UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2010 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
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TO
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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(860) 669-8636
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, address and former fiscal year, if changed since last report)
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 12 months (or 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 No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “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 in Rule 12b-2 of the Exchange Act).
Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date
8,639,859
Number of shares of common stock outstanding, June 30, 2010
(Includes 102,326 common stock equivalent shares awarded under the Performance Stock Programs)
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
Financial Report
June 30, 2010 and 2009
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Part I, Item 1: Financial Statements (Unaudited)
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Page 3
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Page 4
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Page 5
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Page 6
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Page 7
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Page 8
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Page 9
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Page 10
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Page 13
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Page 18
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Page 18
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Page 18
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Page 19
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Page 19
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Page 19
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Exhibit 31.1
Exhibit 31.2
Exhibit 32
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Page 20
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Connecticut Water Service, Inc. and Subsidiaries
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||||||||
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At June 30, 2010 and December 31, 2009
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(Unaudited)
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||||||||
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(In thousands)
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||||||||
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June 30,
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December 31,
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|||||||
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ASSETS
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2010
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2009
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Utility Plant
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$ | 455,193 | $ | 441,412 | ||||
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Construction Work in Progress
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5,294 | 6,751 | ||||||
| 460,487 | 448,163 | |||||||
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Accumulated Provision for Depreciation
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(127,065 | ) | (122,961 | ) | ||||
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Net Utility Plant
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333,422 | 325,202 | ||||||
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Other Property and Investments
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5,312 | 5,513 | ||||||
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Cash and Cash Equivalents
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454 | 5,437 | ||||||
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Accounts Receivable (Less Allowance, 2010 - $610; 2009 - $472)
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8,973 | 6,502 | ||||||
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Accrued Unbilled Revenues
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6,655 | 5,416 | ||||||
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Materials and Supplies, at Average Cost
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1,231 | 1,136 | ||||||
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Prepayments and Other Current Assets
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2,442 | 1,471 | ||||||
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Total Current Assets
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19,755 | 19,962 | ||||||
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Restricted Cash
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9,391 | 12,697 | ||||||
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Unamortized Debt Issuance Expense
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7,499 | 7,766 | ||||||
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Unrecovered Income Taxes
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26,046 | 25,649 | ||||||
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Pension Benefits
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6,560 | 6,897 | ||||||
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Post-Retirement Benefits Other Than Pension
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2,421 | 2,496 | ||||||
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Goodwill
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3,608 | 3,608 | ||||||
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Deferred Charges and Other Costs
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6,850 | 5,486 | ||||||
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Total Regulatory and Other Long-Term Assets
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62,375 | 64,599 | ||||||
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Total Assets
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$ | 420,864 | $ | 415,276 | ||||
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CAPITALIZATION AND LIABILITIES
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Common Stockholders' Equity
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$ | 109,031 | $ | 108,569 | ||||
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Preferred Stock
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772 | 772 | ||||||
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Long-Term Debt
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111,740 | 111,955 | ||||||
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Total Capitalization
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221,543 | 221,296 | ||||||
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Interim Bank Loans Payable
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27,942 | 25,000 | ||||||
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Accounts Payable and Accrued Expenses
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6,663 | 6,538 | ||||||
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Accrued Taxes
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-- | 18 | ||||||
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Accrued Interest
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1,001 | 954 | ||||||
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Other Current Liabilities
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181 | 546 | ||||||
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Total Current Liabilities
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35,787 | 33,056 | ||||||
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Advances for Construction
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39,658 | 39,543 | ||||||
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Contributions in Aid of Construction
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52,173 | 52,072 | ||||||
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Deferred Federal and State Income Taxes
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33,480 | 32,454 | ||||||
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Unfunded Future Income Taxes
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20,689 | 20,451 | ||||||
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Long-Term Compensation Arrangements
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16,070 | 14,898 | ||||||
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Unamortized Investment Tax Credits
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1,408 | 1,437 | ||||||
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Other Long-Term Liabilities
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56 | 69 | ||||||
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Total Long-Term Liabilities
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163,534 | 160,924 | ||||||
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Commitments and Contingencies
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Total Capitalization and Liabilities
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$ | 420,864 | $ | 415,276 | ||||
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The accompanying footnotes are an integral part of these consolidated financial statements.
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Connecticut Water Service, Inc. and Subsidiaries
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At June 30, 2010 and December 31, 2009
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(Unaudited)
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(In thousands, except share data)
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June 30,
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December 31,
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|||||||
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2010
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2009
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Common Stockholders' Equity
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Common Stock Without Par Value Authorized - 25,000,000 Shares;
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$ | 69,945 | $ | 68,896 | ||||
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Shares Issued and Outstanding: 2010 - 8,639,859 ; 2009 - 8,573,744
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Stock Issuance Expense
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(1,610 | ) | (1,610 | ) | ||||
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Retained Earnings
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41,231 | 41,785 | ||||||
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Accumulated Other Comprehensive Loss
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(535 | ) | (502 | ) | ||||
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Total Common Stockholders' Equity
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109,031 | 108,569 | ||||||
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Preferrred Stock
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Cumulative Preferred Stock of Connecticut Water Service, Inc.
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Series A Voting, $20 Par Value; Authorized, Issued and
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Outstanding 15,000 Shares, Redeemable at $21.00 Per Share
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300 | 300 | ||||||
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Series $.90 Non-Voting, $16 Par Value; Authorized 50,000 Shares
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Issued and Outstanding 29,499 Shares, Redeemable at $16.00 Per Share
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472 | 472 | ||||||
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Total Preferred Stock of Connecticut Water Service, Inc.
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772 | 772 | ||||||
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Long-Term Debt
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The Connecticut Water Company
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Unsecured Water Facilities Revenue Refinancing Bonds
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5.05% 1998 Series A, due 2028
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9,590 | 9,625 | ||||||
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5.125% 1998 Series B, due 2028
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7,535 | 7,600 | ||||||
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4.40% 2003A Series, due 2020
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8,000 | 8,000 | ||||||
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5.00% 2003C Series, due 2022
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14,795 | 14,795 | ||||||
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Var. 2004 Series Variable Rate, due 2029
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12,500 | 12,500 | ||||||
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Var. 2004 Series A, due 2028
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5,000 | 5,000 | ||||||
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Var. 2004 Series B, due 2028
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4,550 | 4,550 | ||||||
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5.00% 2005 A Series, due 2040
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14,885 | 14,885 | ||||||
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5.00% 2007 A Series, due 2037
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14,885 | 15,000 | ||||||
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5.10% 2009 A Series, due 2039
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20,000 | 20,000 | ||||||
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Total Long-Term Debt
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111,740 | 111,955 | ||||||
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Total Capitalization
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$ | 221,543 | $ | 221,296 | ||||
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The accompanying footnotes are an integral part of these consolidated financial statements.
