SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 .
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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 1-8060.
AQUARION COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 06-0852232
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
835 Main Street, Bridgeport, Connecticut 06604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 335-2333
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, no par value New York Stock Exchange
Series A Junior
Participating Preferred New York Stock Exchange
Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part IV of this Form 10-K or any amendment to
this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant: $182,565,435 (Computed by reference to the closing price of the
Registrant's Common Stock on March 12, 1997, as reported on the New York Stock
Exchange-Composite Tape.)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 12, 1997
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Common Stock, no par value 7,046,382
The following documents have been incorporated by reference:
1. Annual Report to Shareholders for the year ended December 31, 1996--
PART I, Item 1; PART II, Item 5, Item 6, Item 7 and Item 8; PART IV.
2. Definitive Proxy Statement, dated March 20, 1997, for the Annual Meeting
of Shareholders to be held on April 22, 1997--PART III.
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PART I
ITEM 1. BUSINESS
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General
Aquarion Company ("Aquarion") is a holding company whose subsidiaries
are engaged both in the regulated utility business of public water supply and
in various nonutility businesses.
Aquarion's utility subsidiaries, BHC Company (BHC) and Sea Cliff Water
Company (SCWC) (collectively the Utilities) collect, treat and distribute
water to residential, commercial and industrial customers, to other utilities
for resale and for private and municipal fire protection. The Utilities
provide water to customers in 30 communities with a population of
approximately 500,000 people in Connecticut and Long Island, New York. These
communities include those served by other utilities to which water is made
available by the Company's Utilities on a wholesale basis for back-up supply
or peak demand purposes through the Southwest Regional Pipeline. BHC is the
largest investor-owned water company in Connecticut and with SCWC is among the
10 largest investor-owned water companies in the nation. The Utilities are
regulated by several state agencies, including the Connecticut Department of
Public Utility Control (DPUC) and the New York Public Service Commission
(PSC).
Aquarion is also engaged in various nonutility activities. The Company
owns Timco, Inc. (Timco), a timber processing company based in New Hampshire.
At Timco's sawmill complex, lumber is cut and packaged for sale to wholesalers
and retailers. Aquarion is also engaged in the utility management service
business through Aquarion Management Services, Inc. (AMS) and owns Main Street
South Corporation (MSSC), a small real estate subsidiary formed in 1969 to
assist the Utilities in marketing surplus land.
The Company was incorporated in Delaware as The Hydraulic Company in
1969 to become the parent company to BHC, a Connecticut corporation founded in
1857. The corporate name was changed to Aquarion Company in 1991. The
Company's executive offices are located at 835 Main Street, Bridgeport,
Connecticut 06604-4995, and its telephone number is (203) 335-2333.
Recent Developments
Discontinued Operations. On March 25, 1997, the Company sold the
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operations of Industrial and Environmental Analysts, Inc. (IEA), its
environmental testing laboratory business for approximately $10,000,000.
In connection with the sale, the Company retained liabiity for
environmentatal matters arising before the date of sale. IEA has been
recorded as a discontinued operation for the years ended December
31, 1996, 1995 and 1994. The Company recorded an after tax loss of $4,255,000
or $.61 per share from the sale of the discontinued operation for
the year ended December 31, 1996. Net losses from the discontinued operation
were $580,000 in 1996, $410,000 in 1995 and $257,000 in 1994, respectively and
are shown separately on the consolidated statements of income.
Merger. Effective at the close of business on December 31, 1996,
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Bridgeport Hydraulic Company merged with its wholly-owned subsidiaries
Stamford Water Company (SWC), New Canaan Water Company (NCWC) and Ridgefield
Water Supply Company (RWSC). Bridgeport Hydraulic Company is the surviving
corporation and has changed its name to BHC Company (BHC). BHC will consist of
an Eastern Division, formerly Bridgeport Hydraulic Company and a Western
Division, formerly SWC, NCWC and RWSC.
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Rates. On January 17, 1997, BHC's Eastern Division filed an a
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application with the DPUC for a Construction-Work-in-Progress (CWIP) rate
surcharge of 8.94 percent of current revenues to recover 90 percent of the
carrying costs through December 31, 1996, of capital used in the construction
of a filtration plant at its Hemlocks Reservoir in Fairfield, Connecticut.
This plant, mandated by the Federal Safe Drinking Water Act of 1974 (SDWA), as
amended, is estimated to cost approximately $48,500,000. This application
updated the CWIP rate surcharge of 8.05 percent granted in December 1996.
BHC's Eastern Division will continue to file quarterly applications for
increases in the CWIP rate surcharge as construction continues until its
completion in 1997, at which time the filtration facilities are expected to be
operational and subject to general ratemaking regulations.
On July 31, 1996, BHC's Eastern Division received approval from the DPUC
for a 6.5 percent water service rate increase designed to provide a $4,000,000
increase in annual water service revenues. As part of the decision, BHC's
Eastern Division will be allowed to re-open the application in 1997 to include
the full cost of construction of the Hemlocks filtration plant, as well as all
corresponding operating expenses, property taxes and depreciation expense. If
approved, water service rates at that time will increase by approximately an
additional 3.5 percent, which is net of the reduction for the repeal of the
Connecticut gross earnings tax, plus a cumulative CWIP rate surcharge, which
is estimated to be 10 percent at that time.
On April 3, 1996, BHC's Western Division collectively, received a final
decision from the DPUC, which became effective on April 25, 1996, allowing for
a 5.1 percent increase, designed to provide a $782,000 increase in annual
water service revenues. As part of the decision, the DPUC approved BHC's
Western Division's proposal to equalize the meter rates and service charges
for SWC, NCWC and RWSC.
There is no certainty that any given rate increase will produce the
intended level of revenues or the allowed return on equity. See "Public Water
Supply--Rates and Regulations."
Utility Acquisition. On May 30, 1996, the Company acquired Sea Cliff
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Water Company (SCWC), a subsidiary of Emcor Group, Inc., for approximately
$2,600,000 in cash. SCWC, which has approximately 4,300 customers, serves a
portion of Nassau County in Long Island, New York, and has approximate annual
revenues of $2,000,000.
Financing Activities. On February 3, 1997, BHC converted the interest
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rate on its $30,000,000 unsecured note, issued in 1995, in consideration for a
loan of the proceeds from the issuance by the Connecticut Development
Authority (CDA) of an equal amount of tax-exempt Water Facilities Revenue
Bonds, from a weekly variable rate to a fixed rate. The bonds will bear
interest at 6.15 percent and will be due on April 1, 2035.
On October 3, 1996, BHC issued a $30,000,000 unsecured note in
consideration for a loan of the proceeds from the issuance by the CDA of an
equal amount of tax-exempt Water Facilities Revenue Bonds (CDA bonds). The
tax-exempt CDA bonds, bearing interest at 6.0 percent, have a 40 year
maturity. BHC has the option to have these bonds redeemed at a price ranging
from 102 percent on September 1, 2006 to 100 percent on September 1, 2010 and
thereafter. The proceeds of this bond issuance are to be used to offset costs
incurred in the construction of the Hemlocks Reservoir Filtration Project, the
filtration facilities at BHC's Lakeville and Norfolk Reservoirs and other
facilities consisting of transmission and distribution mains, service lines,
meters and hydrants for the purpose of supplying safe potable water to the
general public within the Company's service area. Under the terms of the CDA
bonds, proceeds are to be requisitioned from a construction fund held by a
trustee for planned capital improvements.
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Utility Construction Program
The Utilities are engaged in a continuing construction program mandated
by legislative and regulatory requirements, as well as for infrastructure
replacements. The Utilities expended $37,185,000, $38,600,000, and
$17,739,000 in 1996, 1995 and 1994, respectively, for plant additions and
modifications of existing plant facilities, excluding an allowance for funds
used during construction (AFUDC). The 1996 expenditures were made primarily
for construction of water treatment plants at the Hemlocks, Lakeville and
Norfolk reservoirs and installation of water mains, service connections and
meters.
Utility budgeted capital expenditures for 1997 are approximately
$27,100,000. The total cost of the SDWA mandated water filtration project at
the Hemlocks Reservoir through December 31, 1996 was approximately
$38,400,000. Management estimates that the total of such costs for 1997 will
approximate $10,100,000, without adjustment for inflation. Part of the cost
associated with the Hemlocks facility is expected to be offset by CWIP rate
surcharges which, at the DPUC's discretion, permit the recovery of 90 percent
of the carrying cost of capital used in construction of a SDWA-mandated water
treatment facility. Management cannot predict whether future federal, state
or local regulation will require additional capital expenditures.
The Company's ability to finance its future construction programs
depends in part on future rate relief, the level of CWIP rate surcharges and
future debt and equity issues. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources
and Liquidity" and "Business--Public Water Supply--Rates and Regulation."
Industry Segment Information
The Company's operations are grouped into four industry segments: public
water supply; timber processing; real estate; and utility management services,
which formerly included environmental testing laboratories (IEA). The
consolidated operating revenues from continuing operations of the Company for
the year ended December 31, 1996 were derived from the following sources: 86
percent from public water supply, 11 percent from timber processing, 2 percent
from real estate, including both MSSC and surplus utility land sales, and
1 percent from utility management services. For additional information
concerning each segment for each of the years ended December 31, 1996, 1995,
and 1994, see "Note 10" of "Notes to Consolidated Financial Statements" and
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Public Water Supply
Service Area. The Utilities are engaged in the collection, treatment
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and distribution of water for public and private use to residential,
commercial, and industrial users, and for municipal and private fire
protection services in 30 communities in parts of Fairfield, Litchfield and
New Haven counties in Connecticut and Nassau County in Long Island, New York.
The Utilities also sell, as requested, water for redistribution to customers
of the First and Second Taxing Districts' Water Departments of the City of
Norwalk, Connecticut, and Connecticut-American Water Company through the
Southwest Regional Pipeline in Fairfield County.
The communities served by the Utilities as of December 31, 1996 have a
population of approximately 500,000, and the total number of customer accounts
as of that date was approximately 136,000. The Utilities' service areas,
primarily residential in nature, have experienced an average growth in
accounts of approximately 1 percent per year over the last 10 years.
Industrial use has declined significantly in that time period, and the
residential characteristics of the area have changed, indicating an increase
in the percentage of apartment dwellings and condominium units. Management
does not anticipate
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any significant growth in residential consumption in the foreseeable future,
and expects continued decline in industrial use and little or no commercial
growth.
The operating revenues of the Utilities for the 12 months ended December
31, 1996 were derived from the following sources: 61 percent from residential
customers, 16 percent from commercial customers, 4 percent from industrial
customers, 14 percent from fire protection customers, and 5 percent from other
sources.
Seasonality. The business of the Utilities is subject to seasonal
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fluctuations and weather variations. The demand for water during the warmer
months is generally greater than during the cooler months, primarily due to
additional water requirements of industrial, commercial and residential
cooling systems, and various private and public outdoor uses such as lawn and
golf course sprinkling. From year to year and season to season, demand will
vary with rainfall and temperature levels.
Water Supply. Water is available from both surface and subsurface
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sources. During 1996, approximately 91 percent of the water supplied by the
Utilities was provided by impounding reservoirs, 8 percent by producing wells
and 1 percent by purchased water. As of December 31, 1996, the Utilities'
reservoirs, well fields and interconnections with other water utilities had an
aggregate safe daily yield of 113 million gallons. Safe yield is an estimate
of the supply capability during an extended drought. The average daily demand
for water from the Utilities in 1996 was 66 million gallons per day (MGD).
The reservoirs of the Utilities have an aggregate storage capacity of 30.4
billion gallons.
All of the Utilities' reservoirs and active wells are located on
property owned by the Utilities. Management believes it has an adequate water
supply to satisfy the current and projected needs of its customers within its
territorial service area through at least the year 2040. During historical
drought periods in the northeastern United States, BHC has been able to
accommodate the needs of their own customers and to offer relief to supplement
the supplies to neighboring communities by water sales to utilities with which
it has pipeline interconnections. Supply and distribution needs of the
Utilities undergo constant review, and the Utilities continue to explore and
develop additional ground water-supplies and study alternative surface water
sources to meet anticipated future water requirements.
The Connecticut Water Diversion Policy Act, enacted in 1982, prohibits
any future diversions of surface or ground water without a permit from the
state Department of Environmental Protection (DEP). Although this law
"grandfathers" existing surface and ground-water supplies that existed when it
was enacted, any subsequent water diversion that might be effected by BHC is
subject to a lengthy permit application process and approval by the DEP.
Diversion permits granted pursuant to this law are subject to renewal when
their terms, which typically run from five to ten years, expire.
Rates and Regulation. The Company's utility subsidiaries are subject to
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regulation by state regulatory commissions having jurisdiction over their
respective service areas. BHC is subject to regulation by the DPUC, while
SCWC is subject to regulation by the PSC. The authorities have jurisdiction
with respect to rates, service, accounting procedures, issuance of securities,
dispositions of utility property and other related matters. Rates charged by
the Utilities are subject to approval by the DPUC or the PSC. The Utilities
continually review the need for increases in water rates, and historically
have sought rate relief in a timely manner in light of increases in investment
in utility plant, operating costs and related financing costs, as well as
other factors.
The DPUC may allow a surcharge to be applied to rates in order to
provide a current cash return to water utilities on the major portions of CWIP
applicable to facilities, including filtration plants, required for compliance
with the SDWA. See "Environmental Regulations." The surcharge is adjusted
quarterly, subject to DPUC approval, to reflect increased CWIP expenditures
for SDWA facilities.
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Aquarion is neither an operating utility company nor a "public service
company" within the meaning of any state and is not currently subject to
general regulation by the DPUC or PSC. Regulatory approval is necessary,
however, before Aquarion may acquire or exercise control over any public
service company. Regulatory approval is also required before any other entity
can acquire or exercise, or attempt to exercise, control over Aquarion.
Connecticut regulations govern the sale of water company land in
Connecticut and treatment of land sale proceeds. See "Item 2. Properties."
Franchises and Competition. In common with most water companies in
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Connecticut, BHC derives its rights and franchises to operate from special
acts of the Connecticut General Assembly, which are subject to alteration,
amendment or repeal by the General Assembly and which do not grant exclusive
rights to BHC in its service areas.
Subject to such power of alteration, amendment or repeal by the
Connecticut General Assembly and subject to certain approvals, permits and
consents of public authority and others prescribed by statute and by its
charter, BHC has, with minor exceptions, valid franchises free from burdensome
restrictions and unlimited as to time, and is authorized to sell potable water
in the towns (or parts thereof) in which water is now being supplied by BHC.
