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