e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
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Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the fiscal year ended December 31, 2005
or
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Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to
Commission File Number 0-8084
Connecticut Water Service, Inc.
(Exact name of registrant as specified in its charter)
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Connecticut
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06-0739839 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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93 West Main Street, Clinton, CT
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06413 |
(Address of principal executive office)
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(Zip Code) |
Registrants telephone number, including area code (860) 669-8636
Registrants website: www.ctwater.com
Securities registered pursuant to Section 12 (b) of the Act:
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Title of each Class
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Name of each exchange on which registered |
None
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Not applicable |
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve (12)
months (or for such shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K, (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
As of
June 30, 2005, the aggregate market value of the registrants voting Common Stock held
by non-affiliates of the registrant was $200,641,536 based on the closing sale price as reported on
the NASDAQ.
Number
of shares of Common Stock, no par value, outstanding as of March 1, 2006 was 8,127,276,
excluding 55,536 common stock equivalent shares.
DOCUMENTS INCORPORATED BY REFERENCE
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Part of Form 10-K Into Which |
Document
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Document is Incorporated |
Definitive Proxy Statement, dated
on or about April 7, 2006, for
Annual Meeting of Shareholders to be held on May 11, 2006.
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Part III |
INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2005
3
This Form 10-K contains forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. Forward-looking statements should be read in conjunction with the
risk factors described in Item 1A below and the cautionary statements included in this Form 10-K in
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations under
the heading Forward Looking Information.
PART I
ITEM 1. BUSINESS
The Company
The Registrant, Connecticut Water Service, Inc. (referred to as the Company, we or our) was
organized in 1956. Connecticut Water Service, Inc. is a non-operating holding company, whose income
is derived from the earnings of its ten wholly-owned subsidiary companies. In 2005, approximately
88% of the Companys earnings from continuing operations were attributable to water activities
carried out within its three Connecticut regulated water companies: The Connecticut Water Company
(Connecticut Water), The Crystal Water Company of Danielson (Crystal), and The Unionville Water
Company (Unionville). These three companies supply water to 81,763 customers in 41 towns
throughout Connecticut. Each of these companies is subject to state regulation regarding financial
issues, rates, and operating issues, and to various other state and federal regulatory agencies
concerning water quality and environmental standards. In addition to its regulated utilities, the
Company owns seven unregulated companies: Chester Realty, Inc., a real estate company in
Connecticut; New England Water Utility Services, Inc., which provides contract water and sewer
operations and other water related services; Connecticut Water Emergency Services, Inc., a provider
of drinking water by tanker truck; Crystal Water Utilities Corporation, a holding company which
owns Crystal Water and three small rental properties; BARLACO Inc. (BARLACO), a real estate company
in Massachusetts; The Barnstable Holding Company, a holding company which owns Barnstable Water and
BARLACO and The Barnstable Water Company (Barnstable Water), a company that was a public service
company until its assets were sold to the Town of Barnstable in 2005. As a result of the sale of
the assets of Barnstable Water, results of its operations have been classified as discontinued
operations. In 2005, these unregulated companies, in conjunction with the regulated water
companies, contributed the remaining 12% of the Companys earnings from continuing operations
through real estate transactions as well as services and rentals.
Our mission is to provide high quality water service to our customers at a fair return to our
stockholders while maintaining a work environment that attracts, retains and motivates our
employees to achieve a high level of performance.
Our corporate headquarters are located at 93 West Main Street, Clinton, Connecticut 06413. Our
telephone number is 860.669.8636, and our Internet address is www.ctwater.com.
At this time, the Company has applied in February 2006 (Docket 06-02-02) to the Connecticut
Department of Public Utility Control (DPUC), to merge all of its Connecticut-based, regulated
utilities with and into Connecticut Water. On March 20, 2006, the DPUC issued a Draft Decision
which would approve this merger. If, and when, these combinations are completed, the resulting
entity, Connecticut Water, would consist of the current subsidiaries Crystal, Unionville, and
Connecticut Water. It is expected that future rate relief applications would propose rate
4
equalization steps, which, if approved would result, over time, in equalized rates for the
Companys customers in Connecticut. The Company believes it is likely that it will apply for a
rate increase for Connecticut Water, after the completion of the merger, during the summer of 2006.
The Companys annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, proxy statements and all amendments to these documents will be made available free of charge
through the INVESTOR INFO (SEC Filings) section of the Companys Internet website
(http://www.ctwater.com) as soon as practicable after such material is electronically filed with,
or furnished to, the Securities and Exchange Commission (the SEC). The following documents are also
available through the CORPORATE GOVERNANCE section of our website:
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Code of Conduct Board of Directors |
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Code of Conduct Employees |
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Audit Committee Charter |
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Compensation Committee Charter |
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Corporate Governance Committee Charter |
Copies of each of the Companys SEC filings (without exhibits) and corporate governance documents
mentioned above will also be mailed to investors, upon request by contacting the Companys
Corporate Secretary at Connecticut Water, 93 West Main Street, Clinton, CT 06413.
Our Regulated Business
Our business is subject to seasonal fluctuations and weather variations. The demand for water is
generally greater during the warmer months than the cooler months due to customers high water
consumption related to cooling systems and various outdoor uses such as private and public swimming
pools and lawn sprinklers. Demand will vary with rainfall and temperature levels from year to year
and season to season, particularly during the warmer months.
In general, the profitability of the water utility industry is largely dependent on the timeliness
and adequacy of rates allowed by utility regulatory commissions. In addition, profitability is
affected by numerous factors over which we have little or no control, such as costs to comply with
security, environmental, and water quality regulations. Inflation and other factors also impact
costs for construction, materials and personnel related expenses.
Costs to comply
with environmental and water quality regulations are substantial. Since the 1974
enactment of the Safe Drinking Water Act, we have spent approximately
$55,823,000 in constructing
facilities and conducting aquifer mapping necessary to comply with the requirements of the Safe
Drinking Water Act, and other federal and state regulations, of which $6,109,000 was expended in
the last five years. We are presently in compliance with current regulations, but the regulations
are subject to change at any time. The costs to comply with future changes in state or federal
regulations, which could require us to modify existing filtration facilities and/or construct new
ones, or to replace any reduction of the safe yield from any of our current sources of supply,
could be substantial.
5
Our water companies derive their rights and franchises to operate from special state acts that are
subject to alteration, amendment or repeal and do not grant us exclusive rights to our service
areas. Our franchises are free from burdensome restrictions, are unlimited as to time, and
authorize us to sell potable water in all the towns we now serve. There is the possibility that
the State of Connecticut could attempt to revoke our franchises and allow a governmental entity to
take over some or all of our systems. While we would vigorously oppose any such attempts, from
time to time such legislation is contemplated.
The rates we charge our water customers are established under the jurisdiction of and are approved
by a state regulatory agency. It is our policy to seek rate relief as necessary to enable us to
achieve an adequate rate of return. The following table shows information related to each of our
water companies most recent general rate filing.
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Year of Last |
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Allowed |
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Allowed |
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Rate |
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Return on |
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Return on |
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Decision |
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Equity |
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Rate Base |
Connecticut Water |
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1991 |
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12.7 |
% |
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10.74 |
% |
Crystal |
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2005 |
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10.0 |
% |
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7.55 |
% |
Unionville |
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1999 |
** |
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12.35 |
% |
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N/A |
* |
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* |
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Unionvilles rates were based on a return on equity methodology, not a rate base
methodology. |
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Beginning mid-2003, Unionville began imposing a 30% surcharge on its customers water bills to
recover financing and operating costs related to the construction and use of a water
interconnection with a neighboring water supplier. Annually the surcharge is subject to a
retroactive refund to ratepayers if total revenue for Unionville exceeds certain stipulated
amounts. To date, we have not been required to provide any such refunds. |
Our Water Systems
Our water infrastructure consists of 28 noncontiguous water systems in the State of Connecticut.
Our system, in total, consists of approximately 1,300 miles of water main and reservoir storage
capacity of 7.0 billion gallons. The safe, dependable yield from our 119 active wells and 18
reservoirs is approximately 49 million gallons per day. Water sources vary among the individual
systems, but overall approximately 35% of the total dependable yield
comes from reservoirs and 65%
from wells.
We supply water, and in most cases, fire protection to all or portions of 41 towns in Connecticut.
The following table lists the customer count, operating revenues and customer water consumption for
each of our water companies as of December 31, 2005.
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Number |
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Water |
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Customer Water |
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of |
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Revenues |
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Consumption |
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Water Company |
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customers |
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($000s) |
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(millions of gallons) |
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Connecticut Water |
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70,714 |
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$ |
41,537 |
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6,042 |
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Crystal |
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5,050 |
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2,778 |
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542 |
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Unionville |
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5,999 |
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3,138 |
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692 |
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Total |
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81,763 |
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$ |
47,453 |
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7,276 |
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6
The following table breaks down the above total figures by customer class:
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Water |
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Customer Water |
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Number of |
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Revenues |
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Consumption |
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Customer Class |
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customers |
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($000s) |
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(millions of gallons) |
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Residential |
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72,968 |
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$ |
29,980 |
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5,260 |
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Commercial |
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5,333 |
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5,619 |
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1,188 |
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Industrial |
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428 |
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1,538 |
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423 |
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Public Authority |
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580 |
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1,625 |
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405 |
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Fire Protection |
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1,526 |
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8,267 |
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0 |
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Other (including
non-metered accounts) |
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928 |
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424 |
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0 |
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Total |
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81,763 |
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$ |
47,453 |
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7,276 |
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Our water companies own various small, discrete parcels of land that are no longer required for
water supply purposes. At December 31, 2005, this land totaled approximately 370 acres. Over the
past years we have been slowly disposing of such excess land. The largest transaction to date has
been the donation of land by Crystal to the Town of Killingly, CT for protected open space purposes
over a three-year period, 2002 2004. In January 2004, the final parcel of land was transferred to
the Town. Over the three-year period the following acreage was donated to the Town under this
agreement:
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Year |
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Acres |
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After-tax Profit |
2002 |
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54 |
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$ |
293,000 |
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2003 |
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178 |
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$ |
942,000 |
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2004 |
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133 |
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$ |
707,000 |
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During 2005, the Company lowered the after-tax profit shown above by $353,000. This was due to an
ongoing audit by the Internal Revenue Service, which is examining the fair market value of the
property reflected on the Companys 2002, 2003 and 2004 tax returns. The Company continues to
believe the valuations used in those tax years filings are correct.
During 2005, the Company had one significant land transaction. Connecticut Water sold 74 acres of
land in Bristol, Connecticut for $475,000 resulting in a net profit of $256,000.
In December 2004,
Connecticut Water made a donation of approximately 60 acres of land to the Town of Plymouth, CT
for a new school. As a result of legislation passed in 2004, this donation was eligible for the
Connecticut corporate tax credit in the same manner as a donation for open space purposes. The
after tax profit from this transaction was $498,000. In 2005, this amount was increased by $37,000
primarily due to a higher valuation reflected on the Companys tax return as a result of an updated
appraisal.
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We also have a limited amount of land held by our unregulated companies. Included in this category
at December 31, 2005 was approximately 109 acres of land held by BARLACO, which we acquired in
February 2001 in conjunction with the Companys acquisition of The Barnstable Holding Company. In
February 2006, this land was sold to the Town of Barnstable for $1.0 million.
Additional information on Land Dispositions can be found in Item 7 Managements Discussion and
Analysis of Financial Conditions and Results of Operation Commitments and Contingencies.
Competition
Our water companies face competition, presently not material, from a few private water systems
operating within, or adjacent to, their franchise areas and from municipal and public authority
systems whose service areas in some cases overlap portions of our water companies franchise areas.
Employees
As of December 31, 2005, we employed a total of 191 persons. Our employees are not covered by
collective bargaining agreements.
On April 8, 2005, the Company was notified by the National Labor Relations Board, (NLRB) that the
International Union of Operating Engineers, Local 478 (Union) had petitioned the NLRB to organize
a vote by the Companys employees to authorize the Union to represent a portion of the Companys
employees for purposes of collective bargaining with the Company. A representation hearing was
conducted before the NLRB on April 18, 2005 in Hartford, CT. A vote concerning representation by
the Union of the Companys 99 employees eligible to be in the proposed bargaining unit was held on
May 19, 2005. A majority of the ballots cast were against the labor organization; therefore no
collective bargaining representative was selected.
Segments of Our Business
For management and financial reporting purposes we divide our business into three Business
segments: Water Activities, Real Estate Transactions, and Services and Rentals.
The Water Activities segment is comprised of our core regulated water activities to supply public
drinking water to our customers. This segment encompasses all transactions of all our regulated
companies with the exception of real estate transactions and services and rental activities.
Our Real Estate Transactions segment involves the sale or donation for income tax benefits of our
limited excess real estate holdings. These transactions can be effected by either our regulated or
unregulated companies. A breakdown of the net income of this segment between our regulated and
unregulated companies for the past three years is as follows:
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Gain (Loss) from Real Estate Transactions |
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Net
of Taxes from Continuing Operations |
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Regulated |
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Unregulated |
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Total |
2003 |
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$ |
942,000 |
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$ |
87,000 |
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$ |
1,029,000 |
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2004 |
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$ |
1,206,000 |
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$ |
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$ |
1,206,000 |
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2005 |
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$ |
(69,000 |
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$ |
8,000 |
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$ |
(61,000 |
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Our Services and Rentals segment provides contracted services to water and wastewater utilities and
other clients and also leases certain of our properties to third parties. Both our regulated and
unregulated companies offer these transactions. The types of services provided include contract
operations of water and wastewater facilities; Linebacker®, our service line protection
plan for public drinking water customers; and providing bulk deliveries of emergency drinking water
to businesses and residences via tanker truck. Our lease and rental income comes primarily from
telecommunication antennas placed on our water storage tanks by telecommunication companies, as
well as from the renting of residential and commercial property.
Some of the services listed above, including the service line protection plan and antenna leases,
have little or no competition. But there can be considerable competition for contract operations
of large water and wastewater facilities and systems. However, we have sought to develop a niche
market by seeking to serve smaller facilities and systems in our service areas where there is less
competition. The services and rentals segment, while relatively new and a small portion of our
overall business, has grown significantly over the past five years and now provides nearly 10
percent of our overall net income. The table below describes the net income generated by this
segment of our business from our regulated and unregulated companies for the past three years:
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Income from Services and Rentals from |
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Continuing Operations |
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Regulated |
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Unregulated |
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Total |
2003 |
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$ |
370,000 |
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$ |
322,000 |
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$ |
692,000 |
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2004 |
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$ |
436,000 |
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$ |
393,000 |
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$ |
829,000 |
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2005 |
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$ |
490,000 |
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$ |
455,000 |
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$ |
945,000 |
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ITEM 1A. RISK FACTORS
Because we incur annually significant capital expenditures, we depend on the rates we charge our
customers.
The water utility business is capital intensive. On an annual basis, we spend significant sums for
additions to or replacement of property, plant and equipment. Our ability to maintain and meet our
financial objectives is dependent upon the rates we charge our customers. These rates are subject
to approval by the Connecticut Department of Public Utility Control (DPUC). The Company is entitled
to file rate increase requests, from time to time, to recover our investments in utility plant and
expenses. Once a rate increase petition is filed with the DPUC, the ensuing administrative and
hearing process may be lengthy and costly. The timing of our rate increase requests are therefore
partially dependent upon the estimated cost of the administrative process
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in relation to the
investments and expenses that we hope to recover through the rate increase to the extent approved.
We can provide no assurances that any future rate increase request will be approved by the DPUC;
and, if approved, we cannot guarantee that these rate increases will be granted in a timely or
sufficient manner to cover the investments and expenses for which we initially sought the rate
increase. Additionally, the DPUC may rule that a company must reduce its rates.
Our operating costs could be significantly increased because of state and federal environmental and
health and safety laws and regulations.
Our water and wastewater services are governed by various federal and state environmental
protection and health and safety laws and regulations, including the federal Safe Drinking Water
Act, the Clean Water Act and similar state laws, and federal and state regulations issued under
these laws by the U.S. Environmental Protection Agency and state environmental regulatory agencies.
These laws and regulations establish, among other things, criteria and standards for drinking water
and for discharges into the waters of the United States and/or Connecticut. Pursuant to these laws,
we are required to obtain various environmental permits from environmental regulatory agencies for
our operations. We cannot assure that we have been or will be at all times in total compliance
with these laws, regulations and permits. If we violate or fail to comply with these laws,
regulations or permits, we could be fined or otherwise sanctioned by regulators. Environmental laws
and regulations are complex and change frequently. These laws, and the enforcement thereof, have
tended to become more stringent over time. While we have budgeted for future capital and operating
expenditures to maintain compliance with these laws and our permits, it is possible that new or
stricter standards could be imposed that will raise our operating costs. Although these costs may
be recovered in the form of higher rates, there can be no assurance that the DPUC would approve
rate increases to enable us to recover such costs. In summary, we cannot be assured that our costs
of complying with, or discharging liabilities under, current and future environmental and health
and safety laws will not adversely affect our business, results of operations or financial
condition.
Our business is subject to seasonal fluctuations which could affect demand for our water services
and our revenues.
Demand for our water during the warmer months is generally greater than during cooler months due
primarily to additional requirements for water in connection with irrigation systems, swimming
pools, cooling systems and other outside water use. Throughout the year, and particularly during
typically warmer months, demand will vary with temperature and rainfall levels. In the event that
temperatures during the typically warmer months are cooler than normal, or if there is more
rainfall than normal, the demand for our water may decrease and adversely affect our revenues.
Potential drought conditions may impact our ability to serve our current and future customers uses
of water and our financial results.
We depend on an adequate water supply to meet the present and future demands of our customers.
Drought conditions could interfere with our sources of water supply and could adversely affect our
ability to supply water in sufficient quantities to our existing and future customers. An
interruption in our water supply could have a material adverse effect on our financial condition
and results of operations. Moreover, governmental restrictions on water usage
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during drought
conditions may result in a decreased demand for our water, even if our water reserves are
sufficient to serve our customers during these drought conditions, which may adversely affect our
revenues and earnings.
Any future acquisitions we may undertake may involve risks and uncertainties.
An important element of our growth strategy is the acquisition and integration of water systems in
order to move into new service areas and to broaden our current service areas. We will not be able
to acquire other businesses if we cannot identify suitable acquisition opportunities or reach
mutually agreeable terms with acquisition candidates. It is our intent, when practical, to
integrate any businesses we acquire with our existing operations. The negotiation of potential
acquisitions as well as the integration of acquired businesses could require us to incur
significant costs and cause diversion of our managements time and resources. Future acquisitions
by us could result in:
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dilutive issuances of our equity securities; |
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incurrence of debt and contingent liabilities; |
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failure to have effective internal control over financial reporting; |
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fluctuations in quarterly results; and |
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other acquisition-related expenses. |
Some or all of these items could have a material adverse effect on our business as well as our
ability to finance our business and comply with regulatory requirements. The businesses we acquire
in the future may not achieve sales and profitability that would justify our investment and any
difficulties we encounter in the integration process, including in the integration of controls
necessary for internal control and financial reporting, could interfere with our operations, reduce
our operating margins and adversely affect our internal controls. In addition, as consolidation
becomes more prevalent in the water and wastewater industries, the prices for suitable acquisition
candidates may increase to unacceptable levels and limit our ability to grow through acquisitions.
Water supply contamination may adversely affect our business.
Our water supplies are subject to contamination, including contamination from the development of
naturally-occurring compounds, chemicals in groundwater systems, pollution resulting from man-made
sources, such as MTBE, and possible terrorist attacks. In the event that our water supply is
contaminated, we may have to interrupt the use of that water supply until we are able to substitute
the flow of water from an uncontaminated water source or provide additional treatment. We may
incur significant costs in order to treat the contaminated source through expansion of our current
treatment facilities, or development of new treatment methods. If we are unable to substitute water
supply from an uncontaminated water source, or to adequately treat the contaminated water source in
a cost-effective manner, there may be an adverse effect on our revenues, operating results and
financial condition. The costs we incur to decontaminate a water source or an underground water
system could be significant and could adversely affect our business, operating results and
financial condition and may not be recoverable in rates. We could also be held liable for
consequences arising out of human exposure to hazardous substances in our water supplies or other
environmental damage. For example, private plaintiffs have the right to bring personal injury or
other toxic tort claims arising from the presence of hazardous
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substances in our drinking water
supplies. Our insurance policies may not be sufficient to cover the costs of these claims.
The need to increase security may continue to increase our operating costs.
In addition to the potential pollution of our water supply as described above, in the wake of the
September 11, 2001 terrorist attacks and the ensuing threats to the nations health and security,
we have taken steps to increase security measures at our facilities and heighten employee awareness
of threats to our water supply. We have also tightened our security measures regarding the delivery
and handling of certain chemicals used in our business. We have and will continue to bear increased
costs for security precautions to protect our facilities, operations and supplies. These costs may
be significant. We are currently not aware of any specific threats to our facilities, operations or
supplies; however, it is possible that we would not be in a position to control the outcome of
terrorist events should they occur.
Key employee turnover may adversely affect our operating results.
Our success depends significantly on the continued individual and collective contributions of our
management team. The loss of the services of any member of our management team or the inability to
hire and retain experienced management personnel could harm our operating results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
The properties of our water companies consist of land, easements, rights (including water rights),
buildings, reservoirs, standpipes, dams, wells, supply lines, treatment plants, pumping plants,
transmission and distribution mains and conduits, mains and other facilities and equipment used for
the collection, purification, storage and distribution of water. Although our regulated water
companies own their principal properties in fee, substantially all of the properties owned by our
Unionville subsidiary is subject to liens as security for outstanding debt. In addition, in certain
cases, our water companies are parties to limited contractual arrangements for the provision of
water supply from neighboring utilities. We believe that our properties are in good operating
condition. Water mains are located, for the most part, in public streets and, in a few instances,
are located on land that we own in fee simple and/or land utilized pursuant to easement right, most
of which are perpetual and adequate for the purpose for which they are held.
The net utility plant balances of the water companies at December 31, 2005 were as follows:
|
|
|
|
|
|
|
Net Utility Plant |
|
Connecticut Water |
|
$ |
209,670,000 |
|
Crystal |
|
|
19,078,000 |
|
Unionville |
|
|
18,955,000 |
|
|
|
|
|
Total |
|
$ |
247,703,000 |
|
|
|
|
|
12
Sources of water supply owned, maintained, and operated by our regulated water companies include
eighteen reservoirs and fifty-one well fields. In addition, Connecticut Water has an agreement
with the Metropolitan District Commission (MDC) (a public water and sewer authority presently
serving the City of Hartford and portions of surrounding towns), which provides, among other
things, for the operation and maintenance by MDC of a filtration plant to supply up to 650,000
gallons of treated water per day for Connecticut Waters Collinsville System. Collectively, these
sources have the capacity to deliver approximately forty-seven million gallons of potable water
daily to the fifteen major operating systems in the following table. In addition to the principal
systems identified, our regulated water companies own, maintain, and operate thirteen small,
non-interconnected satellite and consecutive water systems that, combined have the ability to
deliver about one million gallons of additional water per day to their respective systems. For some
small consecutive water systems, purchased water may comprise substantially all of the total
available supply of the system.
Our regulated water companies own and operate fifteen water filtration facilities, having a
combined treatment capacity of approximately 26.33 million gallons per day. Of these facilities,
twelve are owned by Connecticut Water, two by Unionville, and one by Crystal.
The companies estimated available water supply, not including water purchases or non-principal
systems, is as follows:
|
|
|
|
|
|
|
ESTIMATED |
|
|
|
AVAILABLE SUPPLY |
|
|
|
(MILLION GALLONS PER |
|
|
|
DAY) |
|
Connecticut Water |
|
|
|
|
Guilford System |
|
|
9.31 |
|
Chester System |
|
|
1.69 |
|
Naugatuck System |
|
|
6.91 |
|
Terryville System |
|
|
0.94 |
|
Thomaston System |
|
|
0.73 |
|
Collinsville System |
|
|
0.65 |
|
Northern Western System |
|
|
15.99 |
|
Somers System |
|
|
0.28 |
|
Stafford System |
|
|
1.00 |
|
Crystal |
|
|
|
|
Danielson System |
|
|
3.69 |
|
Plainfield System |
|
|
1.01 |
|
Thompson System |
|
|
0.29 |
|
KIP System |
|
|
0.50 |
|
Gallup System |
|
|
0.60 |
|
Unionville |
|
|
3.88 |
|
|
|
|
|
Total |
|
|
47.47 |
|
|
|
|
|
As of December 31, 2005, the transmission and distribution systems of our three water
companies consisted of approximately 1,300 miles of main. On that date, approximately 75 percent
of our mains were eight-inch diameter or larger. Substantially all new main installations are
cement-lined ductile iron pipe of eight-inch diameter or larger.