In addition to the right to sell water as set forth above, the
franchises of BHC include rights and powers to erect and maintain certain
facilities on public highways and grounds, all subject to such consents and
approvals of public authority and others as may be required by law. Under the
Connecticut General Statutes, BHC, upon payment of compensation, may take and
use such lands, springs, streams or ponds, or such rights or interests therein
as the Connecticut Superior Court, upon application, may determine is
necessary to enable BHC to supply potable water for pubic or domestic use in
its franchise areas.
BHC faces competition, presently not material, from a few private water
systems operated within, or adjacent to, its franchise areas and from
municipal and public authority systems whose service areas in some cases
overlap portions of BHC's franchise areas. At the present time, except as
noted above, there are no publicly owned utilities, cooperatives or other
private utility companies competing with BHC in the areas now served, although
within certain areas there are wells owned by individuals or private
industries.
Environmental Regulations. The Utilities are subject to regulation by
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the Connecticut Department of Public Health (DPH) and the County of Nassau
Department of Health (CNDH) with respect to water quality matters, use of
water from surface and subsurface sources, the location, construction and
operation of water supply facilities and the sale of certain utility property.
Plans for new water supply systems or expansion of existing water supply
systems also must be submitted to the DPH or CNDH for approval. The
Connecticut Department of Environmental Protection (DEP) is authorized to
regulate the operations of BHC, while the New York Department of Environmental
Conservation (DEC) Regulates the operations of SCWC, with respect to
environmental pollution abatement, diversion of water from surface and
subsurface sources, and the location, construction and alteration of dams and
other water obstructions.
The Federal Clean Water Act (the Clean Water Act) of 1972, as amended,
regulates discharges to air, water and land, as well as the management of
underground storage tanks and hazardous materials. A joint federal and state
permit system has been established to ensure that the impact to the
environment from operations is minimized.
The Utilities are subject to regulation of water quality under the SDWA,
which provides for the establishment of uniform minimum national quality
standards by the Environmental Protection Agency (the EPA), as well as
governmental authority to specify the type of treatment process to be used for
public
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drinking water. EPA regulations issued pursuant to the SDWA set limits for,
among other things, certain organic and inorganic chemical, physical,
microbiological and radiological contaminants. The SDWA provides that the
states have the primary enforcement responsibility for public drinking water
systems, as long as the states' regulations are no less stringent than those
adopted pursuant to SDWA. For certain of these water quality standards the
DPH has adopted regulations that in some instances impose standards more
stringent than those imposed under the federal regulations.
EPA regulations pursuant to SDWA include the Surface Water Treatment
Rule (SWTR), the Total Coliform Rule (TCR) and the Lead and Copper Rule (LCR)
and other rules covering organic and inorganic chemicals. The water treatment
requirements of SWTR mandate the construction of the filtration plant at BHC's
Hemlocks Reservoir. BHC also has entered into a consent agreement with the
DPH establishing timetables for construction of the filtration facility at the
Hemlocks reservoir and penalties if the facility is not completed within such
timetable. The Hemlocks plant must be completed by June 29, 1998 or a
$250,000 penalty will be imposed. The Company anticipates that construction
will be completed by the middle of 1997. BHC has entered into a consent
agreement with the DPH to filter the water produced from the Round Pond
reservoir in Ridgefield, CT or substitute alternative ground water supply by
June 30, 1998. The company has chosen the ground water alternative and will
complete this project by 1998. The TCR affects the Utilities by the imposition
of requirements for additional biological sampling and monitoring. The
stringent requirements of the TCR may also result in increased public
notification relating to water quality. The LCR establishes corrosion control
techniques and requires monitoring to determine compliance with prescribed
lead and copper levels in drinking water. If such levels are exceeded, a
multi-year program involving additional monitoring, public notification,
state-supervised corrosion control and treatment and replacement of lead
service lines could result. All of the Utilities systems are in compliance
with the LCR, and the Utilities continue to monitor these systems
periodically. The DPH has determined that BHC is in compliance with Synthetic
Organic Chemical and Inorganic Chemical requirements, thereby avoiding
additional potentially significant treatment process construction costs.
Further SDWA-related regulations are anticipated for such water quality
parameters as disinfection by-products, radon and enhanced surface water
treatment. It is impossible to determine at this time the ultimate impact
these regulations will have on the Utilities.
In 1996 the SDWA was reauthorized by Congress and signed into law.
Several of the schedules for implementation of various regulations have been
changed. The new law eliminated the requirement to regulate 25 new
contaminants every three years and replaced it with a requirement that the EPA
consider five new contaminants for regulation every five years.
The 1996 law also requires that the EPA, in proposing any new drinking
water regulations, show that such regulations will improve public health. In
addition, such regulations must be subjected to a cost-benefit analysis.
Water quality tests are made continuously at all of the Utilities' water
supply sources, and the Utilities believe they are in substantial compliance
with regulations promulgated in connection with the organic chemical,
inorganic chemical, physical, and bacteriological standards for drinking
water. BHC has been voluntarily monitoring for giardia and cryptosporidium,
radon and disinfection by-products, which are water quality concerns that will
be addressed by future regulations.
Aquifer protection legislation in Connecticut requires each water
utility to conduct on going groundwater data collection and to map critical
wellfield recharge areas. The DEP, in consultation with the DPH and DPUC, have
discussed recommendations for land use restrictions adjacent to public water
supply wellfields and possible acquisition of land to enhance protection. The
discussions have not lead to additional regulations and, therefore, any impact
can not be determined at this time. However, if BHC were to adopt
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recommendations to purchase additional land around its wellfields, the cost
could range from minimal to substantial.
Developments with respect to the identification and measurement of
various elements in water supplies and concern about the effect of such
elements on public health, together with possible contamination of water
sources, may in the future require the Utilities to modify all or portions of
their various water supplies, to develop replacement supplies or to implement
new treatment techniques. Any such developments may significantly increase
the Utilities' operating costs and capital requirements. The Company expects
that all such expenditures and costs should ultimately be recoverable through
rates for water service, but there can be no assurance that this will be the
case.
Certain dams owned by the Utilities are subject to inspection under the
National Dam Inspection Act as well as the Connecticut Dam Registration Act,
and dams owned by SWC in New York are subject to inspection by the New York
State Department of Environmental Conservation. The Utilities own 29 dams, 16
of which are subject to federal inspection. Although certain modifications
and further studies have been required, no material problems with respect to
these dams have been reported to the Company.
The Utilities are required to obtain permits from the respective
regulatory authority for the location, construction or alteration of any dam
or reservoir, and to secure the approval of the regulatory authority for the
diversion and use of water from any surface or ground source for public use.
The Utilities have taken all compliance actions required to date.
IEA receives and uses various small quantities of hazardous chemicals
in its operations and is a licensed hazardous waste handler. Pursuant to the
agreement relating to the sale of IEA, the Company has retained responsibility
for environmental liabilities arising before the date of sale under federal
and applicable state laws and regulations.
Timber Processing
The Company is engaged in the timber processing business through Timco,
which has operations in New Hampshire consisting of a sawmill complex. The
sawmill complex processes and markets kiln-dried, finished eastern white pine
and other lumber. Timco also provides custom kiln drying services for pine
mills in Maine and southern New Hampshire. The product is used in the
remodeling and do-it-yourself markets and, to a lesser extent, in the
construction of new homes. It is marketed in the Northeast and Mid-Atlantic
regions through lumber wholesalers, distributors and, in some instances,
directly to large volume retailers. Wholesalers and distributors, in turn,
sell the product to the construction trade and to retail outlets. Timco
obtains the timber used in its products from independent loggers and from
purchased timber rights.
Traditionally, the demand for Timco's lumber is lower in the winter
months and inventories are built up in anticipation of the busier spring and
summer season. The lumber products industry is very competitive, on the basis
of quality and price. Timco faces competition on the basis of both quality
and price from domestic and foreign forest product companies, many of which
have greater resources than the Company.
Utility Management Services
The Company through its AMS subsidiary, provides clients with an
integrated range of utility management services, including contract management
and operations, information services, water and wastewater billing and
collections and various engineering, operations and management consulting
services.
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AMS clients are private and municipal water and wastewater
utilities, including municipal systems engaged in privatization initiatives.
The utility management services businesses are highly competitive.
Real Estate
The Company treats real estate as a separate business segment in order
to distinguish the earnings impact from sales of surplus utility land from the
results of utility operations. For a discussion of the surplus off-watershed
land which the Utilities intend to market as appropriate, see "Item 2.
Properties."
Employees
As of December 31, 1996, the Company employed approximately 399 persons
on a full-time basis, including 277 in the Public Water Supply business, 119
in the Timber Processing business and 3 in the Utility Management Services
business. None of the Company's employees is covered by collective bargaining
arrangements, and the Company believes its relations with its employees are
satisfactory.
ITEM 2. PROPERTIES
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BHC owns a 20,000-square-foot headquarters building and a 44,370-square-
foot Operations Center in Bridgeport, a 28,000-square-foot office building in
Monroe, Connecticut and leases an additional 22,000-square feet of office,
laboratory and garage space in Bridgeport for utility operations.
At December 31, 1996, BHC owned in the aggregate 17 active reservoirs,
53 producing wells and approximately 1,966 miles of water mains, of which
approximately 76 miles have been laid in the past five years. The rights to
locate and maintain water transmission and distribution mains are secured by
charter, easement and permit and are generally perpetual. Water is delivered
to the distribution system from three major reservoir systems, comprised of
several smaller reservoirs and producing wells. BHC owns five filtration
plants for treatment of its reservoir systems. These plants have capacities
ranging from .75 to 25 MGD, respectively.
SCWC owns four acres of land in Long Island, New York in four separate
locations that are occupied by an office and pump station, two well sites and
a tank site. SCWC also owns 54 miles of main.
Aquarion owns nonutility land totaling approximately 99 acres in Easton
and Litchfield, Connecticut. BHC owns approximately 21,400 acres of real
property, most of which consists of reservoirs and surrounding watershed,
located in Fairfield, New Haven, and Litchfield counties in Connecticut and in
Pound Ridge and Lewisboro New York. All but 1,360 specified acres of such
property are subject to the first lien arising under the BHC Indenture
securing its First Mortgage Bonds.
The DPH regulates Connecticut company lands according to a three-tiered
classification system. Class I lands cannot be sold, leased or transferred.
The DPH may authorize a transfer or change in use of Class II lands only upon
a finding that there will be no adverse impact upon the public water supply
and that any use restrictions required as a condition of transfer are
enforceable against subsequent owners and occupants of the lands. Class III
lands, which are off-watershed, are not currently subject to regulation by the
DPH. BHC has identified approximately 2,600 acres of land it believes are
surplus to its water supply needs, and therefore would qualify as Class III
land. All of this Class III land, which includes approximately 570 acres that
have never been in rate base, is available for sale, although all of it may
not be marketable. Up to 530 additional acres could become available if the
DPH approves the abandonment of a former reservoir system in New Haven County
and reclassifies that existing watershed property as Class III land, as
requested by the Company.
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Real property may not be sold or transferred by a water utility without
the prior approval of the DPUC and compliance with other restrictions imposed
by Connecticut law. State laws and regulations govern, among other things,
to whom certain water company lands may be transferred, with preference
given to other water companies, the municipality in which the property is
located and the State of Connecticut, in that order. Additionally, the
disposition of the proceeds of any permissible sale is subject to state law.
Until changed by statute in 1988, it had been the practice of the DPUC
to apply gains from the sale of surplus water company land that had ever been
in the rate base to ratepayers. In effect, these gains served as an offset
against operating expenses, thereby substituting profits from the sale of such
land for revenues that would otherwise be provided through rates. Legislation
enacted in 1988, the Equitable Sharing Statute, required the DPUC to use an
accounting treatment to "equitably allocate" the economic benefits of the net
proceeds from the sales of Class III land that was previously in the utility's
rate base between the Company's ratepayers and its shareholders. Ratepayers do
not share in gains from the sale of land that has never been in rate base.
The Equitable Sharing Statute was clarified by a 1990 amendment which
provides that the economic benefits from the sale of former rate base, Class
III land shall be allocated "substantially in favor" of shareholders when
25 percent or more of the land sold is to be used for open space or
recreational purposes.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The registrant has nothing to report for this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The registrant has nothing to report for this item.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-----------------------------------------------------------------------
MATTERS
-------
Page 31 of the Company's Annual Report to Shareholders for the year
ended December 31, 1996 is incorporated by reference herein pursuant to Rule
12b-23 of the Securities and Exchange Act of 1934 (the Act) and to Instruction
G(2) to Form 10-K.
Aquarion has declared and paid quarterly dividends on its common stock
without interruption since its organization in 1969 and, prior thereto, BHC
paid dividends annually on its common stock without interruption since 1890.
Dividends, when declared, are normally paid on the 30th day of January, April,
July and October.
The earnings of Aquarion are derived from its investments in its
subsidiaries, particularly BHC. Aquarion's future ability to pay dividends to
holders of its Common Stock is dependent upon the continued payment by BHC of
dividends to Aquarion. BHC's ability to pay dividends will depend upon timely
and adequate rate relief, compliance with restrictions under certain of the
BHC debt instruments and other factors.
Dividends on Aquarion common stock can be paid only from its net profits
and surplus. Aquarion's ability to pay dividends is further restricted by the
terms of Aquarion's 5.95 percent unsecured Senior Note due January 1999 and
7.8 percent unsecured Senior Notes due June 1997 (the "Aquarion Notes"). As
of
- 9 -
<PAGE>
<PAGE>
December 31, 1996, the applicable restrictions would have permitted payment
of additional dividends on Aquarion's common stock of up to $33,700,000.
While Aquarion's Board of Directors intends to continue the practice of
declaring cash dividends on a quarterly basis, no assurance can be given as to
future dividends or dividend rates since they will be determined in light of a
number of factors, including earnings, cash flow, and Aquarion and BHC's
financial requirements. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Capital Resources and
Liquidity."
