<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
Commission File Number 0-8084
Connecticut Water Service, Inc.
(Exact name of registrant as specified in its charter)
Connecticut 06-0739839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
93 West Main Street, Clinton, CT 06413-1600
(Address of principal executive offices) (Zip Code)
(860) 669-8636
(Registrant's telephone number, including area code)
Not Applicable
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a count. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
4,535,813
Number of shares of common stock outstanding, October 31, 1998
<PAGE> 2
TABLE OF CONTENTS
PART I, ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 Page 3
Consolidated Statements of Capitalization at
September 30, 1998 and December 31, 1997 Page 4
Consolidated Statements of Income for Three Months
Ended September 30, 1998 and 1997 Page 5
Consolidated Statements of Income for Nine Months
Ended September 30, 1998 and 1997 Page 6
Consolidated Statements of Retained Earnings for Three
Months Ended September 30, 1998 and 1997 Page 7
Consolidated Statements of Retained Earnings for Nine
Months Ended September 30, 1998 and 1997 Page 7
Consolidated Statements of Cash Flows for Nine Months
Ended September 30, 1998 and 1997 Page 8
Notes to Consolidated Financial Statements Page 9-10
PART I, ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations Page 11-14
PART II, ITEM 6: Exhibits and Reports on Form 8-K. Page 14-15
Signature Page Page 16
<PAGE> 3
PART I, ITEM 1: FINANCIAL STATEMENTS Page 3
Connecticut Water Service, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
At September 30, 1998 and December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
September 30,
1998 Dec. 31,
ASSETS (Unaudited) 1997
------------ -----------
<S> <C> <C>
Utility Plant
Utility Plant $212,051 $207,476
Construction Work in Progress 10,393 9,882
Utility Plant Acquisition Adjustments (1,255) (1,255)
------------ -----------
221,189 216,103
Accumulated Provision for Depreciation (55,424) (52,346)
------------ -----------
Net Utility Plant 165,765 163,757
------------ -----------
Investments 1,874 1,570
------------ -----------
Current Assets
Cash 1,009 346
Accounts Receivable (Less Allowance, 1998- $288; 1997 - $151) 5,853 4,568
Accrued Unbilled Revenues 3,125 2,684
Prepayments and Other Current Assets 1,677 758
------------ -----------
Total Current Assets 11,664 8,356
------------ -----------
Deferred Charges
Unamortized Debt Issuance Expense 5,986 5,023
Income Taxes 8,647 8,623
Postretirement Benefits Other Than Pension 1,220 1,220
Other Costs 860 728
------------ -----------
Total Deferred Charges 16,713 15,594
------------ -----------
Total Assets $196,016 $189,277
============ ===========
CAPITALIZATION AND LIABILITIES
Capitalization (See accompanying statements)
Common Stockholders' Equity $57,677 $56,069
Preferred Stock 772 772
Long-Term Debt 62,510 54,532
------------ -----------
Total Capitalization 120,959 111,373
------------ -----------
Current Liabilities
Interim Bank Loans Payable 5,018 8,811
Accounts Payable and Accrued Taxes and Interest 7,050 7,775
Other 2,289 2,208
------------ -----------
Total Current Liabilities 14,357 18,794
------------ -----------
Long-Term Liabilities
Advances for Construction 15,734 15,203
Contributions in Aid of Construction 19,064 18,750
Deferred Federal Income Taxes 14,627 13,838
Unfunded Future Income Taxes 8,000 8,000
Unfunded Postretirement Benefits Other Than Pension 1,220 1,220
Unamortized Investment Tax Credits 2,055 2,099
------------ -----------
Total Long-Term Liabilities 60,700 59,110
------------ -----------
Total Capitalization and Liabilities $196,016 $189,277
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
Page 4
Connecticut Water Service, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At September 30, 1998 and December 31, 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30,
1998 Dec. 31,
(Unaudited) 1997
---------- -----------
<S> <C> <C>
Common Stockholders' Equity *
Common Stock Without Par Value; Authorized - 7,500,000 Shares;
Shares Issued and Outstanding: 1998 - 4,535,813; 1997 - 4,526,715 $44,070 $43,928
Stock Issuance Expense (1,379) (1,349)
Retained Earnings 14,986 13,490
---------- -----------
Total Common Stockholders' Equity 57,677 56,069
---------- -----------
Cumulative Preferred Stock of Connecticut Water Service, Inc.
