<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
September 30, 1999 OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
Commission File Number 0-8084
Connecticut Water Service, Inc.
(Exact name of registrant as specified in its charter)
Connecticut 06-0739839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
93 West Main Street, Clinton, CT 06413-1600
(Address of principal executive offices) (Zip Code)
(860) 669-8636
(Registrant's telephone number, including area code)
Not Applicable
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a count. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
4,838,688
Number of shares of common stock outstanding, September 30, 1999
<PAGE> 2
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
Financial Report
September 30, 1999 and 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I, ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 1999
and December 31, 1998 Page 3
Consolidated Statements of Capitalization at
September 30, 1999 and December 31, 1998 Page 4
Consolidated Statements of Income for Three Months
Ended September 30, 1999 and 1998 Page 5
Consolidated Statements of Income for Nine Months
Ended September 30, 1999 and 1998 Page 6
Consolidated Statements of Income for Twelve Months
Ended September 30, 1999 and 1998 Page 7
Consolidated Statements of Retained Earnings for Three
Months Ended September 30, 1999 and 1998 Page 8
Consolidated Statements of Retained Earnings for Nine
Months Ended September 30, 1999 and 1998 Page 8
Consolidated Statements of Retained Earnings for Twelve
Months Ended September 30, 1999 and 1998 Page 8
Consolidated Statements of Cash Flows for Nine Months
Ended September 30, 1999 and 1998 Page 9
Notes to Consolidated Financial Statements Page 10
PART I, ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations Page 13-16
PART II, ITEM 6: Report on Form 8-K Page 16
Signature Page Page 17
</TABLE>
Note:
The financial statements have been restated to reflect the acquisitions
of Crystal Water Utilities, Inc., and Gallup Water Service, Inc., as
explained in Footnote 2 of the Notes to Consolidated Financial
Statements.
<PAGE> 3
Page 3
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At September 30, 1999 and December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 DEC. 31,
ASSETS (UNAUDITED) 1998
------------- ---------
<S> <C> <C>
Utility Plant
Utility Plant $ 237,652 $ 232,715
Construction Work in Progress 5,645 4,459
Utility Plant Acquisition Adjustments (1,274) (1,274)
--------- ---------
242,023 235,900
Accumulated Provision for Depreciation (63,261) (59,715)
--------- ---------
Net Utility Plant 178,762 176,185
--------- ---------
Investments 2,171 2,166
--------- ---------
Current Assets
Cash 1,936 372
Accounts Receivable (Less Allowance, 1999- $315; 1998 - $295) 9,877 8,141
Prepayments and Other Current Assets 1,752 974
--------- ---------
Total Current Assets 13,565 9,487
--------- ---------
Deferred Charges and Regulatory Assets
Unamortized Debt Issuance Expense 5,777 5,968
Income Taxes 9,937 9,859
Postretirement Benefits Other Than Pension 1,100 1,150
Other Costs 1,150 1,140
--------- ---------
Total Deferred Charges 17,964 18,117
--------- ---------
TOTAL ASSETS $ 212,462 $ 205,955
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization (See accompanying statements)
Common Stockholders' Equity $ 62,402 $ 60,326
Preferred Stock 772 772
Long-Term Debt 65,476 65,611
--------- ---------
Total Capitalization 128,650 126,709
--------- ---------
Current Liabilities
Current Portion of Long Term Debt 170 419
Interim Bank Loans Payable 5,410 1,895
Accounts Payable and Accrued Taxes and Interest 7,222 8,045
Other 2,848 2,538
--------- ---------
Total Current Liabilities 15,650 12,897
--------- ---------
Long-Term Liabilities
Advances for Construction 16,661 15,273
Contributions in Aid of Construction 22,977 22,944
Deferred Federal Income Taxes 16,088 15,601
Unfunded Future Income Taxes 9,310 9,309
Unfunded Postretirement Benefits Other Than Pension 1,100 1,150
Unamortized Investment Tax Credits 2,026 2,072
--------- ---------
Total Long-Term Liabilities 68,162 66,349
--------- ---------
TOTAL CAPITALIZATION AND LIABILITIES $ 212,462 $ 205,955
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
Page 4
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At September 30, 1999 and December 31, 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 DEC. 31,
(UNAUDITED) 1998
------------- ---------
<S> <C> <C>
Common Stockholders' Equity
Common Stock Without Par Value; Authorized - 7,500,000 Shares;
Shares Issued and Outstanding: 1999 - 4,838,688; 1998 - 4,828,147 $ 45,934 $ 45,788
Stock Issuance Expense (1,385) (1,385)
Retained Earnings 17,853 15,923
--------- ---------
Total Common Stockholders' Equity 62,402 60,326
--------- ---------
Cumulative Preferred Stock of Connecticut Water Service, Inc.
