1997
ANNUAL REPORT
Birmingham Utilities 1997 Annual Report
Company Profile
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 Beaver Lake Reservoir System, a 2.2
million gallon per day (MGD) surface supply in case of emergency
needs.
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 8.0 MGD, while the average daily demand
and the maximum daily demand on the system during 1997 were
approximately 3.2 MGD and 4.3 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 1997 approximately 1.16 billion gallons of water from all
sources were delivered to the Company's customers. The Company
has approximately 8,848 customers of whom approximately 98.7% are
residential and commercial. No single customer accounted for as
much as 10% of total billings in 1997. 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 February 2, 1998, 20 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 (the "DPH") 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
In 1997, your Company enjoyed further success in its plans to
improve the water system infrastructure and enhance public
ownership of open space in the community. At the same time we
have continued to maximize shareholder value. The Company's
excess land disposition and capital construction programs took
further significant steps in 1997 while the Company undertook to
keep its rates for water service in line with both its expenses
and its need to earn an appropriate return on the investment in
its new facilities. The Company's 1997 financial results
confirmed the need for the rate adjustment sought by the Company.
Land Sales and Construction
During 1997, the Company consummated two land sales that had been
in the works for some time. In June, we sold to the Connecticut
Department of Transportation a 3.6 acre parcel in Seymour (the
"DOT Parcel") for $175,000. Later, in November, we were
successful in selling our 10-acre "Lakewoods" residential
development in Seymour for $300,000.
As gratifying as the completion of those transactions has been,
even more exciting was the final agreement with the City of Derby
in May for its acquisition of the Company's 145 acre Sentinel
Hill Reservoir property for $1,800,000. The City plans to
maintain the bulk of that property for open space and
recreational purposes. The agreement was approved by the
Connecticut Department of Public Utility Control ("DPUC") in
October, and I am pleased to report that the sale of that parcel
was consummated in January of this year.
Our hopes to be able to foster additional publicly open space in the
community advanced further in November when the
residents of Seymour voted to acquire approximately 229 acres of
the Company's land there for $1,800,000. Your Company entered
into an agreement with the Town of Seymour in February of this
year for that sale, which we expect to consummate by year-end. We
have also entered into an agreement with the Trust for Public
Land ("TPL"), a nonprofit corporation, to sell all of the
Company's land in Oxford, approximately 515 acres, to TPL
primarily for open space purposes for $3,220,000. TPL has no
obligation to buy the land unless the residents of the Town of
Oxford vote to purchase it from TPL, and, although TPL may, if it
so desires, purchase the land without such a vote, the Company
does not expect it to do so. The agreement with TPL expires at
year-end if no transaction has been consummated by that time.
The Seymour and TPL sales are subject to approval by the DPUC.
The Company knows of no reason why the DPUC should not approve
either sale. Both sales also have been negotiated for purchase
prices the Company believes to be discounts from the property's
fair market value, and the Company expects to obtain tax
deductions as civic or charitable contributions for the
difference between the purchase price and the fair market value
of each parcel. We cannot make any assurances at this time that
the Company will be successful in obtaining any tax benefits from
the "bargain" nature of the two sales or, if we are successful,
what the value of those benefits will be.
As we reported to you last year, your Company also has an
agreement with a developer to sell approximately 245 acres of
land in Seymour to the developer for $3,950,000. The agreement
with the developer is conditioned on his being able to obtain
local land use approvals for a golf course/residential
development project, but late last year he announced that he has
abandoned his plans for the golf course. The Company does not
know whether or not the developer will go forward with the
purchase if he cannot obtain the approvals required for his new
plans prior to the agreement's year-end deadline for all
approvals. The agreement with the developer was approved by the
DPUC during 1997.
As a result of the sales of the DOT Parcel and Lakewoods in 1997,
and the sale to the City of Derby in January 1998, your Company
was able to fund the construction of $1,281,242 of new utility
facilities in 1997 without the need to raise any permanent
outside financing. The Company hopes that its plans for further
improvement of the community's water system infrastructure will
continue to be financed in the same manner over the next several
years.
Financial Performance and Rates
In part because of the effect of the sales of the DOT Parcel and
Lakewoods, the Company experienced net income of $667,879 in
1997. While that net income slipped somewhat from the Company's
net income of $764,737 in 1996, the reduction was attributable
solely to lower income from the sale of excess land in 1997
compared to 1996. The portion of the Company's net income derived
from water operations in 1997 remained relatively flat compared
to that of 1996.
As I had predicted in my letter to you last year, management
found it necessary in 1997 to seek approval from the DPUC to
raise the Company's water rates in order to maintain an
appropriate return on capital invested in the water supply
system. We applied for such approval in July 1997, and on January
21, 1998 the Company was granted permission to raise rates in an
amount designed to increase annual revenues by approximately
$177,260. While the allowed increase will certainly help to
increase the return from the Company's water supply business, we
had sought an increase in annual revenues of $439,426 and were
somewhat disappointed in the results of the rate proceeding.
Because of the effect upon rates that the sale of excess land has
and will have in the future, and because of the expectation that
there will be land sales over the foreseeable future, we will
continue to monitor closely the appropriate time to seek further
rate relief.
