Gains on sales of properties 0 143
Other, net 189 155
----------------------------
(3,455) (3,086)
EARNINGS FROM CONTINUING OPERATIONS ----------------------------
BEFORE INCOME TAXES 2,866 3,040
Income Taxes 1,032 1,110
----------------------------
EARNINGS FROM CONTINUING OPERATIONS:
Income from Continuing Operations 1,834 1,930
----------------------------
LOSS FROM DISCONTINUED OPERATIONS:
Before Discontinuance (Net of taxes of
$234,000 in 1997 and $107,000 in 1996 (387) (106)
Provision for Loss on Disposal of
Discontinued Operations
(Net of taxes of $773,000) (1,500) -
----------------------------
Total from Discontinued Operations (1,887) (106)
----------------------------
Net Income (Loss) ($53) $1,824
============================
WEIGHTED AVERAGE SHARES OUTSTANDING #8,769 #8,547
EARNINGS PER COMMON SHARE:
Continuing Operations -
Total $0.21 $0.22
Discontinued Operations - ----------------------------
Before Discontinuance ($0.05) ($0.01)
Loss from Disposal of Discontinued ----------------------------
Operations ($0.17) $0.00
----------------------------
TOTAL ($0.22) ($0.01)
----------------------------
TOTAL ($0.01) $0.21
----------------------------
DIVIDENDS DECLARED PER COMMON SHARE $0.30 $0.30
----------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Consumers Water Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31, March 31,
1997 1996
----------------------------
OPERATING ACTIVITIES:
NET INCOME (LOSS) ($53) $1,824
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 3,344 2,801
Deferred income taxes and investment
tax credits 150 437
Gains on sales of properties 0 (143)
Changes in assets and liabilities:
Decrease in accounts receivable and
unbilled revenue 959 659
Increase in inventories (118) (103)
Decrease in prepaid expenses 1,280 826
Decrease in accounts payable and
accrued expenses (2,460) (2,726)
Change in other assets, net of change
in other liabilities of continuing
operations (20) (357)
Change in assets, net of change in
liabilities of discontinued
operations 260 232
Loss on disposal of discontinued
operations 1,500 0
----------------------------
TOTAL ADJUSTMENTS 4,895 1,626
----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,842 3,450
----------------------------
INVESTING ACTIVITIES:
Capital expenditures (3,782) (6,089)
Payment received on a note receivable 0 1,330
Decrease (increase)in funds restricted
for construction activity 457 (4)
Decrease in construction accounts payable (2,064) (1,495)
Net proceeds from sales of properties 0 147
----------------------------
NET CASH USED IN INVESTING ACTIVITIES (5,389) (6,111)
----------------------------
FINANCING ACTIVITIES:
Net borrowings of short-term debt 2,376 5,670
Proceeds from issuance of long-term debt 225 0
Repayment of long-term debt (128) (1,633)
Proceeds from issuance of stock 1,385 1,317
Advances and contributions in aid
of construction 499 760
Repayments of advances (91) (50)
Deferred taxes paid by developers on
advances and contributions in aid
of construction (13) (131)
Cash dividends paid (2,627) (2,584)
----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,626 3,349
----------------------------
Net increase in cash and cash equivalents 1,079 688
Cash and cash equivalents at beginning
of year 1,775 2,417
----------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,854 $3,105
============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION FROM CONTINUING OPERATIONS:
Cash paid during the year for:
Interest (net of amounts capitalized) $3,793 $3,159
Income taxes $123 $171
NON-CASH INVESTING AND FINANCING
ACTIVITIES FOR THE YEAR:
Property advanced or contributed $227 $0
The accompanying notes are an integral part of these consolidated financial
statements.
CONSUMERS WATER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
March 31, 1997
PART I ITEM 1
A. PREPARATION OF FINANCIAL STATEMENTS
The condensed financial statements included herein have been prepared
by the registrant, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the registrant believes that the disclosures which are made are adequate
to make the information presented not misleading, particularly when read
in conjunction with the financial statements and notes thereto included
in the registrants' latest annual report on Form 10-K. In management's
opinion, the attached interim financial statements reflect all adjustments
which are necessary for a fair statement of the results for the periods
presented. All adjustments made were of a normal and recurring nature
except for the discontinued operations described below.
B. EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of
shares and common share equivalents actually outstanding during the period.
The effect of employee stock options which are included as common share
equivalents is not material.
C. GAINS AND LOSSES
Included in Income from Continuing Operations are Gains (Losses) net of
taxes of $86,000 or $.01 per share in the three months ended March 31,
1996.
D. DISCONTINUED OPERATIONS
On April 29, 1997, the Company announced its intention to dispose of its
technical services company, Consumers Applied Technologies, Inc. The
business is being offered for sale. Estimated losses on the disposal equal
$1.5 million, net of taxes of $773,000. This disposal is expected to be
completed within one year. The operating results of Consumers Applied
Technologies prior to the date of discontinuance are shown under
Discontinued Operations on the accompanying consolidated statements of
income and all financial statements of prior periods have been restated.