Series A Voting, $20 Par Value; Authorized, Issued and
Outstanding 15,000 Shares, Redeemable at $21.00 Per Share 300 300
Series $.90 Non-Voting, $16 Par Value; Authorized 50,000 Shares
Issued and Outstanding 29,499 Shares, Redeemable at $16.00 Per Share 472 472
--------- ---------
Total Preferred Stock of Connecticut Water Service, Inc. 772 772
--------- ---------
Long-Term Debt
The Connecticut Water Company
First Mortgage Bonds
5.875% Series R, due 2022 14,800 14,800
6.65% Series S, due 2020 8,000 8,000
5.75% Series T, due 2028 5,000 5,000
5.3% Series U, due 2028 4,550 4,550
6.94% Series V, due 2029 12,050 12,050
--------- ---------
44,400 44,400
--------- ---------
Unsecured Water Facilities Revenue Refinancing Bonds
5.05% 1998 Series A, due 2028 10,000 10,000
5.125% 1998 Series B, due 2028 8,000 8,000
--------- ---------
18,000 18,000
--------- ---------
Other
5.5% Unsecured Promissory Note 108 132
--------- ---------
Crystal Water Utilities
8.0% Due 2017 135 137
6.25% Due 2015 0 18
7.82% Due 2020 523 528
8.0% Due 2011 2,339 2,416
--------- ---------
2,997 3,099
--------- ---------
Gallup Water Service
9.58% Due 1999 0 255
--------- ---------
Chester Realty
6% Due 2006 141 144
--------- ---------
TOTAL 65,646 66,030
Less Current Portion of Long-Term Debt (170) (419)
--------- ---------
Total Long-Term Debt 65,476 65,611
--------- ---------
TOTAL CAPITALIZATION $ 128,650 $ 126,709
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
Page 5
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Operating Revenues $ 12,892 $ 12,020
-------- --------
Operating Expenses
Operation and Maintenance 4,681 4,450
Depreciation 1,133 1,004
Federal and State Income Taxes 2,222 1,919
Other Taxes 1,093 1,008
-------- --------
Total Operating Expenses 9,129 8,381
Utility Operating Income 3,763 3,639
-------- --------
Other Income (Deductions)
Interest 15 37
Allowance for Funds Used During Construction 84 108
Gain on Sale of Property 53 46
Non-Water Sales Earnings 0 8
Miscellaneous Income (Deductions) (8) (15)
Taxes on Other Income (14) (14)
-------- --------
Total Other Income (Deductions) 130 170
-------- --------
Interest and Debt Expense
Interest on Long-Term Debt 984 994
Other Interest Charges 128 92
Amortization of Debt Expense 55 55
-------- --------
Total Interest and Debt Expense 1,167 1,141
-------- --------
Net Income Before Preferred Dividends 2,726 2,668
Preferred Stock Dividend Requirement 10 10
-------- --------
Net Income Applicable to Common Stockholders $ 2,716 $ 2,658
======== ========
Weighted Average Common Shares Outstanding 4,839 4,828
======== ========
Basic and Fully Diluted Earnings Per Average Common Share $ 0.56 $ 0.55
======== ========
Dividends Per Common Share $ 0.28 $ 0.28
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
Page 6
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1999 and 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Operating Revenues $ 32,575 $ 30,643
-------- --------
Operating Expenses
Operation and Maintenance 13,096 12,800
Depreciation 3,322 3,015
Federal and State Income Taxes 4,051 3,368
Other Taxes 3,164 3,054
-------- --------
Total Operating Expenses 23,633 22,237
-------- --------
Utility Operating Income 8,942 8,406
-------- --------
Other Income (Deductions)
Interest 77 99
Allowance for Funds Used During Construction 316 357
Gain on Sale of Property 94 253
Non-Water Sales Earnings 132 127
Miscellaneous Income (Deductions) (13) (28)
Taxes on Other Income (64) (150)