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Connecticut Water Service, Inc. and Subsidiaries
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For the Three Months Ended June 30, 2010 and 2009
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(Unaudited)
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(In thousands, except per share amounts)
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2010
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2009
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Operating Revenues
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$ | 15,901 | $ | 15,147 | ||||
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Operating Expenses
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Operation and Maintenance
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8,001 | 8,400 | ||||||
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Depreciation
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1,734 | 1,449 | ||||||
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Income Taxes
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1,120 | 840 | ||||||
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Taxes Other Than Income Taxes
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1,505 | 1,436 | ||||||
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Total Operating Expenses
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12,360 | 12,125 | ||||||
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Net Operating Revenues
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3,541 | 3,022 | ||||||
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Other Utility Income, Net of Taxes
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173 | 193 | ||||||
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Total Utility Operating Income
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3,714 | 3,215 | ||||||
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Other Income (Deductions), Net of Taxes
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Non-Water Sales Earnings
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200 | 253 | ||||||
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Allowance for Funds Used During Construction
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20 | 35 | ||||||
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Other
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(152 | ) | (120 | ) | ||||
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Total Other Income, Net of Taxes
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68 | 168 | ||||||
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Interest and Debt Expense
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Interest on Long-Term Debt
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1,162 | 978 | ||||||
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Other Interest Charges
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193 | 40 | ||||||
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Amortization of Debt Expense
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115 | 99 | ||||||
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Total Interest and Debt Expense
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1,470 | 1,117 | ||||||
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Net Income
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2,312 | 2,266 | ||||||
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Preferred Stock Dividend Requirement
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10 | 10 | ||||||
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Net Income Applicable to Common Stock
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$ | 2,302 | $ | 2,256 | ||||
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Weighted Average Common Shares Outstanding:
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Basic
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8,522 | 8,439 | ||||||
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Diluted
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8,624 | 8,513 | ||||||
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Earnings Per Common Share:
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Basic
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$ | 0.28 | $ | 0.27 | ||||
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Diluted
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$ | 0.27 | $ | 0.27 | ||||
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Dividends Per Common Share
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$ | 0.2275 | $ | 0.2225 | ||||
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The accompanying footnotes are an integral part of these consolidated financial statements.
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Connecticut Water Service, Inc. and Subsidiaries
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For the Six Months Ended June 30, 2010 and 2009
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(Unaudited)
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(In thousands, except per share amounts)
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2010
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2009
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Operating Revenues
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$ | 29,702 | $ | 28,528 | ||||
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Operating Expenses
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Operation and Maintenance
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16,091 | 16,600 | ||||||
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Depreciation
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3,415 | 3,082 | ||||||
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Income Taxes
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1,529 | 847 | ||||||
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Taxes Other Than Income Taxes
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3,023 | 2,909 | ||||||
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Total Operating Expenses
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24,058 | 23,438 | ||||||
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Net Operating Revenues
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5,644 | 5,090 | ||||||
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Other Utility Income, Net of Taxes
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353 | 348 | ||||||
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Total Utility Operating Income
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5,997 | 5,438 | ||||||
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Other Income (Deductions), Net of Taxes
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Non-Water Sales Earnings
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436 | 462 | ||||||
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Allowance for Funds Used During Construction
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51 | 59 | ||||||
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Other
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(265 | ) | (263 | ) | ||||
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Total Other Income, Net of Taxes
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222 | 258 | ||||||
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Interest and Debt Expense
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Interest on Long-Term Debt
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2,329 | 1,987 | ||||||
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Other Interest Charges
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279 | 101 | ||||||
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Amortization of Debt Expense
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229 | 198 | ||||||
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Total Interest and Debt Expense
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2,837 | 2,286 | ||||||
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Net Income
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3,382 | 3,410 | ||||||
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Preferred Stock Dividend Requirement
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19 | 19 | ||||||
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Net Income Applicable to Common Stock
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$ | 3,363 | $ | 3,391 | ||||
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Weighted Average Common Shares Outstanding:
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Basic
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8,512 | 8,429 | ||||||
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Diluted
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8,612 | 8,503 | ||||||
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Earnings Per Common Share:
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Basic
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$ | 0.40 | $ | 0.40 | ||||
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Diluted
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$ | 0.39 | $ | 0.40 | ||||
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Dividends Per Common Share
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$ | 0.4550 | $ | 0.4450 | ||||
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The accompanying footnotes are an integral part of these consolidated financial statements.
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Connecticut Water Service, Inc. and Subsidiaries
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For the Three Months Ended June 30, 2010 and 2009
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(Unaudited)
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(In thousands)
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2010
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2009
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Net Income Applicable to Common Stock
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$ | 2,302 | $ | 2,256 | ||||
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Other Comprehensive Income, net of tax
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Qualified Cash Flow Hedging Instrument Expense,
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net of tax benefit of $0 in 2010 and $14 in 2009
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-- | (22 | ) | |||||
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Adjustment to Pension and Post-Retirement Benefits Other
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Than Pension, net of tax expense of $1 in 2010 and 2009
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-- | -- | ||||||
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Unrealized (loss)/gain on investments, net of tax benefit (expense) of
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$35 in 2010 and $(52) in 2009
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(55 | ) | 70 | |||||
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Comprehensive Income
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$ | 2,247 | $ | 2,304 | ||||
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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For the Six Months Ended June 30, 2010 and 2009
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(Unaudited)
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(In thousands)
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| 2010 | 2009 | |||||||
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Net Income Applicable to Common Stock
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$ | 3,363 | $ | 3,391 | ||||
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Other Comprehensive Income, net of tax
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Qualified Cash Flow Hedging Instrument Income,
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net of tax expense of $0 in 2010 and $20 in 2009
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1 | 31 | ||||||
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Adjustment to Pension and Post-Retirement Benefits Other
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Than Pension, net of tax benefit of $1 in 2010 and 2009
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(1 | ) | (1 | ) | ||||
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Unrealized (loss)/gain on investments, net of tax benefit (expense) of
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$21 in 2010 and $(52) in 2009
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(33 | ) | 81 | |||||
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Comprehensive Income
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$ | 3,330 | $ | 3,502 | ||||
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The accompanying footnotes are an integral part of these consolidated financial statements.
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Connecticut Water Service, Inc. and Subsidiaries
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For the Three Months Ended June 30, 2010 and 2009
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(Unaudited)
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(In thousands, except per share amounts)
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2010
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2009
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Balance at Beginning of Period
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$ | 40,890 | $ | 38,547 | ||||
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Net Income
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2,312 | 2,266 | ||||||
| 43,202 | 40,813 | |||||||
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Dividends Declared:
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Cumulative Preferred, Class A, $0.20 per share
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3 | 3 | ||||||
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Cumulative Preferred, Series $0.90, $0.225 per share
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7 | 7 | ||||||
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Common Stock - 2010 $0.2275 per share; 2009 $0.2225 per share
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1,961 | 1,877 | ||||||
| 1,971 | 1,887 | |||||||
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Balance at End of Period
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$ | 41,231 | $ | 38,926 | ||||
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
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For the Six Months Ended June 30, 2010 and 2009
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(Unaudited)
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(In thousands, except per share amounts)
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||||||||
| 2010 | 2009 | |||||||
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Balance at Beginning of Period
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$ | 41,785 | $ | 39,285 | ||||
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Net Income
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3,382 | 3,410 | ||||||
| 45,167 | 42,695 | |||||||
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Dividends Declared:
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Cumulative Preferred, Class A, $0.40 per share
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6 | 6 | ||||||
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Cumulative Preferred, Series $0.90, $0.45 per share
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13 | 13 | ||||||
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Common Stock - 2010 $0.455 per share; 2009 $0.445 per share
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3,917 | 3,750 | ||||||
| 3,936 | 3,769 | |||||||
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Balance at End of Period
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$ | 41,231 | $ | 38,926 | ||||
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The accompanying footnotes are an integral part of these consolidated financial statements.
