UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
Form
10-K
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x
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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, 2008
or
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o
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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
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Commission
File Number 0-8084
Connecticut
Water Service, Inc.
(Exact
name of registrant as specified in its charter)
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Connecticut
(State
or other jurisdiction of
incorporation
or organization)
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06-0739839
(I.R.S.
Employer Identification No.)
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93
West Main Street, Clinton, CT
(Address
of principal executive office)
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06413
(Zip
Code)
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Registrant's
telephone number, including area code (860) 669-8636
Registrant’s
website: www.ctwater.com
Securities
registered pursuant to Section 12 (b) of the Act:
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Title
of each Class
Common
Stock, without par value
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Name
of each exchange on which registered
The
Nasdaq Stock Market, Inc.
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Securities
registered pursuant to Section 12 (g) of the Act:
None
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 x
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 x
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 x Noo
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 registrant's 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, or a smaller reporting
company. See the definitions of “accelerated filer and large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
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Large
Accelerated Filer o
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Accelerated
Filer x
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Non-Accelerated
Filer o
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Smaller
Reporting Company o
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(Do not
check if smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act). Yes o No x
As of
June 30, 2008, the aggregate market value of the registrant's voting Common
Stock held by non-affiliates of the registrant was $186,392,551 based on the
closing sale price on such date as reported on the NASDAQ.
Number of
shares of Common Stock, no par value, outstanding as of March 1, 2009
was 8,417,504 excluding 75,358 common stock equivalent shares.
DOCUMENTS
INCORPORATED BY REFERENCE
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Document
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Part
of Form 10-K Into Which Document is Incorporated
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Definitive
Proxy Statement, dated March 31, 2009, for Annual Meeting of Shareholders
to be held on May 13, 2009.
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Part
III
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Part
I
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Page Number
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Part
II
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Part
III
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Part
IV
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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, Management’s
Discussion and Analysis of Financial Condition and Results of Operations under
the heading “Forward Looking Information”.
PART
I
The
Company
The
Registrant, Connecticut Water Service, Inc. (referred to as “the Company”, “we”
or “our”) was incorporated in 1974, with The Connecticut Water Company
(Connecticut Water) as its largest subsidiary which was organized in 1956.
Connecticut Water Service, Inc. is a non-operating holding company, whose income
is derived from the earnings of its four wholly-owned subsidiary
companies. In 2008, approximately 93% of the Company’s earnings from
continuing operations were attributable to water activities carried out within
its regulated water company, Connecticut Water. As of December 31,
2008, Connecticut Water supplied water to 87,361 customers in 54 towns
throughout Connecticut. As a regulated water company, Connecticut
Water 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 utility, the Company owns three unregulated companies,
two of which were active and one of which was inactive as of December 31,
2008. In 2008, these unregulated companies, together with real estate
transactions within Connecticut Water, contributed the remaining 7% of the
Company’s earnings from continuing operations through real estate transactions
as well as services and rentals. The two active companies are Chester
Realty, Inc., a real estate company in Connecticut; and New England Water
Utility Services, Inc. (NEWUS), which provides contract water and sewer
operations and other water related services.
The
inactive company is The Barnstable Holding Company (Barnstable Holding), a
holding company which previously owned BARLACO Inc. (BARLACO) and Barnstable
Water Company (Barnstable Water). BARLACO, a real estate company in
Massachusetts whose entire inventory of land was sold in 2006; and Barnstable
Water, a company that was a public service company until its assets were sold to
the Town of Barnstable, Massachusetts in 2005; were each merged with and into
Barnstable Holding during 2007. As a result of the sale of the assets
of Barnstable Water, results of its operations have been classified as
discontinued operations.
Our
mission is to provide high quality water service to our customers at a fair
return to our shareholders 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.
The
Company’s 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 INFORMATION” menu of the
Company’s 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 (SEC). The following documents are also available through
the “CORPORATE GOVERNANCE” section of our website:
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·
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Employee
Code of Conduct
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·
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Audit
Committee Charter
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Board
of Directors Code of Conduct
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Compensation
Committee Charter
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Corporate
Governance Committee Charter
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Amended
and Restated Bylaws of Connecticut Water Service,
Inc.
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·
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2008
Annual Meeting of Shareholders (Annual Report and
Proxy)
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Copies of
each of the Company’s SEC filings (without exhibits) and corporate governance
documents mentioned above will also be mailed to investors, upon request, by
contacting the Company’s Corporate Secretary at Connecticut Water, 93 West Main
Street, Clinton, CT 06413.
Our
Regulated Business
On July
23, 2008, the Company announced that it had reached a definitive purchase
agreement with Ellington Acres Company (Ellington Acres) to purchase all of
Ellington Acres’ outstanding stock for approximately $1.5
million. Ellington Acres is a regulated water company serving
approximately 750 customers in Ellington and Somers, Connecticut, situated
between two systems in the Company’s Northern Region that the Company had
planned to interconnect. The Company will be able to interconnect the
two systems in the Northern Region with Ellington Acres, saving ratepayers of
both Connecticut Water and Ellington Acres significant capital
expenditures. The Department of Utility Control (DPUC) approved the
acquisition in December 2008 and the Company completed the transaction on
January 16, 2009. The Company expects the integration to be
materially complete in the second quarter of 2009. For more
information, please refer to Item 7 – “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and Note 17 of the Notes to
Consolidated Financial Statements.
On
January 16, 2008, Connecticut Water and NEWUS acquired the regulated water
utility assets of Eastern Connecticut Regional Water Company, Inc. (Eastern), a
wholly-owned subsidiary of Birmingham Utilities, Inc. (Birmingham) and the
unregulated assets of Birmingham H2O Services, Inc. (H2O) for $3.5 million, at
which point all of the former customers of Eastern became customers of
Connecticut Water. The acquisition of Eastern added more than 2,300
residential customers residing in 14 towns across Connecticut, some only a few
miles from existing Connecticut Water systems. The operations of
Birmingham have been fully integrated as of December 31, 2008.
In July
2006, the Company filed a rate application with the DPUC for Connecticut Water
requesting an increase in rates of approximately $14.6 million, or
30%. On January 16, 2007, the DPUC issued its final decision and
approved a Settlement Agreement; negotiated with the Office of Consumer Counsel
and the DPUC’s Prosecutorial Staff; that allowed Connecticut Water an increase
in revenues of approximately $10,940,000, or 22.3%. The Settlement
Agreement allowed Connecticut Water to defer a portion of the approved rate
increase, approximately $3.8 million through December 31, 2007 and $4.8 million
through March 31, 2008. The Company recognized that increase through recording
deferred revenues and a corresponding regulatory asset, as required by the
decision. On January 31, 2008, the Company filed to reopen the case,
a procedure required by the Settlement Agreement, to implement the second phase.
In addition to the approval for the inclusion in current rates of the previously
approved deferred revenues of $4.8 million, the filing includes requested
recovery and a return on a $15.5 million of additional capital investments made
in 2007. On March 28, 2008 an 11.95% increase was
approved. The approved rates became effective on April 1,
2008.
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’ incremental 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 $58.2 million 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 $7.4
million was expended in the last five years. The Company expects to
spend approximately $1.2 million in 2009 on Safe Water Drinking Act projects,
primarily to bring newly acquired systems up to the Company’s
standards. The Company believes that 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.
Connecticut
Water derives its 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 the DPUC. It is our policy to seek rate relief as
necessary to enable us to achieve an adequate rate of return. As noted above, on
March 28, 2008, the DPUC approved an increase of revenues for Connecticut Water
effective April 1, 2008. Connecticut Water’s allowed return on equity
and return on rate base are 10.125% and 8.07%, respectively.
On
October 10, 2008, the Company filed its Infrastructure Assessment Report (IAR)
under the Water Infrastructure and Conservation Adjustment (WICA) Act which was
passed into law in 2007. WICA allows the Company to add a surcharge
to customers’ bills, subject to an expedited review and approval by the DPUC, to
reflect the costs of replacement of certain types of aging utility
plant. The purpose of the IAR is to clearly define the criteria for
determining the priority of future replacement projects. The first
public hearing on the Company’s IAR took place on January 16,
2009. The Company expects a decision from the DPUC on its IAR in the
first quarter of 2009. The Company does not expect to file for a
surcharge under the WICA mechanism until the second quarter of
2009. Approximately 90 days after the surcharge filing, customers
would begin to see an increase in their bills.
Our
Water Systems
Our water
infrastructure consists of 60 noncontiguous water systems in the State of
Connecticut. Our system, in total, consists of approximately 1,500
miles of water main and reservoir storage capacity of 7.0 billion gallons. The
safe, dependable yield from our 201 active wells and 18 reservoirs is
approximately 50 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.
As of
December 31, 2008, Connecticut Water’s 87,361 customers consumed approximately
6.9 billion gallons of water generating $61,270,000 in revenue. We
supply water, and in most cases, fire protection to all or portions of 54 towns
in Connecticut.
The
following table breaks down the above total figures by customer class as of
December 31, 2008, 2007 and 2006:
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2008
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2007
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2006
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Customers:
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Residential
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78,254 | 75,579 | 74,253 | |||||||||
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Commercial
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5,646 | 5,532 | 5,485 | |||||||||
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Industrial
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425 | 426 | 429 | |||||||||
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Public
Authority
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606 | 602 | 587 | |||||||||
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Fire
Protection
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1,648 | 1,599 | 1,562 | |||||||||
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Other
(including non-metered accounts)
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782 | 680 | 931 | |||||||||
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Total
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87,361 | 84,418 | 83,247 | |||||||||
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Water Revenues (in
thousands):
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||||||||||||
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Residential
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$ | 37,963 | $ | 38,354 | $ | 29,067 | ||||||
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Commercial
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7,150 | 6,762 | 5,652 | |||||||||
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Industrial
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1,822 | 1,764 | 1,589 | |||||||||
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Public
Authority
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2,027 | 1,924 | 1,507 | |||||||||
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Fire
Protection
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10,606 | 9,482 | 8,708 | |||||||||
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Other
(including non-metered accounts)
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1,702 | 740 | 422 | |||||||||
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Total
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$ | 61,270 | $ | 59,026 | $ | 46,945 | ||||||
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Customer Water
Consumption (millions of
gallons):
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||||||||||||
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Residential
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4,954 | 5,186 | 4,933 | |||||||||
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Commercial
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1,180 | 1,259 | 1,198 | |||||||||
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Industrial
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396 | 423 | 424 | |||||||||
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Public
Authority
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365 | 389 | 363 | |||||||||
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Total
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6,895 | 7,257 | 6,918 | |||||||||
Connecticut
Water owns various small, discrete parcels of land that are no longer required
for water supply purposes. At December 31, 2008, this land totaled approximately
490 acres. Over the past several years, we have been disposing of
these land parcels. For more information, please refer to Segments of Our Business
below.
Additional
information on land dispositions can be found in Item 7 – Management’s
Discussion and Analysis of Financial Conditions and Results of Operations –
Commitments and Contingencies.
Competition
Connecticut
Water faces competition from a few small privately-owned water systems operating
within, or adjacent to, our franchise areas and from municipal and public
authority systems whose service areas in some cases overlap portions of our
franchise areas.
Employees
As of
December 31, 2008, we employed a total of 226 persons, an increase of 20
employees over December 31, 2007. Eight of these employees were added
as a result of the Birmingham acquisition. Our employees are not
covered by collective bargaining agreements.
Segments
of Our Business
For
management and financial reporting purposes we divide our business into three
segments: Water Activities, Real Estate Transactions, and Services and
Rentals.
Water Activities – 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 our regulated water company with the exception of certain real
estate transactions.
Real Estate Transactions – Our
Real Estate Transactions segment involves the sale or donation for income tax
benefits of our real estate holdings. These transactions can be effected by any
of our subsidiary companies. During 2008, the Company did not engage
in any land transactions. Currently, the Company plans to complete
one land transaction during 2009, additional information can be found on page 24
of this Form 10-K.
During
2007, the Company engaged in two land transactions totaling 33 acres and
increased its valuation allowance, resulting in a net profit of
$167,000.
In
February 2006, the Company sold 109 acres of land that were owned by BARLACO to
the Town of Barnstable, Massachusetts for $1.0 million.
In 2005,
the Company reduced after-tax profit by $353,000 by recording a reserve for
income taxes. This was due to an examination by the Internal Revenue
Service (IRS), which was examining the fair market value of the property
reflected on the Company’s 2002, 2003 and 2004 tax returns. The IRS
completed its examination during 2006 and no adjustment to the Company’s 2002 –
2004 tax liability was needed. As a result, the reserve of $353,000,
along with an additional $623,000 in reserves was reversed in 2006.
A
breakdown of the net income of this segment between our regulated and
unregulated companies for the past three years is as follows:
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Income
(Loss) from Real Estate Transactions from Continuing
Operations
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Regulated
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Unregulated
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Total
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2008
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$ | (160,000 | ) | $ | -- | $ | (160,000 | ) | ||||
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2007
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$ | 199,000 | $ | (32,000 | ) | $ | 167,000 | |||||
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2006
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$ | 1,083,000 | $ | 980,000 | $ | 2,063,000 | ||||||
Services and Rentals – 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 through our unregulated companies. 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 the
renting of residential and commercial property.
Linebacker® is an
optional service line protection program offered by the Company to eligible
residential and commercial customers through NEWUS covering the cost of repairs
for leaking or broken water service lines which provide the drinking water to a
customer’s home or business. For customers who enroll in this
program, the Company will repair or replace a leaking or broken water service
line, curb box, curb box cover, meter pit, meter pit cover, meter pit valve plus
in-home water main shut off valve before the meter. The program does
not cover non-standard items such as pressure reducing valves, booster pumps,
and lawn and/or fire sprinkler protection systems. The Linebacker® program
costs $70 per year for residential customers and $96 per year for commercial
customers. The program has no deductible or limits on number or cost
of leaks repaired each year. As of December 31, 2008 and 2007, the
Company had 21,670 and 21,375 customers enrolled in its Linebacker®
protection program, respectively.
Some of
the services listed above, including the service line protection plan, 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 still a
relatively small portion of our overall business, has grown significantly over
the past five years and now provides approximately 8% of our overall net income
in 2008. Net income generated by this segment of our business was
$790,000, $651,000 and $515,000 for the years 2008, 2007 and 2006,
respectively.
Our
business, financial condition, operating results and cash flows can be impacted
by a number of factors, including, but not limited to, those set forth below,
any one of which could cause our actual results to vary materially from recent
results or anticipated future results. For a discussion identifying additional
risk factors and important factors that could cause actual results to differ
materially from those anticipated, see the discussion in “Forward Looking
Information” in Item 7 below – “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Notes to Consolidated
Financial Statements.”
Because
we incur significant capital expenditures annually, 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 DPUC.
The Company is entitled to file rate increase requests, from time to time, to
recover our investments in utility plant and expenses; however as part of our
2007 Settlement Agreement with the DPUC, we have agreed not to request rate
relief that would become effective prior to January 2010. 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 future rate increase requests are
dependent on the terms of our rate case decision on January 16, 2007 and also
partially dependent upon the estimated cost of the administrative process 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 requests will be approved by the DPUC; and, if approved, we
cannot guarantee that any such rate increase requests 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.
Under a
2007 law, the DPUC may authorize regulated water companies to use a rate
adjustment mechanism, known as a Water Infrastructure and Conservation
Adjustment (WICA), for eligible projects completed and in service for the
benefit of the customers. The Company has filed its IAR and expects a
ruling from the DPUC on its IAR in the first quarter of 2009. The
Company does not expect to file for a surcharge under the WICA mechanism until
the second quarter of 2009. Approximately 90 days after the surcharge
filing, customers would begin to see an increase in their bills. For
more information related to WICA, please refer to the “Executive Overview” found
in Item 7 of this Form 10-K.
If
we are unable to pay the principal and interest on our indebtedness as it comes
due, or we default under certain other provisions of our loan documents, our
indebtedness could be accelerated and our results of operations and financial
condition could be adversely affected.
Our
ability to pay the principal and interest on our indebtedness as it comes due
will depend upon our current and future performance. Our performance
is affected by many factors, some of which are beyond our control. We
believe that our cash generated from operations, and, if necessary, borrowing
under our existing and planned credit facilities, will be sufficient to enable
us to make our debt payments as they become due. If, however, we do
not generate sufficient cash, we may be required to refinance our obligations or
sell additional equity, which may be on terms that are not favorable to the
Company as current terms.
No
assurance can be given that any refinancing or sale of equity will be possible
when needed or that we will be able to negotiate acceptable terms. In
addition, our failure to comply with certain provisions contained in our trust
indentures and loan agreements relating to our outstanding indebtedness could
lead to a default on these documents, which could result in an acceleration of
our indebtedness.
Credit
market volatility may affect our ability to refinance our existing debt, borrow
funds under our existing lines of credit or incur additional debt.
The
credit markets have been experiencing extreme volatility and disruption for more
than 12
months. In recent months, the volatility and disruption have reached
unprecedented levels. In many cases, the markets have limited credit
capacity for certain issuers, and lenders have requested shorter
terms. The market for new debt financing is limited and in some cases
not available at all. In addition, the markets have increased the
uncertainty that lenders will be able to comply with their previous
commitments. If current levels of market disruption and volatility
continue or worsen, we may not be able to refinance our existing debt when it
comes due, draw upon our existing lines of credit or incur additional debt,
which may require us to seek other funding sources to meet our liquidity needs
or to fund our capital expenditures budget. We cannot assure you that
we will be able to obtain debt or other financing on reasonable terms, or at
all.
Failure
to maintain our existing credit ratings could affect our cost of funds and
related margins and liquidity position.
Since
2003, Standard & Poor's Ratings Services has rated our outstanding debt and
has given credit ratings to us and our subsidiary The Connecticut Water
Company. Their evaluations are based on a number of factors, which
include financial strength as well as transparency with rating agencies and
timeliness of financial reporting. On August 26, 2008, Standard &
Poor's Ratings Services raised the senior unsecured rating on Connecticut Water
Service to 'A' from 'A-' and affirmed the 'A' rating of The Connecticut Water
Company, our subsidiary, both with an outlook of "stable". In light
of the difficulties in the financial services industry and the difficult
financial markets, however, there can be no assurance that we will be able to
maintain our current strong credit ratings. Failure to do so could
adversely affect our cost of funds and related margins and liquidity
position.
Market
disruptions caused by the worldwide financial crisis could affect our ability to
meet our liquidity needs at reasonable cost and our ability to meet long-term
commitments, which could adversely affect our financial condition and results of
operations.
We rely
on our revolving credit facility and the capital markets to satisfy our
liquidity needs. Further disruptions in the credit markets or further
deterioration of the banking industry’s financial condition, may discourage or
prevent lenders from meeting their existing lending commitments, extending the
terms of such commitments or agreeing to new commitments. Market disruptions may
also limit our ability to issue debt securities in the capital
markets. The Company has received approval from its Board of
Directors to increase its line of credit to $40 million from its current $21
million. The Company expects to secure access to increased lines of
credit by the end of the second quarter of 2009.
Our
inability to comply with debt covenants under our credit facilities could result
in prepayment obligations.
We are
obligated to comply with debt covenants under some of our loan and debt
agreements. Failure to comply with covenants under our credit facilities could
result in an event of default, which if not cured or waived, could result in us
being required to repay or finance these borrowings before their due date, could
limit future borrowings, and result in cross default issues and increase
borrowing costs. The covenants are normal and customary in bank and
loan agreements. The Company was in compliance with the covenants at
December 31, 2008.
Market
conditions may unfavorably impact the value of our benefit plan assets and
liabilities which then could require significant additional
funding.
The
performance of the capital markets affects the values of the assets that are
held in trust to satisfy future obligations under the Company’s pension and
postretirement benefit plans and could significantly impact our results of
operations and financial position. As detailed in the Notes to
Consolidated Financial Statements, the Company has significant obligations in
these areas and the Company holds significant assets in these trusts. These
assets are subject to market fluctuations, which may affect investment returns,
which may fall below the Company’s projected return rates. A decline in the
market value of the pension and postretirement benefit plan assets, as was
experienced in 2008, will increase the funding requirements under the Company’s
pension and postretirement benefit plans if the actual asset returns do not
recover these declines in value. Additionally, the Company’s pension and
postretirement benefit plan liabilities are sensitive to changes in interest
rates. As interest rates decrease, the liabilities increase, potentially
increasing benefit expense and funding requirements. Further, changes in
demographics, including increased numbers of retirements or changes in life
expectancy assumptions may also increase the funding requirements of the
obligations related to the pension and other postretirement benefit plans. Also,
future increases in pension and other postretirement costs as a result of
reduced plan assets may not be fully recoverable from our customers, and our the
results of operations and financial position of the Company could be negatively
affected.
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 full 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. In 2008, the Company’s Northern region experienced
approximately double the rainfall when compared to 2007, reducing per customer
residential consumption.
Declining
per customer residential water usage may reduce our revenues, financial
condition and results of operations in future years.
A trend
of declining per customer residential water usage in Connecticut has been
observed for the last several years, which we would attribute to the declining
household size reported throughout the state, as well as increased water
conservation, including the use of more efficient household fixtures and
appliances among residential users. Our regulated business is heavily
dependent on revenue generated from rates we charge to our residential customers
for the volume of water they use. The rate we charge for our water is
regulated by the DPUC and we may not unilaterally adjust our rates to reflect
changes in demand. Declining volume of residential water usage may,
thus, have a negative impact on our operating revenues in the future if
regulators do not reflect any usage declines in the rate setting design
process.
Potential
regulatory changes or drought conditions may impact our ability to serve our
current and future customers’ demand for water and our financial
results.
We depend
on an adequate water supply to meet the present and future demands of our
customers. Changes in regulatory requirements could affect our
ability to utilize existing supplies and/or secure new sources, as
required. Insufficient supplies or an interruption in our water
supply could have a material adverse effect on our financial condition and
results of operations. Although not occurring in 2008, 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 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.
The
failure of, or the requirement to repair, upgrade or dismantle, any of our dams
may adversely affect our financial condition and results of
operations.
We own
and operate 32 dams throughout the state of Connecticut. While the
Company maintains robust dam maintenance and inspection programs, a failure of
any of those dams could result in injuries and damage to residential and/or
commercial property downstream for which we may be responsible, in whole or in
part. The failure of a dam could also adversely affect our ability to
supply water in sufficient quantities to our customers and could adversely
affect our financial condition and results of operations. Any losses
or liabilities incurred due to the failure of one of our dams might not be
covered by insurance policies or be recoverable in rates, and such losses may
make it difficult for us to secure insurance in the future at acceptable
rates.
Any
failure of our reservoirs, storage tanks, mains or distribution networks could
result in losses and damages that may affect our financial condition and
reputation.
Connecticut
Water distributes water through an extensive network of mains and stores water
in reservoirs and storage tanks located across Connecticut. A failure
of major mains, reservoirs, or tanks could result in injuries and damage to
residential and/or commercial property for which we may be responsible, in whole
or in part. The failure of major mains, reservoirs or tanks may also
result in the need to shut down some facilities or parts of our water
distribution network in order to conduct repairs. Such failures and
shutdowns may limit our ability to supply water in sufficient quantities to our
customers and to meet the water delivery requirements prescribed by governmental
regulators, including the DPUC, and adversely affect our financial condition,
results of operations, cash flow, liquidity and reputation. Any
business interruption or other losses might not be covered by insurance policies
or be recoverable in rates, and such losses may make it difficult for us to
secure insurance in the future at acceptable rates.