Series A Voting, $20 Par Value; Authorized, Issued and
Outstanding 15,000 Shares, Redeemable at $21.00 Per Share 300 300
Series $.90 Non-Voting, $16 Par Value; Authorized 50,000 Shares
Issued and Outstanding 29,499 Shares, Redeemable at $16.00 Per Share 472 472
---------- -----------
Total Preferred Stock of Connecticut Water Service, Inc. 772 772
---------- -----------
Long-Term Debt
The Connecticut Water Company
First Mortgage Bonds
6.9% Series Q, due 2021 0 10,000
5.875% Series R, due 2022 14,800 14,800
6.65% Series S, due 2020 8,000 8,000
5.75% Series T, due 2028 5,000 5,000
5.3% Series U, due 2028 4,550 4,550
6.94% Series V, due 2029 12,050 12,050
---------- -----------
44,400 54,400
---------- -----------
Unsecured Water Facilities Revenue Refinancing Bonds
5.05% 1998 Series A, due 2028 10,000 0
5.125% 1998 Series B, due 2028 8,000 0
---------- -----------
18,000 0
---------- -----------
Other
5.5% Unsecured Promissory Note 139 161
---------- -----------
62,539 54,561
Less Current Portion of Long-Term Debt (29) (29)
---------- -----------
Total Long-Term Debt 62,510 54,532
---------- -----------
Total Capitalization $120,959 $111,373
========== ===========
</TABLE>
* Reflects three-for-two stock split as described in the accompanying Notes to
Consolidated Financial Statements.
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
Page 5
Connecticut Water Service, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 30, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Operating Revenues $11,392 $10,855
------------ ------------
Operating Expenses
Operation 3,227 3,280
Maintenance 853 447
Depreciation 935 866
Federal Income Taxes 1,575 1,400
Connecticut Corporation Business Taxes 312 380
Municipal Taxes 869 801
Payroll Taxes 106 126
------------ ------------
Total Operating Expenses 7,877 7,300
------------ ------------
Utility Operating Income 3,515 3,555
------------ ------------
Other Income (Deductions)
Interest 35 23
Allowance for Funds Used During Construction 108 156
Gain on Sale of Property 46 0
Non-Water Sales Earnings (2) 56
Miscellaneous Income (Deductions) (14) (15)
Taxes on Other Income (10) (46)
------------ ------------
Total Other Income (Deductions) 163 174
------------ ------------
Interest and Debt Expense
Interest on Long-Term Debt 923 865
Other Interest Charges 92 168
Amortization of Debt Expense 53 32
------------ ------------
Total Interest and Debt Expense 1,068 1,065
------------ ------------
Net Income 2,610 2,664
Preferred Stock Dividend Requirement 10 10
------------ ------------
Net Income Applicable to Common Stockholders $2,600 $2,654
============ ============
Weighted Average Common Shares Outstanding * 4,536,000 4,526,000
============ ============
Earnings Per Average Common Share * $0.57 $0.59
============ ============
Dividends Per Common Share * $0.293 $0.290
============ ============
</TABLE>
* Reflects three-for-two stock split as described in the accompanying Notes to
Consolidated Financial Statements.
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
Page 6
Connecticut Water Service, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Operating Revenues $28,860 $29,500
------------ ------------
Operating Expenses
Operation 10,015 9,789
Maintenance 1,734 1,455
Depreciation 2,807 2,605
Federal Income Taxes 2,756 2,921
Connecticut Corporation Business Taxes 531 704
Municipal Taxes 2,550 2,424
Payroll Taxes 403 395
Connecticut Gross Earnings Tax 0 924
Organizational Charges 0 423
------------ ------------
Total Operating Expenses 20,796 21,640
------------ ------------
Utility Operating Income 8,064 7,860
------------ ------------
Other Income (Deductions)
Interest 89 72
Allowance for Funds Used During Construction 357 470
Gain on Sale of Property 253 170
Non-Water Sales Earnings 82 139
Miscellaneous Income (Deductions) (25) (19)
Taxes on Other Income (130) (219)
------------ ------------
Total Other Income (Deductions) 626 613
------------ ------------
Interest and Debt Expense
Interest on Long-Term Debt 2,714 2,595
Other Interest Charges 343 430
Amortization of Debt Expense 154 126
------------ ------------
Total Interest and Debt Expense 3,211 3,151
------------ ------------
Net Income 5,479 5,322
Preferred Stock Dividend Requirement 29 29
------------ ------------
Net Income Applicable to Common Stockholders $5,450 $5,293
============ ============
Weighted Average Common Shares Outstanding * 4,535,000 4,524,000
============ ============
Earnings Per Average Common Share * $1.20 $1.17
============ ============
Dividends Per Common Share * $0.873 $0.863
============ ============
</TABLE>
* Reflects three-for-two stock split as described in the accompanying Notes to
Consolidated Financial Statements.