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Connecticut Water Service, Inc. and Subsidiaries
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For the Six Months Ended June 30, 2010 and 2009
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(Unaudited)
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||||||||
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(In thousands)
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2010
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2009
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Operating Activities:
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Net Income
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$ | 3,382 | $ | 3,410 | ||||
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Adjustments to Reconcile Net Income to Net Cash Provided by
|
||||||||
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Operating Activities:
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Deferred Revenues
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119 | 119 | ||||||
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Allowance for Funds Used During Construction
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(85 | ) | (96 | ) | ||||
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Depreciation (including $401 in 2010, $353 in 2009 charged to other accounts)
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3,816 | 3,435 | ||||||
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Change in Assets and Liabilities:
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(Increase) Decrease in Accounts Receivable and Accrued Unbilled Revenues
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(3,710 | ) | 240 | |||||
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Increase in Prepayments and Other Current Assets
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(1,060 | ) | (193 | ) | ||||
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Decrease in Other Non-Current Items
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1,916 | 1,605 | ||||||
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Increase in Accounts Payable, Accrued Expenses and Other
|
||||||||
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Current Liabilities
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14 | 26 | ||||||
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Increase in Deferred Income Taxes and Investment Tax Credits, Net
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837 | 400 | ||||||
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Total Adjustments
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1,847 | 5,536 | ||||||
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Net Cash and Cash Equivalents Provided by Operating Activities
|
5,229 | 8,946 | ||||||
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Investing Activities:
|
||||||||
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Company Financed Additions to Utility Plant
|
(11,693 | ) | (10,157 | ) | ||||
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Advances from Others for Construction
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(118 | ) | (355 | ) | ||||
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Net Additions to Utility Plant Used in Continuing Operations
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(11,811 | ) | (10,512 | ) | ||||
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Purchase of Customer Contracts
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(900 | ) | -- | |||||
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Purchase of water systems, net of cash acquired of $0 in 2010 and $26 in 2009
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(297 | ) | (1,469 | ) | ||||
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Release of restricted cash
|
3,300 | -- | ||||||
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Net Cash and Cash Equivalents Used in Investing Activities
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(9,708 | ) | (11,981 | ) | ||||
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Financing Activities:
|
||||||||
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Proceeds from Interim Bank Loans
|
27,942 | 17,771 | ||||||
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Repayment of Interim Bank Loans
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(25,000 | ) | (12,074 | ) | ||||
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Proceeds from Issuance of Common Stock
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486 | 485 | ||||||
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Proceeds from the Exercise of Stock Options
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102 | -- | ||||||
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Costs Incurred to Issue Long-Term Debt and Common Stock
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(1 | ) | -- | |||||
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Repayment of Long-Term Debt Including Current Portion
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(215 | ) | (133 | ) | ||||
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Advances from Others for Construction
|
118 | 355 | ||||||
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Cash Dividends Paid
|
(3,936 | ) | (3,770 | ) | ||||
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Net Cash and Cash Equivalents (Used in) Provided by Financing Activities
|
(504 | ) | 2,634 | |||||
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Net Decrease in Cash and Cash Equivalents
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(4,983 | ) | (401 | ) | ||||
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Cash and Cash Equivalents at Beginning of Period
|
5,437 | 684 | ||||||
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Cash and Cash Equivalents at End of Period
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$ | 454 | $ | 283 | ||||
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Non-Cash Investing and Financing Activities:
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Non-Cash Contributed Utility Plant
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$ | 129 | $ | 860 | ||||
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Short-term Investment of Bond Proceeds Held in Restricted Cash
|
$ | 9,391 | -- | |||||
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Supplemental Disclosures of Cash Flow Information:
|
||||||||
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Cash Paid for:
|
||||||||
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Interest
|
$ | 2,629 | $ | 2,214 | ||||
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State and Federal Income Taxes
|
$ | 1,376 | $ | 410 | ||||
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The accompanying footnotes are an integral part of these consolidated financial statements.
|
||||||||
1. Summary of Significant Accounting Policies
The consolidated financial statements included herein have been prepared by CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that are of a normal recurring nature which are, in the opinion of management, necessary to a fair statement of the results for interim periods. Certain information and footnote disclosures have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The Balance Sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2009 and as updated in the Company’s March 31, 2010 Form 10-Q.
The results for interim periods are not necessarily indicative of results to be expected for the year since the consolidated earnings are subject to seasonal factors.
2. Pension and Other Post-Retirement Benefits
The following tables set forth the components of pension and other post-retirement benefit costs for the three and six months ended June 30, 2010 and 2009.
Pension Benefits
Components of Net Periodic Cost (in thousands):
|
Three Months
|
Six Months
|
|||||||||||||||
|
Period ended June 30
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
Service Cost
|
$ | 425 | $ | 388 | $ | 834 | $ | 727 | ||||||||
|
Interest Cost
|
545 | 507 | 1,087 | 1,012 | ||||||||||||
|
Expected Return on Plan Assets
|
(615 | ) | (543 | ) | (1,254 | ) | (1,114 | ) | ||||||||
|
Amortization of:
|
||||||||||||||||
|
Transition Obligation
|
-- | -- | 1 | 1 | ||||||||||||
|
Prior Service Cost
|
18 | 17 | 35 | 34 | ||||||||||||
|
Net Loss
|
163 | 104 | 301 | 199 | ||||||||||||
|
Net Periodic Benefit Cost
|
$ | 536 | $ | 473 | $ | 1,004 | $ | 859 | ||||||||
The Company expects to make a contribution to the pension plan of $3.4 million during the third quarter of 2010 for the 2009 plan year.
Post-Retirement Benefits Other Than Pension (PBOP)
Components of Net Periodic Cost (in thousands):
|
Three Months
|
Six Months
|
|||||||||||||||
|
Period ended June 30
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
Service Cost
|
$ | 142 | $ | 113 | $ | 283 | $ | 236 | ||||||||
|
Interest Cost
|
152 | 117 | 287 | 240 | ||||||||||||
|
Expected Return on Plan Assets
|
(76 | ) | (68 | ) | (153 | ) | (136 | ) | ||||||||
|
Other
|
56 | 56 | 112 | 112 | ||||||||||||
|
Amortization of:
|
||||||||||||||||
|
Prior Service Cost
|
(102 | ) | (102 | ) | (203 | ) | (203 | ) | ||||||||
|
Recognized Net Loss
|
99 | 50 | 165 | 103 | ||||||||||||
|
Net Periodic Benefit Cost
|
$ | 271 | $ | 166 | $ | 491 | $ | 352 | ||||||||
3. Earnings per Share
Earnings per weighted average common share are calculated by dividing net income applicable to common stock by the weighted average number of shares of common stock outstanding during the respective periods as detailed below (diluted shares include the effect of unexercised stock options):
|
Three months ended June 30,
|
2010
|
2009
|
||||||
|
Common Shares Outstanding End of Period:
|
8,639,859 | 8,526,304 | ||||||
|
Weighted Average Shares Outstanding (Days Outstanding Basis):
|
||||||||
|
Basic
|
8,521,840 | 8,438,865 | ||||||
|
Diluted
|
8,624,319 | 8,512,669 | ||||||
|
Basic Earnings per Share
|
$ | 0.28 | $ | 0.27 | ||||
|
Dilutive Effect of Unexercised Stock Options
|
(0.01 | ) | -- | |||||
|
Diluted Earnings per Share
|
$ | 0.27 | $ | 0.27 | ||||
|
Six Months ended June 30,
|
||||||||
|
Weighted Average Shares Outstanding (Days Outstanding Basis):
|
||||||||
|
Basic
|
8,512,120 | 8,429,103 | ||||||
|
Diluted
|
8,611,917 | 8,502,946 | ||||||
|
Basic Earnings per Share
|
$ | 0.40 | $ | 0.40 | ||||
|
Dilutive Effect of Unexercised Stock Options
|
(0.01 | ) | -- | |||||
|
Diluted Earnings per Share
|
$ | 0.39 | $ | 0.40 | ||||
Total unrecognized compensation expense for all stock awards was approximately $1.1 million as of June 30, 2010 and will be recognized over the next four years.
