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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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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 0-493
CONSUMERS WATER COMPANY
(Exact name of registrant as specified in its charter)
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Maine 01-0049450
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
THREE CANAL PLAZA, PORTLAND, MAINE 04101 (207-773-6438)
(Address and telephone number of principal executive offices)
NONE
(Securities registered pursuant to Section 12(b) of the Act)
COMMON SHARES, PAR VALUE $1.00 PER SHARE
(Title of class of Securities registered
pursuant to Section 12(g) of the Act)
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 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 a check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K 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 [ ].
The aggregate market value of all voting shares held by non-affiliates
as of March 11, 1998 was $190,005,010. As of March 11, 1998, there were
8,994,320 Common Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The "Nominees for Election as Directors," "Other Executive Officers,"
"Executive Compensation," "Section 16(a) Ownership Reporting Delinquencies,"
and "Common Stock Ownership of Certain Beneficial Owners and Management"
sections of the registrant's proxy statement for its 1998 annual meeting
filed pursuant to Regulation 14A are incorporated in Part III of this Form
10-K by reference.
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PART I
Item 1. Business.
Consumers Water Company (Consumers or the Company) is a holding and
management company whose principal business is the ownership and operation
of water utility subsidiaries. Consumers owns directly or indirectly at
least 95% of the voting stock of 8 water companies (the Consumers Water
Subsidiaries) which operate 28 divisions providing water service to
approximately 232,000 customers in six states. The Company also owns 100% of
Consumers Applied Technologies, Inc. (CAT), which formerly provided services
primarily in the areas of meter installation, corrosion engineering,
contract operations and water conservation. On April 29, 1997, the Company
announced its intention to dispose of Consumers Applied Technologies, Inc.
CAT substantially shut down its operations during 1997. CAT continues to be
responsible for certain long-term contracts, however.
Consumers was incorporated under the laws of Maine in 1926. The address of
its executive offices is Three Canal Plaza, Portland, Maine 04101, and the
Company's telephone number is (207) 773-6438.
The Company had at December 31, 1997, subsidiaries as noted on Exhibit 21
attached hereto, the accounts of which are included in the consolidated
financial statements in this report.
Consumers Water Subsidiaries
The Consumers Water Subsidiaries operate 28 divisions in six states for the
collection, treatment and distribution of water for public use to
residential, commercial and industrial customers, to other water utilities
for resale and for private and municipal fire protection purposes. In 1997,
65% of the revenue of the Consumers Water Subsidiaries was generated from
residential accounts while sales for commercial users, industrial users,
fire protection and miscellaneous uses accounted for 13%, 8%, 8%, and 6% of
revenues respectively. Water utility revenues for the three years ended
December 31, 1997, 1996 and 1995 were $98,337,000, $93,587,000, and
$89,143,000, respectively. At December 31, 1997, the Consumers Water
Subsidiaries owned in the aggregate 3,428 miles of mainline pipe of which
approximately 84% was 6-inches or larger in diameter.
Of the 28 divisions, 14 use primarily surface supplies (lakes, ponds, rivers
and streams) as their source of supply; 12 obtain water principally or
entirely from wells; and 2 purchase their supplies from adjacent systems.
Less than 5% of the Consumers Water Subsidiaries' water usage is purchased
from other systems. In general, the Company considers the surface and well
supplies at the Consumers Water Subsidiaries to be adequate for anticipated
average daily demand and normal peak demand.
All of the systems (except one system serving solely industrial users in
Ohio and a few small developer built systems in New Hampshire) provide
customers with water which has been subjected to disinfection treatment and
some of which has been subjected to additional treatment such as softening,
sedimentation, filtration, chemical stabilization, iron and/or manganese
removal and taste and odor control. Nine systems own and operate full scale
water treatment plants. In addition, Consumers Illinois Water Company
(Consumers Illinois) operates 4 wastewater treatment facilities.
The water treatment, pumping and distribution capacities of the systems are
generally considered by management to be adequate to meet the present
requirements of residential, commercial and industrial customers. On a
continuing basis, the Consumers Water Subsidiaries make system improvements
and additions to capacity in response to changing regulatory standards,
changing patterns of consumption and increases in the number of customers.
See "Environmental Regulation." Operating and capital costs associated with
these improvements are normally recognized by the various state regulatory
commissions in setting rates. See "Rate Regulation."
Consumers' water utility business is seasonal because the demand for water
during the warmer months is generally greater than during the cooler months
due to additional requirements for industrial and residential cooling
systems, private and public swimming pools and lawn sprinklers.
The following table indicates, for each of the Consumers Water Subsidiaries,
the number of customers, revenues and net utility plant as of December 31,
1997:
<TABLE>
<CAPTION>
Number Number of Utility Net Utility
Subsidiary of Divisions Customers Revenue Plant (1)
- ------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Consumers Ohio Water Company 5 75,617 $31,746 $122,731
Consumers Illinois Water Company 7 59,698 21,342 98,985
Consumers Pennsylvania Water Company-
Shenango Valley Division (2) 1 18,655 7,689 30,963
Roaring Creek Division 1 17,645 8,648 37,701
Susquehanna Division 1 4,576 1,825 6,332
Consumers New Jersey Water Company 3 31,491 12,404 59,158
Consumers New Hampshire Water Company 1 8,229 6,543 32,318
Consumers Maine Water Company 9 15,598 8,140 31,807
Inter-Company Eliminations - - - (3,271)
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28 231,509 $98,337 $416,724
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<F1> Includes construction work in progress.
<F2> Includes Masury Water Company, wholly-owned by the Shenango Valley
Division.
</TABLE>
The properties of the Consumers Water Subsidiaries consist of transmission
and distribution mains and conduits, purification plants, pumping
facilities, wells, tanks, meters, supply lines, dams, reservoirs, buildings,
land, easements, rights and other facilities and equipment used for the
collection, purification, storage and distribution of water. Substantially
all of the property and all rights and franchises of the Consumers Water
Subsidiaries are owned by the subsidiaries and are subject to liens of
mortgages or indentures. For the most part, such liens are imposed to secure
bonds, notes and/or other evidences of long-term indebtedness of the
respective companies.
Management considers that the Consumers Water Subsidiaries' water
collection, treatment and distribution systems, facilities and properties
are well maintained and structurally sound. In addition, Consumers carries
replacement cost insurance coverage on substantially all of its and its
subsidiaries' above-ground properties, as well as liability coverage for
risks incident to their ownership and use.
Rate Regulation
The Consumers Water Subsidiaries are subject to regulation by their
respective state regulatory bodies. The state regulatory bodies have broad
administrative power and authority to regulate water and other public
utilities, including the power to regulate rates and charges, service and
the issuance of securities. They also establish uniform systems of accounts,
develop standards with respect to groundwater withdrawal rights, surface
water supply, potability and adequacy of treatment, approve the terms of
contracts and relations with affiliates and customers, and approve purchases
and sales of property and loans.
The profitability of the operations of the Consumers Water Subsidiaries is
influenced to a great extent by the timeliness and magnitude of rate
allowances by regulatory authorities in various states. Accordingly,
Consumers maintains a rate case management capability to ensure that the
tariffs of the Consumers Water Subsidiaries reflect, to the extent possible,
current costs of operations, capital, taxes, energy, materials and
compliance with environmental regulations. This process also addresses other
factors bearing on rate determinations, such as the quantity of rainfall and
temperature in a given period of time, system expansion and industrial
demand.
The approximate amount of annual rate increases allowed for the last three
years was $2,769,000 for 1997, $4,510,000 for 1996, and $6,938,000 for 1995,
represented by four, eight, and six, rate decisions, respectively.
The Company currently has two rate filings pending totaling $4.8 million of
requested annualized new revenue. Decisions on these cases are expected
during 1998.
Rates for some divisions of Consumers Ohio Water Company (Consumers Ohio)
are fixed by negotiated agreements with the political subdivisions that are
served, instead of through a filing with the Public Utility Commission of
Ohio. Currently, two of the four regulated divisions of Consumers Ohio are
operating under rate ordinances.
Water Utility Competition
In general, the Company believes that the Consumers Water Subsidiaries have
valid operating rights, free from unduly burdensome restrictions, sufficient
to enable them to carry on their businesses as presently conducted. They
derive their rights to install and maintain mains in streets, highways and
other public places, from the acts under which they were incorporated,
municipal consents and ordinances, permits granted for an indefinite period
of time by states and permits from state highway departments and county and
township authorities. In most instances, such operating rights are non-
exclusive. In certain cases, permits from state highway departments and
county and township authorities have not been received for service in
unincorporated areas, but service is being rendered without assertion or
lack of authority by the governmental body concerned.
Each of the Consumers Water Subsidiaries serves an area or areas in which it
is sole operator of the public water supply system. In some instances
another water utility provides service to a separate and sometimes
contiguous area within the same township or other political subdivision
served by one of the Consumers Water Subsidiaries.
In the states in which the operations of the Consumers Water Subsidiaries
are carried on, there exists the right of municipal acquisition by one or
more of the following methods: eminent domain, the right of purchase given
or reserved by a municipality or other political subdivision in granting a
franchise, and the right of purchase given or reserved under the law of the
state in which the subsidiary was incorporated or from which it received its
permit. The price to be paid upon acquisition is usually determined in
accordance with both federal law and the laws of the state governing the
taking of lands or other property under eminent domain statutes; in other
instances, the price may be negotiated, fixed by appraisers, selected by the
parties or computed in accordance with a formula prescribed in the law of
the state or in the particular franchise or special charter. The Company has
sold five divisions, with customers totaling approximately 15,000 under
threat of eminent domain in the last several years. The gain on those sales
totaled over $7 million. In addition, the Town of Hudson has recently
completed requirements for acquiring the assets of Consumers New Hampshire
Water Company pursuant to the New Hampshire condemnation statute. The
Company expects the Town to acquire the assets in the first quarter of 1998.
The Company is working with the local communities in its service areas in an
effort to prevent future eminent domain proceedings.
Environmental Regulation
The primary federal laws affecting the provision of water and wastewater
treatment services by the Consumers Water Subsidiaries are the Clean Water
Act (the CWA), the Safe Drinking Water Act (the SDWA) and the regulations
promulgated pursuant thereto by the United States Environmental Protection
Agency (EPA), as well as federal and state regulations affecting dams. These
laws and regulations establish criteria and standards, including those for
drinking water and for liquid discharges into waters of the United States.
The States have the right to establish criteria and standards stricter than
those established by the EPA, and some of the states in which the Consumers
Water Subsidiaries operate have done so. Numerous federal and state
environmental laws other than the SDWA, the CWA and Dam Safety Regulations,
affect the operations of the Consumers Water Subsidiaries.
Safe Drinking Water Act
The Federal SDWA established criteria and procedures for the EPA to develop
minimum national quality standards for drinking water. EPA regulations
promulgated pursuant to the SDWA set standards on the amount of certain
inorganic and organic chemical contaminants, microbials and radionuclides in
drinking water. The Federal 1996 Safe Drinking Water Act Amendments require
the EPA to put more emphasis on the benefits versus costs of compliance when
considering new or stricter finished water quality criteria and standards.
Stricter drinking water standards currently under consideration may result
in additional capital expenditures being required by the Company's Water
Subsidiaries. Estimated capital costs for the projects described below are
in 1998 dollars.
In order to eliminate and/or inactivate microbials in the finished water,
improved disinfection and/or filtration is required under the EPA Surface
Water Treatment Rule (SWTR) adopted pursuant to the SDWA. Except for one
location, the necessary improvements to comply with the SWTR have been
completed. The estimated cost for 1997 and beyond to comply with the SWTR,
replace aged infrastructure, increase capacity and address other SDWA items
at the one location, is estimated at $32 million with completion in year
2000. Costs related to dealing with future regulations for increased removal
and/or inactivation of microbials such as cryptosporidium cannot be
estimated at the present time.
Two of the Consumers Maine Water Company divisions have unfiltered surface
supplies pursuant to exemptions granted from the filtration requirement of
the SDWA. If filtration were required in the future, an additional
expenditure of $6 million would be necessary. Two of the Consumers Water
Subsidiaries' operations have groundwater that might be found to be under
the influence of a surface supply which could require filtration at an
estimated cost of $9 million.
The Disinfectants/Disinfection By-Products Rule (D/DBP) adopted under the
SDWA is expected to affect four Consumers Water Subsidiaries' operations.
The cost to comply with what was previously proposed as Stage I and Stage II
of this rule is expected to be $3 to $9 million. However, most of the
necessary improvements will be for Stage II compliance which will occur
after 2002.
An enhanced Surface Water Treatment Rule (ESWTR) is anticipated to be
proposed by the EPA in late 1998 or early 1999. A portion of the capital
investment indicated for compliance with the D/DBP Rule is expected also to
meet a portion of the ESWTR requirements. Additional capital investment for
ESWTR compliance cannot be estimated until the actual rule is in place.
The EPA has not yet established the Maximum Contaminant Level (MCL) for
radon in drinking water pursuant to the SDWA provisions applicable to
radionuclides. The Company anticipates the EPA will set the standard between
1,000 and 2,000 pico curies/liter. The necessary capital expenditures for
the lower level will be approximately $3 million and will occur after year
2000.
If elevated levels of herbicides and/or pesticides are found in the finished
water, existing water treatment facilities in Midwest farming areas may have
to be modified or improved. The capital cost of these modifications and
improvements, if required, are estimated at $8 million.