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
Page 7
Connecticut Water Service, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In thousands, except share data)
For the Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(Unaudited) (Unaudited)
------------ -----------
<S> <C> <C>
Balance at Beginning of Period $13,714 $11,986
Net Income 2,610 2,664
------------ -----------
16,324 14,650
------------ -----------
Dividends Declared: *
Cumulative Preferred, Class A, $.20 per share 3 3
Cumulative Preferred, Series $.90, $.225 per share 7 7
Common Stock - 1998 $.293 per share; 1997 $.290 per share 1,328 1,312
------------ -----------
1,338 1,322
------------ -----------
Balance at End of Period $14,986 $13,328
============ ===========
For the Nine Months Ended September 30, 1998 and 1997
Balance at Beginning of Period $13,490 $11,939
Net Income 5,479 5,322
------------ -----------
18,969 17,261
------------ -----------
Dividends Declared: *
Cumulative Preferred, Class A, $.80 per share 9 9
Cumulative Preferred, Series $.90, $.90 per share 20 20
Common Stock - 1998 $.873 per share; 1997 $0.863 per share 3,954 3,904
------------ -----------
3,983 3,933
------------ -----------
Balance at End of Period $14,986 $13,328
============ ===========
</TABLE>
* Common stock dividend per share amounts have been adjusted to reflect a
three-for-two stock split as described in the accompanying Notes to Consolidated
Financial Statements.
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
Page 8
<TABLE>
<CAPTION>
Connecticut Water Service, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
(In thousands)
1998 1997
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Operating Activities:
Net Income Before Preferred Dividends of Parent $5,479 $5,322
----------- -----------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation (including $95 in 1998, $88 in 1997 charged to other accounts) 2,902 2,693
Change in Assets and Liabilities:
Increase in Accounts Receivable and Accrued Unbilled Revenues (1,726) (454)
Decrease (Increase) in Other Current Assets (920) (926)
Increase in Other Non-Current Items (307) (697)
Increase (Decrease) in Accounts Payable, Accrued Expenses and
Other Current Liabilities (642) (21)
Increase (Decrease) in Deferred Federal Income Taxes and
Investment Tax Credits, Net 745 715
----------- -----------
Total Adjustments 52 1,310
----------- -----------
Net Cash Provided by (Used for) Operating Activities 5,531 6,632
----------- -----------
Investing Activities:
Gross Additions to Utility Plant (including Allowance for Funds
Used During Construction of $357 in 1998 and $470 in 1997) (4,971) (7,619)
----------- -----------
Financing Activities:
Proceeds from Interim Bank Loans 5,018 10,611
Repayment of Interim Bank Loans (8,811) (5,795)
Proceeds from Issuance of Common Stock 142 160
Proceeds from Issuance of Long-Term Debt 18,000 133
Repayment of Long-Term Debt (10,022) 0
Advances, Contributions and Funds From Others for Construction, Net of (Refunds) 906 631
Costs Incurred to Issue Long-Term Debt, Preferred Stock, and Common Stock (1,147) (22)
Cash Dividends Paid (3,983) (3,932)
----------- -----------
Net Cash Provided by (Used in) Financing Activities 103 1,786
----------- -----------
Net Increase (Decrease) in Cash 663 799
Cash at Beginning of Period 346 35
----------- -----------
Cash at End of Period $1,009 $834
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest (Net of Amounts Capitalized) $3,198 $3,591
Income Taxes $2,370 $2,875
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 9
Page 9
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements included herein have been prepared by
CONNECTICUT WATER SERVICE, INC. (the Company), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission and reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for interim periods. Certain information and footnote
disclosures have been omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. These consolidated financial statements should be read
in conjunction with the financial statements and the notes thereto included in
the Company's latest annual report on Form 10-K.
The results for interim periods are not necessarily indicative of results
to be expected for the year since the consolidated earnings are subject to
seasonal factors.
On September 15, 1998 the Company effected a three-for-two stock split.