Aldore J. Rivers
I now have what I consider to be both the pleasure and the task
of informing you that Al Rivers has announced to your Board of
Directors that he will be retiring as President on September 30,
1998. Announcing Al's retirement is a pleasure because I can
think of nobody who deserves the time to relax and enjoy the
benefits of retirement more than Al. It is a task because the
Company will miss his expertise and professionalism, and I will
personally miss his warmth and guidance, which I have come to
rely on over the years.
During Al's tenure as President beginning in 1985, your Company
has undergone dramatic changes. Al paved the way for the
beginning of the Company's excess land disposition program by
preparing the first comprehensive water supply plan to be
approved in the State of Connecticut. That plan demonstrated the
wisdom of abandoning the Company's small, unfiltered reservoirs
and using the proceeds from the sale of the land associated with
them to improve the water supply system. During his tenure, Al
supervised the construction of new utility facilities that more
than doubled the Company's net investment in utility plant from
$5,466,765 at year end 1984 to $13,211,516 at year end 1997.
Among other things, the Company's reservoir dams were upgraded,
storage facilities were added, and old, substandard transmission
and distribution mains were replaced. Under Al's direction, the
Company's facilities have become a statewide model for companies
our size.
Al has also supervised the planning for further construction
budgeted for $10,715,000. When Al retires, he will be leaving a
Company whose operating facilities are second to none. We owe
him our deepest gratitude.
The Company's Board of Directors has begun the process of
searching for Al's successor. As always I invite your comments
and questions about our Company. Please feel free to call me at
any time.
Sincerely,
Betsy Henley-Cohn
Chairwoman
Fellow Shareholders
Water quality and quantity should never be taken for granted.
Your Company has secured quality water of sufficient quantities
through its purchase agreement with the South Central Connecticut
Regional Water Authority, (the "Regional Water Authority") and
through development of our own supplies from the Derby and
Housatonic wellfields. These abundant supplies, of up to eight
million gallons per day, not only satisfy domestic, industrial
and commercial needs in our service areas, but provide our
community with fire protection and a valuable resource necessary
for economic growth.
Our long range planning has been carefully designed to address
the protection of our sources of supply, replacement of aged
piping, and increased pipe capacities in key areas for improved
fire and domestic distribution. In the next few years, we will
complete our Low System Distribution piping improvements while we
continue to replace old 4" and 6" cast iron mains. The Low System
Distribution piping provides large pipe connections between our
wellfields and the Regional Water Authority's interconnections.
We hope to complete these improvements in approximately five
years. Thereafter, we can concentrate on and increase the
replacement of the 4" and 6" mains that will further improve
system flow capabilities.
We also plan to expand a high service area in Ansonia served by
the Woodbridge interconnection with the Regional Water Authority
to eliminate two old pumping stations that are too small to
provide expanded service to the areas they serve. When that
project is completed, there will be sufficient supplies available
for expansion of our service area both to residential areas
served by individual wells and to undeveloped land areas.
The local economic outlook appears to be much brighter than it
did a year ago. The Fountain Lake Industrial Park development is
scheduled to be completed late this Spring. Both commercial and
residential construction has increased and further development is
in the planning stages. In addition, the cities of Derby and
Ansonia are actively pursuing plans for revitalization of their
downtown business districts. We hope that our abundant supplies
of water can be useful in helping to spur continued growth in the community.
This is my last annual letter as President of your Company, as I
plan to retire this year after 41 years in the water industry.
I'm very proud of what we've accomplished over the past few
years, and I want to thank our talented employees for making the
operations and service to our customers run so efficiently. I'd
also like to thank you our shareholders and our Board of
Directors for your help and support over the past 13 years.
Sincerely,
Aldore J. Rivers
President and Chief Executive Officer
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. (construction subcontractors)
Director, United Illuminating Corp.
Director, Aristotle Corp.
Director, Citizens Bank of Connecticut
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, Unicco 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)
Alvaro da Silva (1,3)
President, DSA Corp.
President, B.I.D., Inc. (land development
and home building company)
Managing Partner Connecticut
Commercial Investors, LLC.,
(a commercial real estate and
Chairman of Shelton Inland
Wetlands Comm
Board of Governors Unquowa School
Director of Great Country Bank
(1991-1995)
Director Griffin Hospital (1987-1990)
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 company)
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
David Silverstone (1,2)
Lawyer in Practice in Hartford to
March 31, 1998; from April 1, 1998,
Vice President Southern Connecticut
Gas Company
Charles T. Seccombe
Director Emeritus
Committees
(1) Audit Committee meets regularly with the management and
independent accountants to review and discuss the scope and
results of the annual audit of 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; review and determines actuarial policies, investment
guidelines and selects the investment manager.
