10-Q 1 form10-q_12285.txt BIW LIMITED FORM 10-Q PERIOD END 09-30-03 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 COMMISSION FILE NUMBER 1-31374 BIW LIMITED (Exact name of registrant as specified in its charter) CONNECTICUT 04-3617838 (State of Incorporation of Organization) (I.R.S Employer I.D. No.) 230 BEAVER STREET, ANSONIA, CT 06401 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 735-1888 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 for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO --------- --------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X --------- --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 2003 -------------------------------------------------------------------------------- COMMON STOCK, NO PAR VALUE 1,637,076 ================================================================================ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BIW LIMITED ----------- CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS ------------------------------------------------------- (UNAUDITED) -----------

2 BIW Limited ----------- CONSOLIDATED BALANCE SHEETS ---------------------------

3 BIW Limited ----------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (UNAUDITED) -----------

4 BIW Limited NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BIW Limited (the Company), formed in March 2002, is a non-operating holding company whose income is derived from Birmingham Utilities, Inc. (BUI or Birmingham Utilities), a specially chartered public service corporation in the business of collecting and distributing water for domestic, commercial and industrial uses and fire protection and Birmingham H2O Services, Inc. (BHS or Birmingham H2O Services), which provides water related services to other water utilities, contractors and individuals throughout Connecticut. Birmingham Utilities provides water to Ansonia and Derby, Connecticut and in small parts of the contiguous Town of Seymour with a population of approximately 31,000 people. BIW Limited became the holding company for Birmingham Utilities, Inc. pursuant to an Agreement and Plan of Merger and Share Exchange effective June 28, 2002 (See Note 9). Birmingham Utilities is subject to the jurisdiction of the Connecticut Department of Public Utility Control (DPUC) as to accounting, financing, ratemaking, disposal of property, the issuance of long-term securities and other matters affecting its operations. The Connecticut Department of Public Health (the Health Department or DPH) has regulatory powers over BUI under state law with respect to water quality, sources of supply, and the use of watershed land. The Connecticut Department of Environmental Protection (DEP) is authorized to regulate BUI's operations with regard to water pollution abatement, diversion of water from streams and rivers, safety of dams and the location, construction and alteration of certain water facilities. BUI's activities are also subject to regulation with regard to environmental and other operational matters by federal, state and local authorities, including, without limitation, zoning authorities. Birmingham Utilities is subject to regulation of its water quality under the Federal Safe Drinking Water Act (SDWA). The United States Environmental Protection Agency has granted to the Health Department the primary enforcement responsibility in Connecticut under the SDWA. The Health Department has established regulations containing maximum limits on contaminants, which have or may have an adverse effect on health. NOTE 1 - QUARTERLY FINANCIAL DATA ------------------------------------ The accompanying consolidated financial statements of BIW Limited have been prepared in accordance with accounting principles generally accepted in the United States of America, without audit, except for the Balance Sheet for the year ended December 31, 2002, which has been audited. The interim financial information conforms to the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and, as applied in the case of rate-regulated public utilities, complies with the Uniform System of Accounts and ratemaking practices prescribed by the DPUC. In management's opinion, these consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the 5 interim periods presented. Certain information and footnote disclosures required by accounting principles generally accepted in the United States of America 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 Company applies Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123) to account for its stock option plans. As permitted by SFAS 123, the Company has chosen to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and, accordingly, no compensation cost has been recognized for stock options in the financial statements. For further information, refer to the financial statements and accompanying footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Birmingham Utilities' business of selling water is to a certain extent seasonal because water consumption normally increases during the warmer summer months. Another factor affecting the comparability of various accounting periods includes the timing of rate increases. BUI was granted a 27.74 percent water service rate increase on August 7, 2003 (See Note 6). In addition, Birmingham H2O Services' business activities will slow in the winter months. Accordingly, annualization of the results of operations for the nine months ended September 30, 2003 and 2002 would not necessarily accurately forecast the annual results of each year. NOTE 2 - PRINCIPLES OF CONSOLIDATION --------------------------------------- The consolidated financial statements include the accounts of BIW Limited and its wholly owned subsidiaries Birmingham Utilities, Inc. and Birmingham H2O Services, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. NOTE 3 - RECLASSIFICATIONS ----------------------------- Certain September 30, 2002 balances have been reclassified to conform to the September 30, 2003 presentation. NOTE 4 - CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED ---------------------------------------------------------------------- The following table summarizes the number of common shares used in the calculation of earnings per share. 6

