<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 June 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.
4,594,815
Number of shares of common stock outstanding, June 30, 1999
<PAGE> 2
CONNECTICUT WATER SERVICE, INC.
Financial Report
June 30, 1999 and 1998
TABLE OF CONTENTS
PART I, ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 1999
and December 31, 1998 Page 3
Consolidated Statements of Capitalization at
June 30, 1999 and December 31, 1998 Page 4
Consolidated Statements of Income for Three Months
Ended June 30, 1999 and 1998 Page 5
Consolidated Statements of Income for Six Months
Ended June 30, 1999 and 1998 Page 6
Consolidated Statements of Income for Twelve Months
Ended June 30, 1999 and 1998 Page 7
Consolidated Statements of Retained Earnings for Three
Months Ended June 30, 1999 and 1998 Page 8
Consolidated Statements of Retained Earnings for Six
Months Ended June 30, 1999 and 1998 Page 8
Consolidated Statements of Retained Earnings for Twelve
Months Ended June 30, 1999 and 1998 Page 8
Consolidated Statements of Cash Flows for Six Months
Ended June 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 13-15
Signature Page Page 16
<PAGE> 3
Page 3
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
At June 30, 1999 and December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
JUNE 30,
1999 DEC. 31,
ASSETS (UNAUDITED) 1998
----------- ---------
<S> <C> <C>
Utility Plant
Utility Plant $ 224,650 $ 222,411
Construction Work in Progress 5,395 4,459
Utility Plant Acquisition Adjustments (1,253) (1,253)
--------- ---------
228,792 225,617
Accumulated Provision for Depreciation (59,062) (56,913)
--------- ---------
Net Utility Plant 169,730 168,704
--------- ---------
Investments 2,163 2,110
--------- ---------
Current Assets
Cash 1,170 128
Accounts Receivable (Less Allowance, 1999- $270; 1998 - $207) 7,486 7,754
Prepayments and Other Current Assets 841 877
--------- ---------
Total Current Assets 9,497 8,759
--------- ---------
Deferred Charges and Regulatory Assets
Unamortized Debt Issuance Expense 5,763 5,896
Income Taxes 9,053 9,000
Postretirement Benefits Other Than Pension 1,150 1,150
Other Costs 1,159 971
--------- ---------
Total Deferred Charges 17,125 17,017
--------- ---------
TOTAL ASSETS $ 198,515 $ 196,590
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization (See accompanying statements)
Common Stockholders' Equity $ 59,149 $ 58,502
Preferred Stock 772 772
Long-Term Debt 62,614 62,634
--------- ---------
Total Capitalization 122,535 121,908
--------- ---------
Current Liabilities
Current Portion Long Term Debt 43 297
Interim Bank Loans Payable 4,546 1,895
Accounts Payable and Accrued Taxes and Interest 5,798 7,809
Other 2,582 2,442
--------- ---------
Total Current Liabilities 12,969 12,443
--------- ---------
Long-Term Liabilities
Advances for Construction 15,515 15,195
Contributions in Aid of Construction 20,311 20,316
Deferred Federal Income Taxes 15,524 15,038
Unfunded Future Income Taxes 8,500 8,500
Unfunded Postretirement Benefits Other Than Pension 1,150 1,150
Unamortized Investment Tax Credits 2,011 2,040
--------- ---------
Total Long-Term Liabilities 63,011 62,239
--------- ---------
TOTAL CAPITALIZATION AND LIABILITIES $ 198,515 $ 196,590
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
Page 4
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At June 30, 1999 and December 31, 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 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 - 4,594,815; 1998 - 4,583,616 $ 44,677 $ 44,590
Stock Issuance Expense (1,385) (1,385)
Retained Earnings 15,857 15,297
--------- ---------
Total Common Stockholders' Equity 59,149 58,502
--------- ---------
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 116 132
--------- ---------
62,516 62,532
Gallup Water Service
9.58% Due 1999 0 255
--------- ---------
0 255
--------- ---------
Chester Realty
6% Due 2006 141 144
--------- ---------
141 144
--------- ---------
TOTAL 62,657 62,931
--------- ---------
Less Current Portion of Long-Term Debt (43) (297)
--------- ---------
Total Long-Term Debt 62,614 62,634
--------- ---------
TOTAL CAPITALIZATION $ 122,535 $ 121,908
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
Page 5
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30,