ITEM 6. SELECTED FINANCIAL DATA
- -----------------------------------
See the inside front cover ("Selected Financial Data") and Pages 30 - 31
("Supplemental Financial Data") of the Company's Annual Report to Shareholders
for the year ended December 31, 1996, which is incorporated by reference
herein pursuant to Rule 12b-23 of the Act and Instruction G(2) to Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
See the inside front cover ("Selected Financial Data") and Pages 9 - 14
of the Company's Annual Report to Shareholders for the year ended December 31,
1996, which is incorporated by reference herein pursuant to Rule 12b-23 of the
Act and Instruction G(2) to Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------------------------------------------------------
The consolidated financial statements, together with the report thereon
of Price Waterhouse LLP, dated February 18, 1997, appearing on Pages 15 - 28,
the inside front cover ("Selected Financial Data") and Pages 30 - 31
("Supplemental Financial Data") of the accompanying 1996 Annual Report to
Shareholders of Aquarion Company are incorporated by reference herein pursuant
to Rule 12b-23 of the Act and Instruction G(2) to Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ---------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The registrant has nothing to report for this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------
The information as to directors required by Item 10 is set forth at
Pages 1 - 7 of the Company's Definitive Proxy Statement, dated March 20, 1997
relating to the proposed Annual Meeting of Shareholders to be held on April
22, 1997, filed with the Commission pursuant to Regulation 14a under the Act,
and is incorporated by reference herein pursuant to Rule 12b-23 of the Act and
Instruction G(3) to Form 10-K.
Executive Officers
The executive officers of the registrant are listed below. These
officers were elected to the offices indicated on April 23, 1996, except as
otherwise noted, for a term expiring with the 1997 annual meeting of
directors. Except as indicated, all have been with registrant and its
predecessors in an executive capacity for more than five years. There are no
family relationships among members of the executive officers.
- 10 -
<PAGE>
<PAGE>
There were no arrangements or undertakings between any of the officers
listed below and any other person pursuant to which he or she was
selected as an officer.
<TABLE>
<CAPTION>
Served
as
Office, Business Experience Officer
Executive Officer Age During Past Five Years Since
- ----------------- ---- --------------------------- -------
<S> <C> <C> <C>
Richard K. Schmidt 52 President and Chief Executive Officer (since 1993
October 1995), formerly Senior Vice
President (1993-1995) of the Company;
President (1992-1995) and Chief Executive
Officer (since 1992) of IEA; formerly
President and Chief Operating Officer (1984-
1992) of Mechanical Technology, Inc.
Janet M. Hansen 54 Executive Vice President (since October 1983
1995), Chief Financial Officer (since April
1992), Treasurer (since 1988) and Senior
Vice President (1993-1995) of the Company
and Vice President (since 1989), Chief
Financial Officer (since April 1991) and
Treasurer (since 1985) of BHC; Mrs. Hansen
is Vice President and Treasurer (since April
1991) of IEA and Chairman of the Board and
Chief Executive Officer (since April 1992)
of Timco. Mrs. Hansen is also Director,
Vice President, Chief Financial Officer and
Treasurer of certain of the Company's other
subsidiaries.
James S. McInerney 59 Senior Vice President (since April 1992) of 1989
the Company; President (since April 1991),
Chief Executive Officer (since April 1995)
and Chief Operating Officer (January 1990 to
April 1995) of BHC. Executive Vice
President (1990 to April 1991) of BHC.
Mr. McInerney is a Director, President or
Vice President of certain of the Company's
other subsidiaries.
Larry L. Bingaman 47 Vice President, Corporate Relations and 1990
Secretary (since April 1993); Vice
President, Marketing and Communications
(1990-1993) of the Company. Mr. Bingaman is
also Director, Vice President and Secretary
of certain of the Company's other
subsidiaries.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
- ----------------------------------
Pages 8 - 14 of the Company's Definitive Proxy Statement, dated March
20, 1997, relating to the proposed Annual Meeting of Shareholders to be held
on April 22, 1997, filed with the Commission pursuant to Regulation 14a under
the Act are incorporated by reference herein pursuant to Rule 12b-23 of the
Act and Instruction G(3) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------
Pages 4 - 5 of the Company's Definitive Proxy Statement, dated March
20, 1997, relating to the proposed Annual Meeting of Shareholders to be held
on April 22, 1997, filed with the Commission pursuant to Regulation 14a under
the Act, are incorporated by reference herein pursuant to Rule 12b-23 of the
Act and Instruction G(3) to Form 10-K.
- 11 -
<PAGE>
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ----------------------------------------------------------
The registrant has nothing to report for this item.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------
a) The following documents are filed as part of this report:
Page in
Annual Report*
-------------
(1) Consolidated Statements of Income for
the three years ended December 31,
1996 15
Consolidated Balance Sheets at
December 31, 1996 and 1996 16 - 17
Consolidated Statements of Cash Flows
for the three years ended
December 31, 1996 18
Consolidated Statements of
Shareholders' Equity for the three
years ended December 31, 1996 19
Notes to Consolidated Financial
Statements 20 - 27
Report of Independent Accountants 28
Selected Financial Data Inside Front Cover
Supplemental Financial Information 30 - 31
* Incorporated by reference from the indicated pages of the
1996 Annual Report to Shareholders.
______________________
(b) Reports on Form 8-K.
The Company did not file a report on Form 8-K for the
fourth quarter of the year ended December 31, 1996.
(c) Exhibits:
Each document referred to below is incorporated by
reference to the files of the Commission, unless the
reference is preceded by an asterisk (*). Each management
contract, compensatory plan or arrangement required to be
filed as an exhibit hereto is preceded by a double asterisk
(**).
- 12 -
<PAGE>
<PAGE>
3(a) Restated Certificate of Incorporation of
Aquarion, as amended.(1)
3(b) By-laws of Aquarion, as amended. (4)
4(a) Rights Agreement between Aquarion and The
ChaseMellon Shareholder Services, L.L.C. setting
forth description of Preferred Stock Purchase
Rights distributed to holders of Aquarion Common
Stock.(11)
10(a) First Mortgage Indenture of BHC dated June 1,
1924.(2)
10(b) Seventeenth Supplemental Mortgage of BHC dated
as September 1, 1960.(2)
10(c) Twentieth Supplemental Mortgage of BHC dated as
of November 1, 1968.(1)
10(d) Loan and Trust Agreement of Timco as of
November 1, 1984.(1)
10(e) Note Agreement of BHC dated January 24, 1991.(10)
10(f) Note Agreement of Aquarion dated as of May 19, 1992.(5)
10(g) Aquarion Long-Term Incentive Plan.(1)
10(h) Joint Venture Agreement between John J.
Brennan, Jr., William A. Brennan and Main Street
South Corporation dated February 23, 1979.(3)
10(i) Joint Venture Agreement amendment between John
J. Brennan, Jr., William A. Brennan and Main
Street South Corporation dated January 1, 1994.(10)
**10(j) Employment Agreement between Aquarion and
James S. McInerney, dated June 1, 1990.(4)
**10(k) Employment Agreement between Aquarion and
Janet M. Hansen dated November 1, 1992.(5)
**10(l) Employment Agreement between Aquarion and
Jack E. McGregor dated October 1, 1995.(10)
**10(m) Form of Stock Option Award Agreement for options
granted pursuant to Long-Term Incentive Plan.(9)
**10(n) Employment Agreement between Aquarion and
Larry L. Bingaman dated June 11, 1990.(10)
10(o) Agreement for Construction Management Services
dated April 18, 1991 between BHC and Gilbane
Building Company.(1)
- 13 -
<PAGE>
<PAGE>
**10(p) Employment Agreement between Aquarion and
Richard K. Schmidt dated October 1, 1995.(10)
**10(q) Employment Agreement between Industrial and
Environmental Analysts, Inc. and David C. Houle
dated October 1, 1995.(10)
10(r) Loan Agreement of BHC dated as of June 1,
1990.(4)
10(s) Revolving Credit Agreement of Aquarion dated May 14,
1993.(6)
10(t) Revolving Credit Agreement amendment dated May 12,
1994.(9)
10(u) Loan Agreement of BHC dated as of June 1, 1993. (6)
10(v) Loan Agreement of BHC dated September 1,
1993.(7)
10(w) Loan Agreement of BHC dated December 1, 1993.(8)
10(x) Note Agreement of Aquarion dated January 4,
1994.(8)
**10(y) Aquarion Stock Incentive Plan.(8)
10(z) Loan Agreement of BHC dated April 1, 1995(10)
10(aa) Agreement between Aquarion and SRK, Inc. dated
January 31, 1996.(10)
*10(bb) Loan Agreement of BHC dated September 1, 1996
*13(a) Annual Report to Shareholders for the year ended
December 31, 1996.
*21(a) Subsidiaries of Aquarion
*23(a) Consent of Independent Accountants
*27(a) Financial Data Schedule
____________________
(1) Filed as part of Aquarion's Form 8 Amendment to its
Form 10-Q for the quarter ended September 30, 1991, filed February 19,
1992.
(2) Filed as an Exhibit to BHC's Registration Statement on
Form S-1, File Number 2-23434, dated April 26, 1965.
(3) Filed as part of the Amendment No. 1 to the Company's Registration
Statement as Form S-7, File No. 2-74305, dated November 5, 1981.
- 14 -
<PAGE>
<PAGE>
(4) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1991.
(5) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1992.
(6) Filed as part of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993.
(7) Filed as part of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
(8) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1993.
(9) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
(10) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
(11) Filed as part of the Company's Registration Statement on
Form 8-A, file #1-8060, dated June 26, 1996.
- 15 -
<PAGE>
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
Aquarion Company
- ----------------
(Registrant)
By /S/JANET M. HANSEN March 25, 1997
Janet M. Hansen
------------------------------------------
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /S/GEORGE W. EDWARDS, JR. March 25, 1997
-------------------------------------
George W. Edwards, Jr.
Chairman of the Board of Directors
and Director
By March 25, 1997
-------------------------------------
William S. Warner
Vice Chairman of the Board of Directors
and Director
By /S/RICHARD K. SCHMIDT March 25, 1997
-------------------------------------
Richard K. Schmidt
President, Chief Executive Officer
and Director
By /S/JACK E. MCGREGOR March 25, 1997
-------------------------------------
Jack E. McGregor
Director
By /S/GEOFFREY ETHERINGTON March 25, 1997
-------------------------------------
Geoffrey Etherington
Director
- 16 -
<PAGE>
<PAGE>
By /S/JANET D. GREENWOOD March 25, 1997
-------------------------------------
Janet D. Greenwood
Director
By /S/DONALD M. HALSTED, JR. March 25, 1997
-------------------------------------
Donald M. Halsted, Jr.
Director
By March 25, 1997
-------------------------------------
Edgar G. Hotard
Director
By /S/EUGENE D. JONES March 25, 1997
-------------------------------------
Eugene D. Jones
Director
By March 25, 1997
-------------------------------------
G. Jackson Ratcliffe
Director
By /S/JOHN A. URQUHART March 25, 1997
-------------------------------------
John A. Urquhart
Director
- 17 -
<PAGE>
<PAGE>
EXHIBIT 21(a)
--------------
Subsidiaries of the Registrant
------------------------------
- - BHC Company, incorporated in the State of Connecticut
- - Sea Cliff Water Company, incorporated in the State of New York
- - Main Street South Corporation, incorporated in the State of Connecticut
- - Timco, Inc., incorporated in the State of Connecticut
- - Hydrocorp, Inc., incorporated in the State of Delaware
- - Industrial and Environmental Analysts, Inc., incorporated in the State of
Vermont
- - Industrial and Environmental Analysts, Inc., Massachusetts, incorporated in
the State of Massachusetts
- - Industrial and Environmental Analysts, Inc., New Jersey, incorporated in
the State of Delaware
- - Industrial and Environmental Analysts, Inc., Illinois, incorporated in the
State of Delaware
- - Industrial and Environmental Analysts, Inc., Florida, incorporated in the
State of Florida
- - THC Acquisition Corp., incorporated in the State of Delaware
- - Aquarion Management Services, Inc., incorporated in the State of Delaware
- 18 -
<PAGE>
<PAGE>
EXHIBIT 23(a)
-------------
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 33-52973) and in the Registration Statement on
Form S-8 (No. 33-53473) of Aquarion Company of our report dated February 18,
1997, appearing on Page 28 of the Annual Report to Shareholders, which is
incorporated by reference in this Annual Report on Form 10-K.
Price Waterhouse LLP
New York, New York
March 25, 1997
- 19 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The terms "Aquarion Company," "Aquarion," and "the Company" are used in
this section for convenience and reading ease. These terms do not in all cases
describe exact intercompany relationships among Aquarion and its subsidiaries.
Effective at the close of business on December 31, 1996, Bridgeport Hydraulic
Company merged with its wholly-owned subsidiaries Stamford Water Company
(SWC), New Canaan Water Company (NCWC) and Ridgefield Water Supply Company
(RWSC). Bridgeport Hydraulic Company is the surviving corporation and has
changed its name to BHC Company (BHC). BHC will consist of an Eastern
division, formerly Bridgeport Hydraulic Company, and a Western division,
formerly SWC, NCWC and RWSC.
On February 19, 1997, the Company announced that it had entered into an
agreement in principle to sell the operations of Industrial and Environmental
Analysts, Inc. (IEA), its environmental testing laboratory business for
approximately $10,000,000. The sale is subject to the execution of a
definitive agreement and other conditions. Accordingly, IEA's results have
been recorded as a discontinued operation for the years ended December 31,
1996, 1995 and 1994. The Company recorded an after tax loss of $4,255,000 or
$0.61 per share from the anticipated sale of the discontinued operation for
the year ended December 31, 1996. Net losses from the discontinued operation
were $580,000 in 1996, $410,000 in 1995 and $257,000 in 1994 and are shown
separately on the consolidated statements of income. Revenues from discontinued
operations were approximately $22,800,000 in 1996, $23,700,000 in 1995 and
$24,300,000 in 1994, respectively. (Note 2)
Capital resources and liquidity
Capital expenditures. The Company invested $38,600,000 in property, plant and
equipment in 1996, compared with $41,600,000 in 1995 and $19,800,000 in 1994.
Aquarion's utility subsidiaries, BHC and Sea Cliff Water Company (SCWC)
(collectively, the Utilities) accounted for approximately 93 percent of plant
additions during the three-year period. Management estimates that capital
expenditures will total $28,200,000 in 1997, of which approximately
$27,100,000 will be for water utility construction programs.
Federal Safe Drinking Water Act (SDWA) regulations require water
filtration or alternate water treatment measures for BHC's major unfiltered
water supplies. In accordance with SDWA regulations, engineering for the
construction of filtration facilities at BHC's Hemlocks Reservoir commenced
during 1992, and construction
-9-
<PAGE>
<PAGE>
began in October 1994. The total expected cost of construction through
completion in 1997 will approximate $48,500,000. Expenditures totaling
$38,400,000 have been made for the Hemlocks filtration project through
December 31, 1996. BHC's Litchfield Division's filtration facilities were
completed and placed in service in 1996 at a total project cost of $8,700,000.