13
The size of each companys system(s) in terms of miles of mains is as follows:
|
|
|
|
|
|
|
Miles of |
|
|
|
Transmission and |
|
|
|
Distribution Water |
|
|
|
Mains |
|
Connecticut Water |
|
|
1,100 |
|
Crystal |
|
|
90 |
|
Unionville |
|
|
110 |
|
|
|
|
|
Total |
|
|
1,300 |
|
|
|
|
|
We believe that our properties are maintained in good condition and in accordance with current
regulations and standards of good waterworks industry practice.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings from time to time. Although the results of legal
proceedings cannot be predicted with certainty, there are no pending legal proceedings to which we,
or any of our subsidiaries are a party, or to which any of our properties is subject, that presents
a reasonable likelihood of a material adverse impact on the Companys financial condition, results
of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
ITEM 5. MARKET FOR THE COMPANYS COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES
OF EQUITY SECURITIES
Our Common Stock is traded on the NASDAQ exchange under the symbol CTWS. Our quarterly high and
low stock prices as reported by NASDAQ and the cash dividends we paid during 2005 and 2004 are
listed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price |
|
Dividends |
Period |
|
High |
|
Low |
|
Paid |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
27.53 |
|
|
$ |
24.75 |
|
|
$ |
.2100 |
|
Second Quarter |
|
|
25.87 |
|
|
|
21.91 |
|
|
$ |
.2100 |
|
Third Quarter |
|
|
28.17 |
|
|
|
24.27 |
|
|
$ |
.2125 |
|
Fourth Quarter |
|
|
26.32 |
|
|
|
22.69 |
|
|
$ |
.2125 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
29.76 |
|
|
$ |
27.57 |
|
|
$ |
.2075 |
|
Second Quarter |
|
|
29.00 |
|
|
|
24.29 |
|
|
$ |
.2075 |
|
Third Quarter |
|
|
27.55 |
|
|
|
23.83 |
|
|
$ |
.2100 |
|
Fourth Quarter |
|
|
28.98 |
|
|
|
24.17 |
|
|
$ |
.2100 |
|
As of March 1, 2006, there were approximately 4,500 holders of record of our common stock.
We presently have paid or intend to pay quarterly cash dividends in 2006 on March 15, June 15,
September 15 and December 15 subject to our earnings and financial condition, regulatory
requirements and other factors our Board of Directors may deem relevant.
Purchases of Equity
Securities by the Company In May 2005, the Company adopted a common stock
repurchase program (Share Repurchase Program). The Share Repurchase Program allows the Company to
repurchase up to 10% of its outstanding common stock, or
approximately 812,000 shares, at a price or prices that are deemed
appropriate. As of December 31, 2005, no shares have been repurchased.
15
ITEM 6. SELECTED FINANCIAL DATA
SUPPLEMENTAL INFORMATION (Unaudited)
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, (thousands of dollars except per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amounts and where otherwise indicated) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
CONSOLIDATED STATEMENTS OF INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
$ |
47,453 |
|
|
$ |
46,008 |
|
|
$ |
44,598 |
|
|
$ |
43,278 |
|
|
$ |
42,885 |
|
Operating Expenses |
|
$ |
37,961 |
|
|
$ |
35,679 |
|
|
$ |
33,503 |
|
|
$ |
32,011 |
|
|
$ |
31,737 |
|
Operating Income |
|
$ |
9,492 |
|
|
$ |
10,329 |
|
|
$ |
11,095 |
|
|
$ |
11,267 |
|
|
$ |
11,148 |
|
Interest and Debt Expense |
|
$ |
4,017 |
|
|
$ |
3,742 |
|
|
$ |
4,482 |
|
|
$ |
4,348 |
|
|
$ |
4,422 |
|
Income from Continuing Operations |
|
$ |
7,166 |
|
|
$ |
9,163 |
|
|
$ |
8,890 |
|
|
$ |
8,318 |
|
|
$ |
8,637 |
|
Cash Common Stock Dividends Paid |
|
$ |
6,773 |
|
|
$ |
6,641 |
|
|
$ |
6,529 |
|
|
$ |
6,277 |
|
|
$ |
6,105 |
|
Dividend Payout Ratio from Continuing Operations |
|
|
95 |
% |
|
|
72 |
% |
|
|
73 |
% |
|
|
75 |
% |
|
|
71 |
% |
Weighted Average Common Shares Outstanding |
|
|
8,094,346 |
|
|
|
7,999,318 |
|
|
|
7,956,426 |
|
|
|
7,717,608 |
|
|
|
7,619,031 |
|
Basic Earnings Per Common Share from Continuing Operations |
|
$ |
0.89 |
|
|
$ |
1.15 |
|
|
$ |
1.11 |
|
|
$ |
1.08 |
|
|
$ |
1.13 |
|
Number of Shares Outstanding at Year End |
|
|
8,169,627 |
|
|
|
8,035,199 |
|
|
|
7,967,379 |
|
|
|
7,939,713 |
|
|
|
7,649,362 |
|
ROE on Year End Common Equity |
|
|
7.6 |
% |
|
|
10.4 |
% |
|
|
10.7 |
% |
|
|
10.4 |
% |
|
|
12.2 |
% |
Declared Common Dividends Per Share |
|
$ |
0.845 |
|
|
$ |
0.835 |
|
|
$ |
0.825 |
|
|
$ |
0.814 |
|
|
$ |
0.804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED BALANCE SHEET |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stockholders Equity |
|
$ |
94,076 |
|
|
$ |
87,865 |
|
|
$ |
83,315 |
|
|
$ |
79,975 |
|
|
$ |
70,783 |
|
Long-Term Debt |
|
$ |
77,404 |
|
|
$ |
66,399 |
|
|
$ |
64,754 |
|
|
$ |
64,734 |
|
|
$ |
63,953 |
|
Preferred Stock (Consolidated, Excluding Current Maturities) |
|
$ |
847 |
|
|
$ |
847 |
|
|
$ |
847 |
|
|
$ |
847 |
|
|
$ |
847 |
|
|
Total Capitalization |
|
$ |
172,327 |
|
|
$ |
155,111 |
|
|
$ |
148,916 |
|
|
$ |
145,556 |
|
|
$ |
135,583 |
|
Stockholders Equity (Includes Preferred Stock) |
|
|
55 |
% |
|
|
57 |
% |
|
|
57 |
% |
|
|
56 |
% |
|
|
53 |
% |
Long-Term Debt |
|
|
45 |
% |
|
|
43 |
% |
|
|
43 |
% |
|
|
44 |
% |
|
|
47 |
% |
Net Utility Plant |
|
$ |
247,703 |
|
|
$ |
241,776 |
|
|
$ |
235,098 |
|
|
$ |
229,097 |
|
|
$ |
202,330 |
|
Total Assets |
|
$ |
306,035 |
|
|
$ |
290,940 |
|
|
$ |
281,345 |
|
|
$ |
264,799 |
|
|
$ |
231,714 |
|
Book Value Per Common Share |
|
$ |
11.52 |
|
|
$ |
10.94 |
|
|
$ |
10.46 |
|
|
$ |
10.07 |
|
|
$ |
9.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING REVENUES BY
REVENUE CLASS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
29,980 |
|
|
$ |
28,951 |
|
|
$ |
27,831 |
|
|
$ |
27,310 |
|
|
$ |
27,318 |
|
Commercial |
|
|
5,619 |
|
|
|
5,444 |
|
|
|
5,327 |
|
|
|
5,141 |
|
|
|
5,024 |
|
Industrial |
|
|
1,538 |
|
|
|
1,633 |
|
|
|
1,616 |
|
|
|
1,709 |
|
|
|
1,687 |
|
Public Authority |
|
|
1,625 |
|
|
|
1,236 |
|
|
|
1,302 |
|
|
|
1,245 |
|
|
|
1,272 |
|
Fire Protection |
|
|
8,267 |
|
|
|
8,231 |
|
|
|
8,026 |
|
|
|
7,355 |
|
|
|
7,110 |
|
Other (including non-metered accounts) |
|
|
424 |
|
|
|
513 |
|
|
|
496 |
|
|
|
518 |
|
|
|
474 |
|
|
Total Operating Revenues |
|
$ |
47,453 |
|
|
$ |
46,008 |
|
|
$ |
44,598 |
|
|
$ |
43,278 |
|
|
$ |
42,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Customers (Average) |
|
|
81,763 |
|
|
|
87,259 |
|
|
|
86,145 |
|
|
|
82,119 |
|
|
|
78,156 |
|
Billed Consumption (Millions of Gallons) |
|
|
7,276 |
|
|
|
7,801 |
|
|
|
7,640 |
|
|
|
7,418 |
|
|
|
7,259 |
|
Number of Employees |
|
|
191 |
|
|
|
193 |
|
|
|
195 |
|
|
|
191 |
|
|
|
181 |
|
16
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Overview
The Company is a non-operating holding company, whose income is derived from the earnings of its
ten wholly-owned subsidiary companies. In 2005, approximately 88% of the Companys earnings from
continuing operations were attributable to water activities carried out within its three regulated
water companies: Connecticut Water, Crystal, and Unionville. The rates charged for service by
these regulated water companies are subject to regulation by the Connecticut DPUC. In 2005,
virtually all water activity income came from Connecticut Water, our largest subsidiary and water
company. Connecticut Water has not had an increase in its rates since 1991. Primarily due to the
construction of six major water treatment plants during the late 1970s and throughout the 1980s,
our overall investment in gross utility plant increased by $122,881,000, or 270%, from 1978 to
1991, which resulted in our water rates being amongst the highest in Connecticut. In 1991, we began
developing opportunities to increase revenues and earnings without raising regulated water rates.
Through these efforts we have successfully:
|
- |
|
until 2005, increased our consolidated earnings each year since 1991 without
increasing water rates, and; |
|
|
- |
|
continued increasing our common dividend payments per share during this period. |
For the first time since 1991, a regulated subsidiary of the Company increased its rates, effective
December 28, 2005. During the year, Gallup Water Service, Inc. (Gallup) was merged with and into
Crystal prior to the filing of an application for rate increase for the newly merged company. In
December 2005, Crystal was granted an across the board rate increase of 21.35%. We expect to seek
regulatory approval to increase rates charged in all of our Connecticut regulated water companies
in the summer of 2006. The material factors that have driven our decision to file for a rate
increase in 2006 are:
|
- |
|
Increases in infrastructure investment necessary to insure a safe, reliable
water system remains in place, |
|
|
- |
|
Modest historical and projected annual growth in regulated water sales of
approximately 1.5%, and; |
|
|
- |
|
Increases in operating costs such as utilities, wage, pension, medical, audit
and insurance costs. |
On a year-to-year basis our earnings are primarily influenced by weather patterns that affect our
customers water usage and thereby our revenues. Our revenues may fluctuate by as much as $1.5
million (or 3.0%) above or below a normal year because customers use more water in hot, dry years
and less water in cool, rainy years.
17
Regulatory Matters and Inflation
The Company, like all other businesses, is affected by inflation, most notably by the continually
increasing costs required to maintain, improve, and expand its service capabilities. The
cumulative effect of inflation over time results in significantly higher operating costs and
facility replacement costs, which must be recovered from future cash flows.
Our water companies are also subject to environmental and water quality regulations. Costs to
comply with environmental and water quality regulations are substantial. We are currently in
compliance with current regulations, but the regulations are subject to change at any time. The
costs to comply with future changes in state or federal regulations, which could require us to
modify current filtration facilities and/or construct new ones, or to replace any reduction of the
safe yield from any of our current sources of supply, could be substantial.
Our water companies ability to recover their increased expenses and/or investment in utility plant
is dependent on the regulatory rates they charge their customers. Changes to these rates must be
approved by the appropriate regulatory authority through formal rate proceedings. The rates of our
three Connecticut based water companies are regulated by the Connecticut DPUC. Due to the
subjectivity of certain items involved in the process of establishing rates such as future customer
growth, inflation, and allowed return on investment, we have no assurance that our water companies
will be able to raise their rates to a level we consider appropriate, or to raise their rates at
all, through any future rate proceeding.
The Company currently plans to merge all of its Connecticut subsidiaries into one company,
Connecticut Water. Further, the Company expects to apply for a rate increase in the summer of
2006.
Critical Accounting Policies and Estimates
The Companys consolidated financial statements are prepared in conformity with Generally Accepted
Accounting Principles in the United States of America (GAAP) and as directed by the regulatory
commissions to which the Companys subsidiaries are subject. (See Note 1 to the Consolidated
Financial Statements for a discussion of our significant accounting policies.) The Company
believes the following policies and estimates are critical to the presentation of its consolidated
financial statements.
Public Utility Regulation - Statement of Financial Accounting Standards Financial Accounting
Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires
cost based, rate-regulated enterprises such as the Companys water companies to reflect the impact
of regulatory decisions in their financial statements. The state regulators, through the rate
regulation process, can create regulatory assets that result when costs are allowed for ratemaking
purposes in a period after the period in which costs would be charged to expense by an unregulated
enterprise. The balance sheet includes regulatory assets and liabilities as appropriate, primarily
related to income taxes and post-retirement benefit costs. The Company believes, based on current
regulatory circumstances, that the regulatory assets recorded are likely to be recovered and that
its use of regulatory accounting is appropriate and in accordance with the provisions of FAS 71.
Material regulatory assets are earning a return.
18
Revenue Recognition Revenue from metered customers includes billings to customers based on
quarterly or monthly meter readings plus an estimate of water used between the customers last
meter reading and the end of the accounting period. The unbilled revenue amount is listed as a
current asset on the balance sheet. The amount recorded as unbilled revenue is generally higher
during the summer months when water sales are higher. Based upon historical experience,
management believes the Companys estimate of unbilled revenues is reasonable.
Pension Plan Accounting Management evaluates the appropriateness of the discount rate through the
modeling of a bond portfolio which approximates the Plan liabilities. Management further considers
rates of high quality corporate bonds of approximate maturities as published by nationally
recognized rating agencies consistent with the duration of the Companys Plans.
The discount rate assumption we use to value our pension benefit obligations has a material impact
on the amount of pension expense we record in a given period. Our 2005 and 2004 pension expense was
calculated using assumed discount rates of 5.75% and 6.25%, respectively. In 2006, our pension
expense will be calculated with an assumed discount rate of 5.50%. The following table shows how
much a one percent change in our assumed discount rate would have changed our reported 2005 pension
expense:
|
|
|
|
|
|
|
Increase |
|
|
(Decrease) |
|
|
in expense |
A 1% increase in the discount rate |
|
|
($316,000 |
) |
A 1% decrease in the discount rate |
|
|
$ 328,000 |
|
Outlook
The Companys earnings and profitability are primarily dependent upon the sale and distribution of
water, the amount of which is dependent on seasonal weather fluctuations, particularly during the
summer months when water demand will vary with rainfall and temperature levels. The Companys
earnings and profitability in future years will also depend upon a number of other factors, such as
the ability to maintain our operating costs at lower levels, customer growth in the Companys core
regulated water utility business, growth in revenues attributable to non-water sales operations,
and the timing and adequacy of rate relief if and when requested, from time to time, by our
regulated water companies.
The Company believes that the factors described above and those described in detail below under the
heading Commitments and Contingencies may have significant impact, either alone or in the
aggregate, on the Companys earnings and profitability in fiscal years 2006 and beyond. Please
also review carefully the risks and uncertainties described in Item 1A Risk Factors and described
below under the heading Forward Looking Information.
Based on the Companys current projections, the Company believes that its Net Income from
Continuing Operations for the year 2006, excluding the gain from the sale of BARLACO assets in
February 2006, will be materially reduced from the levels reported for the years 2003, 2004 and
2005. Any such reductions would likely be primarily attributable to lower net income (in the form
of reduced tax benefits) related to the Companys land disposition program, excluding the BARLACO
land sale. Since the sale of the assets of Barnstable, the results of operations for
19
Barnstable are included in discontinued operations, including any income earned under the
management contract. In addition, the regulated water company subsidiaries increased operating
costs, including depreciation on their investments in utility plant, will require the Companys
primary subsidiary, The Connecticut Water Company, to seek rate relief in 2006. Based upon
appropriate recovery of these costs in a timely manner based upon a rate increase application
expected to be filed in the summer of 2006, and taking into account the other factors discussed
impacting profitability and earnings, the Company believes that its net income should return to
levels achieved in recent years. However, there can be no assurance that the Company will be
able to recover costs in an appropriate and timely manner in 2006. During 2006 and subsequent
years, the ability of the Company to maintain and increase its net income comparable to historical
levels will principally depend upon the effect on the Company of the factors described above in
this Outlook section, those factors described in the section entitled Commitments and
Contingencies and the risks and uncertainties described in Forward Looking Information,
including the Companys plan to file for rate relief during 2006.
FINANCIAL CONDITION
Liquidity and Capital Resources
In recent years, we have financed the majority of investment in Utility Plant through internally
generated funds. In November 2005 two of our regulated subsidiaries, Connecticut Water and Crystal
issued $10 million and $5 million respectively of 35-year long-term debt. The following table
shows the total construction expenditures excluding non-cash contributed utility plant for each of
the last three years and what we expect to invest on construction projects in 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
|
|
Gross |
|
Funded by |
|
Construction |
|
|
Construction |
|
Developers & |
|
Funded by |
|
|
Expenditures |
|
Others |
|
Company |
2003 |
|
$ |
9,747,000 |
|
|
$ |
1,261,000 |
|
|
$ |
8,486,000 |
|
2004 |
|
$ |
11,045,000 |
|
|
$ |
2,665,000 |
|
|
$ |
8,380,000 |
|
2005 |
|
$ |
16,957,000 |
|
|
$ |
2,869,000 |
|
|
$ |
14,088,000 |
|
2006 (Projected) |
|
$ |
18,387,000 |
|
|
$ |
3,000,000 |
|
|
$ |
15,387,000 |
|
We currently fund our working capital requirements through our lines of credit with four banks,
which provide liquidity to satisfy ongoing cash needs. We consider the current aggregate
$15,500,000 lines of credit to be adequate to finance any expected short-term borrowing
requirements that may arise in 2006. All the lines have one-year lives and will expire on different
dates in 2006. We expect to renew the lines in 2006. The interest rates payable are variable and
fluctuate over time based on financial conditions. The weighted average interest rate on the
$4,750,000 aggregate balance outstanding at December 31, 2005 was 4.62%.
During 2003, interest rates fell to historically low levels. We took advantage of the low rates and
refinanced a portion of our long-term debt in the fourth quarter of 2003. In October 2003,
Connecticut Water borrowed $22.93 million from the issuance of Water Facilities Refunding Revenue
Bonds by the Connecticut Development Authority (the Authority). The bonds were sold in two series
with the following terms:
20
|
|
|
|
|
|
|
2003 A Series: $8,000,000 (Non-AMT)
|
|
4.40% Maturing 12/15/2020 |
|
|
2003 C Series: $14,930,000 (AMT)
|
|
5.00% Maturing 9/1/2022 |
The proceeds of the transaction were used to redeem the Series R and S first mortgage bonds of
Connecticut Water and paid for a portion of the expenses associated with the issuance.
During the first quarter of 2004, Connecticut Water refinanced an additional portion of its
long-term debt through the issuance of $12,500,000 of variable rate, taxable debenture bonds Series
2004 with a maturity date of January 4, 2029. The bonds were secured by an irrevocable direct pay
letter of credit issued by a financial institution, with a five-year term expiring in March 2009.
The proceeds of the sale of the bonds, which are general debt obligations of Connecticut Water,
were used to redeem the $12,050,000 aggregate principal amount of Connecticut Waters First
Mortgage Bonds (Series V) and to pay a portion of the expenses associated with the bonds
refunding.
In connection with the issuance of the bonds, Connecticut Water entered into an interest rate swap
transaction with a counterparty in the notional principal amount of $12,500,000. The interest rate
swap agreement provides that, beginning in April 2004 and thereafter on a monthly basis,
Connecticut Water will pay the counterparty a fixed interest rate of 3.73% on the notional amount
for a period of five years. In exchange, the counterparty began in April 2004 and thereafter on a
monthly basis, paying Connecticut Water a floating interest rate (based on 105% of the U.S. Dollar
one-month LIBOR rate) on the notional amount for a period of five years. The purpose of the
interest rate swap is to manage the Companys exposure to fluctuations in prevailing interest
rates.
In June 2004, Unionville secured $1.6 million through the Drinking Water State Revolving Fund for
costs incurred in developing a water interconnection with a neighboring water supplier. The funds
were used to pay off a portion of the balances outstanding under bank lines of credit. As of
December 31, 2005 the Company intends to prepay this debt in 2006.
On September 1, 2004, Connecticut Water refinanced a portion of its existing bond indebtedness.
Connecticut Water borrowed $9.55 million in sale proceeds from the issuance of Water Facilities
Refunding Revenue Bonds by the Authority. The bonds were sold in two series with the following
terms:
|
|
|
|
|
2004 A Series: $5,000,000 Variable Interest Maturing 7/1/2028
2004 B Series: $4,550,000 Variable Interest Maturing 9/1/2028 |
The proceeds of the transaction were used to redeem prior obligations to the Authority that were
secured by the Series T and Series U first mortgage bonds of Connecticut Water.
In November 2005, Connecticut Water borrowed $10 million through the issuance of Water Facilities
Revenue Bonds by the Connecticut Development Authority sold in one series with an interest rate of
five percent maturing on October 1, 2040. The proceeds from the sale of the bonds were used to
finance construction and installation of various capital improvements to the Companys existing
water systems.
In November 2005, Crystal borrowed $5 million through the issuance of Water Facilities Revenue
Bonds by the Connecticut Development Authority sold in a single series with an
21
interest rate of five percent maturing on October 1, 2040. The proceeds from the sale of the bonds
are being used to finance the construction of a water treatment plant in the Town of Killingly, CT
and to facilitate the interconnection of two systems in the Town of Killingly.
Barnstable Water Companys note payable was paid off in 2005 in connection with the sale of
Barnstable Waters assets. As a result of the prepayment, the Company paid the lender a prepayment
fee of $322,000.
Off-Balance Sheet Arrangements and Contractual Obligations
We do not use off-balance sheet arrangements such as securitization of receivables with any
unconsolidated entities or other parties. The Company does not engage in trading or risk management
activities (other than the interest rate swap agreement discussed above) and does not have material
transactions involving related parties.