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. Connecticut Water has completed two acquisitions since the
beginning of 2008 through the filing of this report on Form 10-K on March 13,
2009. The acquisitions of Birmingham’s Eastern Division and Ellington Acres
water systems have increased the Company’s customer base by approximately 3,000
customers. Following these acquisitions, The Connecticut Water Company now
serves more than 88,000 customers, or a population of over 300,000 people,
in more than 54 Connecticut towns. 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 management's time and resources. Future acquisitions
by us could result in:
|
·
|
dilutive
issuances of our equity securities;
|
|
·
|
incurrence
of debt and contingent liabilities;
|
|
·
|
failure
to have effective internal control over financial
reporting;
|
|
·
|
fluctuations
in quarterly results; and
|
|
·
|
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 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 ongoing threats to
the nation's 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.
The
accuracy of our judgments and estimates about financial and accounting matters
will impact our operating results and financial condition.
We make
certain estimates and judgments in preparing our financial statements regarding,
among others:
|
·
|
the
number of years to depreciate certain
assets;
|
|
·
|
amounts
to set aside for uncollectible accounts receivable, inventory obsolesces
and uninsured losses;
|
|
·
|
our
legal exposure and the appropriate accrual for claims, including medical
and workers’ compensation claims;
|
|
·
|
future
costs for pensions and other post-retirement benefits,
and;
|
|
·
|
possible
tax allowances.
|
The
quality and accuracy of those estimates and judgments will have an impact on our
operating results and financial condition.
In
addition, we must estimate unbilled revenues and costs at the end of each
accounting period. If our estimates are not accurate, we will be
required to make an adjustment in a future period.
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 senior management team or the inability to hire and retain experienced
management personnel could harm our operating results.
None
The
properties of our regulated water company 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. In certain cases,
our water company may be a party 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 of the Company at December 31, 2008 was solely owned by
Connecticut Water. Connecticut Water’s net utility plant balance as
of December 31, 2008 was $299,233,000, over $21 million more than the balance of
net utility plant as of December 31, 2007, due primarily to normal plant
additions, the acquisition of Birmingham and construction spending related to
WICA.
Sources
of water supply owned, maintained, and operated by Connecticut Water include
eighteen reservoirs and eighty-seven well fields. In addition,
Connecticut Water has agreements with various neighboring water utilities to
provide water, at negotiated rates, to our water
systems. Collectively, these sources have the capacity to deliver
approximately forty-eight million gallons of potable water daily to the fourteen
major operating systems in the following table. In addition to the principal
systems identified, Connecticut Water owns, maintains, and operates forty-six
small, non-interconnected satellite and consecutive water systems that, combined
have the ability to deliver about two 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. During 2008, the Company entered into a purchased water
agreement with the Avon Water Company to purchase up to one million gallons of
water per day, which purchases are planned to supplement the Company’s
Collinsville System. Activation of the interconnection is expected to
occur in 2009 on an as needed basis.
Connecticut
Water owns and operates 20 water filtration facilities, having a combined
treatment capacity of approximately 29.54 million gallons per
day.
The
Company’s estimated available water supply, not including water purchases or
non-principal systems, is as follows:
|
System
|
Estimated
Available Supply
(million
gallons per day)
|
|||
|
Chester
System
|
1.69 | |||
|
Collinsville
System
|
0.65 | |||
|
Danielson
System
|
3.76 | |||
|
Gallup
System
|
0.60 | |||
|
Guilford
System
|
10.31 | |||
|
Naugatuck
System
|
6.91 | |||
|
Northern
Western System
|
16.37 | |||
|
Plainfield
System
|
1.01 | |||
|
Somers
System
|
0.28 | |||
|
Stafford
System
|
1.00 | |||
|
Terryville
System
|
0.94 | |||
|
Thomaston
System
|
0.73 | |||
|
Thompson
System
|
0.29 | |||
|
Unionville
System
|
3.88 | |||
|
Total
|
48.42 | |||
As of
December 31, 2008, the transmission and distribution systems of Connecticut
Water consisted of approximately 1,500 miles of main. On that date,
approximately 76 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.
We
believe that our properties are maintained in good condition and in accordance
with current regulations and standards of good waterworks industry
practice.
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 Company’s financial condition, results of
operations or cash flows.
None.
PART
II
Our
Common Stock is traded on the NASDAQ Global Select Market under the symbol
“CTWS”. Our quarterly high and low stock prices as reported by NASDAQ
and the cash dividends we paid during 2008 and 2007 are listed as
follows:
|
Price
|
Dividends
|
|||||||||||
|
Period
|
High
|
Low
|
Paid
|
|||||||||
|
2008
|
||||||||||||
|
First
Quarter
|
$ | 25.48 | $ | 23.00 | $ | .2175 | ||||||
|
Second
Quarter
|
24.98 | 21.82 | .2175 | |||||||||
|
Third
Quarter
|
28.95 | 22.28 | .2225 | |||||||||
|
Fourth
Quarter
|
28.71 | 19.26 | .2225 | |||||||||
|
2007
|
||||||||||||
|
First
Quarter
|
$ | 25.09 | $ | 22.52 | $ | .2150 | ||||||
|
Second
Quarter
|
25.00 | 23.62 | .2150 | |||||||||
|
Third
Quarter
|
25.61 | 23.10 | .2175 | |||||||||
|
Fourth
Quarter
|
25.15 | 22.40 | .2175 | |||||||||
As of
March 1, 2009, there were approximately 4,000 holders of record of our common
stock.
We
presently intend to pay quarterly cash dividends in 2009 on March 16, 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.
The
Company’s Annual Meeting of Shareholders is scheduled for May 13, 2009 in
Westbrook, Connecticut.
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, at a
price or prices that are deemed appropriate. As of December 31, 2008,
no shares have been repurchased. Currently, the Company has no plans
to repurchase shares under the Share Repurchase Program.
Performance Graph – Set forth
below is a line graph comparing the cumulative total shareholder return for each
of the years 2003 – 2008 on the Company’s Common Stock, based on the market
price of the Common Stock and assuming reinvestment of dividends, with the
cumulative total shareholder return of companies in the Standard & Poor’s
500 Index and the Standard and Poor’s 500 Utility Index.
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||||||||
|
Connecticut
Water Service, Inc.
|
$100.00 | $98.82 | $94.53 | $91.04 | $97.77 | $101.43 | ||||||||||||||||||
|
Standard
& Poor’s 500 Index
|
100.00 | 110.88 | 116.33 | 134.70 | 142.10 | 89.53 | ||||||||||||||||||
|
Standard
& Poor’s 500 Utilities Index
|
100.00 | 124.28 | 145.21 | 175.69 | 209.73 | 148.95 | ||||||||||||||||||
(Source: Standard
& Poor’s Institutional Market Service)
|
SELECTED
FINANCIAL DATA
|
||||||||||||||||||||
|
Years
Ended December 31, (thousands of dollars except per share
|
||||||||||||||||||||
|
amounts
and where otherwise indicated)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||||||||||||||||
|
Continuing
Operations
|
||||||||||||||||||||
|
Operating
Revenues
|
$ | 61,270 | $ | 59,026 | $ | 46,945 | $ | 47,453 | $ | 46,008 | ||||||||||
|
Operating
Expenses
|
$ | 47,874 | $ | 46,324 | $ | 39,962 | $ | 37,486 | $ | 35,487 | ||||||||||
|
Other
Utility Income, Net of Taxes
|
$ | 579 | $ | 552 | $ | 542 | $ | 571 | $ | 520 | ||||||||||
|
Total
Utility Operating Income
|
$ | 13,975 | $ | 13,254 | $ | 7,525 | $ | 10,538 | $ | 11,041 | ||||||||||
|
Interest
and Debt Expense
|
$ | 5,198 | $ | 4,411 | $ | 4,461 | $ | 3,583 | $ | 3,451 | ||||||||||
|
Income
from Continuing Operations
|
$ | 9,424 | $ | 8,781 | $ | 6,708 | $ | 7,166 | $ | 9,163 | ||||||||||
|
Cash
Common Stock Dividends Paid
|
$ | 7,373 | $ | 7,146 | $ | 7,014 | $ | 6,773 | $ | 6,641 | ||||||||||
|
Dividend
Payout Ratio from Continuing Operations
|
78 | % | 81 | % | 105 | % | 95 | % | 72 | % | ||||||||||
|
Weighted
Average Common Shares Outstanding
|
8,377,428 | 8,270,494 | 8,187,801 | 8,094,346 | 7,999,318 | |||||||||||||||
|
Basic
Earnings Per Common Share from Continuing Operations
|
$ | 1.12 | $ | 1.06 | $ | 0.81 | $ | 0.89 | $ | 1.15 | ||||||||||
|
Number
of Shares Outstanding at Year End
|
8,463,269 | 8,376,842 | 8,270,394 | 8,169,627 | 8,035,199 | |||||||||||||||
|
ROE
on Year End Common Equity
|
9.1 | % | 8.8 | % | 7.0 | % | 7.6 | % | 10.4 | % | ||||||||||
|
Declared
Common Dividends Per Share
|
$ | 0.880 | $ | 0.865 | $ | 0.855 | $ | 0.845 | $ | 0.835 | ||||||||||
|
CONSOLIDATED
BALANCE SHEET
|
||||||||||||||||||||
|
Common
Stockholders' Equity
|
$ | 103,476 | $ | 100,098 | $ | 95,938 | $ | 94,076 | $ | 87,865 | ||||||||||
|
Long-Term
Debt (Consolidated, Excluding Current Maturities)
|
92,227 | 92,285 | 77,347 | 77,404 | 66,399 | |||||||||||||||
|
Preferred
Stock
|
772 | 772 | 772 | 847 | 847 | |||||||||||||||
|
Total
Capitalization
|
$ | 196,475 | $ | 193,155 | $ | 174,057 | $ | 172,327 | $ | 155,111 | ||||||||||
|
Stockholders'
Equity (Includes Preferred Stock)
|
53 | % | 52 | % | 56 | % | 55 | % | 57 | % | ||||||||||
|
Long-Term
Debt
|
47 | % | 48 | % | 44 | % | 45 | % | 43 | % | ||||||||||
|
Net
Utility Plant
|
$ | 299,233 | $ | 277,662 | $ | 263,187 | $ | 247,703 | $ | 241,776 | ||||||||||
|
Total
Assets
|
$ | 372,431 | $ | 360,813 | $ | 328,140 | $ | 306,035 | $ | 290,940 | ||||||||||
|
Book
Value - Per Common Share
|
$ | 12.23 | $ | 11.95 | $ | 11.60 | $ | 11.52 | $ | 10.94 | ||||||||||
|
OPERATING
REVENUES BY
|
||||||||||||||||||||
|
REVENUE
CLASS
|
||||||||||||||||||||
|
Residential
|
$ | 37,963 | $ | 38,354 | $ | 29,067 | $ | 29,980 | $ | 28,974 | ||||||||||
|
Commercial
|
7,150 | 6,762 | 5,652 | 5,619 | 5,479 | |||||||||||||||
|
Industrial
|
1,822 | 1,764 | 1,589 | 1,538 | 1,635 | |||||||||||||||
|
Public
Authority
|
2,027 | 1,924 | 1,507 | 1,625 | 1,430 | |||||||||||||||
|
Fire
Protection
|
10,606 | 9,482 | 8,708 | 8,267 | 8,087 | |||||||||||||||
|
Other
(Including Non-Metered Accounts)
|
1,702 | 740 | 422 | 424 | 403 | |||||||||||||||
|
Total
Operating Revenues
|
$ | 61,270 | $ | 59,026 | $ | 46,945 | $ | 47,453 | $ | 46,008 | ||||||||||
|
Number
of Customers (Average)
|
87,028 | 84,023 | 82,552 | 81,211 | 87,259 | |||||||||||||||
|
Billed
Consumption (Millions of Gallons)
|
6,895 | 7,257 | 6,918 | 7,276 | 7,801 | |||||||||||||||
|
Number
of Employees
|
226 | 206 | 200 | 191 | 193 | |||||||||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL
CONDITION
Executive
Overview
The
Company is a non-operating holding company, whose income is derived from the
earnings of its four wholly-owned subsidiary companies: The Connecticut Water
Company (Connecticut Water), New England Water Utility Services, Inc. (NEWUS),
Chester Realty Company (Chester Realty), and Barnstable Holding Company
(Barnstable Holding).
In 2008,
approximately 93% of the Company earnings from continuing operations were
attributable to the water activities of its largest subsidiary, Connecticut
Water, a regulated water utility with 87,361 customers throughout 54 Connecticut
towns, as of December 31, 2008. The rates charged for service by
Connecticut Water are subject to review and approval by the Connecticut
Department of Public Utility Control (DPUC).
In the
mid 1990’s, Connecticut Water made a conscious decision to minimize its reliance
on rate increase requests to drive its financial
performance. Instead, it relied upon unregulated operations and cost
containment to grow the earnings of the Company without seeking higher
rates. After a successful extended period of meeting these
objectives, it became clear in 2006 that a rate increase was needed to continue
to provide shareholder value through increased earnings. The Company
decided to return to the more traditional model of recurring rate increase
filings to efficiently collect its cost of both annual expenses and its
investment in the infrastructure of the regulated business. In 2006,
the Connecticut Water communicated to its customers, regulators and shareholders
that it expected to seek rate relief on a more recurring basis for amounts less
than the 30% that was requested in the 2006 filing. Currently, the
Company is precluded from increasing its customers’ base rates prior to January
1, 2010. The Company has not determined when it will file for its
next general rate increase.
Over the
next twenty years, the Environmental Protection Agency expects water companies
to spend over $275 billion in infrastructure costs nationwide to ensure
compliance with existing and future water regulations. Recognizing
the importance of timely infrastructure replacement and improvement, the
Company, along with other investor-owned regulated water companies in the state,
campaigned for the passage of the Water Infrastructure and Conservation
Adjustment (WICA) Act in the Connecticut General Assembly in
2007. WICA allows the Company to add a surcharge to customers’ bills,
subject to an expedited review and approval by the DPUC and no more than twice a
year, to reflect the replacement of certain types of aging utility plant;
principally water mains, meters, service lines and water conservation related
investments. The Company, however, does not expect to be able to file
for a surcharge under the WICA mechanism until the second quarter of
2009.
The
passage of the WICA legislation will help augment the Company’s current strategy
of seeking to collect its costs of operating the regulated utility on a timely
basis through a mechanism even more efficient than a general rate filing with
the DPUC. The use of WICA will help to eliminate the regulatory lag
from the time the Company invests in infrastructure replacement, or certain
qualified new, plant and when it can begin to recover that investment in the
rates charged to customers. In October 2008, the Company filed with
the DPUC its Infrastructure Assessment Report (IAR) required under the WICA
legislation. The purpose of the IAR is to clearly define the criteria
for determining the priority of future replacement projects. The
first public hearing on the Company’s IAR was held on January 16,
2008. The Company expects a ruling on its IAR from the DPUC in the
first quarter of 2009, after which the Company would be eligible to file for its
first surcharge under WICA. Approximately 90 days after the surcharge
filing, customers would begin to see an increase in their
bills.
The
Company has and will continue to focus on minimizing operating costs that are
passed along to its customers without sacrificing the quality service it values
and the customers demand. At the same time, the Company will continue
to employ its current strategy of timely collection of appropriate costs and a
fair rate of return for its shareholders through appropriate rates for its
regulated water service.
Following
our successful acquisition and integration of the water utility assets of
Eastern Connecticut Regional Water Company (Eastern), which added over 2,300
customers, the Company announced on July 23, 2008 that it had reached a
definitive purchase agreement with Ellington Acres Company (Ellington Acres) to
purchase all of Ellington Acres’ outstanding stock for approximately $1.5
million. Ellington Acres is a regulated water company serving
approximately 750 customers in Ellington and Somers, Connecticut, situated
between two systems in the Company’s Northern Region that the Company had
planned to interconnect. The Company will be able to interconnect the
two systems in the Northern Region with Ellington Acres, saving ratepayers of
both Connecticut Water and Ellington Acres significant capital
expenditures. The DPUC approved the acquisition in December 2008 and
the Company completed the transaction on January 16, 2009.
In 2009
and beyond, the Company will continue to look for acquisition candidates that we
would easily be able to “tuck-in” to existing service territories, as well as
possible acquisitions outside of our service territories, including outside the
State of Connecticut. Additionally, the Company plans to continue its
efforts to tie-in private well owners whose homes are in close proximity to our
mains. In 2008, Connecticut Water added 89 private well owners in our
existing service territories. Lastly, the Company will continue to
work with developers to encourage public water use for new residential
construction within Connecticut Water’s service areas.
While the
Company plans to file timely rate cases, continue to make acquisitions and, in
the future, utilize the WICA adjustment to increase its earnings through its
regulated subsidiary, it will also look to NEWUS to increase its earnings in the
unregulated business. As part of the Company’s January 2008
acquisition of Eastern, NEWUS acquired the operation and maintenance contracts
of Birmingham H2O Services Inc., an unregulated business of Birmingham that has
nearly 50 contracts for unregulated water systems in eastern Connecticut,
totaling approximately $500,000 in annual revenues. The Company will
continue to seek out maintenance and service contracts with new customers and
renew existing contracts that have proven to be beneficial to the Company, as
well as to continue the expansion of the Linebacker®
program.
In 2008,
the Company entered into negotiations with the town of Windsor Locks,
Connecticut to sell a conservation easement on a well field property no longer
needed as a source of supply for $2.16 million. Windsor Locks was awarded a
grant from the Connecticut Department of Environmental Protection to assist in
purchasing the conservation easement in order to permanently protect the
approximate 200-acre property from development and guarantee public access to
the land for passive recreation. The Purchase and Sale Agreement
between the Company and the Town has not been executed as of the date of this
filing. The Company expects to file an application with the DPUC and
will submit the draft agreement and the form of Conservation Easement to the
DPUC in March 2009. DPUC approval is expected in the second half of
2009. Subject to successful receipt of DPUC approval, and of final
authorization for the town to proceed with the transaction, the Company expects
the transaction to be completed in 2009. If the transaction closes,
the Company estimates that it will generate approximately $1.0 million in net
income in the Real Estate segment. The Company currently has no other
specific plans for land transactions in 2009 and beyond.
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.
Connecticut
Water’s ability to recover its increased expenses and/or investment in utility
plant is dependent on the rates we charge our customers. Changes to
these rates must be approved by the DPUC through formal rate
proceedings. Due to the subjectivity of certain items involved in the
process of establishing rates such as customer usage, future customer growth,
inflation, and allowed return on investment, we have no assurance that we will
be able to raise our rates to a level we consider appropriate, or to raise rates
at all, through any future rate proceeding.
Connecticut
Water is also subject to environmental and water quality regulations, which are
continually modified and refined to ensure the safety of the Company’s water
sources and, ultimately, the public’s health. Costs to comply with
environmental and water quality regulations are substantial. 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. While there can be no guarantee that
all expenditures related to increased regulation will be recoverable in rate
proceedings, the Company believes that the regulatory environment in Connecticut
would allow prudent expenditures to be recovered in rates. To date,
the Company has never had any costs associated with water quality and
environmental spending refused in a general rate proceeding. The
Company believes that it is in compliance with current regulations, but the
regulations are subject to change at any time. During 2008, the
Company incurred approximately $0.6 million in capital expenditures on Safe
Drinking Water Act projects. The Company expects to spend
approximately $1.2 million on Safe Water Drinking Act projects in 2009,
primarily to bring newly acquired systems up to the Company’s
standards.
Critical
Accounting Policies and Estimates
The
Company’s consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America (GAAP)
and as directed by the regulatory commissions to which the Company’s
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 No. 71, “Accounting for the Effects
of Certain Types of Regulation” (SFAS 71), requires cost-based, rate-regulated
enterprises such as Connecticut Water 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 SFAS 71. Material regulatory
assets, other than deferred revenue, are earning a return.
Revenue Recognition – The
Company’s accounting policies regarding revenue recognition by segment are as
follows:
Water Activities –
Most of our water customers are billed quarterly, with the exception of larger
commercial and industrial customers, as well as public and private fire
protection customers who are billed monthly. Most customers, except
fire protection customers, are metered. Revenues from metered
customers are based on their water usage multiplied by approved, regulated rates
and are earned when water is delivered. Public fire protection
revenues are based on the length of the water main, and number of hydrants in
service and are earned on a monthly basis. Private fire protection
charges are based on the diameter of the connection to the water
main. Our water companies accrue an estimate for metered customers
for the amount of revenues earned relating to water delivered but unbilled at
the end of each quarter.
Real Estate
Transactions – Revenues are recorded when a sale or other transaction has
been completed and title to the real estate has been transferred.
Services and Rentals
– Revenues are recorded when the Company has delivered the services called for
by contractual obligation.
Employee Benefit Plan
Accounting – Management evaluates the appropriateness of the discount
rate through the modeling of a bond portfolio which approximates the pension and
postretirement 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
Company’s pension and postretirement plans.
The
discount rate assumption we use to value our pension and postretirement benefit
obligations has a material impact on the amount of expense we record in a given
period. Our 2008 and 2007 pension and postretirement expense was calculated
using assumed discount rates of 6.30% and 5.75%, respectively. In 2009, our
pension and postretirement expense will be calculated using an assumed discount
rate of 6.25% and 6.20%, respectively. The following table shows how
much a one percent change in our assumed discount rate would have changed our
reported 2008 pension and postretirement expense:
|
Increase
(Decrease) in Pension Expense
|
Increase
(Decrease) in Postretirement Expense
|
|||||||
|
1%
Increase in the discount rate
|
$ | (317,000 | ) | $ | (210,000 | ) | ||
|
1%
Decrease in the discount rate
|
$ | 366,000 | $ | 254,000 | ||||
Outlook
The
Company’s 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 Company’s 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 current or lower levels,
customer growth in the Company’s core regulated water utility business, growth
in revenues attributable to non-water sales operations, and the timing and
adequacy of rate relief when requested, from time to time, by our regulated
water company.
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 Company’s earnings and
profitability in fiscal years 2009 and beyond. Please also review
carefully the risks and uncertainties described in Item 1A – Risk Factors and
those described below under the heading “Forward Looking
Information”.
Based on
the Company’s current projections, assuming normal weather patterns and
appropriate regulatory treatment on recovery of infrastructure improvement, and
the completion of the Windsor Locks land sale, the Company believes that
its Net Income from Continuing Operations for the year 2009 will increase from
the levels reported for 2008, primarily as a result of the second phase of the
rate increase which was approved by the DPUC in March 2008. During
2009 and subsequent years, the ability of the Company to maintain and increase
its Net Income from Continuing Operations 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” and
Item 1A – Risk Factors.
FINANCIAL
CONDITION
Liquidity
and Capital Resources
The
Company has three variable rate bonds with principle values totaling $22.05
million. They are secured by irrevocable direct pay letters of credit issued by
a financial institution. These bonds are currently remarketed on a
weekly basis. On October 7, 2008, the Company was notified that there
was a combined remarketing failure of $2.6 million on two of these
bonds. We believe the increased volatility of the credit markets that
began in September 2008 was the primary cause.