1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Operating Revenues $ 9,766 $ 8,942
------- -------
Operating Expenses
Operation and Maintenance 3,997 4,178
Depreciation 1,041 947
Federal and State Income Taxes 1,080 549
Municipal Taxes 862 870
Payroll Taxes 115 132
------- -------
Total Operating Expenses 7,095 6,676
------- -------
Utility Operating Income 2,671 2,266
------- -------
Other Income (Deductions)
Interest 1 31
Allowance for Funds Used During Construction 113 119
Gain on Sale of Property 36 207
Non-Water Sales Earnings 63 57
Miscellaneous Income (Deductions) (2) (8)
Taxes on Other Income (28) (103)
------- -------
Total Other Income (Deductions) 183 303
------- -------
Interest and Debt Expense
Interest on Long-Term Debt 928 931
Other Interest Charges 71 89
Amortization of Debt Expense 79 54
------- -------
Total Interest and Debt Expense 1,078 1,074
------- -------
Net Income Before Preferred Dividends 1,776 1,495
Preferred Stock Dividend Requirement 9 9
------- -------
Net Income Applicable to Common Stockholders $ 1,767 $ 1,486
======= =======
Weighted Average Common Shares Outstanding 4,595 4,583
======= =======
Basic and Fully Diluted Earnings Per Average Common Share $ 0.38 $ 0.32
======= =======
Dividends Per Common Share $0.2925 $0.2865
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
Page 6
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Operating Revenues $ 18,767 $ 17,750
-------- --------
Operating Expenses
Operation and Maintenance 7,881 7,854
Depreciation 2,091 1,895
Federal and State Income Taxes 1,789 1,418
Municipal Taxes 1,727 1,685
Payroll Taxes 285 307
-------- --------
Total Operating Expenses 13,773 13,159
-------- --------
Utility Operating Income 4,994 4,591
-------- --------
Other Income (Deductions)
Interest 59 55
Allowance for Funds Used During Construction 232 249
Gain on Sale of Property 41 207
Non-Water Sales Earnings 98 85
Miscellaneous Income (Deductions) (4) (11)
Taxes on Other Income (40) (120)
-------- --------
Total Other Income (Deductions) 386 465
-------- --------
Interest and Debt Expense
Interest on Long-Term Debt 1,856 1,806
Other Interest Charges 138 251
Amortization of Debt Expense 133 102
-------- --------
Total Interest and Debt Expense 2,127 2,159
-------- --------
Net Income Before Preferred Stock 3,253 2,897
Preferred Stock Dividend Requirement 19 19
-------- --------
Net Income Applicable to Common Stockholders $ 3,234 $ 2,878
======== ========
Weighted Average Common Shares Outstanding 4,591 4,582
======== ========
Basic and Fully Diluted Earnings Per Average Common Share $ 0.70 $ 0.63
======== ========
Dividends Per Common Share $ 0.5824 $ 0.5731
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
Page 7
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Twelve Months Ended June 30, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Operating Revenues $ 39,524 $ 37,911
-------- --------
Operating Expenses
Operation and Maintenance 16,234 15,566
Depreciation 4,096 3,684
Federal and State Income Taxes 4,397 4,123
Municipal Taxes 3,498 3,336
Payroll Taxes 495 548
-------- --------
Total Operating Expenses 28,720 27,257
-------- --------
Utility Operating Income 10,804 10,654
-------- --------
Other Income (Deductions)
Interest 144 129
Allowance for Funds Used During Construction 459 510
Gain on Sale of Property 309 220
Non-Water Sales Earnings 201 178
Miscellaneous Income (Deductions) (30) (72)
Taxes on Other Income (182) (162)
-------- --------
Total Other Income (Deductions) 901 803
-------- --------
Interest and Debt Expense
Interest on Long-Term Debt 3,714 3,553
Other Interest Charges 359 645
Amortization of Debt Expense 242 197
-------- --------
Total Interest and Debt Expense 4,315 4,395
-------- --------
Net Income Before Preferred Dividend 7,390 7,062
Preferred Stock Dividend Requirement 38 38
-------- --------
Net Income Applicable to Common Stockholders $ 7,352 $ 7,024
======== ========
Weighted Average Common Shares Outstanding 4,587 4,578
======== ========
Basic and Fully Diluted Earnings Per Average Common Share $ 1.60 $ 1.53
======== ========
Dividends Per Common Share $ 1.1620 $ 1.1466
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
Page 8
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In thousands, except share data)
