10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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þ |
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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 March 31, 2006 |
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM |
TO
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 offices)
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06413-1600
(Zip Code) |
(860) 669-8636
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer.
Large
accelerated filer o
Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
8,205,424
Number of shares of common stock outstanding, March 31, 2006
(Includes 56,007 common stock equivalent shares awarded under the Performance Stock Program)
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
Financial Report
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
March 31, 2006 and 2005
TABLE OF CONTENTS
Part I, Item 1: Financial Statements
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32
Page 3
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At March 31, 2006 and December 31, 2005
(In thousands)
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March 31, |
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Dec. 31, |
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2006 |
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2005 |
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(Unaudited) |
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(Unaudited) |
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ASSETS |
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Utility Plant |
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$ |
342,841 |
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$ |
340,755 |
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Construction Work in Progress |
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7,215 |
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5,505 |
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Utility Plant Acquisition Adjustments |
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(1,273 |
) |
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(1,273 |
) |
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|
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348,783 |
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344,987 |
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Accumulated Provision for Depreciation |
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(98,733 |
) |
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(97,284 |
) |
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Net Utility Plant |
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250,050 |
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247,703 |
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Other Property and Investments |
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4,489 |
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4,542 |
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Cash and Cash Equivalents |
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4,444 |
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4,439 |
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Restricted Cash |
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2,655 |
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2,628 |
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Accounts
Receivable (Less Allowance, 2006 $275; 2005 $256) |
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4,839 |
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5,888 |
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Accrued Unbilled Revenues |
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3,797 |
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3,918 |
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Materials and Supplies, at Average Cost |
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923 |
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860 |
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Prepayments and Other Current Assets |
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1,916 |
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1,274 |
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Short-Term Investments |
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6,863 |
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6,815 |
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Barlaco Assets Held for Sale |
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324 |
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Total Current Assets |
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25,437 |
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26,146 |
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Unamortized Debt Issuance Expense |
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7,709 |
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7,823 |
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Unrecovered Income Taxes |
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14,437 |
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12,986 |
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Post-retirement Benefits Other Than Pension |
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1,877 |
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1,595 |
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Goodwill |
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3,608 |
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3,608 |
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Deferred Charges and Other Costs |
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1,960 |
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1,632 |
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Total Regulatory and Other Long-Term Assets |
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29,591 |
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27,644 |
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Total Assets |
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$ |
309,567 |
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$ |
306,035 |
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CAPITALIZATION AND LIABILITIES |
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Common Stockholders Equity |
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$ |
94,663 |
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$ |
94,076 |
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Preferred Stock |
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|
847 |
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|
847 |
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Long-Term Debt |
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77,352 |
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77,404 |
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Total Capitalization |
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172,862 |
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172,327 |
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Current Portion of Long Term Debt |
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2,284 |
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2,331 |
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Interim Bank Loans Payable |
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7,500 |
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4,750 |
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Accounts Payable and Accrued Taxes, Interest and Other Expenses |
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3,099 |
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5,629 |
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Other Current Liabilities |
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443 |
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519 |
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Total Current Liabilities |
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13,326 |
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13,229 |
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Advances for Construction |
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30,488 |
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29,355 |
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Contributions in Aid of Construction |
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45,718 |
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45,709 |
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Deferred Federal and State Income Taxes |
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25,213 |
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24,915 |
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Unfunded Future Income Taxes |
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12,224 |
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11,273 |
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Long-term Compensation Arrangements |
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8,066 |
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7,541 |
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Unamortized Investment Tax Credits |
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1,670 |
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1,686 |
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Commitments and Contingencies
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Total Long-Term Liabilities |
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123,379 |
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120,479 |
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Total Capitalization and Liabilities |
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$ |
309,567 |
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$ |
306,035 |
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|
The accompanying notes are an integral part of these financial statements.