4. New Accounting Pronouncements
FASB ASC 860 “Transfers and Servicing” (“FASB ASC 860”) improves the relevance and comparability of information that a reporting entity provides in its financial statements about transfers of financial assets. The provisions of FASB ASC 860 became effective on January 1, 2010 and will be applied prospectively to transfers of financial assets completed after December 31, 2009. The adoption of these provisions did not have an impact on the Company’s financial statements.
FASB ASC 810 “Consolidation” (“FASB ASC 810”) amends the consolidation guidance for variable interest entities. The provisions were applicable on January 1, 2010. The adoption of these provisions did not have an impact on the Company’s financial statements.
In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). This update requires additional information to be disclosed principally in respect to Level 3 fair value measurements and transfers to and from Level 1 and Level 2 measurements. In addition, enhanced disclosures are required concerning inputs and valuation techniques used to determine Level 2 and Level 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 1, 2009, however, the requirements to disclose separately purchases, sales, issuances, and settlements in the Level 3 reconciliation are effective for fiscal years beginning after December 15, 2010. The Company partially adopted this guidance effective January 1, 2010. As this guidance provides only disclosure requirements, the adoption of these provisions did not impact the Company’s results of operations, cash flows or financial position. For the portion of the guidance that does not become effective until 2011, the Company does not anticipate this update will have a material impact on its financial statements or disclosures.
5. Fair Value Disclosures
FASB ASC 820, “Fair Value Measurements and Disclosures” (“FASB ASC 820”) provides enhanced guidance for using fair value to measure assets and liabilities and expands disclosure with respect to fair value measurements. In 2008, the Company elected the one year deferral option of adoption of FASB ASC 820 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. The Company adopted FASB ASC 820 for financial assets and liabilities as of January 1, 2008 and FASB ASC 820 as of January 1, 2009 for non-financial assets and liabilities.
FASB ASC 820 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 June 30, 2010 (in thousands):
|
Level 1
|
Level 2
|
Level 3
|
||||||||||
|
Assets:
|
||||||||||||
|
Investments
|
$ | 726 | $ | -- | $ | -- | ||||||
The following table summarizes our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2009 (in thousands):
|
Level 1
|
Level 2
|
Level 3
|
||||||||||
|
Assets:
|
||||||||||||
|
Investments
|
$ | 1,151 | $ | -- | $ | -- | ||||||
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.
Investments – At June 30, 2010 and December 31, 2009, the Company had $631,000 and $1,051,000, respectively, of equity based mutual funds. The Company also had $95,000 and $46,000 of money market funds as of June 30, 2010 and December 31, 2009, respectively. Additionally, at December 31, 2009, the Company had $54,000 of fixed equity funds. These investments are carried on the balance sheet at fair value on the Other Property and Investments line. Unrealized gains and losses associated with these investments are reflected in Accumulated Other Comprehensive Loss, net of tax.
Restricted Cash – As part of the Company’s December 2009 bond offering, 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 expects to use the remainder of the proceeds during 2010. The carrying amount approximates fair value.
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 June 30, 2010 and December 31, 2009, the estimated fair value of the Company's long-term debt was $110,267,000 and $110,479,000, respectively, as compared to the carrying amounts of $111,740,000 and $111,955,000, respectively.
The fair values shown above have been reported to meet the disclosure requirements of accounting principles generally accepted in the United States and do not purport to represent the amounts at which those obligations would be settled.
6. Segment Reporting
The Company operates principally in three business segments: Water Activities, Real Estate Transactions, and Services and Rentals. Financial data for the segments is as follows (in thousands):
|
Three Months Ended June 30, 2010
|
||||||||||||||||
|
Segment
|
Revenues
|
Pre-Tax Income
|
Income Tax Expense
|
Net Income
|
||||||||||||
|
Water Activities
|
$ | 16,205 | $ | 3,261 | $ | 1,149 | $ | 2,112 | ||||||||
|
Real Estate Transactions
|
-- | -- | -- | -- | ||||||||||||
|
Services and Rentals
|
1,267 | 340 | 140 | 200 | ||||||||||||
|
Total
|
$ | 17,472 | $ | 3,601 | $ | 1,289 | $ | 2,312 | ||||||||
|
Three Months Ended June 30, 2009
|
||||||||||||||||
|
Segment
|
Revenues
|
Pre-Tax Income
|
Income Tax Expense
|
Net Income
|
||||||||||||
|
Water Activities
|
$ | 15,462 | $ | 2,907 | $ | 894 | $ | 2,013 | ||||||||
|
Real Estate Transactions
|
-- | -- | -- | -- | ||||||||||||
|
Services and Rentals
|
1,226 | 414 | 161 | 253 | ||||||||||||
|
Total
|
$ | 16,688 | $ | 3,321 | $ | 1,055 | $ | 2,266 | ||||||||
|
Six Months Ended June 30, 2010
|
||||||||||||||||
|
Segment
|
Revenues
|
Pre-Tax Income
|
Income Tax Expense
|
Net Income
|
||||||||||||
|
Water Activities
|
$ | 30,337 | $ | 4,550 | $ | 1,604 | $ | 2,946 | ||||||||
|
Real Estate Transactions
|
-- | -- | -- | -- | ||||||||||||
|
Services and Rentals
|
2,347 | 734 | 298 | 436 | ||||||||||||
|
Total
|
$ | 32,684 | $ | 5,284 | $ | 1,902 | $ | 3,382 | ||||||||
|
Six Months Ended June 30, 2009
|
||||||||||||||||
|
Segment
|
Revenues
|
Pre-Tax Income
|
Income Tax Expense
|
Net Income
|
||||||||||||
|
Water Activities
|
$ | 29,134 | $ | 3,858 | $ | 910 | $ | 2,948 | ||||||||
|
Real Estate Transactions
|
-- | -- | -- | -- | ||||||||||||
|
Services and Rentals
|
2,303 | 757 | 295 | 462 | ||||||||||||
|
Total
|
$ | 31,437 | $ | 4,615 | $ | 1,205 | $ | 3,410 | ||||||||
The Revenues shown in Water Activities above consist of revenues from water customers of $15,901,000 and $15,147,000 for the three months ended June 30, 2010 and 2009, respectively. Additionally, there were revenues associated with utility plant leased to others of $304,000 and $315,000 for the three months ended June 30, 2010 and 2009, respectively. The Revenues shown in Water Activities above consist of revenues from water customers of $29,702,000 and $28,528,000 for the six months ended June 30, 2010 and 2009, respectively. Additionally, there were revenues associated with utility plant leased to others of $635,000 and $606,000 for the six months ended June 30, 2010 and 2009, respectively.
The Company owns various small, discrete parcels of land that are no longer required for water supply purposes. From time to time, the Company may sell or donate these parcels, depending on various factors, including the current market for land, the amount of tax benefits received for donations and the Company’s ability to use any benefits received from donations. During the six months ended June 30, 2010 and 2009, the Company did not engage in any such transactions.
Assets by segment (in thousands):
|
June 30, 2010
|
December 31, 2009
|
|||||||
|
Total Plant and Other Investments:
|
||||||||
|
Water Activities
|
$ | 338,152 | $ | 330,151 | ||||
|
Non-Water
|
582 | 564 | ||||||
| 338,734 | 330,715 | |||||||
|
Other Assets:
|
||||||||
|
Water Activities
|
79,707 | 77,622 | ||||||
|
Non-Water
|
2,423 | 6,939 | ||||||
| 82,130 | 84,561 | |||||||
|
Total Assets
|
$ | 420,864 | $ | 415,276 | ||||
7. Income Taxes
FASB ASC 740 “Income Taxes” (“FASB ASC 740”) 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 FASB ASC 740, the Company 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 the Company’s tax positions in accordance with FASB ASC 740 did not have an impact on the Company’s results of operations, financial condition or liquidity.
