1996
ANNUAL REPORT
Birmingham Utilities 1996 Annual Report
The Company is a specially chartered Connecticut public service corporation in
the business of collecting and distributing water for domestic, commercial and
industrial uses and fire protection in Ansonia and Derby, Connecticut, and in
small parts of the contiguous Town of Seymour. Under its charter, the Company
enjoys a monopoly franchise in the distribution of water in the area which it
serves. In conjunction with its right to sell water, the Company has the power
of eminent domain and the right to erect and maintain certain facilities on and
in public highways and grounds, all subject to such consents and approvals of
public bodies and others as may be required by law.
The current sources of the Company's water are wells located in Derby and
Seymour and interconnections with the South Central Connecticut Regional Water
Authority's (the "Regional Water Authority") system (a) at the border of Orange
and Derby (the "Grassy Hill Interconnection") and (b) near the border of Seymour
and Ansonia (the "Woodbridge Interconnection"). The Company maintains its
interconnected Peat Reservoirs, a 2.2 million gallons per day (MGD) surface
supply for emergency use only.
The Company's entire system has a safe daily yield (including only those
supplies that comply with the SDWA on a consistent basis) of approximately
6.8 MGD, while the average daily demand and the maximum daily demand on the
system during 1996 were approximately 3.25 MGD and 3.99 MGD, respectively.
The distribution system with the exception of the well supplies, is mainly
through gravity, but there are seven distinct areas at higher elevations
where pumping, pressure tanks and standpipes are utilized. These higher
areas serve approximately 25% of the Company's customers.
During 1996 approximately 1.19 billion gallons of water from all sources were
delivered to the Company's customers. The Company has approximately 8,800
customers of whom approximately 98.7% are residential and commercial. No
single customer accounted for as much as 10% of total billings in 1996. The
business of the Company is to some extent seasonal, since greater quantities
of water are delivered to customers in the hot summer months.
The Company had, as of March 10, 1997, 18 full-time employees. The Company's
employees are not affiliated with any union organization.
The Company is subject to the jurisdiction of the Connecticut Department of
Public Utility Control ("DPUC") as to accounting, financing, ratemaking,
disposal of property, the issuance of long term securities and other matters
affecting its operations. The Connecticut Department of Public Health and
Addiction Services (the "Health Department" or "DPHAS") has regulatory powers
over the Company under state law with respect to water quality, sources of
supply, and the use of watershed land. The Connecticut Department of
Environmental Protection ("DEP") is authorized to regulate the Company's
operations with regard to water pollution abatement, diversion of water from
streams and rivers, safety of dams and the location, construction and
alteration of certain water facilities. The Company's activities are also
subject to regulation with regard to environmental and other operational
matters by federal, state and local authorities, including, without
limitation, zoning authorities.
The Company is subject to regulation of its water quality under the Federal
Safe Drinking Water Act ("SDWA"). The United States Environmental Protection
Agency has granted to the Health Department the primary enforcement
responsibility in Connecticut under the SDWA. The Health Department has
established regulations containing maximum limits on contaminants which have
or may have an adverse effect on health.
Fellow Shareholders
I am pleased to report that in 1996 your Company began to build on the
groundwork laid over the past several years. As we have reported in past
years, your management has been actively engaged in an ongoing process of
preparing the Company's excess land for sale. That process has included such
things as engaging planners and surveyors, commissioning base mapping and
otherwise making sure that we could answer potential buyers' questions about
the potential uses and value of our land.
That groundwork resulted in substantial activity and in record net
income of $764,737 in 1996. Contributing to that record 1996 net income was
a net gain, after taxes and application of required ratemaking accounting, of
$386,709 recorded by the Company from a substantial land sale. The Company
sold 59 acres of land in Ansonia associated with the former Sentinel Hill
Reservoir to the City of Ansonia for a sales price of $1,041,000. The City
is currently constructing a new high school on a portion of the property and
has committed to retain the open space nature of the rest of the parcel.
Late in 1996, the Company also reached agreement with the Connecticut
Department of Transportation for its acquisition of a 3.6 acre parcel of land
in Seymour for a sales price of $175,000. That sale is still subject to
approval by the Connecticut Department of Public Utility Control, but the
Company knows no reason why the DPUC should not approve the sale. Finally,
the Company received approval from the DPUC last year to sell six building
lots in Seymour. The Company has not yet reached agreement for the sale of
any of the lots but is actively seeking offers from various developers to
purchase the entire subdivision.
Following on the success of the Company's sale of the Ansonia portion of
the Sentinel Hill Reservoir property, late last year the Company reached a
tentative, non-binding agreement to sell all of the approximately 145 acres
of the Derby portion of that property to the City of Derby for a purchase
price of $1,800,000. The City expects to use the property primarily for open
space purposes and, on March 19 of this year, obtained referendum approval
from its residents to bond for the purchase price. Since the referendum
approval, the Company and the City have been negotiating a definitive,
binding agreement for the sale. This sale, if formal agreement between the
parties is reached as we expect, will also be subject to the DPUC's approval.
The Company knows no reason why the DPUC would not approve the sale.
The Company also recently announced that it had reached agreement with a
developer for the sale of approximately 245 acres of land in the Great Hill
Reservoir area of Seymour for $3,950,000. The developer has proposed to
construct on the site an 18 hole golf course and approximately 180 detached
residential units for active adults. The sale requires not only the approval
of the DPUC, but also various land use approvals. Again, the Company knows
no reason why the DPUC would not approve the sale, but at this stage it is
too early to predict whether the developer will be successful in obtaining
all of the required local approvals. Your management is convinced that the
proposed development is a thoughtful and appropriate environmental use of the
property that will greatly benefit the Seymour community. We are hopeful
that the required approvals will be forthcoming in due course and that we can
consummate the sale in late 1998.
While it would be tempting to sit back and rest on our laurels,
additional work needs to be done. Because the Company continues to face
capital requirements exceeding $11,000,000 over the next ten years, we will
continue to work with developers and others to explore appropriate uses for
the balance of the Company's substantial open space land holdings. We must
also continue to monitor the Company's revenues from water sales. While the
Company enjoyed record net earnings in 1996, the portion of those earnings
derived from water sales was somewhat disappointing. Your management
believes that it will probably be necessary to seek permission from the DPUC
to increase water rates effective either late in 1997 or early in 1998. We
are certainly looking forward to the excitement that will accompany our
continued efforts to create value for your investment in the Company.
We know we will find it difficult to fill the shoes of Charles Seccombe,
who has served on your Board of Directors since 1967. Recognizing that, we
have asked Charles to remain as a Director Emeritus following his retirement
after this year's Annual Meeting of Shareholders.
Finally, I want to add my personal thanks to all of the Company's
employees for making the Company's operations go as smoothly as they do.
Their tireless efforts make your Company the model by which water companies
its size in this State should be judged.
Sincerely,
Betsy Henley-Cohn,
Chairwoman
Fellow Shareholders
With the completion of improvements to the Company's utility system
currently required by the Federal Safe Drinking Water Act and the various
related Connecticut regulations, we turned this year to the expansion of our
ongoing program of infrastructure replacement and modernization. With the
beginning success of the Company's land sale program, we were able in 1996 to
make capital improvements in a near record amount of $1,518,142, without any
significant increase in long term borrowings.