-------- --------
Total Other Income (Deductions) 542 658
-------- --------
Interest and Debt Expense
Interest on Long-Term Debt 2,962 2,927
Other Interest Charges 265 343
Amortization of Debt Expense 191 159
-------- --------
Total Interest and Debt Expense 3,418 3,429
-------- --------
Net Income Before Preferred Stock 6,066 5,635
Preferred Stock Dividend Requirement 29 29
-------- --------
Net Income Applicable to Common Stockholders $ 6,037 $ 5,606
======== ========
Weighted Average Common Shares Outstanding 4,836 4,827
======== ========
Basic and Fully Diluted Earnings Per Average Common Share $ 1.25 $ 1.16
======== ========
Dividends Per Common Share $ 0.85 $ 0.83
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
Page 7
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Twelve Months Ended September 30, 1999 and 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Operating Revenues $ 42,235 $ 40,253
-------- --------
Operating Expenses
Operation and Maintenance 17,537 16,911
Depreciation 4,440 3,983
Federal and State Income Taxes 4,772 4,289
Other Taxes 4,190 4,059
-------- --------
Total Operating Expenses 30,939 29,242
-------- --------
Utility Operating Income 11,296 11,011
-------- --------
Other Income (Deductions)
Interest 129 153
Allowance for Funds Used During Construction 435 462
Gain on Sale of Property 316 267
Non-Water Sales Earnings 253 173
Miscellaneous Income (Deductions) (27) (75)
Taxes on Other Income (202) (149)
-------- --------
Total Other Income (Deductions) 904 831
-------- --------
Interest and Debt Expense
Interest on Long-Term Debt 3,953 3,864
Other Interest Charges 394 569
Amortization of Debt Expense 247 224
-------- --------
Total Interest and Debt Expense 4,594 4,657
-------- --------
Net Income Before Preferred Dividend 7,606 7,185
Preferred Stock Dividend Requirement 38 38
-------- --------
Net Income Applicable to Common Stockholders $ 7,568 $ 7,147
======== ========
Weighted Average Common Shares Outstanding 4,834 4,825
======== ========
Basic and Fully Diluted Earnings Per Average Common Share $ 1.57 $ 1.48
======== ========
Dividends Per Common Share $ 1.14 $ 1.12
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
Page 8
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Balance at Beginning of Period $16,569 $14,451
Net Income 2,726 2,668
------- -------
19,295 17,119
------- -------
Dividends Declared:
Cumulative Preferred, Class A, $.20 per share 3 3
Cumulative Preferred, Series $.90, $.225 per share 7 7
Common Stock - 1999 $0.28 per share; 1998 $0.28 per share 1,432 1,328
------- -------
1,442 1,338
------- -------
Balance at End of Period $17,853 $15,781
======= =======
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Balance at Beginning of Period $15,923 $14,189
Net Income 6,066 5,635
------- -------
21,989 19,824
------- -------
Dividends Declared:
Cumulative Preferred, Class A, $.40 per share 9 9
Cumulative Preferred, Series $.90, $.45 per share 20 20
Common Stock - 1999 $0.85 per share; 1998 $0.83 per share 4,107 4,014
------- -------
4,136 4,043
------- -------
Balance at End of Period $17,853 $15,781
======= =======
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Balance at Beginning of Period $15,781 $14,014
Net Income 7,606 7,185
------- -------
23,387 21,199
------- -------
Dividends Declared:
Cumulative Preferred, Class A, $.80 per share 12 12
Cumulative Preferred, Series $.90, $.90 per share 26 26
