1998 Birmingham Utilities Annual Report
Company Profile
The Company is in the business of collecting and distributing
water for domestic, commercial and industrial uses and fire protection
in Ansonia, Derby and in small parts of the contiguous Town of Seymour,
Connecticut. On February 1, 1999, the Company maintained a workforce
of 19 full-time employees, none of whom are affiliated with any union.
The Strategy to dispose of excess Water Company
Lands in a prudent and equitable manner benefits the Company's
customers, shareholders and fosters a partnership with the communities
in which the Company operates.
John S. Tomac
Sources of Supply
Wells:
Located in Derby and Seymour with a safe daily yield of 3.0
million gallons per day (MGD).
Interconnections:
Two interconnections with the South Central Regional Water
Authority at the border of Orange and Derby (the "Grassy Hill
Interconnection") and near the border of Seymour and Ansonia
(the "Woodbridge Interconnection"). Annual purchases of water
contracted at a minimum of 600 million gallons a year. Safe daily
yield of Interconnection - 5.0 MGD.
Emergency Supply:
Beaver Lake Reservoir System - 2.2 MGD surface water supply.
Customer Base and Demand
8,902 customers, 94% residential and commercial
Water delivered in 1998 - 1.18 Billion Gallons
Average daily demand - 3.2 MGD.
Maximum daily demand in 1998 - 4.7 MGD.
Total safe daily yield - 8.0 MGD.
Regulation
The Company is subject to jurisdiction by the following agencies:
Connecticut Department of Public Utility Control (DPUC)
Matters related to ratemaking, financing, accounting,
disposal of property, issuance of long-term debt and
securities and other operational matters.
PAGE 2
Connecticut Department of Public Health (DPH)
Water quality, sources of supply and use of watershed
land.
Connecticut Department of Environmental Protection (DEP)
Water quality, pollution abatement, diversion of water from
streams and rivers, safety of dams and location, construction
and alteration of certain water facilities.
The Company is also 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.
Financial Highlights
Market For the Registrant's Common Stock and
Related Security Holding Matters
As of December 31, 1998, 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> <C>
Bid Dividend
High Low Paid
1998 First Quarter $15.00 $11.75 $ .17
Second Quarter 18.50 14.50 .17
Third Quarter 19.13 15.75 .17
Fourth Quarter 25.25 18.50 .17
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
</TABLE>
PAGE 3
Selected Financial Data
Presented below is a summary of selected financial data for the years
1994 through 1998:
(000's omitted except for per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Operating Revenues $ 4,395 $ 4,367 $ 4,380 $ 4,238 $ 4,124
Income before Interest
Charges 1,170 1,112 968 863 913
Income from Land
Dispositions* 3,354 195 387 279 _
Net Income 3,911 668 765 518 363
Earnings Per Share-
Basic** 5.10 .88 1.02 .69 .48
Earnings Per Share-
Diluted** 4.95 .87 1.02 .69 .48
Cash Dividends Declared
(per share) .68 .60 .50 .48 .48
Total Assets 19,519 16,491 15,568 14,624 15,246
Long Term Debt 4,418 5,662 5,981 6,001 6,329
Short Term Debt 94 1,524 294 75 165
Shareholder Equity 7,648 4,097 3,841 3,408 3,220
</TABLE>
* See Management Discussion and Analysis, Results of Operations - Land
Dispositions
** See Note 18 to the financial statements
Fellow Shareholders
I998 was a year of great accomplishment and change for your Company. It
was a fitting year to mark the retirement of Aldore J. Rivers, our
President since 1985, and the election of John S. Tomac, as Al's
successor. John had joined us in 1997 as the Company's Chief Financial
Officer and has over 20 years experience in the water industry.
Birmingham Utilities continued its strategy to dispose of its excess
lands to improve its aging water system infrastructure. As a result of
the land sales, earnings achieved in 1998 were at record levels. Land
PAGE 4
sales in 1998 included 145 acres to the City of Derby, 229 acres to
the Town of Seymour and 515 acres to the Town of Oxford, most of
which will be maintained as open space for the residents of our
communities to enjoy. The Seymour and Oxford transactions involved
sales prices at below market levels. The "bargain prices" were
available due to a unique relationship established among the Company,
Town officials and the Trust for Public Land. As a result of the
bargain sales, the Company expects to be afforded reductions in
federal and state income taxes. These sales were accomplished with
the wholehearted support of the local communities, both local and
state elected officials, and the Company's regulators. Because of that
support and cooperation, the sales were accomplished in a timely
fashion that benefited both the Company and its customers as well as
the communities involved. The combination of the income tax deductions
and the ability to consummate the sales quickly because of the
local community support, resulted in financial gains on the sales
comparable to those that would have been enjoyed in fair market value
transactions.
We hope our land sale strategy will bear additional fruit in 1999 and
beyond. The Company continues to have an additional 245 acres of land
in Seymour under contract for sale to a developer. Under the original
1997 contract, the developer had proposed the construction of a golf
course, together with 180 units of "active adult" housing. During the
latter part of 1997 and in 1998, it became clear that the developer
would not be able to obtain land use approvals necessary to construct
the golf course. As a result, the developer has amended his plans and,
rather than construct a golf course along with the housing, has
proposed that over 50% of the land involved be donated to the Town
of Seymour for open space. The amended plans resulted in the need to
amend our contract with the developer to extend the originally
anticipated closing date from December 31, 1998 until June 30, 1999,
subject to the developer receiving the appropriate land use approvals
for the project. The Company and the developer agreed to an amended
contract, which also increased the purchase price from $3,950,000 to
$4,020,000, of which $2,370,000 will be payable on June 30, 1999 and
the balance of $1,650,000 on June 30, 2000. In addition to the necessary
land use approvals, the amendments to the contract also must be
approved by the Connecticut Department of Public Utility Control. We
cannot predict whether or not all the required approvals can be
obtained, but we are aware of no reasons why they should not be.