In 1992, Consumers Illinois executed a Letter of Commitment with the
Illinois Environmental Protection Agency to comply with the MCL for nitrates
at its Vermilion Division by 1997 and to take additional interim steps to
address the problem. The Vermilion Division will be required to add
treatment facilities and/or new sources of supply to reduce the level of
nitrates in its finished water at certain times of the year for an estimated
total project cost of $6 to $12 million, depending on the alternative
selected. Due to project delays, it is anticipated the 1997 compliance date
will be extended by the IEPA to the year 2000.
Most of the Water Subsidiaries' conventional water treatment facilities
recycle their filter backwash water. Future regulations may be promulgated
after the year 2000 that would require additional treatment for the backwash
prior to recycling. The cost relating to this issue cannot be estimated at
this time.
Dam Safety
The Consumers Water Subsidiaries own 10 major dams that are subject to the
requirements of the Federal and State regulations related to dam safety.
Most major dams undergo a comprehensive engineering inspection annually. The
Company believes nine of the dams are structurally sound and well
maintained. One of the dams in Pennsylvania will require repair or breaching
at a cost of less than $500,000.
Clean Water Act
The CWA regulates the discharge of liquid effluents from drinking water and
wastewater treatment facilities into the lakes, rivers, streams, subsurface
or sanitary sewers. Ten of the water treatment facilities owned by the
Consumers Water Subsidiaries generate water treatment precipitate from
operating conventional filtration facilities used for producing drinking
water. The water treatment precipitate is a combination of silt and
chemicals used in the treatment process and chemicals removed from the raw
water. For each of the ten facilities, the water treatment precipitate
generated from the treatment facilities is disposed of either in a storage
facility such as a lagoon owned by the subsidiary, an off-site facility not
owned by the subsidiary, a State approved landfill, municipal sewer system
or it is used for agricultural land application. Wastewater precipitate
generated from a small wastewater treatment facility in Illinois is used as
a soil additive. Additional capital expenditures and operating costs in
connection with the management and ultimate disposal of wastewater effluent
from water and wastewater facilities may be required in the future,
particularly if changes are made in the requirements of the CWA or other
applicable federal or state laws.
At Consumers Illinois, a new wastewater plant is now serving the Candlewick
area. Pursuant to a settlement agreement entered into with a Homeowners
Association in the area served by the Candlewick treatment plant, Consumers
Illinois has agreed to study the possible relocation of the effluent
discharge from the facility. As a result, the location of the discharge may
be changed at an estimated cost of up to $500,000.
The Struthers Filtration Plant, which is operated by Consumers Ohio, has
been disposing of treatment residuals at an inactive strip mine. The Ohio
Environmental Protection Agency has informed Consumers Ohio that it must
find an alternative method of disposal for the treatment precipitate. This
issue is being studied and the cost for an alternative disposal method is
estimated at $500,000 to $1.0 million.
Numerous federal and state environmental laws other than the SDWA, the CWA
and Dam Safety Regulations, affect the operations of the Consumers Water
Subsidiaries. In addition to the capital expenditures and costs currently
anticipated, changes in environmental regulations, enforcement policies and
practices or related matters may result in additional capital expenditures
and costs. Capital expenditures and costs required as a result of water
quality standards and environmental requirements generally have been
recognized by state public utility commissions as appropriate plant
additions in establishing rates.
Water Subsidiary Information
Consumers' five largest water subsidiaries, Consumers Ohio, Consumers
Illinois, Consumers New Jersey, Consumers Pennsylvania - Roaring Creek
Division (Roaring Creek), and Consumers Maine accounted for approximately
84% of consolidated operating revenues of the water subsidiaries in 1997 and
84% of consolidated water utility net property, plant and equipment at
December 31, 1997.
Consumers' five largest water subsidiaries are discussed separately below.
Consumers Ohio operates five divisions in Ohio which serve 75,617 customers.
Four of the five systems deliver treated water and one delivers partially
treated water to industrial customers. Consumers Ohio serves portions of
Ashtabula, Lake, Stark, Summit, and Mahoning counties in Northern Ohio.
Consumers Ohio obtains its water supply for its customers in Lake County
from Lake Erie. Customers in Mahoning County obtain their water from
artificial lakes. Finally, Consumers Ohio purchases water from Ashtabula
County to supply its Ashtabula County customers. Consumers Ohio's net
utility plant at December 31, 1997 and utility revenues for 1997 were
$122,731,000 and $31,746,000 respectively.
Consumers Illinois Consumers Illinois serves 49,689 customers in the City of
Kankakee, Village of Bourbonnais, Village of Tower Lakes, and a portion of
the Village of Bradley, as well as unincorporated areas of Kankakee,
Bourbonnais, Aroma, Limestone, and Manteno Townships, all in Kankakee
County; the Cities of Danville, Tilton, Westville and Catlin as well as the
communities of Lake Boulevard and Hooton, all in Vermilion County, the
Village of University Park and unincorporated areas of Crete and Monee
Townships in Will County, and portions of Lee, Boone and Knox Counties, all
in the state of Illinois.
Consumers Illinois also serves 10,009 sewer customers in the Village of
University Park, portions of Crete and Monee Townships in Will County, and
portions of Lee and Boone Counties, all in the state of Illinois.
Consumers Illinois obtains its water supply for its customers in Kankakee
County from the Kankakee River and satellite wells while its customers in
Vermilion County are supplied from Lake Vermilion. In Will, Lee, Boone and
Knox counties, its customers are supplied from deep well systems. The
economy of the Company's service areas is based on agriculture and diverse
light industries. Consumers Illinois' net utility plant at December 31,
1997, and utility revenues for 1997 were $98,985,000 and $21,342,000,
respectively.
Consumers New Jersey Consumers New Jersey operates three divisions in New
Jersey which serve 31,491 customers in territories which are not contiguous.
Each district draws its water from deep high capacity wells. The Southern
Division serves a growing residential area, primarily in Camden County. The
Central Division serves a growing residential area that also includes a
small amount of light industry and agriculture, primarily in Mercer County.
The Northern Division serves an industrial and agricultural community and
outlying municipalities, primarily in Warren County, that are experiencing
modest growth. Consumers New Jersey's net utility plant at December 31,
1997, and utility revenues for 1997 were $59,158,000 and $12,404,000
respectively.
Roaring Creek Roaring Creek, which draws its water from artificial lakes
within a 12,000 acre watershed, serves 17,645 residential, commercial, and
industrial customers in the City of Shamokin and other portions of
Northumberland, Columbia and Schuylkill Counties, all in Pennsylvania. The
economy of the area is based on light industrial and service oriented
employment. Roaring Creek's net utility plant at December 31, 1997, and
utility revenue for 1997 were $37,701,000 and $8,648,000, respectively.
Consumers Maine Consumers Maine serves 15,598 customers through eleven non-
contiguous water systems across the state of Maine. Towns served include
Camden, Rockport, Rockland, Thomaston, Owls Head, Union, Warren, Bucksport,
Skowhegan, Oakland, Hartland, Millinocket, Greenville, Freeport, Porter,
Parsonsfield, and Hiram. Each system has its own distinct water supply; five
systems use groundwater, five systems use surface water, and one system
purchases water from a neighboring municipal district. Consumers Maine's
customer base is primarily residential with light commercial and industrial
use. Net utility plant at December 31, 1997 and utility revenue for 1997
were $31,807,000 and $8,140,000 respectively.
Discontinued Operations
On April 29, 1997, the Company announced its intention to dispose of its
technical services company, Consumers Applied Technologies, Inc. The Company
has been unsuccessful in selling CAT as an on-going business and is
proceeding with its liquidation. Consumers established a reserve of $1.9
million in the first quarter of 1997 that included incurred losses of
approximately $390,000. The reserve was increased by $850,000 in the fourth
quarter to accommodate additional expenses associated with the completion of
certain contracts. CAT's operations were substantially shut down in 1997.
CAT continues to be responsible for certain long-term contracts, however.
See Note 12 to the consolidated Financial Statements for further detail.
Employees
Consumers Water Company and its subsidiaries employed 448 people as of
December 31, 1997, of which 422 were employed by the Consumers Utility
Subsidiaries. Non-supervisory personnel at the Consumers Water Subsidiaries
in Ohio, Pennsylvania and Illinois are covered by collective bargaining
agreements. Employee relations are considered by management to be
satisfactory throughout the Company.
Foreign Operations
The Company had no foreign operations or export sales in 1997.
Item 2. Properties.
(a) Description
See Item 1. "Consumers Water Subsidiaries" for description of Consumers'
principal properties and encumbrances thereon.
Consumers' properties are located as follows:
Illinois
(1) Consumers Illinois Water Company with seven divisions in
Kankakee, Danville, University Park, Sublette, Oak Run,
Willowbrook and Candlewick, Illinois.
Ohio
(2) Consumers Ohio Water Company with corporate offices in Poland
and five operating divisions located in Massillon, Struthers,
Mahoning Valley, Geneva and Mentor, Ohio.
(3) Masury Water Company located in Trumbull County, Ohio.
Pennsylvania
(4) Consumers Pennsylvania Water Company-Susquehanna Division
located in Sayre, Pennsylvania
(5) Consumers Pennsylvania Water Company-Shenango Valley Division
located in Sharon, Pennsylvania.
(6) Consumers Pennsylvania Water Company-Roaring Creek Division
located in Shamokin, Pennsylvania.
New Jersey
(7) Consumers New Jersey Water Company with corporate offices in
Hamilton and operating divisions in Blackwood, Hamilton Square
and Phillipsburg, New Jersey.
Connecticut
(8) Consumers Applied Technologies, Inc. located in Glastonbury,
Connecticut.
New Hampshire
(9) Consumers New Hampshire Water Company located in Londonderry,
New Hampshire.
Maine
(10) Consumers Maine Water Company with nine divisions located in
Kezar Falls, Freeport, Oakland, Rockport, Skowhegan, Greenville,
Hartland, Bucksport and Millinocket, Maine.
(11) Consumers' corporate headquarters located in Portland, Maine.
Item 3. Legal Proceedings.
Various environmental orders and policies affecting the Consumers Water
Subsidiaries are described above under the caption "Environmental
Regulation."
(a) Ohio Water Mercury Spill. In March, 1993, A.P. O'Horo Company,
an outside contractor (the "Contractor"), spilled a small amount
of mercury while working at a water treatment plant owned and
operated by Consumers Ohio Water Company, a subsidiary of the
Company ("Consumers Ohio"). Several areas in and around the
plant were contaminated by the spill, although no mercury
contaminated Consumers Ohio's water supply. Consumers Ohio
contacted all appropriate regulatory agencies regarding the
spill, and the clean up was completed by the end of 1994. The
total cost to clean up the spill was approximately $900,000.
Consumers Ohio received $100,000 from its insurer towards the
clean-up costs and had sought recovery of all of the clean-up
costs from the Contractor.
On December 20, 1993, the Contractor filed a Complaint against
Consumers Ohio in Lake County Court of Common Pleas seeking
recovery of the retainer of approximately $400,000 that
Consumers Ohio had withheld on this project. On December 30,
1993, Consumers Ohio filed a counterclaim against the Contractor
seeking recovery of all past and future costs related to the
spill. Consumers Ohio settled the claims brought by the
Contractor regarding the retainer, while continuing to pursue
recovery of the costs of the spill. On November 4, 1996, the
Court granted the Contractor's motion for a directed verdict,
finding that the Contractor was not liable for any of the clean-
up costs. Consumers Ohio appealed this decision. As a result of
this adverse judgement, Consumers Ohio increased the reserve
previously taken to cover clean-up costs by $560,000, or
$360,000 net of taxes. On December 26, 1997 the Court of Appeals
for the Eleventh District, State of Ohio, County of Lake
overturned this adverse judgement and ordered a new trial. The
reserve was not adjusted, pending the outcome of the new trial.
The Contractor has filed an appeal of this decision with the
Ohio Supreme Court.
(b) 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 the 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 judgement 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 judgement by the District Court with the
United States First Circuit Court of Appeals (the First Circuit)
alleging that the District Court erred in granting summary
judgement to the Company and the other defendants. On May 5,
1997 the First Circuit affirmed the granting of Summary
Judgement to the Company, its current and former subsidiaries,
and its Director, John H. Schiavi, by the United States District
Court for the District of Maine. On or about August 1, 1997, the
Penobscot Indian Nation filed a petition for certiorari with the
United States Supreme Court seeking a review of the First
Circuit's affirmation of the granting of summary judgement to
the Company and the other defendants. On October 14, 1997, the
Supreme Court denied the Penobscot Indian Nation's petition.
In connection with this litigation, John L. Palmer (no relation
to Director, John E. Palmer, Jr.), who was a co-defendant in the
suit brought by the Penobscot Indian Nation and was formerly a
director and officer of SHC Corporation, brought suit against
the Company and its former subsidiary, SHC Corporation, in
Cumberland County Superior Court in the State of Maine on May
29, 1996, seeking reimbursement of all of his legal fees
incurred in connection with his defense of the claims raised by
the Penobscot Indian Nation. This case was not affected by the
First Circuit's decision. In this litigation, the parties have
completed discovery and are awaiting trial.
