CONNECTICUT WATER SERVICE INC / CT filed 10-Q

CONNECTICUT WATER SERVICE INC / CT filed 10-Q with SEC. Read ‘s full filing at 000027620919000014.

Connecticut Water’s Water Infrastructure Conservation Adjustment (‘WICA’) was 2.15% and 9.81% at March 31, 2019 and 2018, respectively. Connecticut Water’s WICA was reset to zero during 2018 as a result of a rate ruling on the Company’s limited reopener and settlement agreement issued by PURA, as discussed below. As of March 31, 2019 and 2018, respectively, Avon Water’s WICA surcharge was 9.31% and 8.09%. As of March 31, 2019, HVWC has not filed for a WICA surcharge.

In Maine, the overall, cumulative Water Infrastructure Charge (‘WISC’) for all divisions was 5.7% and 4.1% as a percentage of total revenues as of March 31, 2019 and 2018, respectively.

There are no mandatory sinking fund payments required on Connecticut Water’s outstanding bonds.  However, certain fixed rate Unsecured Water Facilities Revenue Refinancing Bonds provide for an estate redemption right whereby the estate of deceased bondholders or surviving joint owners may submit bonds to the trustee for redemption at par, subject to a $25,000 per individual holder and a 3% annual aggregate limitation.

On December 13, 2018, Maine Water executed and delivered to CoBank a new Promissory Note and Single Advance Term Loan Supplement, dated October 30, 2018 (the ‘Fourth Promissory Note’). On the terms and subject to the conditions set forth in the Fourth Promissory Note issued pursuant to the Agreement, CoBank agreed to make an unsecured loan (the ‘Loan’) to Maine Water in the principal amount of $8,000,000 at 5.51%, due December 30, 2043. The proceeds of the above described Loan from CoBank were used to refinance existing debt and to finance certain capital expenditures.

On February 1, 2019, Maine Water secured a 30 year loan for $1,686,700 from the Maine Municipal Bond Bank and the Maine Department of Health and Human Services Drinking Water State Revolving Fund to fund a portion of the construction of a new finished water storage tank in Skowhegan, Maine (2019 Series W, Due 2048). The terms of the loan provide that up to $674,680 of the loan will be forgiven and the net amount, $1,012,020, will be repaid over a 30 year term at an interest rate no less than 1.0%.

Financial Covenants – The Company and its subsidiaries are required to comply with certain covenants in connection with various long term loan agreements.  The most restrictive of these covenants is to maintain a consolidated debt to capitalization ratio of not more than 60%. Additionally, Maine Water has restrictions on cash dividends paid based on restricted net assets. The Company and its subsidiaries were in compliance with all covenants at March 31, 2019.

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 Company’s effective income tax rate for the three months ended March 31, 2019 and 2018 was 5.0% and 7.7%, respectively. The Company’s effective tax rate, excluding discrete items recorded during the three months ended March 31, 2019 and 2018, was 7.0% and 26.7%, respectively. In 2019, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut, and amortizations of accumulated excess deferred taxes. In 2018, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut, and an IRS audit adjustment. Excluding discrete items, there was a decrease in the effective tax rate year over year for the three month period of approximately 19.7%. The decrease in the effective tax rate for this period can be attributed to a higher performance stock deduction in 2018 than in 2019. The blended Federal and State statutory income tax rates during the three months ended March 31, 2019 and 2018 were 28%, respectively. 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, including the basis difference for the adoption of the tangible property regulations.

The Company has operating leases primarily related to buildings, office equipment and land use agreements that convey use of the land during the arrangement for certain of its source water wells. Operating leases primarily have fixed payments with expiration dates ranging from 2019 to 2074, some of which include options to extend the leases from 1 to 10 years and some have options to terminate at the Company’s discretion. At December 31, 2018 and March 31, 2019, the Company’s ROU assets and lease liabilities for operating leases totaled approximately $1.5 million for each period. The Company’s lease liabilities at December 31, 2018 and March 31, 2019 were calculated using a rate indicative of what the Company believes would be secured for incremental long-term debt. These rates were 4.11% and 4.32% as of March 31, 2019 and December 31, 2018, respectively.