Page 4
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At March 31, 2006 and December 31, 2005
(In thousands, except share data)
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March 31, |
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Dec. 31, |
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2006 |
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2005 |
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(Unaudited) |
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(Unaudited) |
|
Common Stockholders Equity |
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Common Stock Without Par Value Authorized 15,000,000 Shares; |
|
$ |
60,144 |
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|
$ |
59,604 |
|
Shares
Issued and Outstanding: 2006 8,205,424 ; 2005 8,169,627
|
|
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Stock Issuance Expense |
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(1,599 |
) |
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(1,599 |
) |
Retained Earnings |
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35,764 |
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35,777 |
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Accumulated Other Comprehensive Income |
|
|
354 |
|
|
|
294 |
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|
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Total Common Stockholders Equity |
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94,663 |
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94,076 |
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Preferred 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
Outstanding 15,000 Shares, Redeemable at $21.00 Per Share |
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300 |
|
|
|
300 |
|
Series $.90 Non-Voting, $16 Par Value; Authorized 50,000 Shares
Issued and Outstanding 29,499 Shares, Redeemable at $16.00 Per Share |
|
|
472 |
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|
472 |
|
|
|
|
|
|
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Total Preferred Stock of Connecticut Water Service, Inc. |
|
|
772 |
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|
772 |
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|
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Cumulative Preferred Stock of Barnstable Water Company |
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Voting, $100 Par Value; Authorized, Issued and Outstanding
750 shares. Redeemable at $105 per share. |
|
|
75 |
|
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|
75 |
|
|
|
|
|
|
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|
Total Preferred Stock |
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847 |
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|
847 |
|
|
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|
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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 |
|
|
9,640 |
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|
9,640 |
|
5.125% 1998 Series B, due 2028 |
|
|
7,635 |
|
|
|
7,685 |
|
4.40% 2003A Series, due 2020 |
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|
8,000 |
|
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|
8,000 |
|
5.00% 2003C Series, due 2022 |
|
|
14,930 |
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|
14,930 |
|
Var. 2004 Series Variable Rate, due 2029 |
|
|
12,500 |
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|
|
12,500 |
|
Var. 2004 Series A, due 2028 |
|
|
5,000 |
|
|
|
5,000 |
|
Var. 2004 Series B, due 2028 |
|
|
4,550 |
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|
4,550 |
|
5.00% 2005 A Series, due 2040 |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
|
|
|
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Total Connecticut Water Company |
|
|
72,255 |
|
|
|
72,305 |
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|
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Crystal Water Utilities Corporation |
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|
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|
8.0% New London Trust, Due 2017 |
|
|
104 |
|
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|
105 |
|
|
|
|
|
|
|
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|
|
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Crystal Water Company of Danielson |
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5.00% Unsecured Water Facilities Revenue Bonds 2005 A Series, Due 2040 |
|
|
5,000 |
|
|
|
5,000 |
|
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|
|
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Chester Realty |
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6% Note Payable, Due 2006 |
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12 |
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|
12 |
|
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Unionville Water Company |
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8.125% Farmington Savings Bank, Due 2011 |
|
|
810 |
|
|
|
842 |
|
3.56% State of Connecticut, Due 2023 |
|
|
1,455 |
|
|
|
1,471 |
|
|
|
|
|
|
|
|
Total Unionville |
|
|
2,265 |
|
|
|
2,313 |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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Total Connecticut Water Service, Inc. |
|
|
79,636 |
|
|
|
79,735 |
|
|
|
|
|
|
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Less Current Portion |
|
|
(2,284 |
) |
|
|
(2,331 |
) |
|
|
|
|
|
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|
Total Long-Term Debt |
|
|
77,352 |
|
|
|
77,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization |
|
$ |
172,862 |
|
|
$ |
172,327 |
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|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
Page 5
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2006 and 2005
(In thousands, except per share amounts)
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|
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|
2006 |
|
|
2005 |
|
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|
(Unaudited) |
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(Unaudited) |
|
Operating Revenues |
|
$ |
10,458 |
|
|
$ |
10,924 |
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Operating Expenses |
|
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|
|
|
|
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Operation and Maintenance |
|
|
6,121 |
|
|
|
5,158 |
|
Depreciation |
|
|
1,464 |
|
|
|
1,435 |
|
Income Taxes |
|
|
106 |
|
|
|
771 |
|
Taxes Other Than Income Taxes |
|
|
1,384 |
|
|
|
1,329 |
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
9,075 |
|
|
|
8,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Utility Operating Income |
|
|
1,383 |
|
|
|
2,231 |
|
|
|
|
|
|
|
|
Other Income, Net of Taxes |
|
|
|
|
|
|
|
|
Gain on Property Transactions |
|
|
924 |
|
|
|
261 |
|
Non-Water Sales Earnings |
|
|
272 |
|
|
|
220 |
|
Allowance for Funds Used During Construction |
|
|
148 |
|
|
|
121 |
|
Other |
|
|
144 |
|
|
|
39 |
|
|
|
|
|
|
|
|
Total Other Income, Net of Taxes |
|
|
1,488 |
|
|
|
641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Debt Expense |
|
|
|
|
|
|
|
|
Interest on Long-Term Debt |
|
|
914 |
|
|
|
670 |
|
Other Interest Charges |
|
|
166 |
|
|
|
117 |
|
Amortization of Debt Expense |
|
|
94 |
|
|
|
88 |
|
|
|
|
|
|
|
|
Total Interest and Debt Expense |
|
|
1,174 |
|
|
|
875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
|
1,697 |
|
|
|
1,997 |
|
Discontinued Operations, Net of Tax of $13, and $
(3) in 2006 and 2005 respectively |
|
|
19 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
Net Income |
|
|
1,716 |
|
|
|
1,985 |
|
|
|
|
|
|
|
|
|
|
Preferred Stock Dividend Requirement |
|
|
9 |
|
|
|
9 |
|
|
|
|
|
|
|
|
Net Income Applicable to Common Stock |
|
$ |
1,707 |
|
|
$ |
1,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
8,183 |
|
|
|
8,047 |
|
Diluted |
|
|
8,201 |
|
|
|
8,084 |
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share: |
|
|
|
|
|
|
|
|
Basic-Continuing Operations |
|
$ |
0.21 |
|
|
$ |
0.25 |
|
Basic-Discontinued Operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
Basic-Total |
|
$ |
0.21 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
Diluted-Continuing Operations |
|
$ |
0.21 |
|
|
$ |
0.25 |
|
Diluted-Discontinued Operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
Diluted-Total |
|
$ |
0.21 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
Dividends Per Common Share |
|
$ |
0.2125 |
|
|
$ |
0.2100 |
|
The accompanying notes are an integral part of these financial statements.