(c) Candlewick Treatment Plant Litigation. On August 25, 1995, the
State of Illinois filed a Complaint in the Circuit Court of the
17th Judicial Court of Illinois in Boone County, Illinois
against the Company and its subsidiary, Consumers Illinois Water
Company ("Consumers Illinois"), alleging violation of the
effluent discharge standards under various state and federal
environmental regulations. The Complaint alleges that Consumers
Illinois' wastewater treatment plant violated such effluent
standards at various times since 1991 and seeks, among other
things, a civil penalty of $10,000 per day for each day that the
alleged violation continued and a civil penalty of $50,000 for
each alleged violation of the Illinois Environmental Protection
Act and the Illinois Pollution Control Board's water pollution
regulations.
On or about September 20, 1995, the Candlewick Lake Association,
Inc., an association of owners of lots within a lake community
development known as Candlewick Lake and served by the Consumers
Illinois wastewater treatment plant (the "Association"), sought
to intervene in the case. In its Complaint, the Association
alleged that effluent from the Consumers Illinois plant had
interfered with and damaged the recreational use of Candlewick
Lake. The Complaint sought $1,000,000 in damages from Consumers
Illinois. On October 25, 1996, Consumers Illinois entered into
an agreement with the Association in which the Association
agreed to dismiss its action against Consumers Illinois Water
Company without prejudice to refile its suit. Pursuant to the
terms of the Settlement Agreement, Consumers Illinois agreed to
cooperate in a study of water quality of Candlewick Lake and the
possible change in the discharge point for Consumers Illinois'
wastewater treatment plant.
The Settlement Agreement with the Association does not affect
the Complaint filed by the Illinois Attorney General, as to
which the Company has filed a motion to dismiss on the basis of
a lack of jurisdiction and as to which settlement negotiations
between the Illinois Attorney General and Consumers Illinois are
ongoing.
(d) Illinois Regulatory Appeal. Consumers Illinois had previously
filed in the Appellate Court for the Third District of Illinois
a Notice of Appeal and Petition for Review of an Order of the
Illinois Commerce Commission entered on May 8, 1996 (the
"Order"). The Order required the transfer of the net gain of
approximately $394,000 resulting from the sale of land by
Consumers Illinois from the shareholders of Consumers Illinois
to ratepayers in Consumers Illinois' Kankakee district in the
form of reduced rates over a 7-year period. The Notice of
Appeal, dated July 17, 1996, was also directed to the City of
Kankakee, the NutraSweet Group, Governor's State University and
the Village of University Park, who had intervened in the
underlying rate case giving rise to the Order.
On July 8, 1997, the Court reversed the Illinois Commerce
Commission's decision to treat the gain from the sale of land as
an adjustment to water operating revenue. The Court remanded the
case to the Illinois Commerce Commission for purposes of
modifying water rates to reflect elimination of the adjustment
and to allow Consumers Illinois to file for new rates consistent
with the Court's decision. The Illinois Commerce Commission
decided not to appeal the Court's decision and held a hearing on
October 23, 1997 to review tariff changes that will increase
annual revenues by about $92,000. Such changes were approved on
November 19, 1997.
Management believes that the various matters under litigation will not have
a significant adverse effect on either the Company's future results of
operations, financial position or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
(a) Market Information
The common shares of Consumers trade on the Nasdaq Stock Market (Nasdaq)
under the symbol: CONW. The following table sets forth the high and low last
sale prices for the common shares for the periods indicated, as reported by
Nasdaq, together with cash dividends declared per common share.
<TABLE>
<CAPTION>
DIVIDENDS
Calendar Year HIGH LOW DECLARED
-----------------------------------------------
<S> <C> <C> <C>
1997
First Quarter 18 3/4 16 3/4 $0.30
Second Quarter 17 3/4 15 1/8 0.30
Third Quarter 18 1/4 16 3/8 0.305
Fourth Quarter 20 3/4 17 0.305
------
$1.21
======
1996
First Quarter 19 16 1/2 $0.30
Second Quarter 18 1/4 14 1/2 0.30
Third Quarter 18 3/4 15 1/2 0.30
Fourth Quarter 19 1/4 16 3/4 0.30
-----
$1.20
=====
</TABLE>
(b) Holders
As of December 31, 1997, there were approximately 6,000 shareholders of
record of the Registrant's common shares.
Item 6. Selected Financial Data.
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenue-Continuing Operations $ 98,339 $ 93,589 $ 89,146 $ 80,397 $ 78,057
Net Income from Continuing Operations $ 12,076 $ 9,481 $ 11,913 $ 9,757 $ 11,660
Earnings Per Common Share:
Continuing Operations $ 1.36 $ 1.09 $ 1.41 $ 1.19 $ 1.59
Total $ 1.05 $ .72 $ 1.34 $ 1.22 $ .80
Dividends Declared Per Common Share $ 1.21 $ 1.20 $ 1.19 $ 1.17 $ 1.15
Total Assets $465,699 $455,982 $429,988 $397,535 $368,886
Long-Term Debt of Continuing
Operations (including current maturities,
sinking fund requirements and
redeemable preferred stock) $172,607 $173,562 $162,868 $132,648 $125,080
</TABLE>
Item 7. 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 December 31, 1997 and the results of
its operations for the three years ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
CONSTRUCTION PROGRAM
Capital construction expenditures totaled $21.8 million, net of
contributions and advances in 1997, substantially all of which relates to
the Company's utility subsidiaries. Projects included $1.5 million spent on
the major plant replacement described below, $1.3 million spent on system
improvements to a newly acquired system in Maine, which cost $3.0 million in
total; and many smaller projects around the Company.
The Company expects capital expenditures for 1998 through 2000 to be $72
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 is engaged in a project that will replace a major plant at
Consumers Pennsylvania Water Company - Shenango Valley Division. The cost of
this project is estimated at $32 million when it is completed in 2000. This
will replace one of the Company's oldest water treatment plants. Current and
future water quality regulations along with future demand projections
require that the existing plant be retired and replaced with a new facility.
The design is complete and construction has commenced. The Company expects
to finance this project with tax exempt debt and equity.
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 judgement 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 the additional risk of the SDWA requirements and the
uncertainty of future regulatory treatment of the cost of these
requirements. Due to this need for higher equity ratios and the size of the
Company's capital spending program the Company had expected to return to the
equity market. However, the sale of Consumers New Hampshire is expected to
generate over $17 million in cash. This will delay the Company's need to
return to the equity market for a few years. The Company will use the cash
from the New Hampshire sale to pay down the revolving lines of credit
described below. 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 December 31, 1997 of $70.0 million. In
addition, the Company has three revolving credit agreements totaling $35
million. These agreements are committed until mid-1999. At December 31,
1997, $17.0 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 $3.7 million in new equity in 1997. The Company
does not anticipate the need for cash from the Dividend Reinvestment Program
and has instructed the Plan's independent agent to acquire shares on the
market with dividends reinvested under the Plan. 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 $1,463,000 in 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). The
Company has been unsuccessful in selling CAT as an on-going business and is
proceeding with its liquidation. Estimated losses on the disposal equal
$2,350,000, net of tax benefits of $1,200,000. This estimated loss includes
an additional $850,000 net of tax loss recorded in the fourth quarter due to
anticipated cost overruns on CAT's last two remaining contracts. The
operating results of CAT 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 five 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, initiated
eminent domain proceedings to acquire the distribution system assets of
Consumers New Hampshire Water Company (Consumers New Hampshire), located in
Hudson. In order to settle the condemnation proceeding, the Company has
agreed to a $34.5 million sales price for all the assets of Consumers New
Hampshire. This represents about 8% of the Company's total assets. A
purchase and sale agreement was signed by the Town and Consumers New
Hampshire on October 24, 1997. The sale was approved by the New Hampshire
Public Utilities Commission on October 24, 1997. The voters of the Town of
Hudson approved the acquisition on January 13, 1998. The Town has completed
the steps required under New Hampshire's condemnation statute, and the sale
is expected to close during the first quarter of 1998 with a gain of
approximately $3.5 million or $0.40 per share. The Company continues to work
with the local communities in its service areas in an effort to prevent
future eminent domain proceedings.
OTHER
Gains (losses) net of taxes equaled $425,000 or $0.05 per share, ($240,000)
or ($0.03) per share and $1,108,000 or $0.13 per share in 1997, 1996, and
1995, respectively. These gains (losses) were due to several small land
sales in Ohio, Illinois, Pennsylvania, New Hampshire and Maine plus the more
significant sales described below.
In 1994, Consumers Illinois Water Company (Consumers Illinois) recorded a
gain, net of taxes of $394,000 from the sale of nine acres of land. In 1996,
as part of a rate hearing, the Illinois Commerce Commission ordered
Consumers Illinois to return the gain from this sale to customers through
reduced rates. Therefore, the gain was reversed in the second quarter of
1996. Consumers Illinois challenged this decision in court. On July 8, 1997,
the Appellate Court for the Third District of Illinois reversed the Illinois
Commerce Commission's decision to treat the gain from the sale of land as an
adjustment to water operating revenue. Therefore, Consumers Illinois
recorded a gain in the third quarter of 1997.
On June 5, 1995, the Company's Consumers Ohio Water Company subsidiary
closed on the sale of Girard Lake and Liberty Lake. These two lakes once
supplied raw water to the area's steel industry. The lakes have not been
needed as a source of supply for several years. The lakes were sold for $2.5
million and generated a gain, net of taxes, of $724,000.
On October 20, 1994, the Damariscotta division of Consumers Maine Water
Company (Consumers Maine) was taken by the local communities by eminent
domain for $600,000 or approximately 75% of rate base. Consumers Maine
prepared to challenge the purchase price in court, but, instead, on February
21, 1995, reached an out of court settlement for $1,552,000. This sale
generated a gain which was recorded in 1995 of approximately $363,000, net
of taxes.
In 1985, the Company's subsidiary, Consumers Maine Water Company, 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 its water rights and carrying
costs until its first rate case after June 1, 1997. Consumers Maine
currently has approximately $600,000 on its balance sheet related to this
project and expects to file a rate case with the MPUC in 1998 seeking
recovery of these costs.
The State of Maine has assessed the Company for additional taxes based on a
unitary method. The Company has appealed this assessment and does not expect
that it will have a material impact on the financial position or results of
operations of the Company.
The Company has completed a review of the computer programs used in its
business to determine the risk that those systems might fail due to the so-
called "millennium bug" which causes computer systems to fail or malfunction
as a result of their inability to distinguish dates after December 31, 1999
using a two digit entry field. The Company's computer systems can be divided
into three categories: the Financial Information System, the Customer
Information System, and other systems. The Company plans on replacing the
Financial Information System during 1998 due primarily to the age of the
system. The new system is expected to cost approximately $2.5 million in
total. Most of the costs of the new system pertain to hardware or software
and therefore will be capitalized. Training, data conversion, and other
costs will be expensed. It is expected that efficiency gains from the new
system will offset many of these costs. The Company has completed updates to
the Customer Information System and has begun testing. This work was
completed with in-house resources and therefore added no significant
incremental costs. The Company is continuing to evaluate its other systems
but does not expect the cost of updating these systems to be material. The
Company believes that its plan minimizes the risk of failure in its computer
systems due to the millennium bug.
The Company recently announced that it intended to form Consumers Services
Company to provide financial support services to the Company's water
utilities beginning in 1998. These services are now provided by the Company
in part and by each water utility subsidiary in part. Other support services
such as engineering and human resources may be added in the future.
RESULTS OF OPERATIONS
1997 Compared to 1996
UTILITY REVENUE
Utilities revenues were $4,750,000 or 5.0% greater in 1997 compared to 1996,
due primarily to $2,916,000 in rate increases, and increased consumption due
to drier weather throughout the areas served by Consumers Water
Subsidiaries. During 1997, the Company settled four rate cases providing
additional annual revenues of $2.8 million. Currently, the Company has two
rate cases pending which request additional annual revenues of $4.8 million.
OPERATING EXPENSES
Operating expenses were approximately $1,696,000 or 2.6% greater in 1997
than in 1996. Depreciation increased $1,142,000 due to higher plant balances
and depreciation rates. Taxes other than income increased $629,000
predominantly due to increases in property taxes due to higher plant
balances. Operations and maintenance expense decreased by $75,000 due to the
Company's cost control efforts.
OTHER
Interest expense increased $1,024,000 or 7.4% in 1997 compared to 1996, due
primarily to higher debt balances.
RESULTS OF OPERATIONS
1996 Compared to 1995
UTILITY REVENUE
Revenues increased $4,443,000 or 5.0% in 1996 compared to 1995, primarily
due to $5,256,000 in rate increases offset by reduced consumption. The
reduced consumption was due to a wet 1996 compared to a dry 1995 and reduced
industrial usage. The causes for the remainder of the reduced consumption
are difficult to determine, but Management believes that some decreased
usage may have been attributable to increased conservation due to the large
percentage rate increases.
OPERATING EXPENSES
Operating expenses increased approximately $4,500,000 or 7.5%. Expenses
increased due to increased depreciation of $1,293,000 and increased taxes
other than income of $1,009,000 predominately due to increased property
taxes due to higher plant balances. The remainder of the increase was due to
increased operating expense of $400,000 at the new treatment plant at the
Consumers Pennsylvania Water Company - Roaring Creek Division, which went on
line in May, 1995, and normal expense increases.
OTHER
Interest expense increased $1,116,000 or 8.8%, due primarily to increased
debt balances.