Financing activities. The Company's capital expenditures have historically
been financed from several sources including internally generated funds, rate
relief, proceeds from debt financings, sale of common stock, and short-term
borrowings under the Company's revolving credit agreements.
The percentage of capital expenditures financed by net cash from
operating activities was 61 percent, 54 percent and 100 percent for the years
ended December 31, 1996, 1995 and 1994, respectively. (See "Consolidated
Financial Statements-Consolidated Statements of Cash Flows.") The remainder
has been provided from external financing sources.
The Company obtained funds of $3,449,000 from issuances of Common Stock
under its Dividend Reinvestment and Common Stock Purchase Plan (the Plan) in
1996 versus $2,696,000 and $2,902,000 in 1995 and 1994, respectively. The
Utilities also received $2,626,000 from advances and contributions in aid of
construction from developers and customers in 1996.
During 1996, BHC's Eastern and Western divisions received approval from
the Connecticut Department of Public Utility Control (DPUC) for water service
rate increases as well as BHC's Eastern division's quarterly Construction-
Work-in-Progress (CWIP) rate surcharges for SDWA projects. (Note 3)
On October 3, 1996, BHC issued a $30,000,000 unsecured note in
consideration for a loan of the proceeds from the issuance by the Connecticut
Development Authority of an equal amount of tax-exempt Water Facilities
Revenue Bonds. These bonds bear interest at 6.0 percent and have a 40-year
maturity. (Note 7)
Aquarion has revolving credit agreements that provide $50,000,000 of
short-term credit availability on a committed basis. (Note 8) The Company
borrows on a short-term basis and periodically refinances through long-term
debt or equity issues.
The Company has a target dividend payout ratio, over the long term, of
75 to 80 percent. The dividend payout as a percentage of net income was
125 percent and 85 percent in 1996 and 1995, respectively, and 48 percent as
a percentage of net cash provided by operating activities in 1996 and 1995,
respectively.
Future financing requirements. As in the past, the Company's ability to
finance future capital expenditures depends on rate relief, in addition to the
Company's general financial policies regarding capitalization, market
conditions and other economic factors. Rate relief has an impact on cash flow
since sufficient operating cash flows are necessary to maintain debt coverage
ratios to allow for the issuance of
-10-
<PAGE>
<PAGE>
additional debt securities and to provide a reasonable return in the form of
dividends to Aquarion's shareholders.
The Company's ability to obtain funding from external sources will be
affected by the terms of certain of its existing obligations. Under BHC's
First Mortgage Indenture (BHC Indenture), approximately $5,000,000 of First
Mortgage Bonds were outstanding at December 31, 1996. No additional bonds
have been issued under the BHC Indenture since 1980. Substantially all of
BHC's properties are subject to the lien of the BHC Indenture.
Additional long-term debt may be issued by the Company under the terms
of the Aquarion Senior Notes as long as consolidated long-term debt (including
capitalized lease obligations) does not exceed 66 2/3 percent of its
consolidated total capitalization, as defined. BHC may issue additional long-
term debt under its Senior Notes if it meets a similar 66 2/3 percent long-
term debt to total capitalization test.
The Company's need for future external financing may also be affected by
future net proceeds from its land-disposition program. BHC has identified
approximately 2,600 acres of off-watershed land, most of which was previously
in its rate base, as surplus to utility operations. Under Connecticut law,
net proceeds from the sale of land which have been in a utility's rate base
must be reinvested in utility plant, and profits from such transactions are
allocated by the DPUC between the utility's customers and shareholders
pursuant to legislative and regulatory criteria. (Note 4)
Other.
Inflation. Inflation, as measured by the Consumer Price Index, increased
3.3 percent, 2.5 percent and 2.7 percent in 1996, 1995 and 1994, respectively,
and primarily affects the Utilities. The regulatory authorities allow the
recovery of depreciation through revenues solely on the basis of the
historical cost of plant. The replacement cost of utility plant would be
significantly higher than the historical cost. While the regulatory
authorities give no recognition in the ratemaking process to the current cost
of replacing utility plant, the Company believes that, based on past
practices, the Utilities will continue to be allowed to earn a return on the
increased cost of their net investment when prudent replacement of facilities
actually occurs.
Results of operations
1996 compared with 1995
Overview. The Company's consolidated net income for 1996 was $9,005,000
compared with net income of $12,886,000 in 1995. Net income per share was
$1.30 in 1996 based on a weighted average of 6,931,388 common shares
outstanding, compared with $1.90 in 1995 based on a weighted average of
6,794,400 common shares outstanding. For the year ended December 31,1996, the
Company recorded an after tax loss of $4,255,000 from the anticipated sale of
IEA. (Note 2) For the year ended December 31, 1996, net income from
continuing operations was
-11-
<PAGE>
<PAGE>
$13,840,000, or $2.00 per share, versus $13,296,000, or $1.96 per share in
1995. Operating results in 1996 reflect the Utilities improved operating
efficiencies as well as a lower tax obligation and improved receivable
collections, partially offset by lower property sales in 1996. Property sales
in 1995 include an after-tax gain of approximately $1,100,000, or $0.16 cents
per share, as a result of the property-exchange agreement in connection with
the acquisition of NCWC and RWSC on October 12, 1995.(Note 5).
Operating revenues. Consolidated operating revenues of $94,804,000 in 1996
were $235,000 higher than 1995. Revenues from the Utilities increased
$3,020,000, due to additional CWIP rate surcharge revenues, BHC's Eastern and
Western divisions' rate increases that became effective in 1996 and the
acquisition of SCWC, partially offset by a wetter than normal year in 1996.
Timber processing experienced an increase in revenues during 1996 of
$1,461,000 primarily due to increased lumber sales volume. Revenues from
property sales decreased $4,259,000 due to the sale of NCWC's reservoir in
1995 and lower volume in the land sales program in 1996, partially offset by
the revenues recognized from the condemnation of the former SWC headquarters
in 1996. (Note 4)
Operating expenses. Operating expenses for 1996 were $24,017,000, an increase
of $743,000 over 1995. Timber processing experienced increased operating
expenses of $1,334,000 compared with 1995 primarily due to
higher costs associated with the increased sales volume. The Utilities
experienced an increase in operating expenses of $614,000, principally due to
additional expenses associated with water treatment and distribution.
Operating expenses from property sales decreased by $1,347,000 due to the
decreased activity in the land sales program.
General & administrative expenses. General and administrative expenses
totaled $16,196,000, a $2,759,000 decrease over 1995. This decrease reflects
the improved operating efficiencies at the Utilities, reduced bad debt expense
in 1996 and the non-recurring retirement benefits for the former chairman in
1995, partially offset by increased costs for health insurance, employee
benefits and other administrative expenses in 1996 and a non-recurring
insurance rebate in 1995.
Depreciation expense. Depreciation expense in 1996 was $954,000 higher than
1995, which was largely the result of general plant additions at the Utilities
and a higher composite annual depreciation rate for BHC's eastern division
effective August 1, 1996.
Interest expense. Interest expense for 1996 was $842,000 higher than 1995 due
to the interest expense associated with the May 1995 and October 1996 debt
issuances by BHC of $30,000,000 each and higher average short-term
borrowings, primarily associated with filtration projects.
-12-
<PAGE>
<PAGE>
Taxes other than income taxes. Taxes other than income taxes were $760,000
higher than 1995. Increased property taxes of $468,000 as well as higher
payroll and gross earnings taxes of $292,000 in 1996 account for this
increase.
Income taxes. Income taxes for 1996 were $598,000 lower than 1995, primarily
due to lower state business taxes and a lower federal income tax obligation.
Significant changes in balance sheet accounts. Net property, plant and
equipment increased by $27,634,000, due primarily to construction at the
filtration plants and general utility plant additions.
The increase in other current assets of $16,838,000 was primarily the
result of the amount due the Company from the anticipated sale of IEA. (Note
2)
The decrease of $9,293,000 in goodwill was largely attributable to the
treatment of IEA as a discontinued operation.
Long-term debt increased by $16,496,000 which was primarily the result
of BHC's $30,000,000 debt issue in 1996, partially offset by the transfer of
Aquarion's $15,000,000 note, due June 1, 1997, to current maturities of long-
term debt.
1995 compared with 1994
Overview. In 1994 two nonrecurring transactions occurred. On November 8,
1994, Timco agreed to terminate its long-term rate order with Public Service
Company of New Hampshire (PSNH) under which Timco sold PSNH electricity
produced at its cogeneration plant. Under the agreement, PSNH paid Timco
$8,195,105 in exchange for the assignment of the rate order to PSNH and a
release of PSNH's obligations to buy power from Timco. The net after-tax
gain on this transaction, after providing for unrecoverable costs and expenses,
was $1,902,000. Revenues from electricity cogeneration were $3,000,000 in
1994.
Aquarion also recorded a charge of $1,900,000 related to the Company's
investment in a rehabilitation housing unit in New Hampshire (the
Partnership). Aquarion has been informed that the Partnership may require
additional capital from each of the five limited partners beyond the amounts
originally agreed upon. At present, it is not known whether the limited
partners will make the necessary capital contributions to sustain the
operation of the Partnership. Based upon the risk of continued funding and
the project's poor performance, the Company no longer believes that the value
of its Partnership investment is recoverable. The after-tax effect of these
two transactions had no impact on Aquarion's earnings in 1994.
Operating revenues. Consolidated operating revenues of $94,569,000 in 1995
were $3,122,000 lower than 1994. Timber processing experienced decreased
revenues during 1995 of $11,986,000 primarily due to the termination of the
rate order with PSNH and corresponding loss of cogeneration revenues.
Revenues from the Utilities increased $5,428,000, principally due to the
addition of
-13-
<PAGE>
<PAGE>
NCWC and RWSC's revenues, the CWIP rate surcharge and increased consumption
due to a hot, dry summer in 1995. Revenues from property sales increased
$3,480,000 due to the sale of NCWC's reservoir and the Company's continued
commitment to sell surplus land.
Operating expenses. Operating expenses for 1995 were $23,274,000, a decrease
of $5,358,000 over 1994. Timber processing had lower operating expenses of
$7,549,000 compared with 1994, primarily due to the costs associated with the
termination of the rate order in 1994. Operating expenses from property sales
increased by $1,205,000 due to the increased activity in the land sales
program. The Utilities experienced an increase in operating expenses of
$1,216,000, principally due to the additional expenses associated with NCWC
and RWSC and higher expenses associated with purchased water, fuel purchases
and maintenance.
General & administrative expenses. General and administrative expenses
totaled $18,955,000, a $591,000 increase over 1994. This increase is
primarily the result of increased expenses of $2,321,000 for the Utilities due
to the acquisition of NCWC and RWSC, partially offset by a $1,900,000 charge
in 1994 related to the investment in the Partnership.
Depreciation expense. Depreciation expense in 1995 was $271,000 higher than
1994. This increase is attributable to the additional depreciation from NCWC
and RWSC, partially offset by the retirement of the cogeneration plant at the
Timco facility in 1994.
Interest expense. Interest expense for 1995 was $999,000 higher then 1994 due
to the interest expense associated with the 1995 debt issuance by BHC of
$30,000,000 and higher short-term borrowing rates.
Taxes other than income taxes. Taxes other than income taxes were $149,000
higher than 1994. Increased payroll and gross earnings taxes of $441,000
offset by lower property taxes of $292,000 in 1995 account for this increase.
Income taxes. Income taxes for 1995 were $289,000 lower than 1994, primarily <PAGE>
due to the non-recurring charge recorded in 1994 related to the Partnership.
Seasonality. The Company's operating results are subject to weather
variations and seasonal fluctuations, due to an increased demand for water in
the warmer months. (See Supplemental Financial Information to Consolidated
Financial Statements for selected quarterly data for 1996 and 1995.)
In addition to the historical information contained herein, this report
contains a number of "forward-looking statements," within the meaning of the
Securities and Exchange Act of 1934. Such statements address future events
and conditions concerning the adequacy of water supply and utility plant,
capital expenditures, earnings on assets, liquidity and capital resources and
accounting matters. Actual results in each case could differ materially from
those projected in such statements.