As a
result of the remarketing failure, the remarketing agent drew upon the letters
of credit issued by the financial institution in the amount of $2.6
million. These loan amounts were subject to interest rates at 5.09%,
which were 100 basis points over the one month LIBOR rate. In
addition, the letters of credit are reduced by the amounts of these loans, until
such time as the bonds can be successfully remarketed. As of December
31, 2008 these bonds have been, and continue to be, successfully
remarketed.
The
Company currently maintains an aggregate of $21 million in lines of credit with
three banks. During 2007, the Company increased these lines because
of expected increased construction spending and recently completed
acquisitions. The largest line, representing $12 million of our total
available line of credit, was renewed and increased in the fourth quarter of
2007 and is due upon demand from the bank. The two other lines of
credit, of which one renewed in the second quarter of 2008, the other in the
third quarter of 2007, have terms of 12 and 24 months,
respectively. Interim Bank Loans Payable at December 31, 2008 was
approximately $12.1 million and represents the outstanding balance on these
lines of credit. Interest expense charged on interim bank loans will
fluctuate based on market interest rates. The weighted average
interest rate on the $12.1 million aggregate balance outstanding at December 31,
2008 was 1.96%. After defining the Company’s expected 2009 capital
expenditures, discussed below, the Company determined that additional access to
short term capital arrangements may be needed. In November 2008, the
Company was authorized by the Board of Directors to increase the available lines
of credit to $40 million. The Company expects to finalize the
increased lines in the second quarter of 2009.
Standard
and Poor’s recently affirmed their 'A' corporate credit rating on the Company
with a stable outlook. The affirmation of the corporate credit rating
follows their annual review of the Company and incorporates their expectation of
adequate and timely rate relief and maintenance of our current financial risk
profile. The stable outlook reflects improving regulation and timely
rate relief in Connecticut.
The
Company offers a dividend reinvestment plan (DRIP) to all registered
shareholders, whereby shareholders can elect to have cash dividends directly
reinvested into additional shares of the Company’s common
stock. During the years ended December 31, 2008 and 2007,
shareholders reinvested $1,281,000 and $1,313,000, respectively, as part of the
DRIP.
From 1999
through 2003, the Company issued stock options to certain employees of the
Company. No stock options have been issued by the Company since
2003. During the year ended December 31, 2008, 11,775 options were
exercised resulting in approximately $218,000 in proceeds to the
Company. For the same period in 2007, the Company received
approximately $809,000 in proceeds from exercised stock options.
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 2009.
|
Gross
Construction Expenditures
|
Construction
Funded by Developers & Others
|
Construction
Funded by Company
|
||||||||||
|
2008
|
$ | 20,737,000 | $ | 860,000 | $ | 19,877,000 | ||||||
|
2007
|
$ | 19,841,000 | $ | 1,092,000 | $ | 18,749,000 | ||||||
|
2006
|
$ | 17,792,000 | $ | 1,593,000 | $ | 16,199,000 | ||||||
|
2009
(Projected)
|
$ | 31,400,000 | $ | 5,000,000 | $ | 26,400,000 | ||||||
During
2008, the Company incurred approximately $20.7 million of construction
expenditures, including approximately $900,000 funded by developers and
others. The Company financed the expenditures through internally
generated funds, long-term debt issuances, proceeds from its dividend
reinvestment plan, customers’ advances, contributions in aid of construction and
short-term borrowings.
The Board
of Directors has approved a $26.4 million construction budget for 2009, net of
amounts to be financed by customer advances and contributions in aid of
construction. The Company is increasing its construction budget in
2009 and beyond primarily in response to the WICA legislation discussed
above. The Company will use a combination of its internally generated
funds, borrowing under its available lines of credit and, depending on capital
market conditions, a long term debt issuance. The Company anticipates
utilization of private activity bonds issued through the Connecticut Development
Authority (CDA), for long term debt issuance in 2009 and beyond, as approved by
the Board of Directors.
In
December 2007, Connecticut Water borrowed $15 million through the issuance of
Water Facilities Revenue Bonds by the CDA sold in a single series with an
interest rate of five percent maturing on December 1, 2037. The
proceeds from the sale of the bonds have been used to finance construction and
installation of various capital improvements to the Company’s existing water
system.
In
connection with the 2004 issuance of the $12.5 million variable rate 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 paid J.P. Morgan, the
counterparty, a fixed interest rate of 3.73% on the notional amount for a period
of five years, which expired on March 3, 2009. 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 was to manage the
Company’s exposure to fluctuations in prevailing interest rates. The
Company notes that J.P. Morgan has maintained an investment grade rating by the
three major credit rating agencies. We are evaluating whether or not
to enter into a new interest rate swap agreement on our variable rate
bonds.
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 persons.
The
following table summarizes the Company’s future contractual cash obligations as
of December 31, 2008:
|
Payments
due by Periods
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less than 1
Year
|
Years
2
and 3
|
Years
4
and 5
|
More
than
5 years
|
|||||||||||||||
|
Long-Term
Debt (LTD)
|
$ | 92,235 | $ | 8 | $ | 16 | $ | 18 | $ | 92,193 | ||||||||||
|
Interest
on LTD
|
96,633 | 4,182 | 8,362 | 8,361 | 75,728 | |||||||||||||||
|
Operating
Lease Obligations
|
731 | 309 | 347 | 75 | -- | |||||||||||||||
|
Purchase
Obligations (1)
(2)
|
100,006 | 1,192 | 2,103 | 2,180 | 94,531 | |||||||||||||||
|
Long-Term
Compensation Agreement(3)
|
47,735 | 4,461 | 6,685 | 6,690 | 29,899 | |||||||||||||||
|
Total
(4)
(5)
|
$ | 337,340 | $ | 10,152 | $ | 17,513 | $ | 17,324 | $ | 292,351 | ||||||||||
(1)
Connecticut Water has an agreement with the South Central Connecticut Regional
Water Authority (RWA) to purchase water from RWA. The agreement was
signed on April 24, 2006 and will remain in effect for a minimum of fifty (50)
years from that date. Connecticut Water has agreed to purchase a
maximum of one million (1,000,000) gallons of water per day year from
RWA. The Company is required to pay $75,000 per year for access to
this water.
(2)
Connecticut Water 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.
(3)
Pension and post retirement contributions cannot be reasonably estimated beyond
2009 and may be impacted by such factors as return on pension assets, changes in
the number of plan participants and future salary increases. The
amounts included for pension and post retirement contributions are management’s
best estimate.
(4) 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.
(5) We
intend to fund these contractual obligations with cash flows from operations and
liquidity sources held by or available to us.
RESULTS
OF OPERATIONS
Overview
of 2008 Results from Continuing Operations
Income
from Continuing Operations for 2008 was $9,424,000, or $1.12 per basic share, an
increase of $643,000, or $0.06 per basic share, compared to 2007. The
increase in earnings was due to higher net income in our Water Activities and
Services and Rentals segments partially offset by decreases in net income in our
Real Estate segment. Changes in net income for our segments were as
follows:
|
Business
Segment
|
2008
Net Income (Loss)
|
2007
Net Income
|
Increase
(Decrease)
|
|||||||||
|
Water
Activities
|
$ | 8,794,000 | $ | 7,963,000 | $ | 831,000 | ||||||
|
Real
Estate
|
(160,000 | ) | 167,000 | (327,000 | ) | |||||||
|
Services
and Rentals
|
790,000 | 651,000 | 139,000 | |||||||||
|
Total
|
$ | 9,424,000 | $ | 8,781,000 | $ | 643,000 | ||||||
Water
Activities
The
increase in net income from Water Activities in 2008, over 2007 results was
$831,000, or $0.09 per share. A breakdown of the components of this increase was
as follows:
|
2008
|
2007
|
Increase
(Decrease)
|
||||||||||
|
Operating
Revenues
|
$ | 61,270,000 | $ | 59,026,000 | $ | 2,244,000 | ||||||
|
Operation
and Maintenance
|
31,877,000 | 29,864,000 | 2,013,000 | |||||||||
|
Depreciation
|
6,438,000 | 6,525,000 | (87,000 | ) | ||||||||
|
Income
Taxes
|
3,518,000 | 4,195,000 | (677,000 | ) | ||||||||
|
Taxes
Other than Income Taxes
|
6,041,000 | 5,740,000 | 301,000 | |||||||||
|
Other
Utility Income
|
579,000 | 552,000 | 27,000 | |||||||||
|
Other
(Deductions) Income
|
(143,000 | ) | (972,000 | ) | 829,000 | |||||||
|
Interest
and Debt Expense (net of AFUDC)
|
5,038,000 | 4,319,000 | 719,000 | |||||||||
|
Total
Income from Water Activities
|
$ | 8,794,000 | $ | 7,963,000 | $ | 831,000 | ||||||
The 3.8%
increase in Operating Revenues was primarily due to the January 2008 acquisition
of Eastern and the second phase of the 2006 rate case, partially offset by a
decrease in consumption among all customer classes, due primarily to unfavorable
weather conditions in 2008. Significant rainfall in 2008 reduced
residential demand for water. This was a stark contrast to 2007 when
extremely dry weather was experienced in much of our service
territory. Specific details are as follows:
|
-
|
The
Eastern acquisition added approximately $1.7 million in new revenues from
both the additional customers served and the make whole payments received
from the RWA.
|
|
-
|
The
second phase of the 2006 rate case, which became effective April 1, 2008,
contributed approximately $2.0 million in additional revenues over 2007
levels.
|
|
-
|
The
weather impact was most notable in the Company’s northern service area,
which is the Company’s largest service area, where there were 96 days
during the period May 1, 2008 through October 31, 2008 with at least a
trace of rain, totaling 34.8 inches of rain in the aggregate, compared to
17.4 inches during the same period in 2007. The change in
weather conditions between years resulted in an approximate $1.5 million
revenue disparity between years. The impact of the unfavorable
weather can be seen in Operating Revenues from residential
customers. Despite increasing the customer count in this class
of customer by over 2,600 additional customers (or 3.5%), consumption
decreased by approximately 232 million gallons (or -4.5%). In
fact, despite a decrease in consumption across all customer classes, only
the residential class saw a decrease in Operating
Revenues.
|
The
$2,013,000, or 6.7%, increase in Operation and Maintenance (O&M) expense was
due to the following changes in expenses:
|
Components
of O&M
|
2008
|
2007
|
Increase
(Decrease)
|
|||||||||
|
Labor
|
$ | 11,935,000 | $ | 10,842,000 | $ | 1,093,000 | ||||||
|
Medical
expense
|
1,477,000 | 1,097,000 | 380,000 | |||||||||
|
Water
treatment (including chemicals)
|
2,051,000 | 1,754,000 | 297,000 | |||||||||
|
Utility
costs
|
3,534,000 | 3,282,000 | 252,000 | |||||||||
|
Vehicle
|
1,442,000 | 1,214,000 | 228,000 | |||||||||
|
Customer
|
826,000 | 709,000 | 117,000 | |||||||||
|
Outside
services
|
1,556,000 | 1,480,000 | 76,000 | |||||||||
|
Other
employee benefit costs
|
269,000 | 206,000 | 63,000 | |||||||||
|
Purchased
water
|
993,000 | 1,291,000 | (298,000 | ) | ||||||||
|
Pension
costs
|
1,258,000 | 1,465,000 | (207,000 | ) | ||||||||
|
Post-retirement
medical costs
|
1,565,000 | 1,759,000 | (194,000 | ) | ||||||||
|
Other
|
4,971,000 | 4,765,000 | 206,000 | |||||||||
|
Total
O&M Expense
|
$ | 31,877,000 | $ | 29,864,000 | $ | 2,013,000 | ||||||
The
Company saw an increase in its labor expense driven primarily by the addition of
twenty additional employees hired, primarily due to the acquisition of the
assets of Birmingham Utilities’ Eastern Division and due to annual wage
increases. Medical expenses increased primarily due to an increase in
medical and dental claims filed by employees, partially offset by an increase in
the amount contributed by employees. Water treatment costs increased
primarily due to the rising cost of chemicals during the year. The
Company saw an increase in utility costs primarily due to increased
communication charges and an increase in electric costs. The largest
driver of increased vehicle costs during 2008 was an increase in gasoline
costs. Additionally, during 2007, the Company made the decision to
purchase a majority of its vehicles rather than to lease them; this has caused
the maintenance and repairs costs and depreciation on vehicles to increase
during 2008 as the Company now typically keeps the vehicles in service longer
than when they were leased, partially offset by a decrease in lease
expense. The Company saw an increase in its customer costs due to
increases in customer communications, including increased postage costs, and to
an increase in uncollectible accounts. The increase in outside
services used by the Company were primarily related to increased legal fees
during 2008 and to a consultant hired to assist the Company in defining its
information technology needs. The increase in other employee benefits
relates primarily to increases to executive compensation, including stock-based
compensation, employee training and workers’ compensation insurance, offset by
decreases in fringe benefits. Purchased water costs decreased
compared to 2007 levels due to a renegotiated rate with a neighboring water
utility. Pension expense decreased due to an increase in discount
rates. Post-retirement medical expense decreased due to lower claim
history when comparing 2008 data to 2007.
Despite a
higher utility plant in service balance and a large amount of capital projects
during 2008, the Company saw a decrease in Depreciation expense of $87,000, or
1.3%. The main driver of the decrease is the amortization of the
acquisition adjustment, as allowed by the DPUC, related to the acquisition of
Eastern.
The
decrease in Income Tax expense associated with the Water Activities segment of
$677,000 was due primarily to a lower effective income tax rate in 2008 when
compared to 2007 as a result of the establishment of a deferred tax asset
related to unused state tax credits.
The
increase in Taxes Other Than Income Taxes was primarily due to higher property
taxes due to towns charging higher property tax rates on our increasing property
balances, as well as increased asset balances due to acquisitions.
The
increase in Other Utility Operating Income was due to higher revenues generated
from antenna sites on our utility property leased to telecommunication companies
and the sale of timber cleared from Company owned land.
The
decrease in Other Income was primarily due to lower executive employee benefit
costs in 2008 than during the same period in 2007, due primarily to the
retirement of a former executive during 2007.
Interest
and Debt Expense increased due to the $15 million bond issuance in December 2007
and higher interest on interim bank loans payable.
Real
Estate
While the
Company did not complete any real estate transactions in 2008, an adjustment to
the valuation allowances recorded in earlier years negatively impacted net
income in 2008 by $160,000. Through land donations and discount land
sales in previous years, the Company earned tax credits to use in future
years. The Company is limited by time and the amount of taxable
income when using these credits. Each year, the Company assesses its
ability to use these credits going forward and makes adjustments to its
valuation allowances, accordingly.
During
2007, the Company sold 33 acres, in two separate transactions, generating
approximately $201,000 in net income. Additionally, upon completion
of the 2006 tax return in the third quarter of 2007, the Company received an
additional tax benefit relating to the 2006 BARLACO land sale transaction of
approximately $20,000. Offsetting these gains, the Company increased
its valuation allowance by approximately $54,000, generating an overall net gain
in the Real Estate Transactions segment of $167,000. The Company does
expect a land transaction with the Town of Windsor Locks, Connecticut during
2009. For additional information on the planned 2009 transaction, see
page 24 of this Form 10-K.
Income
from this business segment is largely dependent on the tax deductions received
on donations and, or, sales of available land. This typically occurs
when utility-owned land is deemed to be not necessary to protect water
sources. The Company plans to continue to utilize land donations and
sales in 2009, and beyond, to generate income for this segment of our
business.
Services
and Rentals
Net
income generated from the Services and Rental segment increased in 2008 by
$139,000, over 2007 levels, with a $0.01 increase to basic earnings per share.
The increased net income was primarily due to the acquisition of operation and
maintenance contracts related to the acquisition of the unregulated assets of
Birmingham H2O Services, Inc. and an increase in profit from Linebacker®
customers.
Overview
of 2007 Results from Continuing Operations
Income
from Continuing Operations for 2007 was $8,781,000, or $1.06 per basic share, an
increase of $2,073,000, or $0.25 per basic share, compared to 2006. The increase
in earnings was due to higher net income in our Water Activities segment
partially offset by decreases in net income in our Real Estate Transactions
segment. Changes in net income for our segments were as
follows:
|
Business
Segment
|
2007
Net Income
|
2006
Net Income
|
Increase
(Decrease)
|
|||||||||
|
Water
Activities
|
$ | 7,963,000 | $ | 4,130,000 | $ | 3,833,000 | ||||||
|
Real
Estate
|
167,000 | 2,063,000 | (1,896,000 | ) | ||||||||
|
Services
and Rentals Transactions
|
651,000 | 515,000 | 136,000 | |||||||||
|
Total
|
$ | 8,781,000 | $ | 6,708,000 | $ | 2,073,000 | ||||||
Water
Activities
The
increase in net income from Water Activities in 2007, over 2006 results was
$3,833,000, or $0.46 per share. A breakdown of the components of this increase
was as follows:
|
2007
|
2006
|
Increase
(Decrease)
|
||||||||||
|
Operating
Revenues
|
$ | 59,026,000 | $ | 46,945,000 | $ | 12,081,000 | ||||||
|
Operation
and Maintenance
|
29,864,000 | 26,451,000 | 3,413,000 | |||||||||
|
Depreciation
|
6,525,000 | 5,881,000 | 644,000 | |||||||||
|
Income
Taxes
|
4,195,000 | 2,055,000 | 2,140,000 | |||||||||
|
Taxes
Other than Income Taxes
|
5,740,000 | 5,575,000 | 165,000 | |||||||||
|
Other
Utility Income
|
552,000 | 542,000 | 10,000 | |||||||||
|
Other
(Deductions) Income
|
(972,000 | ) | 608,000 | (1,580,000 | ) | |||||||
|
Interest
and Debt Expense (net of AFUDC)
|
4,319,000 | 4,003,000 | 316,000 | |||||||||
|
Total
Income from Water Activities
|
$ | 7,963,000 | $ | 4,130,000 | $ | 3,833,000 | ||||||
The 25.7%
increase in Operating Revenues was primarily due to the rate increase effective
January 1, 2007, specifically:
|
-
|
an
increase of $9,287,000, or 32.0%, in revenues from residential customers
in 2007, including $3,823,000 in deferred
revenues;
|
|
-
|
a
$1,701,000, or 19.4%, increase in all other metered customers, including
commercial, industrial and public authority customers;
and
|
|
-
|
a
$1,092,000, or 12.0%, 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
$3,413,000, or 12.9%, increase in O&M expense was due to the following
changes in expenses:
|
Components
of O&M
|
2007
|
2006
|
Increase
(Decrease)
|
|||||||||
|
Post-retirement
medical expense
|
$ | 1,759,000 | $ | 473,000 | $ | 1,286,000 | ||||||
|
Labor
|
10,842,000 | 10,240,000 | 602,000 | |||||||||
|
Outside
services
|
1,480,000 | 998,000 | 482,000 | |||||||||
|
Purchased
water
|
1,291,000 | 866,000 | 425,000 | |||||||||
|
Utility
costs
|
3,282,000 | 2,947,000 | 335,000 | |||||||||
|
Vehicle
|
1,214,000 | 942,000 | 272,000 | |||||||||
|
Rate
case cost amortization
|
270,000 | 35,000 | 235,000 | |||||||||
|
Maintenance
|
1,632,000 | 1,526,000 | 106,000 | |||||||||
|
Customer
|
709,000 | 606,000 | 103,000 | |||||||||
|
Other
employee benefit costs
|
2,768,000 | 3,697,000 | (929,000 | ) | ||||||||
|
Other
|
4,617,000 | 4,121,000 | 496,000 | |||||||||
|
Total
O&M Expense
|
$ | 29,864,000 | $ | 26,451,000 | $ | 3,413,000 | ||||||
Post-retirement
medical expense increased over the prior year due to the accounting treatment
under the January 2007 rate decision. Prior to 2007, the Company was
able to recover approximately $473,000 in post-retirement medical expense while
deferring any remaining Statement of Financial Accounting Standards No. 106
(SFAS 106) costs on the balance sheet as a regulatory
asset. Beginning in 2007, the Company fully expensed the costs
determined under SFAS 106. The increase in Labor over 2006 levels was
due to normal wage increases and a non-recurring wage adjustment for a majority
of hourly employees made early in 2006. Outside services increased
over the prior year due to increases in audit, legal and other consulting
related costs. Purchased water costs have increased primarily due to
increases in the rates charged to the Company by other water
utilities. The Company has seen an increase in its Vehicle costs due
to rising gasoline prices, increased insurance rates and higher repair
costs. Despite efforts to keep our Utility expense down, such as
signing commodity contracts directly with suppliers, Utility costs have
increased as our electric providers continue to increase the rates they charge
to customers. When filing for a rate increase, the DPUC allows
companies to defer costs associated with the filing and then to amortize these
expenses through Operation and Maintenance expense. The Company is
now seeing an increase in Rate case cost amortization since it has begun to
amortize the costs to file the 2006 rate case during 2007. Offsetting
these increases was a decrease to Other employee benefit costs due to a
reduction in stock based compensation expense and a decrease in pension
costs.
The
Company saw an increase in Depreciation of $644,000, or 11.0%, due to the
Company’s increased capital spending during 2007 in advance of the second phase
of the 2006 rate case, filed in January 2008. The Company expects
that this line item will continue to increase as the Company looks to replace
aging infrastructure in order to take advantage of WICA in future
years.
The
increase in Income Tax expense associated with the Water Activities segment of
$2,140,000 was due primarily to higher pre-tax net income in 2007.
The
increase in Taxes Other Than Income Taxes was primarily due to higher property
taxes due to towns charging higher property tax rates on our ever increasing
property balances.
The
increase in Other Utility Operating Income was due to higher income generated
from antenna sites on our utility property leased to telecommunication
companies.
The
decrease in Other Income was primarily due to the regulatory treatment of income
taxes related to certain compensation and directors’ fees (disallowed costs)
based on the outcome of the Company’s Settlement Agreement approved by the DPUC
in January 2007. This change resulted in a reversal of a regulatory
liability of $986,000 in 2006. There was no similar reversal in 2007,
and there are none expected in future years.
Interest
and Debt Expense remained relatively flat year over year due to the relatively
similar capital structure during most of 2007 when compared to
2006. In 2008, the Company expects that Interest and Debt Expense
will increase due to the $15 million bond issuance in December
2007.
Real
Estate Transactions
The net
income generated by the Real Estate Transactions segment decreased $1,896,000,
or $0.23 per share, from 2006 due to the sale of land from BARLACO to the Town
of Barnstable, Massachusetts and the reversal of reserves during 2006 compared
to limited real estate activity during 2007. During 2007, the Company
sold 33 acres, in two separate transactions, generating approximately $201,000
in net income. Additionally, upon completion of the 2006 tax return
in the third quarter of 2007, the Company received an additional tax benefit
relating to the 2006 BARLACO land sale transaction of approximately
$20,000. Offsetting these gains, the Company increased its valuation
allowance by approximately $54,000 generating an overall net gain in the Real
Estate Transactions segment of $167,000.
The
agreement the Town of Barnstable entered into with the Company to purchase
Barnstable Water’s assets also included a provision whereby the Town of
Barnstable would acquire, through a bargain sale purchase, all of the land owned
by BARLACO for an additional $1 million. The BARLACO land was sold in
February 2006. The Company recorded a gain on the bargain land sale
for 2006 of $980,000. This gain is reported on the Gain (Loss) on
Property Transactions line of the 2006 Consolidated Statements of
Income.