Item 8. Financial Statements and Supplementary Data.
Report of Management
Report of Independent Public Accountants
Consolidated Statements of Income for Years Ended
December 31, 1997, 1996 and 1995
Consolidated Balance Sheets at
December 31, 1997 and 1996
Consolidated Statements of Capitalization
and Interim Financing at December 31, 1997 and 1996
Consolidated Statements of Cash Flow
for Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Change in
Common Shareholders' Investment for
Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Quarterly Information Pertaining to the
Results of Operations for the Years
Ended December 31, 1997 and 1996
Consumers Water Company and Subsidiaries
REPORT OF MANAGEMENT
The accompanying consolidated financial statements of Consumers Water
Company and its subsidiaries were prepared by management, which is
responsible for the integrity and objectivity of the data presented,
including amounts that must necessarily be based on judgements or estimates.
The consolidated financial statements were prepared in conformity with
generally accepted accounting principles and financial information appearing
throughout this annual report is consistent with these statements.
In recognition of its responsibility, management maintains and relies upon
systems of internal accounting controls, which are reviewed and evaluated on
an ongoing basis. The systems are designed to provide reasonable assurance
that transactions are executed in accordance with management's authorization
and properly recorded to permit preparation of reliable financial
statements, and that assets are safeguarded. Management must assess and
balance the relative cost and expected benefits of these controls.
These financial statements have been audited by Arthur Andersen LLP, the
Company's independent public accountants. Their audit, in accordance with
generally accepted auditing standards, resulted in the expression of their
opinion. Arthur Andersen LLP's audit does not limit management's
responsibility for the fair presentation of the financial statements and all
other information in this annual report.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with management, internal audit personnel, and
Arthur Andersen LLP to review the work of each and to discuss areas relating
to internal accounting controls, audits, and financial reporting. Arthur
Andersen LLP and the Company's internal auditor have free access to meet
individually with the Committee, without management present, at any time,
and they periodically do so.
/s/ John F. Isacke
John F. Isacke
Senior Vice President
Chief Financial Officer
Treasurer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Consumers Water Company:
We have audited the accompanying consolidated balance sheets and the
consolidated statements of capitalization and interim financing of CONSUMERS
WATER COMPANY (a Maine corporation) and subsidiaries (the Company) as of
December 31, 1997 and 1996, and the related consolidated statements of
income, change in common shareholders' investment and cash flows for each of
the three years in the period ended December 31, 1997. These consolidated
financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 financial statements referred to above present fairly,
in all material respects, the financial position of Consumers Water Company
and subsidiaries 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.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II, Valuation and Qualifying
Accounts for the years ended December 31, 1997, 1996, and 1995 is presented
for purposes of complying with the Securities and Exchange Commission's
rules and is not a required part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, is fairly stated in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 5, 1998
Consumers Water Company and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------
(Dollars in Thousands Except per Share Amounts)
<S> <C> <C> <C>
Operating Revenue $ 98,339 $ 93,589 $ 89,146
Costs and Expenses:
Operations and maintenance 42,659 42,734 40,536
Depreciation 11,270 10,128 8,835
Taxes other than income 12,452 11,823 10,814
----------------------------------
Operating Expenses 66,381 64,685 60,185
----------------------------------
Operating Income 31,958 28,904 28,961
----------------------------------
Other Income and (Expense):
Interest expense (15,277) (14,635) (13,725)
Construction interest capitalized 398 780 986
Preferred dividends and minority interest of subsidiaries (166) (143) (156)
Gains (losses) on sales of properties 690 (342) 2,042
Other 1,032 296 690
----------------------------------
(13,323) (14,044) (10,163)
----------------------------------
Earnings from Continuing Operations Before Income Taxes 18,635 14,860 18,798
Income Taxes (Note 2) 6,559 5,379 6,885
----------------------------------
Earnings from Continuing Operations:
Income from continuing operations 12,076 9,481 11,913
----------------------------------
Loss From Discontinued Operations:
Before discontinuance (387) (3,230) (610)
Provision for loss on disposal of discontinued operations (2,350) - -
----------------------------------
Total from discontinued operations (2,737) (3,230) (610)
----------------------------------
Net Income $ 9,339 $ 6,251 $ 11,303
==================================
Weighted Average Shares Outstanding 8,857 8,625 8,385
Basic Earnings (Loss) per Common Share:
Continuing Operations $ 1.36 $ 1.09 $ 1.41
----------------------------------
Discontinued Operations-
Before discontinuance $ (0.04) $ (0.37) $ (0.07)
Loss from disposal of discontinued operations $ (0.27) $ 0.00 $ 0.00
----------------------------------
Total Discontinued Operations $ (0.31) $ (0.37) $ (0.07)
----------------------------------
Total Basic Earnings per Common Share $ 1.05 $ 0.72 $ 1.34
==================================
Diluted Earnings (Loss) per Common Share:
Continuing Operations $ 1.36 $ 1.09 $ 1.41
----------------------------------
Discontinued Operations-
Before discontinuance $ (0.04) $ (0.37) $ (0.07)
Loss from disposal of discontinued operations $ (0.27) $ 0.00 $ 0.00
----------------------------------
Total Discontinued Operations $ (0.31) $ (0.37) $ (0.07)
----------------------------------
Total Diluted Earnings per Common Share $ 1.05 $ 0.72 $ 1.34
==================================
Dividends declared per common share $ 1.21 $ 1.20 $ 1.19
==================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Consumers Water Company and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Assets
Property, Plant and Equipment, at cost (Note 1):
Plant in service $499,087 $476,067
Less-Accumulated depreciation 92,787 83,833
--------------------
406,300 392,234
Construction work in progress 11,843 12,567
--------------------
Net property, plant and equipment 418,143 404,801
--------------------
Assets of Discontinued Operations, Net 2,679 5,213
--------------------
Investments, at cost 1,520 1,706
--------------------
Current Assets:
Cash and cash equivalents (Note 1) 2,694 1,775
Accounts receivable, net of reserves of $924 in 1997 and $982 in 1996 8,695 8,971
Unbilled revenue 5,077 5,015
Inventories (Note 1) 2,068 2,054
Prepayments and other 6,585 6,848
--------------------
Total current assets 25,119 24,663
--------------------
Other Assets:
Funds restricted for construction activity (Note 3) 1,079 2,380
Deferred charges and other assets 17,159 17,219
--------------------
18,238 19,599
--------------------
$465,699 $455,982
====================
Shareholders' Investment and Liabilities
Capitalization (See Separate Statement):
Common shareholders' investment $108,657 $106,015
Preferred shareholders' investment 1,044 1,054
Minority interest 2,370 2,352
Long-term debt 171,771 172,917
--------------------
Total capitalization 283,842 282,338
--------------------
Contributions in Aid of Construction 77,297 73,208
--------------------
Current Liabilities:
Interim financing (See Separate Statement) 19,666 17,999
Accounts payable 5,177 5,871
Accrued taxes (Note 2) 9,945 8,103
Accrued interest 3,919 3,873
Dividends payable 2,754 2,629
Accrued expenses and other 10,310 10,395
--------------------
Total current liabilities 51,771 48,870
--------------------
Commitments and Contingencies (Note 10)
Deferred Credits:
Customers' advances for construction 22,049 22,378
Deferred income taxes (Note 2) 26,246 24,506
Unamortized investment tax credits 4,494 4,682
--------------------
52,789 51,566
--------------------
$465,699 $455,982
====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Consumers Water Company and Subsidiaries
Consolidated Statements of Capitalization and Interim Financing
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Capitalization (Notes 3 and 5)
Common Shareholders' Investment:
Common stock, $1 par value
Authorized: 15,000,000 shares
Issued: 8,967,894 shares in 1997 and 8,732,202 shares in 1996 $ 8,968 $ 8,732
Amounts in excess of par value 79,555 75,686
Reinvested earnings 20,134 21,597
--------------------
108,657 106,015
--------------------
Preferred Shareholders' Investment:
Preferred stock, $100 par value 1,044 1,054
--------------------
Minority Interest:
Common stock, at equity 692 674
Preferred stock 1,678 1,678
--------------------
2,370 2,352
--------------------
Long-term Debt:
First mortgage bonds, debentures and promissory notes-
Maturities Interest Rate Range
1997 5.94% to 6.10% - 7
1998 5.94% 1 17,069
1999 5.99% to 8.50% 17,027 45
2000 8.59% 8 11
2001 - - -
2002 - - -
2003-2007 8.00% to 10.55% 14,735 15,440
2008-2012 1.00% to 10.54% 4,899 4,959
2013-2017 0.00% to 9.50% 9,126 9,139
Thereafter 5.60% to 10.40% 126,811 126,892
--------------------
Total first mortgage bonds, debentures and notes 172,607 173,562
Less-Sinking fund requirements and current maturities 836 645
--------------------
171,771 172,917
--------------------
Total capitalization 283,842 282,338
--------------------
Interim Financing (Note 4):
Notes payable 18,830 17,354
Sinking fund requirements and current maturities 836 645
--------------------
Total interim financing 19,666 17,999
--------------------
Total capitalization and interim financing $303,508 $300,337
====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Consumers Water Company and Subsidiaries
Consolidated Statements of Change in
Common Shareholders' Investment
<TABLE>
<CAPTION>
Number of Shares, (Dollars in Thousands)
$1 par value, ----------------------
Issued and Excess of Reinvested
For the years ended December 31, 1997, 1996 and 1995 Outstanding Par Value Earnings
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1994 8,259,685 $68,084 $ 24,584
Net income 11,303
Cash dividends:
Common shares (10,044)
Preferred shares (56)
Dividend Reinvestment Plan 212,149 3,280
Employee benefit plans 22,852 371
Other - (17) (1)
Balance, December 31, 1995 8,494,686 71,718 25,786
Net income 6,251
Cash dividends:
Common shares (10,386)
Preferred shares (55)
Dividend Reinvestment Plan 215,128 3,571
Employee benefit plans 22,388 384
Other - 13 1
--------------------------------------
Balance, December 31, 1996 8,732,202 75,686 21,597
Net income 9,339
Cash dividends:
Common shares (10,748)
Preferred shares (54)
Dividend Reinvestment Plan 211,886 3,463
Employee benefit plans 23,806 404
Other - 2 -
--------------------------------------
Balance, December 31, 1997 8,967,894 $79,555 $ 20,134
======================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Consumers Water Company and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Operating activities:
Net income $ 9,339 $ 6,251 $ 11,303
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 13,397 11,944 10,268
Deferred income taxes and investment tax credits 1,556 2,466 1,967
(Gains) losses on sales of properties (689) 342 (2,028)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable and unbilled revenue 214 (544) (1,112)
(Increase) decrease in inventories (14) (19) 232
Decrease (increase) in prepaid expenses 263 (1,015) 8
Increase in accounts payable and accrued expenses 2,447 578 2,919
Change in other assets, net of change in other liabilities of
continuing operations (1,226) (3,188) (2,437)
Change in assets, net of change in liabilities of
discontinued operations 184 1,082 (1,867)
Loss on disposal of discontinued operations 2,350 - -
--------------------------------
Total adjustments 18,482 11,646 7,950
--------------------------------
Net cash provided by operating activities 27,821 17,897 19,253
--------------------------------
Investing activities:
Capital expenditures (27,605) (34,946) (40,313)
Payment received on a note receivable - 1,330 -
Decrease (increase) in funds restricted for construction activity 1,301 (2,093) 2,216
(Decrease) increase in construction accounts payable (813) 205 126
Net cash cost of acquisitions (Note 6) - (1,988) (1,300)
Net proceeds from sales of properties (Note 7) 437 990 4,861
--------------------------------
Net cash used in investing activities (26,680) (36,502) (34,410)
--------------------------------
Financing activities:
Net borrowing (repayment) of short-term debt 1,476 6,724 (14,176)
Proceeds from issuance of long-term debt - 11,410 48,349
Repayment of long-term debt (955) (716) (18,029)
Proceeds from issuance of stock 4,095 4,182 3,876
Advances and contributions in aid of construction 7,010 8,437 6,189
Repayments of advances (1,167) (1,294) (966)
Taxes paid by developers on advances and contributions in
aid of construction (4) (383) (513)
Cash dividends paid (10,677) (10,397) (9,962)
--------------------------------
Net cash (used in) provided by financing activities (222) 17,963 14,768
--------------------------------
Net increase (decrease) in cash and cash equivalents 919 (642) (389)
Cash and cash equivalents at beginning of year 1,775 2,417 2,806
--------------------------------
Cash and cash equivalents at end of year $ 2,694 $ 1,775 $ 2,417
================================
Supplemental disclosures of cash flow information from continuing
operations
Cash paid during the year for:
Interest (net of amounts capitalized) $ 14,525 $ 13,306 $ 12,319
Income taxes $ 2,782 $ 4,538 $ 2,868
Noncash investing and financing activities for the year:
Assets acquired by stock issuance and/or assumption of debt of acquired
company $ - $ - $ 150
Property advanced or contributed $ 2,083 $ 1,543 $ 1,230
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Consumers Water Company and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Business
Consumers Water Company (Consumers or the Company) is a holding and
management company whose principal business is the ownership and operation
of water utility subsidiaries. Consumers owns directly or indirectly at
least 95% of the voting stock of 8 water companies (the Consumers Water
Subsidiaries) which operate 28 divisions providing water service to
approximately 232,000 customers in six states. The Company also owns 100% of
Consumers Applied Technologies, Inc. (CAT), which formerly provided services
primarily in the areas of meter installation, corrosion engineering,
contract operations and water conservation. On April 29, 1997, the Company
announced its intention to dispose of CAT.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Consumers and its water utility and utility services subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements and related footnotes
have been restated to reflect the Company's utility services subsidiary,
Consumers Applied Technologies, Inc., as a discontinued operation. See Note
12.