Page 6
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2006 and 2005
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Net Income Applicable to Common Stock |
|
$ |
1,707 |
|
|
$ |
1,976 |
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income, net of tax |
|
|
|
|
|
|
|
|
Qualified Cash Flow Hedging Instrument Benefit,
net of tax expense of $47 in 2006;
$115 in 2005 |
|
|
60 |
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
1,767 |
|
|
$ |
2,148 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
Page 7
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the Three Months Ended March 31, 2006 and 2005
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Balance at Beginning of Period |
|
$ |
35,777 |
|
|
$ |
32,264 |
|
Net Income Before Preferred Dividends of Parent |
|
|
1,716 |
|
|
|
1,985 |
|
|
|
|
|
|
|
|
|
|
|
37,493 |
|
|
|
34,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Declared: |
|
|
|
|
|
|
|
|
Cumulative Preferred, Class A, $.20 per share |
|
|
3 |
|
|
|
3 |
|
Cumulative Preferred, Series $.90, $.225 per
share |
|
|
6 |
|
|
|
6 |
|
Common Stock - 2006 $.2125 per share; 2005
$.21 per share |
|
|
1,720 |
|
|
|
1,678 |
|
|
|
|
|
|
|
|
|
|
|
1,729 |
|
|
|
1,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Period |
|
$ |
35,764 |
|
|
$ |
32,562 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
Page 8
Connecticut Water Service, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2006 and 2005
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1,716 |
|
|
$ |
1,985 |
|
Discontinued Operations |
|
|
19 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
Income from Continuing Operations |
|
|
1,697 |
|
|
|
1,997 |
|
|
|
|
|
|
|
|
|
|
Adjustments to Reconcile Net Income to Net Cash
|
|
|
|
|
|
|
|
|
Provided by Operating Activities: |
|
|
|
|
|
|
|
|
Gain on Sale
of Barlaco Assets Held for Sale |
|
|
(921 |
) |
|
|
|
|
Allowance for Funds Used During Construction |
|
|
(181 |
) |
|
|
(134 |
) |
Depreciation (including $68 in 2006, $46 in 2005 charged to other accounts) |
|
|
1,532 |
|
|
|
1,482 |
|
Change in Assets and Liabilities: |
|
|
|
|
|
|
|
|
Decrease in Accounts Receivable and Accrued Unbilled Revenues |
|
|
1,170 |
|
|
|
257 |
|
(Increase) Decrease in Other Current Assets |
|
|
(460 |
) |
|
|
2,336 |
|
Decrease in Other Non-Current Items |
|
|
52 |
|
|
|
90 |
|
Decrease in Accounts Payable, Accrued Expenses and
Other Current Liabilities |
|
|
(1,469 |
) |
|
|
(4,966 |
) |
Increase in Deferred Income Taxes and
Investment Tax Credits, Net |
|
|
(218 |
) |
|
|
143 |
|
|
|
|
|
|
|
|
Total Adjustments |
|
|
(495 |
) |
|
|
(792 |
) |
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Provided by (Used in) Continuing Operations |
|
|
1,202 |
|
|
|
1,206 |
|
Net Cash and Cash Equivalents Provided by (Used in) Discontinued Operations |
|
|
19 |
|
|
|
145 |
|
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Provided by (Used in) Operating Activities |
|
|
1,222 |
|
|
|
1,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Company Financed Additions to Utility Plant |
|
|
(3,687 |
) |
|
|
(2,239 |
) |
Advances from Others for Construction |
|
|
(735 |
) |
|
|
(127 |
) |
|
|
|
|
|
|
|
Net Additions to Utility Plant Used in Continuing Operations |
|
|
(4,422 |
) |
|
|
(2,366 |
) |
Proceeds from Sale of Barlaco Assets Held for Sale (Net of $3 in Transaction Costs) |
|
|
997 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Used in Investing Activities in Continuing Operations |
|
|
(3,425 |
) |
|
|
(2,366 |
) |
Net Cash and Cash Equivalents Used in Investing Activities in Discontinued Operations |
|
|
|
|
|
|
(34 |
) |
|
|
|
|
|
|
|
Net Cash Used in Investing Activities |
|
|
(3,425 |
) |
|
|
(2,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Net Proceeds from Interim Bank Loans |
|
|
7,500 |
|
|
|
8,650 |
|
Net Repayment of Interim Bank Loans |
|
|
(4,750 |
) |
|
|
(5,650 |
) |
Proceeds from Issuance of Common Stock |
|
|
540 |
|
|
|
604 |
|
Repayment of Long-Term Debt Including Current Portion |
|
|
(99 |
) |
|
|
(49 |
) |
Costs Incurred to Issue Long-Term Debt and Common Stock |
|
|
20 |
|
|
|
43 |
|
Advances from Others for Construction |
|
|
735 |
|
|
|
127 |
|
Cash Dividends Paid |
|
|
(1,737 |
) |
|
|
(1,688 |
) |
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Provided by Financing Activities in Continuing Operations |
|
|
2,209 |
|
|
|
2,037 |
|
Net Cash and Cash Equivalents (Used in) Financing Activities in Discontinued Operations |
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
|
Net Cash and Cash Equivalents Provided by Financing Activities in Financing Activities |
|
|
2,209 |
|
|
|
1,960 |
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents |
|
|
5 |
|
|
|
910 |
|
Cash and Cash Equivalents at Beginning of Year |
|
|
4,439 |
|
|
|
707 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year |
|
$ |
4,444 |
|
|
$ |
1,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Investing and Financing Activities |
|
|
|
|
|
|
|
|
Non-Cash Contributed Utility Plant |
|
$ |
426 |
|
|
$ |
42 |
|
Short-term Investment of Bond Proceeds Held in Restricted Cash |
|
$ |
28 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash Paid for Continuing Operations During the Year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,471 |
|
|
$ |
1,218 |
|
State and Federal Income Taxes |
|
$ |
124 |
|
|
$ |
116 |
|
Cash Paid for Discontinued Operations During the Year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
|
|
|
$ |
67 |
|
State and Federal Income Taxes |
|
$ |
1 |
|
|
$ |
15 |
|
The accompanying notes are an integral part of these financial statements.