Common Stock - 1999 $1.14 per share; 1998 $1.12 per share 5,496 5,380
------- -------
5,534 5,418
------- -------
Balance at End of Period $17,853 $15,781
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 9
Page 9
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Operating Activities:
Net Income Before Preferred Dividends $ 6,066 $ 5,635
-------- --------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation (including $93 in 1999, $95 in 1998 charged to other accounts) 3,415 3,110
Change in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable and Accrued Unbilled Revenues (1,736) (1,679)
(Increase) Decrease in Other Current Assets (778) (965)
(Increase) Decrease in Other Non-Current Items 99 (104)
Increase (Decrease) in Accounts Payable, Accrued Expenses and
Other Current Liabilities (513) (775)
Increase (Decrease) in Deferred Federal Income Taxes and
Investment Tax Credits, Net 441 855
-------- --------
Total Adjustments 928 442
-------- --------
Net Cash Provided by (Used for) Operating Activities 6,994 6,077
-------- --------
Investing Activities:
Gross Additions to Utility Plant (including Allowance for Funds
Used During Construction of $316 in 1999 and $357 in 1998) (6,156) (5,295)
-------- --------
Financing Activities:
Proceeds from Interim Bank Loans 5,410 5,018
Repayment of Interim Bank Loans (1,895) (8,811)
Proceeds from Issuance of Common Stock 182 53
Net Proceeds from Issuance of Long-Term Debt 0 18,000
Repayment of Long-Term Debt (384) (10,186)
Advances, Contributions and Funds From Others for Construction, Net 1,585 916
Costs Incurred to Issue Long-Term Debt, Preferred Stock, and Common Stock (36) (1,147)
Cash Dividends Paid (4,136) (4,043)
-------- --------
Net Cash Provided by (Used for) Financing Activities 726 (200)
-------- --------
Net Increase (Decrease) in Cash 1,564 582
Cash at Beginning of Year 372 780
-------- --------
Cash at End of Period $ 1,936 $ 1,362
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest (Net of Amounts Capitalized) $ 2,912 $ 3,417
Income Taxes $ 2,723 $ 2,460
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 10
Page 10
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements included herein have been prepared by
CONNECTICUT WATER SERVICE, INC. (Connecticut Water or the Company), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission and reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for interim periods. Certain
information and footnote disclosures have been omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual report
on 10-K.
The results for interim periods are not necessarily indicative of
results to be expected for the year since the consolidated earnings are subject
to seasonal factors.
2. During 1999 Connecticut Water acquired two companies which have been
accounted for as pooling-of-interests. Accordingly, Connecticut Water's
financial statements have been restated to include the results of the acquired
companies for all periods presented.
On April 16, 1999 Gallup Water Service, Inc. ("Gallup") was merged with
and into Connecticut Water through the issuance of 47,826 shares of Connecticut
Water Service, Inc., which were exchanged for all of the outstanding common
shares of Gallup.
On September 29, 1999 Crystal Water Utilities Corporation ("Crystal")
was merged with and into Connecticut Water through the issuance of 244,508
shares of Connecticut Water Service, Inc., which were exchanged for all of the
outstanding common shares of Crystal.