The bulk of the Company's needed replacements involve the distribution
system and will address such items as fire and domestic water flow capacities
and the replacement of pipe that was installed many years ago. The Company's
system consists of 112 miles of distribution mains, and at the beginning of
1992, 27 miles of that system consisted of old cast iron pipe with diameters
of 6" or less. In order to insure adequate flow capacity and to resist
future corrosion, we began to replace these mains, on a carefully planned
priority basis, with cement-lined, ductile iron pipe with diameters of 8" or
greater. Since we began the program in 1992, we have completed replacement
of approximately two of the 27 miles planned for replacement.
Also planned is the installation, in six phases, of approximately four
miles of 16" main to interconnect the Company's well supplies along the
Housatonic River with our West River and Grassy Hill interconnections to the
South Central Connecticut Regional Water Authority's supplies. The new
transmission main will ensure that water can flow freely throughout our
system and that we can more efficiently manage which sources of supply are
available and used at appropriate times. Through 1996, we have completed
approximately three-quarters of a mile of the planned new interconnection.
The Company's Housatonic Well Field plant received significant
modernization to improve reliability in 1996. The main power feed for all
pumps was upgraded, and new chemical feed pumps were installed along with new
testing and telemetering equipment. One of the wells in the field was also
redeveloped to restore and improve its capacity. Major maintenance work in
1996 included the painting of our two 350,000 gallon high service storage
tanks off Kimberly Lane in Ansonia and downstream slope modifications and
concrete restoration at our Middle Reservoir Dam.
Your Company's water production in 1996 was 1.19 billion gallons
(approximately 3.25 million gallon per day), about 4% lower than the 1.24
billion gallons (approximately 3.41 gallons per day) produced during the
extremely hot and dry previous year. In both years, the demand on the system
was well within its safe yield of approximately 6.8 million gallons per day.
In closing, I'd like to thank each and every shareholder and employee
for your support during the past year.
Sincerely,
Aldore J. Rivers
President and Chief Executive Officer
Financial Highlights
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDING MATTERS
As of February 28, 1997 there were approximately 496 record holders of the
Company's common stock. Approximately 37% of the Company's stock is held in
"nominee" or "street" name. The Company's common stock is traded on the
NASDAQ Small-Cap Market. The market is not active, and actual trades are
infrequent. The following table sets forth the dividend record for the
Company's common stock and the range of bid prices for the last two calendar
years. The stock prices are based upon NASDAQ records provided to the
Company. The prices given are retail prices. The Company's Mortgage Bond
Indenture under which its First Mortgage Bonds are issued contains provisions
that limit the dividends the Company may pay, under certain circumstances.
<TABLE>
<CAPTION>
Bid Dividend
High Low Paid
<S> <C> <C> <C> <C>
1995 First Quarter 10.50 10.50 $ .12
Second Quarter 10.50 10.00 .12
Third Quarter 10.50 10.50 .12
Fourth Quarter 10.50 10.00 .12
1996 First Quarter 11.00 10.00 .12
Second Quarter 11.00 9.50 .125
Third Quarter 10.00 8.50 .13
Fourth Quarter 10.00 10.00 .13
1997 Through February 28 10.50 10.50 ___
</TABLE>
Selected Financial Data
Presented below is a summary of selected financial data for the years 1992
through 1996:
<TABLE>
<CAPTION>
(000's omitted except for per share data)
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Operating Revenues $ 4,380 $ 4,238 $ 4,124 $ 4,033 $ 3,847
Income before
Interest Charges 968 863 913 910 810
Income from Land
Dispositions* 387 279 ___ ___ 39
Net Income 765 518 363 378 342
Earnings Per Share** 1.02 .69 .48 .50 .46
Cash Dividends Declared
(per share)** .50 .48 .48 .46 .44
Total Assets 15,568 14,624 15,246 14,602 13,944
Long Term Debt 5,981 6,001 6,329 5,815 5,511
Short Term Debt 294 75 165 ___ ___
Shareholder Equity 3,841 3,408 3,220 3,217 3,195
</TABLE>
* See Management Discussion and Analysis, Results of Operations - Land
Dispositions
** Per share amounts for 1992 have been restated for comparability to reflect
the impact of the July 16, 1993 two for one stock split.
Management's Discussion and Analysis
Results of Operations
NET INCOME
Net income increased from $362,520 in 1994 to $518,065 in 1995 and $764,737
in 1996. The $155,545 increase in net income from 1994 to 1995 reflected
both a gain on a sale of land, recognized in 1995, of $279,101 and an
increase of $34,970 in other income, resulting primarily from fees from a
management contract. These increases were partially offset by increased
operating expenses of $84,940 and a $73,586 increase in interest expense in
1995.
Operating revenues in 1996 increased $141,696, and interest expense
declined by $33,959, compared to 1995. Other income, however, decreased by
$71,335 which resulted in an increase of $99,896 in net income before
land sales.
Current land sale gains of $386,709 in 1996, along with $161,065 in
amortization of prior years gains produced total gains of $547,774 as
compared with $400,998 in 1995. The increase of $146,776, when combined with
the increase from operations of $99,896, resulted in the overall increase in
1996 net income of $246,672 over 1995 net income.
REVENUES
The Company's business is to provide water service to customers, primarily in
the cities of Ansonia and Derby, Connecticut. In 1996, revenues from sales
of water increased by $141,696 (3.34%) over 1995 revenues. The Company was
granted a 6.89% increase in rates by the Connecticut DPUC effective January
1, 1996. Due to a sharp decline (5.77%) in water consumed by the Company's
customers during the year, the Company did not enjoy the full impact of the
increase granted. The decline in consumption is attributable, for the most
part, to the wet summer of 1996, when consumption declined (13.80%) from the
summer drought conditions of 1995. Consumption of water by commercial and
industrial customers continued to decrease both from 1994 to 1995 and from
1995 to 1996, due to continuing poor economic conditions in the Company's
service area, which has resulted in the loss of several commercial and
industrial customers.
In 1995, revenues increased $113,688 (2.8%) over 1994 revenues, primarily as
a result of the full impact in 1995 of a July 20, 1994 2.75% annual rate
increase granted by the Connecticut DPUC and the increased use of water
during the 1995 summer drought conditions. Because of favorable supply
situations, the Company did not need to impose use restrictions despite the
drought.
While residential water consumption and total water consumption were higher
in 1995 than in 1994, commercial and industrial customers' consumption
dropped from 1994 to 1995 for the same reasons as noted previously.
OPERATING DEDUCTIONS
Operating deductions in 1996 increased by only $4,424 (.0012%) when compared
to 1995.
Operating expenses declined by $109,136 in 1996 from the 1995
level, due mainly to a decrease in purchased water of $63,779 resulting from
the weather differences previously noted. The other major expense reduction
from 1995 to 1996 was $33,307 in special services caused mainly by decreased
auditing fees.
Maintenance expenses increased in 1996 by $70,133 over 1995, caused primarily
by the harsh winter of 1996 which created the necessity for several major
repairs. The increase of $12,207 in depreciation expense from 1995 to 1996
reflects the additions to plant of $2,885,872 over the past three years.