Page 9
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and the notes thereto
included in the Companys latest annual report on Form 10-K for the period ended December 31, 2005.
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.
Certain reclassifications have been made to conform previously reported data to the current
presentation.
Within the Statements of Cash Flows we have revised the classification of certain items to
more clearly reflect the Developer Advances and Contributions that regularly occurred within the
regulated water subsidiaries for 2005. The non-cash contribution of completed utility plant by
developers to the Company has been eliminated from both Investing Activities and Financing
Activities. In addition, we have eliminated AFUDC and any accrual of construction costs that had
been included in the Operating Activities and Investing Activities sections of the Statements of
Cash Flows. The resulting revised classifications have no effect on Net Increase (Decrease) in
Cash and Cash Equivalents during the period.
2. Stock-Based Compensation
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS 123R). SFAS 123R replaces SFAS No. 123, Accounting for
Stock-Based Compensation and supersedes Accounting Principals Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. The Company adopted the provisions of SFAS 123R as of
January 1, 2006 using the modified prospective transition method, which does not require
restatement of prior year results. The resulting impact on the income statement for the period
ended March 31, 2006 is approximately $15,000, net of taxes of $12,000. SFAS 123R requires that
all share-based payments to employees, including grants of stock options, be recognized as
compensation expense in the financial statements based on their fair value.
Prior to January 1, 2006, the Company followed APB 25 and the disclosure requirements for SFAS
123(R) with pro forma disclosures of net income and earnings per share, as if the fair value-based
method of accounting as defined in SFAS 123 has been applied. The Companys consolidated financial
statements as of and for the first quarter of 2006 reflect the impact of adopting SFAS 123(R). The
total compensation cost related to non-vested stock option awards not yet recognized is
an expense of approximately $80,000, net of tax. These costs are expected to be
recognized over the next two
years.
The Companys 2004 Performance Stock Program (2004 PSP), approved by shareholders in 2004,
authorizes the issuance of up to 700,000 shares of Company Common stock. As of March 31, 2006,
there were 644,270 shares available for grant. In total, under the original Plans (1994 Plans)
there were 700,000 shares authorized. There are no shares available for grant under the original
plan. There are four forms of awards under the 2004 PSP. Stock Options are one form of award.
The Company has not issued any stock options since 2003, and does not anticipate issuing any more
for the foreseeable future. The other three forms of award which the Company has continued to
issue are: Restricted Stock, Performance Shares and Cash Units.
For purposes of calculating the fair value of each stock grant at the date of grant, the
Company used the Black Scholes Option Pricing model. Under the plan, options begin to become
exercisable one year from the date of grant. Vesting periods range from one to five years. The
maximum term ranges from
Page 10
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
five to ten years.
The following table illustrates the effect on Net Income and Earnings Per Share if the Company
had applied the fair value recognition provisions of SFAS 123(R) to the stock-based employee
compensation for the three months ended March 31, 2005.