The combined and separate results of Connecticut Water, Gallup and
Crystal during the periods preceding and after the merger were as follows:
(In thousands of Dollars)
<TABLE>
<CAPTION>
September 30
------------------------------------------------
Three Months Nine Months Twelve Months
Ended Ended Ended
----- ----- -----
<S> <C> <C> <C>
Operating Revenues
1999
Connecticut Water $12,185 $30,664 $39,728
Gallup 185 473 623
Crystal 522 1,438 1,884
------- ------- -------
Combined $12,892 $32,575 $42,235
======= ======= =======
1998
Connecticut Water $11,392 $28,860 $37,861
Gallup 151 433 586
Crystal 477 1,350 1,806
------- ------- -------
Combined $12,020 $30,643 $40,253
======= ======= =======
</TABLE>
<PAGE> 11
Page 11
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30
------------------------------------------------
Three Months Nine Months Twelve Months
Ended Ended Ended
----- ----- -----
<S> <C> <C> <C>
Net Income Applicable
to Common Stockholders
1999
Connecticut Water $ 2,574 $ 5,818 $ 7,296
Gallup (21) (29) (9)
Crystal 163 248 281
------- ------- -------
Combined $ 2,716 $ 6,037 $ 7,568
======= ======= =======
1998
Connecticut Water $ 2,600 $ 5,450 $ 6,923
Gallup 21 49 58
Crystal 37 107 166
------- ------- -------
Combined $ 2,658 $ 5,606 $ 7,147
======= ======= =======
</TABLE>
3. Earnings per average common share are calculated by dividing net income
applicable to common stock by the average number of shares of common stock
outstanding during the respective periods as detailed on the following page:
<PAGE> 12
Page 12
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
12 Months Ended
3 Months Ended ---------------------------------------
9/30/99 9/30/98 9/30/99 9/30/98 12/31/98
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Common Shares Outstanding:
January 1, 1998 -- -- -- -- 4,819,970
October 1, 1998 & 1997
respectively -- 4,828,147 4,819,049 --
July 1, 1999 & 1998
respectively 4,838,563 4,828,124 -- -- --
Common Shares Issued:
To CSE - December 15, 1997 -- -- -- 57 --
To 401-K - December 31, 1997 -- -- -- 864 --
To PSP - February 18, 1998 -- -- -- 6,921 6,921
To CSE - March 15, 1998 -- -- -- 102 102
To 401-K - March 30, 1998 -- -- -- 590 590
To CSE - June 15, 1998 -- -- -- 95 95
To 401-K - June 30, 1998 -- -- -- 446 446
Liquidation of Fractional Shares -- (587) -- (587) (587)
To CSE - September 15, 1998 -- 82 -- 82 82
To 401-K - September 30, 1998 -- 528 -- 528 528
To CSE - December 15, 1998 -- -- 81 -- 81
To 401-K - December 31, 1998 -- -- 391 -- 391
To PSP - March 1, 1999 -- -- 9,658 -- --
To CSE - March 15, 1999 -- -- 147 -- --
To CSE - June 15, 1999 -- -- 139 -- --
To CSE - September 15, 1999 125 -- 125 -- --
---------- ---------- ---------- ---------- ----------
Common Shares Outstanding:
September 30, 1999 & 1998
respectively 4,838,688 4,828,147 4,838,688 4,828,147
========== ========== ========== ==========
December 31, 1998 4,828,619
==========
Weighted Average Common Shares Outstanding:
Days outstanding basis* 4,838,585 4,828,061 4,834,294 4,825,191 4,827,484
========== ========== ========== ========== ==========
</TABLE>
* Basic and Fully diluted are the same. The share amounts above have been
restated by 47,826 shares for the acquisition of The Gallup Water Service, Inc.
and 244,508 shares for the acquisition of Crystal Water Utilities Corporation
due to pooling of interests accounting.
PSP = Performance Stock Program
401-K = Company contribution to employees' 401-K savings plan
CSE = Common Stock Equivalents
<PAGE> 13
Page 13
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
PART I, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CORPORATE RESOURCES
At September 30, 1999 the Company had $3,590,000 of unused lines of
interim bank loan credit available.
RESULT OF OPERATIONS
THE FOLLOWING FACTORS HAD A SIGNIFICANT EFFECT UPON THE COMPANY'S NET
INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED WITH THE NET
INCOME FOR THE SAME PERIOD LAST YEAR.