In addition, we have recently received approval from the Connecticut
Department of Health of the five-year update to the Company's
Comprehensive Water Supply Plan. The updated plan includes the
Company's proposal to abandon as a public water supply source our
Quillinan Reservoir in Ansonia. That abandonment will allow the
approximately 600 acres of land associated with the reservoir,
primarily in Ansonia, to be reclassified from "watershed" to
"non-watershed" land and make it available for sale for the first
time. Because of your Company's commitment to try to keep as much of
its land in its natural state as possible, consistent with our need
PAGE 5
to realize a reasonable gain and proceeds for investment into new
utility facilities, the Company has already been in contact with the
Trust for Public Land in order to try to meet both the Company's and
the communities' goals. We hope to be able to structure a transaction
that will meet all of our goals.
Your Board of Directors and I again want to welcome John Tomac at
this critical and exciting point in our Company's development. John's
experience and professionalism, together with the experience and
dedication of the loyal employee corps developed by Al Rivers over
the past 15 years, will be invaluable as we continue to enhance the
Company's ability to provide first class service to our customers and
to provide an exceptional return on your investment. As always, feel
free to contact me at the Company.
Your fellow shareholder,
Betsy Henley-Cohn
Chairwoman
Fellow Shareholders
I want to take this opportunity to report to you the extraordinary
financial results and operational accomplishments your Company achieved
in 1998. Net income for the year was an unprecedented $3,900,000,
compared with $668,000 in 1997 and $765,000 in 1996. The amount of the
Company's net income attributable to both current and prior land sales
was approximately $3,507,000, $371,000, and $548,000 in each of those
years, respectively. Net income from operations also increased in 1998
to $403,000, a 35% gain over net income from operations achieved in
1997. The operational gain is principally a result of a reduction of
operating and maintenance expenses in 1998, and to a lesser extent,
rate relief granted early in 1998.
The strategy of the Company to dispose of land no longer necessary to
its water supply business and to convert those under-utilized assets
into operating capital, financially transformed your Company in 1998.
The 1998 land sales, with aggregate sales prices of approximately
$6,900,000, resulted in net proceeds to the Company, after taxes and
selling expenses, of approximately $4,200,000. With those net proceeds,
the Company was able to repay all short-term debt and the Company's
long-term loan. All of the repaid debt had been incurred in recent
years to fund the construction of new utility facilities as part of
the Company's Capital Improvement Program. The 1998 land sale proceeds
also allowed the Company to invest approximately $1,800,000 in new
1998 capital improvements as well as to plan for an additional
$1,800,000 in capital improvements in 1999. Because of the reinvestment
PAGE 6
of the net land sales proceeds, which is required by Connecticut law,
we expect that we can continue to make the desired improvements to the
water supply system without having to ask our customers to pay increased
water rates for the foreseeable future.
The extraordinary financial results achieved in 1998 have increased the
book value of your Company's Common Stock by 83% to $9.87 per share at
year end 1998 from $5.38 per share at year end 1997. The Company's
total capitalization increased more than $2,300,000 during 1998, while
the equity component of that capitalization increased to 63% at year
end 1998 from 42% at year end 1997. Your Board of Directors declared
and the Company paid dividends of $.68 per share in 1998, a 13%
increase over the dividends of $.60 per share paid in 1997. I know you
will agree that our plans to add value to your investment in the Company
bore fruit in 1998.
With abundant water supplies already in place, the Company's long range
planning continues to focus on protecting those sources, as well as
replacing aged piping and increasing pipe capacities in key areas to
improve fire and domestic service. Replacement of aging infrastructure
has been well documented in the water industry as the "next challenge"
for water utilities, especially for companies located in the Northeast.
I am pleased to report that, as a result of the successful land
sale program in 1998 and the optimistic outlook for future sales in
1999 and beyond, your Company has been positioned financially to meet
those challenges ahead.
The Company's Capital Improvement Program, which is spearheaded by Vice
President of Operations, John J. Keefe, Jr., took major steps in 1998.
As part of the program, the Company installed almost 3.6 miles of new
8-inch and 12-inch water mains. Remarkably for a company our size,
almost 75% of the installations were accomplished by our in-house
construction crew rather than through outside contractors. Because of
our capacity to install water mains with our in-house crew, the cost
of our infrastructure replacements has been and will continue to be
minimized. For example, in 1998, our average cost to install the 3.6
miles of new pipe approximated $70.00 per foot, including paving. This
per-foot cost compares favorably with the average per-foot main
installation costs incurred by any water utility, large or small. The
increased flows from these new mains not only improved customer
service, reduced leaks, and allowed for expanded service to undeveloped
land areas and residential areas previously served by private wells,
they also allowed the Company to abandon three pump stations, thus
reducing operating expenses associated with those stations.
During 1998, we were also successful in reducing other operating
expenses and maintenance expenses as well. We were able to reduce
operating expenses in 1998 by over $120,000 (approximately
4.8%) from those incurred in 1997. Reductions in expenses for outside
professional fees, casualty insurance premiums, uncollectibles,
pension, and post-retirement benefits all contributed to the savings.
Similarly, the Company's maintenance expense was reduced in 1998 by
PAGE 7
approximately $23,000 (approximately 12.4%) from the 1997 amount. As
we proceed with the replacement of older water mains, we hope to
continue the trend in reductions in maintenance expenses experienced
over the past several years.
Your Company is committed to continued planning for the types of capital
improvements described above. Our budget for capital improvements over
the next five years approximates $10,000,000. Our goal is to continue
to enhance shareholder value while simultaneously improving a sound
water supply distribution system. Our strategy allows for improved
customer service, enhanced reliability over the long term, and reduced
operating expenses. Our new financial strength will allow us to honor
that commitment while maintaining water service rates at a level that
remains affordable.
It has been a privilege and an honor to be elected by your Board of
Directors as your Company's new President. I would especially like to
thank Al Rivers for his guidance and insight and for making my
transition to this position as comfortable as possible. We are
fortunate indeed that Al will be remaining as a Director and as a
part time consultant to the Company. I would also like to thank our
very dedicated and talented group of employees whose performance
standards are unmatched in the water industry.