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2005 |
|
(in thousands, except for per share data) |
|
|
|
|
Net income available to common shareholders |
|
$ |
1,976 |
|
Add: Total stock-based employee compensation expense
determined under intrinsic value based method
for all awards, net of $126 in related tax effects |
|
|
84 |
|
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of $160 in related tax effects |
|
|
(107 |
) |
|
|
|
|
Pro forma net income |
|
$ |
1,953 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
Basic Total, as reported |
|
$ |
0.25 |
|
Basic Total, pro forma |
|
$ |
0.24 |
|
|
|
|
|
|
Diluted Total, as reported |
|
$ |
0.24 |
|
Diluted Total, pro forma |
|
$ |
0.24 |
|
A summary of option activity under the Companys Stock Option Program as of March 31, 2006,
and changes during the period ended March 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
Options |
|
Shares |
|
|
Price |
|
|
Life |
|
|
Value |
|
Outstanding at January 1, 2006 |
|
|
202,271 |
|
|
$ |
24.04 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
202,271 |
|
|
$ |
24.04 |
|
|
5.2 years |
|
$ |
601,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
175,685 |
|
|
$ |
23.44 |
|
|
5.0 years |
|
$ |
597,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys non-vested shares as of March 31, 2006 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
Non-vested Shares |
|
Shares |
|
|
Price |
|
Non-vested at January 1, 2006 |
|
|
97,346 |
|
|
$ |
27.90 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2006 |
|
|
97,346 |
|
|
$ |
27.90 |
|
|
|
|
|
|
|
|
3. Pension and Other Postretirement Benefits
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
|
|
|
Components of Net Periodic Cost |
|
|
|
|
|
|
Three months ended March 31 |
|
2006 |
|
|
2005 |
|
Service Cost |
|
$ |
307 |
|
|
$ |
274 |
|
Interest Cost |
|
|
420 |
|
|
|
381 |
|
Page 11
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
|
|
|
Components of Net Periodic Cost |
|
|
|
|
|
|
Three months ended March 31 |
|
2006 |
|
|
2005 |
|
Expected Return on Plan Assets |
|
|
(459 |
) |
|
|
(411 |
) |
Amortization of Transition Obligation |
|
|
1 |
|
|
|
3 |
|
Amortization of Prior Service Cost |
|
|
19 |
|
|
|
24 |
|
Amortization of Net (Gain) Loss |
|
|
122 |
|
|
|
68 |
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
410 |
|
|
$ |
339 |
|
|
|
|
|
|
|
|
The Company
plans to make in the third quarter its expected contribution of $2,450,000 for plan year 2005. In
2007, the Company anticipates it will make a contribution of approximately $3,000,000 for plan year
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits |
|
|
|
|
|
|
Components of Net Periodic Cost |
|
Connecticut Water |
|
|
Barnstable Water |
|
Three months ended March 31 |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service Cost |
|
$ |
135 |
|
|
$ |
100 |
|
|
$ |
|
|
|
$ |
|
|
Interest Cost |
|
|
111 |
|
|
|
93 |
|
|
|
1 |
|
|
|
2 |
|
Expected Return on Plan Assets |
|
|
(45 |
) |
|
|
(43 |
) |
|
|
|
|
|
|
|
|
Amortization of Transition Obligation |
|
|
30 |
|
|
|
30 |
|
|
|
|
|
|
|
2 |
|
Recognized Net (Gain) Loss |
|
|
51 |
|
|
|
28 |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost, Prior to
FAS 88 Event |
|
|
282 |
|
|
|
208 |
|
|
|
|
|
|
|
3 |
|
Additional Amount Recognized Due to
Settlement or Curtailment |
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
282 |
|
|
$ |
208 |
|
|
$ |
30 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has concluded that the postretirement welfare plans benefits will be considered
actuarially equivalent to the benefits provided by Medicare Part D. The Company does not intend to
apply for the government subsidy for postretirement prescription drug benefits, even though it
expects to be eligible. Therefore, the impact of the subsidy on the plans liabilities is not
reflected in the March 31, 2006 disclosure.
4. Earnings per Share
Earnings per average common share are calculated by dividing net income applicable to common
stock by the average number of shares of common stock outstanding during the respective periods as
detailed below (diluted shares include the effect of unexercised stock options):
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended |
|
|
|
03/31/06 |
|
|
03/31/05 |
|
Common Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period: |
|
|
8,205,424 |
|
|
|
8,067,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding: |
|
|
|
|
|
|
|
|
|
Days outstanding basis |
|
|
|
|
|
|
|
|
Basic |
|
|
8,183,193 |
|
|
|
8,047,016 |
|
|
|
|
|
|
|
|
Diluted |
|
|
8,201,260 |
|
|
|
8,084,124 |
|
|
|
|
|
|
|
|
5. Accounting Pronouncements
In November 2005, the FASB released FSP No. FAS 123(R)-3, Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards. FSP No. FAS 123(R)-3 provides a
practical transition election related to accounting for the tax effects of share-based payment
awards to employees. Specifically, FSP No. 123(R)-3 allows an entity to apply either the
accounting treatment of the tax effects of share-based payment awards to employees as prescribed by
SFAS No. 123(R) or the alternative transition method prescribed by FSP No. 123(R)-3. An entity may
take up to one year from the later of its initial adoption of SFAS No. 123(R) or the effective date
of FSP No. FAS 123(R)-3 to evaluate its available transition alternatives and make a one-time
Page 12
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
election. Until and unless an entity elects the transition method described in FSP No. FAS
123(R)-3, the entity should follow the transition method described in SFAS No. 123(R). We are in
the process of evaluating these available transition alternatives.
In February 2006, the FASB released FSP No. FAS 123(R)-4, Classification of Options and
Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement Upon the
Occurrence of a Contingent Event. FSP No. 123(R)-4 addresses the classification of options and
similar instruments issued as employee compensation that allow for cash settlement upon the
occurrence of a contingent event and amends paragraphs 32 and A229 of SFAS No. 123(R). SFAS 123(R)
requires all entities to recognize the fair value of share-based payment awards classified in
equity, unless they are unable to reasonably estimate the fair value of the award. We use the fair
value method for share-based payment awards and therefore the provisions of SFAS No. 123(R)-4 will
have no impact on the Consolidated Financial Statements.
In February 2006, the FASB released SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, effective for all financial instruments acquired or issued after
the beginning of an entitys first fiscal year that begins after September 15, 2006. SFAS No. 155
permits fair value re-measurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation and clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No. 133. Additionally, SFAS No.