Connecticut Water’s Water Infrastructure Conservation Adjustment (‘WICA’) was 2.15% and 9.81% at March 31, 2019 and 2018, respectively. Connecticut Water’s WICA was reset to zero during 2018 as a result of a rate ruling on the Company’s limited reopener and settlement agreement issued by PURA, as discussed below. As of March 31, 2019 and 2018, respectively, Avon Water’s WICA surcharge was 9.31% and 8.09%. As of March 31, 2019, HVWC has not filed for a WICA surcharge.

In Maine, the overall, cumulative Water Infrastructure Charge (‘WISC’) for all divisions was 5.7% and 4.1% as a percentage of total revenues as of March 31, 2019 and 2018, respectively.

Revenue from our regulated customers increased by $1,393,000, or 5.6%, to $26,246,000 for the three months ended March 31, 2019 when compared to the same period in 2018.  The primary cause in the increase in revenues related to increased rates at Connecticut Water, which were effective as of April 1, 2018, and higher WISC surcharges in Maine.

The Company saw an approximate $112,000, or 2.4%, increase in its Depreciation expense for the three months ended March 31, 2019 compared to the same period in 2018. The increase was primarily due to higher Utility Plant in Service as of March 31, 2019 compared to March 31, 2018, driven by continued spending on WICA and WISC projects in Connecticut and Maine, respectively.

The Company had $212,000 in above-the-line Income Tax expense in the three months ended March 31, 2019 compared to a $7,000 in Income Tax benefit in the same period of 2018. The Company’s effective income tax rate for the three months ended March 31, 2019 and 2018 was 5.0% and 7.7%, respectively. The Company’s effective tax rate, excluding discrete items recorded during the three months ended March 31, 2019 and 2018, was 7.0% and 26.7%, respectively. In 2019, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut, and amortizations of accumulated excess deferred taxes. In 2018, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut, and an IRS audit adjustment. Excluding discrete items, there was a decrease in the effective tax rate year over year for the three month period of approximately 19.7%. The decrease in the effective tax rate for this period can be attributed to a higher performance stock deduction in 2018 than in 2019.

Maine Water in the principal amount of $8,000,000 at 5.51%, due December 30, 2043. The proceeds of the above described Loan from CoBank were used to refinance existing debt and to finance certain capital expenditures.

On February 1, 2019, Maine Water secured a 30 year loan for $1,686,700 from the Maine Municipal Bond Bank and the Maine Department of Health and Human Services Drinking Water State Revolving Fund to fund a portion of the construction of a new finished water storage tank in Skowhegan, Maine (2019 Series W, Due 2048). The terms of the loan provide that up to $674,680 of the loan will be forgiven and the net amount, $1,012,020, will be repaid over a 30 year term at an interest rate no less than 1.0%.

The Company offers a dividend reinvestment and stock purchase plan (‘DRIP’) for all registered shareholders and for the customers and employees of our regulated water companies, whereby participants can opt to have cash dividends directly reinvested into additional shares of the Company. In August 2011, the Board of Directors approved amendments to the DRIP (effective as of January 1, 2012) that permit the Company to add, at the Company’s discretion, an ‘up to 5.00% purchase price discount’ feature to the DRIP which is intended to encourage greater shareholder, customer and employee participation in the DRIP. In August 2014, the Board of Directors approved further amendments to the DRIP to reflect the Company’s appointment of a new common stock transfer agent. On August 11, 2017, the Board of Directors approved a Third Amended and Restated DRIP which expanded the class of participants to include any persons other than registered shareholders, customers and employees described above, upon an initial minimum purchase of $500. The DRIP was also amended to add 129,000 additional shares to the DRIP’s share reserve and to revise certain monthly and quarterly share purchase requirements. During the three months ended March 31, 2019 and 2018, plan participants invested $278,000 and $380,000, respectively, in additional shares as part of the DRIP.

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