Taxes other than income taxes decreased by $29,497, due to a decrease in
property taxes caused by a sale of land and a decrease in the mill rate by
one Town in the Company's service area, while the gross receipts tax
increased due to the increase in revenues discussed previously.
Operating deductions in 1995 increased $194,497 (5.6%) when compared to 1994.
The cost of purchased water increased $53,904, due to the Company's increased
reliance on purchased water during drought conditions experienced in 1995's
summer months. The cost of maintaining distribution mains increased $26,064
primarily the result of fixing two significant main breaks in 1995. Customer
account expense increased $31,368 as the result of a concerted collection
effort which significantly reduced delinquent accounts during 1995. The
remaining increase reflects the $28,990 increase in depreciation expense
associated with the cost of capital expenditures of $671,390 in 1995 and
$696,340 in 1994, the annual increase in salaries and the general level of
inflation affecting many accounts, including the $18,875 increase in taxes
other than income. The decline in taxes on income partially offset the
impact of the increases noted above.
INTEREST
Interest expense, which increased from $550,155 in 1994 to $623,741 in 1995,
decreased in 1996 to $589,782, reflecting a sale of land in late September
1995 the proceeds of which were used to reduce debt incurred to fund the
construction of improvements to utility plant, and the capitalization of
$20,262 in interest costs.
INCOME TAXES
Taxes on the Company's income from operations were $128,459, in 1996, $67,742
in 1995 and $95,884 in 1994. The decrease in 1995 from 1994 reflects the
reduction in operating income in that year, while, the increase in 1996 from
1995 reflects the increase in operating income for that year.
The Company also incurs income tax liability for gains from land
transactions, both in the year in which they occur and in the later years in
which income, previously deferred in accordance with the DPUC's orders
concerning the sharing of the gains between the Company's shareholders and
ratepayers, is recognized by the Company. Taxes related to gains on land
transactions were $382,107, $286,694 and $90,977 in 1996, 1995 and 1994,
respectively. The Company's total income tax liability including both the
tax on operating income and on land sale gains was $510,566 in 1996, $354,436
in 1995 and $186,861 in 1994.
LAND DISPOSITIONS
When the Company disposes of land, any gain, net of tax, recognized is shared
between rate payers and stockholders based upon a formula approved by the
DPUC. The impact of land dispositions is recognized in two places on the
statement of income.
The 1996 statement of income reflects income from a disposition of land (net
of taxes) of $386,709 and the 1995 statement of income reflects income from
dispositions of land (net of taxes) of $279,101 which, in both cases,
represent the stockholders' immediate share of income from land dispositions
occurring in each year. In 1994, there were no dispositions of land.
The second place where land disposition income is recognized in the financial
statements is as a component of operating income on the line entitled
"Amortization of Deferred Income on Dispositions of Land." These amounts
represent the recognition of income deferred on land dispositions which
occurred in prior years. The amortization of deferred income on land
dispositions, net of tax was $161,065, $121,897 and $126,028 for the years
1996, 1995 and 1994, respectively.
Recognition of deferred income will continue over time periods ranging from four
to fifteen years depending upon the amortization period ordered by the DPUC
for each particular disposition. See Note 7 of the Financial Statements.
EFFECTS OF INFLATION
The Company received a rate order from the DPUC allowing an increase in the
Company's rates designed to produce increases in the Company's annual
revenues of $113,287 (effective July 20, 1994).
The Company sought approval for additional rate relief on July 3, 1995. As a
result of that application, the DPUC approved a 6.9% increase in rates
effective January 1, 1996 designed to produce an annual increase in revenues
of approximately $289,333.
The Company is currently reviewing the need to seek an additional rate increase
in 1997 to become effective on or about January 1, 1998.
Financial Resources
During 1996, 1995 and 1994, the Company's water operations generated funds
available for investment in utility plant and for use in financing
activities, including payment of dividends on common stock, of $348,773,
$471,196 and $333,579, respectively (see Statement of Cash Flows).
Net cash provided by operating activities decreased $122,423 from 1995 to
1996. The major factors causing the decrease were an increase in deferred
charges and other assets of $80,425 related mostly to the promotion of land
sales and a lesser contribution arising from changes in accounts receivable
and accrued revenues and accounts payable and accrued liabilities.
During the three-year period 1994, 1995 and 1996, the Company has generated
sufficient funds to meet its day-to-day operational needs, including regular
expenses, payment of dividends, and investment in normal plant replacements,
such as new services, meters and hydrants. It expects to be able to continue
to do so for the forseeable future. In order to meet day-to-day cash needs
that may arise unexpectedly, the Company maintains an unsecured working
capital line of credit of up to $600,000 with a local bank. There were
borrowings outstanding of $125,000 under the working capital line of credit
as of December 31, 1996 at an interest rate of 8.375% and at present an
interest rate of 7.125%.
Completion of the Company's Long Term Capital Improvement Program is
dependent upon the Company's ability to raise capital from external sources,
including, for the purpose of this analysis, proceeds from the sale of the
Company's holdings of excess land. During 1996, 1995, and 1994, the Company's
additions to utility plant, net of customer advances, cost $1,461,152,
$600,278, and $619,773, respectively (see Statement of Cash Flows). These
additions were financed primarily from external sources, including proceeds
from land sales and increases in debt.
The Company has outstanding $4,700,000 principal amount of Mortgage Bonds,
due September 1, 2011, issued under its Mortgage Indenture. The Mortgage
Indenture limits the issuing of additional First Mortgage Bonds and the
payment of dividends. It does not, however, restrict the issuance of either
long term or short term debt which is either unsecured or secured with liens
subject to the lien of the Mortgage Indenture. The Company also has a
secured, term loan with a principal amount outstanding on December 31, 1996
of $1,300,000, at an interest rate of 8.18%. The term loan provides for
annual sinking fund payments and must be paid in full in 2004.
The Company also maintains an additional, secured, two-year line of credit in
the principal amount of $1,500,000 maturing on May 1, 1998. The secured line
of credit is being used to provide funds to continue the Company's
construction program; at the Company's option it may be converted to a term
loan at the end of the two year revolving period, with the term loan maturing
in 2004. (See Note 6 to the Financial Statements). In April 1996 when the
revolving loan financing arrangement was approved by the DPUC, the DPUC
prohibited the Company from drawing down funds under the revolving line of
credit if, at the time of or as a result of the draw down, the amount of the
Company's long-term debt (including amounts outstanding under the two year
revolving line of credit) would exceed 67% of the Company's total
capitalization. The effect of the limitation, as of December 31, 1996, is to
limit the Company to advances outstanding under the line of credit in the
aggregate amount of approximately $750,000 for use on budgeted projects until
such time as the Company obtains additional equity capital. There was a
balance of $150,000 outstanding under the two year revolving line of credit
at December 31, 1996 at an interest rate of 8.375% and at present an interest
rate of 7.125%.
The Company's 1997 Capital Budget of $1,430,000 is two-tiered. The first
tier consists of typical capital improvements made each year for services,
hydrants and meters budgeted for $230,000 in 1997 and is expected to be
financed primarily with internally generated funds.
The second tier of the 1997 Capital Budget consists of replacements and
betterments which are part of the Company's Long Term Capital Improvement
Program and includes $1,200,000 of budgeted plant additions. Plant additions
from this part of the 1997 budget will require external financing in addition
to the Company's line of credit. Second tier plant additions can be, and
portions of it are expected to be, deferred to future years if funds are not
available for their construction in 1997.