-14-
<PAGE>
<PAGE>
<TABLE>
Aquarion Company and Subsidiaries
Consolidated Statements of Income
<CAPTION>
In thousands, except share data
Year ended December 31 1996 1995 1994
- ------------------------------- ---- ---- ----
<S> <C> <C> <C>
Operating revenues $ 94,804 $ 94,569 $ 97,691
--------- --------- ---------
Costs and expenses:
Operating 24,017 23,274 28,632
General and administrative 16,196 18,955 18,364
Depreciation 11,077 10,123 9,852
Interest expense 9,311 8,469 7,470
Taxes other than income 12,202 11,442 11,293
--------- --------- ---------
Total costs and expenses 72,803 72,263 75,611
--------- --------- ---------
22,001 22,306 22,080
Allowance for funds used during
construction 1,123 872 569
--------- --------- --------
Income before income taxes 23,124 23,178 22,649
Income taxes 9,284 9,882 10,171
--------- --------- --------
Net income before discontinued
operations 13,840 13,296 12,478
Discontinued operation:
Loss from discontinued operations,
less applicable income tax benefit/
(expense) of $66, $(19) and $(100) (580) (410) (257)
Loss on disposal of discontinued
operations, less applicable income
tax benefit of $5,695 (4,255) - -
--------- --------- ---------
Net income $ 9,005 $ 12,886 $ 12,221
========= ========= =========
Earnings (loss) per share:
Per share from continuing operations $ 2.00 $ 1.96 $ 1.91
Per share from discontinued
operations (0.09) (0.06) (0.04)
Per share from disposal of
discontinued operations (0.61) - -
--------- --------- ---------
Per Share $ 1.30 $ 1.90 $ 1.87
========= ========= =========
Weighted average common shares
outstanding 6,931,388 6,794,400 6,532,627
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-15-
<PAGE>
<PAGE>
<TABLE>
Aquarion Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Assets
In thousands
December 31, 1996 1995
- ------------------------------------- ---- ----
<S> <C> <C>
Property, plant and equipment $454,716 $432,480
Less: accumulated depreciation 131,328 136,726
-------- --------
Net property, plant and equipment 323,388 295,754
-------- --------
Current assets:
Cash and cash equivalents 470 635
-------- --------
Accounts receivable 10,796 15,859
Less: allowance for doubtful accounts 1,253 2,916
-------- --------
9,543 12,943
Accrued revenues 9,893 9,108
Inventories 2,883 4,105
Prepaid expenses 8,732 7,737
Other current assets 18,101 1,263
-------- --------
Total current assets 49,622 35,791
-------- --------
Goodwill 977 10,270
Recoverable income taxes 44,938 44,922
Other assets 30,167 27,243
-------- --------
$449,092 $413,980
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-16-
<PAGE>
<PAGE>
<TABLE>
Aquarion Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Liabilities and Shareholders' Equity
In thousands, except share data
December 31, 1996 1995
- ------------------------------------ ---- ----
<S> <C> <C>
Shareholders' equity:
Preferred stock, no par value, authorized
2,500,000 shares not to exceed aggregate value
of $25,000,000, issuable in shares--none issued $ - $ -
Common stock, stated value: $1
Authorized--16,000,000 shares
Issued 7,080,355 shares in 1996 and 6,936,574
shares in 1995 7,080 6,937
Capital in excess of stated value 101,360 98,213
Retained earnings 16,324 18,583
Less: minimum pension liability adjustment 104 -
Less: treasury stock, at cost 1,709 2,231
-------- --------
Total shareholders' equity 122,951 121,502
-------- --------
Redeemable preferred stock of subsidiaries - 285
-------- --------
Long-term debt and other obligations 148,487 131,991
-------- --------
Current liabilities:
Short-term borrowings, unsecured 8,300 11,600
Current maturities of long-term debt 15,000 62
Accounts payable and accrued liabilities 15,654 15,221
Dividends payable 2,843 2,776
Accrued interest 2,484 2,023
Taxes other than income taxes 1,927 1,713
Income taxes 1,555 1,805
-------- --------
Total current liabilities 47,763 35,200
-------- --------
Advances for construction 28,017 26,264
Contributions in aid of construction 24,354 23,959
Deferred land sale gains 471 620
Accrued postretirement benefit cost 4,125 3,065
Recoverable income taxes 6,346 5,944
Deferred income taxes 66,578 65,150
Commitments & contingencies (Note 16) - -
-------- --------
$449,092 $413,980
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-17-
<PAGE>
<PAGE>
<TABLE>
Aquarion Company and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
In thousands,
Year ended December 31 1996 1995 1994
- --------------------------------- ---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,005 $12,886 $12,221
Adjustments reconciling net income to net cash
provided by operating activities
Depreciation and amortization 13,797 12,979 12,542
Proceeds from sale of surplus land, net of gains 778 2,798 1,372
Loss on disposal of segment 4,255 - -
Gain on disposition of property - (2,033) -
Provision for losses on accounts receivable (29) 842 1,067
Deferred tax provision 45 1,261 662
Allowance for funds used during construction (1,123) (872) (569)
Change in assets and liabilities (Note 15) (3,239) (5,524) 6,431
-------- -------- -------
Net cash provided by operating activities 23,489 22,337 33,726
-------- -------- -------
Cash flows from investing activities:
Capital additions, excluding an allowance for
funds used during construction (38,600) (41,646) (19,766)
Acquisition of business, less cash acquired (2,598) - -
Advances and contributions in aid of
construction 2,626 3,054 1,985
Refunds on advances for construction (933) (288) (465)
Other investing activities (1,202) (25) (178)
-------- -------- --------
Net cash used in investing activities (40,707) (38,905) (18,424)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 31,518 20,588 -
Proceeds from the issuance of common stock, net 3,290 2,644 2,836
Net (repayments) borrowings of short-term debt (5,000) 11,600 (5,500)
Common dividends paid (11,198) (10,830) (10,554)
Principal and premium payments on long-term debt (52) (7,682) (68)
Debt issuance costs (1,220) (407) (726)
Payments for redemption of preferred stock (285) (45) (45)
-------- -------- --------
Net cash provided by (used in) financing
activities 17,053 15,868 (14,057)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents (165) (700) 1,245
Cash and cash equivalents, beginning of year 635 1,335 90
-------- -------- --------
Cash and cash equivalents, end of year $ 470 $ 635 $ 1,335
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-18-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Aquarion Company and Subsidiaries
Consolidated Statements of Shareholders' Equity
Capital Minimum Total
Common Stock in excess pension Treasury Stock share-
---------------- ---------------
In thousands, except share Number Stated of stated Retained liability Number holders
- --------------------------
data of Shares value value earnings adjustment of Shares Amount equity
- --- --------- ----- ----- -------- ---------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Balance, December 31, 1993 6,564,533 $6,565 $91,441 $15,015 $ - 92,291 $(2,540) $110,481
Net income - - - 12,221 - - - 12,221
Dividends on common stock - - - (10,608) - - - (10,608)
Dividend reinvestment plan 125,480 125 2,711 - - - - 2,836
Treasury stock transactions(1) - - - - - (7,299) 202 202
--------- ----- ------- ------- ------ ------ ------ -------
Balance, December 31, 1994 6,690,013 6,690 94,152 16,628 - 84,992 (2,338) 115,132
--------- ----- ------ ------- ------ ------ ------ -------
Year ended December 31, 1995
Net income - - - 12,886 - - - 12,886
Shares issued for Acquisi-
tion of NCWC & RWSC 123,053 123 1,540 - - - - 1,663
Dividends on common stock - - - (10,931) - - - (10,931)
Dividend reinvestment plan 123,508 124 2,521 - - - - 2,645
Treasury stock transactions - - - - - (3,701) 107 107
--------- ----- ------ ------- ------ ------ ------ -------
Balance, December 31, 1995 6,936,574 6,937 98,213 18,583 - 81,291 (2,231) 121,502
--------- ----- ------ ------- ------ ------ ------ -------
Year ended December 31, 1996
Net income - - - 9,005 - - - 9,005
Dividends on common stock - - - (11,264) - - - (11,264)
Dividend reinvestment plan 143,781 143 3,147 - - - - 3,290
Minimum Pension liability
adjustment (Note 11) - - - - (104) - - (104)
Treasury stock transactions(1) - - - - - (19,793) 522 522
--------- ------ -------- ------- ----- ------- ------- --------
Balance, December 31, 1996 7,080,355 $7,080 $101,360 $16,324 $(104) 61,498 $(1,709) $122,951
========= ====== ======== ======= ===== ======= ======= ========
</TABLE>
(1) Includes exercise of stock options.
The accompanying notes are an integral part of these consolidated financial
statements.
-19-
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant accounting policies
Aquarion Company (Aquarion) is a holding company whose subsidiaries are
engaged both in the regulated utility business of public water supply as well
as in various nonutility businesses. Aquarion's utility subsidiaries, BHC
Company (BHC) and Sea Cliff Water Company (SCWC) (collectively, the Utilities)
collect, treat and distribute water to residential, commercial and industrial
customers, to other utilities for resale, and for private and municipal fire
protection. The Utilities provide water to customers in 30 communities in
Connecticut and Long Island, New York, including communities served by other
utilities to which water is available on a wholesale basis for back-up supply
and peak demand purposes through BHC's Southwest Regional Pipeline. BHC is
the largest investor-owned water company in Connecticut and with SCWC, is
among the 10 largest investor-owned water companies in the nation. The
Utilities are regulated by several Connecticut and New York agencies,
including the Connecticut Department of Public Utility Control (DPUC) and the
New York Public Service Commission (PSC). Aquarion and its subsidiaries
(collectively, the Company) are also engaged in nonutility activities. The
Company is engaged in the utility management service business through Aquarion
Management Services, Inc. (AMS), and owns a timber processing business,
Timco, Inc. (Timco) and a small real estate subsidiary, Main Street South
Corporation (MSSC).
The Company's accounting policies conform to generally accepted
accounting principles and, as applied in the case of rate-regulated public
utilities, comply with the Uniform System of Accounts and
ratemaking practices prescribed by the regulatory authorities. A description
of Aquarion's principal accounting policies follows.
Principles of consolidation. The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Property, plant and equipment. Property, plant and equipment is stated at
cost. The costs of additions to and replacements of retired units of property
are capitalized. Costs include charges for direct material, labor and
services, and indirect charges related to construction, such as engineering,
supervision, payroll taxes and employee benefits. BHC also capitalizes an
allowance for funds used during construction (AFUDC) equivalent to the cost of
funds devoted to plant under construction, except for the portion of Federal
Safe Drinking Water Act (SDWA) projects for which it may receive a
Construction-Work-in-Progress (CWIP) water service rate surcharge.
Modifications and improvements to units of property are capitalized.
Expenditures for repairs and maintenance are charged to expense as incurred.
At the time depreciable utility property is retired or disposed of, the
book cost together with the related costs of removal, less salvage, is charged
to the reserve for depreciation in accordance with the Uniform System of
Accounts prescribed by the regulatory authorities. Upon disposal or
retirement of depreciable nonutility property, the appropriate plant accounts
and accumulated depreciation are reduced by the related costs. Any resulting
gain or loss is recognized in the consolidated statements of income.
For financial reporting purposes, depreciation is provided for by use
of the straight-line method over the estimated service lives of the respective
assets. Depreciation is computed based on estimated useful lives of 8 to 81
years for utility plant and equipment and 3 to 20 years for nonutility plant
and equipment. For income tax purposes, the Company uses various accelerated
tax lives and rates as allowed under the Internal Revenue Code.
Cash equivalents. The Company considers all highly liquid investments that
have a maturity of three months or less when purchased to be cash equivalents.
Earnings per share. Earnings per share is based on the annual weighted
average number of shares outstanding and common share equivalents. Common
share equivalents consist of outstanding employee stock options, which do not
have a significant impact on the calculation.
Allowance for funds used during construction. AFUDC is a non-cash credit to
income with a corresponding charge to utility plant which represents the cost
of borrowed funds and a return on equity funds utilized to fund plant under
construction. BHC records AFUDC to the extent permitted by regulatory
authorities.
Construction-work-in-progress surcharge. The DPUC regulations allow water
utilities to implement a CWIP rate surcharge to customer water bills in order
to recover 90 percent of the carrying costs of capital used in SDWA-mandated
projects, until such time as these projects are completed. The CWIP rate
surcharge is in lieu of AFUDC and is included in water service revenues.
Revenue recognition. The Utilities accrue revenue for the estimated amount of
water consumed but not billed at the end of each period. Timber processing
revenues are recognized as the related timber products are shipped. Revenues
from sales of real estate are recognized when the transaction is consummated
and title has passed.
Inventories. Inventories are recorded at the lower of cost or market values,
with cost being determined on the basis of the "first-in, first-out" (FIFO)
method. Materials and supplies are valued at average cost.
Other assets. Other assets consist primarily of prepaid taxes, deferred
financing charges, rate case and other expenses, as well as certain items to
be amortized, subject to regulatory approval, over their anticipated period of
recovery.
Deferred rate case expenses are amortized over periods allowed by the
regulatory authority, generally one to three years. Deferred financing
charges are amortized over the lives of the related debt issues, primarily 30
to 40 years.
-20-
<PAGE>
<PAGE>
Accounts payable. Accounts payable at December 31, 1996 included
liabilities in the amount of $2,263,000 for checks issued but not yet
presented for collection, net of the related bank balance.
Fair value of financial instruments. The carrying amount of cash and cash
equivalents, trade accounts receivable, and short-term borrowings approximate
their fair values due to their short-term nature. The fair value of long-term
debt based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities at December 31 was as follows:
(In thousands) 1996 1995
-------------- ---- ----
Fair Value $132,982 $122,212
Carrying Value 148,487 131,991
Advances for construction/contributions in aid of construction. The Utilities
receive cash advances from developers and customers to finance construction of
new water main extensions. These advances are partially refunded over a 10-
year period as water revenues are earned from those new customers. Any
remaining unrefunded balances are reclassified to contributions in aid of
construction for BHC and Utility Plant for SCWC in the consolidated balance
sheets and are no longer refundable.
Income taxes. The Company and its eligible subsidiaries file a consolidated
federal income tax return. Federal income taxes are deferred under the
liability method in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the liability
method, deferred income taxes are provided for all differences between
financial statement and tax bases of assets and liabilities. Additional
deferred income taxes and offsetting regulatory assets or liabilities are
recorded to recognize that income taxes will be recoverable or refundable
through future revenues.
Investment tax credits arising from property additions are deferred and
amortized over the estimated service lives of the related properties (Note 6).
Accounting for long-lived assets. The Company has adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," in 1996. The statement requires that long-lived assets
and certain identifiable intangible assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The effect of the adoption of this standard did
not have a material impact on the Company's financial statements.
Estimates. The accompanying consolidated financial statements reflect
judgements and estimates made in the application of the above accounting
policies. Actual results may differ from these estimates.
Reclassification. Certain prior year amounts have been reclassified to
conform with the current year presentation.
Note 2 - Sale and Discontinued Operations
On February 19, 1997, the Company announced that it had entered into an
agreement in principle to sell the operations of Industrial and Environmental
Analysts, Inc. (IEA), its environmental testing laboratory business for
approximately $10,000,000. The Company anticipates the sale will take place
before the end of March 1997. The sale is subject to the execution of a
definitive agreement and other conditions. Accordingly IEA's results have
been recorded as a discontinued operation for the years ended December 31,
1996, 1995 and 1994. It is anticipated that proceeds from this transaction
will be used to reduce debt.
The Company recorded an after tax loss of $4,255,000 or $.61 per share
from the anticipated sale of the discontinued operation for the year ended
December 31, 1996. Net losses from the discontinued operation were $580,000 in
1996, $410,000 in 1995 and $257,000 in 1994, respectively and are shown
separately on the consolidated statements of income. Revenues from
discontinued operations were approximately $22,800,000 in 1996, $23,700,000 in
1995 and $24,300,000 in 1994, respectively.
Note 3 - Regulatory matters
Rates. On January 17, 1997, BHC's Eastern division filed an application with
the DPUC for a CWIP rate surcharge of 8.94 percent of current revenues to
recover 90 percent of the carrying costs, through December 31, 1996, of
capital used in the construction of a filtration plant at its Hemlocks
Reservoir in Fairfield, Connecticut. This plant, mandated by the SDWA, as
amended, is estimated to cost approximately $48,500,000. This application
updated the CWIP rate surcharge of 8.05 percent granted in December 1996.
BHC's Eastern division will continue to file quarterly applications for
increases in the CWIP rate surcharge as construction continues until its
completion in 1997, at which time the filtration facilities are expected to be
operational and subject to general ratemaking regulations.