I look forward to the many challenges ahead.
Sincerely,
/s/ John S. Tomac
John S. Tomac
President & Treasurer
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.;
Director, United Illuminating Corp.;
PAGE 8
Director, Aristotle Corp.;
Director, Society for Savings Bancorp, Inc.
(1985-1993).;
Director Citizens Bank of Connecticut;
* Ex-Officio on all other committees
Aldore J. Rivers (2,3)
Retired; President of the Company from 1985
to October 1998
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 &
home building company);
Managing Partner Connecticut Commercial
Investors, LLC., (a commercial real estate
and investment partnership);
Chairman of Shelton Inland Wetlands Comm;
Board of Governors Unquowa School;
Director of Great Country Bank
(1991-1995);
Director Griffin Hospital (1987-1990)
PAGE 9
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
David Silverstone (1,2)
Vice President, The Southern Connecticut Gas Company,
since April 1, 1998;
Lawyer in Practice since 1972
Charles T. Seccombe
Director Emeritus
Officers
Betsy Henley-Cohn
Chairwoman and CEO
John S. Tomac
President and Treasurer
John J. Keefe, Jr.
Vice President, Operations
Anne A. Hobson
Secretary
Diane G. DeBiase
Assistant Treasurer
PAGE 10
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
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; reviews
and determines actuarial policies, investment guidelines and selects
the investment manager.
PAGE 11
Contents
Management's 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 1998 was $3,910,793 compared with net
income of $667,879 in 1997 and $764,737 in 1996. Earnings per share,
basic for 1998, 1997 and 1996 were $5.10, $.88 and $1.02, respectively.
The increase in net income of $3,242,914 in 1998 is principally due to
sales of large parcels of excess water company lands to the Towns of
Oxford, Seymour and Derby, Connecticut and, to a lesser extent,
increased operating income from utility operations. The decrease in
net income in 1997 from 1996 of $96,858 was a result of a decline in
land sale income of $191,252. The decline, however, was largely offset
by increased other income of $70,625 and decreased income taxes from
operations of $58,745.
Revenues
Water sales to the Company's customers, primarily in the cities of
Ansonia and Derby, Connecticut, of $4,394,911 were $27,554 higher than
the sales achieved in 1997 of $4,367,357. A general water service rate
increase of 4.1% that became effective on February 1, 1998 primarily
accounts for this increase. This rate increase more than offsets a 5%
rate reduction that took place on July 1, 1997 as a result of the
repeal of the Connecticut Gross Receipts tax. Consumption in 1998,
for the most part, is only slightly ahead of consumption levels in 1997.
In 1997, water service revenues were $12,414 lower than the revenues
achieved in 1996 principally due to the 5% rate reduction. The rate
reduction, however, was somewhat offset by increased consumption
in 1997 vs. 1996 by the Company's residential class of customers.
PAGE 12
Operating Expenses
Operating expenses of $2,363,523 in 1998 have decreased $120,352, or
4.8%, over total operating expenses of $2,483,875 for 1997. Decreased
costs associated with professional fees, casualty insurance,
uncollectible expenses, pension expense and post retirement benefits
principally account for this variance. Operating expenses in 1997 were
$89,145 higher than in 1996 primarily as a result of special services
relating to professional fees.
Maintenance Expenses
Maintenance expenses of $162,126 for 1998 are $23,005 or 12.4% lower
than maintenance expenses of $185,131 for 1997. Lower expenses
relating to main maintenance and service repairs principally contribute
to this favorable variance. Maintenance expense in 1997 was $39,931
lower than 1996, also due to lower main maintenance and service repair
costs.
Depreciation Expense
Depreciation expense for 1998 of $488,386 exceeds depreciation expense
for 1997 of $439,116 by $49,270. Depreciation expense relating to an
increasing amount of general plant additions made in 1998 and 1997
accounts for this variance. Depreciation expense in 1997 was $44,057
higher than in 1996, due to the continuation of plant additions.
Taxes other than Income Taxes
Taxes other than income taxes of $274,863 in 1998 are $131,697 lower
than the expense of $403,560 in 1997. The repeal of the Connecticut
Gross Receipts tax that became effective July 1, 1997 and lower
property taxes due to the disposition of property in Derby, Connecticut
account for this variance. 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 Gross Receipts tax also accounted for the reduction
from 1996.
Income Taxes
Income tax expense from operations in 1998 of $210,934 is $141,220
higher than income tax expense recorded in 1997. Increased operating
earnings in 1998 principally account for this variance. Taxes on the
Company's income from operations were $69,714 in 1997 and $128,459
in 1996. 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.
PAGE 13
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 $1,756,937, $258,476
and $382,107 in 1998, 1997 and 1996, respectively. The Company's total
income tax liability including both the tax on operating income and on
land sale gains was $1,967,871 in 1998, $328,190 in 1997 and $510,566
in 1996.
Land Dispositions
When the Company disposes of land, any gain recognized, net of tax, is
shared between ratepayers 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 $3,354,240 in 1998, $195,457 in 1997 and $386,709
in 1996, 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 $153,225, $175,744 and $161,065 for the
years 1998, 1997 and 1996, 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 of
the Financial Statements.
Other Income
Other income in 1998 of $121,571 is $29,137 lower than other income of
$150,708 achieved in 1997. Decreased jobbing income and lower fees
associated with the Company's managed system account for the decline
Other income in 1997 of $150,708 is $70,652 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.
Interest Expense
Interest expense of $613,322 in 1998 is $26,671 lower than interest
charges of $639,993 recorded in 1997. Lower interest charges due to
decreased short-term borrowings account for this decline. Interest
expense in 1997 was $50,209 higher than interest charges in 1996.
PAGE 14
Interest charges relating to increased short-term borrowing in 1997
account for this variance.