As of December 31, 1996, the Company has approximately 1,400 acres of excess
land available for sale, consisting of land currently classified as Class
III, non-watershed land under the statutory classification system for water
company lands. The Company believes that by selling these excess lands it
can generate sufficient equity capital to support its 10 year capital budget,
currently estimated at $11,824,000. Such land dispositions are subject to
approval by the DPUC.
During 1996, the Company entered into an agreement with the Connecticut
Department of Transportation ("DOT") to sell to DOT a 3.6 acre parcel of land
in Seymour for $175,000. The Company has applied to the DPUC for permission
to sell the parcel, and the application is pending. The Company knows of no
reason why the DPUC should not approve the sale. The DPUC has issued a
schedule pursuant to which it expects to render a decision in May. Assuming
a favorable decision, the Company hopes to be able to close the transaction
shortly thereafter.
On March 18, 1997, the Company entered into a Purchase and Sale Agreement
with M/1 Homes, LLC ("M/1 Homes"), pursuant to which the Company agreed to
sell and M/1 Homes agreed to purchase approximately 245 acres of the
Company's unimproved real property in Seymour, Connecticut for $3,950,000.
The purchase and sale are subject to the DPUC's approval. While the Company
cannot predict whether it will be able to obtain the approval of the DPUC, it
again knows of no reason why the DPUC should not approve the sale.
Connecticut law requires that the DPUC render a decision on such an
application within 150 days from its filing. The agreement between the
Company and M/1 Homes may be terminated by the Company if it has not received
the required approval by November 14, 1997. The obligation of M/1 Homes to
purchase the property is conditioned upon its receipt of local, state and
federal approvals of its proposed development of the site as an 18 hole golf
course, along with not fewer than 180 detached residential units for adults
55 years old and older, a clubhouse and catering facilities. The agreement
may be terminated by either party if M/1 Homes has not received all the
required development approvals by December 31, 1998. There is a provision in
the agreement to extend its term through December 31, 2000 to accommodate
appeals of required governmental approvals, in which case the purchase price
for the property will increase by $20,000 for each month, or portion thereof,
after December 31, 1999 until the closing shall occur. The Company cannot
predict whether M/1 Homes will be able to obtain all of the required approvals.
Finally, late last year the Company reached a tentative, non-binding
agreement to sell all of the approximately 145 acres of the portion of its
Sentinel Hill property located in Derby, Connecticut to the City of Derby for
$1,800,000. The City expects to use the property primarily for open space
purposes and, on March 19, 1997, obtained overwhelming voter approval to
issue bonds to fund the purchase price. Since the voter approval, the
Company and the City have been negotiating the terms of a definitive, binding
agreement for the sale. If formal agreement between the parties is reached
shortly as the Company expects, the Company will submit the agreement to the
DPUC for approval approximately 40 days after reaching such agreement. The
Company knows of no reason why the DPUC should not approve the sale.
In 1994 the Company's Board of Directors approved a common stock Dividend
Reinvestment Plan (the "Plan") pursuant to which shareholders will be
entitled to purchase up to 70,000 new shares of the Company's Common Stock by
applying to the purchase price of the new shares cash dividends which
otherwise would be issued by the Company with respect to its existing common
stock. The Dividend Reinvestment Plan provides that the purchase price for
the new shares will be their fair market value at the time of the purchase.
All regulatory approvals for the Plan were obtained during the first six
months of 1995 and the Plan was in place for the quarterly dividends paid on
June 30, 1995 and each quarterly dividend payment thereafter. Dividends
reinvested during 1995 totalled $31,108 and in 1996 $51,386.
Independent Auditors' Report
To the Shareholders
Birmingham Utilities, Inc.
Ansonia, Connecticut
We have audited the accompanying balance sheets of Birmingham Utilities, Inc.
as of December 31, 1996 and 1995, and the related statements of income and
retained earnings and cash flows for the years then ended. 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 audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 1996 and 1995 financial statements referred to above
present fairly, in all material respects, the financial position of
Birmingham Utilities, Inc. as of December 31, 1996 and 1995 and the results
of its operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Dworken, Hillman, LaMorte & Sterczala, P.C.
February 14, 1997
Bridgeport, Connecticut
February 24, 1995
To the Board of Directors and Shareholders of
Birmingham Utilities, Inc.
In our opinion, the accompanying statements of income and retained earnings
and of cash flows present fairly, in all material respects, the results of
operations and cash flows of Birmingham Utilities, Inc. for the year ended
December 31, 1994, in conformity with generally accepted accounting
principles. 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 audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for the opinion expressed above. We have not
audited the financial statements of Birmingham Utilities, Inc. for any period
subsequent to December 31, 1994.
/s/ Price Waterhouse LLP
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995
Assets
<S> <C> <C>
Utility plant $17,766,937 $16,352,307
Accumulated depreciation (5,472,071) (5,130,305)
12,294,866 11,222,002
Current assets:
Cash and cash equivalents 185,479 398,869
Accounts receivable, net of allowance for
doubtful accounts of $75,000 681,194 725,154
Accrued utility and other revenue 411,542 412,876
Materials and supplies 51,792 50,840
Prepayments 34,586 27,160
Total current assets 1,364,593 1,614,899
Deferred charges 870,736 713,417
Unamortized debt expense 193,466 205,429
Income taxes recoverable 422,915 456,659
Other assets 421,844 411,352
1,908,961 1,786,857
$15,568,420 $14,623,758
</TABLE>
Shareholders' Equity and Liabilities
<TABLE>
<CAPTION>
<S>
Shareholders' equity:
Common stock, no par value; authorized 2,000,000
shares; issued and outstanding (1996, <C> <C>
757,892 shares; 1995, 752,282 shares) $ 2,221,786 $ 2,172,116
Retained earnings 1,619,188 1,235,482
3,840,974 3,407,598
Notes payable 1,375,000 1,300,000
Long term debt 4,606,000 4,700,564
5,981,000 6,000,564
Current liabilities:
Note payable 125,000 ___
Current portion of note payable and long-term debt 169,000 75,000
Accounts payable and accrued liabilities 747,323 674,488
Total current liabilities 1,041,323 749,488
Customers' advances for construction 1,291,114 1,229,985
Contributions in aid of construction 719,736 719,736
Regulatory liability - income taxes refundable 187,477 195,049
Deferred income taxes 1,484,972 1,263,932
Deferred income on dispositions of land 1,021,824 1,057,406
Commitments and contingent liabilities (Note 13) ___ ___
$15,568,420 $14,623,758
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Income and Retained Earnings
December 31,
<S> 1996 1995 1994
Operating revenues: <C> <C> <C>
Residential and commercial $3,325,758 $3,214,442 $3,089,759
Industrial 169,070 164,192 152,402
Fire protection 628,558 615,563 608,954
Public authorities 74,320 83,212 97,933
Other 182,065 160,666 175,339
4,379,771 4,238,075 4,124,387
Operating deductions:
Operating expenses 2,394,730 2,503,866 2,370,823
Maintenance expenses 225,062 154,929 113,198
Depreciation 395,059 382,852 353,862
Taxes, other than income taxes 509,799 539,296 520,421
Taxes on income 128,459 67,742 95,884
3,653,109 3,648,685 3,454,188