On July 31, 1996, BHC's Eastern division received approval
from the DPUC for a 6.5 percent water service rate increase designed to
provide a $4,000,000 increase in annual water service revenues. As part of
the decision, BHC's Eastern division will be allowed to re-open the application
in 1997 to include the full cost of construction of the Hemlocks filtration
Plant, as well as all corresponding operating expenses, property taxes and
depreciation expense. If approved, water service rates at that time will
increase by approximately an additional 3.5 percent, which is net of the
reduction for the repeal of the Connecticut gross earnings tax, plus a
cumulative CWIP rate surcharge, which is estimated to be 10 percent at
that time.
On April 3, 1996, BHC's Western division received a final decision from
the DPUC, which became effective on April 25, 1996, allowing for a 5.1
percent rate increase, designed to provide a $782,000 increase in annual
water service revenues. As part of the decision, the DPUC approved BHC's
Western division's proposal to equalize the meter rates and service charges
for Stamford Water Company (SWC), New Canaan Water Company (NCWC) and
Ridgefield Water Supply Company (RWSC).
-21-
<PAGE>
<PAGE>
Note 4 - Sale of surplus land
Proceeds from the sale of land are recorded as revenue at the time of
closing, and portions of pretax gains required to be deferred by the DPUC are
amortized as a reduction in BHC's operating expenses over various time periods
as stipulated by the DPUC.
In 1996, the Company sold approximately 32 acres of surplus land with
proceeds totaling $929,500. Total gains, including recognition of deferred
gains from prior land sales of $134,000, approximated $434,000 or
$0.06 cents per share. In addition, the Company recognized a gain of $320,000
or $0.05 cents per share from the condemnation, by the City of Stamford, of
the former headquarters of SWC.
In 1995, the Company sold approximately 90 acres of surplus land with
proceeds totaling $3,957,500. Total gains, including recognition of deferred
gains from prior land sales of $80,000, approximated $1,160,000, or
$0.17 cents per share. In addition, on October 12, 1995, BHC completed the
acquisition of NCWC and RWSC. As the result of the related property-exchange
agreement, Aquarion recorded an after-tax gain of approximately $1,100,000, or
$0.16 cents per share, in the fourth quarter of 1995.
In 1994, the Company sold approximately 43 acres of surplus land with
proceeds totaling $2,185,000. Total gains, including recognition of deferred
gains from prior land sales of $10,000, approximated $813,000 or $0.13 cents
per share. In addition, the Company recognized a gain of $283,000 or $0.04
cents per share for the sale of a 50 percent ownership interest, through a
joint venture, in a commercial building located in Cary, North Carolina.
Note 5 - Acquisitions
On May 30, 1996, the Company acquired Sea Cliff Water Company, a
subsidiary of Emcor Group, Inc., for approximately $2,600,000 in cash. SCWC,
which has approximately 4,300 customers, serves a portion of Nassau County in
Long Island, New York, and has approximate annual revenues of $2,000,000.
On October 12, 1995, the Company completed the acquisition of NCWC and
RWSC for 123,053 shares of Aquarion common stock with a market value of
$2,828,692 and the repayment of certain indebtedness of The New Canaan Company
(NCC) in the amount of $100,000. Immediately after the acquisition closed,
the parties completed a property exchange whereby the Monroe Environmental
Leasing Partnership (MELP) transferred to NCWC a commercial building and the
property on which it is situated, NCWC transferred a reservoir and related
property to the Second Taxing District of Norwalk (STD) and STD, in turn,
paid $2,200,000 to MELP, which also received $214,157 from Aquarion. The
property exchange resulted in net income to Aquarion of approximately
$1,100,000, or 16 cents per share in 1995. The acquisition was accounted for
as a pooling of interests, and the Company did not restate the previous year's
financial statements due to the limited impact on consolidated operating
results in 1995.
Note 6 - Income taxes
Income tax expense for the three years ended December 31, consisted of
the following:
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- -------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Current:
Federal $1,199 $6,297 $ 7,006
State 2,234 2,343 2,603
------ ------ -------
Total current 3,433 8,640 9,609
------ ------ -------
Deferred:
Federal 277 1,542 981
State (187) (281) (319)
------ ------ -------
Total deferred 90 1,261 662
------ ------ -------
Total income tax expense $3,523 $9,901 $10,271
====== ====== =======
</TABLE>
A reconciliation of income tax expense at the statutory federal income
tax rate to the actual income tax expense for the years ended December 31, is
as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- ------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate $4,384 $7,975 $ 7,874
Increases (reductions) in taxes resulting from:
State taxes, net of federal income taxes 1,331 1,340 1,485
Excess depreciation and basis amortization 700 683 662
Partnership investment - - 665
Bond premium costs 26 18 (455)
Investment tax credit (152) (162) (152)
Amortization of goodwill 142 141 146
Excess tax basis on disposition (2,213) - -
Other items, net (695) (94) 46
------ ------ -------
Actual income tax expense $3,523 $9,901 $10,271
====== ====== =======
</TABLE>
Deferred tax liabilities (assets) at December 31, were comprised of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Utility temporary differences $43,679 $43,770 $46,703
Depreciation 20,168 18,944 15,398
Investment tax credits 1,225 1,233 990
Other 1,506 1,203 945
------- ------- -------
Gross deferred tax liabilities 66,578 65,150 64,036
------- ------- -------
Contributions in aid of construction (7,934) (6,503) (6,229)
Other (4,237) (3,168) (2,813)
------- ------- -------
Gross deferred tax assets (12,171) (9,671) (9,042)
------- ------- -------
$54,407 $55,479 $54,994
======= ======= =======
</TABLE>
-22-
<PAGE>
<PAGE>
Note 7 - Long-term debt
Long-term debt at December 31, consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ----------------------------------------------------- ---- ----
<S> <C> <C>
First mortgage bonds
Series R, 6.875%, due November 1, 1998 $ 5,000 $ 5,000
Notes payable - unsecured
7.8% senior notes due June 1, 1997 15,000 15,000
5.95% senior note due January 4, 1999 10,000 10,000
9.55% senior notes due February 1, 2021 20,000 20,000
7.25% note due June 1, 2020 (a) 7,000 7,000
5.5% note due June 1, 2028 (b) 12,000 12,000
5.6% note due June 1, 2028 (b) 10,000 10,000
5.3% note due September 1, 2028 8,980 8,980
5.8% note due March 1, 2029 (b) 7,700 7,700
6.05% note due March 1, 2029 (b) 10,000 10,000
Adjustable rate note due April 1, 2035 (d) 30,000 30,000
6.00% note due September 1, 2036 (e) 30,000 -
4.25% note due November 1, 2004 (c) 5,700 5,700
7.4%-12.5% capital lease obligations - 84
------- --------
171,380 141,464
Less: Amounts due within one year 15,000 62
Balance of note proceeds held by
trustee 7,893 9,411
-------- --------
$148,487 $131,991
======== ========
</TABLE>
(a) BHC has the option to redeem this note at a redemption price
ranging from 102 percent on June 1, 2000 to 100 percent on June 1, 2002 and
thereafter.
(b) These BHC financings are insured as to the payment of principal
and interest by the Municipal Bond Investors Assurance Corporation.
(c) This Timco financing bears interest at a rate adjusted
each November 1 until such time as Timco elects to convert to a fixed rate. On
November 1, 1996, the interest rate was adjusted from 4.40 percent to 4.25
percent. Bondholders may elect to have their bonds redeemed at a price equal
to 100 percent of the principal amount on each November 1 until conversion of
the interest rate on the bonds to a fixed rate.
(d) On February 3, 1997, BHC converted the interest rate on its
$30,000,000 unsecured note, issued in 1995 in consideration for a loan of the
proceeds from the issuance by the Connecticut Development Authority (CDA) of
an equal amount of tax-exempt Water Facilities Revenue Bonds, from a weekly
rate to a fixed rate of 6.15 percent.
(e) On October 3, 1996, BHC issued a $30,000,000 unsecured note in
consideration for a loan of the proceeds from the issuance by the CDA of an
equal amount of tax-exempt Water Facilities Revenue Bonds. The tax-exempt
CDA bonds, bearing interest at 6.0 percent, have a 40-year maturity. BHC has
the option to have these bonds redeemed at a price ranging from 102 percent
on September 1, 2006 to 100 percent on September 1, 2010 and thereafter. The
proceeds of this bond issuance are to be used to offset costs incurred in the
construction of the Hemlocks Reservoir Filtration Project, the filtration
facilities at BHC's Lakeville and Norfolk Reservoirs and other facilities
consisting of transmission and distribution mains, service lines, meters and
hydrants for the purpose of supplying safe potable water to the general
public within the Company's service area. Under the terms of the CDA bonds,
proceeds are to be requisitioned from a construction fund held by a trustee
for planned capital improvements. At December 31, 1996, approximately
$7,893,000 remained in this fund.
Substantially all of BHC's utility plant is subject to the lien of its
first mortgage indenture. The Aquarion and subsidiaries mortgage bond and
note-purchase agreements contain certain covenants typical of such
agreements, the most restrictive of which are under the 9.55 percent
unsecured Senior Notes (BHC Notes) and the 7.8 percent and 5.95 percent
unsecured Senior Notes (Aquarion Notes) and require the maintenance of total
funded debt to total capital, as defined, of no more than 66 2/3 percent.
Additionally, payment of dividends on Aquarion's common stock is restricted
under the Aquarion notes. At December 31, 1996, approximately $33,700,000
was available to pay dividends as defined under the Aquarion notes. The
aggregate maturities and sinking fund requirements on long-term debt,
exclusive of capital lease obligations, for each of the five years succeeding
December 31, 1996 are as follows: 1997-$15,000,000; 1998-$5,000,000; 1999-
$10,000,000; 2000-$0; 2001-$0.
Note 8 - Short-term borrowings
Annually, the Company's unsecured revolving credit agreements are
subject to renewal. The agreements provide that the Company may select among
a variety of interest rates, including a negotiated rate. The Company pays a
commitment fee of .125 of 1 percent on the average daily unused portion of
the commitment for each day during which any unused portion exists. The
lines of credit provide for automatic renewal on an annual basis, but may be
terminated at the option of the banks or the Company upon 90 days notice by
either party prior to the annual anniversary of the agreements. In 1996, Fleet
Bank acquired NatWest Bank, both of which were participating banks in the
agreement, leaving $20,000,000 with one bank and $10,000,000 with each of the
three remaining banks of short-term credit availability on a committed basis.
Short-term borrowings for the years ended December 31, were as follows: <PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------- ---- ---- ----
In thousands)
<S> <C> <C> <C>
Borrowings outstanding at December 31 $8,300 $11,600 $ -
Weighted average interest rate at December 31 6.06% 5.96% N/A
Maximum outstanding during the year $29,200 $12,500 $15,100
Average outstanding during the year $16,292 $7,383 $5,725
Weighted average interest rate during the year 5.51% 5.41% 4.84%
</TABLE>
Note 9 - Redeemable preferred stock and rights
On December 1, 1996, the former Stamford Water Company redeemed all of
the outstanding shares of its $50 par value preferred stock at a price of
$50.50 per share, in addition to the double sinking fund payment, at a price
of $50.00 per share.
The Company has reserved 100,000 shares of Preferred Stock for issuance
under its Preferred Stock Purchase Rights Plan. Each share of common stock
is entitled to one right to buy, under certain circumstances, 1/100th of a
share of Series B Junior Participating Preferred Stock, no par value (Series
B Preferred Stock), at $120.00 per 1/100th of a share.
-23-
<PAGE>
<PAGE>
Each share of Series B Preferred Stock, if issued, would have dividend,
voting and liquidation rights which are at least 100 times the equivalent
rights of one share of the common stock. The rights would become exercisable
only if a person or group acquires 15 percent or more of the outstanding
common stock, or if a person or group announces or commences a tender or
exchange offer for 15 percent or more of the common stock. In the event that
any person or group of affiliated or associated persons becomes the holder of
a 15 percent or more position, each holder of a right, other than rights
beneficially owned by the 15 percent holder, will thereafter have the right
to receive upon exercise of a right at the then current exercise price of the
right, that number of shares of Common Stock having a market value of two
times the exercise price of the right. If, after a person or group has
acquired 15 percent or more of the outstanding Common Stock, the Company were
to be acquired in a merger or other business combination transaction, each
right would entitle its holder (other than a 15 percent or greater
shareholder) to receive, upon payment of the exercise price, that number of
shares of the acquiring company having a market value equal to twice the
exercise price.
The Company may redeem the rights at $.01 per right at any time before
a 15 percent position has been acquired. Until such time as these rights
become exercisable, they will have no dilutive effect on the Company's
earnings.
Note 10 - Industry segment information
The Company's operations are grouped into four industry segments as
follows:
Public water supply--collection, purification and distribution of water
for domestic commercial and industrial use, and for fire protection service;
Utility management services--nonregulated water-related services;
Timber processing--processing, marketing and distribution of lumber
products, and prior to November 1994, the generation and sale of cogenerated
electricity;
Real estate--ownership and sale of real property.
The following table sets forth information about the Company's
operations by industry segment for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- -------------------------------------- --------- --------- --------
<S> <C> <C> <C>
Operating Revenues:
Public Water Supply $ 81,508 $ 78,488 $ 73,060
Utility management services 570 557 601
Timber processing 10,785 9,324 21,310
Real Estate 1,941 6,200 2,720
-------- -------- --------
Total operating revenues $ 94,804 $ 94,569 $ 97,691
======== ======== ========
Operating income:
Public water supply $29,485 $ 26,895 $ 25,862
Utility management services (219) (92) (253)
Timber processing 968 945 5,015
Real estate 1,420 3,938 1,647
------- ------- -------
Industry segment operating income 31,654 31,686 32,271
Other expenses, net (1) (322) (888) (2,694)
Interest expense (9,311) (8,469) (7,470)
Allowance for funds used during
construction 1,123 872 569
Subsidiary preferred dividends (20) (23) (27)
------- ------- -------
Income before income taxes $23,124 $23,178 $22,649
======= ======= =======
</TABLE>
(1) Includes acquisition costs of $573,000 in 1995, and a Partnership
charge of $1,900,000 in 1994.
Operating revenues are comprised of sales to unaffiliated customers.
The Company's operations all take place in North America and no single
customer accounts for 10 percent or more of total operating revenues.
Operating income (loss) is defined as operating revenues less total
costs and expenses, other than interest expense, other (expenses) income,
income taxes, AFUDC and subsidiary preferred dividends.