Regulation
The rates, operations, accounting and certain other practices of the
Company's utility subsidiaries are subject to the regulatory authority of
State Public Utility Commissions.
Property, Plant and Equipment
The utility subsidiaries generally capitalize interest at current rates on
short-term notes payable used to finance major construction projects.
Utility plant construction costs also include payroll, related fringe
benefits and other overhead costs associated with construction activity.
Depreciation is provided principally at straight-line composite rates.
Depreciation rates are based on the estimated useful lives of the assets
which range from 2 to 100 years. The consolidated provision, based on
average amounts of depreciable utility plant (which excludes contributions
in aid of construction and customers' advances for construction for most
subsidiaries), approximated 2.9% in 1997, 2.8% in 1996, and 2.7% in 1995.
Under composite depreciation, when property is retired or sold in the normal
course of business, the entire cost, including net cost of removal, is
charged to accumulated depreciation, and no gain or loss is recognized.
Use of Estimates in the Preparation of Financial Statements
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
All of the utility subsidiaries accrue estimated revenue for water
distributed but not yet billed as of the balance sheet date.
Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments with an original maturity of three
months or less, which are not restricted for construction activity, to be
cash equivalents.
Disclosures about Fair Value of Financial Instruments
The carrying amount of cash, temporary investments, notes receivable and
preferred stock approximate their fair value. The fair value of long-term
debt based on borrowing rates currently available for loans with similar
terms and maturities is approximately $188 million.
Inventories
Inventories generally consist of materials and supplies. They are stated at
the lower of cost (average cost method) or market.
Other Assets
Deferred charges consist primarily of financing charges, rate case, other
expenses, and notes receivable totaling $158,890.
The expenses related to rate proceedings are deferred and amortized over
periods that generally range from one to three years, as permitted by the
governing regulatory authority. Other assets also include preliminary survey
and investigation costs and certain items amortized, subject to regulatory
approval, over their anticipated period of recovery. Deferred financing
charges are amortized over the lives of the related debt issues.
Customers' Advances/Contributions in Aid of Construction
The water subsidiaries periodically receive property or cash to reimburse
the subsidiary for installing property for or on behalf of the customers
subject to written agreements. The terms of these agreements indicate
whether and under what circumstances these amounts are refundable. Amounts
that are not refundable are recorded as contributions in aid of
construction. For most of the subsidiaries, contributions in aid of
construction remains on the balance sheet until the property is retired.
Contributed property generally is not depreciated. Certain of the
subsidiaries do depreciate contributed property and amortize contributions
in aid of construction at the composite rate of the related property based
on specific orders of their governing regulatory authorities.
In accordance with Internal Revenue Code Section 118(b), the Company's water
subsidiaries have been required to report as taxable income all
contributions in aid of construction and customer advances received after
1986, and to make corresponding additions to the tax basis of its
depreciable property for such amounts. However, pursuant to the Small
Business Job Protections Act of 1996, which added IRC Section 118(c), water
utilities are not required to recognize contributions in aid of construction
or customer advances in taxable income after June 12, 1996.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return. The rate-making practices followed by most regulatory agencies allow
the utility subsidiaries to recover, through customer rates, federal and
state income taxes payable currently and deferred taxes related to certain
temporary differences between pretax accounting income and taxable income.
The income tax effect of temporary differences not allowed currently in
rates is recorded as deferred taxes with an offsetting regulatory asset or
liability. The Company expects that these regulatory assets will be
recovered through customer rates in the future when such taxes become
payable.
Investment Tax Credits
Investment tax credits of utility subsidiaries are deferred and amortized
over the estimated useful lives of the related properties. Effective January
1, 1986, investment tax credits were eliminated by the Tax Reform Act of
1986 except for property meeting specific transitional rules.
Earnings (Loss) Per Common Share
Earnings (loss) per common share are based on the annual weighted average
number of shares outstanding and common share equivalents. The effect of
employee stock options, which are included as common share equivalents in
the diluted earnings per share calculation, is not significant.
Inpairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed of," requires impairment losses on long-lived
assets to be recognized when an asset's book value exceeds its expected
future cash flows (undiscounted). This statement imposes stricter criteria
for regulatory assets by requiring that such assets be probable of future
recovery at each balance sheet date. The Company adopted this standard in
1996. The adoption of SFAS No. 121 did not have a material impact on the
financial position or results of operations of the Company.
New Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Other Related Information,"
require certain disclosures and presentations in the financial statements.
While these standards apply to other utilities, management has determined
they do not apply to the Company.
(2) Income Tax Expense
The Company uses the liability method in accounting for income taxes. 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 are recoverable or payable
through future rates, regulatory assets and liabilities have been recorded
in the accompanying Consolidated Balance Sheets. Net regulatory assets of
approximately $4.2 million and $3.9 million at December 31, 1997 and 1996
respectively are reflected in the balance sheet.
Accumulated deferred taxes consisted of tax assets of $1,972,000, $565,000,
and $599,000 related to alternative minimum tax and are offset by
liabilities of $27,836,000, $23,655,000, and $22,347,000, which are
predominantly related to depreciation and other plant related differences in
1997, 1996 and 1995, respectively. Deferred tax assets are expected to be
realized in the future; therefore, no valuation allowance has been recorded.
The components of income tax expense from continuing operations reflected in
the Consolidated Statements of Income are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
(Dollars in Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Currently payable $4,738 $3,072 $4,960
Deferred 1,269 1,994 1,459
Investment tax credit amortization (187) (185) (190)
------------------------------
5,820 4,881 6,229
------------------------------
State:
Currently payable 287 202 356
Deferred 450 292 271
State investment tax credit, net of amortization 2 4 29
------------------------------
739 498 656
------------------------------
Total provision $6,559 $5,379 $6,885
==============================
</TABLE>
The table below reconciles the federal statutory rate to a rate computed by
dividing income tax expense, as shown in the previous table, by income from
continuing operations before income tax expense.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 2.6 2.2 2.3
Effect of decrease in statutory rate on reversing timing items ( .5) ( .4) ( .2)
Investment tax credit amortization (1.0) (1.3) ( .9)
Other .2 1.4 1.3
----------------------
35.3% 35.9% 36.5%
======================
</TABLE>
(3) Long-Term Debt
Maturities and sinking fund requirements of the first mortgage bonds,
debentures and notes, including capitalized leases, are $836,000 in 1998,
$17,826,000 in 1999, $2,010,000 in 2000, $2,010,000 in 2001, $2,010,000 in
2002 and $147,915,000 thereafter.
Substantially all of the Company's water utility plant is pledged as
security under various indentures or mortgages. The indentures restrict cash
dividends and repurchases of the Company's subsidiary's common stocks. The
various water utility subsidiaries' indentures generally prohibit the
payment of dividends on common shares in excess of retained earnings plus a
stated dollar amount. Approximately $37.7 million of reinvested earnings
were not so restricted at December 31, 1997. The parent Company has no cash
dividend restrictions on its retained earnings of $20.1 million.
Funds restricted for construction activity were obtained through the
issuance of tax exempt bonds, the use of which is restricted for utility
plant construction. At December 31, 1997, there was $1.1 million of
restricted funds remaining. Interest income earned is included in Other in
the accompanying Consolidated Statements of Income.
(4) Notes Payable
Notes payable are incurred primarily for temporary financing of plant
expansion. It is the subsidiaries' intent to repay these borrowings with the
proceeds from the issuance of long-term debt or equity securities. Certain
information related to the borrowings of the continuing operations is as
follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unused lines of bank credit $69,970 $72,646 $43,670
Borrowings outstanding at year-end 18,830 17,354 10,630
-----------------------------
Total lines of bank credit $88,800 $90,000 $54,300
=============================
Monthly average borrowings during the year $18,914 $17,071 $22,272
=============================
Maximum borrowings at any month-end during the year $20,430 $20,615 $31,815
=============================
Weighted average annual interest rate during the year 6.9% 7.0% 7.7%
=============================
Weighted average interest rate on borrowings outstanding at year-end 6.9% 6.7% 7.3%
=============================
</TABLE>
(5) Shareholders' Investment
As of December 31, 1997, the Company reserved issuable common shares for the
following purposes:
<TABLE>
<S> <C>
401(k) Savings Plan 405,511
Stock Option Plans 120,000
Long-term Incentive Plan 400,000
-------
925,511
=======
</TABLE>
The stock option plans approved by stockholders in 1988 and 1993 provide for
the sale of shares to eligible key employees of the Company and its
subsidiaries. The plans provide that option prices shall not be less than
100% of the fair market value on the date of the grant. The options expire
after five years. During 1997, 0 options were granted, 2,000 options were
exercised, and 20,600 options lapsed and were canceled. During 1996, 30,000
options were granted, 1,300 options were exercised, and 19,654 options
lapsed and were canceled. During 1995, 27,000 options were granted, no
options were exercised and 38,493 options lapsed and were canceled. At
December 31, 1997, options for 97,400 shares were exercisable at prices of
$18.25, $17.25, $16.75, and $17.50 per share. Stock options were exercised
in 1997 at $16.75. Stock options were exercised in 1996 at $16.50. No
options were exercised in 1995.
Information regarding outstanding preferred stock $(100 par value) of the
Company and its subsidiaries is as follows:
<TABLE>
<CAPTION>
Par Value
of Shares
Cumulative Current Shares Outstanding
Dividend Call Price Shares Issued and (Dollars in
Rate% Per Share Authorized Outstanding Thousands)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumers Pennsylvania-
Shenango Valley Division 5 $110 10,000 9,964 $ 996
Consumers Illinois Water Company 5 1/2 107 5,000 3,577 358
Consumers Maine Water Company 5 105 4,000 2,739 274
Consumers Water Company 5 1/4 105 30,000 10,438 1,044
Consumers Water Company - None 120,000 - -
</TABLE>
In addition to the shares listed above, Consumers Water Company owns 36
preferred shares of Consumers Pennsylvania Water Company-Shenango Valley
Division, 423 preferred shares of Consumers Illinois Water Company and 11
preferred shares of Consumers Maine Water Company.
Of the total 30,000 Consumers Water Company preferred shares authorized with
voting rights, 15,925 shares have been designated 5-1/4% Cumulative
Preferred Stock Series A. The remaining 14,075 shares are undesignated. The
difference between par value and acquisition price was credited to amounts
in excess of par value.
The Company adopted the disclosure-only option under SFAS No. 123,
"Accounting for Stock-Based Compensation," as of December 31, 1996. The
Company issued no stock options in 1997 and does not plan to issue any in
the future. If the fair value based accounting had been used, 1996 net
income would have been $6,243,000 compared to $6,251,000 as reported. Net
income in 1995 would have been $11,291,000 compared to $11,303,000 as
reported. Earnings per share would not change from the reported amounts. The
fair value for these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for the years ended December 31, 1996 and 1995, respectively:
expected volatility of 6.57% and 4.37%; risk-free interest rates of 5.54%
and 7.76% expected life of 5 years and dividend yields of 6.89% for both
years. The weighted average fair value of each option granted during the
years ended December 31, 1996 and 1995 was $.40 and $.75 respectively.
(6) Acquisitions
On November 18, 1996, the Company, through its subsidiary, Consumers Maine
Water Company, acquired the stock of the Bucksport Water Company for
$1,079,000. Bucksport Water Company was subsequently merged into Consumers
Maine Water Company.
On September 10, 1996, the Company, through its subsidiary, Consumers Maine
Water Company, acquired the assets of Hartland Water Company for $148,000.
On September 23, 1996, the Company, through its subsidiary, Consumers
Pennsylvania Water Company-Shenango Valley Division, acquired the assets of
Mercer Water Company for $761,000.
On September 14, 1995, the Company, through its subsidiary, Consumers New
Jersey Water Company, acquired the water utility assets of Lakeland County
Hospital for $1,450,000.
All of these acquisitions were accounted for using the purchase method of
accounting, and the results of their operations have been included in the
consolidated financial statements since the date of acquisition.
(7) Dispositions
Gains (losses) net of taxes equaled $425,000 or $0.05 per share, $(240,000)
or $(0.03) per share and $1,108,000 or $0.13 per share in 1997, 1996, and
1995, respectively. These gains (losses) were due to several small land
sales in Ohio, Illinois, Pennsylvania, New Hampshire, and Maine plus the
more significant sales described below.
In 1994, Consumers Illinois recorded a gain, net of taxes of $394,000 from
the sale of nine acres of land. In 1996, as part of a rate hearing, the
Illinois Commerce Commission ordered Consumers Illinois to return the gain
from this sale to the customer through reduced rates. Therefore, the gain
was reversed in the second quarter of 1996. On July 17, 1996, Consumers
Illinois filed in the Appellate Court for the Third District of Illinois a
Notice of Appeal and Petition for Review of the Commission's Order. On July
8, 1997, the Appellate Court reversed the Illinois Commerce Commission's
decision to treat the gain from the sale of land as an adjustment to water
operating revenue. Therefore, Consumers Illinois recorded a gain in the
third quarter of 1997.