From time to time, the Company may be assessed interest and penalties by taxing authorities. In those cases, the charges would appear on the Other line item on the Income Statement. There were no such charges for the six month periods ended June 30, 2010 and 2009. Additionally, there were no accruals relating to interest or penalties as of June 30, 2010 and December 31, 2009. The Company remains subject to examination by federal authorities for the 2006 through 2009 tax years and by state authorities for the tax years 2006 through 2009.
The Company’s estimated annual effective income tax rate for the first six months of 2010 and 2009, exclusive of discrete items, was 36.0% and 31.7%, respectively. During the first six months of 2009, the Company recognized an income tax benefit of $264,000 for state tax credits earned in 2008. The resulting reported effective tax rate for the six months ended June 30, 2009 was 26.1%. The statutory income tax rates during the same periods were 39%. In determining its annual estimated effective tax rate for interim periods, the Company reflects its estimated permanent and flow-through tax differences for the taxable year. The primary flow-through difference causing the effective rate to be less than the statutory rate in 2010 is the difference between book and tax depreciation. The primary flow-through difference in 2009, other than the state tax credit, causing the effective rate to be less than the statutory rate in 2009 was the pension contributions in excess of the Company’s FASB ASC 740 expense.
8. Lines of Credit
In November 2008, the Company was authorized by its Board of Directors to increase the available lines of credit from $21 million to $40 million. On June 30, 2009, the Company let expire one line of credit totaling $6 million and entered into a new $15 million line of credit agreement, which was to expire on June 25, 2010. In May 2010, the Company extended the maturity date of this line to June 25, 2011. On August 12, 2009, the Company replaced an existing $3 million line of credit with a $10 million line of credit, which expires on August 11, 2010. Finally, on September 15, 2009, the Company increased a third line of credit from $12 million to $15 million, with an expiration date of June 1, 2011. The Company expects to renew the lines of credit as they expire. The outstanding aggregate balance on these lines of credit at June 30, 2010 and December 31, 2009 were $27.9 million and $25.0 million, respectively, and are included in the Interim Bank Loans Payable line of the Balance Sheet. Interest expense charged on interim bank loans will fluctuate based on market interest rates.
The following discussion should be read in conjunction with the accompanying unaudited financial statements and related notes thereto and the audited financial statements and the notes thereto contained in our 2009 Annual Report on Form 10-K.
Regulatory Matters and Inflation
During the three months ended June 30, 2010, there were no material changes under this subheading to any items previously disclosed by the Company in its Annual Report on Form 10-K for the period ended December 31, 2009. On July 14, 2010, the Department of Public Utility Control (DPUC) issued a decision on the Company’s primary subsidiary, The Connecticut Water Company (Connecticut Water), application to increase rates. The details of that decision are described below.
Department of Public Utility Control Matters
On October 29, 2009, Connecticut Water filed its second Water Infrastructure Conservation Act (WICA) application with the DPUC, requesting a 2.15% surcharge to customers’ bills, inclusive of the 0.95% surcharge approved in July 2009. In response to that application on December 23, 2009, the DPUC approved a cumulative WICA surcharge of 2.1%. The 2.1% surcharge appeared on customers’ bills beginning January 1, 2010 and remained until July 14, 2010 when, upon the implementation of a general rate increase it was folded into base rates and was no longer a surcharge.
On January 6, 2010, Connecticut Water filed a rate application with the DPUC, requesting a multi-year increase totaling $19.1 million above pro forma test year revenues, including the aforementioned WICA surcharge, over a three-year period. The Company had proposed options for regulatory consideration, including a multi-year phase-in of rates that, if approved, would have been a first in Connecticut for water utilities. In addition to the phased-in rate increase, the Company also sought a Water Conservation Adjustment Mechanism (“WCAM”), to allow the Company to continue to promote water conservation in an effective manner while addressing the financial impact of increased conservation by its customers. The WCAM would have minimized the effects of conservation on the Company’s revenues through a recovery mechanism that would have been limited to a change in non-weather related residential sales, while at the same time allowing for the promotion of conservation to the benefit of customers and the environment, usually two opposing concerns. In addition to the conservation efforts that have impacted sales, the need for an increase in rates was, in part, based upon an investment of approximately $62 million in Net Utility Plant since 2006, the last time the Company filed for a general rate increase. In addition, increased operating costs for labor, employee benefits and other general operating needs, including chemicals, was being requested.
On July 14, 2010, the DPUC issued its Final Decision in the case, granting an increase in revenues of $8.0 million, or 12.7%, over pro forma test year revenues. The DPUC approved a return on equity of 9.75%, lower than the 11.3% requested. The new rates became effective for services rendered on or after July 14, 2010, at which point the previously approved WICA surcharges were folded into customers’ base charges. The DPUC did not approve Connecticut Water’s requested WCAM approach to align conservation incentives for both Connecticut Water and its customers. Of Connecticut Water’s three-year requested increase of $19.1 million, $16.3 million was associated with the initial year. The DPUC chose to not consider years 2 and 3 included in Connecticut Water’s application. Connecticut Water is not precluded from seeking increased rates for future years as part of a new general rate filing should it choose.
Acquisitions
On January 6, 2010, New England Water Utility Service, Inc. (NEWUS), a wholly owned non-regulated subsidiary of the Company, acquired the certain assets of Home Service USA for $900,000. Prior to the acquisition, Home Service USA offered Connecticut Water customers coverage for breaks or damage to home plumbing and septic drainage lines. NEWUS agreed to purchase the right to provide the service to Connecticut Water customers and began offering its own comparable coverage. As part of the agreement, Home Service USA will not offer its products to Connecticut Water customers for a period of ten years. The products offered by NEWUS have been integrated into the Linebacker ® program.
On February 16, 2010, the Company announced the acquisition of the assets of water systems in Killingworth and Mansfield, Connecticut for a combined purchase price of approximately $300,000. These acquisitions added approximately 500 customers to the Company. The system acquired in Killingworth has water quality issues that the previous owners were unable to address. The Company will evaluate options, obtain regulatory approval and invest in the technology necessary to bring the system into compliance with water quality standards in effect in Connecticut. Additionally, the Company announced that it had reached an agreement to acquire a water system in Old Lyme, Connecticut for an additional $300,000. It is expected, upon approval by the DPUC, that this acquisition will add approximately 100 customers and additional water supply to the Company.
Critical Accounting Policies and Estimates
The Company maintains its accounting records in accordance with accounting principles generally accepted in the United States of America and as directed by the DPUC to which Connecticut Water, the Company’s regulated water utility subsidiary, is subject. Significant accounting policies employed by the Company, including the use of estimates, were presented in the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K filed on March 15, 2010.
Critical accounting policies are those that are the most important to the presentation of the Company’s financial condition and results of operations. The application of such accounting policies requires management’s most difficult, subjective, and complex judgments and involves uncertainties and assumptions. The Company’s most critical accounting policies pertain to public utility regulation related to FASB ASC 980 “Regulated Operations”, revenue recognition, and pension plan accounting. Each of these accounting policies and the application of critical accounting policies and estimates were discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. There were no significant changes in the application of critical accounting policies or estimates during the three months ended June 30, 2010. Please see Note 4 of the financial statements for newly adopted and recently announced accounting standards.