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- ------------------------------- ------- ------- -------
<S> <C> <C> <C>
Identifiable assets:
Public water supply $415,045 $372,244 $331,423
Environmental laboratories and
utility management services (1) 813 21,505 26,751
Timber processing 6,773 6,585 4,469
Real estate 4,451 4,509 4,587
Corporate 22,010 9,137 3,640
-------- -------- --------
Total identifiable assets $449,092 $413,980 $370,870
======== ======== ========
Capital expenditures:
Public water supply $ 37,185 $ 38,600 $ 17,739
Environmental laboratories and
utility management services 749 1,719 1,525
Timber processing 666 1,327 502
Real estate - - 123
-------- -------- --------
Total capital expenditures $ 38,600 $ 41,646 $ 19,889
======== ======== ========
Depreciation expense:
Public water supply $ 10,668 $ 9,757 $ 9,139
Utility management services 9 14 31
Timber processing 389 341 671
Real estate 11 11 11
-------- -------- --------
Total depreciation expense $ 11,077 $ 10,123 $ 9,852
======== ======== ========
</TABLE>
(1) 1996 does not include Environmental laboratories.
Identifiable assets by industry segment are assets used in the
Company's operations in each industry segment. Corporate assets are
principally cash, prepaid expenses, receivables and deferred charges not
identifiable with a specific industry segment.
-24-
<PAGE>
<PAGE>
Note 11 - Employee benefit plans
Retirement plans - The Company and certain of its subsidiaries have a
noncontributory defined benefit pension plan covering qualified employees.
In general, Aquarion's policy is to fund pension costs accrued. The Company
also has a supplemental executive retirement plan (SERP) and a directors'
retirement plan. In addition, certain subsidiaries have established defined
contribution salary deferral plans under Section 401(k) of the Internal
Revenue Code.
The following table sets forth the funded status of Aquarion's
Retirement Plan For Employees (the Plan) at December 31, the Plan's latest
valuation date:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ------------------------------------------ ------- -------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of $19,084
in 1996 and $19,385 in 1995 $ 20,028 $ 20,463
======== ========
Projected benefit obligation $(23,651) $(24,375)
Plan assets at fair value 41,407 37,973
-------- --------
Plan assets in excess of projected
benefit obligation 17,756 13,598
Unrecognized prior service cost 581 646
Unrecognized net asset existing at
January 1, 1986 (2,129) (2,587)
Unrecognized net gain from past
experience (8,300) (4,993)
-------- --------
Prepaid pension cost $ 7,908 $ 6,664
======== ========
</TABLE>
The Company's SERP and directors' retirement plan are unfunded defined
benefit plans. The actuarial present value of benefit obligations and accrued
pension costs related to the two plans totaled $2,248,000 and $1,935,000 at
December 31, 1996 and 1995, respectively. The provisions of SFAS No. 87,
"Employees Accounting for Pensions" require recognition in the balance sheet of
an additional minimum liability and related intangible asset for pension plans
with accumulated benefit obligations in excess of plan assets. At
December 31, 1996, the liability exceeded the unrecognized prior service cost,
resulting in a minimum liability, net of taxes of $104,000, recorded as a
reduction of the company's equity. At December 31, 1995, the additional
pension liability is offset by an intangible asset, not to exceed prior
service costs of the two plans, of $650,000.
Net pension credit for all pension plans for the years ended December
31, included the following components:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- -------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Service cost - benefits earned during
the period $ 839 $ 640 $ 804
Interest cost on projected benefit
obligation 1,832 1,703 1,574
Actual return on plan assets (4,661) (7,601) 675
Net amortization and deferral 1,097 4,588 (3,966)
Non-recurring charge for Ad Hoc
benefit increase - 554 -
------ ------ ------
Net pension credit $ (893) $ (116) $ (913)
====== ====== ======
</TABLE>
The weighted average discount rate used to measure the projected
benefit obligation was 7.50, 7.00 and 8.25 percent for 1996, 1995 and 1994,
respectively. The expected long-term rate of return on assets was 8.6
percent for 1996 and 8.7 percent for 1995 and 1994. The weighted average
rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation was 5.0 percent
in 1996 and 1995 and 5.9 percent in 1994. The Plan invests in publicly
traded stocks and bonds.
Postretirement health care benefits. Aquarion and the Utilities provide
health benefits for substantially all retired employees and life insurance
for a small group of retired individuals. Post retirement health benefits are
not provided to employees hired after July 1, 1996. Only those employees
hired prior to July 1, 1996 who remain until retirement age are eligible.
Effective October 1, 1995, the Company entered into an agreement with a new
health care provider to administer a preferred provider organization (PPO)
plan. Prior to that time, several health care plans were offered with the
largest plan paying a stated percentage of covered expenses after a
deductible was met. Both active and retired employees contribute a portion
of the cost of medical benefits. The Company is funding its postretirement
health care benefits through contributions to a Voluntary Employee
Beneficiary Association Trust (VEBA). The Company's tax deductible
contribution was $423,000 and $462,000 for 1996 and 1995, respectively.
The net periodic postretirement benefit cost for the years ended
December 31, was as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- --------------------------------------- ------ ------ -------
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 493 $ 365 $ 420
Interest cost on benefit
obligation 954 932 890
Actual return on plan assets (45) (19) -
Net amortization and
deferral 548 531 524
------ ------ ------
Net periodic postretirement
benefit cost $1,950 $1,809 $1,834
====== ====== ======
</TABLE>
Expenses recognized for the years ended December 31, 1996, 1995 and
1994 amounted to $1,848,000, $1,679,000 and $1,743,000, respectively. The
remaining cost has been recorded as a regulatory asset. Approval for
recovery of these costs was received from the DPUC in BHC's Eastern
division's rate decision effective August 1, 1993 and BHC's Western
division's rate decision effective April 25, 1996.
-25-
<PAGE>
<PAGE>
The combined funded status and the related accrual for postretirement
benefits other than pensions as of December 31, 1996 and 1995, were as
follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ---------------------------------------------------- ------ ------
<S> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees $ 6,208 $ 6,526
Active plan participants eligible for
retirement 2,825 2,836
Other active participants 4,748 5,628
------- -------
Net obligations 13,781 14,990
Plan assets at fair value 1,258 836
------- -------
Accumulated excess post-retirement obligation
over plan assets (12,523) (14,154)
Unrecognized net obligation existing at January 1,
1993 8,377 8,900
Unrecognized net (gain) or loss from past experience (205) 1,943
Unrecognized prior service cost 226 246
------- -------
Accrued postretirement benefit cost $(4,125) $(3,065)
======= =======
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1996, 1995 and 1994 was 7.5
percent, 7.0 percent and 8.25 percent, respectively. The expected long-term
rate of return on assets, net of tax, was 5.0 percent for 1996 and 1995.
For measurement purposes, a 9.0 percent annual increase in the per
capita cost of covered health care benefits is assumed for 1996 (9.6 percent
and 10.2 percent for 1995 and 1994, respectively). This rate was assumed to
decrease gradually to 6.0 percent for 2001 and remain at that level
thereafter. If the health care cost trend rate were increased 1.0 percent,
the accumulated postretirement benefit obligation as of December 31, 1996
would increase by 18.0 percent and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year
ended December 31, 1996 would increase by 24.0 percent.
Postemployment benefits. In January 1994, the Company adopted SFAS No. 112
"Employers' Accounting for Postemployment Benefits," which requires the
Company to accrue the cost of providing benefits to former or inactive
employees after employment but before retirement. These benefits are to be
recognized over the employees' years of service or at the date of the event
giving rise to such benefits. The implementation of this standard had no
material effect on the Company's financial condition or results of operation
for 1996 and 1995.
Note 12 - Incentive Stock Plans; Dividend Reinvestment and Common Stock
Purchase Plan
In 1985, shareholders adopted a long-term incentive plan (Stock Plan)
that provided for the granting of incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock and performance units to
key executives. As amended by shareholders in 1990, an aggregate of 525,000
shares of the Company's common stock could be awarded under the Stock Plan,
which expired in January 1995.
In 1994, shareholders adopted the Aquarion Company Stock Incentive Plan
(Incentive Plan) that provides for the granting of non-qualified stock
options, stock appreciation rights, restricted stock, unrestricted stock and
performance units (collectively, Awards), but no more than an aggregate of
525,000 shares of stock may be awarded under the Incentive Plan or purchased
upon the exercise of stock options. No Awards will be granted after
April 25, 1999.
Stock options available under the Stock Plan and Incentive
Plan are exercisable at a price equal to the market value, unless otherwise
indicated, at the date of the grant and remain exercisable for 10 years,
conditional on continued employment, from the date of the grant. The following
options have been awarded to key executives:
<TABLE>
<CAPTION> Number Option Price
of Shares per Share
- -------------------------------------------- ---------- ---------------
<S> <C> <C>
Outstanding at December 31, 1993 261,150 $20.63-$28.28
Granted in 1994 (a) 271,100 $21.75-$27.13
Expired in 1994 (11,800) $24.63-$27.13
Exercised in 1994 (6,300) $20.63-$25.00
-------
Outstanding at December 31, 1994 514,150 $20.63-$28.28
Granted in 1995 (a) 178,100 $23.25-$23.50
Expired in 1995 (2,200) $21.75-$27.13
-------
Outstanding at December 31, 1995 690,050 $20.63-$28.28
Granted in 1996 (a) 170,000 $25.25
Expired in 1996 (17,701) $21.75-$27.13
Exercised in 1996 (19,528) $20.74-$24.63
------
Outstanding at December 31, 1996 822,821
=======
</TABLE>
(a) These options were granted on February 2, 1994, March 29, 1994,
December 5, 1994, October 13, 1995, December 5, 1995 and December 4, 1996.
One third of the options granted become exercisable on each of the first
three anniversaries of the grant date, except for options granted to certain
individuals employed by IEA that will become exercisable immediately upon the
sale of that business.
As of December 31, 1996, 472,455 shares were exercisable under the
Stock Plan. In addition, 334 shares of restricted stock were outstanding as
of December 31, 1996.
In accordance with SFAS No. 123 "Accounting for Stock-Based
Compensation," the Company adopted the disclosure method of accounting for
stock-based compensation. The Company continues to apply Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
in accounting for its stock-based compensation plans and accordingly, no
compensation expense has been
-26-
<PAGE>
<PAGE>
recognized. If the Company had recorded compensation cost based upon the
fair value at the grant date for awards under these plans consistent with
SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except share data) 1996 1995
- ---------------------------------------- ---- ----
<S> <C> <C>
Net Income
As reported $9,005 $12,886
Pro forma $8,747 $12,634
Earnings per share
As reported $1.30 $1.90
Pro forma $1.26 $1.86
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1996, 1995 and 1994: dividend yield of
6.51 percent; expected volatility of 18 percent; risk-free interest rate of
6.12 percent; and an expected life of six years.
The Company maintains a Dividend Reinvestment and Common Stock Purchase
Plan (Reinvestment Plan) which provides holders of its common stock with a
method of purchasing additional shares without payment of brokerage or
service charges. In April 1994, the Company amended its Reinvestment Plan to
allow shareholders to make optional cash payments at a 5 percent discount
from the market price and to include an additional 750,000 shares in the
plan. The total number of shares reserved for purchase under the
Reinvestment Plan was 1,650,000, of which 1,173,004 shares were issued at
December 31, 1996.
Note 13 - Property, plant and equipment
Net property, plant and equipment at December 31, consisted of the
following components:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ------------------------------------------- -------- -------
<S> <C> <C>
Organization $ 185 $ 185
Source of supply 29,785 29,048
Pumping 16,756 16,126
Water treatment 62,230 54,126
Transmission and distribution 249,328 235,608
General 34,417 32,809
Construction work in progress 47,787 32,978
Utility plant held for future use 466 466
Nonutility property 13,762 31,134
------- --------
454,716 432,480
Less: accumulated depreciation 131,328 136,726
------- -------
$323,388 $295,754
======= =======
</TABLE>
Note 14 - Inventories
Inventories at December 31, were comprised of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- --------------- ------ ------
<S> <C> <C>
Lumber and logs $1,565 $2,180
Materials and supplies 1,318 1,925
----- -----
$2,883 $4,105
===== =====
</TABLE>
Note 15 - Statement of cash flows
Changes in assets and liabilities for the years ended December 31, net
of effects of acquisitions, are set forth below:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- ----------------------------------- ------- ------ ------
<S> <C> <C> <C>
(Increase) decrease in accounts
receivable and other current assets $(6,228) $ 405 $ (2,703)
Decrease (increase) in inventory 579 (919) (192)
Increase in prepayments (1,082) (744) (1,455)
Increase in accounts payable and accrued
liabilities 2,094 2,883 4,420
Increase (decrease) in interest and
taxes payable 398 (2,383) 3,168
Net changes in other noncurrent balance
sheet items 1,000 (4,766) 3,193
--------- --------- ---------
$ (3,239) $ (5,524) $ 6,431
========= ========= =========
Supplemental cash flow information:
Cash paid for:
Interest $9,336 $8,749 $8,733
Income taxes $10,602 $10,694 $6,306
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
The anticipated sale of the discontinued operation has been recorded as a
non-cash investing transaction for the year ended December 31, 1996.
In October 1995, the Company exchanged a reservoir, located in New Canaan,
Connecticut, for a building, located in Monroe, Connecticut, in a non-cash
transaction. The fair value of the building received was approximately
$2,500,000 and the net book value of the land exchanged was approximately
$170,000.
Note 16 - Commitments and contingencies
Minimum rental payments under operating leases aggregated $350,000 at
December 31, 1996. Annual payments for future minimum rentals are $175,000 in
1997 and 1998, respectively.
-27-
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Aquarion Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Aquarion
Company and its subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
New York, NY
February 18, 1997
-28-
<PAGE>
<PAGE>
MANAGEMENT'S STATEMENT ON RESPONSIBILITY
Management's Statement on Responsibility for Financial Information
The management of the Company is responsible for the fairness,
integrity and objectivity of the Company's consolidated financial
statements, including all related information presented in the annual
report. These statements have been prepared in accordance with generally
accepted accounting principles and include amounts based on management's
best estimates and judgments.
Management maintains and relies on a system of internal controls,
which provides reasonable assurance that assets are safeguarded and
financial records are adequate and can be relied upon to produce accurate
financial statements. The system includes the hiring and training of
qualified personnel, written accounting and control policies and procedures,
clearly drawn lines of accountability and delegation of authority. In
addition, the Company has an internal audit function that evaluates existing
controls and recommends changes and improvements deemed necessary.