Inflation
Inflation, as measured by the Consumer Price Index, increased 1.6
percent, 1.7 percent and 3.3 percent in 1998, 1997 and 1996,
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 Company 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 1998, 1997 and 1996, 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 $968,556,
$489,361 and $456,951, respectively (see Statement of Cash Flows).
Net cash provided by operating activities increased $479,225 from 1997
to 1998. Increases in operating income and accounts payable principally
accounts for this variance.
During the three-year period 1996, 1997 and 1998, 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.
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 1998, 1997
and 1996, the Company's additions to utility plant, net of customer
advances, cost $1,597,247, $1,281,242 and $1,461,152, 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 $4,512,000 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 had a $1,500,000 secured, term loan which
PAGE 15
was repaid in full on November 23, 1998. Principal and interest payments
were made monthly in 1998, up to the time of the repayment.
In 1998, the Company converted a $600,000 working capital line of credit
and a $1,500,000 secured line of credit to a two-year $2,100,000
revolving line of credit. In June, 2000, the Company will have
the option to convert any outstanding balance to a six-year term note
with a 20-year amortization schedule, resulting in a balloon payment at
the end of the six-year term. The revolving line of credit is 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. There were no borrowings outstanding on the
revolving line of credit on December 31, 1998.
The interest rate on the revolving line of credit is a variable option
of 30- or 90-day LIBOR plus 100 basis points or prime. The term option
consists of a fixed rate of the bank's cost of funds plus 100 basis
points or a variable rate of the prime rate or 90 day LIBOR plus 100
basis points which is reset every 90 days.
The Company's 1999 Capital Budget of $1,800,000 is two-tiered. The
first tier consists of typical capital improvements made each year for
services, hydrants and meters budgeted for $550,000 in 1999 and is
expected to be financed primarily with internally generated funds.
The second tier of the 1999 Capital Budget consists of replacements and
betterments which are part of the Company's Long Term Capital Improvement
Program and includes $1,250,000 of budgeted plant additions. The Company
believes that the balance of the net proceeds from the 1998 land sales
described below, after the 1998 repayment of debt and the investment in
new facilities in 1998, will be sufficient to finance the 1999 budgeted
Long Term Capital Improvement Program. Plant additions from this part of
the capital budget, in the future years, 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.
The Company believes that by selling excess lands it can generate
sufficient equity capital to support its 5 year capital budget,
currently estimated at $10,000.000. 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 January 21, 1998, the Company sold to the City of Derby, Connecticut,
145 acres of land in Derby, Connecticut for $1,800,000. The total gain
from the sale amounted to $910,306 of which $81,983 was deferred and
will be recognized over a 3-year period, as approved by the DPUC.
On April 29, 1998, the Company sold 2.9 acres of land in Woodbridge,
Connecticut for the development of a single-family home for $96,000.
The total gain from the sale amounted to $28,955 of which $9,243 was
PAGE 16
deferred and will be recognized over a 10-year period as approved
by the DPUC.
The Company also sold, on November 23, 1998, 229 acres of land in
Seymour and Oxford, Connecticut to the Town of Seymour. This parcel
was sold below market value, and as a result, the transaction was
classified as a bargain sale for income tax purposes. The net gain from
the sale amounted to $1,010,209 of which $90,965 was deferred and will
be recognized over a 3-year period as approved by the DPUC. As a result
of the bargain sale, the net gain also includes tax deductions of
$177,064 of which $98,900 will be carried forward to reduce the
Company's tax liability in subsequent years.
On December 3, 1998, the Company sold 515 acres of land in Oxford and
Seymour, Connecticut to The Trust for Public Land for $3,220,000. The
Trust for Public Land, in turn, simultaneously sold the property to
the Town of Oxford for the same price. This parcel was also sold below
market value, and therefore, the transaction was classified as a bargain
sale for income tax purposes. The net gain from the sale amounted to
$1,743,998 of which $157,037 was deferred and will be recognized over
a 3-year period as approved by the DPUC. As a result of the bargain
sale, the net gain includes tax deductions of $329,274 of which $184,100
will be carried forward to reduce the Company `s tax liability in
subsequent years.
As of December 31, 1998, the Company has approximately 360 additional
acres of excess land available for sale. That land consists of land
currently classified as Class III, non-watershed land under the
statutory classification system for water company lands.
Included in the unsold acreage is a 245-acre parcel of land in Seymour
which is under contract for sale to M/1 Homes LLC ("M/1 Homes"). In
1997, the Company had entered into a contract to sell the parcel to
M/1 Homes by December 31, 1998 for a purchase price of $3,950,000.
Because M/1 Homes had been unable to secure various land use approvals
for the part of its development plan that included construction of an
18-hole golf course, it has amended its development plan. The delays
caused by, among other things, the modified development plan, resulted
in M/1 Homes requesting that the Company extend the closing deadline
beyond the original December 31, 1998 date. The Company and M/1 Homes
recently agreed to a contract amendment extending the closing date to
June 30, 1999 and providing for certain other modifications to the
agreement. The amended agreement contemplates, instead of a golf course,
the donation by M/1 Homes of over 50% (approximately 130 acres) of the
acreage included in the transaction to the Town of Seymour for open
space purposes. Among other things, the modified agreement also
provides for a $70,000 increase in the purchase price to $4,020,000, of
which $2,370,000 will be payable at the closing, and the $1,650,000
balance within one year from the closing. Payment of the deferred
portion of the purchase price will be secured by a first mortgage on a
portion of the property in favor of the Company. The original 1997
agreement had been approved by the DPUC, and the amendment also must
PAGE 17
be so approved. The Company has applied to the DPUC for such approval
but cannot predict whether or not the DPUC will grant it. The Company
knows of no reason, however, why such approval should not be granted.
The agreement may also be terminated by M/1 Homes if it does not obtain
all required land use approvals, such as local site plan and inland
wetlands approvals, by the scheduled closing date. The Company cannot
predict whether or not M/1 Homes will be able to obtain all of the
required approvals. In the event the DPUC approves the amendment and
M/1 Homes terminates the agreement because of its inability to obtain
the required approvals, the Company is entitled to retain the $100,000
deposit made toward the purchase price by M/1 Homes.