The following table summarizes the Companys future contractual cash obligations as of December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Periods |
|
|
(in thousands of dollars) |
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
than 1 |
|
Years |
|
Years |
|
than 5 |
Contractual Obligations |
|
Total |
|
year |
|
2 and 3 |
|
4 and 5 |
|
years |
Long-Term Debt (LTD) |
|
$ |
79,735 |
|
|
$ |
2,331 |
|
|
$ |
14 |
|
|
$ |
16 |
|
|
$ |
77,374 |
|
Interest on LTD |
|
|
83,513 |
|
|
|
3,474 |
|
|
|
6,886 |
|
|
|
6,886 |
|
|
|
66,267 |
|
Operating Lease Obligations |
|
|
498 |
|
|
|
269 |
|
|
|
226 |
|
|
|
2 |
|
|
|
|
|
Purchase Obligations
(2)(3) |
|
|
30,396 |
|
|
|
876 |
|
|
|
1,464 |
|
|
|
1,416 |
|
|
|
26,641 |
|
Long-Term Compensation
Agreement (1) |
|
|
33,061 |
|
|
|
2,204 |
|
|
|
4,408 |
|
|
|
4,408 |
|
|
|
22,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (4)(5)(6) |
|
$ |
227,203 |
|
|
$ |
9,154 |
|
|
$ |
12,998 |
|
|
$ |
12,728 |
|
|
$ |
192,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Pension and post retirement contributions cannot be reasonably estimated beyond 2006 and
may be impacted by such factors as return on pension assets, changes in the number of plan
participants and future salary increases. |
|
(2) |
|
Connecticut Water has an agreement with the South Central Connecticut
Regional Water Authority (RWA) to purchase water from RWA. The agreement was signed on May 13,
2005 and will remain in effect for a minimum of ten (10) years
from that date. Connecticut Water has agreed to
purchase at least three million (3,000,000) gallons of water per calendar year from RWA. Water
sales to Connecticut Water are billed monthly at the most current RWA retail rate. |
|
(3) |
|
Unionville has an agreement with The Metropolitan District (MDC) to
purchase water from MDC. The agreement became effective on
October 6, 2000 for a term of fifty
(50) years beginning May 19, 2003, the date the water supply facilities related to the agreement
were placed in service. |
|
(4) |
|
Advances for Construction are non-interest bearing. |
|
(5) |
|
We pay refunds on Advances for Construction over a specific period of time based on operating
revenues related to developer-installed water mains or as new customers are connected to and take
service from such mains. After all refunds are paid, any remaining balance is transferred to
Contributions in Aid of Construction. The refund amounts are not included in the above table
because the refund amounts and timing are dependent upon several variables, including new customer
connections, customer consumption levels and future rate increases, which cannot be accurately
estimated. Portions of these refund amounts are payable annually through 2020 and amounts not paid
by the contract expiration dates become non-refundable. |
|
(6) |
|
We will fund these contractual obligations with cash flows from operations and liquidity
sources held by or available to us. |
22
Interim Bank Loans Payable at year-end 2005 was $4,750,000, which is $900,000 lower than at
the end of 2004.
During 2005, the Company incurred approximately $16.9 million of construction expenditures. The
Company financed such expenditures through internally generated funds, long-term debt issuances,
customers advances, contributions in aid of construction and short-term borrowings.
The Board of Directors has approved a $15.4 million construction budget for 2006, net of amounts to
be financed by customer advances and contributions in aid of construction. Funds primarily
provided by operating activities, short-term borrowings, and funds remaining in escrow from the $5
million Crystal debt issuance in November 2005, are expected to finance this
entire construction program given normal weather patterns and related operating revenue billings.
RESULTS OF OPERATIONS
On May 20, 2005, the Company completed the sale of the assets of the Barnstable Water Company to
the Town of Barnstable, Massachusetts. The sale of Barnstable Waters assets has been classified
as Discontinued Operations in the Consolidated Statements of Income due to the loss of a
management contract with the Town of Barnstable in January 2006. All of the results of Barnstable
Water, including current and prior years and the gain on the sale of the utilitys assets, have
been reclassified and are included as Discontinued Operations.
Overview of 2005 Results from Continuing Operations
Net Income from Continuing Operations for 2005 were $7,166,000, or $0.89 per basic share, a
decrease of $1,997,000, or $0.26 per basic share when compared to 2004. The decrease in earnings
was due to lower net income in our Water Activities and Real Estate business segments partially
offset by an increase in net income in our Services and Rentals segment.
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
Business segment |
|
In Net Income |
|
Water Activities |
|
$ |
(846,000 |
) |
Real Estate |
|
|
(1,267,000 |
) |
Services and Rentals |
|
|
116,000 |
|
|
|
|
|
Net Decrease |
|
$ |
(1,997,000 |
) |
Water Activities
The decrease in net income from water activities in 2005 was $846,000, or $ 0.10 per share, lower
than it was in 2004. A breakdown of the components of this decrease is as follows:
23
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
|
|
Increase |
|
Operating Revenues |
|
$ |
1,445,000 |
|
Operation and Maintenance expense |
|
|
2,178,000 |
|
Depreciation expense |
|
|
154,000 |
|
Income Taxes |
|
|
(256,000 |
) |
Taxes Other than Income Taxes |
|
|
206,000 |
|
Other Income |
|
|
49,000 |
|
Interest and Debt Expense (net of AFUDC) |
|
|
58,000 |
|
|
|
|
|
Net
(Decrease) |
|
|
($846,000 |
) |
|
|
|
|
The 3.1% increase in Operating Revenues is primarily due to the following:
|
|
a $1,220,000, or 3.3%, increase in metered revenues in 2005 which was due to increased
customer water consumption attributable to a hotter summer and a 1.5% increase in the number
of customers served; and |
|
|
|
a $225,000, or 2.5%, increase in non-metered revenues which was primarily due to increased
fire protection charges related to the expansion of our water system which increased the
number of fire hydrants and revenue generating mains upon which these charges are based. |
The $2,178,000 or 9.8% increase in Operation and Maintenance expense is primarily due to the
following expense increases:
|
|
|
|
|
|
|
Increase |
|
Utility Costs |
|
$ |
491,000 |
|
Pension expense |
|
|
317,000 |
|
Other employee benefit costs |
|
|
468,000 |
|
Legal services |
|
|
260,000 |
|
Other outside services |
|
|
133,000 |
|
Maintenance |
|
|
185,000 |
|
Labor |
|
|
148,000 |
|
Other |
|
|
176,000 |
|
|
|
|
|
Total |
|
$ |
2,178,000 |
|
|
|
|
|
The increase in Depreciation expense is due to the Companys investment in new utility plant.
The decrease in Income Tax expense is due primarily to lower pre-tax net income in 2005, partially
offset by flow through accounting related to book/tax timing differences.
The increase in Taxes Other Than Income Taxes is primarily due to increased municipal taxes related
to our increased investment in utility plant.
24
The increase in Interest and Debt Expense is due to the following:
|
|
|
Higher interest expense on long-term debt primarily due to the issuance of $15.0
million in new bonds in 2005; |
|
|
|
|
Higher other interest charges due primarily to increased commitment fees on the letters of credit associated with bonds
issued in 2004 plus higher interest expense on interim bank loans with higher interest rates; and |
|
|
|
|
Amortization of the debt issuance costs of the bonds issued in 2004 and 2005. |
Real Estate
The net income generated by the Real Estate
segment decreased $1,267,000, or $0.16 per share, in
2005 because there were no large sales or donations of land compared with the two donations of land
we made in 2004 and in 2005 the Company increased its tax reserves related to prior year land
donations.
Income from this business segment is largely dependent on the tax deductions received on
donations/sales of available land. This typically occurs when utility-owned land is deemed to be
not necessary to protect water sources. The Company currently does not project completing any
material land transactions in 2006 other than the sale of the BARLACO land, completed in February
2006.
Services and Rentals
Net income generated from the services and rental segment in 2005 increased $116,000, or $0.02 per
share, over 2004 levels. The increased net income is primarily due to a 15% increase in customer
enrollment in our service line maintenance program plus an increased number of leases and higher
lease rates charged to the telecommunications companies that lease space on our water storage tanks
for their antenna sites. The table below summarizes the income from these two lines of business in
this business segment for 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
Increase |
|
Service line contracts |
|
$ |
377,000 |
|
|
$ |
328,000 |
|
|
$49,000 or 15% |
Antenna leases |
|
$ |
462,000 |
|
|
$ |
401,000 |
|
|
$61,000 or 15% |
Overview
of 2004 Results from Continuing Operations
Net Income from Continuing Operations for 2004
were $273,000, or $0.04 per basic share higher
than in 2003. This increase in earnings from continuing operations was due to higher net income in
our Real Estate and Services and Rentals business segments, which more than offset a reduction in
net income from our Water Activities segment. The table below details the changes in net income by
business segment for Continuing Operations:
25
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
Business segment |
|
In Net Income |
|
Water Activities |
|
$ |
(41,000 |
) |
Real Estate |
|
|
177,000 |
|
Services and Rentals |
|
|
137,000 |
|
|
|
|
|
Net Increase |
|
$ |
273,000 |
|
Water Activities
The net income from water activities in 2004 was $41,000 lower than it was in 2003. A breakdown of
the components of this decrease is as follows:
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
Business segment |
|
(Decrease) |
|
Operating Revenues |
|
$ |
1,410,000 |
|
Operation and Maintenance expense |
|
|
1,250,000 |
|
Depreciation expense |
|
|
87,000 |
|
Income Taxes |
|
|
682,000 |
|
Taxes Other than Income Taxes |
|
|
157,000 |
|
Other Income |
|
|
40,000 |
|
Interest and Debt Expense (net of AFUDC) |
|
|
(685,000 |
) |
|
|
|
|
Net
(Decrease) |
|
$ |
(41,000 |
) |
The 3.2% increase in Operating Revenues was primarily due to:
|
|
a 1.9% increase in metered consumption in 2004 due to a hotter and drier summer and a 1.2%
increase in the number of customers served; |
|
|
|
a $288,000 increase in revenues from Unionvilles 30% rate surcharge that went into effect
mid-2003; and |
|
|
|
a $205,000 increase in fire protection revenues due to system expansion which increased the
number of fire hydrants and revenue generating mains upon which these charges are based. |
The $1,250,000 or 5.9% increase in Operation and Maintenance expense was primarily due to the
following expense increases:
|
|
|
|
|
|
|
Increase |
|
Sarbanes-Oxley Act Section 404 compliance |
|
$ |
738,000 |
|
Purchased Water |
|
|
261,000 |
|
Property and Liability Insurance |
|
|
223,000 |
|
|
|
|
|
Total |
|
$ |
1,222,000 |
|
The increase in Depreciation expense was due to the Companys investment in new utility plant.
Income tax expense increased in 2004 due to the $641,000 increase in book pre-tax income plus a
higher 2004 effective income tax rate due to flow through accounting related to book/tax timing
differences and a 2003 reduction in estimated tax liabilities associated with non-current periods.
26
The increase in Taxes Other Than Income taxes was primarily due to increased municipal taxes
related to our increased investment in utility plant.
The 16.5% decrease in Interest and Debt Expense was primarily due to the lowering of our interest
rates through the long-term debt refinancings that were completed in 2003 and 2004.
Real Estate
The net income generated by the Real Estate segment increased from 2003 primarily due to the tax
benefits of a 2004 donation of approximately 60 acres of land to the Town of Plymouth, CT in
addition to the donation of the final parcel of land to the Town of Killingly, CT under our 3-year
agreement with the Town. The 2004 and 2003 net income in this business segment were generated from
the following:
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
Donation of land to Town of Killingly, CT |
|
$ |
707,000 |
|
|
$ |
942,000 |
|
Donation of land to Town of Plymouth, CT |
|
|
498,000 |
|
|
|
|
|
Miscellaneous sales of real estate |
|
|
1,000 |
|
|
|
87,000 |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1,206,000 |
|
|
$ |
1,029,000 |
|
Services and Rentals
Net income generated from the Services and Rental segment in 2004 increased $137,000, or 20%, over
2003 levels. The increased net income was primarily due to a 19% increase in customer enrollment in
our service line maintenance program plus an increased number of leases and higher lease rates
charged to the telecommunications companies that lease space on our water storage tanks for their
antenna sites. The table below summarizes the major components of the increase in net income from
these two lines of business in this business segment for 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
Increase |
|
Service line contracts |
|
$ |
328,000 |
|
|
$ |
240,000 |
|
|
$88,000 or 37% |
Antenna leases |
|
$ |
401,000 |
|
|
$ |
330,000 |
|
|
$71,000 or 22% |
27
COMMITMENTS AND CONTINGENCIES
Security The Bioterrorism Response Act of 2001 required every public water system serving over
3,300 people to prepare Vulnerability Assessments (VA) of their critical utility assets. The last
of these assessments required to be filed by our companies were submitted to the U.S. Environmental
Protection Agency in June 2004 and was followed by updated Emergency Response Plans in December
2004, per statutory requirements. The information within the VA is not subject to release to the
public and is protected from Freedom of Information Act inquiries.
Investment in security-related improvements is a continuing process and management believes that
the costs associated with any such improvements would be eligible for recovery in future rate
proceedings.
Reverse Privatization Our water companies derive their rights and franchises to operate from
state laws that are subject to alteration, amendment or repeal, and do not grant permanent
exclusive rights to our service areas. Our franchises are free from burdensome restrictions, are
unlimited as to time, and authorize us to sell potable water in all towns we now serve. There is
the possibility that states could revoke our franchises and allow a governmental entity to take
over some or all of our systems. From time to time such legislation is contemplated.
Environmental and Water Quality Regulation The Company is subject to environmental and water
quality regulations. Costs to comply with environmental and water quality regulations are
substantial. We are presently in compliance with current regulations, but the regulations are
subject to change at any time. The costs to comply with future changes in state or federal
regulations, which could require us to modify current filtration facilities and/or construct new
ones, or to replace any reduction of the safe yield from any of our current sources of supply,
could be substantial.
28
Rate Relief Our three Connecticut operating subsidiaries, Connecticut Water, Crystal, and
Unionville, are regulated public utilities, which provide water services to their customers. The
rates that these companies charge their water customers are subject to the jurisdiction of the
regulatory authority of the Connecticut DPUC, which sets water rates for each company independently
because the systems are not interconnected.
The DPUC may authorize the Companys operating subsidiaries to charge rates which the DPUC consider
to be sufficient to recover the normal operating expenses of our operating subsidiaries, to provide
funds for adding new or replacing water infrastructure, and to allow our operating subsidiaries to
earn what the DPUC considers to be a fair and reasonable return on our invested capital.
The Company has filed with the DPUC to merge all of its Connecticut subsidiaries into Connecticut
Water in February 2006. On March 20, 2006, the DPUC issued a Draft Decision which would approve
this merger. Further, the Company expects that Connecticut Water will apply for a rate increase
during the summer of 2006.
Land Dispositions In the past, the Company has engaged in a program of land donations to
municipalities in Connecticut, which has resulted in net income (tax benefits) to the Company of
approximately $3.9 million. As previously disclosed, the land donation program under the Companys
agreement with the Town of Killingly, CT was completed in January 2004 with the donation of the
remaining parcel to the Town. The donation of this final parcel resulted in a net profit (tax
benefit) to the Company of $707,000 during the first quarter of 2004. The donation of land to the
Town of Plymouth, CT in December 2004 resulted in an additional $498,000 of net income. During
2005, the Company lowered the after-tax profit taken in 2002, 2003 and 2004 by $353,000. This
was due to an ongoing audit by the Internal Revenue Service, which is examining the fair market
value of the property reflected on the Companys 2002, 2003 and 2004 tax returns. The Company
continues to believe the valuations used in those tax years filings is correct.
During 2005, the Company has one significant land transaction. Connecticut Water sold 74 acres of
land in Bristol, Connecticut for $475,000 resulting in a net profit of $256,000 on the transaction.
The Company and its subsidiaries own additional parcels of land in Connecticut, which may be
suitable in the future for disposition, either by sale or by donation to municipalities, other
local governments or private charitable entities. These additional parcels would include certain
Class I and II parcels previously identified by the Connecticut DEP, which have restrictions on
development and resale.
During 2003 and 2004, the Company donated approximately 370 acres of land to municipalities in
Connecticut for public and/or open space purposes. These donations contributed approximately $1.0
million and $1.2 million, respectively to net income in those years, as a result of favorable tax
treatment under federal and Connecticut tax laws. The Company currently anticipates that it will
continue to pursue selected land sales and/or donations during fiscal years 2006, 2007 and 2008,
but at a reduced level. The Company currently does not project completing any material land
transactions in 2006, other than the BARLACO land sale. The Company is unable to predict if and
when any sales or donations of some or all of these
29
parcels may occur in the future and, if so, what amount of net income (tax benefits) may result
from any such sales or donations.
Amounts taken as tax benefits in prior years are subject to challenge by the taxing agencies. In
2005, the Company increased its tax reserves by approximately $400,000 for land valuation
allowances (See Taxes below).
Taxes On August 18, 2005, the Company was notified by the Internal Revenue Service (IRS) that
they would be conducting an audit of the Companys 2003 Federal Income Tax Return. The field work
portion of the audit is complete and the IRS has summarized its proposed adjustments. Other than a
proposed change to the value of donated land, none of the other changes are material. The Company
continues to believe that the value of donated land included in its 2003 Federal Income Tax Return
is correct. Discussions between the Company and the IRS are continuing. The Company does not
believe that IRS proposed changes would materially affect financial results.
The Company and its subsidiaries may be subject to a higher tax burden through changes in state
legislation. Also, the Companys future property tax burden may increase if state aid to towns is
decreased.
FORWARD LOOKING INFORMATION
This report, including managements discussion and analysis, contains certain forward-looking
statements regarding the Companys results of operations and financial position. These forward
looking statements are based on current information and expectations, and are subject to risks and
uncertainties, which could cause the Companys actual results to differ materially from expected
results.
Our water companies are subject to various federal and state regulatory agencies concerning water
quality and environmental standards. Generally, the water industry is materially dependent on the
adequacy of approved rates to allow for a fair rate of return on the investment in utility plant.
The ability to maintain our operating costs at the lowest possible level, while providing good
quality water service, is beneficial to customers and stockholders. Profitability is also
dependent on the timeliness of rate relief to be sought from, and granted by, the DPUC, when
necessary, and numerous factors over which we have little or no control, such as the quantity of
rainfall and temperature, industrial demand, financing costs, energy rates, tax rates, and stock
market trends which may affect the return earned on pension assets, and compliance with
environmental and water quality regulations. The profitability of our other revenue sources is
subject to the amount of land we have available for sale and/or donation, the demand for the land,
the continuation of the current state tax benefits relating to the donation of land for open space
purposes, regulatory approval of land dispositions, the demand for telecommunications antenna site
leases and the successful extensions and expansion of our service contract work. We undertake no
obligation to update or revise forward-looking statements, whether as a result of new information,
future events, or otherwise.
30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary market risk faced by the Company is interest rate risk. As of December 31, 2005,
the Company had no exposure to derivative financial instruments or financial instruments with
significant credit risk or off-balance-sheet risks. In addition, the Company is not subject in any
material respect to any currency or other commodity risk.
The Company is subject to the risk of fluctuating interest rates in the normal course of
business. The Companys exposure to interest fluctuations is managed at the Company and subsidiary
operations levels through the use of a combination of fixed rate long-term debt (and variable rate
borrowings) under financing arrangements entered into by the Company and its subsidiaries and the
use of the interest rate swap agreement discussed below. The Company has $15,500,000 current lines
of credit with four banks, under which interim bank loans payable at December 31, 2005 were
$4,750,000.
During the first quarter of 2004, Connecticut Water entered into a five-year interest rate
swap transaction in connection with the refunding of its First Mortgage Bonds (Series V). The
swap agreement provides for Connecticut Waters exchange of floating rate interest payment
obligations for fixed rate interest payment obligations on a notional principal amount of
$12,500,000. The purpose of the interest rate swap is to manage the Companys exposure to
fluctuations in prevailing interest rates. See Liquidity and Capital Resources section of Item 7
Managements Discussion and Analysis and Results of Operations above for further information.
The Company does not enter into derivative financial contracts for trading or speculative purposes
and does not use leveraged instruments.
Management believes that changes in interest rates will not have a material effect on income
or cash flow during 2006, although there can be no assurances that interest rates will not
significantly change.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Connecticut Water Service, Inc., and the Notes to
Consolidated Financial Statements together with the report of PricewaterhouseCoopers LLP are
included herein on pages F-7 through F-30.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
31
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures As of December 31, 2005, management, including the Companys
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and
operation of the Companys disclosure controls and procedures (as defined in Rule 13a-14(c) and
Rule13a-15(e)). Based upon, and as of the date of that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the disclosure controls and procedures were effective.
Managements Report on Internal Control Over Financial Reporting Internal control over financial
reporting (as defined in Exchange Act Rules 13a 15(f) and 15(d) 15(f)) is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting
principles.
Management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting. We have used the criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
conducting our evaluation of the effectiveness of the internal control over financial reporting.
Based on our evaluation, we concluded that the Companys internal control over financial reporting
is effective as of December 31, 2005. Our managements assessment of the effectiveness of the
Companys internal control over financial reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report which appears herein.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting Beginning in 2003, the Company implemented a
comprehensive plan to review, document, test the operational effectiveness, and evaluate the
processes and systems of internal controls over financial reporting, as required under Section 404
of the Sarbanes Oxley Act of 2002 and Public Accounting Oversight Board Standard No. 2, An Audit
of Internal Control Over Financial Reporting Performed in Conjunction With An Audit of Financial
Statements (Standard No. 2), which was adopted in June 2004.
There were no changes in the Companys internal control over financial reporting that occurred
during the Companys most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
32
ITEM 9B. OTHER INFORMATION
On January 6, 2006, the Company and Eric W. Thornburg entered into a letter agreement outlining the
terms and conditions of Mr. Thornburgs planned employment as the Companys next President and
Chief Executive Officer, effective March 1, 2006. Under the terms of employment, Mr. Thornburg
will receive an annual salary of $294,100, annual and long term incentive compensation as
determined by the Compensation Committee, certain other executive and relocation benefits, and
customary employee benefits offered to all of the Companys employees. A copy of the letter
agreement was filed by the Company as an exhibit to the Companys Form 8-K filed on January 11,
2006. On January 11, 2006, the Compensation Committee approved an award of 4,507 restricted shares
of the Companys common stock to Mr. Thornburg under the Companys 2004 Performance Stock Program.
On January 12, 2006, the Company announced that the Board of Directors at its January
11th meeting unanimously approved the appointment of Eric W. Thornburg as the Companys
next President and Chief Executive Officer. Mr. Thornburg, 45, was recently President of
Missouri-American Water and also led Government and Regulatory Affairs for American Waters central
region, spanning 15 states in the Midwest. He has also held leadership positions in Indiana and
Pennsylvania for American Water, a subsidiary of RWE, a German-based conglomerate and a Global 100
company. The Board of Directors also unanimously elected Mr. Thornburg to the Board of Directors,
effective January 11, 2006. Mr. Thornburg has been nominated for election as a Class III
director to serve a term expiring at the 2009 annual meeting of shareholders.
Mr. Thornburg assumed the President/CEO positions at the Company on March 1, 2006, succeeding
Marshall T. Chiaraluce, who had served as the Companys President and Chief Executive Officer since
1992 until his retirement as President and Chief Executive Officer effective March 1, 2006. Mr.
Chiaraluce will continue to serve as the full time Chairman of the Board of Directors and Executive
Officer of the Company until his planned retirement from the Company and the Board of Directors in
the spring of 2007.