Officers
Betsy Henley-Cohn
Chairwoman
Aldore J. Rivers
President and CEO
John S. Tomac
Vice President and Treasurer
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, LLP
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
Financial Highlights
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDING MATTERS
As of December 31, 1997, there were approximately 486 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>
<S> <C> <C> <C>
Bid Dividend
High Low Paid
1997 First Quarter $ 9.00 $ 8.60 $.15
Second Quarter 10.00 9.80 .15
Third Quarter 13.00 11.00 .15
Fourth Quarter 15.00 13.00 .15
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
</TABLE>
SELECTED FINANCIAL DATA
Presented below is a summary of selected financial data for the
years 1993 through 1997:
(000's omitted except for per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Operating Revenues $4,367 $4,380 $4,238 $4,124 $4,033
Income before
Interest Charges 1,112 968 863 913 910
Income from Land
Dispositions * 195 387 279 -
Net Income 668 765 518 363 378
Earnings Per Share,
Basic .88 1.02 .69 .48 .50
Earnings Per Share,
Diluted .87 1.02 .69 .48 .50
Cash Dividends Declared
(per share) .60 .50 .48 .48 .46
Total Assets 16,491 15,568 14,624 15,246 14,602
Long Term Debt 5,662 5,981 6,001 6,329 5,815
Short Term Debt 1,524 294 75 165 -
Shareholder Equity 4,097 3,841 3,408 3,220 3,217
</TABLE>
* See Management Discussion and Analysis, Results of Operations
- - Land Dispositions
Contents
Management Discussion and Analysis 8
Independent Auditors' Report 12
Balance Sheets 13
Statements of Income and Retained Earnings 14
Statements of Cash Flows 15
Notes to Financial Statements 16
Management's Discussion and Analysis
Results of Operations
Overview
The Company's net income for 1997 was $667,879 compared with net
income of $764,737 in 1996 and $518,065 in 1995. Earnings per
share, basic for 1997, 1996 and 1995 were $.88, $1.02 and $.69,
respectively.
The decrease in net income of $96,858 in 1997 is principally a
result of a decline in land sale income of $191,252. This
decline, however, is largely offset by increased other income of
$70,625 and decreased income taxes from operations of $58,745.
The increase in net income in 1996 from 1995 of $246,672 is a
result of increases in land sale income including amortization of
prior year gains of $146,776 and increased income from operations
of $99,896.
Revenues
Water sales to the Company's customers, primarily in the cities
of Ansonia and Derby, Connecticut, of $4,367,357 were $12,414
lower than the sales achieved in 1996 of $4,379,771. A 5% rate
reduction that became effective July 1, 1997, as a result of the
repeal of the Connecticut Gross Receipts tax, is principally
offset by increased revenues due to a 2% increase in consumption
from the Company's residential class of customers. Although
overall consumption in 1997 has only increased .6% from the level
achieved in 1996, the residential consumption increase, for the
most part, can be attributed to dry and warmer weather patterns
experienced in 1997 vs. 1996. In 1996, water service revenues
were $141,696, or 3.3%, ahead of 1995 revenues. A 6.9% water
service rate increase that became effective on January 1, 1996,
was minimized by lower consumption levels achieved in 1996, as a
result of that year's wet and cool summer.
Operating Expenses
Operating expenses of $2,483,875 in 1997 have increased $89,145,
or 3.7%, over total operating expenses of $2,394,730 for 1996.
Increased costs associated with special services relating to
professional fees principally account for this variance.
Operating expenses in 1996 were $109,136 lower than in 1995, as a
result of lower purchased water costs due to wet weather
conditions in 1996, and decreased auditing fees.
Maintenance Expenses
Maintenance expenses of $185,131 for 1997 are $39,931 or 17.7%
lower than maintenance expenses of $225,062 for 1995. Lower
expenses relating to main maintenance and service repairs
principally relating to milder weather conditions in 1997 vs.
1996 contribute to this favorable variance. Maintenance expense
in 1996 was $70,133 higher than 1996 as harsh weather conditions
in 1996, caused main and service repairs to escalate.
Depreciation Expenses
Depreciation expense for 1997 of $439,116 exceeds depreciation
expense for 1996 of $395,059 by $44,057. Depreciation expense
relating to an increasing amount of general plant additions made
in 1996 and 1997 vs. prior years accounts for this variance.
Depreciation expense in 1996 was $12,207 higher than in 1995, due
to routine plant additions.
Taxes other than Income Taxes
Taxes other than income taxes in 1997 of $403,560 are $106,239
lower than the expense of $509,799 for 1996. The repeal of the
Connecticut Gross Receipts tax that became effective July 1, 1997
accounts for this reduction. Taxes other than income taxes in
1996 also decreased from the previous year's expense by $29,497
as a result of decreased property taxes due to the disposition of
property and to a reduction in the mill rate in the Town of
Ansonia, Connecticut.
Income Taxes
Taxes on the Company's income from operations were $69,714 in
1997, $128,459 in 1996 and $67,742 in 1995. The decrease in 1997
from 1996 is principally the result of tax deductions for
property donations in conjunction with the sale of Company excess
land in Seymour, CT to the town of Seymour and property in Derby,
CT to Yale University as well as an increase in flow through tax
deductions principally relating to rate case expense. The tax
increase in 1996 from 1995 reflects an 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
$258,476, $382,107 and $286,694 in 1997, 1996 and 1995,
respectively. The Company's total income tax liability including
both the tax on operating income and on land sale gains was
$328,190 in 1997, $510,566 in 1996 and $354,436 in 1995.