Additionally
in 2006, the Company reversed $976,000 of reserves related to an examination by
the Internal Revenue Service (IRS) of the Company’s Federal Income Tax Returns
for the years 2002 – 2004, which focused primarily on the value of land donated
by the Company. The IRS completed its examination in 2006 without
adjustment to the previously filed tax returns.
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.
Services
and Rentals
Net
income generated from the Services and Rental segment in 2007 increased
$136,000, over 2006 levels, with a $0.02 increase to basic earnings per share.
The increased net income was primarily due to increases in the prices we charge
our customers and in customer enrollment in our service line maintenance
program.
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 will be eligible for
recovery in future rate proceedings.
Reverse Privatization –
Connecticut Water derives its 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.
Rate Relief – Connecticut
Water is a regulated public utility, which provides water services to its
customers. The rates that regulated companies charge their water
customers are subject to the jurisdiction of the regulatory authority of the
DPUC.
On
January 16, 2007, the DPUC issued its final decision and approved a Settlement
Agreement; negotiated with the Office of Consumer Counsel and the DPUC’s
Prosecutorial Staff; that allowed Connecticut Water an increase of revenues of
approximately $10,940,000, or 22.3%. The Settlement Agreement allowed
Connecticut Water to defer a portion of the approved rate increase,
approximately $3.8 million through December 31, 2007 and $4.8 million through
March 31, 2008. The Company recognized that increase through recording deferred
revenues and a corresponding regulatory asset, as required by the
decision. On January 31, 2008, the Company filed to reopen the case,
a procedure required by the Settlement Agreement, to implement the second phase.
In addition to the approval for the inclusion in current rates of the previously
approved deferred revenues of $4.8 million, the filing includes requested
recovery of the costs associated with $15.5 million of additional capital
investments made in 2007. On March 28, 2008 an 11.95% rate increase
was approved. The approved rates became effective on April 1,
2008.
In June
2007, the State of Connecticut adopted legislation which permits regulated water
companies to recapture money spent on eligible infrastructure improvements
without a full rate case proceeding. The DPUC may authorize regulated
water companies to use a rate adjustment mechanism, such as a Water
Infrastructure and Conservation Adjustment (WICA), for eligible projects
completed and in service for the benefit of the customers. Regulated
water companies may only charge customers such an adjustment to the extent
allowed by the DPUC based on a water company’s infrastructure assessment report,
as approved by the DPUC and upon semiannual filings which reflect plant
additions consistent with such report. The Company does not expect to
file for a surcharge under the WICA mechanism until the second quarter of 2009,
approximately 90 days after the surcharge filing; customers would begin to see
an increase in their bills.
In any
future rate proceedings, the DPUC may authorize Connecticut Water to charge
rates which the DPUC considers to be sufficient to recover the normal operating
expenses and to allow Connecticut Water an opportunity to earn what the DPUC
considers to be a fair and reasonable return on our invested
capital.
Land Dispositions – 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 for long term conservation by the Connecticut
DEP, which have restrictions on development and resale based on provisions of
the Connecticut General Statutes.
The
Company made no land dispositions during the fiscal year ended December 31,
2008. However, during 2008, the Company entered into negotiations
with the town of Windsor Locks, Connecticut to sell a conservation easement on a
well field property no longer needed as a source of supply for $2.16
million. The Company plans to file an application with the DPUC in
March 2009 and approval is expected in the second half of
2009. Subject to successful receipt of DPUC approval, and of final
authorization for the town to proceed with the transaction, the Company expects
the transaction to be completed in 2009. If the transaction closes,
the Company estimates that it will generate approximately $1.0 million in net
income in the Real Estate segment. The Company currently has no other
specific plans for land transactions in 2009 and beyond. After the
completion of the Windsor Locks land sale, the Company will have approximately
290 acres available for future land transactions.
19 Perry Street Litigation –
Connecticut Water’s Unionville division has for many years operated a well field
located at 19 Perry Street, Farmington, Connecticut, pursuant to a 99-year lease
entered into in 1975 with the property owner. This well field
provides approximately half of the daily water supply requirements to the
customers of the Unionville division. In 2004, the original property
owner ceased business operations. The property is now owned by 19
Perry Street, LLC, which obtained the property through a foreclosure
proceeding. In June 2007, the new owner commenced a lawsuit in
Hartford Superior Court (Housing Section), asserting that Connecticut Water is
in unlawful possession of the property under several theories, including that
the lease is invalid and that Connecticut Water has failed to pay rent when
due. A trial before a judge was held in November 2007, and a decision
was issued on April 30, 2008. In its decision, the Court ruled that
the lease is valid. However, in deciding the parties’ contentions
regarding the proper form and amount of rental payments due, the Court ruled
that Connecticut Water was in breach of its obligation to pay rent on the
property and therefore entered an order of eviction.
On May 5,
2008, Connecticut Water filed a timely appeal of the decision in the Connecticut
Appellate Court. This appeal stays the eviction order until the
Appellate Court rules on Connecticut Water’s claims that the trial court
erred. At this time, the outcome of the appeal is
uncertain. On August 5, 2008, Connecticut Water was served with a
related lawsuit in which 19 Perry Street, LLC seeks the payment of back rent
with respect to the property. As of February 23, 2009, the lawsuit
for back rent has been stayed pending the resolution of the appeal related to
the eviction case. The Company intends to maintain its use of the
property to provide water to customers of its Unionville division while the
appeal is pending. In addition, Connecticut Water will consider all
other options with respect to its well field use of the property, including the
outright purchase of the property or the exercise of Connecticut Water’s right
to take the property by initiating eminent domain proceedings under applicable
law.
Capital Expenditures – The
Company has received approval from its Board of Directors to spend $26.4 million
on capital expenditures in 2009, in part due to increased spending in order to
take advantage of the WICA legislation.
FORWARD
LOOKING INFORMATION
This
report, including management’s discussion and analysis, contains certain
forward-looking statements regarding the Company’s 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 Company’s actual results to differ
materially from expected results.
Regulated
water companies, including Connecticut Water, 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, customer demand and
related conservation efforts, financing costs, energy rates, tax rates, and
stock market trends which may affect the return earned on pension assets,
compliance with environmental and water quality regulations, and the outcome of
litigation matters, including the Unionville division well field
dispute. From time to time, the Company may acquire other regulated
and/or unregulated water companies. Profitability is often dependent
on identification and consummation of business acquisitions and the profitable
integration of these acquired businesses into the Company’s operations,
including the January 2009 acquisition of Ellington Acres. 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.
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, 2008, 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 Company's 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 $21,000,000
current lines of credit with three banks, under which interim bank loans payable
at December 31, 2008 were $12,074,000. The Company was authorized by
the Board of Directors to increase the available lines of credit to
approximately $40 million. The Company expects to finalize the
increased lines in the second quarter of 2009.
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
Water’s 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 was to manage the
Company’s exposure to fluctuations in prevailing interest rates. The
interest rate swap expired on March 3, 2009. The Company is
evaluating whether or not to enter into a new interest rate swap agreement on
our variable rate bonds. See the “Liquidity and Capital Resources”
section of Item 7 – “Management’s 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.
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, independent registered public accounting firm are
included herein on pages F-2 through F-27.
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM 9A. CONTROLS AND
PROCEDURES
Disclosure Controls and
Procedures – As of December 31, 2008, management, including the Company’s
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of the Company’s disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)). Based upon, and as of
the date of that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were
effective.
Management’s Report on Internal
Control Over Financial Reporting – Internal control over financial
reporting (as defined in Exchange Act Rule 13a-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 accounting principles generally accepted in the United States of
America.
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 Company’s
internal control over financial reporting was effective as of December 31,
2008. The effectiveness of the Company’s internal control over
financial reporting as of December 31, 2008 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 – There were no significant changes in the Company’s
internal control over financial reporting that occurred during the Company’s
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None
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 Company’s definitive proxy statement
to be filed on EDGAR on or about March 31, 2009. Certain information
concerning the executive officers of the Company is included as Item 10 of this
report.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
The
following is a list of the executive officers of the Company:
|
Name
|
Age
in 2009*
|
Office
|
Period
Held or Prior Position
|
Term
of Office Expires
|
||||
|
E.
W. Thornburg
|
48
|
Chairman,
President, and Chief Executive Officer
|
Held
position since March 2006
|
2009
Annual Meeting
|
||||
|
D.
C. Benoit
|
52
|
Vice
President – Finance, Chief Financial Officer and Treasurer
|
Held
current position or other executive position with the Company since April
1996
|
2009
Annual Meeting
|
||||
|
T.
P. O’Neill
|
54
|
Vice
President – Service Delivery
|
Held
current position or other engineering position with the Company since
February 1980
|
2009
Annual Meeting
|
||||
|
M.
P. Westbrook
|
50
|
Vice
President – Customer and Regulatory Affairs
|
Held
current position or other management position with the Company since
September 1988
|
2009
Annual Meeting
|
||||
|
T.
R. Marston
|
56
|
Vice
President – Business Development
|
Held
current position or other position with the Company since June
1974
|
2009
Annual Meeting
|
||||
|
D.
J. Meaney
|
48
|
Corporate
Secretary
|
Held
current position or other communications position with the Company since
August 1994
|
2009
Annual Meeting
|
||||
|
K.
A. Johnson
|
42
|
Vice
President – Human Resources
|
Held
current position or other human resources position with the Company since
May 2007
|
2009
Annual Meeting
|
* - Age
shown is as of filing date of March 13, 2009.
For
further information regarding the executive officers see the Company’s Proxy
Statement dated March 31, 2009.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
PART
IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a)
|
1.
|
Financial
Statements:
|
||||
|
The
report of independent registered public accounting firm and the Company’s
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 Pubic Accounting Firm
|
F-2
|
|||||
|
Consolidated
Statements of Income for the years ended December 31, 2008, 2007 and
2006
|
F-3
|
|||||
|
Consolidated
Statements of Comprehensive Income for the years ended December 31, 2008,
2007 and 2006
|
F-3
|
|||||
|
Consolidated
Balance Sheets at December 31, 2008 and 2007
|
F-4
|
|||||
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
|
F-5
|
|||||
|
Notes
to Consolidated Financial Statements
|
F-6
|
|||||
|
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, 2008, 2007 and 2006
|
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.
|
||||||
|
(b)
|
Exhibits
|
|||||
|
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.
|
||||||
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
|
Page
|
||
|
Index
to Consolidated Financial Statements and Schedule
|
F-1
|
|
|
Report
of Independent Registered Pubic Accounting Firm
|
F-2
|
|
|
Consolidated
Statements of Income for the years ended December 31, 2008, 2007 and
2006
|
F-3
|
|
|
Consolidated
Statements of Comprehensive Income for the years ended December 31, 2008,
2007 and 2006
|
F-3
|
|
|
Consolidated
Balance Sheets at December 31, 2008 and 2007
|
F-4
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
|
F-5
|
|
|
Notes
to Consolidated Financial Statements
|
F-6
|
|
|
Schedule
II – Valuation Accounts
|
S-1
|
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders of Connecticut Water Service,
Inc.:
In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of comprehensive income
present fairly, in all material respects, the financial position of Connecticut
Water Service, Inc. and its subsidiaries (the “Company”) at December 31, 2008
and 2007, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2008 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 accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and on the Company's
internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included 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. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.
A
company’s 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 company’s 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 company’s 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
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford,
Connecticut
March 13, 2009
|
For
the Years Ended December 31, (in thousands, except per share
data)
|
2008
|
2007
|
2006
|
|||||||||
|
Operating
Revenues
|
$ | 61,270 | $ | 59,026 | $ | 46,945 | ||||||
|
Operating
Expenses
|
||||||||||||
|
Operation
and Maintenance
|
31,877 | 29,864 | 26,451 | |||||||||
|
Depreciation
|
6,438 | 6,525 | 5,881 | |||||||||
|
Income
Taxes
|
3,518 | 4,195 | 2,055 | |||||||||
|
Taxes
Other Than Income Taxes
|
6,041 | 5,740 | 5,575 | |||||||||
|
Total
Operating Expenses
|
47,874 | 46,324 | 39,962 | |||||||||
|
Net
Operating Revenues
|
13,396 | 12,702 | 6,983 | |||||||||
|
Other
Utility Income, Net of Taxes
|
579 | 552 | 542 | |||||||||
|
Total
Utility Operating Income
|
13,975 | 13,254 | 7,525 | |||||||||
|
Other
Income (Deductions), Net of Taxes
|
||||||||||||
|
Gain
(Loss) on Real Estate Transactions
|
(160 | ) | 167 | 2,063 | ||||||||
|
Non-Water
Sales Earnings
|
790 | 651 | 515 | |||||||||
|
Allowance
for Funds Used During Construction
|
160 | 92 | 458 | |||||||||
|
Other
|
(143 | ) | (972 | ) | 608 | |||||||
|
Total
Other Income (Deductions), Net of Taxes
|
647 | (62 | ) | 3,644 | ||||||||
|
Interest
and Debt Expenses
|
||||||||||||
|
Interest
on Long-Term Debt
|
4,241 | 3,500 | 3,526 | |||||||||
|
Other
Interest Charges
|
560 | 537 | 514 | |||||||||
|
Amortization
of Debt Expense
|
397 | 374 | 421 | |||||||||
|
Total
Interest and Debt Expenses
|
5,198 | 4,411 | 4,461 | |||||||||
|
Income
from Continuing Operations
|
9,424 | 8,781 | 6,708 | |||||||||
|
Discontinued
Operations, Net of Tax of $(244) in 2006
|
-- | -- | 243 | |||||||||
|
Net
Income
|
9,424 | 8,781 | 6,951 | |||||||||
|
Preferred
Stock Dividend Requirement
|
38 | 38 | 38 | |||||||||
|
Total
Net Income Applicable to Common Stock
|
$ | 9,386 | $ | 8,743 | $ | 6,913 | ||||||
|
Weighted
Average Common Shares Outstanding:
|
||||||||||||
|
Basic
|
8,377 | 8,270 | 8,188 | |||||||||
|
Diluted
|
8,430 | 8,333 | 8,237 | |||||||||
|
Earnings
Per Common Share:
|
||||||||||||
|
Basic
- Continuing Operations
|
$ | 1.12 | $ | 1.06 | $ | 0.81 | ||||||
|
Basic
- Discontinued Operations
|
-- | -- | 0.03 | |||||||||
|
Basic
- Net Income Applicable to Common Stock
|
$ | 1.12 | $ | 1.06 | $ | 0.84 | ||||||
|
Diluted
- Continuing Operations
|
$ | 1.11 | $ | 1.05 | $ | 0.81 | ||||||
|
Diluted
- Discontinued Operations
|
-- | -- | 0.03 | |||||||||
|
Diluted
- Net Income Applicable to Common Stock
|
$ | 1.11 | $ | 1.05 | $ | 0.84 | ||||||
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
||||||||||||
|
For
the Years Ended December 31, (in thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
Income Applicable to Common Stock
|
$ | 9,386 | $ | 8,743 | $ | 6,913 | ||||||
|
Other
Comprehensive Income, net of tax
|
||||||||||||
|
Qualified
cash flow hedging instrument net of tax benefit
|
||||||||||||
|
of
$(52), $(148), and $(22) in 2008, 2007, and 2006,
respectively
|
(81 | ) | (222 | ) | (45 | ) | ||||||
|
Adjustment
to pension and post-retirement benefits other than
pension,
|
||||||||||||
|
net
of tax (benefit) expense of $(189) and $56 in 2008 and 2007,
respectively
|
(296 | ) | 143 | -- | ||||||||
|
Unrealized
loss on investments, net of tax benefit of $(162)
|
(254 | ) | -- | -- | ||||||||
|
Comprehensive
Income
|
$ | 8,755 | $ | 8,664 | $ | 6,868 | ||||||
The
accompanying notes are an integral part of these financial
statements.
F -
3
Connecticut
Water Service, Inc. and Subsidiaries
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||||
|
December
31, (in thousands, except share amounts)
|
2008
|
2007
|
||||||||
|
ASSETS
|
||||||||||
|
Utility
Plant
|
$ | 410,471 | $ | 384,421 | ||||||
|
Construction
Work in Progress
|
4,577 | 1,407 | ||||||||
| 415,048 | 385,828 | |||||||||
|
Accumulated
Provision for Depreciation
|
(115,815 | ) | (108,166 | ) | ||||||
|
Net
Utility Plant
|
299,233 | 277,662 | ||||||||
|
Other
Property and Investments
|
6,034 | 6,652 | ||||||||
|
Cash
and Cash Equivalents
|
684 | 337 | ||||||||
|
Restricted
Cash
|
-- | 8,220 | ||||||||
|
Accounts
Receivable (Less Allowance, 2008 - $376; 2007 - $352)
|
6,653 | 6,507 | ||||||||
|
Accrued
Unbilled Revenues
|
5,372 | 4,545 | ||||||||
|
Materials
and Supplies, at Average Cost
|
1,095 | 987 | ||||||||
|
Prepayments
and Other Current Assets
|
1,976 | 2,375 | ||||||||
|
Total
Current Assets
|
15,780 | 22,971 | ||||||||
|
Unamortized
Debt Issuance Expense
|
7,318 | 7,685 | ||||||||
|
Unrecovered
Income Taxes
|
22,856 | 30,278 | ||||||||
|
Pension
Benefits
|
8,911 | -- | ||||||||
|
Post-Retirement
Benefits Other Than Pension
|
2,570 | 6,410 | ||||||||
|
Goodwill
|
3,608 | 3,608 | ||||||||
|
Deferred
Charges and Other Costs
|
6,121 | 5,547 | ||||||||
|
Total
Regulatory and Other Long-Term Assets
|
51,384 | 53,528 | ||||||||
|
Total
Assets
|
$ | 372,431 | $ | 360,813 | ||||||
|
CAPITALIZATION
AND LIABILITIES
|
||||||||||
|
Common
Stockholders' Equity:
|
||||||||||
|
Common
Stock Without Par Value:
|
||||||||||
|
Authorized
- 25,000,000 Shares - Issued and Outstanding:
|
||||||||||
| 2008 - 8,463,269; 2007 - 8,376,842 | $ | 64,804 | $ | 62,808 | ||||||
|
Retained
Earnings
|
39,285 | 37,272 | ||||||||
|
Accumulated
Other Comprehensive Income
|
(613 | ) | 18 | |||||||
|
Common
Stockholders' Equity
|
103,476 | 100,098 | ||||||||
|
Preferred
Stock
|
772 | 772 | ||||||||
|
Long-Term
Debt
|
92,227 | 92,285 | ||||||||
|
Total
Capitalization
|
196,475 | 193,155 | ||||||||
|
Interim
Bank Loans Payable
|
12,074 | 6,459 | ||||||||
|
Current
Portion of Long-Term Debt
|
8 | 7 | ||||||||
|
Accounts
Payable and Accrued Expenses
|
5,700 | 5,984 | ||||||||
|
Accrued
Taxes
|
-- | 1,316 | ||||||||
|
Accrued
Interest
|
870 | 810 | ||||||||
|
Other
Current Liabilities
|
418 | 337 | ||||||||
|
Total
Current Liabilities
|
19,070 | 14,913 | ||||||||
|
Advances
for Construction
|
38,928 | 34,583 | ||||||||
|
Contributions
in Aid of Construction
|
49,420 | 47,865 | ||||||||
|
Deferred
Federal and State Income Taxes
|
30,472 | 28,616 | ||||||||
|
Unfunded
Future Income Taxes
|
18,128 | 25,404 | ||||||||
|
Long-Term
Compensation Arrangements
|
18,331 | 14,717 | ||||||||
|
Unamortized
Investment Tax Credits
|
1,497 | 1,560 | ||||||||
|
Other
Long-Term Liabilities
|
110 | |||||||||
|
Commitments
and Contingencies
|
||||||||||
|
Total
Capitalization and Liabilities
|
$ | 372,431 | $ | 360,813 | ||||||
The
accompanying notes are an integral part of these financial
statements.
F -
4
Connecticut
Water Service, Inc. and Subsidiaries
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
For
the Years Ended December 31, (in thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Operating
Activities:
|
||||||||||||
|
Net
Income
|
$ | 9,424 | $ | 8,781 | $ | 6,951 | ||||||
|
Adjustments
to Reconcile Net Income to Net Cash
|
||||||||||||
|
Provided
by Operating Activities:
|
||||||||||||
|
Deferred
Revenues
|
(777 | ) | (3,823 | ) | -- | |||||||
|
Gain
on Sale of BARLACO Assets Sold
|
-- | -- | (980 | ) | ||||||||
|
Earnings
from Discontinued Operations
|
-- | -- | (243 | ) | ||||||||
|
Allowance
for Funds Used During Construction
|
(123 | ) | (131 | ) | (491 | ) | ||||||
|
Depreciation
(including $642 in 2008, $338 in 2007,
|
||||||||||||
|
and
$396 in 2006 charged to other accounts)
|
7,080 | 7,173 | 6,277 | |||||||||
|
Change
in Assets and Liabilities:
|
||||||||||||
|
Decrease
(Increase) in Accounts Receivable and Accrued Unbilled
Revenues
|
(974 | ) | (1,513 | ) | 268 | |||||||
|
Decrease
(Increase) in Other Current Assets
|
204 | (129 | ) | (805 | ) | |||||||
|
(Increase)
Decrease in Other Non-Current Items, net
|
(146 | ) | 2,072 | (549 | ) | |||||||
|
(Decrease)
Increase in Accounts Payable, Accrued
|
||||||||||||
|
Expenses
and Other Current Liabilities
|
(879 | ) | 1,258 | 690 | ||||||||
|
Increase
(Decrease) in Deferred Income Taxes and
|
||||||||||||
|
Investment
Tax Credits, Net
|
1,878 | 1,893 | (1,492 | ) | ||||||||
|
Total
Adjustments
|
6,263 | 6,800 | 2,675 | |||||||||
|
Net
Cash and Cash Equivalents Provided by Continuing
Operations
|
15,687 | 15,581 | 9,626 | |||||||||
|
Net
Cash and Cash Equivalents Provided by Discontinued
Operations
|
-- | -- | 243 | |||||||||
|
Net
Cash and Cash Equivalents Provided by Operating Activities
|
15,687 | 15,581 | 9,869 | |||||||||
|
Investing
Activities:
|
||||||||||||
|
Company
Financed Additions to Utility Plant
|
(19,877 | ) | (18,749 | ) | (16,199 | ) | ||||||
|
Advances
from Others for Construction
|
(737 | ) | (961 | ) | (1,102 | ) | ||||||
|
Net
Additions to Utility Plant Used in Continuing Operations
|
(20,614 | ) | (19,710 | ) | (17,301 | ) | ||||||
|
Purchase
of Eastern and H20 Services Assets
|
(3,500 | ) | -- | -- | ||||||||
|
Release
of Restricted Cash
|
8,393 | -- | 2,686 | |||||||||
|
Proceeds
from Sale of BARLACO Assets Sold (Net of $35 in Transaction
Costs)
|
-- | -- | 965 | |||||||||
|
Sale
(Purchase) of Short Term Investments
|
-- | -- | 6,922 | |||||||||
|
Net
Cash and Cash Equivalents Used in Investing Activities in Continuing
Operations
|
(15,721 | ) | (19,710 | ) | (6,728 | ) | ||||||
|
Net
Cash and Cash Equivalents Used in Investing Activities in Discontinued
Operations
|
-- | -- | -- | |||||||||
|
Net
Cash Used in Investing Activities
|
(15,721 | ) | (19,710 | ) | (6,728 | ) | ||||||
|
Financing
Activities:
|
||||||||||||
|
Proceeds
from Interim Bank Loans
|
12,074 | 6,459 | 5,250 | |||||||||
|
Repayment
of Interim Bank Loans
|
(6,459 | ) | (5,250 | ) | (4,750 | ) | ||||||
|
Repayment
of Long-Term Debt Including Current Portion
|
(57 | ) | (62 | ) | (2,381 | ) | ||||||
|
Proceeds
from Issuance of Long-Term Debt
|
-- | 6,482 | -- | |||||||||
|
Proceeds
from Issuance of Common Stock
|
1,281 | 1,238 | 1,401 | |||||||||
|
Proceeds
from Exercise of Stock Options
|
218 | 809 | 284 | |||||||||
|
Redemption
of Preferred Stock
|
-- | -- | (75 | ) | ||||||||
|
Costs
Incurred to Issue Long-Term Debt and Common Stock
|
(2 | ) | (367 | ) | (4 | ) | ||||||
|
Advances
from Others for Construction
|
737 | 961 | 1,102 | |||||||||
|
Cash
Dividends Paid
|
(7,411 | ) | (7,181 | ) | (7,030 | ) | ||||||
|
Net
Cash and Cash Equivalents Provided by (Used in)
|
||||||||||||
|
Financing
Activities in Continuing Operations
|
381 | 3,089 | (6,203 | ) | ||||||||
|
Net
Cash and Cash Equivalents Used in Financing Activities in Discontinued
Operations
|
-- | -- | -- | |||||||||
|
Net
Cash and Cash Equivalents Provided by (Used in) Financing
Activites
|
381 | 3,089 | (6,203 | ) | ||||||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
347 | (1,040 | ) | (3,062 | ) | |||||||
|
Cash
and Cash Equivalents at Beginning of Year
|
337 | 1,377 | 4,439 | |||||||||
|
Cash
and Cash Equivalents at End of Year
|
$ | 684 | $ | 337 | $ | 1,377 | ||||||
|
Non-Cash
Investing and Financing Activities:
|
||||||||||||
|
Non-Cash
Contributed Utility Plant (see Note 1 for details)
|
$ | 4,089 | $ | 2,116 | $ | 3,295 | ||||||
|
Short-term
Investment of Bond Proceeds Held in Trust
|
$ | -- | $ | 8,220 | $ | -- | ||||||
|
Supplemental
Disclosures of Cash Flow Information:
|
||||||||||||
|
Cash
Paid for Continuing Operations During the Year for:
|
||||||||||||
|
Interest
|
$ | 4,876 | $ | 4,398 | $ | 4,159 | ||||||
|
State
and Federal Income Taxes
|
$ | 3,273 | $ | 2,096 | $ | 1,176 | ||||||
|
Cash
Paid for Discontinued Operations During the Year for:
|
||||||||||||
|
Interest
|
$ | -- | $ | -- | $ | -- | ||||||
|
State
and Federal Income Taxes
|
$ | -- | $ | -- | $ | 73 | ||||||
The
accompanying notes are an integral part of these financial
statements.