NOTE 5 - PURCHASE AND SALE AGREEMENT --------------------------------------- On May 19, 2003 BIW Limited's wholly-owned subsidiaries Birmingham Utilities, Inc. (BUI) and Birmingham H2O Services, Inc. (BHS) entered into a Purchase Agreement (the Purchase Agreement) with Philadelphia Suburban Corporation (PSC). The Purchase Agreement provides for the acquisition by BUI of all of the issued and outstanding shares of common stock of Eastern Connecticut Regional Water Company, Inc., as well as certain assets used in regulated water utility operations in Connecticut. BUI would also acquire all of the issued and outstanding stock of five regulated water companies located in and operating in the State of New York. Pursuant to the Purchase Agreement, BHS would purchase certain non-regulated assets that consist largely of operating and maintenance agreements with respect to various unregulated water supply systems located in eastern and central Connecticut. The aggregate purchase price for the regulated and unregulated Connecticut operations and the New York operations to be purchased by Birmingham Utilities and Birmingham H2O Services pursuant to the Purchase Agreement is $5,000,000. The purchase price is subject to certain adjustments based on changes in the rate base and working capital of the Connecticut and New York regulated companies. These adjustments may not increase the purchase price by more than $1,200,000 in the aggregate. On July 31, 2003, PSC purchased the Aqua Source utility and non-utility systems, which include the Connecticut and New York operations from Aqua Source, Inc., pursuant to a previously announced purchase agreement among PSC, Aqua Source and DQE, Inc. The sale of the Connecticut and New York regulated operations to Birmingham Utilities is subject to Connecticut and New York regulatory approval. Applications for approval were filed with the Connecticut DPUC on June 19, 2003 and with the New York Commission on July 3, 2003. On August 1, 2003 PSC and Birmingham H2O Services signed a professional service agreement whereby BHS would operate the Connecticut operations for PSC until such time that the transaction was approved by the Connecticut DPUC. Under the terms of the agreement Birmingham H2O Services would pay PSC their carrying costs for the purchase of the Connecticut operations while Birmingham H2O Services would retain all profits from the operation. 7 On October 31, 2003 Birmingham Utilities and Birmingham H2O Services purchased the Connecticut regulated and unregulated operations from PSC. The Connecticut DPUC approved the sale of the regulated operations on October 22, 2003. The purchase price was $4,000,000 which included the regulated and non regulated operation in Connecticut which is also subject to certain purchase price adjustments. The purchase price was funded through borrowings on Birmingham Utilities' existing line of credit with Citizens Bank. The application filed with the New York Commission on July 3, 2003 is expected to be adjudicated early next year. NOTE 6 - WATER SERVICES RATE APPLICATION ------------------------------------------- On February 11, 2003, Birmingham Utilities filed an application with the DPUC for a 34.55 percent water service rate increase designed to provide a $1,576,183 increase in annual water service revenues. On August 7, 2003, the DPUC granted the company a 27.74 percent water service rate increase designed to provide a $1,264,178 annual increase in revenues and a 10.5 percent return on common equity. NOTE 7 - FORMATION OF BIRMINGHAM H2O SERVICES, INC. ------------------------------------------------------ On November 22, 2002, Birmingham H2O Services, Inc., a non-regulated subsidiary of BIW Limited, was formed. This company provides water related services to other water utilities, developers and individuals. NOTE 8 - LAND SALES ---------------------- On September 27, 2002, Birmingham Utilities sold 27 acres of unimproved land in Seymour, Connecticut to the State of Connecticut, Department of Environmental Protection (DEP) for $537,500. The after tax gain on this transaction amounted to $311,092, of which 16% or $49,775, was allocated by the DPUC to an account stipulated as an offset to rate base for a period of 40 years. The rate base offset account does not represent a claim by ratepayers on any asset of BUI. The rate base offset account was utilized in calculating rate base in the recently approved rate decision. NOTE 9 - CORPORATE RESTRUCTURING ----------------------------------- On January 17, 2002, Birmingham Utilities, Inc., in accordance with Section 16-47 of the Connecticut General Statutes, filed an application with the DPUC requesting approval for the establishment of a holding company. The Company believes the holding company structure will better support business opportunities that exist in the marketplace and separate these activities from regulated company activities. On May 8, 2002 the DPUC issued a decision granting approval of the holding company structure. Shareholders subsequently approved the holding company structure on June 25, 2002 at BUI's Annual Meeting and on June 28, 2002 a Certificate of Merger was filed with the Secretary of the State of Connecticut and became effective. 