On June 5, 1995, the Company's Consumers Ohio Water Company subsidiary
closed on the sale of Girard Lake and Liberty Lake. These two lakes once
supplied raw water to the area's steel industry. The lakes have not been
needed as a source of supply for several years. The lakes were sold for $2.5
million and generated a gain, net of taxes, of $724,000.
On October 20, 1994, the Damariscotta division of Consumers Maine Water
Company was taken by the local communities by eminent domain for $600,000 or
approximately 75% of rate base. Consumers Maine prepared to challenge the
purchase price in court, but instead, on February 21, 1995, reached an out
of court settlement for $1,552,000. This sale generated a gain which was
recorded in 1995 of approximately $363,000, net of taxes.
(8) Retirement Plan
The Company has a defined benefit pension plan covering substantially all of
its employees. Pension benefits are based on years of service and the
employee's average salary during the last five years of employment. The
Company's funding policy is to contribute an amount that will provide for
benefits attributed to service to date and for those expected to be earned
in the future by current participants, to the extent deductible for income
tax purposes.
The funded status of the plan as of December 31 is as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations
Vested $26,740 $24,167
Nonvested 1,849 1,651
------------------
Total 28,589 25,818
Effect of future salary increases 7,570 6,594
------------------
Projected benefit obligations for services provided to date 36,159 32,412
Market value of plan assets, primarily invested in stocks,
bonds and short-term funds 42,660 38,112
------------------
Plan assets in excess of projected benefit obligations 6,501 5,700
Unrecognized net asset existing as of January 1, 1987, being
amortized over 22 years (2,481) (2,690)
Unrecognized prior service cost 1,747 1,959
Unrecognized net gain (8,082) (7,258)
------------------
Accrued pension cost at year-end $(2,315) $(2,289)
==================
</TABLE>
Net pension cost included the following items:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 1,082 $ 1,142 $ 980
Interest cost on projected benefit obligations 2,527 2,430 2,236
Actual return on plan assets (6,106) (5,869) (6,555)
Net amortization and deferral 2,523 2,946 4,127
-----------------------------
Net periodic pension cost $ 26 $ 649 $ 788
=============================
</TABLE>
The expected long-term rate of return on plan assets was 9.0% in 1997, 1996
and in 1995. The salary increase assumption was 4.5% in 1997 and 1996, and
5.0% in 1995. The discount rate used to determine the actuarial present
value of the projected benefit obligations was 7.5% in 1997, 8.0% in 1996,
and 8.0% in 1995.
The Company also has a 401(k) Plan, which covers substantially all its
employees. The Company matches up to 40% of an employee's contributions in
Company stock, subject to a $1,040 limitation. The value of the match was
$371,000, $394,000, and $364,000 in 1997, 1996, and 1995, respectively.
In addition, the Company has a Long-Term Incentive Plan, which covers
eligible members of Senior Management. Awards are at the discretion of the
Board of Directors. No amounts were earned in the current year.
(9) Postretirement Benefits
Employees retiring from the Company in accordance with the retirement plan
provisions are entitled to postretirement health care and life insurance
coverage. These benefits are subject to deductibles, co-payment provisions
and other limitations. The Company may amend or change the plan
periodically. In 1997, the Company established a Voluntary Employee Benefit
Association. The Company contributed $336,000 to the Plan in December 1997.
The Company has adopted the delayed recognition method under which the
unrecorded SFAS 106 liability as of January 1, 1993, will be amortized to
expense on a straight-line basis over a 20-year period.
The following table sets forth the postretirement health and life insurance
plans' combined funded status.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation $(3,480) $(3,226)
Plan assets at fair value invested in a money market fund 336 -
------------------
Accumulated postretirement benefit obligation in excess of plan assets $(3,144) $(3,226)
Unrecognized net gain from past experience different from that
assumed and from changes in assumptions (1,236) (1,337)
Unrecognized transition obligation 2,406 2,567
------------------
Accrued postretirement benefit cost $(1,974) $(1,996)
==================
</TABLE>
The accumulated postretirement benefit obligation for health insurance is
$2,559,000 and for life insurance is $921,000.
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits attributed to service during the period $ 96 $132 $148
Interest cost on accumulated postretirement benefit obligation 254 272 292
Amortization of transition obligation over 20 years 160 160 160
Net amortization and deferral (63) (30) (6)
---------------------
Net periodic postretirement benefit cost $447 $534 $594
=====================
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% in 1997 and 8.0% in 1996 and in
1995. An 8% annual rate of increase in the per capita cost of covered health
care benefits is assumed for 1997, 1996 and 1995. The health care cost trend
rate is assumed to decrease annually through the year 2001 to an ultimate
rate of 5%.
Increasing the assumed health care cost trend rates by 1% would increase the
accumulated postretirement benefit obligation by $266,000 as of September
30, 1997, $77,000 as of September 30, 1996, and $123,000 as of September 30,
1995. The effect of this increase in trend rate assumptions on the sum of
the service cost and interest cost components of the net periodic
postretirement benefit cost for the year ended December 31, 1997, would be
an increase of $12,000.
(10) Commitments and Contingencies
The Company is a party in or may be affected by various matters under
litigation. Many of the improvements required by the Safe Drinking Water
Act have been completed. The Company expects that some of its subsidiaries
will need to make significant additional improvements, however, including,
but not limited to, construction of treatment plants, new wells and
replacement of water mains, to stay in compliance with environmental
regulations and to replace aging plant. Management believes that the
ultimate treatment of these expenditures and the various matters under
litigation will not have a significant adverse effect on either the
Company's future results of operations, financial position or cash flows.
Estimated losses including the expected cost of legal fees are recorded for
any litigation where a loss is probable and can be reasonably estimated.
The Company has operating leases for buildings, vehicles, water meters and
office equipment. Rental expenses relating to these leases for the years
ended December 31, 1997, 1996 and 1995 were approximately $832,000,
$1,333,000, and $1,344,000, respectively. At December 31, 1997, minimum
future lease payments under noncancelable operating leases are $760,000 in
1998, $613,000 in 1999, $490,000 in 2000, $336,000 in 2001, $301,000 in 2002
and $579,000 thereafter.
The State of Maine has assessed the Company for additional taxes based on a
unitary method. The Company has appealed this assessment and does not expect
that it will have a material impact on the financial position or results of
operations of the Company.
In March, 1993, an outside contractor spilled a small amount of mercury
while working at Consumers Ohio's water treatment plant. Several areas in
and around the plant were contaminated by the spill, although no mercury
contaminated Consumers Ohio's water supply. The cleanup has been completed
at a total cost of approximately $900,000. Consumers Ohio Water has received
$100,000 from its insurer and has sought recovery of all the cleanup costs
from the contractor. Management believed it probable that Consumers Ohio
would recover cleanup costs from the contractor and/or the contractor's
insurer and, therefore, had recorded a long-term receivable for the costs
incurred in connection with the spill. However, due to the progress of the
case and to the expected cost of the litigation, Consumers Ohio reserved
$375,000 in 1995 for probable losses on this claim. In November, 1996, the
contractor obtained a judgement in its favor, from which Consumers Ohio has
appealed. As a result of this adverse judgement, Consumers Ohio increased
the reserve previously taken to cover the clean up and legal costs by
$560,000 or $370,000, net of taxes. On December 26, 1997 the Court of
Appeals, Eleventh District overturned the judgement in favor of the
contractor and ordered a new trial. The Contractor has filed an appeal of
this decision with the Ohio Supreme Court.
(11) Earnings Per Share
<TABLE>
<CAPTION>
(In Thousands Except per Share Amounts) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
BASIC
<S> <C> <C> <C>
Weighted average basic shares 8,857 8,625 8,385
==============================
Income from Continuing Operations $12,076 $ 9,481 $11,913
Preferred dividends (54) (55) (56)
------------------------------
Earnings from continuing operations applicable to common shares 12,022 9,426 11,857
Loss from Discontinued Operations (2,737) (3,230) (610)
------------------------------
Net Income applicable to common shares $ 9,285 $ 6,196 $11,247
==============================
Basic earnings per common share from continuing operations $ 1.36 $ 1.09 $ 1.41
==============================
Loss per common share from discontinued operations $ (0.31) $ (0.37) $ (0.07)
==============================
Total basic earnings per common share $ 1.05 $ 0.72 $ 1.34
==============================
DILUTED
Weighted average number of shares outstanding 8,857 8,625 8,385
Net effect of dilutive common stock equivalents 2 3 3
------------------------------
Weighted average diluted shares 8,859 8,628 8,388
==============================
Earnings from continuing operations applicable to common shares $12,022 $ 9,426 $11,857
Loss from Discontinued Operations (2,737) (3,230) (610)
------------------------------
Net Income applicable to common shares $ 9,285 $ 6,196 $11,247
==============================
Diluted earnings per common share from continuing operations $ 1.36 $ 1.09 $ 1.41
==============================
Loss per common share from discontinued operations $ (0.31) $ (0.37) $ (0.07)
==============================
Total diluted earnings per common share $ 1.05 $ 0.72 $ 1.34
==============================
</TABLE>
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
year. Diluted earnings per common share for the years 1997, 1996, and 1995
were determined by taking employee stock options into account. In 1997, the
Company adopted SFAS No. 128, "Earnings per Share," effective December 15,
1997. As a result, the Company's reported earnings per share for 1996 and
1995 were restated. The effect of this accounting change had no impact on
the previously reported earnings per share (EPS).
(12) Discontinued Operations
On April 29, 1997, the Company announced its intention to dispose of its
technical services company, Consumers Applied Technologies, Inc (CAT). The
Company has been unsuccessful in selling CAT as an on-going business and is
proceeding with its liquidation. Estimated loss on the disposal of $1.5
million, net of tax benefits of $773,000 was recorded in the first quarter
of 1997. In the fourth quarter an additional reserve of $850,000 net of tax
benefits of $438,000 was recorded to reflect additional expenses associated
with the completion of contracts. CAT's operations were substantially
shutdown during 1997. CAT continues to be responsible for certain long-term
contracts, however. The operating results of CAT 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 operations for
1997 and 1996 were $4,573,000 and $13,796,000, respectively. Net assets of
the discontinued operations approximate realizable value. A summary of the
net assets of discontinued operations follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Cash $ 332,000 $ 439,000
Receivables, net 1,815,000 5,125,000
Inventory - 402,000
Income taxes receivable 2,443,000 2,032,000
Other current assets 16,000 371,000
Property, plant and equipment - 480,000
--------------------------
Total assets $4,606,000 $8,849,000
--------------------------
Notes Payable $ - $1,200,000
Accounts Payable 17,000 554,000
Accrued expenses 1,816,000 1,788,000
Other 94,000 94,000
--------------------------
Total liabilities $1,927,000 $3,636,000
--------------------------
Net assets of discontinued operations $2,679,000 $5,213,000
==========================
</TABLE>
(13) Subsequent Event
On January 13, 1998, the Town of Hudson, N.H. voted to acquire the Company's
New Hampshire water utility assets for $34.5 million. This represents
approximately 8% of the Company's total assets. The sale, pursuant to New
Hampshire's condemnation statute, will result in a gain of approximately
$3.5 million, or $0.40 per share, when the transaction closes, which is
expected in March 1998. The operation generated $6.5 million in revenues and
had 8,229 customers in 1997.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference are the "Nominees for Election as Directors,"
"Section 16(a) Beneficial Ownership Reporting Compliance," and "Other
Executive Officers," and sections of the Company's Definitive Proxy
Statement filed pursuant to Regulation 14A.
Item 11. Executive Compensation.
Incorporated by reference is the "Executive Compensation" section of the
Company's Definitive Proxy Statement filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference is the "Common Stock Ownership of Certain
Beneficial Owners and Management" section of the Company's Definitive Proxy
Statement filed pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference is the "Executive Compensation" section of the
Company's Definitive Proxy Statement filed pursuant to Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) List of financial statements, schedules and exhibits.
(1) Consolidated financial statements and notes thereto of
Consumers Water Company and its subsidiaries together with
the Report of Independent Public Accountants, are listed
as part of Item 8 of this Form 10-K.
(2) Schedules
II Valuation and Qualifying Accounts for the Years Ended
December 31, 1997, 1996 and 1995.
All other schedules have been omitted, since they are not
required, not applicable or the information is included in
the consolidated financial statements or notes thereto.
(3) Exhibits
Exhibits
2.1 Agreement for Purchase and Sale of Assets dated October 24, 1997 by
and between Consumers New Hampshire Water Company and the Town of
Hudson is incorporated by reference to Exhibit 2.1 to Consumers Water
Company's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1997.
3.1 Conformed Copy of Restated Articles of Incorporation of Consumers
Water Company, as amended, is incorporated by reference to Exhibit
3.1 to Consumers Water Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
3.2 Bylaws of Consumers Water Company, as amended March 2, 1994, are
incorporated by reference to Exhibit 3.2 to Consumers Water Company's
Annual Report on Form 10-K for the year ended December 31, 1993.
4.1 Instruments defining the rights of security holders, including
Indentures. The registrant agrees to furnish copies of instruments
with respect to long-term debt to the Commission upon request.