155 establishes a requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation and clarifies that concentrations of credit risk in
the form of subordination are not embedded derivatives. SFAS No. 155 also amends SFAS No. 140 to
eliminate the prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument. We believe that there will be no material effect on the Companys financial
position or results of operations upon the adoption of this interpretation.
In March 2006, the FASB released SFAS No. 156, Accounting for Servicing of Financial Assets,
an amendment of FASB Statement No. 140. SFAS No. 140 establishes, among other things, the
accounting for all separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if practible. This Statement permits, but does not require, the subsequent
measurement of separately recognized servicing assets and servicing liabilities at fair value.
Under this Statement, an entity can elect subsequent fair value measurement to account for its
separately recognized servicing assets and servicing liabilities. Adoption of this Statement is
required as of the beginning of the first fiscal year that begins after September 15, 2006. We
believe that there will be no material effect on the Companys financial position or results of
operations upon the adoption of this interpretation.
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
of dollars:
Three Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from |
|
|
|
|
|
|
|
Pre-tax |
|
|
|
|
|
|
Continuing |
|
Segment |
|
Revenues |
|
|
Income |
|
|
Income Tax |
|
|
Operations |
|
Water Activities |
|
$ |
10,458 |
|
|
$ |
639 |
|
|
$ |
138 |
|
|
$ |
501 |
|
Real Estate
Transactions |
|
|
1,005 |
|
|
|
594 |
|
|
|
(330 |
) |
|
|
924 |
|
Services & Rentals |
|
|
1,160 |
|
|
|
453 |
|
|
|
181 |
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,623 |
|
|
$ |
1,686 |
|
|
$ |
(11 |
) |
|
$ |
1,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 13
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
Three Months Ended March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from |
|
|
|
|
|
|
|
Pre-tax |
|
|
|
|
|
|
Continuing |
|
Segment |
|
Revenues |
|
|
Income |
|
|
Income Tax |
|
|
Operations |
|
Water Activities |
|
$ |
10,924 |
|
|
$ |
2,288 |
|
|
$ |
772 |
|
|
$ |
1,516 |
|
Real Estate
Transactions |
|
|
475 |
|
|
|
427 |
|
|
|
166 |
|
|
|
261 |
|
Services & Rentals |
|
|
937 |
|
|
|
361 |
|
|
|
141 |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,336 |
|
|
$ |
3,076 |
|
|
$ |
1,079 |
|
|
$ |
1,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Sale of Barnstable Water Company Assets Discontinued Operations
On May 20, 2005, the Company completed the sale of the assets of one of its Massachusetts
subsidiaries, the Barnstable Water Company (BWC), to the Town of Barnstable, Massachusetts. Upon
the closing of the deal, the Town of Barnstable and BWC entered into a one year management contract
for BWC to provide the Town with full operating and management services for the water systems
operations. Under the terms of the one year management contract, BWC was paid $130,000 a month for
operating and management services performed by BWC for the Town of Barnstable. This management
contract could be terminated within the 12 month period by 30 days written notice by either party.
In January 2006, the Company received notice of termination. The management contract was
terminated on February 7, 2006.
The Company received $10.0 million in gross proceeds from the sale of its water utility
assets, advances, and contribution in aid of construction. The gain, net of income taxes of $1.6
million, was $3.0 million in 2005 and has been included in Net Income from Discontinued Operations.
The sale of BWCs assets has been classified as Discontinued Operations in the Consolidated
Statements of Income as there will be no continuing involvement due to the termination of the
management contract with the Town of Barnstable. All of the results of BWC, including current and
prior years and the gain on the sale of the utilitys assets, have been reclassified and are
included as Discontinued Operations.
8. Sale of Barlaco Assets
The agreement the Town entered into with the Company to purchase the BWC assets also included
a provision whereby the Town would acquire all the land owned by BARLACO, another of our
Massachusetts subsidiaries, for an additional $1,000,000. The BARLACO land was sold in February.
The land has been valued at approximately $6.9 million. The Company intends to file its corporate
income tax return with a charitable contribution related to the bargain sale. As such the Company
has recorded a net tax benefit relating to the bargain sale of approximately $330,000 and an after
tax profit of approximately $900,000.
Part I, Item 2: Managements Discussion and Analysis of Financial Condition
and Results of Operations
Regulatory Matters and Inflation
During the three months ended March 31, 2006, there were no material changes under this
subheading to any items previously disclosed by the Company
Page 14
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
in its Annual Report on Form 10-K for the period ended December 31, 2005.
In February 2006, the Company filed an application with the DPUC to merge all of its
Connecticut subsidiaries into Connecticut Water. On April 20, 2006, the DPUC approved these
mergers. The Company intends to complete these mergers on or before June 30, 2006. The Company
anticipates it will apply for a rate increase for Connecticut Water during the summer of 2006.
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 regulatory commissions to
which the Companys subsidiaries are subject. Significant accounting policies employed by the
Company, including the use of estimates, were presented in the Notes to Consolidated Financial
Statements of the Companys Annual Report on Form 10-K.
Critical accounting policies are those that are the most important to the presentation of the
Companys financial condition and results of operations. The application of such accounting
policies requires managements most difficult, subjective, and complex judgments and involves
uncertainties and assumptions. The Companys most critical accounting policies pertain to public
utility regulation related to Financial Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation (FAS 71), revenue recognition, and pension plan accounting. Each of
these accounting policies and the application of critical accounting policies and estimates was
discussed in the Companys Annual Report on Form 10-K for the year ended December 31, 2005. There
were no significant changes in the application of critical accounting policies or estimates during
the first quarter of 2006.