33
PART III
Pursuant to General Instruction G(3), the information called for by Items 10, (except for
information concerning the executive officers of the Company) 11, 12, 13 and 14 is hereby
incorporated by reference to the Companys definitive proxy statement to be filed on EDGAR on or
about April 7, 2006. Information concerning the executive officers of the Company is included as
Item 10 of this report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the executive officers of the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
Age |
|
|
|
|
|
|
|
|
in |
|
|
|
Period Held or |
|
Term of Office |
Name |
|
2006 |
|
Office |
|
Prior Position |
|
Expires |
M. T. Chiaraluce
|
|
|
63 |
|
|
Chairman of the
Board and Executive
Officer
|
|
Held position of
President since
January 1992 and
position of Chief
Executive Officer
since July 1992
until his
retirement as of
March 1, 2006
|
|
2006 Annual Meeting |
|
|
|
|
|
|
|
|
|
|
|
E. W. Thornburg
|
|
|
46 |
|
|
President, Chief
Executive Officer
|
|
Held position since
March 1, 2006
|
|
2006 Annual Meeting |
|
|
|
|
|
|
|
|
|
|
|
D. C. Benoit
|
|
|
48 |
|
|
Vice President Finance, Chief
Financial Officer
and Treasurer
|
|
Held current
position or other
executive position
with the company
since April 1996
|
|
2006 Annual Meeting |
|
|
|
|
|
|
|
|
|
|
|
T. P. ONeill
|
|
|
52 |
|
|
Vice President
Operations &
Engineering
|
|
Held current
position or other
engineering
position with the
Company since
February 1980
|
|
2006 Annual Meeting |
|
|
|
|
|
|
|
|
|
|
|
M. P. Westbrook
|
|
|
46 |
|
|
Vice President
Administration and
Government Affairs
|
|
Held current position or other management position
with the Company since September
1988
|
|
2006 Annual Meeting |
34
|
|
|
|
|
|
|
|
|
|
|
|
|
Age |
|
|
|
|
|
|
|
|
in |
|
|
|
Period Held or |
|
Term of Office |
Name |
|
2006 |
|
Office |
|
Prior Position |
|
Expires |
T. R. Marston
|
|
|
53 |
|
|
Vice President Planning &
Treatment
|
|
Held current
position or other
management position
with the Company
since June 1974.
|
|
2006 Annual Meeting |
|
|
|
|
|
|
|
|
|
|
|
P. J. Bancroft
|
|
|
56 |
|
|
Assistant Treasurer
and Controller
|
|
Held current
position or other
accounting position
with the Company
since October 1979
|
|
2006 Annual Meeting |
|
|
|
|
|
|
|
|
|
|
|
M. G. DiAcri
|
|
|
60 |
|
|
Corporate Secretary
|
|
Held administrative
position with the
Company since
February 1990
|
|
2006 Annual Meeting |
For further information regarding the executive officers see the Companys Proxy Statement dated
on or about April 7, 2006.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCHOLDER
MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
35
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
|
|
|
|
|
|
|
(a)
|
|
|
1. |
|
|
Financial Statements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
The report of independent registered public accounting firm and the Companys
Consolidated Financial Statements listed in the Index to Consolidated Financial
Statements on page F-1 hereof are filed as part of this report, commencing on page F-2. |
|
|
|
|
|
|
|
Page |
|
Index to Consolidated Financial Statements and Schedule |
|
|
F-1 |
|
Report of Independent Registered Public
Accounting Firm |
|
|
F-2 |
|
Consolidated Statements of Income for the years
Ended December 31, 2005, 2004, and 2003 |
|
|
F-4 |
|
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2005, 2004, and 2003 |
|
|
F-4 |
|
Consolidated Balance Sheets at December 31, 2005
and 2004 |
|
|
F-5 |
|
Consolidated Statements of Cash Flows for the
years ended December 31, 2005, 2004, and 2003 |
|
|
F-6 |
|
Notes to Consolidated Financial Statements |
|
|
F-7 |
|
|
|
|
|
|
|
|
|
|
|
2. |
|
|
Financial Statement Schedule: |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule of the Company is included on the attached page as indicated: |
|
|
|
Schedule II-Valuation and Qualifying Accounts
and Reserves for the years ended December 31,
2005, 2004, and 2003
|
|
S-1 |
|
|
|
|
|
|
|
|
|
|
|
|
All other schedules provided for in the applicable
regulations of the Securities and Exchange Commission have
been omitted because of the absence of conditions under
which they are required or because the required information
is set forth in the financial statements or notes thereto. |
36
|
|
|
Exhibits for Connecticut Water Service, Inc. are in the
Index to Exhibits
|
|
E-1 |
|
|
|
|
|
|
|
|
|
Exhibits heretofore filed with the Securities and
Exchange Commission as indicated below are
incorporated herein by reference and made a part
hereof as if filed herewith. Exhibits marked by
asterisk (*) are being filed herewith. |
F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
|
|
|
|
|
|
|
Page |
|
|
|
|
F-1 |
|
|
|
|
F-2 |
|
|
|
|
F-4 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
S-1 |
|
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Connecticut Water Service, Inc.:
We have completed integrated audits of Connecticut Water Service, Inc.s 2005 and 2004 consolidated
financial statements and of its internal control over financial reporting as of December 31, 2005,
and an audit of its 2003 consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of Connecticut Water
Service, Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2005
in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index appearing under Item
15(a)(2) presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in Managements Report on Internal Control
Over Financial Reporting, appearing under Item 9A, that the Company maintained effective internal
control over financial reporting as of December 31, 2005 based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on criteria established in Internal
Control Integrated Framework issued by the COSO. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on managements assessment and on the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control
F-3
over financial reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we consider necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 30, 2006
F-4
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, (in thousands, except per share data) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Operating Revenues |
|
$ |
47,453 |
|
|
$ |
46,008 |
|
|
$ |
44,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Operation and Maintenance |
|
|
24,514 |
|
|
|
22,336 |
|
|
|
21,086 |
|
Depreciation |
|
|
5,724 |
|
|
|
5,570 |
|
|
|
5,483 |
|
Income Taxes |
|
|
2,338 |
|
|
|
2,594 |
|
|
|
1,912 |
|
Taxes Other Than Income Taxes |
|
|
5,385 |
|
|
|
5,179 |
|
|
|
5,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
37,961 |
|
|
|
35,679 |
|
|
|
33,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Operating Income |
|
|
9,492 |
|
|
|
10,329 |
|
|
|
11,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Deductions), Net of Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Property Transactions |
|
|
(61 |
) |
|
|
1,206 |
|
|
|
1,029 |
|
Non-Water Sales Earnings |
|
|
945 |
|
|
|
829 |
|
|
|
692 |
|
Allowance for Funds Used During Construction |
|
|
638 |
|
|
|
421 |
|
|
|
476 |
|
Other |
|
|
169 |
|
|
|
120 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Deductions), Net of Taxes |
|
|
1,691 |
|
|
|
2,576 |
|
|
|
2,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Debt Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on Long-Term Debt |
|
|
2,937 |
|
|
|
2,918 |
|
|
|
3,878 |
|
Other Interest Charges |
|
|
720 |
|
|
|
486 |
|
|
|
373 |
|
Amortization of Debt Expense |
|
|
360 |
|
|
|
338 |
|
|
|
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest and Debt Expenses |
|
|
4,017 |
|
|
|
3,742 |
|
|
|
4,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
|
7,166 |
|
|
|
9,163 |
|
|
|
8,890 |
|
Discontinued Operations, Net of Tax of $1,720, $238 and $123
in 2005, 2004 and 2003, respectively |
|
|
3,158 |
|
|
|
231 |
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
10,324 |
|
|
|
9,394 |
|
|
|
9,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Dividend Requirement |
|
|
38 |
|
|
|
38 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Income Applicable to Common Stock |
|
$ |
10,286 |
|
|
$ |
9,356 |
|
|
$ |
9,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
8,094 |
|
|
|
7,999 |
|
|
|
7,956 |
|
Diluted |
|
|
8,143 |
|
|
|
8,039 |
|
|
|
8,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic Continuing Operations |
|
$ |
0.89 |
|
|
$ |
1.15 |
|
|
$ |
1.11 |
|
Basic Discontinued Operations |
|
|
0.38 |
|
|
|
0.02 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.27 |
|
|
$ |
1.17 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Continuing Operations |
|
$ |
0.88 |
|
|
$ |
1.14 |
|
|
$ |
1.11 |
|
Diluted Discontinued Operations |
|
|
0.38 |
|
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.26 |
|
|
$ |
1.16 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, (in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net Income |
|
$ |
10,286 |
|
|
$ |
9,356 |
|
|
$ |
9,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
cash flow hedging instrument net of tax of $188 and $58
in 2005 and 2004, respectively |
|
|
294 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
10,580 |
|
|
$ |
9,443 |
|
|
$ |
9,172 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
December 31, (in thousands, except share amounts) |
|
2005 |
|
|
2004 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
Utility Plant |
|
$ |
340,755 |
|
|
$ |
333,985 |
|
Construction Work in Progress |
|
|
5,505 |
|
|
|
7,463 |
|
Utility Plant Acquisition Adjustments |
|
|
(1,273 |
) |
|
|
(1,273 |
) |
|
|
|
|
|
|
|
|
|
|
344,987 |
|
|
|
340,175 |
|
Accumulated Provision for Depreciation |
|
|
(97,284 |
) |
|
|
(98,399 |
) |
|
|
|
|
|
|
|
Net Utility Plant |
|
|
247,703 |
|
|
|
241,776 |
|
|
|
|
|
|
|
|
Other Property and Investments |
|
|
4,542 |
|
|
|
4,298 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
|
4,439 |
|
|
|
707 |
|
Restricted Cash |
|
|
2,628 |
|
|
|
|
|
Accounts Receivable (Less Allowance, 2005 - $256;
2004 - $212) |
|
|
5,888 |
|
|
|
5,702 |
|
Accrued Unbilled Revenues |
|
|
3,918 |
|
|
|
4,064 |
|
Materials and Supplies, at Average Cost |
|
|
860 |
|
|
|
869 |
|
Prepayments and Other Current Assets |
|
|
1,274 |
|
|
|
3,923 |
|
Short-Term Investment |
|
|
6,815 |
|
|
|
|
|
Barlaco Assets Held for Sale |
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
26,146 |
|
|
|
15,265 |
|
|
|
|
|
|
|
|
Unamortized Debt Issuance Expense |
|
|
7,823 |
|
|
|
7,169 |
|
Unrecovered Income Taxes |
|
|
12,986 |
|
|
|
16,173 |
|
Post-Retirement Benefits Other Than Pension |
|
|
1,595 |
|
|
|
1,088 |
|
Goodwill |
|
|
3,608 |
|
|
|
3,608 |
|
Deferred Charges and Other Costs |
|
|
1,632 |
|
|
|
1,563 |
|
|
|
|
|
|
|
|
Total Regulatory and Other Long-Term Assets |
|
|
27,644 |
|
|
|
29,601 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
306,035 |
|
|
$ |
290,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITALIZATION AND LIABILITIES |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common Stock Without Par Value: |
|
|
|
|
|
|
|
|
Authorized - 15,000,000 Shares Issued
and Outstanding: |
|
|
|
|
|
|
|
|
2005 - 8,169,627; 2004 - 8,035,199 |
|
$ |
58,005 |
|
|
$ |
55,514 |
|
Retained Earnings |
|
|
35,777 |
|
|
|
32,264 |
|
Accumulated Other Comprehensive Income |
|
|
294 |
|
|
|
87 |
|
|
|
|
|
|
|
|
Common Stockholders Equity |
|
|
94,076 |
|
|
|
87,865 |
|
Preferred Stock |
|
|
847 |
|
|
|
847 |
|
Long-Term Debt |
|
|
77,404 |
|
|
|
66,399 |
|
|
|
|
|
|
|
|
Total Capitalization |
|
|
172,327 |
|
|
|
155,111 |
|
|
|
|
|
|
|
|
Interim Bank Loans Payable |
|
|
4,750 |
|
|
|
5,650 |
|
Current Portion of Long-Term Debt |
|
|
2,331 |
|
|
|
326 |
|
Accounts Payable and Accrued Expenses |
|
|
4,776 |
|
|
|
5,512 |
|
Accrued Taxes |
|
|
154 |
|
|
|
3,300 |
|
Accrued Interest |
|
|
699 |
|
|
|
601 |
|
Other Current Liabilities |
|
|
519 |
|
|
|
559 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
13,229 |
|
|
|
15,948 |
|
|
|
|
|
|
|
|
Advances for Construction |
|
|
29,355 |
|
|
|
27,157 |
|
|
|
|
|
|
|
|
Contributions in Aid of Construction |
|
|
45,709 |
|
|
|
46,111 |
|
|
|
|
|
|
|
|
Deferred Federal and State Income Taxes |
|
|
24,915 |
|
|
|
24,249 |
|
|
|
|
|
|
|
|
Unfunded Future Income Taxes |
|
|
11,273 |
|
|
|
13,096 |
|
|
|
|
|
|
|
|
Long-Term Compensation Arrangements |
|
|
7,541 |
|
|
|
7,445 |
|
|
|
|
|
|
|
|
Unamortized Investment Tax Credits |
|
|
1,686 |
|
|
|
1,823 |
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
Total Capitalization and Liabilities |
|
$ |
306,035 |
|
|
$ |
290,940 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, (in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
10,324 |
|
|
$ |
9,394 |
|
|
$ |
9,210 |
|
Discontinued Operations |
|
|
3,158 |
|
|
|
235 |
|
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
|
7,166 |
|
|
|
9,159 |
|
|
|
8,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to Reconcile Net Income to Net Cash |
|
|
|
|
|
|
|
|
|
|
|
|
Provided by Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Funds Used During Construction |
|
|
(743 |
) |
|
|
(436 |
) |
|
|
(476 |
) |
Depreciation (including $188 in 2005 and $253 in 2004,
and $165 in 2003 charged to other accounts) |
|
|
5,912 |
|
|
|
5,763 |
|
|
|
5,648 |
|
Change in Assets and Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) in Accounts Receivable and
Accrued Unbilled Revenues |
|
|
(342 |
) |
|
|
(769 |
) |
|
|
(49 |
) |
(Increase) Decrease in Other Current Assets |
|
|
2,600 |
|
|
|
288 |
|
|
|
(51 |
) |
(Increase) in Other Non-Current Items |
|
|
(556 |
) |
|
|
(469 |
) |
|
|
(690 |
) |
Increase (Decrease) in Accounts Payable, Accrued
Expenses and Other Current Liabilities |
|
|
(3,603 |
) |
|
|
1,678 |
|
|
|
(2,069 |
) |
Increase in Deferred Income Taxes and
Investment Tax Credits, Net |
|
|
2,332 |
|
|
|
996 |
|
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
|
Total Adjustments |
|
|
5,600 |
|
|
|
7,051 |
|
|
|
4,713 |
|
|
|
|
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Provided by (Used In) Continuing Operations |
|
|
12,766 |
|
|
|
16,210 |
|
|
|
13,599 |
|
Net Cash and Cash Equivalents Provided by (Used In) Discontinued Operations |
|
|
(185 |
) |
|
|
497 |
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Provided by (Used In) Operating Activities |
|
|
12,581 |
|
|
|
16,707 |
|
|
|
13,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Company Financed Additions to Utility Plant |
|
|
(14,088 |
) |
|
|
(8,380 |
) |
|
|
(8,486 |
) |
Advances from Others for Construction |
|
|
(1,955 |
) |
|
|
(2,057 |
) |
|
|
(592 |
) |
|
|
|
|
|
|
|
|
|
|
Net Additions to Utility Plant Used in Continuing Operations |
|
|
(16,043 |
) |
|
|
(10,437 |
) |
|
|
(9,078 |
) |
Net Additions to Utility Plant Used in Discontinued Operations |
|
|
(171 |
) |
|
|
(172 |
) |
|
|
(193 |
) |
Proceeds from Sale of Barnstable Water Company Assets (Net of $114 in Transaction Costs) |
|
9,885 |
|
|
|
|
|
|
|
|
Purchase of Short Term Investments |
|
|
(6,713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Used in |
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities in Continuing Operations |
|
|
(12,871 |
) |
|
|
(10,437 |
) |
|
|
(9,078 |
) |
Net Cash and Cash Equivalents Used in |
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities in Discontinued Operations |
|
|
(171 |
) |
|
|
(172 |
) |
|
|
(193 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities |
|
|
(13,042 |
) |
|
|
(10,609 |
) |
|
|
(9,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds from Interim Bank Loans |
|
|
4,750 |
|
|
|
5,650 |
|
|
|
9,700 |
|
Net Repayment of Interim Bank Loans |
|
|
(5,650 |
) |
|
|
(9,700 |
) |
|
|
(6,950 |
) |
Proceeds from Issuance of Common Stock |
|
|
2,038 |
|
|
|
1,751 |
|
|
|
699 |
|
Proceeds from Issuance of Long-Term Debt |
|
|
12,282 |
|
|
|
23,581 |
|
|
|
22,930 |
|
Repayment of Long-Term Debt Including Current Portion |
|
|
(665 |
) |
|
|
(21,764 |
) |
|
|
(22,798 |
) |
Costs Incurred to Issue Long-Term Debt and Common Stock |
|
|
(934 |
) |
|
|
(1,309 |
) |
|
|
(1,359 |
) |
Advances from Others for Construction |
|
|
1,955 |
|
|
|
2,057 |
|
|
|
592 |
|
Proceeds from Exercise of Stock Options |
|
|
455 |
|
|
|
|
|
|
|
|
|
Cash Dividends Paid |
|
|
(6,838 |
) |
|
|
(6,525 |
) |
|
|
(6,393 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Provided by (Used in) |
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities in Continuing Operations |
|
|
7,393 |
|
|
|
(6,259 |
) |
|
|
(3,579 |
) |
Net Cash and Cash Equivalents Provided by (Used in) |
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities in Discontinued Operations |
|
|
(3,200 |
) |
|
|
(254 |
) |
|
|
(275 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Provided by (Used in) Financing Activites |
|
|
4,193 |
|
|
|
(6,513 |
) |
|
|
(3,854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
3,732 |
|
|
|
(415 |
) |
|
|
658 |
|
Cash and Cash Equivalents at Beginning of Year |
|
|
707 |
|
|
|
1,122 |
|
|
|
464 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year |
|
$ |
4,439 |
|
|
$ |
707 |
|
|
$ |
1,122 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Contributed Utility Plant (see Note 1 for details) |
|
$ |
1,231 |
|
|
$ |
2,337 |
|
|
$ |
2,930 |
|
Short-term Investment of
Bond Proceeds Held in Restricted Cash |
|
$ |
2,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for Continuing Operations During the Year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
3,511 |
|
|
$ |
3,440 |
|
|
$ |
4,372 |
|
State and Federal Income Taxes |
|
$ |
3,515 |
|
|
$ |
1,383 |
|
|
$ |
2,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for Discontinued Operations During the Year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
106 |
|
|
$ |
141 |
|
|
$ |
150 |
|
State and Federal Income Taxes |
|
$ |
410 |
|
|
$ |
31 |
|
|
$ |
52 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -The consolidated financial statements include the operations of Connecticut
Water Service, Inc. (the Company), an investor-owned holding company and its ten wholly owned
subsidiaries, listed below:
The Connecticut Water Company (Connecticut Water)
Crystal Water Utilities Corporation
The Crystal Water Company of Danielson (Crystal Water)
Chester Realty, Inc.
New England Water Utility Services, Inc.
Connecticut Water Emergency Services, Inc.
The Barnstable Holding Company
The Barnstable Water Company (Barnstable Water)
BARLACO, Inc.
The Unionville Water Company (Unionville)
Connecticut Water, Crystal Water, and Unionville (our water companies) are public water utility
companies serving 81,763 customers in 41 towns throughout Connecticut.
Crystal Water Utilities
Corporation is a holding company, owning the stock of The Crystal Water Company
of Danielson and three small rental properties.
Chester Realty, Inc. is a real estate company whose net profits from rental of property are
included in the Other Income (Deductions), Net of Taxes section of the Consolidated Statements of
Income in the Non-Water Sales Earnings category.
New England Water Utility Services, Inc. is engaged in water-related services, including the
Linebackerâ program, and contract operations. Its earnings are included in the Non-Water
Sales Earnings category in the Other Income (Deductions), Net of Taxes section of the Consolidated
Statements of Income.
Connecticut Water Emergency Services, Inc. is a provider of emergency drinking water and pool water
via tanker trucks. Its net earnings are included in the Non-Water Sales Earnings category in the
Other Income (Deductions), Net of Taxes section of the Consolidated Statements of Income.
Barnstable Holding Company is a holding company, owning the stock of Barnstable Water Company and
BARLACO, Inc. Barnstable Water was a public water utility company serving customers in Barnstable,
Massachusetts, until the Company sold the assets of Barnstable Water to the Town of Barnstable in
May 2005. After the sale and through February 2006, Barnstable Water operated the system under a
management contract for the Town of Barnstable. In February 2006, the Town of Barnstable
terminated the management contract with Barnstable Water. BARLACO, Inc. is a real estate company
which held real estate for sale. In February 2006, BARLACO sold all of its real estate holdings to
the Town of Barnstable.
Intercompany accounts and transactions have been eliminated.
PUBLIC UTILITY REGULATION Three of our water companies are subject to regulation for rates and
other matters by the Connecticut Department of Public Utility Control (DPUC) and follow accounting
policies prescribed by the DPUC. The Company prepares its financial statements in accordance with
Generally Accepted Accounting Principles in the United States of America (GAAP), which includes the
provisions of Statement of Financial Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation, (FAS 71). FAS 71 requires cost-based, rate-regulated enterprises such
as our water companies to reflect the impact of regulatory decisions in their financial statements.
The state regulators, through the rate regulation process, can create regulatory assets that result
when costs are allowed for ratemaking purposes in a period after the period in which the costs
would be charged to expense by an unregulated enterprise. The balance sheets include regulatory
assets and liabilities as appropriate, primarily related to income taxes and post-retirement
benefit costs. In accordance with FAS 71, costs which benefit future periods, such as tank
painting, are expensed over the periods they benefit. The Company believes, based on current
regulatory circumstances, that the regulatory assets recorded are likely to be recovered and that
its use of regulatory accounting is appropriate and in accordance with the provisions of FAS 71.
Material regulatory assets are earning a return.
USE OF ESTIMATES - The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from these estimates.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-8
REVENUES - Most of our water customers are billed quarterly, with the exception of larger
commercial and industrial customers, as well as public fire protection customers who are billed
monthly. Most customers, except fire protection customers are metered. Revenues from metered
customers are based on their usage multiplied by approved, regulated rates. Public fire protection
charges are based on the length and diameter of the water main, and number of hydrants in service.
Private fire protection charges are based on the diameter of the connection to the water main. Our
water companies accrue an estimate for the amount of revenues relating to sales earned but unbilled
at the end of each quarter.
UTILITY PLANT Utility plant is stated at the original cost of such property when first devoted to
public service. In the case of acquisitions, the difference between the original cost and the cost
to our water companies is charged or credited to utility plant acquisition adjustments. Utility
plant accounts are charged with the cost of improvements and replacements of property including an
allowance for funds used during construction. Retired or disposed of depreciable plant is charged
to accumulated provision for depreciation together with any costs applicable to retirement, less
any salvage received. Maintenance of utility plant is charged to expense. Accounting policies
relating to other areas of utility plant are listed below:
Allowance For Funds Used During Construction - Allowance for Funds Used During Construction
(AFUDC) is the cost of debt and equity funds used to finance the construction of our water
companies utility plant. Generally, utility plant under construction is not recognized as part
of rate base for ratemaking purposes until facilities are placed into service, and accordingly,
AFUDC is charged to the construction cost of utility plant. Capitalized AFUDC, which does not
represent current cash income, is recovered through rates over the service lives of the
facilities.
In order for certain water system acquisitions made in and after 1995 to not degrade earnings,
Connecticut Water has received DPUC approval to record AFUDC on certain of its investments in
these systems. Through December 31, 2005, Connecticut Water has capitalized approximately $3.5
million of AFUDC relating to financing these acquisitions. This amount is expected to be
recovered in Connecticut Waters next rate case.
Each companys allowed rate of return on rate base is used to calculate its AFUDC.
Customers Advances For Construction, Contributed Plant And Contributions In Aid Of
Construction - Under the terms of construction contracts with real estate developers and others,
our water companies periodically receive either advances for the costs of new main
installations or title to the main after it is constructed and financed by the developer.
Refunds are made, without interest, as services are connected to the main, over periods not
exceeding fifteen years and not in excess of the original advance. Unrefunded balances, at the
end of the contract period, are credited to contributions in aid of construction (CIAC) and are
no longer refundable.
Utility Plant is added in two ways. The majority of the Companys plant additions occur from
direct investment of Company funds that originated through operating activities or financings. The
Company manages the construction of these plant additions. These plant additions are part of the
Companys depreciable utility plant and are generally part of rate base. The Companys rate base is
a key component of how its regulated rates are set, and is recovered through the depreciation
component of the Companys rates. The second way in which plant additions occur are through
developer advances and contributions. Under this scenario either the developer funds the additions
through payments to the Company, who in turn manages the construction of the project, or the
developer pays for the plant construction directly and contributes the asset to the Company after
it is complete. Plant additions that are financed by a developer, either directly or indirectly,
are excluded from the Companys rate base and not recovered through the rates process, and are also
not depreciated.