The distribution of these shares increased the number of shares outstanding by
1,511,838 shares. All outstanding common shares and per share amounts in this
report have been restated to reflect this stock split. Appropriate adjustments
to reflect the stock split were made to the Company's Performance Stock Program.
2. Earnings per average common share are calculated by dividing net income
applicable to common stock by the average number of shares of common stock
outstanding during the respective periods as detailed on the following page:
<PAGE> 10
Page 10
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
3 Months Ended * 12 Months Ended *
---------------- -----------------
9/30/98 9/30/97 9/30/98 9/30/97 12/31/97
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Common Shares Outstanding:
January 1, 1997 -- -- -- -- 4,518,125
October 1, 1997 & 1996
respectively -- -- 4,526,715 4,517,150 --
July 1, 1998 & 1997
respectively 4,535,790 4,525,652 -- -- --
Common Shares Issued:
To PSP - July 1, 1996 -- -- -- -- --
To 401-K - September 30, -- -- -- -- --
1996
To 401-K - December 31, -- -- -- 975 --
1996
To PSP - February 14, 1997 -- -- -- 5,289 5,289
To 401-K - March 30, 1997 -- -- -- 1,015 1,015
To CSE - June 13, 1997 -- -- -- 60 60
To 401-K - June 30, 1997 -- -- -- 1,163 1,163
To CSE - September 15, -- 61 -- 61 61
1997
To 401-K - September 30, -- 1,002 -- 1,002 1,002
1997
To CSE - December 15, 1997 -- -- 57 -- 57
To 401-K- - December 31, -- -- 864 -- 864
1997
To PSP - February 18, 1998 -- -- 6,921 -- --
To CSE - March 15, 1998 -- -- 102 -- --
To 401-K - March 30, 1998 -- -- 590 -- --
To CSE - June 15, 1998 -- -- 95 -- --
To 401-K -June 30, 1998 -- -- 446 -- --
Liquidation of (587) -- (587) -- --
fractional shares
To CSE - September 15, 82 -- 82 -- --
1998
To 401-K -
September 30, 1998 528 -- 528 -- --
--------- --------- --------- --------- ---------
Common Shares Outstanding:
September 30, 1998 & 1997
respectively 4,535,813 4,526,715 4,535,813 4,526,715
========= ========= ========= =========
December 31, 1997 4,527,636
=========
Weighted Average Common Shares Outstanding:
Days outstanding basis** 4,535,727 4,525,675 4,532,857 4,522,005 4,524,419
========= ========= ========= ========= =========
</TABLE>
* All share amounts reflect a three-for-two split as described in Note 1 above.
** Basic and Fully diluted are the same
DRIP = Dividend Reinvestment Plan
PSP = Performance Stock Program
401-K = Company contribution to employees' 401-K savings plan
CSE = Common Stock Equivalents
<PAGE> 11
Page 11
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
PART I, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CORPORATE RESOURCES
At September 30, 1998 the Company had $3,982,000 of unused lines of
interim bank loan credit available.
RESULTS OF OPERATIONS
THE FOLLOWING FACTORS HAD A SIGNIFICANT EFFECT UPON THE COMPANY'S RESULTS
OF OPERATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED WITH THE
RESULTS OF OPERATION FOR THE SAME PERIOD LAST YEAR.
Net income applicable to common stock for the nine months ended September
30, 1998 increased from that of the nine months ended September 30, 1997 by
$157,000, or $.03 per average common share. The increase in net income resulted
from a $204,000 increase in utility operating income, a $13,000 increase in
other income, partially offset by a $60,000 increase in interest expense.
Operating revenues decreased $640,000 due to the reduction in revenues
associated with the decrease in customers' rates effective July 1, 1997 related
to the elimination of the Connecticut Gross Earnings Tax. This decrease in
revenue had no impact on net income since it was matched by a reduction in
operating expenses due to the elimination of these taxes. The decrease in
revenues associated with this rate decrease was partially offset by increased
revenues from the Company's .5% rate increase effective October 1, 1997 for
increased post-retirement employee benefit costs, increased revenues from the
Company's acquisition of the SDC, Bay Mountain and Masons Island water systems
in 1997 and 1998, and increased public fire billings and revenues resulting from
regular growth in customers.