Management must use informed judgments and best estimates to properly apply these critical accounting policies. Because of the uncertainty in these estimates, actual results could differ from estimates used in applying the critical accounting policies. The Company is not aware of any reasonably likely events or circumstances which would result in different amounts being reported that would materially affect its financial condition or results of operations.
Outlook
The following modifies and updates the “Outlook” section of the Company’s 2009 Annual Report on Form 10-K filed on March 15, 2010.
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.
As noted above, the DPUC authorized a revenue increase equating to approximately 50% of what was requested. Based on the allowed increase, more favorable weather through July 2010 compared to the same period in 2009, and continued cost-cutting measures in Operation and Maintenance expenses, the Company expects its earnings from its Water Activities segment to be higher for the fiscal year-ended December 31, 2010 than 2009. During 2010, income in our Services and Rentals segment is expected to increase due to additional operating contracts and higher margins on existing contracts. However, the Company has no plans for any Real Estate transactions during the remainder of 2010, unlike 2009 when this segment produced approximately $0.17 per share. As a result of the rate decision, which did not approve either the level of increase requested, or some of the components that Connecticut Water believes would have provided benefits to both customers and shareholders, the Company is currently reviewing both its regulated and unregulated operations to provide the best opportunity to both produce the maximum financial results contemplated by the decision and maintain the high quality water and service our customers have come to expect.
During 2010 and subsequent years, the ability of the Company to maintain and increase its Net Income will principally depend upon the effect on the Company of the factors described above in this “Outlook” section, those factors described in the sections entitled Item 1A – Risk Factors, “Commitments and Contingencies” in Item 7 of the Company’s Annual Report on Form 10-K and the risks and uncertainties described in the “Forward-Looking Information” section below.
Liquidity and Capital Resources
The Company is not aware of demands, events, or uncertainties that will result in a decrease of liquidity or a material change in the mix or relative cost of its capital resources.
With the implementation of the Company’s new Enterprise Resource Planning System (ERP), the Company delayed customer billings in order to verify the integrity of the system and the accuracy of those bills prior to mailing. As a result, billings and consequently, cash receipts were delayed. The Company has increased its utilization of its lines of credit during this period. Its operations, including plans to continue investment in new infrastructure, are not impacted.
The Company has returned to its normal billing and collections processes and does not anticipate delays in billings or collections in subsequent periods.
In November 2008, the Company was authorized by its Board of Directors to increase the available lines of credit from $21 million to $40 million. On June 30, 2009, the Company let expire one line of credit totaling $6 million and entered into a new $15 million line of credit agreement, which was to expire on June 25, 2010. In May 2010, the Company extended the maturity date of this line to June 25, 2011. On August 12, 2009, the Company replaced an existing $3 million line of credit with a $10 million line of credit, which expires on August 11, 2010. Finally, on September 15, 2009, the Company increased a third line of credit from $12 million to $15 million, with an expiration date of June 1, 2011. The Company expects to renew the lines of credit as they expire. The outstanding aggregate balance on these lines of credit at June 30, 2010 and December 31, 2009 were $27.9 million and $25.0 million, respectively, and are included in the Interim Bank Loans Payable line of the Balance Sheet. As of June 30, 2010, the Company had $12.1 million in unused lines of credit. Interest expense charged on interim bank loans will fluctuate based on market interest rates.
The Board of Directors approved a $25.8 million construction budget for 2010, net of amounts to be financed by customer advances and contributions in aid of construction. The Company is using a combination of its internally generated funds, borrowing under its available lines of credit, and its recently-issued long term debt to fund this construction budget. The Company issued $20 million in private activity bonds issued through the Connecticut Development Authority (CDA), for a long term debt issuance in December 2009. The bonds were issued on December 1, 2009 at five and one-tenth percent and are due December 1, 2039.
Standard and Poor’s, on April 29, 2010, 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 opt to have dividends directly reinvested into additional shares of the Company. During the six months ended June 30, 2010 and 2009, shareholders reinvested $486,000 and $485,000, respectively, in additional shares 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 six months ended June 30, 2010, a total of 5,012 stock options were exercised, resulting in approximately $102,000 in proceeds to the Company. During the six months ended June 30, 2009, no stock options were exercised.
Results of Operations
Three Months Ended June 30
Net Income for the three months ended June 30, 2010 increased from the same period in the prior year by $46,000, which increased earnings per basic average common share by $0.01, to $0.28. Earnings per diluted average common share remained flat at $0.27.
This increase in Net Income is broken down by business segment as follows:
|
Business Segment
|
June 30, 2010
|
June 30, 2009
|
(Decrease)/Increase
|
|||||||||
|
Water Activities
|
$ | 2,112,000 | $ | 2,013,000 | $ | 99,000 | ||||||
|
Real Estate Transactions
|
-- | -- | -- | |||||||||
|
Services and Rentals
|
200,000 | 253,000 | (53,000 | ) | ||||||||
|
Total
|
$ | 2,312,000 | $ | 2,266,000 | $ | 46,000 | ||||||
The increase in the Water Activity segment’s Net Income was primarily due to the net effects of the variances listed below:
Revenue
Revenue from our water customers increased by $754,000, or 5.0%, to $15,901,000 for the three months ended June 30, 2010 when compared to the same period in 2009. The primary reason for the increase in revenues was the 2.1% cumulative WICA surcharge, which was not implemented until the third quarter of 2009. Additionally, the second quarter of 2009 was an extremely rainy period in Windsor Locks, CT, part of our largest service area. During that period, rain was experienced on 63 of 91 days, including 24 days of rain in the month of June. During the second quarter of 2010, however, there was rain on only 41 of 91 days, including 17 in June. This change in weather contributed to a 5.5% increase in water production at our facilities. Weather primarily impacts residential water usage, which resulted in higher revenues from this group of customers of $823,000 or 8.8% compared to the second quarter of 2009.
Operation and Maintenance Expense
Operation and Maintenance expense decreased by $399,000 primarily due to the following components:
|
Expense Components
|
June 30, 2010
|
June 30, 2009
|
Increase/(Decrease)
|
|||||||||
|
Labor
|
$ | 3,111,000 | $ | 2,986,000 | $ | 125,000 | ||||||
|
Post retirement medical
|
271,000 | 171,000 | 100,000 | |||||||||
|
Pension
|
537,000 | 473,000 | 64,000 | |||||||||
|
Water treatment (including chemical costs)
|
589,000 | 533,000 | 56,000 | |||||||||
|
Utility costs
|
823,000 | 797,000 | 26,000 | |||||||||
|
Investor Relations
|
159,000 | 181,000 | (22,000 | ) | ||||||||
|
Regulatory commission expense
|
1,000 | 62,000 | (61,000 | ) | ||||||||
|
Property and liability insurance
|
219,000 | 296,000 | (77,000 | ) | ||||||||
|
Customer
|
196,000 | 279,000 | (83,000 | ) | ||||||||
|
Medical
|
379,000 | 494,000 | (115,000 | ) | ||||||||
|
Outside services
|
326,000 | 481,000 | (155,000 | ) | ||||||||
|
Other
|
1,390,000 | 1,647,000 | (257,000 | ) | ||||||||
|
Total
|
$ | 8,001,000 | $ | 8,400,000 | $ | (399,000 | ) | |||||
|
-
|
Operating and Maintenance expenses declined 4.8% in the second quarter of 2010 due to several reasons:
|
|
·
|
Outside services decreased primarily due to a reduction in consulting costs that were higher in 2009 due to the implementation of an Enterprise Resource Planning (ERP) system and a reduction in temporary labor in 2010 as part of cost containment efforts;
|
|
·
|
Medical costs decreased in 2010 due to a decrease in claims filed and an increase in contributions from employees;
|
|
·
|
Customer costs decreased primarily due to a reduction in postage and customer communication costs, partially offset by an increase in bad debt expense;
|
|
·
|
The decrease in regulatory commission expense was due to the capitalized costs associated with the 2007 rate case being fully amortized during 2009. The Company expects to begin to amortize costs associated with the 2010 rate case recently approved by the DPUC during the second half of 2010; and
|
|
·
|
The primary driver in the decrease in Other expense is due to the mark-to-market adjustment related to stock awards of certain employees. The Company adjusts the value of those stock awards at the end of each reporting period based on the Company’s stock price on the last day of that period.