Net income applicable to common stock for the three months ended
September 30, 1999 increased from that of September 30, 1998 by $58,000, or
$.01, per average common share. The increase in net income resulted from a
$124,000 increase in operating income, partially offset by a $40,000 decrease in
other income and deductions and a $26,000 increase in interest and debt expense.
The increase in operating income is due to $872,000 or a 7.3% increase
in operating revenues, partially offset by a $748,000 or 8.9% increase in
operating expenses.
The increase in operating revenues is a result of higher than average
customer water consumption brought on by the extremely dry, hot weather in July
and August 1999.
The increase in operating expenses is primarily due to increased income
taxes as a result of the higher taxable income, higher operation costs related
to the production and supply of the additional water consumed by customers, and
higher depreciation and property tax expense resulting from the Company's
increased investments in utility plant.
The decrease in other income and deductions is partially due to the
completion of a major capital project in late 1998, which generated an overall
higher level of Allowance for Funds Used During Construction in 1998 as compared
to 1999.
THE FOLLOWING FACTORS HAD A SIGNIFICANT EFFECT UPON THE COMPANY'S NET
INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED WITH THE NET
INCOME FOR THE SAME PERIOD LAST YEAR.
Net income applicable to common stock for the nine months ended
September 30, 1999 increased from that of September 30, 1998 by $432,000 or $.09
a share. The higher net income resulted from a $536,000 increase in operating
income and $12,000 decrease in interest and debt expense, partially offset by a
$116,000 decrease in other income.
The $1,932,000 or 6.3% increase in operating revenues is primarily due
to higher than average water consumption resulting from the extremely hot and
dry weather in June, July and August 1999.
<PAGE> 14
Page 14
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
The $1,396,000 or 6.3% increase in operating expenses is primarily due to higher
income taxes as a result of the higher taxable income, higher depreciation and
municipal property tax expense as a result of the Company's increasing
investment in utility plant and higher operation costs related to the production
and supply of the additional water consumed by customers.
The decrease in other income is primarily due to a lower level of real estate
sales in 1999 as compared to 1998.
YEAR 2000
Like many organizations, the Company has evaluated and continues to
respond to its exposure to the Year 2000 problem. In general terms, the problem
arises from the fact that many existing computer systems and other equipment
containing date-sensitive embedded technology (including non-information
technology equipment and systems) use only two digits to identify a year in the
date field, with the assumption that the first two digits of the year are always
"19". As a result, such systems may misinterpret dates after December 31, 1999,
which may result in miscalculations, other malfunctions or the total failure of
such systems. Additional problems arise from the fact that the Year 2000 is a
special case leap year. Because the Company is dependent upon the proper
functioning of computer systems and other equipment containing date-sensitive
embedded technology, a failure of such systems and equipment to be Year 2000
compliant could have a material adverse effect on the Company. If not remedied,
potential risks include business interruption or shutdown, financial loss,
regulatory actions and legal liability.
Last year the Company established a team of senior managers to address
the Year 2000 problem. This team has evaluated the Company's exposure to the
Year 2000 problem and has prepared, and is executing a plan for managing the
risks and costs associated therewith. The Connecticut Department of Public
Utility Control (DPUC) has reviewed the readiness of nine Connecticut utilities,
including the Company. The DPUC review found no significant deficiencies.
The Company's general process of addressing the Year 2000 problem can
be broken down into the following steps: (a) inventorying systems, equipment and
other items (including those of third parties) that potentially present a Year
2000 problem, (b) assigning priorities to identified items, (c) assessing the
Year 2000 compliance of the items determined to be material to the Company
through internal testing and outside certification,(d) repairing or replacing
items determined to be non-compliant, and (e) designing and implementing
contingency plans around items that are identified to be subject to a Year 2000
problem but unable to be tested or otherwise determined to be compliant.
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 certified to be
Year 2000 compliant. The integration of the new system is now complete. The
costs of implementing the new system totaled approximately $2 million, which the
Company has capitalized. The Company has done internal testing of the MIS and
has completed its Year 2000 testing of MIS. The Company has found no indication
that the MIS is not Year 2000 compliant as certified by its software or hardware
vendors.