Total sales for the discontinued technical services company for the first
quarter of 1997 and 1996 were $2,152,000 and $3,153,000, respectively.
Net assets of the discontinued operations approximate net realizable value.
A summary of the net assets of discontinued operations follows:
March 31, December 31,
1997 1996
Cash $271,000 $439,000
Receivables, net 4,371,000 5,125,000
Inventory 200,000 402,000
Income taxes receivable 2,156,000 2,032,000
Other current assets - 371,000
Property, plant and equipment 150,000 480,000
--------------------------------
Total assets $7,148,000 $8,849,000
--------------------------------
Note payable $1,200,000 $1,200,000
Accounts payable 415,000 554,000
Accrued expenses 1,987,000 1,788,000
Other 93,000 94,000
--------------------------------
Total liabilities $3,695,000 $3,636,000
--------------------------------
Net assets of discontinued
operation $3,453,000 $5,213,000
================================
E. RECLASSIFICATIONS
Certain amounts for 1996 have been reclassified to conform with the 1997
presentation.
PART I ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion and analysis sets forth certain factors relative
to the Company's financial condition at March 31, 1997 and the results of
its operations for the three months then ended as compared to the same
period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
CONSTRUCTION PROGRAM
Capital construction expenditures totaled $3.4 million, net of
contributions and advances in the first quarter of 1997, substantially
all of which relates to the Company's utility subsidiaries. Projects
included $611,000 spent on system improvements to a newly acquired system
in Maine, which is expected to cost $3.0 million in total when completed
during 1997; and many smaller projects around the Company.
The Company expects capital expenditures for 1997 through 1999 to be $89
million, net of contributions and advances. The capital construction
budget is down from its peak of $103 million for the 1995-1997 planning
period as a result of the completion of many of the improvements required
by the Safe Drinking Water Act (SDWA), the Clean Water Act (CWA), and
other regulations. With the reduced capital spending due to regulatory
requirements, the Company has increased its focus on replacing aging
infrastructure.
The Company has also started planning a major plant upgrade at Consumers
Pennsylvania Water Company - Shenango Valley Division. This project is
expected to cost approximately $31 million when it is completed in 2000.
This upgrade of one of the Company's older water treatment plants is
required to keep it in compliance with current and future regulations and
to meet expected increases in demand. The project is still in the planning
stage. Several design and financing alternatives for this project are
still being explored.
Several of the Company's water utility subsidiaries have filed or plan to
file rate cases in their respective jurisdictions for recovery of and
return on capital used to fund their capital expenditure programs. Costs
which have been prudently incurred in the judgment of the appropriate
public utility commission have been, and are expected to continue to be,
recognized in rate setting. Given the large rate increases in recent
years, Management expects the current increased scrutiny of rate requests
by state public utility commissions, and delays in obtaining rate relief
to continue even with decreasing capital construction budgets.
FINANCING AND CAPITALIZATION
Water utilities now require higher equity ratios than in the past to
maintain favorable debt ratings due to the recognition by Standard & Poor's
rating system of additional risk of the SDWA requirements and the
uncertainty of future regulatory treatment of the cost of these requirements.
This, coupled with the size of the Company's capital expenditure program,
makes it likely that the Company will return to the equity market again
in the next few years. The Company anticipates continuing to fund its
immediate cash flow needs with short-term lines of credit until a
subsidiary's short-term debt level is high enough to warrant placement of
long-term debt, generally, in the $4-6 million range. The Company's
subsidiaries had unused lines of credit available at March 31, 1997 of
$69.8 million. In addition, the Company has three revolving credit
agreements totaling $35 million, including one for $10 million obtained
in March, 1997. These agreements are committed until mid-1998. At March
31, 1997, $17.3 million was outstanding on these agreements, which is
recorded as long-term debt on the balance sheet. These borrowings were
used primarily to provide equity infusions to the subsidiaries. In
addition, the Company is using funds generated through its Dividend
Reinvestment Plan. The Dividend Reinvestment Plan generated $1.0
million in new equity in the first quarter of 1997. In addition to the
short-term debt, the Company's water utility subsidiaries plan to continue
to use tax-exempt, long-term debt financing in appropriate situations.
Retained earnings declined by $2.7 million in the first quarter of 1997
as a result of dividends in excess of earnings.
DISCONTINUED OPERATIONS
On April 29, 1997, the Company announced its intention to dispose of its
technical services company, Consumers Applied Technologies, Inc. (CAT).
CAT recently completed a reorganization, which reduced the Company's
involvement in environmental services and certain other lines of business.
In addition, the Company had set certain performance criteria for the
remaining business. When it became apparent that those criteria would not be
met, the decision was made to discontinue operations. The business is
being offered for sale. Estimated losses on the disposal equal $1.5
million, net of taxes. The operating results of Consumers Applied
Technologies prior to the date of discontinuance are shown under
Discontinued Operations on the accompanying consolidated statements of
income and all financial statements of prior periods have been restated.