Land Dispositions
When the Company disposes of land, any gain recognized, net of
tax, 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 statement of income reflects income from the disposition of
land (net of taxes) of $195,457 in 1997, $386,709 in 1996 and
$279,101 in 1995, which represent the stockholders' immediate
share of income from land dispositions occurring in each year.
Land disposition income is also recognized in the financial
statements 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 $175,744, $161,065 and $121,897 for the years 1997, 1996 and
1995, respectively.
Recognition of deferred income will continue over time periods
ranging from three to fifteen years, depending upon the
amortization period ordered by the DPUC for each particular
disposition. See Note 6 to the financial statements.
Other Income
Other income in 1997 of $150,708 is $70,625 greater than the
level achieved in 1996 of $80,083. Increased jobbing income and
fees associated with the Company's managed system and increased
AFUDC account for this favorable increase. Other income in 1996
was $71,335 below the 1995 level due to reduced interest income
in conjunction with a note provided from a developer for a land
sale, which note was repaid in early 1995.
Inflation
Inflation, as measured by the Consumer Price Index, increased 1.7
percent, 3.3 percent and 2.5 percent in 1997, 1996 and 1995,
respectively. The regulatory authorities allow the recovery of
depreciation through revenues solely on the basis of the
historical cost of plant. The replacement cost of utility plant
would be significantly higher than the historical cost. While the
regulatory authorities give no recognition in the ratemaking
process to the current cost of replacing utility plant, the
Company believes that, based on past practices, the Utilities
will continue to be allowed to earn a return on the increased
cost of their net investment when prudent replacement of
facilities actually occurs.
Financial Resources
During 1997, 1996 and 1995, 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 $489,361, $456,951 and $498,949, respectively
(see Statement of Cash Flows).
Net cash provided by operating activities increased $32,410 from
1996 to 1997. Increases in operating income and decreases in
accounts receivable and accrued revenues are almost offset by
decreases in accounts payable and decreased income from land
dispositions.
During the three-year period 1995, 1996 and 1997, 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 foreseeable 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 no borrowings outstanding under the
working capital line of credit as of December 31, 1997.
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 1997, 1996 and 1995, the Company's additions to utility
plant, net of customer advances, cost $1,281,242, $1,461,152 and
$600,278, 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 $4,606,000 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, 1997 of $1,225,000 at an interest rate of 8.18%.
Principal and interest payments are made monthly and must be paid
in full in 2004.
The Company also maintains an additional, secured, line of credit
in the principal amount of $1,500,000 maturing on May 1, 1998.
The secured line of credit is used to provide funds to continue
the Company's construction program; at the Company's option it
may be converted to a term loan on May 1 1998, with the term loan
maturing in 2004. (See Note 3 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
revolving line of credit) would exceed 67% of the Company's total
capitalization. The effect of the limitation, as of December 31,
1997, is to limit the Company to advances outstanding under the
line of credit in the aggregate amount of approximately $145,000
for use on budgeted projects until such time as the Company
obtains additional equity capital. There was a balance of
$1,355,000 outstanding under the revolving line of credit at
December 31, 1997 at an interest rate of 8.375%.
The Company's 1998 Capital Budget of $1,300,000 is two-tiered.
The first tier consists of typical capital improvements made each
year for services, hydrants and meters budgeted for $250,000 in
1998 and is expected to be financed primarily with internally
generated funds.
The second tier of the 1998 Capital Budget consists of
replacements and betterments which are part of the Company's Long
Term Capital Improvement Program and includes $1,050,000 of
budgeted plant additions. Plant additions from this part of the
1998 budget may 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 1998.
As of December 31, 1997, the Company has approximately 1,250
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 $10,715,000. Such land
dispositions are subject to approval by the DPUC. Proceeds from
the sale of land are recorded as revenue at the time of closing
and portions of the gains are deferred and amortized over various
time periods as stipulated by the DPUC.
On June 27, 1997, the Company sold to the Connecticut Department
of Transportation ("DOT"), 3.6 acres of land in Seymour,
Connecticut for $175,000. The total gain from sale amounted to
$92,811 of which $15,570 was deferred and will be amortized over
a 5-year period, as approved by the DPUC on June 4, 1997.
On November 7, 1997, the Company sold to Nemer Associates 10.02
acres of land in Seymour, Connecticut for $300,000. The total
gain from the sale amounted to $142,329 of which $23,876 was
deferred and will be amortized over a 4-year period, as approved
by the DPUC on December 4, 1996.
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 agreement calls for
at least 50% of the property to be dedicated for open space. The
purchase and sale was approved by the DPUC on September 17, 1997,
stipulating a four-year amortization period for the net gain,
based on that 50% open space dedication. 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.
On January 21, 1998, the Company sold to the City of Derby,
Connecticut 145 acres of land in Derby, Connecticut for
$1,800,000. The net gain on this sale including the deferred
portion approximated $913,000. The DPUC approved this sale on
October 22, 1997 stipulating a 3-year amortization period as 75% of this
parcel will be dedicated for open space.