726,662 589,390 670,199
Amortization of deferred income on
dispositions of land (net of income
taxes of $115,977 in 1996, $90,091 in
1995 and $90,977 in 1994) 161,065 121,897 126,028
Operating income 887,727 711,287 796,227
Other income, net 80,083 151,418 116,448
Income before interest expense 967,810 862,705 912,675
Interest expense 589,782 623,741 550,155
Income from dispositions of land (net of
income taxes of $266,130 in 1996 and
$196,603 in 1995) 386,709 279,101 ___
Net income 764,737 518,065 362,520
Retained earnings, beginning of year 1,235,482 1,077,185 1,074,266
Dividends 381,031 359,768 359,601
Retained earnings, end of year $1,619,188 $1,235,482 $1,077,185
Earnings per share $1.02 $.69 $.48
Dividends per share $ .50 $.48 $.48
Shares outstanding 757,892 752,282 749,168
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Cash Flows
December 31,
1996 1995 1994
<S>
Cash flows from operating activities: <C> <C> <C>
Net income $ 764,737 $ 518,065 $ 362,520
Adjustments to reconcile net income
to net cash provided by operating
activities:
Income from land dispositions (386,709) (279,101) ___
Depreciation and amortization 453,116 460,108 429,425
Amortization of deferred income (161,065) (121,897) (126,028)
Deferred income taxes (302,617) (256,489) 29,935
Allowance for funds used during
construction (20,262) ___ (21,515)
Change in assets and liabilities:
(Increase) decrease in accounts
receivable and accrued revenues 45,294 85,008 (103,588)
(Increase) decrease in materials
and supplies (952) (5,391) 4,442
Increase in prepayments (7,426) (421) (551)
Increase (decrease) in accounts
payable and accrued liabilities 72,835 99,067 (14,398)
Increase in deferred charges and
other assets (108,178) (27,753) (226,663)
Net cash provided by operating activities 348,773 471,196 333,579
Cash flows from investing activities:
Capital expenditures (1,518,142) (671,390) (696,340)
Sale of utility plant ___ 2,248 3,187
Proceeds from land disposition 1,041,350 ___ ___
Note receivable ___ 1,213,222 ___
Customer advances 56,990 71,112 76,567
Customer advances for construction (9,180) (2,107) (6,074)
Net cash provided by (used in)
investing activities (428,982) 613,085 (622,660)
Cash flows from financing activities:
Issuance of long-term debt ___ ___ 1,500,000
Net borrowings under revolving
line of credit 275,000 ___ 340,000
Repayments of long-term debt (75,564) (75,564) (50,939)
Repayments of revolving line of credit ___ (340,000) (1,110,000)
Debt issuance cost (2,972) ___ (38,267)
Dividends paid, net (329,645) (328,660) (359,601)
Net cash provided by (used in) financing
activities (133,181) (744,224) 281,193
Net increase (decrease) in cash (213,390) 340,057 (7,888)
Cash and cash equivalents,
beginning of year 398,869 58,812 66,700
Cash and cash equivalents,
ending of year $ 185,479 $ 398,869 $ 58,812
See notes to financial statements.
</TABLE>
Notes to Financial Statements
Note 1 Accounting policies
Description of business
Birmingham Utilities, Inc.'s (the "Company") predominant business activity is
to provide water service to various cities and towns in Connecticut. The
Company's accounting policies conform to generally accepted accounting
principles, and the Uniform System of Accounts and ratemaking practices
prescribed by the Connecticut Department of Public Utility Control ("DPUC").
Estimates and assumptions
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 at the date of the
financial statements and the reported revenues and expenses during the
reporting period. Actual results could vary from those estimates.
Utility plant
The costs of additions to utility plant and the costs of renewals and
betterments are capitalized. The cost of repairs and maintenance is charged
to income. Upon retirement of depreciable utility plant in service,
accumulated depreciation is charged with the book cost of the property
retired and the cost of removal, and is credited with the salvage value and
any other amounts recovered.
Depreciation
For financial statement purposes, the Company provides for depreciation using
the straight-line method. The rates used are intended to distribute the cost
of depreciable properties over their estimated service lives. For income tax
purposes, the Company provides for depreciation utilizing the straight-line
and accelerated methods.
Cash and cash equivalents
Cash and cash equivalents consist of cash in banks and overnight investment
accounts in banks.
From time to time, the Company has on deposit at financial institutions cash
balances which exceed federal deposit insurance limitations. The Company has
not experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash and cash equivalents.
Allowance for funds used during construction
An allowance for funds used during construction ("AFUDC") is made by applying
the last allowed rate of return on rate base granted by the DPUC to
construction projects exceeding $10,000 and requiring more than one month to
complete. AFUDC represents the net cost, for the period of construction, of
borrowed funds used for construction purposes and a reasonable rate on other
funds used. AFUDC represents a noncash credit to income. Utility plant under
construction is not recognized as part of the Company's rate base for
ratemaking purposes until facilities are placed into service. Accordingly,
the Company capitalizes AFUDC as a portion of the construction cost of
utility plant until it is completed. Capitalized AFUDC is recovered through
water service rates over the service lives of the facilities.
Revenue recognition
The Company follows the practice of recognizing revenue when bills are
rendered to customers. In addition, the Company accrues revenue for the
estimated amount of water sold but not billed as of the balance sheet date.
Advances for construction/contributions in aid of construction
The Company receives cash advances from developers and customers to finance
construction of new water main extensions. A portion of these advances are
refunded to developers and customers as revenues are earned on the new water
mains. Any unrefunded balances are reclassified to "Contributions in aid of
Construction" and are no longer refundable.
Fair value of financial instruments
The carrying amount of cash and cash equivalents, trade accounts receivable,
and trade accounts payable approximate their fair values due to their short-
term nature. The carrying amount of note payable and long-term debt
approximates fair value based on market conditions for debt of similar terms
and maturities.
Income taxes
Except for accelerated depreciation since 1981 (federal only) and the tax
effect of post-1986 contributions in aid of construction, for which deferred
income taxes have been provided, the Company's policy is to reflect as income
tax expense the amount of tax currently payable. This method, known as the
flow-through method of accounting, is consistent with the ratemaking policies
of the DPUC, and is based on the expectation that tax expense payments in
future years will be allowed for ratemaking purposes.
The Company's deferred tax provision was determined under the liability
method. Deferred tax assets and liabilities were recognized based on
differences between the book and tax bases of assets and liabilities using
presently enacted tax rates. The provision for income taxes is the sum of the
amount of income tax paid or payable as determined by applying the provisions
of enacted tax laws to the taxable income for that year and the net change
during the year in the Company's deferred tax assets and liabilities.
In addition, the Company is required to record an additional deferred
liability for temporary differences not previously recognized. This
additional deferred tax liability totaled $235,438 at December 31, 1996 and
$261,610 at December 31, 1995. Management believes that these deferred taxes
will be recovered through the ratemaking process. Accordingly, the Company
has recorded an offsetting regulatory asset and regulatory liability.