For the Three Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Balance at Beginning of Period $15,434 $13,662
Net Income 1,776 1,495
------- -------
17,210 15,157
------- -------
Dividends Declared:
Cumulative Preferred, Class A, $.20 per share 3 3
Cumulative Preferred, Series $.90, $.225 per share 6 6
Common Stock - 1999 $0.2925 per share; 1998 $0.2865 per share 1,344 1,313
------- -------
1,353 1,322
------- -------
Balance at End of Period $15,857 $13,835
======= =======
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Balance at Beginning of Period $15,297 $13,583
Net Income 3,253 2,897
------- -------
18,550 16,480
------- -------
Dividends Declared:
Cumulative Preferred, Class A, $.40 per share 6 6
Cumulative Preferred, Series $.90, $.45 per share 13 13
Common Stock - 1999 $0.5824 per share; 1998 $0.5731 per share 2,674 2,626
------- -------
2,693 2,645
------- -------
Balance at End of Period $15,857 $13,835
======= =======
FOR THE TWELVE MONTHS ENDED JUNE 30, 1999 AND 1998
Balance at Beginning of Period $13,835 $12,060
Net Income 7,390 7,062
------- -------
21,225 19,122
------- -------
Dividends Declared:
Cumulative Preferred, Class A, $.80 per share 12 12
Cumulative Preferred, Series $.90, $.90 per share 26 26
Common Stock - 1999 $1.1620 per share; 1998 $1.1466 per share 5,330 5,249
------- -------
5,368 5,287
------- -------
Balance at End of Period $15,857 $13,835
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 9
Page 9
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Operating Activities:
Net Income Before Preferred Dividends $ 3,253 $ 2,897
-------- --------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation (including $61 in 1999, $63 in 1998 charged to other accounts) 2,152 1,958
Change in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable and Accrued Unbilled Revenues 268 (557)
(Increase) Decrease in Other Current Assets 36 59
(Increase) Decrease in Other Non-Current Items (160) (327)
Increase (Decrease) in Accounts Payable, Accrued Expenses and
Other Current Liabilities (1,913) (1,935)
Increase (Decrease) in Deferred Federal Income Taxes and
Investment Tax Credits, Net 457 477
-------- --------
Total Adjustments 840 (325)
-------- --------
Net Cash Provided by (Used for) Operating Activities 4,093 2,572
-------- --------
Investing Activities:
Gross Additions to Utility Plant (including Allowance for Funds
Used During Construction of $232 in 1999 and $249 in 1998) (3,180) (3,031)
-------- --------
Financing Activities:
Proceeds from Interim Bank Loans 4,546 4,129
Repayment of Interim Bank Loans (1,895) (8,811)
Proceeds from Issuance of Common Stock 87 93
Net Proceeds from Issuance of Long-Term Debt 0 18,000
Repayment of Long-Term Debt (232) (10,030)
Advances, Contributions and Funds From Others for Construction, Net 317 472
Costs Incurred to Issue Long-Term Debt, Preferred Stock, and Common Stock (1) (1,098)
Cash Dividends Paid (2,693) (2,645)
-------- --------
Net Cash Provided by (Used for) Financing Activities 129 110
-------- --------
Net Increase (Decrease) in Cash 1,042 (349)
Cash at Beginning of Year 128 447
-------- --------
Cash at End of Period $ 1,170 $ 98
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest (Net of Amounts Capitalized) $ 1,986 $ 2,476
Income Taxes $ 1,770 $ 1,795
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 10
Page 10
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements included herein have been
prepared by CONNECTICUT WATER SERVICE, INC. (the Company), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
and reflect all adjustments which are, in the opinion of management, necessary
to a fair statement of the results for interim periods. Certain information and
footnote disclosures have been omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. 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. On April 16, 1999 Gallup Water Service, Inc. ("Gallup") was merged with
and into the Company through the issuance of 47,826 shares of Connecticut Water
Service, Inc. which were exchanged for substantially all of the outstanding
common shares of Gallup. The merger has been accounted for as a
pooling-of-interests. Accordingly, the Company's financial statements have been
restated to include the results of Gallup for all periods presented.