The Company also has approximately 600 acres of unsold land associated
with the Company's former Quillinan Reservoir in Ansonia. The Company
recently received approval from the Department of Public Health for its
5-year update to the Company's Comprehensive Water Supply Plan, which
called for the abandonment of its Quillinan Reservoir. Upon receipt by
the Company of an abandonment permit from the Department of Public
Health, the land associated with the former reservoir becomes
available for sale by the Company for the first time. The land
associated with the former Quillinan Reservoir is currently subject to
the lien of the Company's Mortgage Indenture, and the Company
will need to secure the release of that lien prior to the consummation
of any sale. The trustee under the Mortgage Indenture pursuant to which
the Company's First Mortgage Bonds are issued is not, pursuant to the
terms of that Mortgage Indenture, required to grant such release. The
Company believes, however, that it will be able to obtain the required
release.
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 1997 totaled $45,581 and in 1998, $52,493.
PAGE 18
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, 1998 and 1997, and the related statements of
income and retained earnings and cash flows for each of the three years
in the period ended December 31, 1998. 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, 1998 and 1997 and the results of
its operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted
accounting principles.
February 3, 1999
Bridgeport, Connecticut
Balance Sheets
<TABLE>
December 31,
<S> <C> <C>
1998 1997
Assets
Utility plant $20,622,907 $19,045,629
Accumulated depreciation (6,189,596) (5,834,113)
14,433,311 13,211,516
Current assets:
Cash and cash equivalents 2,696,706 62,699
Accounts receivable, net of
allowance for doubtful
accounts of $50,000 in 1998
and 1997. 493,165 604,627
PAGE 19
Accrued utility and other revenue 361,448 375,327
Materials and supplies 62,046 56,976
Prepayments 42,643 15,068
Total current assets 3,656,008 1,114,697
Deferred charges 377,182 1,148,510
Unamortized debt expense 170,481 176,057
Income taxes recoverable 414,078 446,551
Other assets 467,826 394,096
1,429,567 2,165,214
$19,518,886 $16,491,427
Shareholders' Equity and Liabilities
Shareholders' equity:
Common stock, no par value;
authorized 2,000,000 shares;
issued and outstanding (1998,
775,158 shares; 1997, 761,702
shares) $ 2,427,752 $ 2,266,027
Retained earnings 5,219,875 1,831,377
7,647,627 4,097,404
Notes payable _ 1,150,000
Long term debt 4,418,000 4,512,000
4,418,000 5,662,000
Current liabilities:
Notes payable _ 1,355,000
Current portion of note payable
and long term debt 94,000 169,000
Accounts payable and accrued
liabilities 2,456,271 454,659
Total current liabilities 2,550,271 1,978,659
Customers' advances for construction 1,261,090 1,238,339
Contributions in aid of construction 1,043,719 851,154
Regulatory liability - income taxes
refundable 172,356 179,916
Deferred income taxes 1,391,476 1,695,608
Deferred income on dispositions of land 1,034,347 788,347
Commitments and contingent liabilities
(Note 13) _ _
4,902,988 4,753,364
$19,518,886 $16,491,427
</TABLE>
See notes to financial statements
PAGE 20
Statements of Income and Retained Earnings
<TABLE>
Years Ended December 31,
<S> <C> <C> <C>
1998 1997 1996
Operating revenues:
Residential and commercial $3,319,318 $3,335,743 $3,325,758
Industrial 148,367 160,307 169,070
Fire protection 657,005 621,592 628,558
Public authorities 95,135 82,488 74,320
Other 175,086 167,227 182,065
4,394,911 4,367,357 4,379,771
Operating deductions:
Operating expenses 2,363,523 2,483,875 2,394,730
Maintenance expenses 162,126 185,131 225,062
Depreciation 488,386 439,116 395,059
Taxes, other than income taxes 274,863 403,560 509,799
Taxes on income 210,934 69,714 128,459
3,499,832 3,581,396 3,653,109
895,079 785,961 726,662
Amortization of deferred income
on dispositions of land (net of
income taxes of $108,175 in 1998,
$124,718 in 1997 and $115,977
in 1996) 153,225 175,744 161,065
Operating income 1,048,304 961,705 887,727
Other income, net 121,571 150,708 80,083
Income before interest expense 1,169,875 1,112,413 967,810
Interest expense 613,322 639,991 589,782
PAGE 21
Income from dispositions of land
(net of income taxes of $1,648,762
in 1998, $133,758 in 1997 and
$266,130 in 1996) 3,354,240 195,457 386,709
Net income 3,910,793 667,879 764,737
Retained earnings, beginning
of year 1,831,377 1,619,188 1,235,482
Dividends 522,295 455,690 381,031
Retained earnings, end of year $5,219,875 $1,831,377 $1,619,188
Earnings per share, basic $ 5.10 $ .88 $ 1.02
Earnings per share, diluted $ 4.95 $ .87 $ 1.02
PAGE 22
Dividends per share $ .68 $ .60 $ .50
</TABLE>
See notes to financial statements
Statements of Cash Flows
<TABLE>
Years Ended December 31,
<S> <C> <C> <C>
1998 1997 1996
Cash flows from operating activities:
Net income $ 3,910,793 $ 667,879 $ 764,737
Adjustments to reconcile net
income to net cash provided
by operating activities:
Income from land dispositions (3,354,240) (195,457) (386,709)
Depreciation and amortization 551,498 491,208 453,116
Amortization of deferred income (153,225) (175,744) (161,065)
Deferred income taxes (2,033,909) (91,243) (302,617)
Allowance for funds used during
construction (46,639) (41,741) (20,262)
Change in assets and liabilities:
Decrease in accounts receivable
and accrued revenues 125,341 112,781 45,294
(Increase) in materials and
supplies (5,070) (5,183) (952)
(Increase) decrease in
prepayments (27,575) 19,518 (7,426)
Increase (decrease) in accounts
payable and accrued
liabilities 2,001,612 (292,657) 72,835
Net cash provided by operating
activities 968,586 489,361 456,951
Cash flows from investing
activities:
Capital expenditures (1,820,297) (1,359,886) (1,518,142)
Sales of utility plant 25,000 _ _
Proceeds from land disposition 6,916,000 475,000 1,041,350
Increase in deferred charges
and other assets (523,941) (306,790) (108,178)
Customer advances 223,050 78,644 56,990
Customer advances for construction _ _ (9,180)
Net cash provided by (used in) investing
activities 4,819,812 (1,113,032) (537,160)
PAGE 23
Cash flows from financing activities:
Borrowings under line of credit _ 1,205,000 275,000
Repayments of note payable and
long term debt (1,319,000) (169,000) (75,564)
Repayments of line of credit (1,355,000) (125,000) _
Debt issuance cost (10,590) _ (2,972)
Dividends paid, net (469,801) (410,109) (329,645)
Net cash provided by (used in)
financing activities (3,154,391) 500,891 (133,181)
Net increase (decrease) in cash 2,634,007 (122,780) (213,290)
Cash and cash equivalents, beginning
of year 62,699 185,479 398,869
Cash and cash equivalents,
end of year $ 2,696,706 $ 62,699 $ 185,479
</TABLE>
See notes to financial statements
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
PAGE 24
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. These advances
are partially refunded over a 10-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.