During the past three years the following are the components that comprise Net Additions to Utility
Plant:
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Additions to Utility Plant: |
|
|
|
|
|
|
|
|
|
|
|
|
Company Financed |
|
$ |
14,088 |
|
|
$ |
8,380 |
|
|
$ |
8,486 |
|
Allowance for Funds Used During Construction |
|
|
743 |
|
|
|
436 |
|
|
|
476 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal Utility Plant Increase to Rate Base |
|
|
14,831 |
|
|
|
8,816 |
|
|
|
8,962 |
|
Non-Cash Contributed Plant |
|
|
1,231 |
|
|
|
2,337 |
|
|
|
2,930 |
|
Advances from Others for Construction |
|
|
1,955 |
|
|
|
2,057 |
|
|
|
592 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal Gross Additions to Utility Plant |
|
|
18,017 |
|
|
|
13,210 |
|
|
|
12,484 |
|
Less: Non-Cash Contributed Plant |
|
|
1,231 |
|
|
|
2,337 |
|
|
|
2,930 |
|
|
|
|
|
|
|
|
|
|
|
Net Additions to Utility Plant Continuing Operations |
|
|
16,786 |
|
|
|
10,873 |
|
|
|
9,554 |
|
Plus: Discontinued Operations |
|
|
171 |
|
|
|
172 |
|
|
|
193 |
|
|
|
|
|
|
|
|
|
|
|
Net Additions to Utility Plant |
|
$ |
16,957 |
|
|
$ |
11,045 |
|
|
$ |
9,747 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation - Over 99% of the Companys depreciable plant is owned by its three water
companies. Depreciation is computed on a straight-line basis at various rates as approved by the
state regulators on a company by company basis. Depreciation allows the utility to recover the
investment in utility plant over its useful life. The overall consolidated company depreciation
rate, based on the average balances of depreciable property, was 2.1% for 2005, 2004, and 2003.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-9
INCOME TAXES - The Company provides income tax expense for its utility operations in
accordance with the regulatory accounting policies of the applicable jurisdictions. The
Connecticut DPUC requires the flow-through method of accounting for most state tax temporary
differences as well as for certain federal temporary differences.
The Company computed deferred tax reserves for all temporary book-tax differences using the
liability method prescribed in FAS 109 Accounting for Income Taxes. Under the liability method,
deferred income taxes are recognized at currently enacted income tax rates to reflect the tax
effect of temporary differences between the financial reporting and tax bases of assets and
liabilities. Such temporary differences are the result of provisions in the income tax law that
either require or permit certain items to be reported on the income tax return in a different
period than they are reported in the financial statements. Deferred tax liabilities that have not
been reflected in tax expense due to regulatory treatment are described as unfunded future income
taxes, and are expected to be recoverable in future years rates.
The Company believes that all deferred income tax assets will be realized in the future. The
majority of all unfunded future income taxes relate to deferred state income taxes.
Deferred Federal Income Taxes consist primarily of amounts that have been provided for accelerated
depreciation subsequent to 1981, as required by federal income tax regulations. Deferred taxes
have also been provided for temporary differences in the recognition of certain expenses for tax
and financial statement purposes as allowed by DPUC ratemaking policies.
MUNICIPAL TAXES - Municipal taxes are generally expensed over the twelve-month period beginning on
July 1 following the lien date, corresponding with the period in which the municipal services are
provided.
STOCK OPTIONS - The Company has the ability to issue stock options through its Performance Stock
Program (PSP). The Company has not issued any options since 2003. The PSP is described more
completely in Note 13. FAS No. 123 Accounting for Stock-Based Compensation, encourages entities
to recognize as expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, FAS No. 123 also allows entities to continue to apply the provisions
of Accounting Principles Board (APB) opinion No. 25 Accounting for Stock Issued to Employees and
provide pro forma net income and pro forma earnings per share disclosures for employee stock grants
as if the fair-value-based method defined in FAS No. 123 had been applied. Please see New
Accounting Pronouncements below for pending changes on rules for accounting relating to stock
options.
The Company accounts for the stock options it has issued under the recognition and measurement
principles of APB No. 25. As such, no compensation cost related to the stock options is reflected
in Net Income, as all options issued through the PSP had an exercise price equal to market value of
the underlying common stock on the date of grant. The following table illustrates the effect on
Net Income and Earnings Per Share if the Company had applied the fair value recognition provisions
of FAS No. 123 to the stock options issued.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
(in thousands, except for per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income, applicable to common stockholders
as reported |
|
$ |
10,286 |
|
|
$ |
9,356 |
|
|
$ |
9,172 |
|
Add: Total stock-based employee
compensation expense determined under
intrinsic value based method for all awards,
net of related tax effects |
|
|
233 |
|
|
|
137 |
|
|
|
151 |
|
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects |
|
|
(232 |
) |
|
|
(408 |
) |
|
|
(425 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income, applicable to common
stockholders |
|
$ |
10,287 |
|
|
$ |
9,085 |
|
|
$ |
8,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
1.27 |
|
|
$ |
1.17 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
1.27 |
|
|
$ |
1.14 |
|
|
$ |
1.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
1.26 |
|
|
$ |
1.16 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
1.26 |
|
|
$ |
1.13 |
|
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
|
|
Under the Companys PSP, restricted shares of Common Stock, common stock equivalents or cash units
may be awarded annually to officers and key employees. Based upon the occurrence of certain
events, including the achievement of goals established by the Compensation Committee, the
restrictions on the stock can be removed. Amounts charged to expense pursuant to the PSP were
$265,000, $228,000 and $251,000, for 2005, 2004 and 2003, respectively. These amounts are included
in Net Income, as reported.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-10
UNAMORTIZED DEBT ISSUANCE EXPENSE The issuance costs of long-term debt, including the remaining
balance of issuance costs on long-term debt issues that have been refinanced prior to maturity, and
related call premiums, are amortized over the respective lives of the outstanding debt, as approved
by the state regulators.
GOODWILL The Company accounts for goodwill in accordance with FAS No. 142, Goodwill and Other
Intangible Assets (FAS 142). FAS 142 requires that goodwill no longer be amortized on a ratable
basis. In accordance with FAS 142, goodwill must be allocated to reporting units and reviewed for
impairment at least annually. The Company utilized a net income valuation approach in the
performance of the annual goodwill impairment test.
EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share for the years ended December 31, 2005, 2004, and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Basic earnings per share from Continuing Operations |
|
$ |
0.89 |
|
|
$ |
1.15 |
|
|
$ |
1.12 |
|
Dilutive effect of unexercised stock options |
|
|
0.01 |
|
|
|
.01 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.88 |
|
|
$ |
1.14 |
|
|
|
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income from Continuing Operations |
|
$ |
7,166 |
|
|
$ |
9,163 |
|
|
$ |
8,890 |
|
Diluted income from Continuing Operations |
|
$ |
7,166 |
|
|
$ |
9,163 |
|
|
$ |
8,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
8,094 |
|
|
|
7,999 |
|
|
|
7,956 |
|
Dilutive effect of unexercised stock options |
|
|
19 |
|
|
|
40 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
8,113 |
|
|
|
8,039 |
|
|
|
8,002 |
|
|
RECLASSIFICATIONS AND REVISIONS Certain reclassifications have been made to conform previously
reported data to the current presentation.
Within the Statements of Cash Flows we have revised the classification of certain items to more
clearly reflect the Developer Advances and Contributions that regularly occurred within the
regulated water subsidiaries for 2004 and 2003. The non-cash contribution of completed utility
plant by developers to the Company has been eliminated from both Investing Activities and Financing
Activities. In addition, we have eliminated AFUDC and any accrual of construction costs that had
been included in the Operating Activities and Investing Activities sections of the Statements of
Cash Flows. The resulting revised classifications have no effect on Net Increase (Decrease) in
Cash and Cash Equivalents during either period. For additional information please see the Utility
Plant section of Footnote 1.
NEW ACCOUNTING PRONOUNCEMENTS - In March 2005, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations.
The Interpretation clarifies the accounting for a conditional asset retirement obligation as
identified in FAS No. 143, Accounting for Asset Retirement Obligations. Interpretation No. 47 is
effective for our 2006 fiscal year. We believe there will be no material effect on the Companys
financial position or results of operations upon adoption of this Interpretation.
In December 2004, the FASB issued SFAS No. 123(R) Share Based Payment. This statement is a
revision to SFAS 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and amends FASB Statement No. 95, Statement of Cash Flows. This statement requires a public
entity to expense the cost of employee services received in exchange for an award of equity
instruments. This statement also provides guidance on valuing and expensing these awards, as well
as disclosure requirements of these equity arrangements. This statement is effective for the first
interim reporting period that begins after December 15, 2005, and will be effective for the Company
in its first quarter of 2006.
SFAS 123(R) permits public companies to choose between the following two adoption methods:
1. A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of Statement 123 for all
awards granted to employees prior to the effective date of SFAS 123R that remain unvested on
the effective date, or
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-11
2. A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either
(a) all prior periods presented or (b) prior interim periods of the year of adoption.
As permitted by SFAS 123, we currently account for share-based payments to employees using APB
Opinion 25s intrinsic value method and, as such, we generally recognize no compensation cost for
employee stock options. Valuation of employee stock options under SFAS 123(R) is similar to SFAS
123, with minor exceptions. For information about what our reported results of operations and
earnings per share would have been had we adopted SFAS 123, please see the discussion under the
heading Stock Based Compensation in Note 1 to our Consolidated Financial Statements. Accordingly,
the adoption of SFAS 123(R)s fair value method will not have a significant impact on our results
of operations, or on our overall financial position. SFAS 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods after adoption.
The Company is currently assessing its valuation options allowed under FAS 123(R), however, we
expect FAS 123(R) to impact earnings in fiscal 2006 by approximately $35,000 before taxes using the
modified prospective method of adoption.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, which is effective for our 2006
fiscal year. This statement amends previous guidance as it relates to inventory valuation to
clarify that abnormal amounts of idle facility, expense, freight, handling costs, and spoilage
should be recorded as a current period charge. We do not anticipate a significant effect on
financial position or operations upon adoption of this statement.
In June 2005, the FASB issued SFAS 154 Accounting Changes and Error Corrections. SFAS 154
changes the requirements for the accounting for, and reporting of, a change in accounting
principle. Previously, most voluntary changes in accounting principles were required to be
recognized by way of a cumulative effect adjustment within net income during the period of change.
SFAS 154 requires retrospective application to prior periods financial statements unless it is
impracticable to determine either the period-specific effects or the cumulative effect of the
change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December
15, 2005; however, SFAS 154 does not change the transition provisions of any existing accounting
pronouncements.
NOTE 2: SALE OF BARNSTABLE WATER COMPANY ASSETS DISCONTINUED OPERATIONS
On May 20, 2005, the Company completed the sale of the assets of one of its Massachusetts
subsidiaries, the Barnstable Water Company (BWC), to the Town of Barnstable, Massachusetts. Upon
completion of the sale, the Town of Barnstable and BWC entered into a one year management contract
for BWC to provide the Town with full operating and management services for the water systems
operations. Under the terms of the one year management contract, BWC was paid $130,000 a month for
operating and management services performed by BWC for the Town of Barnstable. This management
contract could be terminated within the 12 month period by 30 days written notice by either party.
In January 2006, the Company received notice of termination. The last day of the operating
contract was February 7, 2006.
The Company received $10.0 million in gross proceeds from the sale of its water utility assets,
advances, and contribution in aid of construction. The gain, net of income taxes of $1.6 million
was $3.0 million in 2005 and has been included in Net Income from Discontinued Operations.
The sale of Barnstables assets has been classified as Discontinued Operations in the
Consolidated Statements of Income as there will be no continuing involvement due to the termination
of the management contract with the Town of Barnstable. All of the results of BWC, including
current and prior years and the gain on the sale of the utilitys assets, have been reclassified
and are included as Discontinued Operations. At December 31, 2005, assets held for sale of
approximately $300,000 remain relating to BARLACO, which was sold in February 2006.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-12
Discontinued Operations for the years ended December 31, 2005, 2004 and 2003 was comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Year ended December 31, |
|
|
2005 |
|
2004 |
|
2003 |
Water Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
$ |
802 |
|
|
$ |
2,485 |
|
|
$ |
2,517 |
|
Income Taxes |
|
$ |
(9 |
) |
|
$ |
191 |
|
|
$ |
96 |
|
Utility Operating Income |
|
$ |
(11 |
) |
|
$ |
155 |
|
|
$ |
279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services and Rentals: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,067 |
|
|
$ |
163 |
|
|
$ |
115 |
|
Income Taxes |
|
$ |
132 |
|
|
$ |
47 |
|
|
$ |
27 |
|
Income from Services and Rentals |
|
$ |
213 |
|
|
$ |
76 |
|
|
$ |
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on Sale of Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross Proceeds |
|
$ |
10,000 |
|
|
$ |
|
|
|
$ |
|
|
Income Taxes |
|
$ |
1,597 |
|
|
$ |
|
|
|
$ |
|
|
Gain on Sale of Assets |
|
$ |
2,956 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Income from Discontinued
Operations |
|
$ |
3,158 |
|
|
$ |
231 |
|
|
$ |
320 |
|
|
|
|
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-13
NOTE 3: INCOME TAX EXPENSE
Income Tax Expense from Continuing Operations for the years ended December 31, is comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Federal Classified as Operating Expense from Continuing Operations |
|
$ |
2,400 |
|
|
$ |
2,401 |
|
|
$ |
1,666 |
|
Federal Classified as Other Income from Continuing Operation: |
|
|
|
|
|
|
|
|
|
|
|
|
Land Sales |
|
|
132 |
|
|
|
|
|
|
|
(11 |
) |
Land Donation |
|
|
87 |
|
|
|
(280 |
) |
|
|
(246 |
) |
Non-Water Sales |
|
|
467 |
|
|
|
411 |
|
|
|
330 |
|
Other |
|
|
179 |
|
|
|
(74 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal Income Tax Expense from Continuing Operations |
|
|
3,265 |
|
|
|
2,458 |
|
|
|
1,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Classified as Operating Expense from Continuing Operations |
|
|
(62 |
) |
|
|
193 |
|
|
|
246 |
|
State Classified as Other Income from Continuing Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Land Sales |
|
|
31 |
|
|
|
|
|
|
|
(3 |
) |
Land Donation |
|
|
225 |
|
|
|
(965 |
) |
|
|
(733 |
) |
Non-Water Sales |
|
|
119 |
|
|
|
118 |
|
|
|
86 |
|
Other |
|
|
34 |
|
|
|
31 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total State Income Tax Expense (Benefit) from Continuing Operations |
|
|
347 |
|
|
|
(623 |
) |
|
|
(382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense from Continuing Operations |
|
$ |
3,612 |
|
|
$ |
1,835 |
|
|
$ |
1,291 |
|
|
The components of the Federal and State income tax provisions from Continuing Operations are:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Current from Continuing Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
1,758 |
|
|
$ |
1,817 |
|
|
$ |
(181 |
) |
State |
|
|
(377 |
) |
|
|
240 |
|
|
|
460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current from Continuing Operations |
|
|
1,381 |
|
|
|
2,057 |
|
|
|
279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Taxes from Continuing Operations, Net: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
Investment Tax Credit |
|
|
(62 |
) |
|
|
(64 |
) |
|
|
(62 |
) |
Capitalized Interest and AFUDC |
|
|
37 |
|
|
|
3 |
|
|
|
25 |
|
Depreciation |
|
|
721 |
|
|
|
868 |
|
|
|
2,187 |
|
Other |
|
|
810 |
|
|
|
(167 |
) |
|
|
(296 |
) |
|
Total Federal from Continuing Operations |
|
|
1,506 |
|
|
|
640 |
|
|
|
1,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State from Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
1 |
|
|
|
8 |
|
Other |
|
|
725 |
|
|
|
(863 |
) |
|
|
(850 |
) |
|
Total State from Continuing Operations |
|
|
725 |
|
|
|
(862 |
) |
|
|
(842 |
) |
|
Total Deferred Income Taxes from Continuing Operations, Net |
|
|
2,231 |
|
|
|
(222 |
) |
|
|
1,012 |
|
|
Total from Continuing Operations |
|
|
3,612 |
|
|
$ |
1,835 |
|
|
$ |
1,291 |
|
|
Deferred income tax (assets) and liabilities are categorized as follows on the Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
Unrecovered Income Taxes |
|
$ |
(12,986 |
) |
|
$ |
(16,173 |
) |
Deferred Federal and State Income Taxes |
|
|
24,915 |
|
|
|
24,249 |
|
Unfunded Future Income Taxes |
|
|
11,273 |
|
|
|
13,096 |
|
Unamortized Investment Tax Credit |
|
|
1,686 |
|
|
|
1,823 |
|
Other |
|
|
(68 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
Net Deferred Income Tax Liability |
|
$ |
24,820 |
|
|
$ |
22,986 |
|
|
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-14
Deferred income tax (assets) and liabilities are comprised of the following:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
Charitable Contribution Carryforward (1) |
|
$ |
290 |
|
|
$ |
(1,108 |
) |
Tax Credit Carryforward (2) |
|
|
(1,335 |
) |
|
|
(1,292 |
) |
Alternative Minimum Tax Carryforward |
|
|
(225 |
) |
|
|
(285 |
) |
Prepaid Income Taxes on CIAC |
|
|
(128 |
) |
|
|
(179 |
) |
Prepaid FIT on Services |
|
|
(126 |
) |
|
|
(107 |
) |
Other Comprehensive Income |
|
|
188 |
|
|
|
58 |
|
Accelerated Depreciation |
|
|
24,628 |
|
|
|
24,247 |
|
Net of AFUDC and Capitalized Interest |
|
|
225 |
|
|
|
161 |
|
Unamortized Investment Tax Credit |
|
|
1,686 |
|
|
|
1,823 |
|
Other |
|
|
(383 |
) |
|
|
(332 |
) |
|
|
|
|
|
|
|
|
|
|
Net Deferred Income Tax Liability |
|
$ |
24,820 |
|
|
$ |
22,986 |
|
|
|
|
|
(1) |
|
2005 charitable contribution carryover expires beginning in 2006 and ending in 2009.
|
|
(2) |
|
State tax credit carry-forwards expire beginning 2016 and ending in 2019. |
The calculation of Pre-Tax Income from Continuing Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Pre-Tax Income |
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
$ |
7,166 |
|
|
$ |
9,163 |
|
|
$ |
8,890 |
|
Income Taxes |
|
|
3,612 |
|
|
|
1,835 |
|
|
|
1,291 |
|
|
Total Pre-Tax Income from Continuing Operations |
|
$ |
10,778 |
|
|
$ |
10,998 |
|
|
$ |
10,181 |
|
|
In accordance with required regulatory treatment, deferred income taxes are not provided for
certain timing differences. This treatment, along with other items, causes differences between the
statutory income tax rate and the effective income tax rate. The differences between the effective
income tax rate recorded by the Company and the statutory federal tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Federal Statutory Income Tax Rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
Tax Effect of Differences: |
|
|
|
|
|
|
|
|
|
|
|
|
State Income Taxes Net of Federal Benefit: |
|
|
|
|
|
|
|
|
|
|
|
|
State Income Tax Excluding Land Donation Credit |
|
|
0.7 |
% |
|
|
2.1 |
% |
|
|
2.3 |
% |
Land Donation Credit |
|
|
1.4 |
% |
|
|
(5.8 |
%) |
|
|
(4.8 |
%) |
Depreciation |
|
|
1.6 |
% |
|
|
1.7 |
% |
|
|
0.3 |
% |
Charitable Contribution Land Donation |
|
|
0.8 |
% |
|
|
(5.5 |
%) |
|
|
(4.9 |
%) |
Pension Costs |
|
|
(3.3 |
%) |
|
|
(2.7 |
%) |
|
|
(0.3 |
%) |
Debt Refinancing Costs |
|
|
0.7 |
% |
|
|
(3.7 |
%) |
|
|
(4.6 |
%) |
Allowance for Funds Used During Construction |
|
|
(1.4 |
%) |
|
|
(1.2 |
%) |
|
|
(1.3 |
%) |
Change in Estimate of Prior Year Income Tax Expense |
|
|
(2.5 |
%) |
|
|
(1.4 |
%) |
|
|
(12.1 |
%) |
Common Stock Equivalents |
|
|
(0.4 |
%) |
|
|
0.4 |
% |
|
|
1.0 |
% |
Other |
|
|
1.9 |
% |
|
|
(1.2 |
%) |
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Income Tax Rate for Continuing Operations |
|
|
33.5 |
% |
|
|
16.7 |
% |
|
|
12.7 |
% |
|
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-15
NOTE 4: COMMON STOCK
The Company has 15,000,000 authorized shares of common stock, no par value. A summary of the
changes in the common stock accounts for the period January 1, 2003 through December 31, 2005,
appears below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance |
|
|
|
|
|
|
|
(in thousands, except share data) |
|
Shares |
|
|
Amount |
|
|
Expense |
|
|
Total |
|
Balance, January 1, 2003 |
|
|
7,939,713 |
|
|
$ |
54,661 |
|
|
$ |
(1,592 |
) |
|
$ |
53,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock and equivalents issued through
Performance Stock Program |
|
|
8,347 |
|
|
|
305 |
|
|
|
|
|
|
|
305 |
|
Stock Options Exercised |
|
|
19,319 |
|
|
|
394 |
|
|
|
(2 |
) |
|
|
392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003 |
|
|
7,967,379 |
|
|
$ |
55,360 |
|
|
$ |
(1,594 |
) |
|
$ |
53,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock and equivalents issued through
Performance Stock Program |
|
|
6,893 |
|
|
|
138 |
|
|
|
|
|
|
|
138 |
|
Dividend Reinvestment Plan |
|
|
60,927 |
|
|
|
1,622 |
|
|
|
(3 |
) |
|
|
1,619 |
|
Tax adjustment on prior year stock
options exercised |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
|
8,035,199 |
|
|
$ |
57,111 |
|
|
$ |
(1,597 |
) |
|
$ |
55,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock and equivalents issued through
Performance Stock Program |
|
|
29,379 |
|
|
|
99 |
|
|
|
|
|
|
|
99 |
|
Dividend Reinvestment Plan |
|
|
60,486 |
|
|
|
1,529 |
|
|
|
|
|
|
|
1,529 |
|
Stock Options Exercised |
|
|
44,563 |
|
|
|
865 |
|
|
|
(2 |
) |
|
|
863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005(1) |
|
|
8,169,627 |
|
|
$ |
59,604 |
|
|
$ |
(1,599 |
) |
|
$ |
58,005 |
|
|
|
|
|
(1) |
|
Includes 22,376 restricted shares and 49,931 common stock equivalent shares issued through
the Performance Stock Programs through December 31, 2005. |
The Companys Shareholder Rights Plan was authorized by the Board of Directors on August 12, 1998.
Pursuant to the Plan, the Board authorized a dividend distribution of one Right to purchase one
one-hundredth of a share of Series A Junior Participating Preference Stock of the Company for each
outstanding share of the Companys common stock. The distribution was effected October 11, 1998.
Upon the terms of the Shareholder Rights Plan, each Right will entitle shareholders to buy one
one-hundredth of a share of Series A Junior Participating Preference Stock at a purchase price of
$90, and the Rights will expire October 11, 2008. The Rights will be exercisable only if a person
or group acquires 15% or more of the Companys common stock, or announces a tender or exchange
offer for 15% or more of the Companys common stock. The Board will be entitled to redeem the
Rights at $0.01 per Right at any time before such acquisition occurs, and upon certain conditions
after such a position has been acquired.
Upon the acquisition of 15% or more of the Companys common stock by any person or group, each
Right will entitle its holder to purchase, at the Rights purchase price, a number of shares of the
Companys common stock having a market value equal to twice the Rights purchase price. In such
event, Rights held by the acquiring person will not be allowed to purchase any of the Companys
common stock or other securities of the Company. If, after the acquisition of 15% or more of the
Companys common stock by any person or group, the Company should consolidate with or merge with
and into any person and the Company should not be the surviving company, or if the Company should
be the surviving company and all or part of its common stock should be exchanged for the securities
of any other person, or if more than 50% of the assets or earning power of the Company were sold,
each Right (other than Rights held by the acquiring person, which will become void) will entitle
its holder to purchase, at the Rights purchase price, a number of shares of the acquiring
Companys common stock having a market value at that time equal to twice the Rights purchase
price.