F -
5
Connecticut
Water Service, Inc. and Subsidiaries
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 four
wholly-owned subsidiaries, listed below:
The
Connecticut Water Company (Connecticut Water)
Chester
Realty, Inc. (Chester Realty)
New
England Water Utility Services, Inc. (NEWUS)
Barnstable
Holding Company (Barnstable Holding)
Connecticut
Water is our sole public water utility company, which served 87,361 customers in
54 towns throughout Connecticut as of December 31, 2008. During 2006,
The Crystal Water Company of Danielson (Crystal) and The Unionville Water
Company (Unionville) subsidiaries were merged with and into Connecticut
Water.
Chester
Realty 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.
NEWUS is
engaged in water-related services, including the Linebackerâ program, emergency
drinking water, pool water and contract operations. Its earnings are
included in the Non-Water Sales Earnings category of the Consolidated Statements
of Income.
Barnstable
Holding is an inactive holding company, which previously owned the stock of two
other inactive companies, Barnstable Water Company (Barnstable Water) and
BARLACO, Inc. (BARLACO) prior to their merger with and into Barnstable
Holding. BARLACO was 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, as disclosed in Note 2.
On June
29, 2007, the Company announced that its principal operating subsidiary,
Connecticut Water, and its unregulated subsidiary, NEWUS, have entered into
definitive purchase agreements to acquire the regulated water utility assets of
Eastern Connecticut Regional Water Company, Inc. (Eastern), a wholly-owned
subsidiary of Birmingham Utilities, Inc. (Birmingham) and the unregulated assets
of Birmingham H2O Services, Inc. (H2O). The agreements called for
Connecticut Water and NEWUS to pay a combined $3.5 million for the assets
acquired, which had a book value of $9.9 million. On November 16,
2007, the DPUC issued a final decision approving the
transactions. The transaction was completed January 16, 2008, at
which point all of the former customers of Eastern became customers of
Connecticut Water.
Intercompany
accounts and transactions have been eliminated.
PUBLIC UTILITY REGULATION –
Our public water utility company is subject to regulation for rates and other
matters by the Connecticut Department of Public Utility Control (DPUC) and
follows accounting policies prescribed by the DPUC. The Company
prepares its financial statements in accordance with accounting principles
generally accepted 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,” (SFAS 71). SFAS 71
requires cost-based, rate-regulated enterprises, such as Connecticut Water, 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 SFAS 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 SFAS 71. Material regulatory assets are earning a
return.
Regulatory
assets and liabilities are comprised of the following:
|
(in
thousands)
|
December
31
|
|||||||
|
2008
|
2007
|
|||||||
|
Assets:
|
||||||||
|
Postretirement
benefits
|
$ | 11,481 | $ | 6,136 | ||||
|
Unrecovered
income taxes and other
|
18,128 | 25,404 | ||||||
|
Deferred
revenue (included in deferred charges)
|
4,600 | 3,823 | ||||||
|
Other
(included in deferred charges)
|
1,363 | 1,806 | ||||||
|
Total
regulatory assets
|
$ | 35,572 | $ | 37,169 | ||||
|
Liabilities:
|
||||||||
|
Investment
Tax Credits
|
$ | 1,497 | $ | 1,560 | ||||
|
Unfunded
future income taxes and other
|
18,128 | 25,404 | ||||||
|
Total
regulatory liabilities
|
$ | 19,625 | $ | 26,964 | ||||
Postretirement
benefits include pension and other postretirement benefit costs. The
costs include actuarially determined pension and post-retirement
benefits costs in excess of amounts funded. Connecticut Water
believes these costs will be recoverable in future years, through rates, as
funding is required. The recovery period is dependent on
contributions made to the plans and the discount rate used to value the
obligations.
Certain
items giving rise to deferred state income taxes, as well as a portion of
deferred federal income taxes related primarily to differences between book and
tax depreciation expense, are recognized for ratemaking purposes on a cash or
flow-through basis and will be recovered in rates as they reverse.
Deferred
revenue represents a portion of the rate increase granted in Connecticut Water’s
2007 rate decision. The regulator’s decision required the Company to
defer for future collection, beginning in 2008, a portion of the
increase.
Regulatory
liabilities include deferred investment tax credits. These
liabilities will be given back to customers in rates as tax deductions occur in
the future.
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.
REVENUES – The Company’s
accounting policies regarding revenue recognition by segment are as
follows:
Water Activities – Most of our
water customers are billed quarterly, with the exception of larger commercial
and industrial customers, as well as public and private fire protection
customers who are billed monthly. Most customers, except fire
protection customers, are metered. Revenues from metered customers
are based on their water usage multiplied by approved, regulated rates and are
earned when water is delivered. Public fire protection revenues are
based on the length of the water main, and number of hydrants in service and are
earned on a monthly basis. Private fire protection charges are based
on the diameter of the connection to the water main. Our water
companies accrue an estimate for metered customers for the amount of revenues
earned relating to water delivered but unbilled at the end of each quarter,
which is reflected as Accrued Unbilled Revenues in the accompanying balance
sheets.
Real Estate Transactions –
Revenues are recorded when a sale or other transaction has been completed and
title to the real estate has been transferred.
Services and Rentals –
Revenues are recorded when the Company has delivered the services called for by
contractual obligation.
UTILITY PLANT – Utility plant
is stated at the original cost of such property when first devoted to public
service. 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 utility
plant. The amount shown on the Consolidated Statements of Income relates to the
equity portion. The debt portion is included as an offset to Other
Interest Charges. 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, 2006,
Connecticut Water has capitalized approximately $3.9 million of AFUDC relating
to financing these acquisitions. As part of the Company’s most recent
rate decision, approved on January 16, 2007 and effective as of January 1, 2007,
the DPUC has approved the inclusion of this capitalized amount in rate
base. The Company did not record any AFUDC on water system
acquisitions in 2008 or 2007.
Connecticut
Water’s 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,
Connecticut Water periodically receives 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 Company’s 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
Company’s depreciable utility plant and are generally part of rate
base. The Company’s rate base is a key component of how its regulated
rates are set, and is recovered through the depreciation component of the
Company’s 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 Company’s rate base and not
recovered through the rates process, and are also not depreciated.
The
components that comprise Net Additions to Utility Plant during the last three
years are as follows:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Additions
to Utility Plant:
|
||||||||||||
|
Company
Financed
|
$ | 19,877 | $ | 18,749 | $ | 16,199 | ||||||
|
Allowance
for Funds Used During Construction
|
123 | 131 | 491 | |||||||||
|
Subtotal
– Utility Plant Increase to Rate Base
|
20,000 | 18,880 | 16,690 | |||||||||
|
Advances
from Others for Construction
|
737 | 961 | 1,102 | |||||||||
|
Net
Additions to Utility Plant
|
$ | 20,737 | $ | 19,841 | $ | 17,792 | ||||||
Depreciation – Depreciation is
computed on a straight-line basis at various rates as approved by the state
regulator on a company by company basis. Depreciation allows the
Company 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 2.2% for 2008, and 2.0% 2007
and 2006, respectively.
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 liabilities for all temporary book-tax differences
using the liability method prescribed in Statement of Financial Accounting
Standards No. 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 reflected as Unfunded Future Income
Taxes, and are expected to be recoverable in future years’ rates.
The
Company believes that the majority of deferred income tax assets will
be realized in the future. The majority of 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.
The
Company adopted FIN 48 “Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB statement No. 109” in 2007. See Note
4.
MUNICIPAL TAXES – Municipal
taxes which are reflected as Taxes Other than Income 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 – In the past,
the Company has issued stock options to certain employees; but has not done so
since 2003. For more information regarding stock based compensation,
see Note 14, Stock Based Compensation Plans.
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 DPUC.
GOODWILL – As part of the
purchase of the Unionville Water Company in October 2002, the Company recorded
goodwill of $3.6 million representing the amount of the purchase price over net
book value of the assets acquired. The Company accounts for goodwill
in accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142).
In
accordance with SFAS 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. As of December 31, 2008, there was no impairment of the
Company’s goodwill.
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, 2008, 2007, and
2006.
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Numerator
(in thousands)
|
||||||||||||
|
Basic
Income from Continuing Operations
|
$ | 9,424 | $ | 8,781 | $ | 6,708 | ||||||
|
Diluted
Income from Continuing Operations
|
$ | 9,424 | $ | 8,781 | $ | 6,708 | ||||||
|
Denominator
(in thousands)
|
||||||||||||
|
Basic
Weighted Average Shares Outstanding
|
8,377 | 8,270 | 8,188 | |||||||||
|
Dilutive
Effect of Stock Awards
|
53 | 63 | 49 | |||||||||
|
Diluted
Weighted Average Shares Outstanding
|
8,430 | 8,333 | 8,237 | |||||||||
|
Earnings
per Share
|
||||||||||||
|
Basic
Earnings per Share from Continuing Operations
|
$ | 1.12 | $ | 1.06 | $ | 0.81 | ||||||
|
Dilutive
Effect of Stock Awards
|
0.01 | 0.01 | -- | |||||||||
|
Diluted
Earnings per Share from Continuing Operations
|
$ | 1.11 | $ | 1.05 | $ | 0.81 | ||||||
RECLASSIFICATIONS AND
REVISIONS – Certain reclassifications have been made to conform
previously reported data to the current presentation.
NEW ACCOUNTING PRONOUNCEMENTS
– In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurement”
(SFAS 157). SFAS 157 provides a single definition of fair value, a
framework for measuring fair value, and requires additional disclosure about the
use of fair value to measure assets and liabilities. SFAS 157 is
effective for fiscal years beginning after November 15, 2007; as such we
partially adopted SFAS 157 in the first quarter of 2008. In February
2008, the FASB issued FASB Staff Position 157-2, “Effective Date of FASB
Statement No. 157”, (FSP No. 157-2), which delays the effective date of SFAS 157
for non-financial assets and liabilities that are recognized or disclosed in the
financial statements on a nonrecurring basis to fiscal years beginning after
November 15, 2008. We have not applied the provisions of SFAS 157 to
our non-financial assets and non-financial liabilities in accordance with FSP
No. 157-2. FSP No. 157-2 is effective for the Company beginning
January 1, 2009. See Note 7 for additional disclosures regarding fair
value.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “Fair Value Option for Financial Assets and Financial Liabilities –
Including an Amendment of FASB Statement No. 115” (SFAS 159). SFAS
159 permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective of SFAS 159 is to reduce
both the complexity in accounting for financial instruments and the volatility
in earnings caused by measuring related assets and liabilities
differently. SFAS 159 was effective for fiscal years beginning after
November 15, 2007. The Company did not elect the fair value option
for any of its existing financial instruments and has not yet determined whether
or not to elect this option for financial instruments it may acquire in the
future.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (Revised 2007) “Business Combinations” (SFAS 141(R)), which establishes
principles and requirements for how the acquiring company shall recognize and
measure in its financial statements the identifiable assets acquired,
liabilities assumed, any non-controlling interest in the acquired company and
goodwill acquired in a business combination. This statement is effective for
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company does not expect that the adoption
of SFAS 141(R) will have a material effect on its financial position and results
of operations.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Non-controlling Interests in Consolidated Financial Statements — an
Amendment of ARB No. 51” (SFAS 160), which establishes and expands accounting
and reporting standards for minority interests, which will be recharacterized as
non-controlling interests, in a subsidiary and the deconsolidation of a
subsidiary. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008. The Company does not expect that the adoption of
SFAS 160 will have a material effect on its financial position and results of
operations.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities – an amendment
of FASB Statement No. 133” (SFAS 161). SFAS 161 requires enhanced
disclosures about an entity’s derivative and hedging
activities. Under SFAS 161, entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for
under Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. This statement is effective for fiscal
years and interim periods beginning after November 15, 2008. The
Company is currently assessing the impact of SFAS 161.
In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (SFAS
162). SFAS 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in preparation of
financial statements presented in conformity with generally accepted accounting
principles (GAAP). SFAS 162 directs the hierarchy to the entity,
rather than the independent auditors, as the entity is responsible for selecting
accounting principles for financial statements that are presented in conformity
with GAAP. SFAS 162 is effective 60 days following SEC approval of
the Public Company Accounting Oversight Board amendments to remove the hierarchy
of GAAP from the auditing standards. The Company does not expect SFAS
162 to have a material impact on its financial condition or results of
operations.
In June
2008, the FASB issued FASB Staff Position EITF 03-6-1 (EITF 03-6-1),
“Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities.” EITF 03-6-1 states that unvested awards of
share-based payments with rights to receive dividends or dividend equivalents
are considered participating securities for purposes of calculating earnings per
share. As a result, these participating securities will be included
in the weighted average number of shares outstanding as disclosed on the face of
the income statement. EITF 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those
years. All prior period earnings per share data presented in
financial reports after the effective date shall be adjusted retrospectively to
conform to the provisions of EITF 03-6-1. Early application is not
permitted. The Company does not expect EITF 03-6-1 to have a material
impact on its reported earnings per share.
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, Barnstable Water, to the Town of Barnstable,
Massachusetts. Upon completion of the sale, the Town of Barnstable
and Barnstable Water entered into a one year management contract for Barnstable
Water to provide the Town with full operating and management services for the
water system’s operations. Under the terms of the one year management
contract, Barnstable Water was paid $130,000 a month for operating and
management services performed by Barnstable Water 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 sale
of Barnstable Water’s 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 Barnstable Water, including prior
years and the gain on the sale of the utility’s assets, have been reclassified
and are included as ‘Discontinued Operations’.
There
were no Discontinued Operations during the years ended December 31, 2008 and
2007. The Net Income from Discontinued Operations for the year ended
December 31, 2006, would have been presented in the 2006 financial statements,
as follows:
|
(in
thousands)
|
Year
ended
December
31, 2006
|
|||
|
Water
Activities:
|
||||
|
Operating
Revenues
|
$ | -- | ||
|
Income
Taxes
|
(244 | ) | ||
|
Net
Income from Water Activities
|
243 | |||
|
Services
and Rentals:
|
||||
|
Revenues
|
$ | -- | ||
|
Income
Taxes
|
(12 | ) | ||
|
Net
Income from Services and Rentals
|
-- | |||
|
Total
Net Income from Discontinued Operations
|
$ | 243 | ||
NOTE
3: SALE OF BARLACO ASSETS
The
agreement the Town of Barnstable entered into with the Company to purchase
Barnstable Water’s assets also included a provision whereby the Town of
Barnstable would acquire, through a bargain sale purchase, all of the land owned
by BARLACO for an additional $1 million. The BARLACO land was sold in
February 2006. The Company has recorded a gain on the bargain land
sale for 2006 of $980,000. This gain is reported on the Gain (Loss)
on Property Transactions line of the Consolidated Statements of
Income.
NOTE
4: INCOME TAX EXPENSE
In June
2006, the FASB issued interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48), which
became effective for the Company as of January 1, 2007. FIN 48
addresses the determination of how tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial statements. Under FIN 48, we must recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon ultimate resolution. The
reassessment of our tax positions in accordance with FIN 48 did
not have an impact on our results of operations, financial condition or
liquidity. From time to time, the Company is assessed interest and
penalties by taxing authorities. In those cases, the charges would
appear on the Other line item on the Income Statement. During 2007,
the Company was charged approximately $2,000 in interest relating to the 2003
federal tax examination. There were no such charges for the years
ending December 31, 2008 and 2006. Additionally, there were no
accruals relating to interest or penalties as of December 31, 2008 and
2007. The Company remains subject to examination by federal
authorities for the 2005 through 2007 tax years and by state authorities for the
tax years 2003 through 2007.
Income
Tax Expense from Continuing Operations for the years ended December 31, is
comprised of the following:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Federal
Classified as Operating Expense from Continuing Operations
|
$ | 3,631 | $ | 3,834 | $ | 2,080 | ||||||
|
Federal
Classified as Other Utility Income from Continuing
Operations
|
267 | 238 | 232 | |||||||||
|
Federal
Classified as Other Income from Continuing Operations
|
||||||||||||
|
Land
Sales
|
-- | 61 | 287 | |||||||||
|
Land
Donations
|
178 | 83 | (892 | ) | ||||||||
|
Non-Water
Sales
|
360 | 332 | 264 | |||||||||
|
Other
|
(195 | ) | (529 | ) | (981 | ) | ||||||
|
Total
Federal Income Tax Expense from Continuing Operations
|
4,241 | 4,019 | 990 | |||||||||
|
State
Classified as Operating Expense from Continuing Operations
|
(113 | ) | 361 | (26 | ) | |||||||
|
State
Classified as Other Utility Income from Continuing
Operations
|
64 | 57 | 68 | |||||||||
|
State
Classified as Other Income from Continuing Operations
|
||||||||||||
|
Land
Sales
|
-- | 14 | 89 | |||||||||
|
Land
Donations
|
(19) | (199 | ) | (902 | ) | |||||||
|
Non-Water
Sales
|
90 | 79 | 79 | |||||||||
|
Other
|
(23) | (101 | ) | (191 | ) | |||||||
|
Total
State Income Tax Expense from Continuing Operations
|
(1 | ) | 211 | (883 | ) | |||||||
|
Total
Income Tax Expense from Continuing Operations
|
$ | 4,240 | $ | 4,230 | $ | 107 | ||||||
The
components of the Federal and State income tax provisions from Continuing
Operations are:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Current
from Continuing Operations
|
||||||||||||
|
Federal
|
$ | 1,906 | $ | 1,938 | $ | 1,165 | ||||||
|
State
|
110 | 158 | 221 | |||||||||
|
Total
Current from Continuing Operations
|
2,016 | 2,096 | 1,386 | |||||||||
|
Deferred
Income Taxes from Continuing Operations, Net
|
||||||||||||
|
Federal
|
||||||||||||
|
Investment
Tax Credit
|
(63 | ) | (63 | ) | (63 | ) | ||||||
|
Deferred
Revenue
|
264 | 1,202 | -- | |||||||||
|
Land
Donations
|
187 | 260 | (501 | ) | ||||||||
|
Depreciation
|
1,583 | 1,206 | 1,173 | |||||||||
|
Other
|
364 | (524 | ) | (784 | ) | |||||||
|
Total
Federal from Continuing Operations
|
2,335 | 2,081 | (175 | ) | ||||||||
|
State
|
||||||||||||
|
Land
Donations
|
85 | (108 | ) | (134 | ) | |||||||
|
Other
|
(196 | ) | 161 | (970 | ) | |||||||
|
Total
State from Continuing Operations
|
(111 | ) | 53 | (1,104 | ) | |||||||
|
Total
Deferred Income Taxes from Continuing Operations
|
2,224 | 2,134 | (1,279 | ) | ||||||||
|
Total
from Continuing Operations
|
$ | 4,240 | $ | 4,230 | $ | 107 | ||||||
Deferred
income tax (assets) and liabilities are categorized as follows on the
Consolidated Balance Sheets:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Unrecovered
Income Taxes
|
$ | (22,856 | ) | $ | (30,278 | ) | ||
|
Deferred
Federal and State Income Taxes
|
30,472 | 28,616 | ||||||
|
Unfunded
Future Income Taxes
|
18,128 | 25,404 | ||||||
|
Unamortized
Investment Tax Credit
|
1,497 | 1,560 | ||||||
|
Other
|
(142 | ) | (80 | ) | ||||
|
Net
Deferred Income Tax Liability
|
$ | 27,099 | $ | 25,222 | ||||
Deferred
income tax (assets) and liabilities are comprised of the following:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Charitable
Contribution Carryforward (1)
|
$ | (2,705 | ) | $ | (2,977 | ) | ||
|
Valuation
Allowance
|
2,064 | 1,888 | ||||||
|
Tax
Credit Carryforward (2)
|
(1,624 | ) | (1,436 | ) | ||||
|
Prepaid
Income Taxes on CIAC
|
(120 | ) | (209 | ) | ||||
|
Prepaid
FIT on Services
|
(112 | ) | (174 | ) | ||||
|
Other
Comprehensive Income
|
(432 | ) | (29 | ) | ||||
|
Accelerated
Depreciation
|
28,438 | 26,975 | ||||||
|
Net
of AFUDC and Capitalized Interest
|
234 | 211 | ||||||
|
Unamortized
Investment Tax Credit
|
1,497 | 1,560 | ||||||
|
Other
|
(141 | ) | (587 | ) | ||||
|
Net
Deferred Income Tax Liability
|
$ | 27,099 | $ | 25,222 | ||||
|
(1)
|
2008
charitable contribution carryover expires beginning in 2009 and ending in
2012.