Employee benefits
The Company has a noncontributory defined benefit plan which covers
substantially all employees. The benefits are primarily based on years of
service and the employee's compensation. Pension expense includes the
amortization of a net transition obligation over a twenty-three year period. The
Company's funding policy is to make annual contributions in an amount that
approximates what was allowed for ratemaking purposes consistent with ERISA
funding requirements. Contributions are intended to provide not only for
benefits attributed to service to date, but also for those expected to be
earned in the future.
The Company has a 401(k) Plan. Employees are allowed to contribute a
percentage of salary, based on certain parameters. From January 1, 1994
through March 31, 1996 the Company matched 25% of employee contributions up
to 6% of total compensation. Effective April 1, 1996, the Company matches 50% of
employee contributions up to 6% of total compensation.
In addition, the Company provides certain health care and life insurance
benefits for retired employees and their spouses. Generally, the plan
provides for Medicare wrap-around coverage plus life insurance based on a
percentage of each participant's final salary. Substantially all of the
Company's employees may become eligible for these benefits if they reach
retirement age while working for the Company. The Company's obligation for
postretirement benefits expected to be provided to or for an employee must be
fully accrued by the date that the employee attains full eligibility for all
benefits. The Company has elected to recognize the unfunded accumulated
postretirement benefit obligation over 20 years. The Company's funding policy
is to contribute amounts annually to a benefit trust and pay directly all
current retiree premiums.
Compensated absences
Company policy and practice does not provide for any accumulated but unused
vacation, sick time or any other compensated absences to be carried over
beyond the year end.
Deferred charges relating to land dispositions
Deferred charges are allocated to dispositions of land based on specific
identification, if applicable, and on the percentage of acres disposed to
total surplus acres.
Land dispositions
The Company is actively seeking to dispose of surplus land not required for
utility operations. The net gain of each disposition, after deducting costs,
expenses and taxes is allocated between the shareholders and ratepayers by a
method approved by the DPUC based on legislation passed by the Connecticut
General Assembly. The portion of income applicable to shareholders is
recognized in the year of disposition. Income attributable to ratepayers is
deferred and amortized in a manner that reflects reduced water revenue arising
from the sharing formula as determined by the DPUC.
Unamortized debt expense
Costs related to the issuance of debt are capitalized and amortized over the
term of the related indebtedness. The Company has received permission from
the DPUC to amortize the costs associated with debt previously outstanding
over the term of the new indebtedness.
Note 2 Utility Plant
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Pumping, treatment and distribution $13,368,635 $12,260,402
Source of supply 3,126,167 2,879,303
General plant 1,132,329 1,010,268
Organization 30,219 30,219
17,657,350 16,180,192
Construction in process 109,587 172,115
$17,766,937 $16,352,307
</TABLE>
Note 3 Accounts Payable and Accrued Liabilities
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Accounts payable 239,886 $116,313
Accrued liabilities:
Interest 151,027 151,172
Taxes 173,777 297,810
Pension 147,250 72,710
Other 35,383 36,483
$747,323 $674,488
</TABLE>
Note 4 Taxes, Other Than Income Taxes
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Municipal $225,320 $267,183 $261,685
Gross receipts 215,300 208,201 198,548
Payroll 69,179 63,912 60,188
$509,799 $539,296 $520,421
</TABLE>
Note 5 Long Term Debt
<TABLE>
<CAPTION>
December 31,
1996 1995
<S>
First mortgage bonds, Series E, 9.64%, <C> <C>
due September 1, 2011 $4,700,000 $4,700,000
Other ___ 564
$4,700,000 $4,700,564
</TABLE>
Pursuant to its Mortgage Bond Indenture, the Company has outstanding, a
series of first mortgage bonds in the amount of $4,700,000 due on September
1, 2011. The terms of the indenture provide, among other things, annual
sinking fund requirements commencing September 1, 1997, and limitations on
(a) payment of cash dividends; and (b) incurrence of additional bonded
indebtedness. Under the dividend limitation, approximately $696,000 was
available to pay dividends at December 31, 1996 after the quarterly dividend
payment made on that date. Interest is payable semi-annually on the first day
of March and September. The indenture is secured by a lien on all of the
Company's utility property other than excess land available for sale.
There are no maturities of long term debt until September 1, 1997, when the
Company is required to pay $94,000 and on each September 1 thereafter, until
the bonds are paid in full.
Note 6 Note Payable
In a previous year, the Company converted certain short term borrowings to a
ten year $1,500,000 term loan, established a $1,500,000 revolving line of
credit to fund additional capital improvements, and obtained an unsecured
line of credit of $600,000 to be used for working capital purposes. The
revolving line of credit and unsecured line of credit become due and payable
May 1, 1998 and May 1, 1997, respectively, with the unsecured portion
required to be reduced to a zero balance for 30 consecutive days prior to the
maturity date. The outstanding balance of the revolving note may be converted
to a term loan at maturity with the same maturity and payment terms as the
original term loan. Both the term loan and the revolving line of credit are
secured by a lien (subordinate to the lien of the Mortgage Bond Indenture -
See Note 5) on all of the Company's utility property other than its excess
land available for sale.
The term loan portion of the facility has both fixed and variable interest
rate options. The applicable interest rate at December 31, 1996 and through
July 2000 is 8.18%. Interest is payable monthly. The revolving line of credit
also has various interest rate options, including a variable rate at 0.125%
above the prime rate and LIBOR rate options, fixed for various short term
periods including 30, or 90 days at 1.75% over the applicable LIBOR rate.
Interest is payable monthly. Borrowings of $150,000 were outstanding on the
revolving line of credit at December 31, 1996.
The unsecured line of credit also provides for various interest rate options,
including a variable rate at 0.125% above the prime rate, a variable rate at
1.75% above the bank's cost of funds (as provided by the bank), and the LIBOR
options also available under the revolving line of credit. Borrowings of
$125,000 were outstanding on the unsecured line of credit at December 31, 1996.
All three facilities provide that a default under any of them or under the
Mortgage Bond Indenture is considered a default under the others. They also
provide that the net proceeds from the sale of any of the Company's excess
land must be used to reduce the balance of the revolving line of credit first
and then the term loan and require maintenance of certain financial ratios
and shareholders' equity of at least $3,000,000.
In addition, the DPUC has restricted the Company from borrowing funds under
the revolving line of credit if at any time or as a result of the borrowing,
the Company's long-term debt (including amounts outstandin gunder the
revolving line of credit) would exceed 67% of the Company's total
capitalization. The DPUC has also required the Company's ratio of long-term
debt to total capital not exceed 62% by May 1, 1998.
Minimum annual principal payments due on the term loan follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 75,000
1998 75,000
1999 75,000
2000 75,000
2001 75,000
Thereafter 925,000
$1,300,000
</TABLE>
Note 7 Deferred Income on Dispositions of Land
Deferred income on the prior dispositions of land is amortized to operating
income under a method that coordinates the sharing of the net gains from land
sales between the Company's shareholders and ratepayers in accordance with a
rate making formula approved by the DPUC. Amortization of deferred income and
related taxes to be included in future years operating income for land sales
completed as of the balance sheet date follow:
<TABLE>
<CAPTION>
Deferred Amortization To
Deferred Income Be Included In
Year ending December 31: Income Taxes Operating Income
<S> <C> <C> <C>
1997 $ 299,883 $124,718 $175,165
1998 231,777 96,148 135,629
1999 171,578 71,093 100,485
2000 126,387 52,506 73,881
2001 87,233 36,382 50,851
Thereafter 104,966 43,558 61,408
$1,021,824 $424,405 $579,419
</TABLE>
The amortization of deferred income on prior land sales does not include the
effect of anticipated future land sales under the Company's ongoing land
sales program.