|
|
-
|
These decreases were partially offset by the following:
|
|
·
|
The increase in labor costs was primarily attributable to annual wage increases, partially offset by labor capitalized to the ERP system. The Company implemented the ERP in the first quarter of 2010 and expects Labor costs to continue to grow during the remainder of 2010 when compared to 2009. During 2009, many employees were spending considerable time on this project, requiring the Company to capitalize those labor costs. Upon implementation of the ERP system on March 22, 2010, most of the employees who had been involved in the project resumed working on their normal responsibilities, resulting in a higher percentage of employee time to be expensed. However, the Company will continue to focus on capital projects related to WICA and other field related improvements;
|
|
·
|
Pension and post-retirement medical costs increased due primarily to a decrease in the discount rate used to determine the liabilities of the plans and to the decline in market value of plan assets in prior periods;
|
|
·
|
Water treatment costs were higher due to an increase in the costs to remove and dispose waste at water treatment facilities and an increase in the cost of chemicals used in the treatment process; and
|
|
·
|
Utility costs increased due to increased communication costs in the control services group, which uses remote sensors to monitor our systems’ performance.
|
|
-
|
The Company saw an approximate 19.7% increase in its Depreciation expense due to an increase in the Company’s Utility Plant investment and a reduction in depreciation rates approved by the DPUC during the second quarter of 2009.
|
|
-
|
Income Tax expense associated with Water Activities increased due to an increase in pre-tax income and a higher effective tax rate in 2010.
|
Six Months Ended June 30
Net Income for the six months ended June 30, 2010 decreased from that of the prior year by $28,000, which did not impact earnings per basic average common share. Earnings per diluted average common share decreased $0.01 to $0.39.
This decrease in Net Income is broken down by business segment as follows:
|
Business Segment
|
June 30, 2010
|
June 30, 2009
|
(Decrease)/Increase
|
|||||||||
|
Water Activities
|
$ | 2,946,000 | $ | 2,948,000 | $ | (2,000 | ) | |||||
|
Real Estate Transactions
|
-- | -- | -- | |||||||||
|
Services and Rentals
|
436,000 | 462,000 | (26,000 | ) | ||||||||
|
Total
|
$ | 3,382,000 | $ | 3,410,000 | $ | (28,000 | ) | |||||
The decrease in the Water Activity segment’s Net Income was primarily due to the net effects of the variances listed below:
Revenue
Revenue from our water customers increased by $1,174,000, or 4.1%, to $29,702,000 for the six months ended June 30, 2010 when compared to the same period in 2009. The primary reason for the increase in revenues was the 2.1% cumulative WICA surcharge, which was not implemented until the third quarter of 2009. Additionally, the improved weather conditions led to an increase in residential revenues of $1,124,000, or 6.4%, in the first six months of 2010.
Operation and Maintenance Expense
Operation and Maintenance expense decreased by $509,000 primarily due to the following components:
|
Expense Components
|
June 30, 2010
|
June 30, 2009
|
Increase/(Decrease)
|
|||||||||
|
Pension
|
$ | 1,005,000 | $ | 859,000 | $ | 146,000 | ||||||
|
Post retirement medical
|
491,000 | 356,000 | 135,000 | |||||||||
|
Water treatment (including chemical costs)
|
1,147,000 | 1,067,000 | 80,000 | |||||||||
|
Utility costs
|
1,811,000 | 1,746,000 | 65,000 | |||||||||
|
Purchased water
|
558,000 | 510,000 | 48,000 | |||||||||
|
Labor
|
5,946,000 | 5,996,000 | (50,000 | ) | ||||||||
|
Customer
|
416,000 | 509,000 | (93,000 | ) | ||||||||
|
Regulatory commission expense
|
3,000 | 124,000 | (121,000 | ) | ||||||||
|
Medical
|
811,000 | 989,000 | (178,000 | ) | ||||||||
|
Outside services
|
783,000 | 1,002,000 | (219,000 | ) | ||||||||
|
Other
|
3,120,000 | 3,442,000 | (322,000 | ) | ||||||||
|
Total
|
$ | 16,091,000 | $ | 16,600,000 | $ | (509,000 | ) | |||||
|
-
|
Operating and Maintenance expenses declined 3.1% in the first half of 2010 largely due to cost containment and the employee focus on capital projects, both administrative and field-related, early in 2010. Factors contributing to this decline include:
|
|
·
|
Outside services decreased primarily a reduction in legal costs associated with the favorable resolution of an on-going legal matter in our Unionville division and a reduction in temporary labor in 2010 as part of cost containment.
|
|
·
|
Medical costs decreased in 2010 due to a decrease in claims filed and an increase in contributions from employees.
|
|
·
|
The decrease in regulatory commission expense was due to the capitalized costs associated with the 2007 rate case being fully amortized during 2009. The Company expects to begin to amortize costs associated with the 2010 rate case recently approved by the DPUC during the second half of 2010.
|
|
·
|
Customer costs decreased primarily due to a reduction in postage and customer communication costs, partially offset by an increase in bad debt expense.
|
|
·
|
The decrease in labor costs was primarily attributable to the ongoing employee focus on capital projects, specifically, the ERP. During 2009, many employees were spending considerable time on this project, allowing the Company to capitalize those labor costs. The ERP system was implemented in the first quarter of 2010 and the Company expects to capitalize fewer hours related to the project throughout the remainder of 2010. However, the Company will continue to focus on capital projects related to WICA and other field related improvements.
|
|
·
|
The primary driver in the decrease in Other expense is due to the mark-to-market adjustment related to stock awards of certain employees. The Company adjusts the value of those stock awards at the end of each reporting period based on the Company’s stock price on the last day of that period.
|
|
-
|
These decreases were partially offset by the following:
|
|
·
|
Pension and post-retirement medical costs increased due primarily to a decrease in the discount rate used to determine the liabilities of the plans and to the decline in market value of plan assets in prior periods.
|
|
·
|
Water treatment costs were higher due to an increase in the costs to remove and dispose waste at water treatment facilities and an increase in the cost of chemicals used in the treatment process.
|
|
·
|
Utility costs increased due to higher power and communication costs. Communication costs increased primarily in the control services group, which uses remote sensors to monitor our systems’ performance.
|
|
·
|
Purchased water costs increased in the period due to an increase in water supplied by a neighboring utility in our Unionville system.
|
|
-
|
The Company saw an approximate 10.8% increase in its Depreciation expense due to an increase in the Company’s Utility Plant investment and a reduction in depreciation rates approved by the DPUC during the second quarter of 2009.
|
|
-
|
Income Tax expense associated with Water Activities increased due to the higher effective tax rate in 2010. The driver of the lower effective tax rate in 2009 was the recognition of state tax credits associated with infrastructure investment made by the Company.
|
|
-
|
Interest Expense increased by $551,000, or 24.1%, primarily due to the issuance of $20,000,000 in debt during December 2009. Additionally, interest and fees on the Company’s lines of credit increased due to higher balances throughout 2010 when compared to 2009.
|
Commitments and Contingencies
There were no material changes under this subheading to any of the other items previously disclosed by the Company in its Annual Report on Form 10-K for the period ended December 31, 2009.