Operating expenses decreased $844,000 primarily due to the elimination of
the Connecticut Gross Earnings Tax, a one-time organizational charge in 1997
relating to an early retirement program, and decreased income tax expense. The
decrease in income tax expense was caused by lower pre-tax income, a book/tax
timing adjustment relating to the 1998 refinancing of the Series Q First
Mortgage bonds, and a reduction in the state corporation income tax rate. These
expense reductions were partially offset by increases in operation, maintenance,
depreciation and municipal tax expenses.
THE FOLLOWING FACTORS HAD A SIGNIFICANT EFFECT UPON THE COMPANY'S RESULTS OF
OPERATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED WITH THE
RESULTS OF OPERATION FOR THE SAME PERIOD LAST YEAR.
Net income applicable to common stock for the three months ended September
30, 1998 decreased from that of the three months ended September 30, 1997 by
$69,000 or $.02 per average common share. The decrease in net income resulted
from a $55,000 decrease in utility operating income, a $11,000 decrease in other
income, and a $3,000 increase in interest expense.
<PAGE> 12
Page 12
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
Operating revenue increased $537,000 due to the dry 1998 July and August
summer weather which increased customer water consumption, increased revenues
from customers acquired through the Company's acquisition of the SDC, Bay
Mountain and Masons Island water systems in 1997 and 1998, increased public fire
billings and revenues resulting from regular growth in our customers and the .5%
rate increase effective last October related to increased post-retirement
employee benefit costs.
Operating expenses increased $576,000 primarily due to increased
maintenance costs, increased depreciation and municipal taxes resulting from the
Company's increased investment in utility plant, and increased income tax
expense from increased taxable income.
YEAR 2000
Like many organizations, the Company is currently evaluating and
responding to its exposure to the Year 2000 problem. In general terms, the
problem arises from the fact that many existing computer systems and other
equipment containing date-sensitive embedded technology (including
non-information technology equipment and systems) use only two digits to
identify a year in the date field, with the assumption that the first two digits
of the year are always "19". As a result, such systems may misinterpret dates
after December 31, 1999, which may result in miscalculations, other malfunctions
or the total failure of such systems. Additional problems arise from the fact
that the Year 2000 is a special case leap year. Because the Company is dependent
upon the proper functioning of computer systems and other equipment containing
date-sensitive embedded technology, a failure of such systems and equipment to
be Year 2000 compliant could have a material adverse effect on the Company. If
not remedied, potential risks include business interruption or shutdown,
financial loss, regulatory actions and legal liability.
The Company has established a team of senior managers to address the Year
2000 problem. This team is currently evaluating the Company's exposure to the
year 2000 problem and is preparing a plan for managing the risks and costs
associated therewith. It is anticipated that this plan will be completed during
the fourth quarter of this year. The Connecticut Department of Public Utility
Control has informed the Company that it will review the readiness of nine
utilities, of which the Company is one.
The Company's general process of addressing the Year 2000 problem can be
broken down into the following steps: (a) inventorying systems, equipment and
other items (including those of third parties) that potentially present a Year
2000 problem, (b) assigning priorities to identified items, (c) assessing the
Year 2000 compliance of the items determined to be material to the Company
through internal testing and outside certification, (d) repairing, replacing or
preparing for the failure of material items that are determined to be
non-compliant, (e) testing repaired or replaced items, and (f) designing and
implementing contingency plans.
<PAGE> 13
Page 13
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
Since 1996, the Company has been implementing a new Management Information
System (MIS) encompassing operational and administrative applications. In
addition to enhanced customer service technology and increased administrative
and operational efficiencies, the new system is designed to be Year 2000
compliant. The integration of the new system is 95% complete and is expected to
be completed during the first quarter of 1999. The costs of implementing the new
system will total approximately $2 million, which the company is capitalizing.
The hardware and software vendors for the MIS have certified its components as
being Year 2000 compliant. In addition, the Company has completed preliminary
Year 2000 testing on the MIS and found it to be compliant. The Company intends
to perform additional Year 2000 testing once the system is completed. Such
testing is expected to be completed during the second quarter of 1999.
The Company also is evaluating the Year 2000 compliance of systems and
equipment which are not linked to the MIS and is currently in the process of
identifying the items that could be impacted by the Year 2000 problem. The
Company expects that this inventory of items which may not be Year 2000
compliant will be completed in the fourth quarter of 1998. Once the Company
determines that an item may present a Year 2000 problem, the Company contacts
the supplier to obtain adequate assurance that it is Year 2000 compliant or
determine and address any noncompliance. In addition, wherever practical, the
Company independently tests the item for compliance. The Company has obtained
supplier compliance certification for approximately 15% of the items that it has
inventoried as potentially non-compliant and has completed testing of
approximately 15% of such items. The Company estimates that this assessment
process will be completed in the first quarter of 1999, and anticipates
deploying and testing all repairs and replacements of non-compliant systems and
equipment by June, 1999.