The combined and separate results of the Company and Gallup during the
periods preceding and after the merger were as follows:
(In thousands of Dollars)
<TABLE>
<CAPTION>
June 30
-------------------------------------------
Three Months Six Months Twelve Months
Ended Ended Ended
------------ ---------- -------------
<S> <C> <C> <C>
Operating Revenues
1999
Connecticut Water Service
Consolidated $ 9,621 $18,479 $38,935
Gallup Water Service, Inc. 145 288 589
------- ------- -------
Combined $ 9,766 $18,767 $39,524
------- ======= =======
1998
Connecticut Water Service
Consolidated $ 8,796 $17,468 $37,324
Gallup Water Service, Inc. 146 282 587
------- ------- -------
Combined $ 8,942 $17,750 $37,911
======= ======= =======
</TABLE>
<PAGE> 11
Page 11
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
June 30
-------------------------------------------
Three Months Six Months Twelve Months
Ended Ended Ended
------------ ---------- -------------
<S> <C> <C> <C>
Net Income Applicable
to Common Stockholders
1999
Connecticut Water Service
Consolidated $ 1,790 $ 3,242 $ 7,319
Gallup Water Service, Inc. (23) (8) 33
------- ------- -------
Combined $ 1,767 $ 3,234 $ 7,352
======= ======= =======
1998
Connecticut Water Service
Consolidated $ 1,470 $ 2,850 $ 6,977
Gallup Water Service, Inc. 16 28 47
------- ------- -------
Combined $ 1,486 $ 2,878 $ 7,024
======= ======= =======
</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 SUBSIDIARY
<TABLE>
<CAPTION>
3 Months Ended 12 Months Ended
------------------------ ----------------------------------------
6/30/99 6/30/98 6/30/99 6/30/98 12/31/98
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Common Shares Outstanding:
January 1, 1998 -- -- -- -- 4,575,462
July 1, 1998 & 1997
respectively -- 4,583,616 4,573,478 --
April 1, 1999 & 1998
respectively 4,594,676 4,583,075 -- -- --
Common Shares Issued:
To CSE - September 15, 1997 -- -- -- 61 --
To 401-K - September 30, 1997 -- -- -- 1,002 --
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 95
To 401-K - June 30, 1998 -- 446 -- 446 446
Liquidation of Fractional Shares -- -- (587) -- (587)
To CSE - September 15, 1998 -- -- 82 -- 82
To 401-K - September 30, 1998 -- -- 528 -- 528
To CSE - December 15, 1998 -- -- 81 -- 81
To 401-K - December 31, 1998 -- -- 391 -- 391
To PSP - March 1, 1999 -- -- 10,418 -- --
To CSE - March 15, 1999 -- -- 147 -- --
To CSE - June 15, 1999 139 -- 139 -- --
---------- ---------- ---------- ---------- ----------
Common Shares Outstanding:
June 30, 1999 & 1998
respectively 4,594,815 4,583,616 4,594,815 4,583,616
========== ========== ========== ==========
December 31, 1998 4,584,111
=========
Weighted Average Common Shares Outstanding:
Days outstanding basis* 4,594,700 4,583,097 4,587,387 4,578,150 4,582,976
========== ========== ========== ========== ==========
</TABLE>
* Basic and Fully diluted are the same. The share amounts above have been
restated by 47,826 shares due to the pooling of interest required for the Gallup
Water Service, Inc. acquisition.
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 SUBSIDIARY
PART I, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CORPORATE RESOURCES
At June 30, 1999 the Company had $4,454,000 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 JUNE 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
June 30, 1999 increased from that of June 30, 1998 by $281,000, or $.06, per
average common share. The increase in net income resulted from a $405,000
increase in operating income, partially offset by a $120,000 decrease in other
income and deductions and a $4,000 increase in interest and debt expense.