On February 18, 1998, the Company executed a purchase and sale
agreement with The Trust for Public Land, Inc. ("TPL") for the
purchase by TPL of 465 acres of unimproved real property in the
Town of Oxford, Connecticut for $3,220,000. TPL is a non-profit
California public benefit corporation with offices in New Haven,
Connecticut. TPL is not required to purchase the property unless
voters of the Town of Oxford approve the Town to acquire such
property from TPL. The agreement is also subject to approval by
the DPUC. The closing is scheduled to be completed within 45 days
after the completion of the above events, but in no event, shall
any closing occur after December 31, 1998. The Company has no
reason to believe that the DPUC will not approve the agreement.
The Company cannot predict whether or not the voters of the Town
of Oxford will vote to acquire the property or if TPL will
proceed in the event that the voters fail to approve the
acquisition.
On March 3, 1998, the Company executed a purchase and sale
agreement with the Town of Seymour (the "Town") for the purchase
by the Town of 229 acres of unimproved real property in the town
for $1,800,000. The sales agreement must be approved by the DPUC
and the company has no reason to believe that the DPUC will not
approve the agreement.
The Company maintains 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 Plan provides that the purchase
price for the new shares will be their fair market value at the
time of the purchase. Dividends reinvested during 1996 totaled
$51,386 and in 1997, $45,581.
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, 1997 and 1996, and the related
statements of income and retained earnings and cash flows for
each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the 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 financial statements referred to above
present fairly, in all material respects, the financial position
of Birmingham Utilities, Inc. as of December 31, 1997 and 1996
and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
February 12, 1998
Bridgeport, Connecticut
<TABLE>
<S> <C> <C>
Balance Sheets
December 31,
1997 1996
Assets
Utility plant $19,045,629 $17,766,937
Accumulated depreciation (5,834,113) (5,472,071)
13,211,516 12,294,866
Current assets:
Cash and cash equivalents 62,699 185,479
Accounts receivable,
net of allowance
for doubtful accounts
(1997, $50,000;
1996, $75,000) 604,627 681,194
Accrued utility and
other revenue 375,327 411,542
Materials and supplies 56,976 51,792
Prepayments 15,068 34,586
Total current assets 1,114,697 1,364,593
Deferred charges 1,148,510 870,736
Unamortized debt expense 176,057 193,466
Income taxes recoverable 446,551 422,915
Other assets 394,096 421,844
2,165,214 1,908,961
$16,491,427 $15,568,420
Shareholders' Equity and Liabilities
Shareholders' equity:
Common stock, no par value;
authorized 2,000,000 shares;
issued and outstanding
(1997, 761,702 shares;
1996, 757,892 shares) $2,266,027 $2,221,786
Retained earnings 1,831,377 1,619,188
4,097,404 3,840,974
Notes payable 1,150,000 1,375,000
Long term debt 4,512,000 4,606,000
Current liabilities:
Notes payable 1,355,000 125,000
Current portion of note
payable and long term
debt 169,000 169,000
Accounts payable and accrued
liabilities 454,659 747,323
Total current liabilities 1,978,659 1,041,323
Customers' advances for
construction 1,238,339 1,291,114
Contributions in aid of
construction 851,154 719,736
Regulatory liability - income
taxes refundable 179,916 187,477
Deferred income taxes 1,695,608 1,484,972
Deferred income on dispositions
of land 788,347 1,021,824
Commitments and contingent
liabilities (Note 13) - -
$16,491,427 $15,568,420
See notes to financial statements.
Statements of Income and Retained Earnings
Years Ended December 31,
1997 1996 1995
Operating revenues:
Residential and
<S> <C> <C> <C>
commercial $3,335,743 $3,325,758 $ 3,214,442
Industrial 160,307 169,070 164,192
Fire protection 621,592 628,558 615,563
Public authorities 82,488 74,320 83,212
Other 167,227 182,065 160,666
4,367,357 4,379,771 4,238,075
Operating deductions:
Operating expenses 2,483,875 2,394,730 2,503,866
Maintenance expenses 185,131 225,062 154,929
Depreciation 439,116 395,059 382,852
Taxes, other than
income taxes 403,560 509,799 539,296
Taxes on income 69,714 128,459 67,742
3,581,396 3,653,109 3,648,685
785,961 726,662 589,390
Amortization of deferred income on
dispositions of land
(net of income taxes
of $124,718 in 1997,
$115,977 in 1996 and
$90,091 in 1995) 175,744 161,065 121,897
Operating income 961,705 887,727 711,287
Other income, net 150,708 80,083 151,418
Income before interest
expense 1,112,413 967,810 862,705
Interest expense 639,991 589,782 623,741
Income from disposition of
land (net of income
taxes of $133,758 in
1997, $266,130 in 1996
and $196,603 in 1995) 195,457 386,709 279,101
Net income 667,879 764,737 518,065
Retained earnings, beginning
of year 1,619,188 1,235,482 1,077,185
Dividends 455,690 381,031 359,768
Retained earnings, end
of year $1,831,377 $1,619,188 $1,235,482
Earnings per share,
basic $ .88 1.02 .69
Earnings per share,
diluted $ .87 1.02 .69
Dividends per share $ .60 .50 .48
See notes to financial statements.