8 In order to implement the plan of merger and share exchange, Birmingham Utilities, Inc. formed BIW Limited as Birmingham Utilities, Inc.'s wholly-owned subsidiary. BIW Limited, in turn, formed its own wholly-owned subsidiary, Birmingham Mergings, Inc. The plan of merger and share exchange was unanimously approved by the boards of directors of Birmingham Utilities, Inc., BIW Limited and Birmingham Mergings, Inc., by Birmingham Utilities, Inc. as the sole stockholder of BIW Limited, and by BIW Limited as the sole stockholder of Birmingham Mergings, Inc. On June 28, 2002, the following events ocurred: o Birmingham Mergings, Inc. merged with and into Birmingham Utilities, Inc. with Birmingham Utilities, Inc. being the surviving corporation; o Each outstanding share of Birmingham Mergings common stock was automatically converted into one share of Birmingham Utilities, Inc. common stock; o Each previously outstanding share of Birmingham Utilities, Inc. common stock was automatically converted into one share of BIW Limited common stock; and o Each share of BIW Limited common stock owned by Birmingham Utilities, Inc. was automatically cancelled. Neither the certificate of incorporation of Birmingham Utilities, Inc., nor Birmingham Utilities, Inc.'s bylaws, was affected by the plan of merger and share exchange. BIW Limited is governed by its own separate certificate of incorporation that was filed with the Secretary of State of the State of Connecticut on March 13, 2002 and by its own separate bylaws. Upon effectiveness of the merger, each of the directors and officers of Birmingham Utilities, Inc. also became the directors and officers of BIW Limited. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------- Management's Discussion and Analysis of the Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10K for the year ended December 31, 2002 should be read in conjunction with the comments below. CAPITAL RESOURCES AND LIQUIDITY Completion of Birmingham Utilities' Long Term Capital Improvement Program will be funded from the proceeds available from the 2001 and 2002 land sales, the internal generation of funds, including rate relief, as well as the Company's ability to raise capital from external sources. For the nine months ended September 30, 2003 and 2002, BUI's additions to utility plant, net of customer advances, were $1,050,638 and $1,103,282 respectively (See Statement of Cash Flows). These additions were financed primarily from proceeds of land sales. 9 Birmingham Utilities has outstanding $3,948,000 principal amount of Mortgage Bonds, due September 1, 2011, issued under its Mortgage Indenture. The Mortgage Indenture limits the issuing of additional First Mortgage Bonds and the payment of dividends. It does not, however, restrict the issuance of either long term or short-term debt, which is either unsecured or secured with liens subordinate to the lien of the Mortgage Indenture. Birmingham Utilities also maintains a $5,000,000 one-year, unsecured revolving line of credit that expired in October 2003. This line was subsequently extended until December 28, 2003. The Company has received preliminary approval for a new $7,000,000 one year unsecured revolving line of credit that is expected to close before the end of the year. During the revolving period, BUI can choose between variable rate options of 30, 60, 90 or 180-day LIBOR plus 100 basis points or prime. BUI is required to pay interest only during the revolving period. The loan is payable in full at maturity. The extended revolving line maintains the same terms as the expired line. Borrowings of $565,000 were outstanding on the revolving line of credit on September 30, 2003 and there were no outstanding borrowings on the revolving line of credit on September 30, 2002. Results of Operations for the nine months ended and three months ended ---------------------------------------------------------------------- September 30, 2003 and 2002 --------------------------- Net Income ---------- Net income for the nine months ended September 30, 2003 was $547,455 compared with $784,107 for the same 2002 period. Land sale income contributed $261,317 to net income in 2002 while there was no land sale income in 2003. Net income for the three months ended September 30, 2003 was $349,298 compared with $474,910 for the comparable 2002 period. Land sales, which took place in the third quarter of 2002, contributed $261,317 to net income while there were no land sales recorded in the third quarter of 2003. Operating Revenues ------------------ Operating revenues for the first nine months of 2003 of $4,247,384 are $537,231 above the comparable 2002 period. The third quarter 2003 includes revenues from the managed Eastern Connecticut regulated and unregulated operations of PSC for the months of August and September of $381,204. Birmingham H20 Services under the operating agreement signed with PSC assumed full responsibility of operating these entities on August 1, 2003 (See Note 5). Birmingham H2O Services revenues decreased by $25,587 and Birmingham Utilities' revenues increased by $181,614. Although consumption was lower due to the unusually wet weather, this was offset by the rate increase which went into effect on August 7, 2003. Operating revenues for the three month period ended September 30, 2003 are $450,523 above the comparable 2002 quarter. Birmingham Utilities accounts for $136,795 of the increase while Birmingham 10 H2O Services revenues decreased by $67,476. The remaining $381,204 is attributable to the newly managed operations. Operating and Maintenance Expenses ---------------------------------- Operating and Maintenance expenses for the first nine months of 2003 of $2,643,675 are $223,071 higher than operating and maintenance