PAGE 25
Fair value of financial instruments
The carrying amount of cash and cash equivalents, trade accounts
receivable, and trade accounts payable approximates their fair values
due to their short-term nature. The carrying amount of note payable
and long term debt approximate fair value based on market conditions for
debt of similar terms and maturities.
Income taxes
Except for accelerated depreciation since 1981 (federal only), the tax
effect of contributions in aid of construction for the period January
1, 1987 through June 12, 1996, and in 1998 the tax effect of bargain
sale of land, 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 $241,724 at December 31, 1998
and $266,635 at December 31, 1997. 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.
PAGE 26
The Company has a 401(k) Plan. Employees are allowed to contribute a
percentage of salary, based on certain parameters. 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 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.
PAGE 27
Note 2
Utility Plant
<TABLE>
December 31,
<S> <C> <C>
1998 1997
Pumping, treatment and distribution $15,741,525 $14,590,321
Source of Supply 3,242,662 3,216,090
General Plant 1,313,180 1,146,517
Organization 30,219 30,219
20,327,586 18,983,147
Construction in process 295,321 62,482
$20,622,907 $19,045,629
</TABLE>
Note 3
Notes Payable
Notes Payable consists of a $2,100,000 two-year, secured line of credit,
which may, at the Company's option, at the end of the two-year period,
be converted into a six-year term loan with a 20-year amortization
schedule. During the revolving period, the Company can choose between
variable rate options of 30- or 90-day LIBOR plus 1.00%, or Prime plus
0%. The Company is required to pay only interest during the revolving
period. During the term period, the Company may choose among interest
rate options, including a fixed rate at 100 basis points over the bank's
six-year cost of funds or a 90-day rate at 1.00% over the 90-day LIBOR
rate.
The DPUC approved this transaction on September 16, 1998. The $2,100,000
two-year, secured line of credit replaces the Company's $1,500,000
secured line of credit and $600,000 unsecured working capital line of
credit, which expired during the second quarter of 1998. The two year,
secured line of credit is 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 for sale and requires the
maintenance of certain financial ratios and shareholders' equity of
$3,000,000.
There were no borrowings outstanding on the Revolving Line of Credit on
December 31, 1998.
The Company also maintained a $1,500,000 term loan which was paid in
full on November 23, 1998, as a result of the consummation of a land
sale between the Town of Seymour and the Company. The applicable
interest rate for that term loan was 8.18% and required annual
principal payments of $75,000.
PAGE 28
Note 4
Long Term Debt
<TABLE>
December 31,
<S> <C> <C>
1998 1997
First mortgage bonds, Series E. 9.64%,
due September 1, 2011 $4,512,000 $4,606,000
</TABLE>
Pursuant to its Mortgage Bond Indenture, the Company has outstanding,
a series of first mortgage bonds in the amount of $4,512,000 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 $4,292,000 was available to pay dividends at December 31,
1998 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>
December 31,
<S> <C> <C>
1998 1997
Accounts payable $ 179,967 $139,782
Accrued liabilities:
Interest 144,986 148,005
Taxes 1,785,452 (30,541)
Pension 281,286 160,597
Other 64,580 36,816
$2,456,271 $454,659
</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:
PAGE 29
<TABLE>
<S> <C> <C> <C>
Deferred Amortization To
Deferred Income Be Included In
Year Ending December 31: Income Taxes Operating Income
1999 $ 535,689 $192,731 $342,958
2000 293,049 108,490 184,559
2001 94,990 39,523 55,467
2002 51,873 21,511 30,362
2003 30,332 12,568 17,764
Thereafter 28,414 11,754 16,660
$1,034,347 $386,577 $647,770
</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>
December 31,
<S> <C> <C> <C>
1998 1997 1996
Municipal $194,472 $227,022 $225,320
Gross receipts _ 105,403 215,300
Payroll 80,391 71,135 69,179
$274,863 $403,560 $509,799
</TABLE>
The Connecticut Gross Receipts tax was repealed as of July 1, 1997
and as a result, water service rates were also reduced to reflect
that reduction.