ACQUISITIONS AND DISPOSITIONS
Over the past five years, the Company has acquired nine water systems.
Management anticipates continuing the acquisition policy of recent years.
The Company has sold five divisions with customers totaling approximately
15,000 under the threat of eminent domain since 1991. The gain on these
sales totaled over $7 million. The Town of Hudson, New Hampshire, has
initiated eminent domain proceedings to acquire the distribution system
assets of Consumers New Hampshire Water Company, which are located in
Hudson. The ultimate resolution of these proceedings is unknown. The
assets subject to this proceeding represent approximately 2% of the
Company's utility plant in service. The Company continues to work with
the local communities in its service areas in an effort to prevent future
eminent domain proceedings.
OTHER
In 1985, the Company's subsidiary, Consumers Maine Water Company (Consumers
Maine), started construction of a transmission main to Fish and Hobbs ponds,
which are located in Hope, Maine, to increase the available water supply of
its Camden and Rockland Division. Due to local opposition related to the
uncertainty about the environmental impact of withdrawing water from these
ponds, the project was delayed. In 1989, final legislation was passed that
imposed a moratorium on the withdrawal of water from these ponds. The Maine
Public Utilities Commission (MPUC) ordered Consumers Maine to defer the
costs of the project, the legal costs of defending the water rights and
carrying costs until its first rate case after June 1, 1997. Consumers
Maine currently has $673,000 on its balance sheet related to this project.
Consumers Maine expects to file a rate case with the MPUC in 1998 seeking
recovery of these costs.
RESULTS OF OPERATIONS
First Quarter 1997, Compared to First Quarter, 1996
REVENUE
Revenues increased $1,029,000 or 4.7% compared to the first three months
of 1996, primarily due to $953,000 in rate increases. Currently, there
are two rate cases pending in which over $1.4 million in additional annual
revenue is sought. The Company's water utility subsidiaries plan to file
seven additional cases in 1997, timed to seek recovery of and return on
funds used to finance their large capital expenditure programs.
OPERATING EXPENSES
Operating expenses increased $834,000 or 5.3% compared to the first three
months of 1996. Depreciation increased $398,000 due to higher plant
balances and higher depreciation rates. Other taxes, which predominantly
relates to property taxes, increased $129,000 due to higher plant balances.
The remainder is due to normal expense increases.
PART II
Item 1. Legal Proceedings.
- ---------------------------
Schiavi Homes Litigation. In 1994, the Penobscot Indian Nation commenced
litigation against the Company, a former subsidiary of the Company, a
current subsidiary of the Company and John H. Schiavi, a director of the
Company, among others, in the United States District Court for the District
of Maine (the "District Court"). The complaint filed in District Court
alleged, among other things, that one or all of the defendants defrauded
the Penobscot Indian Nation by breaching their duty of good faith and fair
dealing and by making misrepresentations in connection with the acquisition
of the assets of SHC Corporation, then a subsidiary of the Company, by a
Maine limited partnership in which the Penobscot Indian Nation held a limited
partnership interest.
On October 25, 1995, the District Court issued an order granting the
summary judgment motions of certain defendants, including the Company,
its current and former subsidiaries, and John H. Schiavi. On or about
June 6, 1996, the Penobscot Indian Nation filed an appeal from the
granting of summary judgment by the District Court with the United
States First Circuit Court of Appeals (the "First Circuit"), alleging
that the District Court had erred in granting summary judgment to the
Company and the other defendants. On May 5, 1997, the First Circuit issued
its opinion affirming the granting of summary judgment to the various
defendants including the Company, its current and former subsidiaries and
John H. Schiavi.
The suit brought by John L. Palmer (no relation to the Company's director,
John E. Palmer, Jr.), who was a co-defendant in the suit brought by the
Penobscot Indian Nation and was formerly a director of SHC Corporation,
against the Company and its former subsidiary, SHC Corporation, in
Cumberland County Superior Court of the State of Maine on May 29, 1996
seeking reimbursement of all of his legal fees incurred in connection
with the defense of claims raised by the Penobscot Indian Nation was not
affected by the First Circuit's decision. In that litigation, the parties
have completed discovery and are awaiting trial.
Management believes that this matter will not have a significant adverse
effect on either the Company's future results of operations, financial
position or cash flows.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule is submitted herewith as Exhibit 27.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
ended March 31, 1997.
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.
CONSUMERS WATER COMPANY
(Registrant)
5/14/97 /s/ Peter L. Haynes
- -------------------------- -----------------------
Date Peter L. Haynes
Chief Executive Officer
5/14/97 /s/ John F. Isacke
- --------------------------- ------------------------
Date John F. Isacke
Chief Financial Officer
Exhibit Index
27.
Financial Data Schedule is submitted herewith as Exhibit 27.
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