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 Companys 2005 Form 10-K
filing on March 31, 2006.
The Companys earnings and profitability are primarily dependent upon the sale and
distribution of water, the amount of which is dependent on seasonal weather fluctuations,
particularly during the summer months when water demand will vary with rainfall and temperature
levels. The Companys earnings and profitability in current and future years will also depend upon
a number of other factors, such as the ability to maintain our operating costs at lower levels,
customer growth in the Companys core regulated water utility business, growth in revenues
attributable to non-water sales operations, and the timing and adequacy of rate relief when
requested, from time to time by our regulated water companies.
The Company believes that the factors described above, as well as those described in
Commitments and Contingencies in Item 7 of its Annual Report on Form 10-K may have significant
impact, either alone or in the aggregate, on the Companys earnings and profitability in fiscal
years 2006 and beyond. Please also review carefully the risks and uncertainties described below
under the heading Forward Looking Information.
Page 15
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
Based upon the Companys current projections, it believes that its Net Income from Continuing
Operations for the year 2006, excluding the gain from the sale of BARLACO assets in February 2006,
will be materially reduced from the income levels reported for the years 2003, 2004 and 2005. This
reduction will likely be primarily attributable to lower net income (in the form of reduced tax
benefits) related to the Companys land disposition program, excluding the BARLACO land sale.
Since the sale of the assets of BWC, the results of operations for BWC have been included in
discontinued operations, including any income earned under the management contract which terminated
on February 7, 2006. In addition, the regulated water company subsidiaries increased operating
costs, including depreciation on their investments in utility plant, will require the Companys
primary subsidiary, The Connecticut Water Company, to seek rate relief in 2006. Based upon
appropriate recovery of these costs in a timely manner based upon a rate increase application
expected to be filed in the summer of 2006, and taking into account the other factors discussed
impacting the profitability and earnings, the Company believes that its net income should return to
levels achieved in recent years. However, there can be no assurance that the Company will be able
to recover costs in an appropriate and timely manner in this rate proceeding.
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 capital resources.
Interim Bank Loans Payable at March 31, 2006 were $7,500,000.
We consider the current $15,500,000 lines of credit with four banks adequate to finance any
expected short-term borrowing requirements that may arise during the next twelve months. All the
line have one-year lives and will expire on different dates in 2006. We expect to renew the lines
in 2006. Interest expense charged on interim bank loans will fluctuate based on market interest
rates.
Results of Operations
The following factors had a significant effect upon the Companys net income for the three
months ended March 31, 2006 as compared with the net income for the same period last year.
Income from continuing operations for the three months ended March 31, 2006 decreased from
that of the prior year by $300,000, which reduced earnings from continuing operations per basic
average common share by $0.04 to $0.21. This decrease in income is broken down by business segment
as follows:
|
|
|
|
|
|
|
Increase |
|
|
|
(Decrease) |
|
Business Segment |
|
Income |
|
Water Activities |
|
$ |
(1,015,000 |
) |
Real Estate Transactions |
|
|
663,000 |
|
Services and Rentals |
|
|
52,000 |
|
|
|
|
|
Total |
|
$ |
(300,000 |
) |
|
|
|
|
The
$1,015,000 decrease in the Water Activity segments net income was
Page 16
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
primarily due to the net effects of variances listed below.
- a $465,000 decrease in Operating Revenue primarily due to lower billed consumption in 2006
as compared to the same period last year.
|
|
- |
a $962,000 increase in Operation and Maintenance expense due primarily due to the
following expense increases: |
|
|
|
|
|
Employee Benefit Costs |
|
$ |
300 |
|
Labor |
|
|
285 |
|
Adjustments related to changes in the Companys stock price |
|
|
161 |
|
Utility Costs |
|
|
118 |
|
Other |
|
|
98 |
|
|
|
|
|
Total |
|
$ |
962 |
|
|
|
|
|
- a $300,000 increase in Interest and Debt Expense due primarily to two new long-term debt
issuances in the fourth quarter of 2005 and higher interest rates on the variable rate debt.
- partially offset by a $665,000 decrease in Operating Income Tax Expense primarily due to
lower pretax net income and a lower effective tax rate due to flow though accounting related to
book/tax timing differences.
The $663,000 increase in the Real Estate Segment is primarily due to the sale of the Barlaco
land that was sold to the Town of Barnstable in February 2006.
The $52,000 increase in the Services and Rentals segments net income was primarily due to
higher revenues from the Companys Linebacker® Service Line Maintenance program and
antenna site leases.
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, 2005.
Forward Looking Information
This report, including managements discussion and analysis, contains certain forward-looking
statements regarding the Companys results of operations and financial position. These
forward-looking statements are based on current information and expectations, and are subject to
risks and uncertainties, which could cause the Companys actual results to differ materially from
expected results.