|
|
(2)
|
State
tax credit carry-forwards expire beginning 2017 and ending in
2020.
|
The
calculation of Pre-Tax Income from Continuing Operations is as
follows:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Pre-Tax
Income
|
||||||||||||
|
Income
From Continuing Operations
|
$ | 9,424 | $ | 8,781 | $ | 6,708 | ||||||
|
Income
Taxes
|
4,240 | 4,230 | 107 | |||||||||
|
Total
Pre-Tax Income From Continuing Operations
|
$ | 13,664 | $ | 13,011 | $ | 6,815 | ||||||
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:
|
2008
|
2007
|
2006
|
||||||||||
|
Federal
Statutory Tax Rate
|
34.0 | % | 34.0 | % | 34.0 | % | ||||||
|
Tax
Effect Differences:
|
||||||||||||
|
State
Income Taxes Net of Federal Benefit
|
-- | 1.1 | % | (0.1 | %) | |||||||
|
Reversal
of Regulatory Liability
|
-- | -- | (14.4 | %) | ||||||||
|
Adjustment
to Taxes Due to Closed IRS Examination
|
-- | -- | (14.3 | %) | ||||||||
|
Depreciation
|
1.6 | % | 1.7 | % | 2.6 | % | ||||||
|
Charitable
Contributions – Land Donation (Net of Valuation Allowance)
|
1.5 | % | 0.4 | % | (7.7 | %) | ||||||
|
Pension
Costs
|
(5.1 | %) | (5.3 | %) | 7.7 | % | ||||||
|
Allowance
for Funds Used During Construction
|
(0.3 | %) | (0.3 | %) | (2.9 | %) | ||||||
|
Change
in Estimate of Prior Year Income Tax Expense
|
(0.5 | %) | 0.2 | % | 0.6 | % | ||||||
|
Rate
Case Expense
|
0.6 | % | 0.6 | % | (3.6 | %) | ||||||
|
Other
|
(0.7 | %) | 0.1 | % | (0.3 | %) | ||||||
|
Effective
Income Tax Rate for Continuing Operations
|
31.1 | % | 32.5 | % | 1.6 | % | ||||||
NOTE
5: COMMON STOCK
The
Company has 25,000,000 authorized shares of common stock, no par
value. A summary of the changes in the common stock accounts for the
period January 1, 2006 through December 31, 2008, appears below:
|
(in
thousands, except share data)
|
Shares
|
Issuance
Amount
|
Expense
|
Total
|
||||||||||||
|
Balance,
January 1, 2006
|
8,169,627 | $ | 59,604 | $ | (1,599 | ) | $ | 58,005 | ||||||||
|
Stock
and equivalents issued through Performance Stock Program, Net of
Forfeitures
|
23,058 | 323 | -- | 323 | ||||||||||||
|
Dividend
Reinvestment Plan
|
60,747 | 1,401 | -- | 1,401 | ||||||||||||
|
Stock
Options Exercised and Expensed
|
16,962 | 441 | (2 | ) | 439 | |||||||||||
|
Other
Paid in Capital
|
-- | (3 | ) | -- | (3 | ) | ||||||||||
|
Balance,
December 31, 2006
|
8,270,394 | $ | 61,766 | $ | (1,601 | ) | $ | 60,165 | ||||||||
|
Stock
and equivalents issued through Performance Stock Program, Net of
Forfeitures
|
13,975 | 420 | -- | 420 | ||||||||||||
|
Dividend
Reinvestment Plan
|
54,567 | 1,326 | -- | 1,326 | ||||||||||||
|
Stock
Options Exercised and Expensed
|
37,906 | 902 | (5 | ) | 897 | |||||||||||
|
Balance,
December 31, 2007
|
8,376,842 | $ | 64,414 | $ | (1,606 | ) | $ | 62,808 | ||||||||
|
Stock
and equivalents issued through Performance Stock Program, Net of
Forfeitures
|
22,046 | 465 | -- | 465 | ||||||||||||
|
Dividend
Reinvestment Plan
|
52,606 | 1,287 | -- | 1,287 | ||||||||||||
|
Stock
Options Exercised and Expensed
|
11,775 | 246 | (2 | ) | 244 | |||||||||||
|
Balance,
December 31, 2008 (1)
|
8,463,269 | $ | 66,412 | $ | (1,608 | ) | $ | 64,804 | ||||||||
|
(1)
|
Includes
37,281 restricted shares and 49,199 common stock equivalent shares issued
through the Performance Stock Programs through December 31,
2008.
|
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.
NOTE
6: RETAINED EARNINGS
The
summary of the changes in Retained Earnings for the period January 1, 2006
through December 31, 2008, appears below:
|
(in
thousands, except per share data)
|
2008
|
2007
|
2006
|
|||||||||
|
Balance,
beginning of year
|
$ | 37,272 | $ | 35,676 | $ | 35,777 | ||||||
|
Net
Income
|
9,424 | 8,781 | 6,951 | |||||||||
|
Sub-total
|
46,696 | 44,457 | 42,728 | |||||||||
|
Dividends
declared:
|
||||||||||||
|
Cumulative
Preferred Stock, Series A, $0.80 per share
|
12 | 12 | 12 | |||||||||
|
Cumulative
Preferred Stock, Series $0.90, $0.90 per share
|
26 | 26 | 26 | |||||||||
|
Common
Stock:
|
||||||||||||
|
2008
$0.880 per Common Share
|
7,373 | -- | -- | |||||||||
|
2007
$0.865 per Common Share
|
-- | 7,147 | -- | |||||||||
|
2006
$0.855 per Common Share
|
-- | -- | 7,014 | |||||||||
|
Total
Dividends Declared
|
7,411 | 7,185 | 7,052 | |||||||||
|
Balance,
end of year
|
$ | 39,285 | $ | 37,272 | $ | 35,676 | ||||||
NOTE
7: FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company partially adopted SFAS 157 as of January 1, 2008, which among other
things requires enhanced disclosures for assets and liabilities that are
measured and reported at fair value and establishes a framework for measuring
fair value. SFAS 157 applies to accounting pronouncements that
already require or permit fair value measures and does not require any new fair
value measurements.
SFAS 157
establishes a fair value hierarchy that distinguishes between assumptions based
on market data (observable inputs) and the Company’s assumptions (unobservable
inputs). The hierarchy consists of three broad levels, as
follows:
|
|
Level
1 –
|
Quoted
market prices in active markets for identical assets or
liabilities
|
|
|
Level
2 –
|
Inputs
other than Level 1 that are either directly or indirectly
observable
|
|
|
Level
3 –
|
Unobservable
inputs developed using the Company’s estimates and assumptions, which
reflect those that the Company believes market participants would
use.
|
The
following table summarizes our financial instruments measured at fair value on a
recurring basis within the fair value hierarchy as of December 31,
2008:
|
(in
thousands)
|
Level
1
|
Level
2
|
Level
3
|
|||||||||
|
Assets:
|
||||||||||||
|
Investments
|
$ | 1,288 | $ | -- | $ | -- | ||||||
|
Liabilities:
|
||||||||||||
|
Interest
Rate Swap
|
$ | -- | $ | 88 | $ | -- | ||||||
In
February 2008, the FASB issued FSP No. 157-2 which allows companies to elect a
one-year deferral of adoption of SFAS 157 for non-financial assets and
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis. The Company has
elected the deferral option permitted by FSP No. 157-2 for its non-recurring
non-financial assets and non-financial liabilities. Non-recurring
non-financial assets and non-financial liabilities for which the Company has not
applied the provisions of SFAS 157 include those measured at fair value in
goodwill and long-lived assets for impairment testing. FSP No. 157-2
is effective for the Company beginning January 1, 2009.
The
following methods and assumptions were used to estimate the fair value of each
of the following financial instruments, which are not reported at market value
on the financial statements.
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.
RESTRICTED CASH – As part of
the December 2007 bond offering, described in Note 8 to the Notes to the
Consolidated Financial Statements, the Company recorded unused proceeds from
this bond issuance as restricted cash as the funds can only be used for certain
capital expenditures. The Company used the remainder of the proceeds
during 2008.
LONG-TERM DEBT – The fair
value of the Company's fixed rate long-term debt is based upon borrowing rates
currently available to the Company. As of December 31, 2008 and 2007,
the estimated fair value of the Company's long-term debt was $77,228,000 and
$91,109,000, respectively, as compared to the carrying amounts of $92,227,000
and $92,285,000, respectively.
The fair
values shown above have been reported to meet the disclosure requirements of
Statement of Financial Accounting Standards 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,
Connecticut Water entered into a five-year interest rate swap associated with
its $12.5 million 2004 series variable rate unsecured water facilities revenue
refinancing bonds to manage the Company’s exposure to fluctuations in prevailing
interest rates. The swap agreement qualifies for hedge treatment under
Statement of Financial Accounting Standards No. 133 “Accounting for Derivative
Instruments and Hedging Activities.” The fair value of the interest
rate swap is included in the Company’s Consolidated Balance sheet
in "Other Current Liabilities" at December 31, 2008 was approximately
$88,000 and in "Deferred Charges and Other Costs" at December 31, 2007 was
approximately $45,000. Changes in the fair value of this derivative
instrument are recorded in “Other Comprehensive Income” in Common Stockholders’
Equity. The interest rate swap agreement expired on March 3,
2009.
NOTE
8: LONG-TERM DEBT
Long-Term
Debt at December 31, consisted of the following:
|
(in
thousands)
|
2008
|
2007
|
|||||||||
|
The
Connecticut Water Company:
|
|||||||||||
|
Unsecured
Water Facilities Revenue Bonds
|
|||||||||||
| 5.05 | % |
1998
Series A, Due 2028
|
$ | 9,635 | $ | 9,640 | |||||
| 5.125 | % |
1998
Series B, Due 2028
|
7,615 | 7,635 | |||||||
| 4.40 | % |
2003A
Series, Due 2020
|
8,000 | 8,000 | |||||||
| 5.00 | % |
2003C
Series, Due 2022
|
14,915 | 14,915 | |||||||
|
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
|
14,935 | 14,960 | |||||||
| 5.00 | % |
2007
A Series, Due 2037
|
15,000 | 15,000 | |||||||
|
Total
The Connecticut Water Company
|
92,150 | 92,200 | |||||||||
|
Chester
Realty:
|
|||||||||||
|
Secured
|
|||||||||||
| 6.39 | % |
NewAlliance
Bank, Due 2017
|
85 | 92 | |||||||
|
Total
Chester Realty
|
85 | 92 | |||||||||
|
Total
Connecticut Water Service, Inc.
|
92,235 | 92,292 | |||||||||
|
Less
Current Portion
|
(8 | ) | (7 | ) | |||||||
|
Total
Long-Term Debt
|
$ | 92,227 | $ | 92,285 | |||||||
The
Company’s principal payments required for years 2009 – 2013 are as
follows:
|
(in
thousands)
|
||||
|
2009
|
$ | 8 | ||
|
2010
|
8 | |||
|
2011
|
8 | |||
|
2012
|
9 | |||
|
2013
|
9 | |||
In
December 2007, Connecticut Water borrowed $15 million through the issuance of
Water Facilities Revenue Bonds by the Connecticut Development Authority
(Authority) sold in a single series with an interest rate of five percent
maturing on December 1, 2037. The proceeds from the sale of the bonds
have been used to finance construction and installation of various capital
improvements to the Company’s existing water system.
In
November 2005, Connecticut Water borrowed $10 million through the issuance of
Water Facilities Revenue Bonds by the Authority sold in a single 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 Company’s existing water
system.
In
November 2005, Crystal borrowed $5 million through the issuance of Water
Facilities Revenue Bonds by the Authority sold in a single series with an
interest rate of five percent maturing on October 1, 2040. 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. The proceeds of the sale of the bonds have been 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. In the table above, the $5 million Water Facilities
Revenue Bonds has been combined with Connecticut Water $10 million Water
Facilities Revenue Bonds.
In
connection with the 2004 issuance of the $12.5 million variable rate 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 Company’s exposure to fluctuations in prevailing interest
rates. The interest rate swap agreement expired on March 3,
2009. See Note 7.
There are
no mandatory sinking fund payments required on Connecticut Water’s 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 2003 Series C, September 1, 2008 Unsecured Water Facility Revenue
Bonds of Connecticut Water may be initially called for redemption on October 1,
2009 at 100% plus accrued interest.
Financial Covenants – The
Company is required to comply with certain covenants in connection with various
long term loan agreements. The covenants are normal and customary in
bank and loan agreements. The Company was in compliance with the
covenants at December 31, 2008.
NOTE
9: PREFERRED STOCK
The
Company’s Preferred Stock at December 31, consisted of the
following:
|
(in
thousands, except share data)
|
2008
|
2007
|
||||||
|
Connecticut
Water Service, Inc.
|
||||||||
|
Cumulative
Series A Voting, $20 Par Value; Authorized, Issued and Outstanding 15,000
Shares
|
$ | 300 | $ | 300 | ||||
|
Cumulative
Series $0.90 Non-Voting, $16 Par Value; Authorized 50,000 Shares, Issued
and Outstanding 24,999
|
472 | 472 | ||||||
|
Total
Preferred Stock
|
$ | 772 | $ | 772 | ||||
All or
any part of any series of either class of the Company's 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 Company's 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 Company's 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 Company’s common stock.
NOTE
10: BANK LINES OF CREDIT
The
Company’s total available lines of credit totaled $21,000,000 at December 31,
2008 and 2007, respectively. During 2007, the Company increased these
lines because of expected increased construction spending and recently completed
acquisitions. The largest line was renewed and increased in the
fourth quarter of 2007 and does not have an expiration date. The two
other lines of credit, of which one renewed in the second quarter of 2008, the
other in the third quarter of 2007, have terms of 12 and 24 months,
respectively. As of December 31, 2008 and 2007, the outstanding
borrowings from bank lines of credit were $12,074,000 and $6,459,000
respectively. In November 2008, the Company was authorized by the
Board of Directors to increase the available lines of credit to approximately
$40 million.
At
December 31, 2008 and 2007, the weighted average interest rates on these
short-term borrowings outstanding were 1.96% and 5.47%,
respectively.
NOTE
11: UTILITY PLANT AND CONSTRUCTION PROGRAM
The
components of utility plant and equipment at December 31, were as
follows:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Land
|
$ | 9,917 | $ | 9,507 | ||||
|
Source
of supply
|
27,605 | 25,876 | ||||||
|
Pumping
|
27,646 | 24,999 | ||||||
|
Water
treatment
|
54,643 | 52,919 | ||||||
|
Transmission
and distribution
|
268,927 | 246,676 | ||||||
|
General
|
28,921 | 25,235 | ||||||
|
Held
for future use
|
419 | 429 | ||||||
|
Acquisition
Adjustment
|
(7,607 | ) | (1,220 | ) | ||||
|
Total
|
$ | 410,471 | $ | 384,421 | ||||
The
amounts of depreciable utility plant at December 31, 2008 and 2007 included in
total utility plant were $360,440,000 and $336,204,000,
respectively. Non-depreciable plant is primarily funded through
CIAC.
NOTE
12: TAXES OTHER THAN INCOME TAXES
Taxes
Other than Income Taxes consist of the following:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Municipal
Property Taxes
|
$ | 5,129 | $ | 4,903 | $ | 4,743 | ||||||
|
Payroll
Taxes
|
912 | 837 | 832 | |||||||||
|
Total
Taxes Other than Income Taxes
|
$ | 6,041 | $ | 5,740 | $ | 5,575 | ||||||
NOTE
13: LONG-TERM COMPENSATION ARRANGEMENTS
The
Company has accrued for the following long-term compensation arrangements as of
December 31, 2008 and 2007:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Defined
Benefit Pension Plan
|
$ | 9,624 | $ | 2,199 | ||||
|
Post
Retirement Benefit Other than Pension
|
3,347 | 6,464 | ||||||
|
Supplemental
Executive Retirement Plan
|
3,723 | 4,055 | ||||||
|
Deferred
Compensation
|
1,342 | 1,325 | ||||||
|
Other
Long-Term Compensation
|
295 | 674 | ||||||
|
Total
Long-Term Compensation Arrangements
|
$ | 18,331 | $ | 14,717 | ||||
The
Company adopted the recognition provisions of Statement of Financial Accounting
Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans,” (SFAS 158) as of December 31, 2006, which requires that
the funded status of defined benefit pension and other postretirement plans be
fully recognized in the balance sheet.
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, 2008 and 2007 were:
|
2008
|
2007
|
|||||||
|
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. In December 2008 the Company’s Pension Committee
determined to delay a rebalancing of the assets due to the unusual volatility in
market conditions.
Our
expected long-term rate of return on the various benefit plan assets is based
upon the plan’s expected asset allocation, expected returns on various classes
of plan assets as well as historical returns. The expected long-term
rate of return on the Company’s pension plan is 8%.
PENSION
Defined Benefit Plan – The
Company and certain of its subsidiaries have a noncontributory defined benefit
pension plan covering qualified employees. In general, the Company’s
policy is to fund accrued pension costs as permitted by federal income tax and
Employee Retirement Income Security Act of 1974 regulations. The
Company amortizes actuarial gains and losses over the average remaining service
period of active participants, without regard to a specified corridor of a
percentage of the greater of the obligation or market-related value of
assets. A contribution of $3,500,000 was made in 2008 for the 2007
plan year. The Company expects to make a contribution of
approximately $3,300,000 in 2009 for the 2008 plan year.
The
Company has amended its pension plan to exclude employees hired after January 1,
2009.
The
following tables set forth the benefit obligation and fair value of the assets
of the Company’s retirement plans at December 31, the latest valuation
date:
|
Pension Benefits (in
thousands)
|
2008
|
2007
|
||||||
|
Change
in benefit obligation:
|
||||||||
|
Benefit
obligation, beginning of year
|
$ | 30,365 | $ | 31,539 | ||||
|
Service
cost
|
1,259 | 1,277 | ||||||
|
Interest
cost
|
1,906 | 1,789 | ||||||
|
Actuarial
loss (gain)
|
410 | (2,415 | ) | |||||
|
Benefits
paid
|
(1,054 | ) | (1,825 | ) | ||||
|
Benefit
obligation, end of year
|
$ | 32,886 | $ | 30,365 | ||||
|
Change
in plan assets:
|
||||||||
|
Fair
value, beginning of year
|
$ | 28,166 | $ | 28,015 | ||||
|
Actual
return on plan assets
|
(7,350 | ) | 1,931 | |||||
|
Employer
contributions
|
3,500 | 45 | ||||||
|
Benefits
paid
|
(1,054 | ) | (1,825 | ) | ||||
|
Fair
value, end of year
|
$ | 23,262 | $ | 28,166 | ||||
|
Funded
Status
|
$ | (9,624 | ) | $ | (2,199 | ) | ||
|
Amount
Recognized in Consolidated Balance Sheets Consisted of:
|
||||||||
|
Non-current
asset
|
$ | -- | $ | -- | ||||
|
Current
liability
|
-- | -- | ||||||
|
Non-current
liability
|
(9,624 | ) | (2,199 | ) | ||||
|
Net
amount recognized
|
$ | (9,624 | ) | $ | (2,199 | ) | ||
The
accumulated benefit obligation for all defined benefit pension plans was
approximately $26,291,000 and $23,934,000 at December 31, 2008 and 2007,
respectively.
|
Weighted-average
assumptions used to determine benefit obligations at December
31:
|
2008
|
2007
|
||||||
|
Discount
rate
|
6.25 | % | 6.30 | % | ||||
|
Rate
of compensation increase
|
4.50 | % | 4.50 | % | ||||
|
Weighted-average
assumptions used to determine net periodic cost for years ended December
31:
|
||||||||
|
Discount
rate
|
6.30 | % | 5.75 | % | ||||
|
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 trends of
several different bond indices and uses a spot yield curve in order to mimic
expected benefit payments. The Company based its discount rate on a
single point on this spot yield curve that approximated the present value of the
plan.
The
following table shows the components of periodic benefit costs:
|
Pension Benefits (in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Components
of net periodic benefit costs:
|
||||||||||||
|
Service
cost
|
$ | 1,259 | $ | 1,277 | $ | 1,228 | ||||||
|
Interest
cost
|
1,906 | 1,789 | 1,681 | |||||||||
|
Expected
return on plan assets
|
(2,120 | ) | (2,017 | ) | (1,836 | ) | ||||||
|
Amortization
of:
|
||||||||||||
|
Net
transition obligation
|
2 | 2 | 2 | |||||||||
|
Net
loss
|
69 | 69 | 75 | |||||||||
|
Prior
service cost
|
142 | 345 | 491 | |||||||||
|
Net
Periodic Pension Benefit Costs
|
$ | 1,258 | $ | 1,465 | $ | 1,641 | ||||||
The
following table shows the other changes in plan assets and benefit obligations
recognized as a regulatory asset (liability):
|
Pension Benefits (in
thousands)
|
2008
|
2007
|
||||||
|
Change
in net loss (gain)
|
$ | 9,880 | $ | (2,329 | ) | |||
|
Amortization
of transition obligation
|
(2 | ) | (2 | ) | ||||
|
Amortization
of net loss
|
(69 | ) | (69 | ) | ||||
|
Amortization
of prior service cost
|
(142 | ) | (345 | ) | ||||
|
Total
recognized to Regulatory Asset (Liability)
|
$ | 9,667 | $ | (2,745 | ) | |||
|
Amounts
Recognized as a Regulatory Asset (Liability) at December 31:
|
2008
|
2007
|
||||||
|
Transition
obligation
|
$ | 6 | $ | 9 | ||||
|
Prior
service cost
|
516 | 585 | ||||||
|
Net
(gain) loss
|
8,984 | (754 | ) | |||||
|
Total
Recognized as a Regulatory Asset (Liability)
|
$ | 9,506 | $ | (160 | ) | |||
|
Estimated
Net Periodic Benefit Cost Amortizations for the periods January 1 -
December 31:
|
2009
|
|||
|
Amortization
of transition obligation
|
$ | 2 | ||
|
Amortization
of prior service cost
|
69 | |||
|
Amortization
of net loss
|
380 | |||
|
Total
Estimated Net Periodic Benefit Cost Amortizations
|
$ | 451 | ||
Plan
Assets
The
Company’s pension plan weighted-average asset allocations at December 31, 2008,
and 2007 by asset category were as follows:
|
2008
|
2007
|
|||||||
|
Equity
|
58 | % | 64 | % | ||||
|
Fixed
Income
|
42 | % | 36 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
During
the last part of 2008, the Company’s investments in equity securities had lost
value in relation to the overall holdings in the pension plan. Due to
market uncertainty and volatility, the Company has not rebalanced the pension
plan assets to more closely align with the stated target
allocation.
The
Plan’s expected future benefit payments are:
|
(in
thousands)
|
||||
|
2009
|
$ | 1,443 | ||
|
2010
|
1,924 | |||
|
2011
|
1,482 | |||
|
2012
|
2,713 | |||
|
2013
|
1,982 | |||
|
Years
2014 – 2018
|
16,465 | |||
POST-RETIREMENT BENEFITS OTHER THAN
PENSION (PBOP) – In addition to providing pension benefits, Connecticut
Water, 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 Water’s 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 2008 and 2007 was $841,600 and $1,758,600,
respectively.