</TABLE>
Statement of Cash Flows
Years Ended December 31
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Cash flows from operating
activities:
Net income $667,879 $764,737 $518,065
Adjustments to reconcile
net income
to net cash provided by
operating activities:
Income from land
dispositions (195,457) (386,709) (279,101)
Depreciation and
amortization 491,208 453,116 460,108
Amortization of
deferred income (175,744) (161,065) (121,897)
Deferred income taxes (91,243) (302,617) (256,489)
Allowance for funds
used during construction (41,741) (20,262) -
Change in assets and
liabilities:
Decrease in accounts
receivable and accrued
revenues 112,781 45,294 85,008
(Increase) in materials
and supplies (5,183) (952) (5,391)
(Increase) decrease in
prepayments 19,518 (7,426) (421)
Increase (decrease) in
accounts payable and
accrued liabilities (292,657) 72,835 99,067
Net cash provided by
operating activities 489,361 456,951 498,949
Cash flows from investing
activities:
Capital expenditures (1,359,886)(1,518,142) (671,390)
Sale of utility plant - - 2,248
Proceeds from land
disposition 475,000 1,041,350 -
Increase in deferred
charges and other
assets (306,790) (108,178) (27,753)
Note receivable - - 1,213,222
Customer advances 78,644 56,990 71,112
Customer advances for
construction - (9,180) (2,107)
Net cash provided by
(used in) investing
activities (1,113,032) (537,160) 585,332
Cash flows from
financing activities:
Borrowings under line
of credit 1,205,000 275,000 -
Repayments of note
payable and
long term debt (169,000) (75,564) (75,564)
Repayments of line of
credit (125,000) - (340,000)
Debt issuance cost - (2,972) -
Dividends paid, net (410,109) (329,645) (328,660)
Net cash provided by
(used in) financing
activities 500,891 (133,181) (744,224)
Net increase (decrease)
in cash (122,780) (213,390) 340,057
Cash and cash equivalents,
beginning of year 185,479 398,869 58,812
Cash and cash equivalents,
end of year $ 62,699 $ 185,479 $ 398,869
See notes to financial statements.
</TABLE>
Notes to Financial Statements
Note 1
Accounting Policies
Description of business
Birmingham Utilities, Inc.Os (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 a new water main extensions. These advances
are partially refunded over a ten year contract period
to developers 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 contributions in aid of construction for the
period January 1, 1987 through June 12, 1996 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
$266,635 at December 31, 1997 and $235,438 at December 31, 1996.
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 paramters. From January 1, 1995
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
Deferred charges consist primarily of costs incurred to prepare
the Company's surplus land for future disposition. 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 resulting from the sharing
formula as determined by the DPUC.
Unamortized debt expense
Cost 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>
<S> <C> <C>
1997 1996
Pumping, treatment and distribution $ 14,590,321 $13,368,635
Source of Supply 3,216,090 3,126,167
General Plant 1,146,517 1,132,329
Organization 30,219 30,219
18,983,147 17,657,350
Construction in process 62,482 109,587
$ 19,045,629 $ 17,766,937
</TABLE>
Note 3
Notes Payable
Notes payable consist of a ten year $1,500,000 term loan, a
$1,500,000 revolving line of credit to fund additional capital
improvements, and 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 on May 1,
1998, 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 4) 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, 1997 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 $1,355,000 and
$150,000 were outstanding on the revolving line of credit at
December 31, 1997 and 1996, respectively. On January 28, 1998,
these borrowings were paid in full as a result of the
consummation of a land sale between the City of Derby and the
Company (See Note 18).
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, 1997.
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
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
outstanding under the revolving line of credit) would exceed 67%
of the Company's total capitalization. The DPUC has also required
that 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:
Year Ending December 31:
1998 $ 75,000
1999 75,000
2000 75,000
2001 75,000
2002 75,000
Thereafter 850,000
$ 1,225,000
Note 4
Long Term Debt
December 31,
1997 1996
First mortgage bonds, Series E. 9.64%,
due September 1, 2011 $ 4,606,000 $ 4,700,000
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
$906,700 was available to pay dividends at December 31, 1997
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.
The Company began to pay current maturities of long-term debt of
$94,000 on September 1, 1997, and is required to pay $94,000 each
September 1, thereafter, until the bonds are paid in full.
Note 5
Accounts Payable and Accrued Liabilities
<TABLE>
<S> <C> <C>
December 31,
1997 1996
Accounts payable $ 139,782 $ 239,886
Accrued liabilities:
Interest 148,005 151,027
Taxes (30,541) 173,777
Pension 160,597 147,250
Other 36,816 35,383
$ 454,659 $ 747,323
</TABLE>
Note 6
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>
<S> <C> <C> <C>
Deferred Amortization To
Deferred Income Be Included In
Year Ending December 31: Income Taxes Operating Income
1998 $ 261,400 $ 108,175 $ 153,225
1999 191,370 79,129 112,241
2000 138,142 57,279 80,863
2001 92,470 38,508 53,962
2002 49,947 20,735 29,212
Thereafter 55,018 22,824 32,194
$ 788,347 $ 326,650 $ 461,697
</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 7
Taxes, other than Income Taxes
<TABLE>
<S> <C> <C> <C>
December 31,
1997 1996 1995
Municipal $ 227,022 $ 225,320 $ 267,183
Gross receipts 105,403 215,300 208,201
Payroll 71,135 69,179 63,912
$ 403,560 $ 509,799 $ 539,296
</TABLE>
The Connecticut Gross Receipts tax was repealed as of July 1,
1997, resulting in a corresponding decrease in water service
rates.