Our water companies are subject to various federal and state regulatory agencies concerning
water quality and environmental standards. Generally, the water industry is materially dependent
on the adequacy of approved rates to allow for a fair rate of return on the investment in utility
plant. The ability to maintain our operating costs at the lowest possible level, while providing
good quality water service, is beneficial to customers and stockholders. Profitability is also
dependent on the timeliness and amount of rate relief, when necessary, and numerous factors over
which we have little or no control, such as the quantity of rainfall and temperature, industrial
demand, financing costs, energy rates, tax rates, stock market trends which may affect the return
earned on pension assets, and compliance with environmental and water quality regulations. The
profitability of our other revenue sources is subject to the amount of land we have available for
sale and/or donation, the demand for the land, the continuation of the current state tax benefits
relating to the donation of land for open space purposes, regulatory approval of land dispositions,
the demand for telecommunications antenna site leases and the successful extensions and expansion
of our service contract work. We undertake no obligation to update or revise forward-looking
statements, whether
Page 17
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
as a result of new information, future events, or otherwise.
Part I, Item 3: Quantitative and Qualitative Disclosure About Market Risk
The primary market risk faced by the Company is interest rate risk. The Company has exposure
to derivative financial instruments through an interest rate swap agreement. The Company has no
other financial instruments with significant credit risk or off-balance sheet risks and is not
subject in any material respect to any currency or other commodity risk.
The Company is subject to the risk of fluctuating interest rates in the normal course of
business. The Companys exposure to interest fluctuations is managed at the Company and subsidiary
operations levels through the use of a combination of fixed rate long-term debt, variable long-term
debt and short-term variable borrowings under financing arrangements entered into by the Company
and its subsidiaries and its use of the interest rate swap agreement discussed below. The Company
has $15,500,000 of variable rate lines of credit with four banks, under which interim bank loans
payable at March 31, 2006 were $7,500,000.
During March 2004, The Connecticut Water Company entered into a five-year interest rate swap
transaction in connection with the refunding of its First Mortgage Bonds (Series V). The swap
agreement provides for The Connecticut Water Companys exchange of floating rate interest payment
obligations for fixed rate interest payment obligations on a notional principal amount of
$12,500,000. The purpose of the interest rate swap is to manage the Companys exposure to
fluctuations in prevailing interest rates. The Company does not enter into derivative financial
contracts for trading or speculative purposes and does not use leveraged instruments.
Management does not believe that changes in interest rates will have a material effect on
income or cash flow during the next twelve months, although there can be no assurances that
interest rates will not significantly change.
Part I, Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of March 31, 2006, management, including the Companys Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in Rule 13a-14(c) and 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 disclosure controls and procedures were effective, in all material respects, to
ensure that information required to be disclosed in the reports the Company files and submits under
the Securities Exchange Act of 1934 is accumulated and communicated to management, including the
Companys Chief Executive Officer and Chief Financial Officer as appropriate to allow timely
decisions regarding disclosure to be made within the time periods specified in the SECs rules and
forms.
Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the quarter ending March 31, 2006 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
Because of its inherent limitations, internal control over financial
Page 18
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Part II, Item 1: Legal Proceedings
We are involved in various legal proceedings. 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.
Part II, Item 1A: Risk Factors
Information regarding risk factors appeared in Item 1A of Part I of our Report on Form 10-K
for the fiscal year ended December 31, 2005. There have been no material changes to our risk
factors from those disclosed in our Annual Report of Form 10-K for the fiscal year ended December
31, 2005.
Part II, Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
No stock repurchases were made during the quarter ended March 31, 2006.
Part II, Item 5: Other Information
On November 2, 2005, the Company announced an interim agreement with the University of
Connecticut (the University) where the Company, through its wholly owned subsidiary New England
Water Utility Services, Inc., will operate and manage the Universitys water systems at the Storrs,
CT campus through May 1, 2006. Under the terms of the agreement, the Company will provide an
on-site project manager to direct the operation of the water system at the Storrs campus to meet
regulatory compliance. The Company will provide guidance and direction on the water system
operations including a review of the Universitys water system, recommendations on capital
improvements and major maintenance projects, and conducting a leak detection survey of the water
systems. This agreement has been extended until July 1, 2006. This agreement expands upon
services that the Company has been providing to the University over the past two years.
Page 19
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
Part II, Item 6: Exhibits
|
|
|
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.) |
|
|
|
10.1*
|
|
First Amendment to Reimbursement and Credit Agreement, dated as of April 28, 2006, between
The Connecticut Water Company and Citizens Bank of Rhode Island, 2004A Series. |
|
|
|
10.2*
|
|
First Amendment to Reimbursement and Credit Agreement, dated as of April 28, 2006, between
The Connecticut Water Company and Citizens Bank of Rhode Island, 2004B Series. |
|
|
|
10.3*
|
|
First Amendment to Reimbursement and Credit Agreement, dated as of April 28, 2006, between
The Connecticut Water Company and Citizens Bank of Rhode Island, 2004 Series Variable Rate,
due 2029. |
|
|
|
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. |
Page 20
CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES
SIGNATURES
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:
May 10, 2006
|
|
By:
|
|
/s/ David C. Benoit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David C. Benoit |
|
|
|
|
|
|
Vice President Finance, and |
|
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
Date:
May 10, 2006
|
|
By:
|
|
/s/ Peter J. Bancroft |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter J. Bancroft |
|
|
|
|
|
|
Assistant Treasurer |
|
|