Note 8 Income Taxes
The provisions for taxes on income for the years ended December 31, 1996,
1995 and 1994 consist of:
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1995 1994
<S>
Current: <C> <C> <C>
Federal $318,311 $212,705 $ 26,820
State 112,765 111,526 20,838
Deferred:
Federal:
Accelerated depreciation 81,714 117,076 96,405
Alternative minimum tax credit ___ 76,855 (24,342)
Income on land dispositions 15,127 (112,489) 65,821
Investment tax credit (14,700) (14,700) (14,700)
Construction advances and other (5,071) (6,165) (9,137)
State 2,420 (30,372) 25,156
$510,566 $354,436 $186,861
</TABLE>
State deferred income taxes relate solely to timing differences in the
recognition of income related to land dispositions.
A reconciliation of the income tax expense at the federal statutory tax rate
of 34 percent to the effective rate follows:
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Federal income tax at statutory rates $433,603 $296,650 $185,500
Increase (decrease) resulting from:
State income tax, net of federal benefit 72,828 93,653 30,356
Rate case expense 4,536 (9,103) 9,187
SFAS 106 expense in excess of funding 768 2,068 995
Other, net 13,531 (14,132) (24,477)
Investment tax credit (14,700) (14,700) (14,700)
Total provision for income taxes 510,566 354,436 186,861
Taxes related to land dispositions (382,107) (286,694) (90,977)
Operating provision for taxes $128,459$ 67,742 $ 95,884
</TABLE>
Deferred tax liabilities (assets) were comprised of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Depreciation $1,572,362 $1,483,004
Investment tax credits 363,961 378,661
Other 229,181 251,598
Gross deferred tax liabilities 2,165,504 2,113,263
Land sales (424,405) (441,952)
Alternative minimum tax (2,228) (164,879)
Other (253,899) (242,500)
Gross deferred tax assets (680,532) (849,331)
Total deferred income taxes $1,484,972 $1,263,932
</TABLE>
Note 9 Related Party Transactions
The Company has paid legal and consulting fees to firms whose partners are
directors and shareholders of the Company. During the years ended
December 31, 1996, 1995 and 1994 fees paid amounted to $32,378, $34,748, and
$27,912, respectively. Amounts due to these firms at year end are not
significant.
Note 10 Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning $75,000 $75,000 $100,000
Provision 43,237 46,712 42,487
Recoveries 8,549 13,036 1,916
Charge-offs (51,786) (59,748) (69,403)
Allowance for doubtful accounts, ending $75,000 $75,000 $ 75,000
</TABLE>
Note 11 Supplemental Information
Amortization of deferred charges follows:
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Rate case and other $62,596 $62,592 $71,391
Debt issue costs 14,934 14,934 13,658
$77,530 $77,526 $85,049
</TABLE>
The Company has received revenues through the rate making process to recover
the amortization of deferred charges.
Note 12 Postemployment Benefits
Pension plan
The plan's funded status and related pension accrual follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested <C> <C>
benefits of $523,864 in 1996 and $413,926 in 1995 $537,226 $419,625
Projected benefit obligation (742,517) (562,788)
Plan assets at fair value 502,793 460,380
Projected benefit obligation in excess of plan assets (239,724) (102,408)
Unrecognized prior service cost (44,183) (46,437)
Unrecognized deferred loss 194,709 71,173
Other liability (33,311) ___
Unrecognized net obligation at transition 88,077 93,949
Prepaid (accrued) pension obligation included in accounts
payable accrued liabilities $(34,432) $ 16,277
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations was 7.0% in 1996 and 7.5% in 1995. The expected
long-term rate of return on assets was 8.0% and 8.5% in 1996 and 1995,
respectively.
Net periodic pension costs include the following components:
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Service cost $40,780 $30,077 $23,945
Interest cost on projected benefit obligation 46,694 38,004 34,843
Amortization of net loss from prior years 8,065 6,167 3,182
Amortization of net obligation at transition 5,872 5,872 5,872
Amortization of unrecognized prior service cost (2,254) (2,263) (2,271)
Deferred gain (loss) (13,119) 61,097 (39,600)
Actual return on assets (24,638) (91,892) 9,507
Net pension cost $61,400 $47,062 $35,478
</TABLE>
Employer matching contributions to the 401(k) plan were $14,372, $7,731 and
$6,722 in 1996, 1995 and 1994, respectively.
Other postretirement benefit
The net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Service cost-benefits earned during the period $19,612 $22,268 $15,230
Interest cost on benefit obligation 29,385 29,700 35,205
Actual return on plan assets (16,003) (27,185) 2,376
Net amortization and deferral (8,985) 11,430 (13,704)
Amortization of transition obligation 25,378 25,378 25,378
Net periodic postretirement benefit cost $49,387 $61,591 $64,485
</TABLE>
The funded status and the related accrual for postretirement benefits other
than pensions were as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S>
Accumulated postretirement benefit obligation: <C> <C>
Retirees $(234,544) $(233,530)
Other vested (196,674) (205,659)
(431,218) (439,189)
Plan assets at fair value 214,759 170,275
Accumulated postretirement obligation in excess
of plan assets (216,459) (268,914)
Unrecognized net gain (189,588) (162,512)
Unrecognized net transition obligation 406,047 431,426
Accrued postretirement benefit cost
included in current assets $ 0 $ 0
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% in 1996 and 1995. The expected
long-term rate of return on assets was 7.5% in 1996 and 1995.
For measurement purposes, a 11.0% annual increase in the per capita cost of
covered health care benefits was assumed for 1997. This rate was assumed to
decrease gradually to 6% for 2004 and remain at that level thereafter. A 1%
increase in health care cost trend rate assumptions would produce an increase
in the accumulated postretirement benefit obligation at December 31, 1996 of
$70,121 and an increase in the aggregate service and interest cost of the net
periodic postretirement benefit cost of $9,597.
The Company has established tax effective funding vehicles for such
retirement benefits in the form of a qualified Voluntary Employee Beneficiary
Association (VEBA) trust. The Company funded the VEBA trust with tax
deductible contributions totaling $49,387, $57,767 and $61,559 in 1996, 1995
and 1994, respectively.
The Company president's employment contract requires accounting for benefits
payable in accordance with SFAS 106. The accumulated present value of future
benefits attributable to the Company's president is being recognized over his
remaining years of service to retirement. The liability recorded at
December 31, 1996 and 1995 was $112,818 and $88,987, respectively. At
December 31, 1996, an amount of $70,818 has been included in other assets
relating to a regulatory asset for costs which were included in the Company's
rate case.
Note 13 Commitments and Contingent Liabilities
Leases
The Company leases equipment under several noncancellable operating leases
expiring through 2001. Total minimum rentals under noncancellable operating
leases are as follow:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $11,341
1998 11,808
1999 8,990
2000 5,841
2001 467
$38,447
</TABLE>
Lease expense was $27,903 in 1996, $35,274 in 1995 and $31,173 in 1994,
respectively.