The Company may not pay any dividends on its common stock unless full cumulative dividends to the
preceding dividend date for all outstanding shares of Preferred Stock of the Company have been paid
or set aside for
payment. All such Preferred Stock dividends have been paid.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-16
NOTE 5: ANALYSIS OF RETAINED EARNINGS
The summary of the changes in Retained Earnings for the period January 1, 2003 through December 31,
2005, appears below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Balance, Beginning of Year |
|
$ |
32,264 |
|
|
$ |
29,549 |
|
|
$ |
26,906 |
|
Net Income |
|
|
10,324 |
|
|
|
9,394 |
|
|
|
9,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,588 |
|
|
|
38,943 |
|
|
|
36,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Declared: |
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Preferred Stock, Series A, $.80 Per Share |
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
Cumulative Preferred Stock, Series $.90, $.90 Per Share |
|
|
26 |
|
|
|
26 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
2005 $0.845 Per Share |
|
|
6,773 |
|
|
|
|
|
|
|
|
|
2004 $0.835 Per Share |
|
|
|
|
|
|
6,641 |
|
|
|
|
|
2003 $0.825 Per Share |
|
|
|
|
|
|
|
|
|
|
6,529 |
|
|
|
|
|
6,811 |
|
|
|
6,679 |
|
|
|
6,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, End of Year |
|
$ |
35,777 |
|
|
$ |
32,264 |
|
|
$ |
29,549 |
|
|
NOTE 6: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each of the following
financial instruments.
CASH AND CASH EQUIVALENTS Cash equivalents consist of highly liquid instruments with original
maturities at the time of purchase of three months or less. The carrying amount approximates fair
value.
LONG-TERM DEBT The fair value of the Companys fixed rate long-term debt is based upon borrowing
rates currently available to the Company. As of December 31, 2005 and 2004, the estimated fair
value of the
Companys long-term debt was $75,609,000 and $59,149,000, respectively, as compared to the carrying
amounts of $77,404,000 and $66,399,000, respectively.
The fair values shown above have been reported to meet the disclosure requirements of FAS No. 107,
Disclosures About Fair Values of Financial Instruments and do not purport to represent the
amounts at which those obligations would be settled.
INTEREST RATE SWAP In 2004, the Connecticut Water Company entered into a five-year interest rate
swap associated with its $12.5 million 2004 series variable rate unsecured water facilities revenue
refinancing bonds. This was done to manage the Companys exposure to fluctuations in prevailing
interest rates. The swap agreement qualifies for hedge treatment under FAS No. 133 Accounting for
Derivative Instruments and Hedging Activities. The fair value of the interest rate swap included
in the Companys Consolidated Balance sheet in Deferred Charges and Other Costs was approximately
$482,000 and $145,000 at December 31, 2005 and December 31, 2004, respectively. Changes in the
fair value of this derivative instrument are recorded in Accumulated Other Comprehensive Income
in Common Stockholders Equity.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-17
NOTE 7: LONG-TERM DEBT
Long-Term Debt at December 31, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
2005 |
|
|
2004 |
|
|
Unsecured Water Facilities Revenue Bonds |
|
|
|
|
|
|
|
|
|
5.05 |
% |
|
1998 Series A, Due 2028 |
|
$ |
9,640 |
|
|
$ |
9,640 |
|
|
5.125 |
% |
|
1998 Series B, Due 2028 |
|
|
7,685 |
|
|
|
7,685 |
|
|
4.40 |
% |
|
2003A Series, Due 2020 |
|
|
8,000 |
|
|
|
8,000 |
|
|
5.00 |
% |
|
2003C Series, Due 2022 |
|
|
14,930 |
|
|
|
14,930 |
|
Var. |
|
2004 Series Variable Rate, Due 2029 |
|
|
12,500 |
|
|
|
12,500 |
|
Var. |
|
2004 Series A, Due 2028 |
|
|
5,000 |
|
|
|
5,000 |
|
Var. |
|
2004 Series B. Due 2028 |
|
|
4,550 |
|
|
|
4,550 |
|
|
5.00 |
% |
|
2005 A Series, Due 2040 |
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
Total Connecticut Water Company |
|
|
72,305 |
|
|
|
62,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crystal Water Utilities Corporation |
|
|
|
|
|
|
|
|
|
8.0 |
% |
|
Westbank, Due 2017 |
|
|
105 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crystal Water Company of Danielson |
|
|
|
|
|
|
|
|
|
7.82 |
% |
|
Connecticut Development Authority, Due 2020 |
|
|
|
|
|
|
455 |
|
|
5.00 |
% |
|
Unsecured Water Facilities Revenue Bonds 2005 A Series, Due 2040 |
|
|
5,000 |
|
|
|
|
|
|
Total Crystal Water Company of Danielson |
|
|
5,000 |
|
|
|
455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chester Realty |
|
|
|
|
|
|
|
|
|
6 |
% |
|
Note Payable, Due 2006 |
|
|
12 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barnstable Water Company |
|
|
|
|
|
|
|
|
|
10.2 |
% |
|
Indianapolis Life Insurance, Due 2011 |
|
|
|
|
|
|
1,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unionville Water Company |
|
|
|
|
|
|
|
|
|
8.125 |
% |
|
Farmington Savings Bank, Due 2011 |
|
|
842 |
|
|
|
963 |
|
|
3.56 |
% |
|
State of Connecticut, Due 2023 |
|
|
1,471 |
|
|
|
1,531 |
|
|
|
|
|
|
Total Unionville Water Company |
|
|
2,313 |
|
|
|
2,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Connecticut Water Service, Inc. |
|
|
79,735 |
|
|
|
66,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Current Portion |
|
|
(2,331 |
) |
|
|
(326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt |
|
$ |
77,404 |
|
|
$ |
66,399 |
|
|
The Companys principal payments required for years 2006 2010 are as follows:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
2006 |
|
|
|
|
|
$ |
2,331 |
|
2007 |
|
|
|
|
|
$ |
7 |
|
2008 |
|
|
|
|
|
$ |
7 |
|
2009 |
|
|
|
|
|
$ |
8 |
|
2010 |
|
|
|
|
|
$ |
8 |
|
At December 31, 2005 a portion of the Companys utility plant was pledged as collateral for
long-term debt.
In November 2005, Connecticut Water borrowed $10 million through the issuance of Water Facilities
Revenue Bonds by the Connecticut Development Authority sold in one series with an interest rate of
five percent maturing on October 1, 2040. The proceeds from the sale of the bonds have been used
to finance construction and installation of various capital improvements to the Companys existing
water system.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-18
In November 2005, Crystal borrowed $5 million through the issuance of Water Facilities Revenue
Bonds by the Connecticut Development Authority sold in a single series with an interest rate of
five percent maturing on October 1, 2040. The proceeds of the sale of the bonds have been and will
be used to finance the construction of a water treatment plant in the Town of Killingly, CT and to
facilitate the interconnection of two systems in the Town of Killingly.
A portion
of the proceeds of the Crystal bond issuance mentioned above are held
in trust and will be released to the Company after it completes the
projects for which the bond issuance was granted. The Company expects
to complete the projects before the end of 2006. The
December 31, 2005 $2.6 million fund balance is classified
as Restricted Cash on the Balance Sheet.
Barnstable Water Companys note payable was paid off in 2005 in connection with the sale of
Barnstable Waters assets. As a result of the prepayment, the Company paid the lender a prepayment
fee of $322,000.
During the first quarter of 2004, Connecticut Water refinanced a portion of its long-term debt
through the issuance of $12,500,000 of variable rate, taxable debenture bonds Series 2004 with a
maturity date of January 4, 2029. The bonds have been secured by an irrevocable direct pay letter
of credit issued by a financial institution, with a five-year term expiring in March 2009. The
proceeds of the sale of the bonds, which are general debt obligations of Connecticut Water, were
used to redeem the $12,050,000 aggregate principal amount of Connecticut Waters First Mortgage
Bonds (Series V) and to pay a portion of the expenses associated with the bonds refunding.
In connection with the issuance of the bonds, Connecticut Water entered into an interest rate swap
transaction with a counterparty in the notional principal amount of $12,500,000. The interest rate
swap agreement provides that, beginning in April 2004 and thereafter on a monthly basis,
Connecticut Water will pay the counterparty a fixed interest rate of 3.73% on the notional amount
for a period of five years. In exchange, the counterparty will, beginning in April 2004 and
thereafter on a monthly basis, pay Connecticut Water a floating interest rate (based on 105% of the
U.S. Dollar one-month LIBOR rate) on the notional amount for a period of five years. The purpose
of the interest rate swap is to manage the Companys exposure to fluctuations in prevailing
interest rates.
In June 2004, Unionville secured $1.6 million through the Drinking Water State Revolving Fund for
costs incurred in developing a water interconnection with a neighboring water supplier. The funds
were used to pay off a portion of the balances outstanding under bank lines of credit. As of
December 31, 2005 the Company intends to prepay this debt in 2006.
On September 1, 2004, The Company refinanced a portion of its existing bond indebtedness. The
Company borrowed $9.55 Million in sale proceeds from the issuance of Water Facilities Refunding
Revenue Bonds by the Connecticut Development Authority (the Authority). The bonds were sold in two
series with the following terms:
2004 A Series: $5,000,000 Variable Interest Maturing 7/1/2028
2004 B Series: $4,550,000 Variable Interest Maturing 9/1/2028
The proceeds of the transaction were used to redeem prior obligations to the Authority that were
secured by the Series T and Series U first mortgage bonds of the Company.
There are no mandatory sinking fund payments required on Connecticut Water Companys outstanding
Unsecured Water Facilities Revenue Refinancing Bonds. However, the 1998 Series A and B and the
2003 Series A and C Unsecured Water Facilities Revenue Refinancing Bonds provide for an estate
redemption right whereby the estate of deceased bondholders or surviving joint owners may submit
bonds to the Trustee for redemption at par, subject to a $25,000 per individual holder and a 3%
annual aggregate limitation.
The outstanding Unsecured Water Facility Revenue Bonds of Connecticut Water may be initially called
for redemption at the following dates and prices 1998 Series A and B, March 1, 2008 at 100% plus
accrued interest; 2003 Series A, December 15, 2008 at 100% plus accrued interest; 2003 Series C,
September 1, 2008 at 100% plus accrued interest; and 2005 A Series, October 1, 2009 at 100% plus
accrued interest.
The Crystal Water Company Series A Water Facility Revenue Bonds may be initially called for
redemption on October 1, 2009 at 100% plus accrued interest.
Unionville Water Companys term note with Farmington Savings Bank requires monthly payments of
principal and interest. The note bears a fluctuating interest rate. The interest rate is adjusted
on each 60-month anniversary date from the effective date of May 1, 1996. On the anniversary date
(Interest Change Date) the interest rate shall be increased or decreased to a rate determined by
adding 2.5 percentage points to the most recent Federal Home Loan Bank of Boston Long-Term,
Regular, 5 year, Fixed Rate Mortgage Rate (Index), available 45 days prior to the Interest Change
Date,
rounded to the next highest one-eighth of one percentage point. Unionville may prepay the
principal balance
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-19
outstanding under the note without penalty for the thirty days preceding each Interest Change Date
upon 30 days prior
written notice to the bank. Prepayment made at any other time requires a prepayment penalty, which
is 110% of the present value of the difference between the interest on the amount prepaid for the
remaining term to the next Interest Change Date, as determined by the Current Index and the
interest on the same amount for the remaining term to the next Interest Change Date, as determined
by the Index in effect for that maturity on the day the prepayment is made. As of December 31,
2005 the Company intends to prepay this debt in 2006.
NOTE 8: PREFERRED STOCK
The Companys Preferred Stock at December 31, consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands, except share data) |
|
2005 |
|
|
2004 |
|
|
Connecticut Water Service, Inc.
|
|
|
|
|
|
|
|
|
Cumulative Series A Voting, $20 Par Value; Authorized, Issued and
Outstanding 15,000 Shares |
|
$ |
300 |
|
|
$ |
300 |
|
Cumulative Series $.90 Non-Voting, $16 Par Value; Authorized 50,000
Shares, Issued and Outstanding 29,499 Shares |
|
|
472 |
|
|
|
472 |
|
|
|
|
|
772 |
|
|
|
772 |
|
|
|
|
|
|
|
|
|
|
Barnstable Water Company |
|
|
|
|
|
|
|
|
6% Cumulative, $100 Par Value; Authorized, Issued and
Outstanding 750 Shares |
|
|
75 |
|
|
|
75 |
|
|
Total Preferred Stock |
|
$ |
847 |
|
|
$ |
847 |
|
|
All or any part of any series of either class of the Companys issued Preferred Stock may be called
for redemption by the Company at any time. The per share redemption prices of the Series A and
Series $.90 Preferred Stock, if called by the Company, are $21.00 and $16.00, respectively.
The Company is authorized to issue 400,000 shares of an additional class of Preferred Stock, $25
par value, the general preferences, voting powers, restrictions and qualifications of which are
similar to the Companys existing Preferred Stock. No shares of the $25 par value Preferred Stock
have been issued.
The Company is also authorized to issue 1,000,000 shares of $1 par value Preference Stock, junior
to the
Companys existing Preferred Stock in rights to dividends and upon liquidation of the Company.
150,000 of such shares have been designated as Series A Junior Participating Preference Stock.
Pursuant to the Shareholder Rights Plan, described in Note 4, the Company keeps reserved and
available for issuance one one-hundredth of a
share of Series A Junior Participating Preference Stock for each outstanding share of the Companys
common
stock.
Barnstable Water Company paid Preferred Dividends of $4,500 in each of 2005, 2004 and 2003. These
dividends are included in the Other category of the Other Income (Deductions) section of the
Consolidated Statements of Income. These preferred shareholders have 1/10 of a common vote for
matters related to Barnstable Water Company.
NOTE 9: BANK LINES OF CREDIT
The Companys total available lines of credit totaled $15,500,000 at December 31, 2005 and 2004,
respectively. All of the lines have one year lives and will expire at different dates in 2006.
The Company expects the lines of credit to be renewed in 2006. As of December 31, 2005 and 2004,
the outstanding bank lines of credit were $4,750,000 and $5,650,000 respectively. Bank commitment
fees associated with the lines of credit were approximately $37,500, $37,500, and $30,000 in 2005,
2004, and 2003 respectively.
At December 31, 2005 and 2004, the weighted average interest rates on short-term borrowings
outstanding were 4.62% and 2.83%, respectively.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-20
NOTE 10: UTILITY PLANT AND CONSTRUCTION PROGRAM
The components of utility plant and equipment at December 31, were as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
Land |
|
$ |
9,139 |
|
|
$ |
9,652 |
|
Source of Supply |
|
|
24,423 |
|
|
|
20,724 |
|
Pumping |
|
|
23,650 |
|
|
|
25,348 |
|
Water Treatment |
|
|
46,812 |
|
|
|
47,726 |
|
Transmission and Distribution |
|
|
216,513 |
|
|
|
209,887 |
|
General |
|
|
19,800 |
|
|
|
20,228 |
|
Held for Future Use |
|
|
418 |
|
|
|
420 |
|
|
Total |
|
$ |
340,755 |
|
|
$ |
333,985 |
|
|
The amounts of depreciable utility plant at December 31, 2005 and 2004 included in total utility
plant were $295,105,000 and $291,641,000, respectively.
Barnstable Water Company had Utility Plant of $11,519,000 as of December 31, 2004 that was sold
during 2005.
NOTE 11: TAXES OTHER THAN INCOME TAXES
Taxes Other than Income Taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Municipal Property Taxes |
|
$ |
4,708 |
|
|
$ |
4,527 |
|
|
$ |
4,374 |
|
Payroll Taxes |
|
|
677 |
|
|
|
652 |
|
|
|
648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,385 |
|
|
$ |
5,179 |
|
|
$ |
5,022 |
|
|
NOTE 12: PENSION AND OTHER POST-RETIREMENT EMPLOYEE BENEFITS
GENERAL As of December 31, 2005, Connecticut Water had 167 employees, Crystal 11, Barnstable
Water 6 , and Unionville 7 for a total of 191 employees. The Companys officers are employees of
Connecticut Water. Employee expenses are charged between companies as appropriate.
Investment Strategy The Pension Trust and Finance Committee (the Committee) reviews and approves
the investment strategy of the investments made on behalf of various pension and post-retirement
benefit plans existing under the Company and certain of its subsidiaries.
The targeted asset allocation ratios for those plans as set by the Committee at December 31, 2005
and 2004 were:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Equity |
|
|
65 |
% |
|
|
65 |
% |
Fixed Income |
|
|
35 |
% |
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
The Committee recognizes that a variation of up to 5% in either direction from its targeted asset
allocation mix is acceptable due to market fluctuations.
Our expected long-term rate of return on the various benefit plan assets is based upon the plans
expected asset allocation, expected returns on various classes of plan assets as well as historical
returns. The expected long-term rates of return on the Companys pension plan is 8%.
PENSION
Defined Contribution Plan Through 2003, one of the Companys subsidiaries, Unionville, had a
noncontributory defined contribution pension plan which covered all employees who had completed one
year of service. Unionville provided a contribution to the plan based upon 10% of the
participants annual pay. The Unionville contribution charged to expense under this plan for the
twelve months ended December 31, 2003 was $31,000. Effective December 31, 2003 the Unionville
pension plan was terminated. Effective January 1, 2004, the employees of Unionville are covered by
the Companys noncontributory defined benefit pension plan.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-21
Defined Benefit Plans The Company and certain of its subsidiaries have noncontributory defined
benefit pension plans covering qualified employees. In general, the Companys policy is to fund
accrued pension costs as permitted by federal income tax and Employee Retirement Income Security
Act of 1974 regulations. A contribution of $2,009,000 was made in 2005 for 2004 plan year. A
contribution of approximately $2,450,000 is expected to be made in 2006 for plan year 2005.
The following tables set forth the funded status of the Companys retirement plans at December 31,
the latest valuation date:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
Change in Benefit Obligation: |
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year |
|
$ |
27,049 |
|
|
$ |
23,812 |
|
Service Cost |
|
|
1,050 |
|
|
|
951 |
|
Interest Cost |
|
|
1,552 |
|
|
|
1,458 |
|
Actuarial loss/(gain) |
|
|
2,008 |
|
|
|
1,807 |
|
Benefits paid |
|
|
(1,150 |
) |
|
|
(979 |
) |
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year |
|
$ |
30,509 |
|
|
$ |
27,049 |
|
|
Change in Plan Assets: |
|
|
|
|
|
|
|
|
Fair Value, beginning of year |
|
$ |
22,250 |
|
|
$ |
20,311 |
|
Actual return on plan assets |
|
|
1,737 |
|
|
|
2,004 |
|
Employer contribution |
|
|
2,009 |
|
|
|
914 |
|
Benefits paid |
|
|
(1,150 |
) |
|
|
(979 |
) |
|
|
|
|
|
|
|
|
|
|
Fair Value, end of year |
|
$ |
24,846 |
|
|
$ |
22,250 |
|
|
|
Funded Status |
|
$ |
(5,663 |
) |
|
$ |
(4,799 |
) |
Unrecognized net actuarial (gain) loss |
|
|
3,171 |
|
|
|
1,577 |
|
Unrecognized transition obligation |
|
|
13 |
|
|
|
24 |
|
Unrecognized prior service cost |
|
|
730 |
|
|
|
827 |
|
|
|
|
|
|
|
|
|
|
|
Accrued Cost |
|
$ |
(1,749 |
) |
|
$ |
(2,371 |
) |
|
The accumulated benefit obligation for all defined benefit pension plans was approximately
$24,031,000 and $21,195,000 at December 31, 2005 and 2004, respectively.
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Weighted-average assumptions used to determine benefit obligations at December 31: |
|
|
|
|
|
|
Discount rate |
|
|
5.50 |
% |
|
|
5.75 |
% |
Rate of compensation increase |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Weighted-average assumptions used to determine net periodic cost for years ended December 31: |
|
|
|
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
6.25 |
% |
Expected long-term return on plan assets |
|
|
8.00 |
% |
|
|
8.00 |
% |
Rate of compensation increase |
|
|
4.50 |
% |
|
|
4.50 |
% |
The discount rate is based on interest rates for long-term, high quality, fixed income investments.
The Company looks at the general trend of several different bond indices.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
(in thousands) |
|
2005 |
|
2004 |
|
2003 |
|
Components of net periodic benefit costs
|
|
|
|
|
|
|
| |
|
|
|
|
Service cost |
|
$ |
1,050 |
|
|
$ |
951 |
|
|
$ |
843 |
|
Interest cost |
|
|
1,552 |
|
|
|
1,458 |
|
|
|
1,390 |
|
Expected return on plan assets |
|
|
(1,645 |
) |
|
|
(1,572 |
) |
|
|
(1,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net transition asset |
|
|
10 |
|
|
|
12 |
|
|
|
12 |
|
Unrecognized net (gain)/loss |
|
|
322 |
|
|
|
95 |
|
|
|
(2 |
) |
Unrecognized prior service cost |
|
|
98 |
|
|
|
108 |
|
|
|
108 |
|
|
Net Periodic Pension Benefit Costs |
|
$ |
1,387 |
|
|
$ |
1,052 |
|
|
$ |
807 |
|
|
Plan Assets
The Companys pension plan weighted-average asset allocations at December 31, 2005, and 2004 by
asset category were as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
Equity Securities |
|
|
65 |
% |
|
|
67 |
% |
Fixed Income |
|
|
35 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
The Plans expected future benefit payments are:
|
|
|
|
|
Year |
|
Amount |
2006 |
|
$ |
1,137,000 |
|
2007 |
|
|
1,238,000 |
|
2008 |
|
|
1,566,000 |
|
2009 |
|
|
1,593,000 |
|
2010 |
|
|
1,847,000 |
|
Years 2011-2015 |
|
|
12,337,000 |
|
POST-RETIREMENT BENEFITS OTHER THAN PENSION (PBOP) - In addition to providing pension
benefits, a subsidiary company, Connecticut Water Company, provides certain medical, dental and
life insurance benefits to retired employees partially funded by a 501(c)(9) Voluntary Employee
Beneficiary Association Trust that has been approved by the DPUC. Substantially all of Connecticut
Waters employees may become eligible for these benefits if they retire on or after age 55 with 10
years of service. The contribution for calendar years 2005 and 2004 was $473,100 for each year.
A regulatory asset has been recorded to reflect the amount which represents the future FAS 106
costs expected to be recovered in customer rates. In 1997, Connecticut Water requested and
received approval from the DPUC to include FAS 106 costs in customer rates. The DPUCs 1997
limited reopener of Connecticut Waters general rate proceeding allowed it to increase customer
rates $208,000 annually for FAS 106 costs. Connecticut Waters current rates now allow for
recovery of $473,100 annually for post-retirement benefit costs other than pension.
The
Company uses no corridor, as permitted by FAS 106, when recognizing
actuarial gains and losses.
Connecticut Water has elected to recognize the transition obligation on a delayed basis over a
period equal to the plan participants 21.6 years of average future service.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-23
The Company has concluded that the postretirement welfare plans benefits will be considered
actuarially equivalent to the benefits provided by Medicare Part D. The Company does not intend to
apply for the government subsidy for postretirement prescription drug benefits, even though it
expects to be eligible. Therefore, the impact of the subsidy on the plans liabilities are not
reflected in the December 31, 2005 disclosure.
Another subsidiary company, Barnstable Water, also provides certain health care benefits to
eligible retired employees. Substantially all Barnstable Water employees may become eligible for
these benefits if they retire on or after age 65 with at least 15 years of service. Post-65
medical coverage is provided for employees up to a maximum coverage of $500 per quarter. Barnstable
Waters PBOP currently is not funded.