Forward-Looking Information
Certain statements made in this Form 10-Q, (10-Q) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”) that are made based upon, among other things, our current assumptions, expectations and beliefs concerning future developments and their potential effect on us. These forward-looking statements involve risks, uncertainties and other factors, many of which are outside our control, which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. In some cases you can identify forward-looking statements where statements are preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “continue” or the negative of such terms or similar expressions. Forward-looking statements included in this 10-Q, include, but are not limited to, statements regarding:
|
·
|
projected capital expenditures and related funding requirements;
|
|
·
|
the availability and cost of capital;
|
|
·
|
developments, trends and consolidation in the water and wastewater utility industries;
|
|
·
|
dividend payment projections;
|
|
·
|
our ability to successfully acquire and integrate regulated water and wastewater systems, as well as unregulated businesses, that are complementary to our operations and the growth of our business;
|
|
·
|
the capacity of our water supplies, water facilities and wastewater facilities;
|
|
·
|
the impact of limited geographic diversity on our exposure to unusual weather;
|
|
·
|
the impact of conservation awareness of customers and more efficient plumbing fixtures and appliances on water usage per customer;
|
|
·
|
our capability to pursue rate increase requests on a timely successful basis;
|
|
·
|
our authority to carry on our business without unduly burdensome restrictions;
|
|
·
|
our ability to maintain our operating costs at the lowest possible level, while providing good quality water service;
|
|
·
|
our ability to obtain fair market value for condemned assets;
|
|
·
|
the impact of fines and penalties;
|
|
·
|
changes in laws, governmental regulations and policies, including environmental, health and water quality and public utility regulations and policies;
|
|
·
|
the decisions of governmental and regulatory bodies, including decisions to raise or lower rates;
|
|
·
|
our ability to successfully extend and expand our service contract work within our Service and Rentals Segment;
|
|
·
|
the development of new services and technologies by us or our competitors;
|
|
·
|
the availability of qualified personnel;
|
|
·
|
the condition of our assets;
|
|
·
|
the impact of legal proceedings;
|
|
·
|
general economic conditions;
|
|
·
|
the profitability of our Real Estate Segment, which is subject to the amount of land we have available for sale and/or donation, the demand for any available land, the continuation of the current state tax benefits relating to the donation of land for open space purposes and regulatory approval for land dispositions; and
|
|
·
|
acquisition-related costs and synergies.
|
Because forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including but not limited to:
|
·
|
changes in general economic, business, credit and financial market conditions;
|
|
·
|
changes in government regulations and policies, including environmental and public utility regulations and policies;
|
|
·
|
changes in environmental conditions, including those that result in water use restrictions;
|
|
·
|
unusual weather conditions;
|
|
·
|
increases in energy and fuel costs;
|
|
·
|
unfavorable changes to the federal and/or state tax codes;
|
|
·
|
significant changes in, or unanticipated, capital requirements;
|
|
·
|
significant changes in our credit rating or the market price of our common stock;
|
|
·
|
our ability to integrate businesses, technologies or services which we have acquired or may acquire;
|
|
·
|
our ability to manage the expansion of our business;
|
|
·
|
the extent to which we are able to develop and market new and improved services;
|
|
·
|
the continued demand by telecommunication companies for antenna site leases on our property;
|
|
·
|
the effect of the loss of major customers;
|
|
·
|
our ability to retain the services of key personnel and to hire qualified personnel;
|
|
·
|
labor disputes;
|
|
·
|
increasing difficulties in obtaining insurance and increased cost of insurance;
|
|
·
|
cost overruns relating to improvements or the expansion of our operations;
|
|
·
|
increases in the costs of goods and services;
|
|
·
|
civil disturbance or terroristic threats or acts; and
|
|
·
|
changes in accounting pronouncements.
|
Given these uncertainties, you should not place undue reliance on these forward-looking statements. You should read this 10-Q, the 2009 Annual Report on Form 10-K (10-K) and the documents that we incorporate by reference into the 10-K completely and with the understanding that our actual future results, performance and achievements may be materially different from what we expect. These forward-looking statements represent our assumptions, expectations and beliefs only as of the date of this 10-Q. Except for our ongoing obligations to disclose certain information under the federal securities laws, we are not obligated, and assume no obligation, to update these forward-looking statements, even though our situation may change in the future. For further information or other factors which could affect our financial results and such forward-looking statements, see Part I, Item 1A“Risk Factors” found in the 10-K. We qualify all of our forward-looking statements by these cautionary statements.
The primary market risk faced by the Company is interest rate risk. The Company has 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, variable long-term debt and short-term variable borrowings under financing arrangements entered into by the Company and its subsidiaries. The Company has $40.0 million of variable rate lines of credit with three banks, under which the interim bank loans payable at June 30, 2010 were approximately $27.9 million.
As of June 30, 2010, the Company had $22.05 million of variable-rate long-term debt outstanding. Holding other variables constant, including levels of indebtedness, a one-percentage point change in interest rates would impact pre-tax earnings by approximately $0.2 million, annually. The Company monitors its exposure to variable rate debt and will make future financing decisions as the need arises.
Evaluation of Disclosure Controls and Procedures
As of June 30, 2010, 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.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
During the first quarter of 2010, the Company implemented a new enterprise resource planning (ERP) system. The implementation of the ERP system involved changes to certain internal controls over financial reporting. Management has reviewed and evaluated the design of key controls in the new ERP system and the accuracy of the data conversion that took place during the implementation and thus far has not uncovered a control deficiency or combination of control deficiencies that management believes meet the definition of a material weakness in internal control over financial reporting. There is a risk such control deficiencies may exist that have not yet been identified and that could constitute, individually or in combination, a material weakness. Management will continue to evaluate the operating effectiveness of related key controls during subsequent periods.
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 the subject that presents a reasonable likelihood of a material adverse impact on the Company.
Information regarding risk factors appeared in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no material changes to our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
No stock repurchases were made during the quarter ended June 30, 2010.
|
Exhibit
Number
|
Description
|
||
| 3.1 |
Certificate of Incorporation of Connecticut Water Service, Inc. amended and restated as of April, 1998. (Exhibit 3.1 to Form 10-K for the year ended 12/31/98).
|
||
| 3.2 |
By Laws, as amended, of Connecticut Water Service, Inc. as amended and restated as of August 12, 1999. (Exhibit 3.2 to Form 10-K for the year ended 12/31/99).
|
||
| 3.3 |
Certification of Incorporation of The Connecticut Water Company effective April, 1998. (Exhibit 3.3 to Form 10-K for the year ended 12/31/98).
|
||
| 3.4 |
Certificate of Amendment to the Certificate of Incorporation of Connecticut Water Service, Inc. dated August 6, 2001 (Exhibit 3.4 to Form 10-K for the year ended 12/31/01).
|
||
| 3.5 |
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Connecticut Water Service, Inc. dated April 23, 2004. (Exhibit 3.5 to Form 10-Q for the quarter ended March 31, 2003).
|
||
| 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 | ** |
Certification of Eric W. Thornburg, Chief Executive Officer, and David C. Benoit, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
* filed herewith
|
|||
|
** furnished herewith
|
|||
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Connecticut Water Service, Inc.
(Registrant)
|
|
|
Date: August 6, 2010
|
By: /s/ David C. Benoit
David C. Benoit
Vice President – Finance and
Chief Financial Officer
|
|
Date: August 6, 2010
|
By: /s/ Nicholas A. Rinaldi
Nicholas A. Rinaldi
Controller
|