Management agreement
The Company maintains an agreement with the City of Derby (the "City"),
pursuant to which agreement, the Company manages the water system owned by
the City. The Company is responsible for costs of maintenance and
improvements. Amounts collected from customers, net of expenses, are retained
by the Company.
Capital budget
Management has budgeted $1,430,000 for capital expenditures in 1997, $225,000
of which is expected to be necessary to meet its service obligations for the
coming year. The balance of the capital budget depends on the Company's
ability to raise additional capital.
Purchase commitment
The Company has an agreement with South Central Connecticut Regional Water
Authority to purchase water. This agreement provides for a minimum purchase
of 600 million gallons of water annually. Charges to expense were $680,125,
$743,904, and $690,000 for the years 1996, 1995 and 1994, respectively. The
purchase price is based on South Central Connecticut Regional Water
Authority's wholesale rate. At December 31, 1996, this rate was approximately
$1,150 per million gallons. This agreement expires December 31, 2015 and
provides for two ten year extensions at the Company's option.
Note 14 Rate Matters
On December 27, 1995, the DPUC granted the Company an increase in annual
revenues of $289,333 (6.89% increase) effective January 1, 1996.
Note 15 Equity
Stock option plans
On September 13, 1994, the Company adopted two stock option plans. A non-
employee director stock option plan and a key employee incentive stock option
plan. 40,000 and 35,000 shares respectively were authorized under the two
plans which provide for options to purchase common stock of the Company at
the fair market value at the date of the grant. The options vest over various
periods and must be exercised within 10 years from date of grant. The
following table summarizes the issuance of options for the Company's common
stock:
<TABLE>
<CAPTION>
Granted Exercisable
Weighted Weighted
Number Average Number Average
of Shares Exercise Price of Shares Exercise Price
<S> <C> <C> <C> <C>
Granted during 1994 4,000 $ 10.50
December 31, 1994 54,000 $ 10.50 ___ ___
Granted during 1995 3,750 $ 11.00
December 31, 1995 57,750 $ 10.53 22,750 $ 10.50
Granted during 1996 5,000 $ 8.50
December 31, 1996 62,750 $ 10.37 55,875 $ 10.52
</TABLE>
All of the options granted in 1996 and 1995 were granted under the non-
employee director stock option plan. As of December 31, 1996, no options
granted under the plans had been exercised or forfeited. On January 1,
1996, the Company adopted Statement of Financial Accounting Standards No. 123
- - "Accounting for Stock Based Compensation" (SFAS 123). As permitted by SFAS
123, the Company has chosen to apply Accounting Principles Board Opinion
No. 25 - "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for stock based compensation. There being no
grants of options to employees in 1996 or 1995, there was no material effect
on the Company's results of operations in those years.
Dividend reinvestment plan
On September 13, 1994, the Company adopted a dividend reinvestment plan which
provides for the issuance and sale of up to 70,000 shares of the Company's
authorized but unissued common stock to its shareholders who elect to
reinvest cash dividends on the Company's existing shares. Shares under the
plan will be purchased at their fair market value price on the date of the
dividends to be invested in the new shares. The following table summarizes
the activity in common shares related to the dividend reinvestment plan:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Number of shares issued 5,610 3,114
Value of shares when issued $51,386 $31,108
</TABLE>
Note 16 Supplemental Disclosure of Cash Flow Information and Noncash
Financing Activities
Cash paid for interest for the years ended 1996, 1995 and 1994 was $574,993,
$608,764 and $557,909, respectively.
Cash paid for income taxes for the years ended 1996, 1995 and 1994 was
$539,200, $188,575, and $82,200, respectively.
The Company receives contributions of plant from developers. These
contributions are reported in utility plant and in customers' advances for
construction. The contributions are deducted from construction expenditures
to determine cash expenditures by the Company.
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Gross plant additions $1,518,142 $671,390 $696,340
Customers' advances for construction (56,990) (71,112) (76,567)
$1,461,152 $600,278 $619,773
</TABLE>
On written request, the Company will furnish to any shareholder a copy of its
most recent annual report to the securities and exchange commission on form
10K, without charge, including the financial statements and schedules
thereto. Such requests should be addressed to Anne A. Hobson, Secretary,
Birmingham Utilities, Inc. P.O. Box 426, Ansonia, CT 06401-0426.
Birmingham Contributors
Board of directors
Betsy Henley-Cohn (2)*
Chairwoman of the Board of Directors of the Company since May of 1992;
Chairman and Treasurer, Joseph Cohn & Sons, Inc. (painting contractors);
Director, United Illuminating Corp.;
Director, Aristotle Corp.;
Director,Society for Savings Bancorp, Inc. (1985-1993).
* Ex-Officio on all other committees
Aldore J. Rivers (2,3)
President of the Company
Stephen P. Ahern (3,4)
Vice President, Ogden Allied Security Services;
Principal, Ahern Builders
Edward G. Brickett (1,4)
Retired; Director of Finance, Town of Southington, Connecticut
until June 1995
James E. Cohen (2,3)
Lawyer in Practice in Derby;
Director, Great Country Bank (1987-1993)
B. Lance Sauerteig (3,4)
Lawyer in Practice in Westport;
Principal in BLS Strategic Capital, Inc.
(financial and investment advisory company);
previously, President, First Spring Corporation, 1986-1994
(private family investment management company);
Director, OFFITBANK (a New York based private investment management bank)
Kenneth E. Schaible (1,3)
Bank Consultant and Real Estate Developer;
previously, Senior Vice President, Webster Bank, 1995-1996;
President, Shelton Savings Bank and Shelton Bancorp., Inc., 1967 to 1995
Charles T. Seccombe (1,4)
President and Treasurer,
Seccombe's Men's Shop, Inc.
David Silverstone (1,2)
Lawyer in Practice in Hartford
Committees
1. Audit Committee meets regularly with the management and independent
accountants to review and discuss the scope and results of the annual
auditof the Company's financial statements.
2. Executive Committee reviews Strategic Planning Alternatives, recommends
to and advises the Board of Directors on Financial Policy, Issuance of
Securities and other high priority issues.
3. Land Committee makes recommendations regarding the sale and/or
development of land available for sale.
4. Personnel and Pension Committee makes recommendations to the Board of
Directors regarding officers' compensation including the promotion
and hiring of officers; reviews Company fringe benefit plans other than
retirement plans; reviews the Pension Trust Fund of the Birmingham
Utilities, Inc. Defined Benefit Plan and the Retired Employee Welfare
Benefit Trust for retiree medical benefits; reviews and determines
actuarial policies, investment guidelines and selects the investment
manager.
Officers
Betsy Henley-Cohn
Chairwoman
Aldore J. Rivers
President and CEO
John J. Keefe, Jr.
Vice President, Operations
Anne A. Hobson
Secretary
Diane G. DeBiase
Assistant Treasurer
Auditors
Dworken, Hillman, LaMorte & Sterczala, P.C.
Bridgeport, Connecticut
General Counsel
Tyler Cooper & Alcorn
Hartford, Connecticut
Registrar and Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Stock Market Listing
NASDAQ - Under the symbol BIRM
Birminham Utilities, Inc.
230 Beaver Street
P.O. Box 426
Ansonia, Connecticut 06401
(203) 735-1888