The following tables set forth the funded status of the Companys post-retirement health care
benefits at December 31, the latest valuation date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connecticut Water |
|
Barnstable Water |
(in thousands) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Change in Benefit Obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year |
|
$ |
6,605 |
|
|
$ |
5,234 |
|
|
$ |
100 |
|
|
$ |
94 |
|
Service Cost |
|
|
460 |
|
|
|
311 |
|
|
|
2 |
|
|
|
2 |
|
Interest Cost |
|
|
405 |
|
|
|
323 |
|
|
|
5 |
|
|
|
6 |
|
Plan Participant Contributions |
|
|
83 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
Actuarial loss/(gain) |
|
|
1,186 |
|
|
|
1,067 |
|
|
|
(3 |
) |
|
|
2 |
|
Benefits paid |
|
|
(486 |
) |
|
|
(405 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year |
|
$ |
8,253 |
|
|
$ |
6,605 |
|
|
$ |
99 |
|
|
$ |
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value, beginning of year |
|
$ |
3,566 |
|
|
$ |
3,179 |
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
209 |
|
|
|
244 |
|
|
|
|
|
|
|
|
|
Employer contribution |
|
|
473 |
|
|
|
473 |
|
|
|
5 |
|
|
|
4 |
|
Participants contributions |
|
|
83 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
Benefits paid |
|
|
(486 |
) |
|
|
(405 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value, end of year |
|
$ |
3,845 |
|
|
$ |
3,566 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status |
|
$ |
(4,408 |
) |
|
$ |
(3,039 |
) |
|
$ |
(99 |
) |
|
$ |
(100 |
) |
Unrecognized net actuarial (gain) loss |
|
|
1,969 |
|
|
|
988 |
|
|
|
(42 |
) |
|
|
(40 |
) |
Unrecognized transition obligation |
|
|
843 |
|
|
|
963 |
|
|
|
53 |
|
|
|
58 |
|
|
Accrued Cost |
|
$ |
(1,596 |
) |
|
$ |
(1,088 |
) |
|
$ |
(88 |
) |
|
$ |
(82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine
benefit obligations at December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.50 |
% |
|
|
5.75 |
% |
|
|
5.50 |
% |
|
|
5.75 |
% |
Weighted-average assumptions used to determine net
periodic benefit cost for years ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
6.25 |
% |
|
|
5.75 |
% |
|
|
6.25 |
% |
Expected long-term return on plan assets |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
Rate of compensation increase |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-24
The discount rate is based on interest rates for long-term, high quality, fixed income investments.
The Company looks at the general trend of several different bond indices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connecticut Water |
|
Barnstable Water |
(in thousands) |
|
2005 |
|
2004 |
|
2003 |
|
2005 |
|
2004 |
|
2003 |
|
Components of net periodic benefit costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
460 |
|
|
$ |
311 |
|
|
$ |
270 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest cost |
|
|
405 |
|
|
|
323 |
|
|
|
314 |
|
|
|
5 |
|
|
|
6 |
|
|
|
6 |
|
Expected return on plan assets |
|
|
(168 |
) |
|
|
(158 |
) |
|
|
(145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net transition asset |
|
|
120 |
|
|
|
121 |
|
|
|
165 |
|
|
|
6 |
|
|
|
6 |
|
|
|
6 |
|
Recognized net (gain)/loss |
|
|
164 |
|
|
|
18 |
|
|
|
(31 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
|
Net Periodic Pension and Post
Retirement Benefit Costs |
|
$ |
981 |
|
|
$ |
615 |
|
|
$ |
573 |
|
|
$ |
11 |
|
|
$ |
11 |
|
|
$ |
10 |
|
|
Assumed health care cost trend rates at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
Medical |
|
Dental |
|
Medical |
|
Dental |
|
Health care cost
trend rate assumed
for next year |
|
|
8.5 |
% |
|
|
8.5 |
% |
|
|
8.5 |
% |
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate to which the
cost trend rate is
assumed to decline |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year that the rate
reaches the
ultimate trend rate |
|
|
2015 |
|
|
|
2015 |
|
|
|
2014 |
|
|
|
2014 |
|
Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans.
A one-percentage-point change in assumed health care cost trend rates would have the following
effects on Connecticut Waters plan and would have no impact on the Barnstable Water plan:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-Point |
|
1-Percentage-Point |
(in thousands) |
|
Increase |
|
Decrease |
|
Effect on total of service and interest cost components |
|
$ |
139 |
|
|
$ |
(113 |
) |
Effect on post-retirement benefit obligation |
|
$ |
1,078 |
|
|
$ |
(901 |
) |
|
Plan Assets
Barnstable Waters other post-retirement benefit plan has no assets. Connecticut Waters other
postretirement benefit plan weighted-average asset allocations at December 31, 2005 and 2004, by
asset category were as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
Equity Securities |
|
|
63 |
% |
|
|
57 |
% |
Fixed Income |
|
|
37 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-25
Cash Flows
Connecticut Water contributed $473,100 to its other post-retirement benefit plan in 2005 for plan
year 2005 and expects to contribute $473,100 in 2006 for plan year 2006.
Expected future benefit payments are:
|
|
|
|
|
|
|
|
|
Year |
|
Connecticut Water |
|
Barnstable |
2006 |
|
$ |
310,000 |
|
|
$ |
8,000 |
|
2007 |
|
|
338,000 |
|
|
|
8,000 |
|
2008 |
|
|
354,000 |
|
|
|
7,000 |
|
2009 |
|
|
390,000 |
|
|
|
7,000 |
|
2010 |
|
|
416,000 |
|
|
|
7,000 |
|
Years 2011 2015 |
|
|
2,750,000 |
|
|
|
38,000 |
|
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Connecticut Water and Barnstable Water provide additional
pension benefits to senior management through supplemental executive retirement contracts. At
December 31, 2005 and 2004 the actuarial present value of the projected benefit obligation of these
contracts were $1,530,000 and $1,301,000, respectively. Expense associated with these contracts
was approximately $194,000 for 2005, $105,000 for 2004, and $152,000 for 2003.
SAVINGS PLAN The Company and certain of its subsidiaries maintain an employee savings plan which
allows participants to contribute from 1% to 15% of pre-tax compensation plus for those age 50 and
older catch-up contributions as allowed by law. The Company matches 50 cents for each dollar
contributed by the employee up to 4% of the employees compensation. The Company contribution
charged to expense in 2005, 2004 and 2003 was $168,000, $174,000, and $166,000, respectively.
The Plan creates the possibility for an incentive bonus contribution to the 401(k) plan tied to
the attainment of a specific goal or goals to be identified each year. If the specific goal or
goals are attained by the end of the year, all eligible employees, except officers and certain key
employees, may receive up to an additional 1% of their annual base salary as a direct contribution
to their 401(k) account. An incentive bonus of .6% of base pay, or a total of $50,000 was accrued
for 2005, to be paid in 2006. An incentive bonus of .6% of base pay, or a total of $51,000 was
awarded in 2005 for 2004. No incentive bonus was awarded in 2003.
NOTE 13: STOCK-BASED COMPENSATION PLANS
The Companys 2004 Performance Stock Program (2004 PSP), approved by shareholders in 2004,
authorizes the issuance of up to 700,000 shares of Company Common Stock. As of December 31, 2005
there were 665,728 shares available for grant. In total under the original Plans (1994
Plans) there were 700,000 shares authorized and 225,218 shares available for grant at December 31,
2005. There are four forms of awards under the 2004 PSP. Stock options are one form of award.
The Company has not issued any stock options since 2003, and does not anticipate issuing any more
for the foreseeable future. The other three forms of award which the Company has continued to
issue are: Restricted Stock, Performance Shares and Cash Units.
STOCK OPTIONS The Company issued stock options between 1999 and 2003 and accounts for those
options under APB Opinion No. 25, under which no compensation cost has been recognized in the
Consolidated Statements of Income. On a pro forma basis, the Companys net income and earnings per
share are shown in Note 1. Beginning January 1, 2006, compensation expense will be recognized when
FAS 123(R) becomes effective.
For purposes of this calculation, the Company arrived at the fair value of each stock grant at the
date of grant by using the Black Scholes Option Pricing model with the following weighted average
assumptions used for grants for the years ended December 31, 2005, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Expected life (years) |
|
|
|
|
|
|
|
|
|
|
5.00 |
|
Risk-free interest rate (percentage) |
|
|
|
|
|
|
|
|
|
|
2.79 |
|
Volatility (percentage) |
|
|
|
|
|
|
|
|
|
|
30.00 |
|
Dividend yield |
|
|
|
|
|
|
|
|
|
|
2.91 |
|
Options begin to become exercisable one year from the date of grant. Vesting periods range from
one to five years.
The maximum term ranges from five to ten years.
The per share weighted average fair value of stock options granted during 2003 was $6.42. No stock
options were granted in 2004 and 2005.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year |
|
|
251,835 |
|
|
$ |
22.85 |
|
|
|
251,835 |
|
|
$ |
22.85 |
|
|
|
235,101 |
|
|
$ |
21.41 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,053 |
|
|
|
29.05 |
|
Terminated |
|
|
(5,001 |
) |
|
|
25.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(44,563 |
) |
|
|
17.11 |
|
|
|
|
|
|
|
|
|
|
|
(19,319 |
) |
|
|
16.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year |
|
|
202,271 |
|
|
|
24.04 |
|
|
|
251,835 |
|
|
|
22.85 |
|
|
|
251,835 |
|
|
|
22.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year |
|
|
175,685 |
|
|
$ |
23.44 |
|
|
|
196,731 |
|
|
$ |
21.48 |
|
|
|
119,992 |
|
|
$ |
21.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No options were exercised during 2004. The following table summarizes the price ranges of the
options outstanding and options exercisable as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Contractual Life |
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
(years) |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Range of prices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$12.00 - $14.99 |
|
|
19,305 |
|
|
|
3.3 |
|
|
$ |
14.83 |
|
|
|
19,305 |
|
|
$ |
14.83 |
|
$15.00 - $17.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$18.00 - $20.99 |
|
|
31,314 |
|
|
|
4.9 |
|
|
|
20.42 |
|
|
|
31,314 |
|
|
|
20.42 |
|
$21.00 - $23.99 |
|
|
47,596 |
|
|
|
3.9 |
|
|
|
22.33 |
|
|
|
47,596 |
|
|
|
22.33 |
|
$24.00 - $26.99 |
|
|
34,253 |
|
|
|
6.9 |
|
|
|
25.78 |
|
|
|
25,690 |
|
|
|
25.78 |
|
$27.00 - $29.99 |
|
|
69,803 |
|
|
|
6.6 |
|
|
|
28.52 |
|
|
|
51,780 |
|
|
|
28.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,271 |
|
|
|
5.5 |
|
|
$ |
24.04 |
|
|
|
175,685 |
|
|
$ |
23.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 14: SEGMENT REPORTING
Our Company operates principally in three segments: water activities, real estate transactions, and
services and rentals. The water segment is comprised of our core regulated water activities to
supply water to our customers. Our real estate transactions segment involves selling or donating
for income tax benefits our limited excess real estate holdings. Our services and rentals segment
provides services on a contract basis and also leases certain of our properties to third parties.
The accounting policies of each reportable segment are the same as those described in the summary
of significant accounting policies. Financial data for reportable segments is as follows:
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
Income |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
Expense |
|
|
|
|
|
from |
|
|
|
|
|
|
|
|
|
|
Operating |
|
Other Income |
|
(net of |
|
Income |
|
Continuing |
(in thousands) |
|
Revenues |
|
Depreciation |
|
Expenses |
|
(Deductions) |
|
AFUDC) |
|
Taxes |
|
Operations |
|
For the year ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Activities |
|
$ |
47,453 |
|
|
$ |
5,724 |
|
|
$ |
29,899 |
|
|
$ |
276 |
|
|
$ |
3,274 |
|
|
$ |
2,550 |
|
|
$ |
6,282 |
|
Real Estate Transactions |
|
|
495 |
|
|
|
|
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
475 |
|
|
|
(61 |
) |
Services and Rentals |
|
|
4,123 |
|
|
|
36 |
|
|
|
2,555 |
|
|
|
|
|
|
|
|
|
|
|
587 |
|
|
|
945 |
|
|
Total |
|
$ |
52,071 |
|
|
$ |
5,760 |
|
|
$ |
32,535 |
|
|
$ |
276 |
|
|
$ |
3,274 |
|
|
$ |
3,612 |
|
|
$ |
7,166 |
|
|
For the year ended
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Activities |
|
$ |
46,008 |
|
|
$ |
5,570 |
|
|
$ |
27,549 |
|
|
$ |
111 |
|
|
$ |
3,321 |
|
|
$ |
2,551 |
|
|
$ |
7,128 |
|
Real Estate Transactions |
|
|
(12 |
) |
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
(1,245 |
) |
|
|
1,206 |
|
Services and Rentals |
|
|
4,655 |
|
|
|
33 |
|
|
|
3,264 |
|
|
|
|
|
|
|
|
|
|
|
529 |
|
|
|
829 |
|
|
Total |
|
$ |
50,651 |
|
|
$ |
5,603 |
|
|
$ |
30,840 |
|
|
$ |
111 |
|
|
$ |
3,321 |
|
|
$ |
1,835 |
|
|
$ |
9,163 |
|
|
For the year ended
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Activities |
|
$ |
44,598 |
|
|
$ |
5,483 |
|
|
$ |
26,108 |
|
|
$ |
26 |
|
|
$ |
4,030 |
|
|
$ |
1,868 |
|
|
$ |
7,169 |
|
Real Estate Transactions |
|
|
170 |
|
|
|
|
|
|
|
133 |
|
|
|
(1 |
) |
|
|
|
|
|
|
(993 |
) |
|
|
1,029 |
|
Services and Rentals |
|
|
3,717 |
|
|
|
23 |
|
|
|
2,583 |
|
|
|
|
|
|
|
|
|
|
|
416 |
|
|
|
692 |
|
|
Total |
|
$ |
48,485 |
|
|
$ |
5,506 |
|
|
$ |
28,824 |
|
|
$ |
25 |
|
|
$ |
4,030 |
|
|
$ |
1,291 |
|
|
$ |
8,890 |
|
|
|
|
|
|
|
|
|
|
|
At December 31 (in thousands) |
|
2005 |
|
|
2004 |
|
|
|
|
Total Plant and Other Investments: |
|
|
|
|
|
|
|
|
Water |
|
$ |
251,511 |
|
|
$ |
245,085 |
|
Non-Water |
|
|
733 |
|
|
|
989 |
|
|
|
|
|
|
|
252,244 |
|
|
|
246,074 |
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
Water |
|
|
46,746 |
|
|
|
39,897 |
|
Non-Water |
|
|
7,045 |
|
|
|
4,969 |
|
|
|
|
|
|
|
53,791 |
|
|
|
44,866 |
|
|
|
|
Total Assets |
|
$ |
306,035 |
|
|
$ |
290,940 |
|
|
|
|
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-28
NOTE 15: COMMITMENTS AND CONTINGENCIES
SECURITY The Bioterrorism Response Act of 2001 required every public water system serving over
3,300 people to prepare Vulnerability Assessments (VA) of their critical utility assets. The last
of these assessments required to be filed by our companies were submitted to the U.S. Environmental
Protection Agency in June 2004 and was followed by updated Emergency Response Plans in December
2004, per statutory requirements. The information within the VA is not subject to release to the
public and is protected from Freedom of Information Act inquiries.
Investment in security-related improvements is a continuing process and management believes that
the costs associated with any such improvements would be chargeable for recovery in future rate
proceedings.
REVERSE PRIVATIZATION Our water companies derive their rights and franchises to operate from
state laws that are subject to alteration, amendment or repeal, and do not grant permanent
exclusive rights to our service areas. Our franchises are free from burdensome restrictions, are
unlimited as to time, and authorize us to sell potable water in all towns we now serve. There is
the possibility that states could revoke our franchises and allow a governmental entity to take
over some or all of our systems. From time to time such legislation is contemplated.
ENVIRONMENTAL AND WATER QUALITY REGULATION The Company is subject to environmental and water
quality regulations. Costs to comply with environmental and water quality regulations are
substantial. We are currently in compliance with current regulations, but the regulations are
subject to change at any time. The costs to comply with future changes in state or federal
regulations, which could require us to modify current filtration facilities and/or construct new
ones, or to replace any reduction of the safe yield from any of our current sources of supply,
could be substantial.
RATE RELIEF Our three Connecticut operating subsidiaries, Connecticut Water, Crystal, and
Unionville, are regulated public utilities which provide water services to their customers. The
rates that these companies charge their water customers are subject to the jurisdiction of the
regulatory authority of the Connecticut DPUC, which sets water rates for each company independently
because the systems are not interconnected.
The DPUC may authorize the Companys operating subsidiaries to charge rates which the DPUC consider
to be sufficient to recover the normal operating expenses of our operating subsidiaries, to provide
funds for adding new or replacing water infrastructure, and to allow our operating subsidiaries to
earn what the DPUC consider to be a fair and reasonable return on our invested capital.
The Company has filed with the DPUC to merge all of its Connecticut subsidiaries into Connecticut
Water in February 2006. On March 20, 2006, the DPUC issued a Draft Decision which would approve
this merger. Further, the Company believes that it will apply for a rate increase for Connecticut
Water during the summer of 2006.
LAND DISPOSITIONS Starting with its first land donation in 2000, the Company has engaged in a
program of land donations to municipalities in Connecticut, which has resulted in net income (tax
benefits) to the Company of approximately $3.9 million. As previously disclosed, the land donation
program under the Companys agreement with the Town of Killingly, CT was completed in January 2004
with the donation of the remaining parcel to the Town. The donation of this final parcel resulted
in a net profit (tax benefit) to the Company of $706,000 during the first quarter of 2004. The
donation of land to the Town of Plymouth, CT in December 2004 resulted in an additional $498,000 of
net income.
The Company and its subsidiaries own additional parcels of land in Connecticut and Massachusetts
which may be suitable in the future for disposition, either by sale or by donation to
municipalities, other local governments or private charitable entities. These additional parcels
would include certain Class I and II parcels previously identified by the Connecticut DEP in the
DEP notice noted above, as well as certain lands owned by BARLACO in Barnstable, Massachusetts.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-29
During 2005, the Company had one significant land transaction. Connecticut Water sold 74 acres of
land in Bristol, Connecticut for $475,000 resulting in a net profit of $256,000 on the transaction.
During 2003 and 2004, the Company donated approximately 370 acres of land to municipalities in
Connecticut for public and/or open space purposes. These donations contributed approximately $1.0
million and $1.2 million, respectively to net income in those years, as a result of favorable tax
treatment under federal and Connecticut tax laws. The Company currently anticipates that it will
continue to pursue selected land sales and/or donations during fiscal years 2006, 2007 and 2008,
but at a reduced level. The Company currently does not project completing any material land
transactions in 2006 except for the sale of the BARLACO land. The Company is unable to predict if
and when any sales or donations of some or all of these parcels may occur in the future and, if so,
what amount of net income (tax benefits) may result from any such sales or donations.
Amounts taken as tax benefits in prior years are subject to challenge by the taxing agencies. In
2005, the Company increased its tax reserves by approximately $400,000 for land valuation
allowances.
TAXES Due to the current environment of state budget deficits, the Company and its subsidiaries
may be subject to a higher tax burden through changes in state legislation. Also, the Companys
future property tax burden may increase as state aid to towns is decreased.
On August 18, 2005, the Company was notified by the Internal Revenue Service (IRS) that they would
be conducting an audit of the Companys 2003 Federal Income Tax Return. The field work portion of
the audit is complete and the IRS has summarized its proposed adjustments. Other than a proposed
change to the value of donated land, none of the other changes are material. The Company continues
to believe that the value of donated land included in its 2003 Federal Income Tax Return is
correct. Discussions between the Company and the IRS are continuing. The Company does not believe
that IRS proposed changes would materially affect financial results.
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
F-30
NOTE 16: QUARTERLY FINANCIAL DATA (Unaudited)
Selected quarterly financial data for the years ended December 31, 2005 and 2004 appears below:
(in thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Operating Revenues |
|
$ |
10,924 |
|
|
$ |
10,389 |
|
|
$ |
10,986 |
|
|
$ |
11,368 |
|
|
$ |
14,088 |
|
|
$ |
13,148 |
|
|
$ |
11,455 |
|
|
$ |
11,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Operating
Income |
|
|
2,231 |
|
|
|
1,851 |
|
|
|
1,712 |
|
|
|
2,699 |
|
|
|
3,793 |
|
|
|
4,185 |
|
|
|
1,756 |
|
|
|
1,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
Continuing
Operations |
|
|
1,998 |
|
|
|
1,948 |
|
|
|
1,184 |
|
|
|
2,100 |
|
|
|
3,279 |
|
|
|
3,568 |
|
|
|
705 |
|
|
|
1,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations |
|
|
(13 |
) |
|
|
33 |
|
|
|
2,904 |
|
|
|
33 |
|
|
|
48 |
|
|
|
172 |
|
|
|
219 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
1,985 |
|
|
|
1,981 |
|
|
|
4,088 |
|
|
|
2,133 |
|
|
|
3,327 |
|
|
|
3,740 |
|
|
|
924 |
|
|
|
1,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per
Common Share
Continuing
Operations |
|
|
0.25 |
|
|
|
0.24 |
|
|
|
0.15 |
|
|
|
0.26 |
|
|
|
0.40 |
|
|
|
0.45 |
|
|
|
0.09 |
|
|
|
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per
Common Share
Discontinued
Operations |
|
|
|
|
|
|
|
|
|
|
0.35 |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Common
Share |
|
|
0.25 |
|
|
|
0.24 |
|
|
|
0.50 |
|
|
|
0.27 |
|
|
|
0.41 |
|
|
|
0.47 |
|
|
|
0.11 |
|
|
|
0.20 |
|
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
E-1
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.1
|
|
Certificate of Incorporation of Connecticut Water Service, Inc. amended
and restated as of April, 1998. (Exhibit 3.1 to Form 10-K for the year
ended 12/31/98). |
|
|
|
3.2
|
|
By-Laws, as amended, of Connecticut Water Service, Inc. as amended and
restated as of August 12, 1999. (Exhibit 3.2 to Form 10-K for the year
ended 12/31/99). |
|
|
|
3.3
|
|
Certification of Incorporation of The Connecticut Water Company effective
April, 1998. (Exhibit 3.3 to Form 10-K for the year ended 12/31/98). |
|
|
|
3.4
|
|
Certificate of Amendment to the Certificate of Incorporation of
Connecticut Water Service, Inc. dated August 6, 2001. (Exhibit 3.4 to Form
10-K for the year ended 12/31/01). |
|
|
|
3.5
|
|
Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Connecticut Water Service, Inc. dated April 23, 2004.
(Exhibit 3.5 to Form 10-Q for the quarter ended 3/31/04). |
|
|
|
4.1
|
|
Loan Agreement dated as of February 9, 1996 between New London Trust,
F.S.B. and The Crystal Water Company of Danielson. (Exhibit 4.10 to Form
10-K for the year ended 12/31/99). |
|
|
|
4.2
|
|
Loan Agreement dated as of April 11, 1991 between Farmington Savings Bank
and The Unionville Water Company. (Exhibit 4.11 to Form 10-K for the year
ended 12/31/02). |
|
|
|
4.3
|
|
Loan Agreement dated as of October 1, 2003 between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.12 to
Form 10-K for the year ended 12/31/03). |
|
|
|
4.4
|
|
Indenture of Trust dated as of October 1, 2003 between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.13 to
Form 10-K for the year ended 12/31/03). |
|
|
|
4.5
|
|
Loan Agreement dated as of October 1, 2003 between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.14 to
Form 10-K for the year ended 12/31/03). |
|
|
|
4.6
|
|
Indenture of Trust dated as of October 1, 2003 between the Connecticut
Development Authority and The Connecticut Water Company. (Exhibit 4.15 to
Form 10-K for the year ended 12/31/03). |
|
|
|
4.7
|
|
Bond Purchase Agreement dated as of October 10, 2003 among Connecticut
Development Authority, The Connecticut Water Company and A.G. Edwards and
Sons, Inc. (Exhibit 4.16 to Form 10-K for the year ended 12/31/03). |
E-2
|
|
|
Exhibit |
|
|
Number |
|
Description |
4.8
|
|
Line of Credit Agreement dated as of March 12, 2004 between Webster Bank
and Connecticut Water Service, Inc. (Exhibit 4.17 to Form 10-Q for the
quarter ended 3/31/04). |
|
|
|
4.9
|
|
Bond Purchase Agreement dated as of March 12, 2004, among The Connecticut
Water Company and A.G. Edwards & Sons, Inc. (Exhibit 4.18 to Form 10-Q for
the quarter ended 3/31/04). |
|
|
|
4.10
|
|
Indenture of Trust, dated as of March 1, 2004, between The Connecticut
Water Company and U.S. Bank National Association, as Trustee. (Exhibit
4.19 to Form 10-Q for the quarter ended 3/31/04). |
|
|
|
4.11
|
|
Reimbursement and Credit Agreement, dated as of March 1, 2004, between The
Connecticut Water Company and Citizens Bank of Rhode Island. (Exhibit
4.20 to Form 10-Q for the quarter ended 3/31/04). |
|
|
|
4.12
|
|
Letter of Credit issued by Citizens Bank of Rhode Island, dated as of
March 4, 2004. (Exhibit 4.21 to Form 10-Q for the quarter ended 3/31/04). |
|
|
|
4.13
|
|
Agreement No. DWSRF 200103-C Project Loan Agreement between the State of
Connecticut and Unionville Water Company under the Drinking Water State
Revolving Fund (DWSRF) Program, dated as of April 19, 2004. (Exhibit 4.22
to Form 10-Q for the quarter ended 6/30/04). |
|
|
|
4.14
|
|
Collateral Assignment of Water Service Charges and Right to Receive Water
ervice Expense Assessments and Security Agreement between Unionville
ater Company and the State of Connecticut, dated as of June 3, 2004.