10.1* Consumers Water Company 1988 Incentive Stock Option Plan is
incorporated by reference to Exhibit 10.2 to Consumers Water
Company's Annual Report on Form 10-K for the year ended December 31,
1993.
10.2* Consumers Water Company 1993 Incentive Stock Option Plan is
incorporated by reference to Appendix B to definitive proxy statement
dated April 5, 1993.
10.3* Consumers Water Company 1992 Deferred Compensation Plan for
Directors, Plan A, is submitted herewith as Exhibit 10.3.
10.4* Consumers Water Company 1992 Deferred Compensation Plan for
Directors, Plan B, is submitted herewith as Exhibit 10.4.
10.5 Letter Agreement between Consumers Water Company and Anjou
International Company dated February 7, 1986, incorporated by
reference to Exhibit 10.6 to Consumers Water Company's Registration
Statement on Form S-2 (No. 33-41113), filed with the Securities and
Exchange Commission on June 11, 1991.
10.6 Assignment of Rights under February 7, 1986 Agreement between
Consumers Water Company and Anjou International Company to Compagnie
Generale des Eaux, dated November 12, 1987, incorporated by reference
to Exhibit 10.7 to Consumers Water Company's Annual Report on Form
10-K for the year ended December 31, 1992.
10.7 Form of Indemnification Agreement entered into between Consumers
Water Company and each of its current directors and executive
officers, incorporated by reference to Exhibit 10.8 to Consumers
Water Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994.
10.8* Consumers Water Company Executive Severance Plan is incorporated by
reference to exhibit 10.9 to Consumers Water Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
10.9* Consumers Water Company's Senior Management Long Term Incentive Plan
is incorporated by reference to Appendix A to the Company's
definitive Proxy Statement dated March 29, 1996.
11. Statement of Computation of Per Share Earnings is submitted herewith
as Exhibit 11.
21. List of Subsidiaries of the Registrant is submitted herewith as
Exhibit 21.
23. Consent of Arthur Andersen LLP is submitted herewith as Exhibit 23.
27. Financial Data Schedule is submitted herewith as Exhibit 27.
- --------------------
* Management contract or compensatory plan or arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K
No reports of Form 8-K were filed during the fourth quarter of
1997.
CONSUMERS WATER COMPANY
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Peter L. Haynes 3/20/98
----------------------------- -------------
Peter L. Haynes Date
President and Director
(Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ John F. Isacke 3/20/98
----------------------------- -------------
John F. Isacke Date
Senior Vice President
(Chief Financial Officer)
(Treasurer)
By: /s/ Gary E. Wardwell 3/20/98
----------------------------- -------------
Gary E. Wardwell Date
Controller
(Chief Accounting Officer)
By: /s/ John E. Menario 3/20/98
----------------------------- -------------
John E. Menario Date
Chairman and Director
By: /s/ Michel Avenas 3/20/98
----------------------------- -------------
Michel Avenas Date
Director
By: /s/ Jack S. Ketchum 3/20/98
----------------------------- -------------
Jack S. Ketchum Date
Director
By: /s/ Jane E. Newman 3/20/98
----------------------------- -------------
Jane E. Newman Date
Director
By: /s/ John E. Palmer 3/20/98
----------------------------- -------------
John E. Palmer, Jr. Date
Director
By: /s/ Robert O. Viets 3/20/98
----------------------------- -------------
Robert O. Viets Date
Director
By: /s/ William B. Russell 3/20/98
----------------------------- -------------
William B. Russell Date
Director
By: /s/ John H. Schiavi 3/20/98
----------------------------- -------------
John H. Schiavi Date
Director
By: /s/ Peter L. Haynes 3/20/98
----------------------------- -------------
Peter L. Haynes Date
President and Director
(Chief Executive Officer)
Schedule II
CONSUMERS WATER COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additions Deductions
------------------------ ----------------------
Balance at Provision Balance
Beginning Charged to Accounts End of
Description of Year Operations Recoveries Written Off Year
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for
Doubtful Accounts
Year ended December 31, 1997 $982 $806 $77 $941 $924
Year ended December 31, 1996 $738 $927 $60 $743 $982
Year ended December 31, 1995 $612 $688 $59 $621 $738
</TABLE>
EXHIBIT 10.3
CONSUMERS WATER COMPANY
1992 DEFERRED COMPENSATION PLAN FOR DIRECTORS
PLAN A
Effective January 1, 1992
This Deferred Compensation Plan is intended to permit certain members
of the Board of Directors of Consumers Water Company to defer the payment of
all or a specified portion of the director fees payable to him or her.
ARTICLE I
Definitions
The following terms, when used herein, shall have the meanings as
hereinafter set forth, unless the context indicates otherwise:
1.01 "Board" shall mean the Board of Directors of Consumers.
1.02 "Bond Rate" shall mean the "ten year plus high quality corporate
bond rate" published from time to time by Merrill Lynch Pierce Fenner &
Smith, Inc., plus two percent, or in the event that such rate shall not then
be published, a comparable index rate selected by the Committee.
1.03 "Committee" shall mean the committee appointed in accordance with
Article V.
1.04 "Consumers" shall mean Consumers Water Company or any
organization with or into which it may be merged or consolidated, unless the
context requires otherwise.
1.05 "Deferred Compensation Account" shall have the meaning provided
in Article III hereof.
1.06 "Director" shall mean a member of the Board of Directors of
Consumers.
1.07 "Fees" shall mean the fees payable to a Director for services as
a Director, including services as a member of any committee of Directors.
1.08 "Plan" shall mean this 1992 Deferred Compensation Plan for
Directors, Plan A, as amended from time to time hereafter.
1.09 "Retirement" shall with respect to the Board, mean termination of
service as a director of the Company as the term "director" is defined and
interpreted from time to time under Section 16 of the Securities Exchange
Act of 1934, as amended, or any successor provision. To "retire" shall mean
the act of retirement.
ARTICLE II
Election to Defer
2.01 Initial Election. A Director may elect, on or before December 31
of any year, to defer payment of all or a specified portion of all Fees
payable to him or her for services performed during the following calendar
year (less those Fees to be deferred under any other deferred compensation
plan for directors of Consumers then in effect). The payment of such fees
shall be deferred to the date specified in such election, except in the case
of a Director's death, retirement, or termination of employment with
Consumers, in which case such Fees shall be paid following such death or
retirement, and if the Director is also an employee of the Company,
following his or her termination of employment by Consumers, as provided in
Article IV hereof. A Director may only elect to defer Fees under this Plan
if the date of distribution selected by the Director is at least six months
after the date of the last credit to his or her Deferred Compensation
Account pursuant to such election. Any person who is appointed by the Board
or elected by the shareholders of Consumers to fill a vacancy on the Board
and who was not a Director on the preceding December 31, may elect, before
his or her term begins, to defer all or a specified part of his or her Fees
for the balance of the calendar year following such appointment or election.
Each Director on the date this Plan is adopted may elect, at any time during
the ten (10) day period following such date, to defer payment of all or a
specified portion of the Fees payable to him or her for services performed
after the date of such election, during the calendar year in which the Plan
is adopted and during succeeding calendar years. An election shall be made
by delivering a written election to the Committee on such form as may be
approved by it. An election shall remain in effect until modified or
terminated as provided in Sections 2.02 and 2.03 of this Plan.
2.02 Modification of Election. A Director may modify a previous
election, on or before December 31 of any year, to increase or decrease the
portion of his or her Fees to be deferred during the following calendar
year. An election may be modified by written notice delivered to the
Committee on such form as may be approved by or acceptable to it.
2.03 Termination of Election. A Director may terminate an election to
defer Fees by written notice delivered to the Committee on such form as may
be approved by or acceptable to it. Termination of an election shall be
effective as of the end of the calendar year in which such notice is
delivered. Fees deferred by such Director prior to the effective date of
such termination shall be distributed when and as provided in Article IV.
2.04 Amounts Transferred. Any balance transferred into the Plan by a
participating Director upon the termination of any other deferred
compensation plan of Consumers, as and when allowed by Consumers, shall be
payable, together with interest accrued thereon pursuant to Article III
hereof, to a participating Director only following his or her death or
retirement, and, if an employee of Consumers, only following his or her
termination of employment with Consumers.
ARTICLE III
Deferred Compensation Account
Consumers shall credit such sums as may be deferred by a Director
pursuant to Article II hereof to a book account (hereinafter referred to as
"Deferred Compensation Account"). Subject to the provisions set forth below
in this Article III, at the end of each calendar year interest shall be
accrued upon any sum carried in each Deferred Compensation Account on the
last day of each calendar month in such year at a rate equal to 1/12 of the
rate of return on Consumers' common equity for such year, such rate of
return to be a fraction, the numerator of which shall be Consumers' Earnings
Available for Common Shares (positive earnings only), as reflected in its
audited financial statements, and the denominator of which shall be the
thirteen-month average Common Shareholders' Investment of Consumers,
utilizing the end of month balance at December 31 of the previous calendar
year. In the event that, in any calendar year, a lump sum payment is to be
made, or if a Director ceases to be a Director prior to the end of any
calendar year, then, in either such event, interest shall be accrued upon
sums carried in his or her Deferred Compensation Account for each month of
the stub period (rounded to the nearest month) using 1/12 of the Bond Rate
for the last trading day of each month of such stub period. If a single lump
sum payment is to be made on a date before the return on equity for the
preceding calendar year can be determined from year end audited financial
statements, then the interest applicable to such year shall be calculated
monthly in the same manner provided above for stub periods.
ARTICLE IV
Distribution of Deferred Fees
4.01 Payment upon Fixed Date. Unless a Director shall have previously
died, retired from the Board, and if an employee of Consumers, terminated
his or her employment with Consumers, Consumers shall pay to him or her the
amounts credited to his or her Deferred Compensation Account (other than
amount transferred to the Plan pursuant to Section 2.04 hereof) on the date
or dates specified in the elections provided to the Committee pursuant to
Section 2.01 hereof, together with interest accrued thereon.
4.02 Retirement. If a Director retires from the Board, for any reason
other than death, and such Director, if an employee of the Company, has also
terminated his or her employment with Consumers, then on the date which is
six months and one day after the date of such retirement and six months and
one day after the date of such termination of employment (if the director
was an employee of the Company), whichever is later (the "Distribution
Date"), the entire amount credited to such Director's Deferred Compensation
Account, together with interest accrued thereon, shall be transferred to the
1992 Consumers Water Company Deferred Compensation Plan for Directors ("Plan
B") to be held thereunder for the benefit of such Director. If such transfer
cannot be made because Plan B is not then in existence or because such
transfer would otherwise not be permitted hereunder, then the entire amount
credited to such Director's Deferred Compensation Account, together with
interest thereon, shall be paid to such Director in a single lump sum
payment on the Distribution Date. No transfer of any amount in a Director's
Deferred Compensation Account will be permitted during any time when such
Director is subject to the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended (the "Act") or any successor
provision thereto.
4.03 Death. If a Director ceases to serve as a Director on account of
death, then Consumers shall pay within 90 days of such death the entire
amount credited to his or her Deferred Compensation Account, together with
interest accrued thereon in a single lump sum payment to his or her
beneficiary, or to his or her estate, as the case may be.
4.04 Designation of Beneficiary. Each Director may, from time to time,
by completing and signing a form furnished by the Committee, designate any
person or persons (who may be designated concurrently, contingently or
successively), his or her estate or any trust or trusts created by him or
her, to receive amounts which are payable under this Plan to his or her
designated beneficiary or beneficiaries. Each beneficiary designation shall
revoke all prior designations and will be effective only when filed with the
Committee. If a Director fails to designate a beneficiary, or if a
beneficiary dies before the date of such Director's death and no contingent
beneficiary has been designated, then the amounts which are payable as
aforesaid shall be paid to his or her estate.
ARTICLE V
Committee
5.01 Appointment of Committee. The Board shall appoint a Committee of
not less than two (2) Directors (each of whom has not, during, or during the
one year prior to, such service on the Committee been granted or awarded
equity securities (within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, or any successor provision) pursuant to
any plan of Consumers or any of its affiliates) who shall have authority to
control and manage the administration of the Plan. The Committee shall act
by a majority of its members and such action shall be taken by a vote at a
meeting or in a writing without a meeting.
5.02 Resignation or Removal. Any member of the Committee may resign at
any time by delivering to the Board a written notice of resignation which
shall take effect at a date specified therein. Each member shall serve at
the pleasure of the Board and may be removed by delivery of written notice
of removal which shall take effect at the date specified therein. The Board,
as soon as practicable following receipt of a written notice of resignation
or delivery of a written notice of removal of any member of the Committee,
shall consider the appointment of a successor.
5.03 Delegation of Ministerial Duties. The Committee may, by a
writing, signed by a majority of its members, delegate to any member or
members of the Committee or to any employee or employees of Consumers,
severally or jointly, the authority to perform any ministerial act in
connection with the administration of the Plan.
ARTICLE VI
Miscellaneous
6.01 Unsecured Promise. This Plan shall not be construed to create or
require Consumers to create a trust of any kind. The Plan is intended and
accepted by each Director as an unfunded plan pursuant to which the rights
of the Directors and their beneficiaries shall be no greater than the right
of any unsecured general creditor of Consumers.
6.02 Assignment. The right of any Director or any beneficiary to the
payment of amounts deferred pursuant to this Plan shall not be subject to
alienation, assignment, garnishment, attachment, execution or levy of any
kind, and any attempt to cause such benefits to be so subjected shall not be
recognized by Consumers.