Note 8
Income Taxes
The provisions for taxes on income for the years ended December 31,
1998, 1997 and 1996 consist of:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Current:
Federal $1,715,170 $ 119,666 $318,311
State 529,545 41,291 112,765
Deferred:
Federal:
Accelerated depreciation 76,240 96,384 81,714
Income on land dispositions (268,490) 83,117 15,127
PAGE 30
Investment tax credit (14,700) (14,700) (14,700)
Other 4,606 (12,207) (5,071)
State (74,500) 14,639 2,420
$1,967,871 $328,190 $510,566
</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>
<S> <C> <C> <C>
1998 1997 1996
Federal income tax at statutory
rates $1,998,791 $338,665 $433,603
Increase (decrease) resulting from:
State income tax, net of federal
benefit 398,669 17,590 72,828
Bargain sale portion of land
dispositions (392,950) _ _
Rate case expense 5,384 (21,508) 4,536
SFAS 106 expense in excess of
funding 713 750 768
Other, net (28,036) 7,393 13,531
Investment tax credit (14,700) (14,700) (14,700)
Total provision for income taxes 1,967,871 328,190 510,566
Taxes related to land
dispositions (1,756,937) (258,476) (382,107)
Operating provision for taxes $ 210,934 $69,714 $128,459
</TABLE>
Deferred tax liabilities (assets) were comprised of the following:
<TABLE>
<S> <C> <C>
1998 1997
Depreciation $1,724,831 $1,662,767
Investment tax credits 334,561 349,261
Other 217,701 244,573
Gross deferred tax liabilities 2,277,093 2,256,601
Land Sales (669,639) (326,650)
Alternative minimum tax _ (2,228)
Other (215,978) (232,115)
PAGE 31
Gross deferred tax assets (885,617) (560,993)
Total deferred income taxes $1,391,476 $1,695,608
</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, 1998, 1997 and 1996, fees paid amounted to $26,038,
$123,439 and $32,378, respectively.
Note 10
Allowance for Doubtful Accounts
<TABLE>
December 31,
<S> <C> <C> <C>
1998 1997 1996
Allowance for doubtful accounts,
beginning $50,000 $75,000 $75,000
Provision 9,389 28,251 43,237
Recoveries 17,047 3,051 8,549
Charge-offs (26,436) (56,302) (51,786)
Allowance for doubtful accounts,
ending $50,000 $50,000 $75,000
</TABLE>
Note 11
Pension and Other Postretirement Benefits
Pension Plan
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" (SFAS 132). The provisions of SFAS
132 revise the disclosure requirements related to pension and other
postretirement benefit plans. SFAS 132 does not change the measurement
or recognition of these plans.
The following provides a reconciliation of benefit obligations, plan
assets and funded status of the plans.
PAGE 32
Pension Benefits Other Postretirement Benefits
<TABLE>
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Change in Benefit Obligation:
Benefit obligation, beginning
of year $851,292 $742,517 $449,159 $431,219
Service cost 44,549 48,297 14,186 19,779
Interest cost 52,384 53,319 24,249 30,709
Actuarial loss/(gain) (90,428) 30,331 (89,341) (10,984)
Benefits paid (25,035) (23,172) (26,797) (21,564)
Benefit obligation, end of year 832,762 851,292 371,456 449,159
Change in Plan Assets:
Fair value, beginning of year 625,767 502,793 271,622 214,759
Actual return on plan assets 16,277 94,454 3,094 33,363
Employer contribution 65,000 51,692 _ 23,500
Benefits paid (25,035) (23,172) _ _
Fair value, end of year 682,009 625,767 274,716 271,622
Funded Status (150,753) (225,525) (96,740) (177,537)
Unrecognized net actuarial
gain/(loss) 107,163 161,758 (258,391) (203,080)
Unrecognized transition
obligation 76,333 82,205 355,292 380,670
Unrecognized prior service cost (39,674) (41,928) _ -
Prepaid (accrued) benefit cost $ (6,931) $(23,490) $ 161 53
Weighted-average Assumptions as
of December 31:
Discount rate 7% 7% 7% 7%
Expected return on plan assets 8% 8% 8% 8%
Rate of compensation increase 5% 5% 5% 5%
</TABLE>
For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5.5% for 2004 and remain at that level
thereafter.
Net periodic pension and other postretirement benefit costs include the
following components:
PAGE 33
Pension Benefits Other Postretirement Benefits
<TABLE>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1998 1997 1996
Components of Net Periodic
Benefit Cost:
Service Cost $ 44,549 $ 48,297 $40,780 $ 14,186 $ 19,779 $19,612
Interest Cost 52,384 53,319 46,694 24,249 30,709 29,385
Expected return on
plan assets (52,110) (41,153)(37,757) (21,730) (16,107)(13,622)
Amortization of
unrecognized
transition obligation 5,872 5,872 5,872 25,378 25,378 25,378
Amortization of
unrecognized
prior service cost (2,254) (2,254) (2,254) _ _ _
Recognized net actuarial
gain _ 9,980 8,065 (15,394) (14,748)(11,366)
Net periodic benefit
cost $ 48,441 $ 74,061 $61,400 $26,689 $ 45,011 $49,387
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan.
A one-percentage-point change in assumed health care cost trend rates
would have the following effects:
<TABLE>
<S> <C> <C>
1-percentage 1-percentage
Point Increase Point Decrease
Effect on total of service and
interest cost components $ 6,102 $ (5,716)
Effect on postretirement benefit
obligation $52,973 $(48,649)
</TABLE>
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 of $0, $23,500 and $28,480
in 1998, 1997 and 1996, respectively.
The employment contract of the Company's former President required
accounting for benefits payable in accordance with SFAS 106. The
accumulated present value of future benefits was recognized during
his term of service to the Company which ended on October 1, 1998.
The liability recorded at December 31, 1998 and 1997 was $254,300
and $136,650, respectively. At December 31, 1998, an amount of
$195,300 has been included in other assets relating to a regulatory
asset for costs which were included in the Company's rate case.
Employer matching contributions to the 401(k) plan were $23,568,
$17,645 and $14,372 in 1998, 1997 and 1996.
PAGE 34
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>
1998 1997 1996
Weighted average shares outstanding
for earnings per share, basic 766,461 759,495 754,449
Incremental shares from assumed
conversion of stock options 23,000 8,051 _
Weighted average shares outstanding
for earnings per share, diluted 789,461 767,546 754,449
</TABLE>
See note 18
Note 13
Commitments and Contingent Liabilities
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 $1,800,000 for capital expenditures in 1999,
$550,000 of which is expected to be necessary to meet its service
obligations for the coming year.