A
regulatory asset has been recorded to reflect the amount which represents the
future SFAS 106 costs expected to be recovered in customer rates. In
1997, Connecticut Water requested and received approval from the DPUC to include
SFAS 106 costs in customer rates. The DPUC’s 1997 limited reopener of
Connecticut Water’s general rate proceeding allowed it to increase customer
rates $208,000 annually for SFAS 106 costs. Prior to the January 2007
rate decision, Connecticut Water’s rates allowed for recovery of $473,100
annually for post-retirement benefit costs other than pension. As a
result of the January 2007 rate decision, the Company will follow the provisions
of SFAS 158 for regulated companies that allows the creation of a regulatory
asset for costs that will be recovered in the future under provisions of SFAS
71.
The
Company amortizes actuarial gains and losses over the average remaining service
period of active participants, without regard to a specified corridor of a
percentage of the greater of the obligation or market-related value of
assets. 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.
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
Water’s PBOP currently is not funded. Barnstable Water no longer has
any employees; therefore, no new participants will be entering Barnstable
Water’s PBOP. The tables below do not include Barnstable Water’s
PBOP. Barnstable Water’s PBOP had a Benefit Obligation of $53,000 and
$54,000 at December 31, 2008 and 2007, respectively. Additionally,
this plan did not hold any assets as of December 31, 2008 and
2007. Barnstable Water’s PBOP did not have any net periodic benefit
costs.
The
Company has amended its PBOP to exclude employees hired after January 1,
2009. In addition, effective April 1, 2009, the Company will no
longer provide prescription drug coverage for its retirees age 65 and
over. Those retirees, who are entitled to Medicare coverage, will
continue to receive the current non-prescription medical coverage.
The
following tables set forth the benefit obligation and fair value of the assets
of the Connecticut Water’s post-retirement health care benefits at December 31,
the latest valuation date:
|
PBOP Benefits (in
thousands)
|
2008
|
2007
|
||||||
|
Change
in benefit obligation:
|
||||||||
|
Benefit
obligation, beginning of year
|
$ | 12,316 | $ | 10,283 | ||||
|
Service
cost
|
632 | 651 | ||||||
|
Interest
cost
|
657 | 610 | ||||||
|
Plan
participant contributions
|
144 | 138 | ||||||
|
Plan
amendments
|
(3,088 | ) | -- | |||||
|
Actuarial
(gain) loss
|
(2,249 | ) | 1,083 | |||||
|
Benefits
paid
|
(423 | ) | (449 | ) | ||||
|
Benefit
obligation, end of year
|
$ | 7,989 | $ | 12,316 | ||||
|
Change
in plan assets:
|
||||||||
|
Fair
value, beginning of year
|
$ | 5,906 | $ | 4,260 | ||||
|
Actual
return on plan assets
|
(1,774 | ) | 198 | |||||
|
Employer
contributions
|
842 | 1,759 | ||||||
|
Participants’
contributions
|
143 | 138 | ||||||
|
Benefits
paid
|
(423 | ) | (449 | ) | ||||
|
Fair
value, end of year
|
$ | 4,694 | $ | 5,906 | ||||
|
Funded
Status
|
$ | (3,295 | ) | $ | (6,410 | ) | ||
|
Amount
Recognized in Consolidated Balance Sheets Consisted of:
|
||||||||
|
Non-current
asset
|
$ | -- | $ | -- | ||||
|
Current
liability
|
-- | -- | ||||||
|
Non-current
liability
|
(3,295 | ) | (6,410 | ) | ||||
|
Net
amount recognized
|
$ | (3,295 | ) | $ | (6,410 | ) | ||
|
Weighted-average
assumptions used to determine benefit obligations at December
31:
|
2008
|
2007
|
||||||
|
Discount
rate
|
6.20 | % | 6.30 | % | ||||
|
Rate
of compensation increase
|
4.50 | % | 4.50 | % | ||||
|
Weighted-average
assumptions used to determine net periodic cost for years ended December
31:
|
||||||||
|
Discount
rate
|
6.30 | % | 5.75 | % | ||||
|
Expected
long-term return on plan assets
|
5.00 | % | 5.00 | % | ||||
|
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 trends of
several different bond indices.
The
following table shows the components of periodic benefit costs:
|
PBOP Benefits (in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Components
of net periodic benefit costs:
|
||||||||||||
|
Service
cost
|
$ | 632 | $ | 651 | $ | 599 | ||||||
|
Interest
cost
|
657 | 610 | 485 | |||||||||
|
Expected
return on plan assets
|
(271 | ) | (189 | ) | (178 | ) | ||||||
|
Other
|
225 | 225 | -- | |||||||||
|
Amortization
of:
|
||||||||||||
|
Net
transition obligation
|
120 | 120 | 120 | |||||||||
|
Recognized
net loss
|
202 | 342 | 273 | |||||||||
|
Net
Periodic Post Retirement Benefit Costs
|
$ | 1,565 | $ | 1,759 | $ | 1,299 | ||||||
The
following table shows the other changes in plan assets and benefit obligations
recognized as a regulatory asset (liability):
|
PBOP Benefits (in
thousands)
|
2008
|
2007
|
||||||
|
Change
in prior service (credit)
|
$ | (3,088 | ) | $ | -- | |||
|
Change
in net (gain) loss
|
(203 | ) | 1,074 | |||||
|
Amortization
of transition obligation
|
(120 | ) | (120 | ) | ||||
|
Amortization
of net loss
|
(203 | ) | (342 | ) | ||||
|
Total
recognized to Regulatory (Liability) Asset
|
$ | (3,614 | ) | $ | 612 | |||
|
Amounts
Recognized as a Regulatory Asset at December 31:
|
2008
|
2007
|
||||||
|
Transition
obligation
|
$ | -- | $ | 602 | ||||
|
Prior
service cost
|
(2,606 | ) | -- | |||||
|
Net
(gain) loss
|
3,205 | 3,611 | ||||||
|
Total
Recognized as a Regulatory Asset
|
$ | 599 | $ | 4,213 | ||||
There
were no other changes in plan assets and benefit obligations recognized as a
regulatory asset.
|
Estimate
Benefit Cost Amortizations for the periods January 1 - December 31:
|
2009
|
|||
|
Amortization
of transition obligation
|
$ | -- | ||
|
Amortization
of prior service cost
|
(406 | ) | ||
|
Amortization
of net loss (gain)
|
208 | |||
|
Total
Estimated Net Periodic Benefit Cost Amortizations
|
$ | (198 | ) | |
|
Assumed
health care cost trend rates at December 31:
|
2008
|
2007
|
||||||||||||||
|
Medical
|
Dental
|
Medical
|
Dental
|
|||||||||||||
|
Health
care cost trend rate assumed for next year (1)
|
10.0 | % | 10.0 | % | 10.0 | % | 10.0 | % | ||||||||
|
Rate
to which the cost trend rate is assumed to decline
|
5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | ||||||||
|
Year
that the rate reaches the ultimate trend rate
|
2018
|
2018
|
2017
|
2017
|
||||||||||||
(1) – Zero
percent trend rate from 2008 to 2009.
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
Water’s plan and would have no impact on the Barnstable Water plan:
|
(in
thousands)
|
1
Percentage-Point
|
|||||||
|
Increase
|
Decrease
|
|||||||
|
Effect
on total of service and interest cost components
|
$ | 219 | $ | (178 | ) | |||
|
Effect
on post-retirement benefit obligation
|
$ | 868 | $ | (731 | ) | |||
Plan
Assets
Barnstable
Water’s other post-retirement benefit plan has no assets. Connecticut
Water’s other post-retirement benefit plan weighted-average asset allocations at
December 31, 2008 and 2007 by asset category were as follows:
|
2008
|
2007
|
|||||||
|
Equity
|
56 | % | 44 | % | ||||
|
Fixed
Income
|
44 | % | 56 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
During
the last part of 2008, the Company’s investments in equity securities had lost
value in relation to the overall holdings in the PBOP. Due to market
uncertainty and volatility, the Company has not rebalanced the PBOP assets to
more closely align with the stated target allocation. In December
2008, the Company’s Pension Committee determined to delay a rebalancing of the
assets due to the unusual volatility in market conditions. The
Company anticipates a return to its investment strategy in 2009. In
2007, the Company made its annual contribution in late December, in the table
above, this contribution is classified as fixed income as there was not enough
time for these funds to be invested in line with the plan’s target
allocation.
Cash
Flows
Connecticut
Water contributed $841,600 to its other post-retirement benefit plan in 2008 for
plan year 2008. The Company expects to make a contribution of
approximately $820,000 in 2009 for plan year 2009.
Expected
future benefit payments are:
|
(in
thousands)
|
||||
|
2009
|
$ | 368 | ||
|
2010
|
380 | |||
|
2011
|
407 | |||
|
2012
|
454 | |||
|
2013
|
474 | |||
|
Years
2014 – 2018
|
3,121 | |||
SUPPLEMENTAL EXECUTIVE RETIREMENT
PLAN (SERP) – The Company and certain of its subsidiaries provide
additional pension benefits to senior management through supplemental executive
retirement contracts. At December 31, 2008 and 2007, the actuarial
present values of the projected benefit obligation of these contracts were
$3,188,000 and $3,109,000, respectively. Expense associated with
these contracts was approximately $48,000 for 2008, $1,363,000 for 2007, and
$503,000 for 2006 and is reflected in Other Income (Deductions) in the
Statements of Income. The 2007 SERP expense included costs associated with
the retirement of a former executive.
Included
in Other Property and Investments at December 31, 2008 and 2007 is $2,987,000
and $3,742,000 of marketable securities purchased by the Company to fund these
obligations.
SAVINGS PLAN (401(k)) – The
Company and certain of its subsidiaries maintain an employee savings plan which
allows participants to contribute from 1% to 50% of pre-tax compensation plus
for those aged 50 years 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 employee’s compensation. The Company contribution charged to
expense in 2008, 2007 and 2006 was $231,000, $213,000, and $186,000,
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. No incentive bonus was awarded in 2008,
2007 or 2006.
Effective
January 1, 2009, the Company changed its 401(k) plan to meet the requirements of
a special IRS safe harbor. Under the provisions of this safe harbor
plan, the Company’s 50% matching contribution has been
eliminated. Also, the Company will make an automatic contribution of
3% of compensation for all eligible employees, even if the employee does not
make their own contributions. For employees hired after January 1,
2009 and ineligible to participate in the Company’s pension plan, the Company
will contribute an additional 1.5% of compensation.
NOTE
14: STOCK BASED COMPENSATION PLANS
The
Company adopted the provisions of Statement of Financial Accounting Standards
No. 123(R) “Share Based Payments” (SFAS 123(R)) as of January 1, 2006 using the
modified prospective transition method, which does not require restatement of
prior year results. The resulting impact on the income statement for
the fiscal year ended December 31, 2006 was an expense of approximately $32,000,
net of tax benefits of $75,000. SFAS 123(R) requires that all
share-based payments to employees, including grants of stock options, be
recognized as compensation expense in the financial statements based on their
fair value.
Prior to
January 1, 2006, the Company followed Accounting Principles Board Opinion No. 25
(APB No. 25) and the disclosure requirements for SFAS 123(R) with pro forma
disclosures of net income and earnings per share, as if the fair value-based
method of accounting as defined in SFAS 123(R) had been applied. The
Company’s consolidated financial statements as of and for the year ended
December 31, 2006 reflect the impact of adopting SFAS 123(R). The
total compensation cost related to non-vested stock option awards recognized
during 2007 was approximately $25,000. There are no stock option
costs to be recognized in future years.
For
purposes of calculating the fair value of each stock grant at the date of grant,
the Company used the Black Scholes Option Pricing model. 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
Company’s 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, 2008, there were 595,538 shares available
for grant. 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 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.
Under the
original Plans (1994 PSP) there were 700,000 shares authorized and 221,660
shares available for payment of dividend equivalents on shares already awarded
under the 1994 PSP as performance shares at December 31, 2008.
Under the
2004 PSP and 1994 PSP (collectively, the PSPs), 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 on account of restricted shares of Common Stock, common stock
equivalents or cash units pursuant to the PSPs were $714,000, $542,000 and
$702,000, for 2008, 2007 and 2006, respectively.
STOCK OPTIONS – The Company
issued stock options between 1999 and 2003 and accounted for those options under
APB No. 25 through December 31, 2005, under which no compensation cost has been
recognized in the Consolidated Statements of Income. Beginning
January 1, 2006, compensation expense was recognized when SFAS 123(R) became
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. Options began to become exercisable one year from the date of
grant. Vesting periods ranged from one to five years. The
maximum term ranged from five to ten years.
No stock
options were awarded or issued during 2008, 2007 or 2006.
|
For
the Years Ended December 31:
|
2008
|
2007
|
2006
|
|||||||||||||||||||||
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
|||||||||||||||||||
|
Options:
|
||||||||||||||||||||||||
|
Outstanding,
beginning of year
|
106,661 | $ | 24.74 | 180,853 | $ | 24.62 | 202,271 | $ | 24.04 | |||||||||||||||
|
Granted
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
|
Forfeited
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
|
Terminated
|
-- | -- | (36,286 | ) | 27.71 | (4,456 | ) | 27.95 | ||||||||||||||||
|
Exercised
|
(11,775 | ) | 18.47 | (37,906 | ) | 21.33 | (16,962 | ) | 16.76 | |||||||||||||||
|
Outstanding,
end of year
|
94,886 | $ | 25.52 | 106,661 | $ | 24.74 | 180,853 | $ | 24.62 | |||||||||||||||
|
Exercisable,
end of year
|
94,886 | $ | 25.52 | 106,661 | $ | 24.74 | 171,840 | $ | 24.39 | |||||||||||||||
The intrinsic value of options exercised during the year ended December 31, 2008 was $85,000. The following table summarizes the price ranges of the options outstanding and options exercisable as of December 31, 2008:
|
Options
Outstanding and Exercisable
|
||||||||||||||
|
Shares
|
Weighted
Average Remaining Contractual Life (years)
|
Weighted
Average Exercise Price
|
||||||||||||
|
Range
of prices:
|
||||||||||||||
| $18.00 - $20.99 | 14,074 | 1.9 | $ | 20.42 | ||||||||||
| $21.00 - $23.99 | 17,498 | 0.9 | 22.33 | |||||||||||
| $24.00 - $26.99 | 22,535 | 3.9 | 25.78 | |||||||||||
| $27.00 - $29.99 | 40,779 | 3.9 | 28.51 | |||||||||||
| 94,886 | 3.1 | $ | 25.52 | |||||||||||
The
intrinsic value of exercisable options as of December 31, 2008 was approximately
$60,000. The average remaining contractual term of exercisable
options as of December 31, 2008 was approximately 3.1 years.
RESTRICTED STOCK AND COMMON STOCK
EQUIVALENTS – The Company has granted restricted shares of Common Stock
and Performance Shares to key members of management under the 2004
PSP. These Common Stock share awards provide the grantee with the
rights of a shareholder, including the right to receive dividends and to vote
such shares, but not the right to sell or otherwise transfer the shares during
the restriction period. The value of these restricted shares is based
on the market price of the Company’s Common Stock on the date of grant and
compensation expense is recorded on a straight-line basis over the awards’
vesting periods. The adoption of SFAS No. 123(R) had no impact on the Company’s
recognition of stock-based compensation expense associated with the restricted
stock awards.
RESTRICTED STOCK
(Non-Performance-Based Awards) – The following tables summarize the
non-performance-based restricted stock amounts and activity:
|
For
the years ended December 31,
|
2008
|
2007
|
||||||||||||||
|
Number
of Shares
|
Grant
Date Weighted Average Fair Value
|
Number
of Shares
|
Grant
Date Weighted Average Fair Value
|
|||||||||||||
|
Non-vested
at beginning of year
|
15,993 | $ | 25.17 | 26,495 | $ | 25.20 | ||||||||||
|
Granted
|
-- | -- | -- | -- | ||||||||||||
|
Vested
|
(3,773 | ) | 25.18 | (8,458 | ) | 25.24 | ||||||||||
|
Forfeited
|
-- | -- | (2,044 | ) | 25.24 | |||||||||||
|
Non-vested
at end of year
|
12,220 | $ | 25.18 | 15,993 | $ | 25.17 | ||||||||||
There
were no vested restricted stock shares as of December 31, 2006. The
shares began vesting during 2007. There were no forfeitures during
2008. There were 2,044 forfeitures of non-performance–based
restricted stock for the year ended December 31, 2007.
Total
stock-based compensation recorded in the statement of income related to the
non-performance-based restricted stock awards was $95,000, $48,000 and $187,000
during the years ended December 31, 2008, 2007 and 2006, respectively, including
accelerated vesting for an approved retirement in 2006. The
Compensation Committee of the Board of Directors may approve retirement of key
employees that trigger accelerating vesting.
As of
December 31, 2008, $282,000 of unrecognized compensation costs related to
non-performance-based restricted stock is expected to be recognized over a
straight-line basis for a period of 6 years.
RESTRICTED STOCK AND COMMON STOCK
EQUIVALENTS (Performance-Based) – The following tables summarize the
performance-based restricted stock amounts and activity:
|
For
the years ended December 31,
|
2008
|
2007
|
||||||||||||||
|
Number
of Shares
|
Grant
Date Weighted Average Fair Value
|
Number
of Shares
|
Grant
Date Weighted Average Fair Value
|
|||||||||||||
|
Non-vested
at beginning of year
|
22,703 | $ | 24.45 | 18,059 | $ | 25.90 | ||||||||||
|
Granted
|
17,108 | 23.92 | 13,186 | 22.38 | ||||||||||||
|
Vested
|
(5,126 | ) | 22.88 | (7,666 | ) | 24.26 | ||||||||||
|
Forfeited
|
(2,241 | ) | 24.26 | (876 | ) | 24.93 | ||||||||||
|
Non-vested
at end of year
|
32,444 | $ | 24.43 | 22,703 | $ | 24.45 | ||||||||||
Total
stock based compensation recorded in the Consolidated Statements of Income
related to performance-based restricted stock awards was $619,000, $494,000, and
$515,000 for the year ended December 31, 2008, 2007, and 2006,
respectively.
The
Company is estimating a forfeiture rate of 30%. Upon meeting specific
performance targets, 27,200 shares, reduced for actual performance targets
achieved in 2008, will begin vesting in the first quarter of 2010 and the
remaining earned shares will vest over three years. The cost is being
recognized ratably over the vesting period. The aggregate intrinsic
value of performance-based restricted stock as of December 31, 2008 was
$381,000.
NOTE
15: 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:
|
(in
thousands)
|
Revenues
|
Depreciation
|
Other
Operating Expenses
|
Other
Income (Deductions)
|
Interest
Expense (net of AFUDC)
|
Income
Taxes
|
Income
(Loss) from Continuing Operations
|
|||||||||||||||||||||
|
For
the year ended December 31, 2008
|
||||||||||||||||||||||||||||
|
Water
Activities
|
$ | 62,288 | $ | 6,438 | $ | 38,027 | $ | (326 | ) | $ | 5,075 | $ | 3,628 | $ | 8,794 | |||||||||||||
|
Real
Estate Transactions
|
-- | -- | -- | -- | -- | 160 | (160 | ) | ||||||||||||||||||||
|
Services
and Rentals
|
4,855 | 23 | 3,596 | -- | (6 | ) | 452 | 790 | ||||||||||||||||||||
|
Total
|
$ | 67,143 | $ | 6,461 | $ | 41,623 | $ | (326 | ) | $ | 5,069 | $ | 4,240 | $ | 9,424 | |||||||||||||
|
For
the year ended December 31, 2007
|
||||||||||||||||||||||||||||
|
Water
Activities
|
$ | 60,025 | $ | 6,525 | $ | 35,755 | $ | (1,641 | ) | $ | 4,281 | $ | 3,860 | $ | 7,963 | |||||||||||||
|
Real
Estate Transactions
|
227 | -- | 101 | -- | -- | (41 | ) | 167 | ||||||||||||||||||||
|
Services
and Rentals
|
4,411 | 25 | 3,304 | -- | 20 | 411 | 651 | |||||||||||||||||||||
|
Total
|
$ | 64,663 | $ | 6,550 | $ | 39,160 | $ | (1,641 | ) | $ | 4,301 | $ | 4,230 | $ | 8,781 | |||||||||||||
|
For
the year ended December 31, 2006
|
||||||||||||||||||||||||||||
|
Water
Activities
|
$ | 47,927 | $ | 5,881 | $ | 32,166 | $ | (598 | ) | $ | 3,969 | $ | 1,183 | $ | 4,130 | |||||||||||||
|
Real
Estate Transactions
|
1,002 | -- | 359 | -- | -- | (1,420 | ) | 2,063 | ||||||||||||||||||||
|
Services
and Rentals
|
4,092 | 36 | 3,189 | -- | 8 | 344 | 515 | |||||||||||||||||||||
|
Total
|
$ | 53,021 | $ | 5,917 | $ | 35,714 | $ | (598 | ) | $ | 3,977 | $ | 107 | $ | 6,708 | |||||||||||||
The
Revenues shown in Water Activities above consist of revenues from water
customers of $61,270,000, $59,026,000 and $46,945,000 in the years 2008, 2007
and 2006, respectively. Additionally, there were revenues associated
with utility plant leased to others of $1,018,000, $999,000 and $982,000 in the
years 2008, 2007 and 2006, respectively.
The table
below shows assets by segment:
|
At
December 31 (in thousands):
|
2008
|
2007
|
||||||
|
Total
Plant and Other Investments:
|
||||||||
|
Water
|
$ | 304,591 | $ | 283,641 | ||||
|
Non-Water
|
676 | 673 | ||||||
|
Total
Plant and Other Investments
|
305,267 | 284,314 | ||||||
|
Other
Assets:
|
||||||||
|
Water
|
64,734 | 73,421 | ||||||
|
Non-Water
|
2,430 | 3,078 | ||||||
|
Total
Other Assets
|
67,164 | 76,499 | ||||||
|
Total
Assets
|
$ | 372,431 | $ | 360,813 | ||||
NOTE
16: 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 will be eligible for
recovery in future rate proceedings.
Reverse Privatization –
Connecticut Water derives its 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.
Rate Relief – Connecticut
Water is a regulated public utility, which provides water services to its
customers. The rates that regulated companies charge their water
customers are subject to the jurisdiction of the regulatory authority of the
DPUC.
On
January 16, 2007, the DPUC issued its final decision and approved a Settlement
Agreement; negotiated with the Office of Consumer Counsel and the DPUC’s
Prosecutorial Staff; that allowed Connecticut Water an increase of revenues of
approximately $10,940,000, or 22.3%. The Settlement Agreement allowed
Connecticut Water to defer a portion of the approved rate increase,
approximately $3.8 million through December 31, 2007 and $4.8 million through
March 31, 2008. The Company recognized that increase through recording deferred
revenues and a corresponding regulatory asset, as required by the
decision. On January 31, 2008, the Company filed to reopen the case,
a procedure required by the Settlement Agreement, to implement the second phase.
In addition to the approval for the inclusion in current rates of the previously
approved deferred revenues of $4.8 million, the filing includes requested
recovery of the costs associated with $15.5 million of additional capital
investments made in 2007. On March 28, 2008 an 11.95% increase was
approved. The approved rates became effective on April 1,
2008.