<PAGE> 15
Page 15
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
The Company also has evaluated the Year 2000 compliance of systems and
equipment which are not linked to the MIS and has identified the items that
could be impacted by the Year 2000 problem. Once the Company determined that an
item may present a Year 2000 problem, the Company contacted the supplier to
obtain adequate assurance that it is Year 2000 compliant or determined and
addressed any non-compliance. In addition, wherever practical, the Company
independently tested the item for compliance. The Company has obtained supplier
compliance certification for substantially all of our items that it has
inventoried as potentially non-compliant. The Company has substantially
completed all repairs and replaced non-compliant systems and equipment.
In addition to its own systems and equipment, the Company depends upon
the proper function of computer systems and other date-sensitive equipment of
outside parties. These parties include other water companies, banks,
telecommunications service providers and electric and other utilities. The
Company has initiated communications with such parties to determine the extent
to which they are vulnerable to the Year 2000 issue and, in certain
circumstances, to coordinate joint testing. If the third parties with which the
Company interacts have Year 2000 problems that are not remedied, resulting
problems could include the loss of telecommunications and electrical service,
the receipt of inaccurate financial and billing-related information, and the
disruption of capital flows potentially resulting in liquidity stress.
Due to the uncertainties presented by such third party Year 2000
problems, and the possibility that, despite its efforts, the Company is
unsuccessful in preparing its internal systems and equipment for the Year
2000,the Company has prepared contingency plans for addressing the most
reasonably likely worst case scenario. Such plans include manual back-ups for
crucial automated systems, the use of electrical generators capable of
sustaining operations through a power failure, and enhanced transition-period
staffing to compensate for automation and communication failures. The Company
has virtually all contingency systems in place and fully tested. As the Company
already has extensive disaster-contingency plans in place, it does not believe
that the cost of preparing or effecting Year 2000 contingency plans will be
material.
The Company does not believe that the costs of addressing the Year 2000
problem, excluding the costs of the MIS, will be material to the Company's
financial condition. The Company anticipates spending approximately $300,000 for
affecting its Year 2000 program in 1999. The Company has funded, and expects to
continue to fund, the costs of its Year 2000 efforts through its operating cash
flow.
The costs of the Company's Year 2000 program and the timetable for
completing its Year 2000 preparations are based on current estimates, which
reflect numerous assumptions about future events, including the continued
availability of certain resources, the timing and effectiveness of third-party
remediation plans and other factors. The Company can give no assurance that
these estimates will be achieved, and actual results could differ materially
from those currently anticipated. In addition, there can be no assurance that
the Company's Year 2000 program will be effective or that its contingency plans
will be sufficient. Specific factors that might cause such material
<PAGE> 16
Page 16
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct relevant
computer software codes and embedded technology, the results of internal and
external testing and the timeliness and effectiveness of remediation efforts of
third parties.
FORWARD LOOKING INFORMATION
This report, including management's discussion and analysis, contains
certain forward looking statements regarding the Company's results of operations
and financial position. These forward looking statements are based on current
information and expectations, and are subject to risks and uncertainties which
could cause the Company's actual results to differ materially from expected
results.
PART II, ITEM 6: REPORT ON FORM 8-K
(1) Report on Form 8-K
The Company filed the following report on Form 8-K during the quarter
ended September 30, 1999; which related to the Company's new
acquisition of Crystal Water Utilities Corporation.
Current report on Form 8-K dated September 29, 1999, filed on
October 5, 1999, reporting item 5 (Other Information).
<PAGE> 17
Page 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Connecticut Water Service, Inc.
(Registrant)
Date: November 5, 1999 By /s/ David C. Benoit
--------------------------------
David C. Benoit
Vice President - Finance
Date: November 5, 1999 By: /s/ Peter J. Bancroft
--------------------------------
Peter J. Bancroft
Assistant Treasurer
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