Note 8
Income Taxes
The provisions for taxes on income for the years ended December
31, 1997, 1996 and 1995 consist of:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Current:
Federal $ 119,666 $ 318,311 $ 212,705
Deferred:
Federal:
Accelerated depreciation 96,384 81,714 117,076
Alternative minimum tax
credit - - 76,855
Income on land dispositions 83,117 15,127 (112,489)
Investment tax credit (14,700) (14,700) (14,700)
Construction advances and
other (12,207) (5,071) (6,165)
State 14,639 2,420 (30,372)
$ 328,190 $ 510,566 $ 354,436
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:
1997 1996 1995
Federal income tax at
statutory rates $ 338,665 $ 433,603 $296,650
Increase (decrease)
resulting from:
State income tax,
net of federal
benefit 17,590 72,828 93,653
Rate case expense (21,508) 4,536 (9,103)
SFAS 106 expense in
excess of funding 750 768 2,068
Other, net 7,393 13,531 (14,132)
Investment tax credit (14,700) (14,700) (14,700)
Total provision for
income taxes 328,190 510,566 354,436
Taxes related to land
dispositions (258,476) (382,107) (286,694)
Operating provision
for taxes $ 69,714 $ 128,459 $ 67,742
Deferred tax liabilities
(assets) were comprised
of the following:
1997 1996
Depreciation $ 1,662,767 $ 1,572,362
Investment tax credits 349,261 363,961
Other 244,573 229,181
Gross deferred tax
liabilities 2,256,601 2,165,504
Land Sales (326,650) (424,405)
Alternative minimum tax (2,228) (2,228)
Other (232,115) (253,899)
Gross deferred tax assets (560,993) (680,532)
Total deferred income
taxes $ 1,695,608 $ 1,484,972
</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, 1997, 1996 and 1995 fees paid
amounted to $123,439, $32,378, and $34,748, respectively. Amounts
due to these firms at year end are not significant.
Note 10
Allowance for Doubtful Accounts
<TABLE>
<S> <C> <C> <C>
December 31,
1997 1996 1995
Allowance for doubtful accounts,
beginning $ 75,000 $ 75,000 $ 75,000
Provision 28,251 43,237 46,712
Recoveries 3,051 8,549 13,036
Charge offs (56,302) (51,786) (59,748)
Allowance for doubtful accounts,
ending $ 50,000 $ 75,000 $ 75,000
</TABLE>
Note 11
Postemployment Benefits
Pension Plan
The plan's funded status and related pension accrual follows:
<TABLE>
<S> <C> <C>
December 31,
1997 1996
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$592,240 in 1997 and $523,864
in 1996 $ 598,187 $ 537,226
Projected benefit obligation (851,292) (742,517)
Plan assets at fair value 625,767 502,793
Projected benefit obligation in excess
of plan assets (225,525) (239,724)
Unrecognized prior service cost (41,928) (44,183)
Unrecognized deferred loss 161,758 194,709
Other liability - (33,311)
Unrecognized net obligation at
transition 82,205 88,077
Accrued pension obligation included in
accounts payable and accrued
liabilities $ (23,490) $ (34,432)
</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 1997 and
1996. The expected long term rate of return on assets was 8.0% in
1997 and 1996.
Net periodic pension costs include the following components:
<TABLE>
<S> <C> <C> <C>
December 31,
1997 1996 1995
Service cost $ 48,297 $ 40,780 $ 30,077
Interest cost on
projected benefit
obligation 53,319 46,694 38,004
Amortization of net
loss from prior
years 9,980 8,065 6,167
Amortization of net
obligation at
transition 5,872 5,872 5,872
Amortization of
unrecognized prior
service cost (2,254) (2,254) (2,263)
Deferred gain (loss) 53,301 (13,119) 61,097
Actual return on assets (94,454) (24,638) (91,892)
Net pension cost $ 74,061 $ 61,400 $ 47,062
</TABLE>
Employer matching contributions to the 401(k) plan were $17,645,
$14,372 and $7,731 in 1997, 1996 and 1995, respectively.
Other post retirement benefit
The net periodic postretirement benefit cost includes the
following components:
<TABLE>
<S> <C> <C> <C>
December 31,
1997 1996 1995
Service cost benefits
earned during
the period $ 19,779 $ 19,612 $ 22,268
Interest cost on benefit
obligation 30,709 29,385 29,700
Actual return on plan
assets (33,363) (16,003) (27,185)
Net amortization and
deferral 2,508 (8,985) 11,430
Amortization of transition
obligation 25,378 25,378 25,378
Net periodic postretirement
benefit cost $ 45,011 $ 49,387 $ 61,591
</TABLE>
The funded status and the related accrual for postretirement
benefits other than pensions were as follows:
<TABLE>
<S> <C> <C>
December 31,
1997 1996
Accumulated postretirement
benefit obligation:
Retirees $ (222,635) $ (234,544)
Other vested (226,524) (196,674)
(449,159) (431,218)
Plan assets at fair value 271,622 214,759
Accumulated postretirement
obligation in excess of
plan assets (177,537) (216,459)
Unrecognized net gain (203,080) (189,588)
Unrecognized net transition
obligation 380,617 406,047
Accrued postretirement benefit
cost included in current
assets $ - $ -
</TABLE>
The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% in 1997
and 1996. The expected long term rate of return on assets was
7.5% in 1997 and 1996.