In June
2007, the State of Connecticut adopted legislation which permits regulated water
companies to recapture money spent on eligible infrastructure improvements
without a full rate case proceeding. The DPUC may authorize regulated
water companies to use a rate adjustment mechanism, such as a Water
Infrastructure and Conservation Adjustment (WICA), for eligible projects
completed and in service for the benefit of the customers. Regulated
water companies may only charge customers such an adjustment to the extent
allowed by the DPUC based on a water company’s infrastructure assessment report,
as approved by the DPUC and upon semiannual filings which reflect plant
additions consistent with such report. The Company does not expect to
file for a surcharge under the WICA mechanism until the second quarter of 2009,
approximately 90 days after the surcharge filing; customers would begin to see
an increase in their bills.
In any
future rate proceedings, the DPUC may authorize Connecticut Water to charge
rates which the DPUC considers to be sufficient to recover the normal operating
expenses and to allow Connecticut Water an opportunity to earn what the DPUC
considers to be a fair and reasonable return on our invested
capital.
Land Dispositions – 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 for long term conservation by the Connecticut
DEP, which have restrictions on development and resale based on provisions of
the Connecticut General Statutes.
The
Company made no land dispositions during the fiscal year ended December 31,
2008. However, during 2008, the Company entered into negotiations
with the town of Windsor Locks, Connecticut to sell a conservation easement on a
well field property no longer needed as a source of supply for $2.16
million. The Company plans to file an application with the DPUC in
March 2009 and approval is expected in the second half of
2009. Subject to successful receipt of DPUC approval, and of final
authorization for the town to proceed with the transaction, the Company expects
the transaction to be completed in 2009. If the transaction closes,
the Company estimates that it will generate approximately $1.0 million in net
income in the Real Estate segment. The Company currently has no other
specific plans for land transactions in 2009 and beyond.
19 Perry Street Litigation –
Connecticut Water’s Unionville division has for many years operated a well field
located at 19 Perry Street, Farmington, Connecticut, pursuant to a 99-year lease
entered into in 1975 with the property owner. This well field
provides approximately half of the daily water supply requirements to the
customers of the Unionville division. In 2004, the original property
owner ceased business operations. The property is now owned by 19
Perry Street, LLC, which obtained the property through a foreclosure
proceeding. In June 2007, the new owner commenced a lawsuit in
Hartford Superior Court (Housing Section), asserting that Connecticut Water is
in unlawful possession of the property under several theories, including that
the lease is invalid and that Connecticut Water has failed to pay rent when
due. A trial before a judge was held in November 2007, and a decision
was issued on April 30, 2008. In its decision, the Court ruled that
the lease is valid. However, in deciding the parties’ contentions
regarding the proper form and amount of rental payments due, the Court ruled
that Connecticut Water was in breach of its obligation to pay rent on the
property and therefore entered an order of eviction.
On May 5,
2008, Connecticut Water filed a timely appeal of the decision in the Connecticut
Appellate Court. This appeal stays the eviction order until the
Appellate Court rules on Connecticut Water’s claims that the trial court
erred. At this time, the outcome of the appeal is
uncertain. On August 5, 2008, Connecticut Water was served with a
related lawsuit in which 19 Perry Street, LLC seeks the payment of back rent
with respect to the property. As of February 23, 2009, the lawsuit
for back rent has been stayed pending the resolution of the appeal related to
the eviction case. The Company intends to maintain its use of the
property to provide water to customers of its Unionville division while the
appeal is pending. In addition, Connecticut Water will consider all
other options with respect to its well field use of the property, including the
outright purchase of the property or the exercise of Connecticut Water’s right
to take the property by initiating eminent domain proceedings under applicable
law.
Capital Expenditures – The
Company has received approval from its Board of Directors to spend $26.4 million
on capital expenditures in 2009, in part due to increased spending in order to
take advantage of the WICA legislation.
NOTE
17: SUBSEQUENT EVENTS
ACQUISITIONS – On July 23,
2008, the Company announced that it had reached a definitive purchase agreement
with Ellington Acres Company (Ellington Acres) to purchase all of Ellington
Acres’ outstanding stock for approximately $1.5 million. Ellington
Acres is a regulated water company serving approximately 750 customers in
Ellington, Connecticut, situated between two systems in the Company’s Northern
Region that the Company had planned to interconnect. The Company will
be able to interconnect the two systems in the Northern Region with Ellington
Acres, saving ratepayers of both Connecticut Water and Ellington Acres
significant capital expenditures. The DPUC approved the acquisition
in December 2008 and the Company completed the transaction on January 16,
2009.
NOTE
18: QUARTERLY FINANCIAL DATA (Unaudited)
Selected
quarterly financial data for the years ended December 31, 2008 and 2007 appears
below:
(in
thousands, except for per share data)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||||||||
|
Operating
Revenues
|
$ | 13,569 | $ | 13,162 | $ | 16,020 | $ | 14,446 | $ | 17,040 | $ | 16,951 | $ | 14,641 | $ | 14,467 | ||||||||||||||||
|
Total
Utility Operating Income
|
2,812 | 2,412 | 3,982 | 2,969 | 3,994 | 5,021 | 3,187 | 2,852 | ||||||||||||||||||||||||
|
Income
from Continuing Operations
|
1,705 | 1,475 | 2,951 | 1,862 | 2,835 | 3,899 | 1,933 | 1,545 | ||||||||||||||||||||||||
|
Net
Income
|
1,705 | 1,475 | 2,951 | 1,862 | 2,835 | 3,899 | 1,933 | 1,545 | ||||||||||||||||||||||||
|
Basic
Earnings per Common Share – Continuing Operations
|
0.20 | 0.18 | 0.35 | 0.22 | 0.34 | 0.47 | 0.23 | 0.19 | ||||||||||||||||||||||||
|
Basic
Earnings per Common Share
|
0.20 | 0.18 | 0.35 | 0.22 | 0.34 | 0.47 | 0.23 | 0.19 | ||||||||||||||||||||||||
|
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 17, 2007. (Exhibit 3.1 to Form 8-K filed on August 21,
2007).
|
|
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 Amended and Restated 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 3/31/03).
|
|
4.1
|
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).
|
|
4.2
|
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).
|
|
4.3
|
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).
|
|
4.4
|
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).
|
|
4.5
|
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).
|
|
4.6
|
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).
|
|
4.7
|
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).
|
|
4.8
|
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).
|
|
4.9
|
Reimbursement
and Credit Agreement, dated as of March 1, 2004, between The Connecticut
Water Company and Citizen’s Bank of Rhode Island. (Exhibit 4.20 to Form
10-Q for the quarter ended 3/31/04).
|
|
4.10
|
Letter
of Credit issued by Citizen’s Bank of Rhode Island, dated as of March 4,
2004. (Exhibit 4.21 to Form 10-Q for the quarter ended
3/31/04).
|
|
4.11
|
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).
|
|
4.12
|
Collateral
Assignment of Water Service Charges and Right to Receive Water Service
Expense Assessments and Security Agreement between Unionville Water
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).
|
|
4.13
|
Bond
Purchase Agreement, dated September 1, 2004, among The Connecticut Water
Company, Connecticut Development Authority, and A.G. Edwards & Sons,
Inc. (Exhibit 4.24 to Form 10-Q for the quarter ended
9/30/04).
|
|
4.14
|
Indenture
of Trust, dated August 1, 2004, between The Connecticut Water Company and
U.S. Bank National Association, as Trustee, 2004A
Series. (Exhibit 4.25 to Form 10-Q for the quarter ended
9/30/04).
|
|
4.15
|
Indenture
of Trust, dated August 1, 2004, between The Connecticut Water Company and
U.S. Bank National Association, as Trustee, 2004B
Series. (Exhibit 4.26 to Form 10-Q for the quarter ended
9/30/04).
|
|
4.16
|
Loan
Agreement, dated August 1, 2004, between The Connecticut Water Company and
Connecticut Development Authority for 2004 Series. (Exhibit
4.27 to Form 10-Q for the quarter ended 9/30/04).
|
|
4.17
|
Loan
Agreement, dated August 1, 2004, between The Connecticut Water Company and
Connecticut Development Authority for 2004B Series. (Exhibit
4.28 to Form 10-Q for the quarter ended 9/30/04).
|
|
4.18
|
Reimbursement
and Credit Agreement, dated as of August 1, 2004, between The Connecticut
Water Company and Citizen’s Bank of Rhode Island, 2004A
Series. (Exhibit 4.29 to Form 10-Q for the quarter ended
9/30/04).
|
|
4.19
|
Reimbursement
and Credit Agreement, dated as of August 1, 2004, between The Connecticut
Water Company and Citizen’s Bank of Rhode Island, 2004B
Series. (Exhibit 4.30 to Form 10-Q for the quarter ended
9/30/04).
|
|
4.20
|
Letters
of Credit, each dated September 2, 2004, between The Connecticut Water
Company and Citizen’s 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).
|
|
4.21
|
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. (Exhibit 4.24 to Form 10-K for the
year ended 12/31/05).
|
|
4.22
|
Loan
Agreement, dated October 1, 2005, between The Connecticut Water Company
and Connecticut Development Authority, Connecticut Water 2005A Series.
(Exhibit 4.25 to Form 10-K for the year ended
12/31/05).
|
|
4.23
|
Indenture
of Trust, dated October 1, 2005, between Connecticut Development Authority
and U.S. Bank National Association, as Trustee, Connecticut Water 2005A
Series. (Exhibit 4.26 to Form 10-K for the year ended
12/31/05).
|
|
4.24
|
Insurance
Agreement, dated November 30, 2005, between The Connecticut Water Company
and Financial Guaranty Insurance Company, as Insurer for The Connecticut
Water 2005A Series. (Exhibit 4.27 to Form 10-K for the year ended
12/31/05).
|
|
4.25
|
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. (Exhibit 4.28 to Form 10-K for the year ended
12/31/05).
|
|
4.26
|
Guaranty
dated as of October 1, 2005 from Connecticut Water Service, Inc. to U.S.
Bank National Association, as Trustee, Crystal Water 2005A Series.
(Exhibit 4.29 to Form 10-K for the year ended
12/31/05).
|
|
4.27
|
Loan
Agreement, dated October 1, 2005, between The Crystal Water Company of
Danielson and Connecticut Development Authority, Crystal Water 2005A
Series. (Exhibit 4.30 to Form 10-K for the year ended
12/31/05).
|
|
4.28
|
Indenture
of Trust, dated October 1, 2005, between Connecticut Development Authority
and U.S. Bank National Association, as Trustee, Crystal Water 2005A
Series. (Exhibit 4.31 to Form 10-K for the year ended
12/31/05).
|
|
4.29
|
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. (Exhibit 4.32 to Form 10-K for the year ended
12/31/05).
|
|
4.30
|
First
Amendment to Reimbursement and Credit Agreement, dated as of April 28,
2006, between The Connecticut Water Company and Citizen’s Bank of Rhode
Island, 2004A Series. (Exhibit 10.1 to Form 10-Q for the period
ending 3/31/06).
|
|
4.31
|
First
Amendment to Reimbursement and Credit Agreement, dated as of April 28,
2006, between The Connecticut Water Company and Citizen’s Bank of Rhode
Island, 2004B Series. (Exhibit 10.2 to Form 10-Q for the period
ending 3/31/06).
|
|
4.32
|
First
Amendment to Reimbursement and Credit Agreement, dated as of April 28,
2006, between The Connecticut Water Company and Citizen’s Bank of Rhode
Island, 2004 Series Variable Rate, due 2029. (Exhibit 10.3 to Form 10-Q
for the period ending 3/31/06).
|
|
4.33
|
Bond
Purchase Agreement, dated December 5, 2007, among The Connecticut Water
Company, Connecticut Development Authority, and Edward Jones and Company,
L.P. water facilities Revenue Bonds – 2007A Series
(AMT). (Exhibit 4.33 to Form 10-K for the year ended
12/31/07)
|
|
4.34
|
Loan
Agreement dated as of December 5, 2007, among The Connecticut Water
Company, and Connecticut Development Authority, Water Facilities Revenue
Bonds – 2007A Series (AMT). (Exhibit 4.34 to Form 10-K for the
year ended 12/31/07)
|
|
4.35
|
Indenture
of Trust dated as of December 5, 2007, among The Connecticut Water
Company, and Connecticut Development Authority, Water Facilities Revenue
Bonds – 2007A Series (AMT). (Exhibit 4.35 to Form 10-K for the
year ended 12/31/07)
|
|
10.1
|
Pension
Plan Fiduciary Liability Insurance for The Connecticut Water Company
Employees' Retirement Plan and Trust, 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 January 1, 2008. (Exhibit 10.7 to Form 8-K filed on January
30, 2008).
|
|
10.4
|
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).
|
|
10.4a
|
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).
|
|
10.4b
|
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).
|
|
10.4c
|
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).
|
|
10.4d
|
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).
|
|
10.4e
|
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).
|
|
10.4f*
|
Nonstandardized
Adoption Agreement Prototype Cash or Deferred Profit-Sharing
Plan.
|
|
10.5
|
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).
|
|
10.5a
|
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).
|
|
10.5b
|
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).
|
|
10.5c
|
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).
|
|
10.5d
|
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).
|
|
10.5e
|
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).
|
|
10.5f
|
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).
|
|
10.5g
|
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).
|
|
10.5h
|
Eighth
Amendment, effective March 28, 2005, to the amended and restated
Connecticut Water Company Employees’ Retirement Plan effective January 1,
1997. (Exhibit 10.5h to Form 10-K for the year ended
12/31/07).
|
|
10.5i
|
Ninth
Amendment, effective August 9, 2006, to the amended and restated
Connecticut Water Company Employees’ Retirement Plan effective January 1,
1997. (Exhibit 10.5i to Form 10-K for the year ended
12/31/07).
|
|
10.5j
|
Tenth
Amendment, effective January 1, 2008, to the amended and restated
Connecticut Water Company Employees’ Retirement plan effective January 1,
1997. (Exhibit 10.1 to Form 8-K dated
1/13/09).
|
|
10.5k
|
Eleventh
Amendment, effective January 1, 2009, to the amended and restated
Connecticut Water Company Employees’ Retirement Plan effective January 1,
1997. (Exhibit 10.2 to Form 8-K dated
1/13/09).
|
|
10.6
|
November
4, 1994 Amendment to Agreement dated December 11, 1957 between The
Connecticut Water Company (successor to the Thomaston Water Company) and
the City of Waterbury. (Exhibit 10.16 to Form 10-K for year
ended 12/31/94).
|
|
10.7
|
Agreement
dated August 13, 1986 between The Connecticut Water Company and the
Metropolitan District. (Exhibit 10.14 to Form 10-K for the year
ended 12/31/86).
|
|
10.8
|
Report
of the Commission to Study the Feasibility of Expanding the Water Supply
Services of the Metropolitan District. (Exhibit 14 to
Registration Statement No. 2-61843).
|
|
10.9
|
Bond
Exchange Agreements between Connecticut Water Service, Inc., The
Connecticut Water Company Bankers Life Company and Connecticut Mutual Life
Insurance Company dated October 23, 1978. (Exhibit 14 to
Form 10-K for the year ended 12/31/78).
|
|
10.10
|
Dividend
Reinvestment and Common Stock Purchase Plan, as amended and restated as of
August 19, 2008. (Exhibit 4 to Form S-3, Registration Statement
No. 333-153910, filed on October 8, 2008).
|
|
10.11
|
Contract
for Supplying Bradley International Airport. (Exhibit 10.21 to
Form 10-K for the year ended 12/31/84).
|
|
10.12
|
Report
of South Windsor Task Force. (Exhibit 10.23 to Form 10-K for
the year ended 12/31/87).
|
|
10.13
|
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).
|
|
10.14
|
1994
Performance Stock Program, as amended and restated as of April 26, 2002.
(Exhibit A to Proxy Statement dated 3/19/02).
|
|
10.14a
|
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. (Exhibit
10.22a to Form 10-K for the year ended
12/31/05).
|
|
10.14b
|
Second
Amendment to The Connecticut Water Service, Inc. Performance Stock Program
Amended and Restated as of April 26, 2002 (the “Plan”) dated January 1,
2008. (Exhibit 10.5 to 8-K filed on 1/30/08).
|
|
10.15
|
2004
Performance Stock Program, as of April 23, 2004. (Appendix A to
Proxy Statement dated 3/12/04).
|
|
10.15a
|
First
Amendment to The Connecticut Water Service, Inc. 2004 Performance Stock
Program, dated January 7, 2004. (Exhibit 10.23f to Form 10-K for the year
ended 12/31/05).
|
|
10.15b
|
Second
Amendment to The Connecticut Water Service, Inc. 2004 Performance Stock
Program, dated January 1, 2008. (Exhibit 10.6 to Form 8-K filed on
1/30/08).
|
|
10.15c
|
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).
|
|
10.15d
|
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).
|
|
10.15e
|
Restricted
Stock Agreement, standard form for officers, dated December 1, 2005
(Exhibit 10.1 to Form 8-K dated 1/13/06).
|
|
10.15f
|
Long-Term
Performance Award Agreement, standard form for officers, dated January 11,
2006 (Exhibit 10.2 to Form 8-K dated 1/13/06).
|
|
10.15g
|
Performance
Award Agreement, standard form for officers, dated January 11, 2006
(Exhibit 10.3 to Form 8-K dated 1/13/06).
|
|
10.16
|
Settlement
Agreement between Connecticut Water Company, Mary J. Healey, Office of
Consumer Counsel of the State of Connecticut, and the Prosecutorial Staff
of the DPUC, dated December 4, 2006. (Exhibit 10.1 to Form 8-K
dated 12/6/06).
|
|
10.16a
|
Revised
Settlement Agreement between Connecticut Water Company, Mary J. Healey,
Office of Consumer Counsel of the State of Connecticut, and the
Prosecutorial Staff of the DPUC, dated December 20,
2006. (Exhibit 99.1 to Form 8-K dated
1/18/07).
|
|
10.16b
|
Final
Decision of the Connecticut DPUC, Docket No. 06-07-08, dated January 16,
2007. (Exhibit 99.2 to Form 8-K dated 1/18/07).
|
|
10.16c
|
Final
Decision of the Connecticut DPUC, Docket No. 06-07-08, dated March 28,
2008. (Exhibit 99.1 to Form 8-K dated 4/3/08).
|
|
10.17
|
Connecticut
Water Service, Inc. and Subsidiaries Employee Code of Conduct, January 24,
2008.
|
|
10.18
|
Stock
Purchase Agreement between The Connecticut Water Company and Ellington
Acres Company and the shareholders of Ellington Acres Company, dated as of
July 21, 2008 (Exhibit 10.1 to Form 10-Q for the quarter ended June 30,
2008).
|
|
10.19*
|
Form
of Amended Restated Employment Agreement with the Company’s executive
officers, including:
a) Peter
J. Bancroft
b) David
C. Benoit
c) Thomas
R. Marston
d) Terrance
P. O’Neill
e) Eric
W. Thornburg
f) Maureen
P. Westbrook
|
|
10.20*
|
Form
of Amended Restated Employment Agreement with the Company’s executive
officers, including:
a) Kristen
A. Johnson
b) Daniel
J. Meaney
c) Nicholas
A. Rinaldi
|
|
10.21*
|
Form
of Amended and Restated Supplemental Executive Retirement Agreement with
the Company’s executive officers, including:
a) Peter
J. Bancroft
b) David
C. Benoit
c) Kristen
A. Johnson
d) Thomas
R. Marston
e) Daniel
J. Meaney
f) Terrance
P. O’Neill
g) Nicholas
A. Rinaldi
h) Eric
W. Thornburg
i) Maureen
P. Westbrook
|
|
10.22
|
Form
of Amended and Restated Deferred Compensation Agreement with the Company’s
executive officers (Exhibit 10.3 to Form 8-K filed on January 30, 2008),
including:
a) Peter
J. Bancroft
b) David
C. Benoit
c) Kristen
A. Johnson
d) Thomas
R. Marston
e) Daniel
J. Meaney
f) Terrance
P. O’Neill
g) Nicholas
A. Rinaldi
h) Eric
W. Thornburg
i) Maureen
P. Westbrook
|
|
21*
|
Connecticut
Water Service, Inc. Subsidiaries Listing.
|
|
23.1*
|
Consent
of Independent Registered Public Accounting Firm.
|
|
31.1*
|
Rule
13a-14 Certification of Eric W. Thornburg, Chief Executive
Officer.
|
|
31.2*
|
Rule
13a-14 Certification of David C. Benoit, Chief Financial
Officer.
|
|
32.1*
|
Certification
of Eric W. Thornburg, Chief Executive Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
32.2*
|
Certification
of David C. Benoit, Chief Financial Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
Note:
|
Exhibits
10.1 through 10.5k, 10.13 through 10.15g, and 10.19 through 10.22 set
forth each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form
10-K.
|
* = filed
herewith
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
|
|
|
March
13, 2009
|
By /s/ Eric
W. Thornburg
Eric
W. Thornburg
Chairman,
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
|
Chairman,
President, and Chief Executive Officer (Principal Executive
Officer)
|
March
13, 2009
|
||
|
/s/ David
C. Benoit
David
C. Benoit
|
Vice
President – Finance, Chief Financial Officer and Treasurer (Principal
Financial Officer)
|
March
13, 2009
|
||
|
/s/ Nicholas
A. Rinaldi
Nicholas
A. Rinaldi
|
Controller
(Principal Accounting Officer)
|
March
13, 2009
|
|
Signature
|
Title
|
Date
|
||
|
/s/ Mary
Ann Hanley
Mary
Ann Hanley
|
Director
|
March
11, 2009
|
||
|
/s/ Heather
Hunt
Heather
Hunt
|
Director
|
March
11, 2009
|
||
|
/s/ Mark
G. Kachur
Mark
G. Kachur
|
Director
|
March
11, 2009
|
||
|
/s/ David
A. Lentini
David
A. Lentini
|
Director
|
March
11, 2009
|
||
|
/s/ Arthur
C. Reeds
Arthur
C. Reeds
|
Director
|
March
11, 2009
|
||
|
/s/ Lisa
J. Thibdaue
Lisa
J. Thibdaue
|
Director
|
March
11, 2009
|
||
|
/s/ Carol
P. Wallace
Carol
P. Wallace
|
Director
|
March
11, 2009
|
||
|
/s/ Donald
B. Wilbur
Donald
B. Wilbur
|
Director
|
March
11, 2009
|
CONNECTICUT
WATER SERVICE, INC. and SUBSIDIARIES
SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS
(in
thousands)
|
Description
|
Balance
Beginning of Year
|
Additions
Charged to Income
|
Deductions
From Reserves(1)
|
Balance
End of Year
|
||||||||||||
|
Allowance
for Uncollectible Accounts
|
||||||||||||||||
|
Year
Ended December 31, 2008
|
$ | 352 | $ | 286 | $ | 262 | $ | 376 | ||||||||
|
Year
Ended December 31, 2007
|
$ | 285 | $ | 265 | $ | 198 | $ | 352 | ||||||||
|
Year
Ended December 31, 2006
|
$ | 256 | $ | 225 | $ | 196 | $ | 285 | ||||||||
(1)
Amounts charged off as uncollectible after deducting recoveries.