In addition to its own systems and equipment, the Company depends upon the
proper function of computer systems and other date-sensitive equipment of
outside parties. These parties include other water companies, banks,
telecommunications service providers and electric and other utilities. The
Company has initiated communications with such parties to determine the extent
to which they are vulnerable to the Year 2000 issue and, in certain
circumstances, to coordinate joint testing. The Company has not yet received
sufficient information about their remediation plans to predict the outcome of
their efforts. If the third parties with which the Company interacts have Year
2000 problems that are not remedied, resulting problems could include, the loss
of telecommunications and electrical service, the receipt of inaccurate
financial and billing-related information, and the disruption of capital flows
potentially resulting in liquidity stress.
Due to the uncertainties presented by such third party Year 2000 problems,
and the possibility that, despite its efforts, the Company is unsuccessful in
preparing its internal systems and equipment for the Year 2000, the Company is
developing contingency plans for dealing with the most reasonably likely worst
case scenario. Such plans include manual back-ups for crucial automated systems,
the use of electrical generators capable of sustaining operations through a
power failure, and enhanced transition-period staffing to compensate for
automation and communication failures. The Company's assessment of its most
reasonably likely worst case scenario and the exact nature and scope of its
contingency plans will be effected by the Company's continued Year 2000
assessment and testing. The Company expects to complete such assessment and
contingency plans during the first quarter of 1999 and to have all contingency
systems in place and fully tested by the fourth quarter of 1999. As the Company
already has extensive disaster-contingency systems in place, it does not believe
that the cost of preparing or effecting Year 2000 contingency plans will be
material.
<PAGE> 14
Page 14
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
The Company does not believe that the costs of addressing the Year 2000
problem, excluding the costs of the MIS, will be material to the Company's
financial condition. It has not budgeted separately for such costs for 1998. The
Company anticipates spending approximately $300,000 for effecting its Year 2000
program in 1999. The Company has funded, and expects to continue to fund, the
costs of its Year 2000 efforts through operating cash flow.
The costs of the Company's year 2000 program and the timetable for
completing its Year 2000 preparations are based on current estimates, which
reflect numerous assumptions about future events, including the continued
availability of certain resources, the timing and effectiveness of third-party
remediation plans and other factors. The Company can give no assurance that
these estimates will be achieved, and actual results could differ materially
from those currently anticipated. In addition, there can be no assurance that
the Company's Year 2000 program will be effective or that its contingency plans
will be sufficient. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct relevant computer software codes
and embedded technology, the results of internal and external testing and the
timeliness and effectiveness of remediation efforts of third parties.
FORWARD LOOKING INFORMATION
This report, including management's discussion and analysis, contains
certain forward looking statements regarding the Company's results of operations
and financial position. These forward looking statements are based on current
information and expectations, and are subject to risks and uncertainties which
could cause the Company's actual results to differ materially from expected
results.
PART II, ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1 The Certificate of Amendment of Certificate of Incorporation with Respect
to Series A Junior Participating Preference Stock of the Company.
(Incorporated herein by reference, Exhibit 3 to the current report on Form
8-K filed by the Company on September 25, 1998)
3.2 The Company's Amended and Restated Certificate of Incorporation
(Incorporated herein by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
<PAGE> 15
Page 15
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
RIDER 14A
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter
ended September 30, 1998, both of which related to the Company's newly
adopted Shareholders Rights Plan:
Current report on Form 8-K dated August 13, 1998, filed on August
18, 1998, reporting item 5 (Other Information) and Item 7 (Financial
Statements and Exhibits)
Current report on Form 8-K dated August 12, 1998, filed on August
13, 1998, reporting Item 5 (Other Information) and Item 7 (Financial
Statements and Exhibits)
<PAGE> 16
Page 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Connecticut Water Service, Inc.
(Registrant)
Date: November 12, 1998 By /s/ David C. Benoit
David C. Benoit
Vice President - Finance
Date: November 12, 1998 By: /s/ Peter J. Bancroft
Peter J. Bancroft
Controller and Assistant
Treasurer
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