For measurement purposes, a 10.0% annual increase in the per
capita cost of covered health care benefits was assumed for 1998.
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,
1997 of $71,579 and an increase in the aggregate service and
interest cost of the net periodic postretirement benefit cost of
$9,718.
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
$45,011, $49,387, $57,767 and in 1997, 1996 and 1995,
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, 1997 and
1996 was $136,650 and $112,818, respectively. At December 31,
1997, an amount of $86,250 has been included in other assets
relating to a regulatory asset for costs which were included in
the Company's rate case.
Note 12
Earnings per share Supplemental Information
The following table summarizes the number of common shares used
in the calculation of earnings per share:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Weighted average shares outstanding
for earnings per share, basic 759,495 754,449 749,827
Incremental shares from assumed
conversion of stock options 8,051 - -
Weighted average shares outstanding
for earnings per share, diluted 767,546 754,449 749,827
</TABLE>
Note 13
Commitments and Contingent Liabilities
Leases
The Company leases equipment under several noncancelable
operating leases expiring through 2001. Total minimum rentals
under noncancelable operating leases are as follow:
Year ending December 31:
1998 $ 16,419
1999 13,601
2000 10,452
2001 851
$ 41,323
Lease expense was $11,907 in 1997, $27,903 in 1996 and $35,274 in
1995.
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 $1,300,000 for capital expenditures in
1998, $250,000 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 $691,166, $680,125, and
$743,904 for the years 1997, 1996 and 1995, respectively. The
purchase price is based on South Central Connecticut Regional
Water Authority's wholesale rate. At December 31, 1997, 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
Year 2000 Compliance
The Company is evaluating its computer systems for compliance
with issues related to the year 2000. Management anticipates its
computer systems will be fully compliant by the end of 1998.
Costs associated with compliance are not expected to have a
material impact on the Company's financial position or results of
operations.
Note 15
Rate Matters
On July 18, 1997, the Company filed a rate application with the
DPUC for a 14.2% water service rate increase designed to provide
a $601,382 increase in annual water service revenues and a return
on common equity of 12.95%. The Company subsequently revised its
On January 21, 1998, the DPUC granted the Company a 4.1% water
service rate increase designed to provide a $177,260 annual
increase in water service revenues and a 12.16% return on common
equity.
On December 27, 1995, the DPUC granted the Company an increase in
annual revenues of $289,333 or 6.9% effective January 1, 1996.
Note 16
Equity
Stock option plans
The Company has 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 transactions of the Company's stock option plans
for the three years ended December 31, 1997:
<TABLE>
<S> <C> <C> <C> <C>
Granted Exercisable
Weighted Weighted
Number Average Number Average
of Shares Exercise Price of Shares
Exercise Price
Outstanding at
January 1, 1995 54,000 $ 10.50 - -
Granted 3,750 $ 11.00
Outstanding at
December 31,1995 57,750 $ 10.53 22,750 $10.50
Granted 5,000 $ 8.50
Outstanding at
December 31, 1996 62,750 $ 10.37 55,875 $10.52
Granted 2,500 $ 12.25
Forfeited (3,000) $10.50
Outstanding at
December 31, 1997 62,250 $ 10.44 57,250 $10.45
</TABLE>
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 continue to apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and, accordingly, no compensation cost has been recognized
for stock options in the financial statements. The pro forma
effect of these options on net income and earnings per share,
utilizing the Black Scholes option pricing model, consistent with
the method stipulated by SFAS 123, was not material to the
Company's results of operations in those years.
Dividend reinvestment plan
The Company has 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 reinvested plan:
<TABLE>
<S> <C> <C>
December 31,
1997 1996
Number of shares issued 3,810 5,610
Value of shares when
issued $ 45,581 $ 51,386
</TABLE>
Note 17
Supplemental Disclosure of Cash Flow Information and Noncash
Financing Activities
Supplemental disclosure of cash flow information and noncash
financing activities:
Cash paid for interest for the years ended 1997, 1996 and 1995
was $625,729, $574,993, and $608,764, respectively.
Cash paid for income taxes for the years ended 1997, 1996 and
1995 was $283,150, $539,200, and $188,575, 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>
<S> <C> <C> <C>
December 31,
1997 1996 1995
Gross plant additions $ 1,359,886 $ 1,518,142 $ 671,390
Customers' advances for
construction (78,644) (56,990) (71,112)
$ 1,281,242 $ 1,461,152 $ 600,278
</TABLE>
Note 18
Subsequent Event
On January 21, 1998, the Company sold to the City of Derby,
Connecticut, 145 acres of land for $1,800,000.
The net gain on sale, including the deferred portion,
approximated $913,000.