expenses of $2,420,604 recorded in the first nine months of 2002. Increased property, liability and workers' compensation insurance costs, partially offset by a decrease in the supplemental pension expense, for Birmingham Utilities as well as the higher costs relating to the newly managed operations, accounts for this increase. Operating and maintenance expenses for the three month period ended September 30, 2003 exceeded the comparable 2002 period for the same reasons noted above for the nine month period. Depreciation ------------ Depreciation for the first nine months of 2003 and for the three month period ended September 30, 2003 are $60,188 and $45,186, respectively, higher than the comparable 2002 periods due to depreciation related to the newly managed operations as well as the depreciation expense relating to plant addition that have continued throughout 2002 and 2003. Taxes Other Than Income Taxes ----------------------------- Taxes other than income taxes for the nine month period ended September 30, 2003 were $25,956 higher than the comparable 2002 period. Increased payroll taxes and property taxes due to new operations as well as new utility plant additions account for this increase. Taxes other than income taxes for the three month period ended September 30, 2003 are $2,651 lower than the comparable 2002 period due to an increase in the monthly expense accrual which began in the third quarter of 2002. This same increase is spread over the entire twelve month period of 2003. Although expenses did increase for the reasons noted above, the timing of the expense between the two years causes the variance for the quarter. Other Income ------------ Other income for the first nine months of 2003 was $9,078 lower than the comparable period in 2002. A decrease in investment interest income partially offset by an increase in allowance for funds used during construction accounts for this decrease. Other income for the three month period ended September 30, 2003 was $18,011 lower than the second quarter of 2002. Decreases in investment interest income also accounts for this decrease. 11 Interest Expense ---------------- Interest expense of $311,227 recorded in the first nine months of 2003 is $7,189 lower than the comparable 2002 period due to the annual sinking fund payment relating to Birmingham Utilities' Series E Bonds. The interest expense for the three month period ended September 30, 2003 is $1,502 lower also because on the sinking fund payment. Land Dispositions ----------------- When Birmingham Utilities disposes of land, any gain recognized, net of tax, is shared between ratepayers and stockholders based upon a formula approved by the DPUC. The impact of land dispositions is recognized in two places on the statement of income. The statement of income reflects income from the disposition of land (net of taxes) of $0 and $261,317 for the nine months ended September 30, 2003 and September 30, 2002 respectively. That amount represents the stockholders immediate share of income from the sales. The net gain on the 2002 sale totaled $311,091. The DPUC's September 26, 2002 decision called for 16% of the gain to be allocated to an account stipulated as an offset to rate base. That amount, $49,775, is to remain in that account for a 40 year period. (See Note 8.) Land disposition income applicable to ratepayers is also recognized in the financial statements as a component of operating income on the line entitled "Amortization of Deferred Income on Dispositions of Land". These amounts represent the recognition of income deferred on land dispositions, which occurred in prior years. The amortization of deferred income on land dispositions, net of tax, was $134,379 and $296,081 for the nine months ended September 30, 2003 and 2002, and $44,793 and $98,693 for the three months ended September 30, 2003 and 2002. Recognition of deferred income will continue over time periods ranging from three to fifteen years, depending upon the amortization period ordered by the DPUC for each particular disposition except for the 2002 sale in which the deferred portion will remain as an offset to rate base for a period of 40 years. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------------------- The Company has certain exposures to market risk related to changes in interest rates. There have been no material changes in market risk since the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. 12 ITEM 4 - CONTROLS AND PROCEDURES ----------------------------------- The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 30, 2003. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no changes in the Company's internal controls that have materially affected, or are reasonably likely to materially affect the internal controls over financial reporting during the quarter ended September 30, 2003. PART II. OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K -------------------------------------------- (a) Exhibits 2.1 Purchase Agreement dated May 19, 2003 by and among Birmingham Utilities, Inc., Birmingham H2O Services, Inc. and Philadelphia Suburban Corporation (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K filed May 28, 2003) 31.1 Certification of CEO pursuant to Section 302 of Sarbanes Oxley Act. 31.2 Certification of CFO pursuant to Section 302 of Sarbanes Oxley Act. 32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes Oxley Act. (b) Reports on Form 8-K None 13 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. BIW Limited ----------- Registrant Date: November 13, 2003 By: /s/ John S. Tomac -------------------------------------- John S. Tomac, President (Duly authorized officer, and chief financial officer) 14

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