6.03 Amendment and Termination. Consumers reserves the right to amend
and terminate this Plan.
6.04 Governing Law. This Plan shall be governed and construed by the
laws of the State of Maine.
6.05 Amendments to Comply with Section 16. This Plan is not intended
to create an "equity security" or a "derivative security" within the meaning
of Section 16 of the Act and the regulations promulgated pursuant thereto.
In particular, and among other things, this Plan is intended to comply with
the exemption from the definition of "derivative security" provided by Rule
16a-1(c)(3)(ii) promulgated pursuant to the Act, or any successor provision
thereto, to the extent that this Plan would otherwise create a "derivative
security" within the meaning of Section 16 of the Act. This Plan shall at
all times be interpreted so that no "derivative security" or "equity
security" shall be deemed to be created hereunder. If any provision
hereunder shall be deemed to result in the creation of such a "derivative
security" or "equity security" or the loss of the aforementioned exemption
from the definition of the term "derivative security" and the loss of all
other available exemptions, then such provision shall be, and hereby is,
amended to the extent necessary to constitute this Plan one in which no
"derivative security" or "equity security" exists.
EXHIBIT 10.4
CONSUMERS WATER COMPANY
1992 DEFERRED COMPENSATION PLAN FOR DIRECTORS
PLAN B
Effective January 1, 1992
This Deferred Compensation Plan is intended to permit certain members
of the Board of Directors of Consumers Water Company to defer the payment of
all or a specified portion of the director fees payable to him or her.
ARTICLE I
Definitions
The following terms, when used herein, shall have the meanings as
hereinafter set forth, unless the context indicates otherwise:
1.01 "Board" shall mean the Board of Directors of Consumers.
1.02 "Bond Rate" shall mean the "ten year plus high quality corporate
bond rate" published from time to time by Merrill Lynch Pierce Fenner &
Smith, Inc., plus two percent, or in the event that such rate shall not then
be published, a comparable index rate selected by the Committee.
1.03 "Committee" shall mean the committee appointed in accordance with
Article V.
1.04 "Consumers" shall mean Consumers Water Company or any
organization with or into which it may be merged or consolidated, unless the
context requires otherwise.
1.05 "Deferred Compensation Account" shall have the meaning provided
in Article III hereof.
1.06 "Director" shall mean a member of the Board of Directors of
Consumers.
1.07 "Fees" shall mean the fees payable to a Director for services as
a Director, including services as a member of any committee of Directors.
1.08 "Plan" shall mean this Consumers Water Company 1992 Deferred
Compensation Plan for Directors, Plan B, as amended from time to time
hereafter.
ARTICLE II
Election to Defer
2.01 Initial Election. A Director may elect, on or before December 31
of any year, to defer payment of all or a specified portion of all Fees
payable to him or her for services performed during the following calendar
year (less those Fees to be deferred under any other deferred compensation
plan for directors of Consumers then in effect). Any person who is appointed
by the Board or elected by the shareholders of Consumers to fill a vacancy
on the Board and who was not a Director on the preceding December 31, may
elect, before his or her term begins, to defer all or a specified part of
his or her Fees for the balance of the calendar year following such
appointment or election and for succeeding calendar years. Each Director on
the date this Plan is adopted may elect, at any time during the ten (10) day
period following such date, to defer payment of all or a specified portion
of the Fees payable to him or her for services performed after the date of
such election, during the calendar year in which the Plan is adopted. An
election shall be made by delivering a written election to the Committee on
such form as may be approved by it. An election shall remain in effect until
modified or terminated as provided in Sections 2.02 and 2.03 of this Plan.
2.02 Modification of Election. A Director may modify a previous
election, on or before December 31 of any year, to increase or decrease the
portion of his or her Fees to be deferred during the following calendar
year. An election may be modified by written notice delivered to the
Committee on such form as may be approved by or acceptable to it.
2.03 Termination of Election. A Director may terminate an election to
defer Fees by written notice delivered to the Committee on such form as may
be approved by or acceptable to it. Termination of an election shall be
effective as of the end of the calendar year in which such notice is
delivered. Fees deferred by such Director prior to the effective date of
such termination shall be distributed when and as provided in Article IV.
2.04 Amounts Transferred. Any balance transferred into the Plan by a
participating Director upon the termination of any other deferred
compensation plan of Consumers, as and when allowed by Consumers, shall be
treated for all purposes as having been deferred hereunder as of the date
such balances are credited to a participating Director's Deferred
Compensation Account under the Plan.
ARTICLE III
Deferred Compensation Account
Consumers shall credit such sums as may be deferred by a Director
pursuant to Article II hereof to a book account (hereinafter referred to as
"Deferred Compensation Account"). Subject to the provisions set forth below
in this Article III, at the end of each calendar month any sum carried in
each Deferred Compensation Account on the last day of each such calendar
month shall be credited with interest calculated at a rate equal to 1/12 of
the Bond Rate for the last trading day in such month. In the event that, in
any month, a lump sum payment is made, or periodic payments are initiated,
or if a Director ceases to be a Director prior to the end of any calendar
month, then, in either such event, the number of months for which interest
is to be calculated shall be rounded to the nearest whole number of months
and interest therefor shall be calculated as provided above.
ARTICLE IV
Distribution of Deferred Fees
4.01 Retirement. If a Director ceases to serve, for any reason other
than death, as a Director of Consumers, and has reached age 65, (or is no
longer a director on the date when amounts are transferred to his Deferred
Compensation Account hereunder)Consumers shall pay to him or her the amount
credited to his or her Deferred Compensation Account pursuant to Section
4.03.
4.02 Request for Accelerated Payout. Upon the request of a Director or
of a person who is no longer serving as a Director, the Committee may, in
its sole discretion, approve payments of the amount credited to his or her
Deferred Compensation Account in installments over a shorter period, or in a
single lump sum. A Director receiving payments pursuant to a request under
this Section 4.02 will no longer be eligible for deferral of future
compensation pursuant to Article II above.
4.03 Manner of Payment. Payments of the amount credited to a
Director's Deferred Compensation Account shall be in equal monthly
installments over a period of ten years. In the sole discretion of the
Committee, upon the request of a Director, payment of the amount so credited
may be in equal monthly installments over a shorter period or in a lump sum.
Interest credited in accordance with Article III during the period
installments are paid pursuant to this Section 4.03 shall be distributed
currently. In the event a Director dies prior to receiving the entire
balance credited to his or her Deferred Compensation Account, any remaining
balance shall within 90 days following his or her death be paid in a single
lump sum payment to his or her beneficiary, or to his estate, as the case
may be.
4.04 Death. If a Director ceases to serve as a Director on account of
death, then Consumers shall pay within 90 days of such death the entire
amount credited to his or her Deferred Compensation Account, in a single
lump sum payment to his or her beneficiary, or to his or her estate, as the
case may be.
4.05 Designation of Beneficiary. Each Director may, from time to time,
by completing and signing a form furnished by the Committee, designate any
person or persons (who may be designated concurrently, contingently or
successively), his or her estate or any trust or trusts created by him or
her, to receive amounts which are payable under this Plan to his or her
designated beneficiary or beneficiaries. Each beneficiary designation shall
revoke all prior designations and will be effective only when filed with the
Committee. If a Director fails to designate a beneficiary, or if a
beneficiary dies before the date of such Director's death and no contingent
beneficiary has been designated, then the amounts which are payable as
aforesaid shall be paid to his or her estate.
ARTICLE V
Committee
5.01 Appointment of Committee. The Board shall appoint a Committee of
not less than two (2) Directors (each of whom has not, during, or during the
one year prior to, such service on the Committee been granted or awarded
equity securities (within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, or any successor provision) pursuant to
any plan of Consumers or any of its affiliates) who shall have authority to
control and manage the administration of the Plan. The Committee shall act
by a majority of its members and such action shall be taken by a vote at a
meeting or in a writing without a meeting.
5.02 Resignation or Removal. Any member of the Committee may resign at
any time by delivering to the Board a written notice of resignation which
shall take effect at a date specified therein. Each member shall serve at
the pleasure of the Board and may be removed by delivery of written notice
of removal which shall take effect at the date specified therein. The Board,
as soon as practicable following receipt of a written notice of resignation
or delivery of a written notice of removal of any member of the Committee,
shall consider the appointment of a successor.
5.03 Delegation of Ministerial Duties. The Committee may, by a
writing, signed by a majority of its members, delegate to any member or
members of the Committee or to any employee or employees of Consumers,
severally or jointly, the authority to perform any ministerial act in
connection with the administration of the Plan.
ARTICLE VI
Miscellaneous
6.01 Unsecured Promise. This Plan shall not be construed to create or
require Consumers to create a trust of any kind. The Plan is intended and
accepted by each Director as an unfunded plan pursuant to which the rights
of the Directors and their beneficiaries shall be no greater than the right
of any unsecured general creditor of Consumers.
6.02 Assignment. The right of any Director or any beneficiary to the
payment of amounts deferred pursuant to this Plan shall not be subject to
alienation, assignment, garnishment, attachment, execution or levy of any
kind, and any attempt to cause such benefits to be so subjected shall not be
recognized by Consumers.
6.03 Amendment and Termination. Consumers reserves the right to amend
and terminate this Plan.
6.04 Governing Law. This Plan shall be governed and construed by the
laws of the State of Maine.
EXHIBIT 11
Statement of Computation of Per Share Earnings
<TABLE>
<CAPTION>
(Amounts in Thousands except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC
Weighted average basic shares 8,857 8,625 8,385
===================================
Income from Continuing Operations $12,076 $ 9,481 $11,913
Preferred dividends (54) (55) (56)
-----------------------------------
Earnings from continuing operations applicable
to common shares 12,022 9,426 11,857
Loss from Discontinued Operations (2,737) (3,230) (610)
-----------------------------------
Net Income applicable to common shares $ 9,285 $ 6,196 $11,247
===================================
Basic earnings per common share
from continuing operations $ 1.36 $ 1.09 $ 1.41
===================================
Loss per common share
from discontinued operations $ (0.31) $ (0.37) $ (0.07)
===================================
Total basic earnings per common share $ 1.05 $ 0.72 $ 1.34
===================================
DILUTED
Weighted average number of shares outstanding 8,857 8,625 8,385
Net effect of dilutive common stock equivalents 2 3 3
-----------------------------------
Weighted average diluted shares 8,859 8,628 8,388
===================================
Earnings from continuing operations applicable
to common shares $12,022 $ 9,426 $11,857
Loss from Discontinued Operations (2,737) (3,230) (610)
-----------------------------------
Net Income applicable to common shares $ 9,285 $ 6,196 $11,247
===================================
Diluted earnings per common share
from continuing operations $ 1.36 $ 1.09 $ 1.41
===================================
Loss per common share
from discontinued operations $ (0.31) $ (0.37) $ (0.07)
===================================
Total diluted earnings per common share $ 1.05 $ 0.72 $ 1.34
===================================
</TABLE>
EXHIBIT 21
Subsidiaries of Registrant
December 31, 1997
<TABLE>
<CAPTION>
Percentage
Voting
State in Which Year Acquired Securities
Name of Subsidiary Incorporated or Formed Owned
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BHNE Liquidating Corp., Inc. Maine 1983 100.0%
Consumers Maine Water Company Maine 1959 98.9%
Consumers Illinois Water Company Illinois 1926 100.0%
Consumers Applied Technologies, Inc. Maine 1984 100.0%
(and its wholly owned subsidiary
EnviroAudit)
Consumers Land Management Co. Maine 1984 100.0%
Consumers New Jersey Water Company New Jersey 1969 96.8%
Consumers Ohio Water Company Ohio 1973 100.0%
Consumers Pennsylvania Water Company
-- Susquehanna Division Pennsylvania 1971 97.0%
-- Roaring Creek Division Pennsylvania 1985 100.0%
-- Shenango Valley Division Pennsylvania 1926 100.0%
(and its wholly-owned subsidiary,
Masury Water Company) Ohio 1926 100.0%
Consumers New Hampshire
Water Company, Inc. New Hampshire 1930 100.0%
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated February 4, 1998, included in this Form 10-K, into the
Company's previously filed Registration Statements (Form S-3 No. 33-59375
and 333-46173 and Forms S-8 Nos. 33-68858, 33-20994, 33-22032, 33-57618 and
333-19821).
/s/ Arthur Andersen LLP
Boston Massachusetts
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,694
<SECURITIES> 0
<RECEIVABLES> 9,619
<ALLOWANCES> (924)
<INVENTORY> 2,068
<CURRENT-ASSETS> 25,119
<PP&E> 499,087
<DEPRECIATION> 92,787
<TOTAL-ASSETS> 465,699
<CURRENT-LIABILITIES> 51,771
<BONDS> 171,771
0
1,044
<COMMON> 8,968
<OTHER-SE> 102,059
<TOTAL-LIABILITY-AND-EQUITY> 465,699
<SALES> 0
<TOTAL-REVENUES> 98,339
<CGS> 0
<TOTAL-COSTS> 66,381
<OTHER-EXPENSES> (1,556)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,879
<INCOME-PRETAX> 18,635
<INCOME-TAX> 6,559
<INCOME-CONTINUING> 12,076
<DISCONTINUED> (2,737)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,339
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
</TABLE>