Exhibit 4.23 to Form 10-Q for the quarter ended 6/30/04). |
|
|
|
4.15
|
|
Bond Purchase Agreement, dated September 1, 2004, among The Connecticut
ater Company, Connecticut Development Authority, and A.G. Edwards & Sons,
nc. (Exhibit 4.24 to Form 10-Q for the quarter ended 9/30/04). |
|
|
|
4.16
|
|
Indenture of Trust, dated August 1, 2004, between The Connecticut Water
ompany and U.S. Bank National Association, as Trustee, 2004A Series.
Exhibit 4.25 to Form 10-Q for the quarter ended 9/30/04). |
|
|
|
4.17
|
|
Indenture of Trust, dated August 1, 2004, between The Connecticut Water
ompany and U.S. Bank National Association, as Trustee, 2004B Series.
Exhibit 4.26 to Form 10-Q for the quarter ended 9/30/04). |
|
|
|
4.18
|
|
Loan Agreement, dated August 1, 2004, between The Connecticut Water
ompany and Connecticut Development Authority for 2004 Series. (Exhibit .27 to Form 10-Q for the quarter ended 9/30/04). |
|
|
|
4.19
|
|
Loan Agreement, dated August 1, 2004, between The Connecticut Water
ompany and Connecticut Development Authority for 2004B Series. (Exhibit .28 to Form 10-Q for the quarter ended 9/30/04). |
E-3
|
|
|
Exhibit |
|
|
Number |
|
Description |
4.20
|
|
Reimbursement and Credit Agreement, dated as of August 1, 2004, between
The Connecticut Water Company and Citizens Bank of Rhode Island, 2004A
Series. (Exhibit 4.29 to Form 10-Q for the quarter ended 9/30/04). |
|
|
|
4.21
|
|
Reimbursement and Credit Agreement, dated as of August 1, 2004, between
The Connecticut Water Company and Citizens Bank of Rhode Island, 2004B
Series. (Exhibit 4.30 to Form 10-Q for the quarter ended 9/30/04). |
|
|
|
4.22
|
|
Letters of Credit, each dated September 2, 2004, between The Connecticut
Water Company and Citizens Bank of Rhode Island, with respect to each of
the 2004A and 2004B Series Bonds. (Exhibit 4.31 to Form 10-Q for the
quarter ended 9/30/04). |
|
|
|
4.24*
|
|
Bond Purchase Agreement, dated October 28, 2005, among The Connecticut
Water Company, Connecticut Development Authority and A.G. Edwards & Sons,
Inc., Connecticut Water 2005A Series. |
|
|
|
4.25*
|
|
Loan Agreement, dated October 1, 2005, between The Connecticut Water
Company and Connecticut Development Authority, Connecticut Water 2005A
Series. |
|
|
|
4.26*
|
|
Indenture of Trust, dated October 1, 2005, between Connecticut Development
Authority and U.S. Bank National Association, as Trustee, Connecticut
Water 2005A Series. |
|
|
|
4.27*
|
|
Insurance Agreement, dated November 30, 2005, between The Connecticut
Water Company and Financial Guaranty Insurance Company, as Insurer for the
Connecticut Water 2005A Series. |
|
|
|
4.28*
|
|
Bond Purchase Agreement, dated November 16, 2005, among The Crystal Water
Company of Danielson, Connecticut Water Service, Inc., Connecticut
Development Authority and A.G. Edwards & Sons, Inc., Crystal Water 2005A
Series. |
|
|
|
4.29*
|
|
Guaranty dated as of October 1, 2005 from Connecticut Water Service, Inc.
to U.S. Bank National Association, as Trustee, Crystal Water 2005A Series. |
|
|
|
4.30*
|
|
Loan Agreement, dated October 1, 2005, between The Crystal Water Company
of Danielson and Connecticut Development Authority, Crystal Water 2005A
Series. |
|
|
|
4.31*
|
|
Indenture of Trust, dated October 1, 2005, between Connecticut Development
Authority and U.S. Bank National Association, as Trustee, Crystal Water
2005A Series. |
|
|
|
4.32*
|
|
Insurance Agreement, dated November 30, 2005, between The Crystal Water
Company of Danielson and Financial Guaranty Insurance Company, as Insurer
for the Crystal Water 2005A Series. |
E-4
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.1
|
|
Pension Plan Fiduciary Liability Insurance for The Connecticut Water
Company Employees Retirement Plan and Trust, The Connecticut Water
Company Tax Credit Employee Stock Ownership Plan, as Amended and Restated,
Savings Plan of The Connecticut Water Company and The Connecticut Water
Company VEBA Trust Fund. (Exhibit 10.1 to Registration Statement No.
2-74938). |
|
|
|
10.2
|
|
Directors and Officers Liability and Corporation Reimbursement Insurance.
(Exhibit 10.2 to Registration Statement No. 2-74938). |
|
|
|
10.3
|
|
Directors Deferred Compensation Plan, effective as of January 1, 1980, as
amended as of April 22, 1994. (Exhibit 10.3 to Form 10-K for the year
ended 12/31/02). |
|
|
|
10.4
|
|
The Connecticut Water Company Amended and Restated Deferred Compensation
Agreement dated May 14, 1999. (Exhibit 10.5 to Form 10-K for the year
ended 12/31/99). |
|
a. |
|
Marshall T. Chiaraluce |
|
|
b. |
|
David C. Benoit |
|
|
c. |
|
James R. McQueen |
|
|
d. |
|
Kenneth W. Kells |
|
|
|
10.5a
|
|
The Connecticut Water Company Amended and Restated Deferred Compensation
Agreement with Thomas R. Marston, dated December 2, 2004. (Exhibit 10.5.a
to Form 10-K for the year ended 12/31/04). |
|
|
|
10.6
|
|
The Connecticut Water Company Supplemental Executive Retirement Agreement
with William C. Stewart. (Exhibit 10.6a to Form 10-K for year ended
12/31/91). |
|
|
|
10.7
|
|
The Connecticut Water Company Supplemental Executive Retirement Agreement
with Marshall T. Chiaraluce dated December 16, 1991. (Exhibit 10.6b to the
Form 10-K for year ended 12/31/91). |
|
|
|
10.7.1
|
|
The Connecticut Water Company First Amended Supplemental Executive
Retirement Agreement with Marshall T. Chiaraluce dated August 1, 1999.
(Exhibit 10.7.2 to Form 10-K for the year ended 12/31/99). |
|
|
|
10.7.1a
|
|
The Connecticut Water Company Second Amended Supplemental Executive
Retirement Agreement with Marshall T. Chiaraluce dated December 17, 2003.
(Exhibit 10.7.1a to Form 10-K for the year ended 12/31/03). |
|
|
|
10.7.2
|
|
The Connecticut Water Company Supplemental Executive Retirement Agreement
with Michele G. DiAcri dated February 28, 2000. (Exhibit 10.7.2 to Form
10-K for the year ended 12/31/01). |
|
|
|
10.7.2a
|
|
The Connecticut Water Company Second Amended Supplemental Executive
Retirement Agreement with Michele G. DiAcri dated December 17, 2003.
(Exhibit 10.7.2a to Form 10-K for the year ended 12/31/03). |
E-5
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.8
|
|
The Connecticut Water Company Supplemental Executive Retirement Agreement
standard form for other officers, dated December 4, 1991. (Exhibit 10.6b
to Form 10-K for the year ended 12/31/91). |
|
|
|
10.8a
|
|
The Connecticut Water Company Supplemental Executive Retirement Agreement
with Thomas R. Marston dated December 2, 2004. (Exhibit 10.8.a to Form
10-K for the year ended 12/31/04). |
|
|
|
10.8.1
|
|
The Connecticut Water Company First Amended Supplemental Executive
Retirement Agreement standard form for other officers, dated August 1,
1999. (Exhibit 10.8.2 to Form 10-K for the year ended 12/31/99). |
|
|
|
10.8.2
|
|
The Connecticut Water Company Second Amended Supplemental Executive
Retirement Agreement standard form for other officers, dated December
17, 2003. (Exhibit 10.8.2 to Form 10-K for the year ended 12/31/03). |
|
a) |
|
David C. Benoit |
|
|
b) |
|
Peter J. Bancroft |
|
|
c) |
|
James R. McQueen |
|
|
d) |
|
Terrance P. ONeill |
|
|
e) |
|
Maureen P. Westbrook |
|
|
|
10.9
|
|
Amended and restated employment agreement between The Connecticut Water
Company and Connecticut Water Service, Inc. with officers, amended and
restated as of May 9, 2001. (Exhibit 10.9 to Form 10-K for the year ended
12/31/01). |
|
a) |
|
Marshall T. Chiaraluce |
|
|
b) |
|
Michele G. DiAcri |
|
|
c) |
|
James R. McQueen |
|
|
d) |
|
David C. Benoit |
|
|
e) |
|
Peter J. Bancroft |
|
|
f) |
|
Maureen P. Westbrook |
|
|
g) |
|
Terrance P. ONeill |
|
|
|
10.9.1
|
|
Employment agreement between The Connecticut Water Company and
Connecticut Water Service, Inc. with Kevin T. Walsh, amended and restated
as of January 9, 2002. (Exhibit 10.9.1 to Form 10-K for the year ended
12/31/02). |
|
|
|
10.9.2
|
|
Employment agreement between The Connecticut Water Company and
Connecticut Water Service, Inc. with Thomas R. Marston, amended and
restated as of December 2, 2004. (Exhibit 10.9.2 to Form 10-K for the year
ended 12/31/04). |
|
|
|
10.10
|
|
Employment and Consulting Agreement between Richard L. Mercier and Gallup
Water Service, Inc. dated April 15, 1999. (Exhibit 10.10 to Form 10-K for
the year ended 12/31/99). |
E-6
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.11
|
|
Employment and Consulting Agreement between Roger Engle and Crystal Water
Company of Danielson dated September 29, 1999. (Exhibit 10.11 to Form 10-K
for the year ended 12/31/99). |
|
|
|
10.11.1
|
|
Employment and Consulting Agreement between James R. McQueen and The
Connecticut Water Company dated December 10, 2004. (Exhibit 10.11.1 to
Form 10-K for the year ended 12/31/04). |
|
|
|
10.12
|
|
Savings Plan of The Connecticut Water Company, amended and restated
effective as of October 1, 2000. (Exhibit 10.12 to Form 10-K for the year
ended 12/31/01). |
|
|
|
10.12.1
|
|
Trust Agreement between Connecticut Water Company and Riggs Bank N.A.,
Trustee, dated as of June 1, 2002. (Exhibit 10.12.1 to Form 10-K for the
year ended 12/31/03). |
|
|
|
10.12.2
|
|
Post-EGTRRA Amendment to the Savings Plan of The Connecticut Water
Company, effective January 1, 2002. (Exhibit 10.12.2 to Form 10-K for the
year ended 12/31/03). |
|
|
|
10.12.3
|
|
Supplemental Participation Agreement to the Savings Plan of The
Connecticut Water Company between The Unionville Water Company and
Connecticut Water Company, dated December 30, 2003. (Exhibit 10.12.3 to
Form 10-K for the year ended 12/31/03). |
|
|
|
10.12.4
|
|
Supplemental Participation Agreement to the Savings Plan of The
Connecticut Water Company between The Crystal Water Company of Danielson
and Connecticut Water Company, dated December 30, 2003. (Exhibit 10.12.4
to Form 10-K for the year ended 12/31/03). |
|
|
|
10.12.5
|
|
Supplemental Participation Agreement to the Savings Plan of The
Connecticut Water Company between Unionville Water Company and Connecticut
Water Company, dated February 23, 2004. (Exhibit 10.12.5 to Form 10-K for
the year ended 12/31/04). |
|
|
|
10.13
|
|
The Connecticut Water Company Employees Retirement Plan as amended and
restated as of January 1, 1997. (Exhibit 10.11 to Form 10-K for the year
ended 12/31/98). |
|
|
|
10.13.1
|
|
First Amendment, dated August 16, 2000 to the amended and restated
Connecticut Water Company Employees Retirement Plan effective January 1,
1997. (Exhibit 10.13.1 to Form 10-K for the year ended 12/31/02). |
|
|
|
10.13.2
|
|
Second Amendment, dated November 14, 2000 to the amended and restated
Connecticut Water Company Employees Retirement Plan effective January 1,
1997. (Exhibit 10.13.2 to Form 10-K for the year ended 12/31/02). |
E-7
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.13.3
|
|
Third Amendment, dated November 14, 2001 to the amended and restated
Connecticut Water Company Employees Retirement Plan effective January 1,
1997. (Exhibit 10.13.3 to Form 10-K for the year ended 12/31/02). |
|
|
|
10.13.4
|
|
Fourth Amendment, dated August 14, 2002 to the amended and restated
Connecticut Water Company Employees Retirement Plan effective January 1,
1997. (Exhibit 10.13.4 to Form 10-K for the year ended 12/31/02). |
|
|
|
10.13.5
|
|
Fifth Amendment, dated August 14, 2002 to the amended and restated
Connecticut Water Company Employees Retirement Plan effective January 1,
1997. (Exhibit 10.13.5 to Form 10-K for the year ended 12/31/02). |
|
|
|
10.13.6
|
|
Sixth Amendment, dated November 10, 2003 to the amended and restated
Connecticut Water Company Employees Retirement Plan effective November
12, 2003. (Exhibit 10.13.6 to Form 10-K for the year ended 12/31/03). |
|
|
|
10.13.7
|
|
Seventh Amendment, dated May 12, 2004 to the amended and restated
Connecticut Water Employees Retirement Plan effective January 1, 1997.
(Exhibit 10.13.7 to Form 10-K for the year ended 12/31/04). |
|
|
|
10.14
|
|
November 4, 1994 Amendment to Agreement dated December 11, 1957 between
he Connecticut Water Company (successor to the Thomaston Water Company)
nd the City of Waterbury. (Exhibit 10.16 to Form 10-K for year ended
2/31/94). |
|
|
|
10.15
|
|
Agreement dated August 13, 1986 between The Connecticut Water Company and
he Metropolitan District. (Exhibit 10.14 to Form 10-K for the year ended
2/31/86). |
|
|
|
10.16
|
|
Report of the Commission to Study the Feasibility of Expanding the Water
upply Services of the Metropolitan District. (Exhibit 14 to Registration
tatement No. 2-61843). |
|
|
|
10.17
|
|
Bond Exchange Agreements between Connecticut Water Service, Inc., The
onnecticut Water Company Bankers Life Company and Connecticut Mutual Life
nsurance Company dated October 23, 1978. (Exhibit 14 to Form 10-K for the
ear ended 12/31/78). |
|
|
|
10.18
|
|
Dividend Reinvestment and Common Stock Purchase Plan, amended and restated
s of November 15, 2001. (Exhibit 99.1 to post-effective amendment filed
n December 5, 2001 to Form S-3, Registration Statement No. 33-53211). |
|
|
|
10.19
|
|
Contract for Supplying Bradley International Airport. (Exhibit 10.21 to
orm 10-K for the year ended 12/31/84). |
|
|
|
10.20
|
|
Report of South Windsor Task Force. (Exhibit 10.23 to Form 10-K for the
ear ended 12/31/87). |
E-8
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.21
|
|
Trust Agreement for The Connecticut Water Company Welfare Benefits Plan
(VEBA) dated January 1, 1989. (Exhibit 10.21 to Form 10-K for year ended
12/31/89). |
|
10.22
|
|
1994 Performance Stock Program, as amended and restated as of April 26,
2002. (Exhibit A to Proxy Statement dated 3/19/02). |
|
|
|
10.22a*
|
|
First Amendment to the Connecticut Water Service, Inc. Performance Stock
Program Amended and Restated as of April 26, 2002 (the Plan) dated
December 1, 2005. |
|
|
|
10.23
|
|
2004 Performance Stock Program, as of April 23, 2004. (Appendix A to Proxy
Statement dated 3/12/04). |
|
|
|
10.23a
|
|
Connecticut Water Service, Inc. Performance Stock Program Incentive Stock
Option Grant Form. (Exhibit 10.1 to Form 10-Q for the quarter ended
9/30/04). |
|
|
|
10.23b
|
|
Connecticut Water Service, Inc. Performance Stock Program Non-Qualified
Stock Option Grant Form. (Exhibit 10.2 to Form 10-Q for the quarter ended
9/30/04). |
|
|
|
10.23c
|
|
Restricted Stock Agreement, standard form for officers, dated December 1,
2005 (Exhibit 10.1 to Form 8-K dated 1/13/06). |
|
|
|
10.23d
|
|
Long-Term Performance Award Agreement, standard form for officers, dated
January 11, 2006 (Exhibit 10.2 to Form 8-K dated 1/13/06). |
|
|
|
10.23e
|
|
Performance Award Agreement, standard form for officers, dated January
11, 2006 (Exhibit 10.3 to Form 8-K dated 1/13/06). |
|
|
|
10.23f*
|
|
First Amendment to the Connecticut Water Service, Inc. 2004 Performance
Stock Program, dated January 7, 2004. |
|
|
|
10.24
|
|
Loan Agreement dated as of February 15, 1991 between Indianapolis Life
Insurance Company and The Barnstable Water Company. (Exhibit 10.26 to Form
10-K for the year ended 12/31/01). |
|
|
|
10.25
|
|
Guaranty Agreement by Connecticut Water Service, Inc. and Second Amendment
to Note Agreement of Barnstable Water Company dated as of February 23,
2001. (Exhibit 10.27 to Form 10-K for the year ended 12/31/01). |
|
|
|
10.26*
|
|
Letter Agreement and Terms between Eric Thornburg and The Connecticut
Water Company dated January 6, 2006. |
|
|
|
10.27*
|
|
Employment Agreement between The Connecticut Water Company and
Connecticut Water Service, Inc. with Thomas R. Roberts, amended and
restated as of November 9, 2005. |
E-9
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.28*
|
|
Employment Agreement between The Connecticut Water Company and
Connecticut Water Service, Inc. with Daniel J. Meaney, amended and
restated as of January 12, 2006. |
|
|
|
10.29
|
|
Employment Agreement dated March 20,
2006 between Connecticut Water Service, Inc., The
Connecticut Water Company and Eric W. Thornburg (Exhibit 10.1 to
Form 8-K dated 3/24/06). |
|
|
|
10.30
|
|
Deferred Compensation Agreement
dated March 20, 2006 between Connecticut Water Service, Inc., The
Connecticut Water Company and Eric W. Thornburg (Exhibit 10.2 to
Form 8-K dated 3/24/06). |
|
|
|
10.31
|
|
Supplemental Executive Retirement
Agreement dated March 20, 2006 between Connecticut Water Service, Inc., The
Connecticut Water Company and Eric W. Thornburg (Exhibit 10.3 to
Form 8-K dated 3/24/06). |
|
|
|
23.1*
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
31.1*
|
|
Rule 13a-14 Certification of Marshall T. Chiaraluce, Chief Executive
Officer. |
|
|
|
31.2*
|
|
Rule 13a-14 Certification of David C. Benoit, Chief Financial Officer. |
|
|
|
32.1*
|
|
Certification of Marshall T. Chiaraluce, Chief Executive Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2*
S
|
|
Certification of David C. Benoit, Chief Financial Officer, pursuant to
ection 906 of the Sarbanes-Oxley Act of 2002. |
Note: |
|
Exhibits 10.1 through 10.13.7, 10.22, 10.23, 10.26 through
10.31 set forth each
management contract or compensatory plan or arrangement required to be filed as an exhibit to
this Form 10-K. |
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
|
|
CONNECTICUT WATER SERVICE, INC. |
|
|
|
|
Registrant |
|
|
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Eric W. Thornburg |
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
|
|
Eric W. Thornburg |
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of Connecticut Water Service, Inc. in the capacities and
on the dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
/s/ Eric W. Thornburg |
|
|
|
|
|
|
|
|
|
Eric W. Thornburg
|
|
President, Director,
|
|
March 31, 2006 |
(Principal Executive Officer)
|
|
and Chief Executive Officer |
|
|
|
|
|
|
|
/s/ David C. Benoit |
|
|
|
|
|
|
|
|
|
David C. Benoit
|
|
Vice President Finance,
|
|
March 31, 2006 |
(Principal Financial and Accounting Officer)
|
|
Chief Financial Officer and
Treasurer |
|
|
39
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
/s/ Marshall T. Chiaraluce
|
|
Director and Chairman
|
|
March 14, 2006 |
|
|
|
|
|
Marshall T. Chiaraluce
|
|
of the Board |
|
|
|
|
|
|
|
/s/ Roger Engle
|
|
Director
|
|
March 11, 2006 |
|
|
|
|
|
Roger Engle |
|
|
|
|
|
|
|
|
|
/s/ Mary Ann Hanley
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
Mary Ann Hanley |
|
|
|
|
|
|
|
|
|
/s/ Marcia Hincks
|
|
Director
|
|
March 14, 2006 |
|
|
|
|
|
Marcia Hincks |
|
|
|
|
|
|
|
|
|
/s/ Mark G. Kachur
|
|
Director
|
|
March 8, 2006 |
|
|
|
|
|
Mark G. Kachur |
|
|
|
|
|
|
|
|
|
/s/ David A. Lentini
|
|
Director
|
|
March 14, 2006 |
|
|
|
|
|
David A. Lentini |
|
|
|
|
|
|
|
|
|
/s/ Ronald D. Lengyel
|
|
Director
|
|
March 14, 2006 |
|
|
|
|
|
Ronald D. Lengyel |
|
|
|
|
|
|
|
|
|
/s/ Robert F. Neal
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
Robert F. Neal |
|
|
|
|
|
|
|
|
|
/s/ Arthur C. Reeds
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
Arthur C. Reeds |
|
|
|
|
|
|
|
|
|
/s/ Lisa J. Thibdaue
|
|
Director
|
|
March 12, 2006 |
|
|
|
|
|
Lisa J. Thibdaue |
|
|
|
|
|
|
|
|
|
/s/ Carol P. Wallace
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
Carol P. Wallace |
|
|
|
|
|
|
|
|
|
/s/ Donald B. Wilbur
|
|
Director
|
|
March 15, 2006 |
|
|
|
|
|
Donald B. Wilbur |
|
|
|
|
S-1
CONNECTICUT WATER SERVICE, INC. and SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Additions |
|
|
Deductions |
|
|
Balance |
|
(in thousands) |
|
Beginning |
|
|
Charged to |
|
|
From |
|
|
End of |
|
Description |
|
of Year |
|
|
Income |
|
|
Reserves (1) |
|
|
Year |
|
Allowance for Uncollectible
Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
$ |
212 |
|
|
$ |
156 |
|
|
$ |
112 |
|
|
$ |
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 |
|
$ |
271 |
|
|
$ |
61 |
|
|
$ |
120 |
|
|
$ |
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2003 |
|
$ |
240 |
|
|
$ |
186 |
|
|
$ |
155 |
|
|
$ |
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts charged off as uncollectible after deducting recoveries. |