The increase in operating income is due to a 9.2% increase in
operating revenues, partially offset by a 6.3% increase in operating expenses.
The increase in operating revenues is a result of higher than
average customer water consumption due to the dry, hot weather in June 1999.
The increase in operating expenses is primarily due to increased
income taxes as a result of the higher taxable income.
The decrease in other income and deductions is primarily due to a
lower level of real estate land sales in 1999 as compared to 1998.
THE FOLLOWING FACTORS HAD A SIGNIFICANT EFFECT UPON THE COMPANY'S
NET INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 AS COMPARED WITH THE NET
INCOME FOR THE SAME PERIOD LAST YEAR.
Net income applicable to common stock for the six months ended
June 30, 1999 increased from that of June 30, 1998 by $356,000. The improvement
in net income resulted from a $403,000 increase in operating income and $32,000
decrease in interest and debt expense, partially offset by a $79,000 decrease in
other income.
The 5.7% increase in operating revenues is primarily due to
higher than average water consumption as a result of the dry, hot weather in
June 1999.
The 4.7% increase in operating expenses is primarily due to
higher income taxes as a result of the higher taxable income and higher
depreciation and municipal tax expense as a result of the Company's increasing
investment in utility plant.
The decrease in other income is primarily due to a lower level of
real estate sales in 1999 as compared to 1998.
<PAGE> 14
Page 14
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARY
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 DPUC has reviewed the readiness of
nine utilities, of which the Company is one.
The Company's general process of addressing the Year 2000 problem
can be broken down into the following steps: (a) inventorying systems, equipment
and other items (including those of third parties) that potentially present a
Year 2000 problem, (b) assigning priorities to identified items, (c) assessing
the Year 2000 compliance of the items determined to be material to the Company
through internal testing and outside certification,(d) repairing 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 totalled 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.
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 is in the
process of all repairs and replacing non-compliant systems and equipment. It is
currently 95% done with this stage and anticipates completion by October 1,
1999.
<PAGE> 15
Page 15
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 dealing with the most
reasonably likely worst case scenario. Such plans include manual back-ups for
crucial automated systems, the use of electrical generators capable of
sustaining operations through a power failure, and enhanced transition-period
staffing to compensate for automation and communication failures. The Company
expects to have all contingency systems in place and fully tested by the third
quarter of 1999. As the Company already has extensive disaster-contingency
systems in place, it does not believe that the cost of preparing or effecting
Year 2000 contingency plans will be material.
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 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.
<PAGE> 16
Page 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Connecticut Water Service, Inc.
(Registrant)
Date: August 13, 1999 By /s/ David C. Benoit
------------------------
David C. Benoit
Vice President - Finance
Date: August 13, 1999 By: /s/ Peter J. Bancroft
------------------------
Peter J. Bancroft
Assistant Treasurer
<TABLE> <S> <C>
<ARTICLE> OPUR1
<MULTIPLIER> 1000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 169,730
<OTHER-PROPERTY-AND-INVEST> 2,163
<TOTAL-CURRENT-ASSETS> 9,497
<TOTAL-DEFERRED-CHARGES> 17,125
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 198,515
<COMMON> 43,292
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 15,857
<TOTAL-COMMON-STOCKHOLDERS-EQ> 59,149
0
772
<LONG-TERM-DEBT-NET> 62,614
<SHORT-TERM-NOTES> 4,546
<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> 71,434
<TOT-CAPITALIZATION-AND-LIAB> 198,515
<GROSS-OPERATING-REVENUE> 9,766
<INCOME-TAX-EXPENSE> 1,080
<OTHER-OPERATING-EXPENSES> 6,015
<TOTAL-OPERATING-EXPENSES> 7,095
<OPERATING-INCOME-LOSS> 2,671
<OTHER-INCOME-NET> 183
<INCOME-BEFORE-INTEREST-EXPEN> 2,854
<TOTAL-INTEREST-EXPENSE> 1,078
<NET-INCOME> 1,776
9
<EARNINGS-AVAILABLE-FOR-COMM> 1,767
<COMMON-STOCK-DIVIDENDS> 1,344
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 4,093
<EPS-BASIC> 0.38
<EPS-DILUTED> 0.38
</TABLE>