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 $705,162, $691,166 and $680,125 for the years 1998, 1997
and 1996, respectively. The purchase price is based on South Central
Connecticut Regional Water Authority's wholesale rate. At December 31,
1998, this rate was $1,150 per million gallons. This agreement expires
December 31, 2015 and provides for two ten-year extensions at the
Company's option.
PAGE 35
Note 14
Year 2000 Compliance
The Company is currently evaluating its exposure to the Year 2000
problem and taking steps to be Year 2000 compliant. In general terms,
the problem arises from the fact that many existing computer systems
and other equipment containing date-sensitive embedded technology
use only two digits to identify a year in the date field, with
the assumption that the first two digits of the year are always "19".
As a result, such systems may misinterpret dates after December 31,
1999, which may result in miscalculations, other malfunctions or
the total failure of such systems.
The Company is currently evaluating its computer systems for compliance
with issues related to the Year 2000. As a result, the Company will
replace existing billing and accounting software with software that is
readily available on the market. Management anticipates its computer
systems will be fully compliant by the end of the second quarter of 1999.
The Company is also evaluating the Year 2000 compliance of systems and
equipment which are not linked to billing and accounting software and
has identified items that could be impacted by the Year 2000 problem.
For the items identified as possibly presenting a Year 2000 problem,
the Company has contacted suppliers, where possible, to obtain adequate
assurance that it is Year 2000 compliant or else is in the process of
determining and addressing any noncompliance. In addition, wherever
practical, the Company is independently testing the item for compliance.
In addition to its own systems and equipment, the Company depends upon
the proper function of computer systems and other date-sensitive
equipment of outside parties. These parties include other water
companies, banks, telecommunications service providers and electric and
other utilities. The Company has initiated communications with such
parties to determine the extent to which they are vulnerable to the
Year 2000 issue.
Due to the uncertainties presented by such third party Year 2000
problems, and the possibility that, despite its efforts, the Company
may be unsuccessful in preparing its internal systems and equipment
for the Year 2000, the Company is developing working plans for dealing
with its most reasonably likely worst-case scenario, many of which are
contained in the Company's approved Emergency Contingency Plan. The
Company's assessment of its most reasonably likely worst-case
scenario and the exact nature and scope of its contingency plans will
be affected by the Company's continued Year 2000 assessment. The
Company expects to complete such assessment and contingency planning
during the third quarter of 1999, and to have all contingency systems
in place and fully tested by the fourth quarter of 1999. Costs to meet
Year 2000 compliance are not expected to have a material impact on the
Company's financial position or results of operations.
PAGE 36
Note 15
Rate Matters
On July 18, 1997, the Company filed a rate application with the DPUC
for a 14.2 percent water service rate increase designed to provide a
$601,382 increase in annual water service revenues and a return on
equity of 12.95%. The Company subsequently revised its request to
$439,426 or an increase in annual revenues of 10.4 percent. On January
21, 1998, the DPUC granted the Company a 4.1 percent water service rate
increase designed to provide a $177,260 annual increase in revenues and
a 12.16% return on common equity.
Note 16
Equity
<TABLE>
<S> <C> <C>
Common Stock Number
of Shares Amount
Balance, January 1, 1997 757,892 $2,221,876
Stock issued through Dividend
Reinvestment Plan 3,810 45,581
Amortization of stock plan costs _ (1,340)
Balance, December 31, 1997 761,702 2,266,027
Stock issued through Dividend
Reinvestment Plan 2,956 52,493
Stock issued through Key Employee and
Non-Employee Stock Option Plans 10,500 110,250
Amortization of stock plan costs _ (1,018)
Balance, December 31, 1998 775,158 $2,427,752
</TABLE>
Stock option plans
The Company has three stock option plans, a non-employee director stock
option plan and two key employee incentive stock option plans. 40,000,
35,000 and 30,000 shares, respectively, were authorized under the
three 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 first Key Employee Plan was adopted in 1994 and
subsequently approved by the Company's shareholders and the DPUC in
1995. The second Key Employee Plan was adopted in 1998 and is subject
to approval by the shareholders and the DPUC in 1999. The following
table summarizes the transactions of the Company's stock option plans
for the three years ended December 31, 1998:
PAGE 37
<TABLE>
Granted Exercisable
<S> <C> <C> <C> <C>
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
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
Granted 12,500 $17.55
Exercised (10,500) $10.50
Outstanding at December
31, 1998 64,250 $11.81 50,500 $10.38
</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.
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.
Note 17
Supplemental Disclosure of Cash Flow Information and Noncash Financing
Activities
Cash paid for interest for the years ended 1998, 1997 and 1996 was
$616,341, $625,729 and $574,993, respectively.
PAGE 38
Cash paid for income taxes for the years ended 1998, 1997 and 1996 was
$428,600, $283,150 and $539,200, 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>
December 31,
<S> <C> <C> <C>
1998 1997 1996
Gross plant additions $1,820,297 $1,359,886 $1,518,142
Customers' advances for
construction (223,050) (78,644) (56,990)
$1,597,247 $1,281,242 $1,461,152
</TABLE>
Note 18
Subsequent Event
On January 11, 1999, the Company filed with the DPUC an Application for
Approval to Issue approximately 780,000 additional shares of common
stock in conjunction with a 2-for-1 stock split. The stock split was
approved by the Board of Directors in December, 1998, and by the
DPUC on February 26, 1999. No financial information contained in the
report has been adjusted to reflect the impact of the common stock
split. The following table represents earnings per share, giving
retroactive effect to the stock split.
<TABLE>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Earnings per share, basic $2.55 $ .44 $ .51 $ .35 $ .24
Earnings per share, diluted $2.48 $ .44 $ .51 $ .35 $ .24
</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 Utilities, Inc.
230 Beaver Street
P.O. Box 426
Ansonia, Connecticut 06401-0426
(203) 735-1888