The Board of Directors' Audit Committee, which is comprised of five
nonmanagement directors, meets periodically with the Company's senior
officers, independent accountants and the internal auditor. The Audit
Committee reviews internal audits, financial reporting and internal control
matters, as well as the nature and extent of the audit effort.
Management believes that the Company's policies and procedures, as
well as its internal control system and activities of the internal auditor
and independent accountants and the Audit Committee, provide you, the
shareholder, with reasonable assurance as to the integrity of the Company's
consolidated financial statements.
Richard K. Schmidt
President & Chief Executive Officer
Janet M. Hansen
Executive Vice President,
Chief Financial Officer
& Treasurer
February 18, 1997
-29-
<PAGE>
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Book value per share $17.52 $17.72 $17.43 $17.07 $16.33
Payout ratio (per share) 124.6% 85.3% 86.6% 92.0% 98.2%
Price/earnings ratio (1) 21.4 13.4 12.6 16.2 15.2
Capitalization:
Long-term debt 54.7% 52.0% 49.1% 51.0% 51.9%
Preferred stock of subsidiaries - .1 0.2 0.2 0.2
Common equity 45.3 47.9 50.7 48.8 47.9
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
(1) Computed at December 31.
Quarterly financial data
(Unaudited)
<TABLE>
<CAPTION>
Income
before
Operating income Net Per share
revenues taxes income (1) (2)
- --------------------------------------------------------------------------
(In thousands, except share
data)
1996
<S> <C> <C> <C> <C>
First quarter (3) $ 20,993 $3,998 $ 2,074 $0.30
Second quarter (3) 23,013 5,418 3,165 0.46
Third quarter (3) 25,499 7,373 4,136 0.60
Fourth quarter 25,299 6,335 (370) (0.06)
-------- ------- -------
Total $ 94,804 $23,124 $ 9,005
======== ======= =======
1995
First quarter (3) $ 19,873 $ 4,493 $ 2,391 0.35
Second quarter (3) 21,967 5,409 3,107 0.46
Third quarter (3) 24,438 6,228 3,242 0.48
Fourth quarter (3) 28,291 7,048 4,146 0.61
-------- ------- -------
Total $ 94,569 $23,178 $12,886
======== ======= =======
</TABLE>
(1) Quarterly earnings per share are based on weighted average shares
outstanding during each quarter and the sum of the quarters may not equal
annual earnings per share.
(2) 1995 quarterly earnings per share have been restated to reflect the
pooling of interests.
(3) Quarterly amounts have been restated to reflect the discontinued
operations.
-30-
<PAGE>
<PAGE>
Market and dividend information
The following table sets forth the high and low closing sale prices of
the Company common stock as traded on the New York Stock Exchange (NYSE) and
as reported on the NYSE composite tape, along with dividends paid per share on
a quarterly basis. At December 31, 1996, there were 8,072 shareholders of
record.
<TABLE>
- ---------------------------------------------------------------------------
Period Closing sales prices Dividends paid
- ---------------------------------------------------------------------------
High Low
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
1996
First quarter $26 5/8 $24 5/8 $.405
Second quarter 25 1/2 23 1/4 .405
Third quarter 27 1/8 24 7/8 .405
Fourth quarter 28 1/8 24 7/8 .405
1995
First quarter $24 1/4 $22 $.405
Second quarter 23 1/2 22 .405
Third quarter 24 1/4 22 .405
Fourth quarter 25 7/8 22 5/8 .405
</TABLE>
-31-
<PAGE>
<PAGE>
FINANCIAL HIGHLIGHTS (In thousands, except share data)
<TABLE>
<CAPTION>
4 year
Compound
Annual
- --------------------------------------------------------------------------------- Growth
1996 1995 1994 1993 1992 Rate
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues from
continuing operations $94,804 $94,569 $97,691 $84,860 $76,572 5.5%
Net income from
continuing operations 13,840 13,296 12,478 12,283 10,003 8.5%
Net income 9,005 12,886 12,221 10,990 9,400 ---
Net income from continuing
operations per common share $2.00 $1.96 $1.91 $1.97 $1.76 3.3%
Net income per common share $1.30 $1.90 $1.87 $1.76 $1.65 ---
Cash dividends per share
of common stock $1.62 $1.62 $1.62 $1.62 $1.62 ---
Dividend yield (Based on
market value @ December 31,) 5.81% 6.35% 6.86% 5.68% 6.48% ---
Total assets 449,092 413,980 370,870 362,872 348,331 6.6%
Shareholders equity 122,951 121,502 115,132 110,481 97,165 6.1%
Long-term debt and
redeemable preferred stock 148,487 132,276 111,796 115,966 105,883 8.8%
Weighted average
common shares outstanding 6,931,388 6,794,400 6,532,627 6,237,875 5,690,853 5.1%
Utility Customers 136,336 130,715 125,015 123,915 123,325 2.5%
</TABLE>
- INSIDE FRONT COVER -
<PAGE>
EXECUTION COPY
===============================================================
Connecticut Development Authority
and
Bridgeport Hydraulic Company
______________
LOAN AGREEMENT
______________
Dated as of September 1, 1996
Connecticut Development Authority
$30,000,000 6.00% Water Facilities Revenue Bonds
(Bridgeport Hydraulic Company Project - 1996 Series)
===============================================================
<PAGE>
<PAGE>
Connecticut Development Authority
Bridgeport Hydraulic Company
LOAN AGREEMENT
THIS LOAN AGREEMENT, made and dated as of September 1, 1996
by and between the Connecticut Development Authority, a body corporate
and politic constituting a public instrumentality and political
subdivision of the State of Connecticut, and Bridgeport Hydraulic
Company, a corporation organized and existing under the laws of the
State of Connecticut,
WITNESSETH THAT:
WHEREAS, the State Commerce Act, constituting Connecticut
General Statutes, Sections 32-1a through 32-23xx, as amended (the
"Act"), declares that there is a continuing need in the State (1) for
economic development and activity to provide and maintain employment
and tax revenues and to control, abate and prevent pollution to
protect the public health and safety and (2) for assistance to public
service businesses providing transportation and utility services in
the State, and that the availability of financial assistance and
suitable facilities are important inducements to industrial and
commercial enterprises to remain or locate in the State and to provide
industrial, recreation, urban and public service projects; and
WHEREAS, the Act provides that (1) the term "project" as
used therein means any facility, plant, works, system, building,
structure, utility, fixture or other real property improvement located
in the State, and the land on which it is located or which is
reasonably necessary in connection therewith, which is of a nature or
which is to be used or occupied by any person for purposes which would
constitute it as an economic development project, recreation project,
urban project, public service project or health care project, and any
real property improvement reasonably related thereto, and (2) that a
project may also include or consist exclusively of machinery,
equipment or fixtures; and
WHEREAS, the Act defines economic development project to
include "any project which is to be used or occupied by any person for
. . . (2) controlling, abating, preventing or disposing of land,
water, air or other environmental pollution . . . or (3) the
conservation of energy or the utilization of cogeneration technology
or solar, wind, hydro, biomass or other renewable sources to produce
energy for any industrial or commercial application."
WHEREAS, the Act provides that the Authority shall have
power (1) to determine the location and character of any project to be
financed under the provisions of the Act; (2) to purchase, receive by
gift or otherwise, lease, exchange, or
<PAGE>
<PAGE>
otherwise acquire, and construct, reconstruct, improve, maintain, equip and
furnish one or more projects, including all real and personal property which
the Authority may deem necessary therewith, and to enter into a contract
with a person therefor upon such terms and conditions as the Authority
shall determine to be reasonable, including but not limited to reim-
bursement for the planning, designing, financing, construction,
reconstruction, improvement, equipping, furnishing, operation and
maintenance of reserve and insurance funds with respect to the
financing of the project; (3) to extend credit or make loans to any
person for the planning, designing, financing, acquiring,
constructing, reconstructing, improving, equipping and furnishing of a
project and for the refinancing of existing indebtedness with respect
to any facility or part thereof which would qualify as a project in
order to facilitate substantial improvements thereto, which credits or
loans may be secured by loan agreements, mortgages, contracts and all
other instruments or fees and charges, upon such terms and conditions
as the Authority shall determine to be reasonable in connection with
such loans, including provision for the establishment and maintenance
of reserve and insurance funds and in the exercise of powers granted
in the Act in connection with a project for such person, to require
the inclusion in any contract, loan agreement or other instrument,
such provisions for the construction, use, operation and maintenance
and financing of a project as the Authority may deem necessary or
desirable; (4) to issue its bonds for such purposes, subject to the
approval of the Treasurer of the State; and, (5) as security for the
payment of the principal or redemption price, if any, of and interest
on any such bonds, to pledge or assign such a loan, lease or sale
agreement and the revenues and receipts derived by the Authority from
such a project; and
WHEREAS, by various resolutions, as amended by subsequent
resolutions, in furtherance of the purposes of the Act, the Authority
has accepted the application of Bridgeport Hydraulic Company for
assistance in the financing of various capital projects in the State
of Connecticut; and
WHEREAS, the Borrower currently owns certain existing
facilities within certain municipalities in the State and, by
resolution adopted in furtherance of the purposes of the Act, the
Authority has accepted the application of the Borrower for assistance
in the design, acquisition, installation and construction of a water
treatment facility for the treatment of water from the Hemlocks
Reservoir in the Town of Fairfield, Connecticut that will treat up to
50 million gallons per day from the Reservoir, two water treatment
facilities in Litchfield County, Connecticut for the filtration of
water from the Lakeville Reservoirs, in Salisbury, Connecticut and
Lake Wangum in Canaan, Connecticut that will each treat .75 million
gallons of water per day. The Project also involves the design,
acquisition,
-2-
<PAGE>
<PAGE>
construction and installation of certain other facilities
consisting of transmission and distribution mains, service lines,
meters and hydrants for the purpose of supplying safe potable water to
the general public within the Company's service area.(the "Project"),
and
WHEREAS, the Authority has by a further resolution adopted
September 18, 1996, authorized the issuance of $30,000,000 principal
amount of its 6.00% Water Facilities Revenue Bonds (Bridgeport
Hydraulic Company Project - 1996 Series) (the "Bonds") for the
purposes of providing funds for the Project; and
WHEREAS, pursuant to such resolution the Bonds (as
hereinafter defined) are to be secured by an Indenture of Trust of
even date herewith, by and between the Authority and Fleet National
Bank, as Trustee (the "Indenture"); and
WHEREAS, the Bonds shall be special obligations of the
Authority, payable solely from the revenues or other receipts, funds
or monies to be derived by the Authority under this Agreement or the
Indenture and from any amounts otherwise available under the Indenture
for the payment of the Bonds; and
WHEREAS, the Authority proposes with the proceeds of the
Bonds to make a loan to the Borrower and the Borrower proposes to
borrow such proceeds from the Authority for the purpose of the
acquisition, construction and installation of the Project; and
WHEREAS, the Borrower acknowledges that the Authority is
providing financing for the Project in furtherance of the Authority's
corporate purposes under the Act, that the accomplishment of these
purposes is dependent upon the compliance of the Borrower with its
covenants contained in this Agreement, that the Authority has a
resulting beneficial interest in the Project, and that the Borrower's
use of and interest in the Project as provided hereby are in
furtherance of the discharge of a public purpose; and
WHEREAS, the Connecticut Department of Public Utility
Control (the "DPUC") has approved the issuance of the Note;
NOW, THEREFORE, in consideration of the premises and of the
mutual representations, covenants and agreements herein set forth, the
Authority and the Borrower, each binding itself, its successors and
assigns, do mutually promise, covenant and agree as follows (provided
that in the performance of the agreements of the Authority herein
contained, any obligation it may incur for the payment of money shall
not be an obligation, debt or liability of the
-3-
<PAGE>
<PAGE>
State or any municipality thereof and neither the State nor any municipality
thereof shall be liable on any obligation so incurred, but any such
obligation shall be payable solely out of the revenues or other
receipts, funds or monies to be derived by the Authority under this
Agreement or the Indenture and from any amounts otherwise available
under the Indenture for the payment of the Bonds):
-4-
<PAGE>
<PAGE>
ARTICLE I
DEFINITIONS AND INTERPRETATION
Section 1.1. Definitions. For the purposes of this
-----------
Agreement, the following words and terms shall have the respective
meanings set forth as follows, and any capitalized word or term used
but not defined herein is used as defined in the Indenture:
"DPUC" means the State Department of Public Utilities
Control.
"Event of Default" means an Event of Default as defined in
subsection 7.1 hereof.
"Net Proceeds" when used with respect to any insurance or
condemnation award, means the gross proceeds from such award less all
expenses (including attorney's fees and expenses and any extraordinary
expenses) incurred by the Trustee in the collection thereof.
"Note" means the promissory note of the Borrower to the
Authority, dated the date of initial delivery of the Bonds in the form
attached as an Appendix to this Agreement, and any amendments and
supplements made in conformity with this Agreement and the Indenture.
"Participating Underwriter" shall have the meaning ascribed
thereto in the Continuing Disclosure Agreement.
"Permitted Encumbrances" mean, as of any particular date,
(i) the lien of the Mortgage, (ii) liens and encumbrances permitted by
the Mortgage, (iii) liens for taxes not yet due and payable, (iv) any
lien created by this Agreement and the Indenture, (v) utility, access
and other easements and rights-of-way, that will not interfere with or
impair the value or use of the Project as herein provided, (vi) any
mechanic's, laborer's, materialman's, supplier's or vendor's lien or
right in respect thereof if payment is not yet due and payable and for
which statutory lien rights exist, and (vii) such minor defects,
irregularities, easements, and rights-of- way (including agreements
with any railroad the purpose of which is to service the railroad
siding) as normally exist with respect to property similar in
character to the Project and which do not materially impair the value
or use of the property affected thereby for the purpose for which it
was acquired hereunder.
"Principal User" means any principal user of the Project
within the meaning of Section 144(a)(2)(B) of the Code, including
without limitation any person who is a greater-than-10-percent-owner
(or if none, the person(s) who
-5-
<PAGE>
<PAGE>
holds the largest ownership interest in
the Project), lessee or user of more than 10% of the Project measured
either by occupiable space or fair rental value under any formal or
informal agreement or, under the particular facts and circumstances,
anyone who is a principal customer of the Project. The term
"principal customer" means any person, who purchases output of the
Project under a contract if the percentage of output taken or to be
taken by such person, multiplied by a fraction the numerator of which
is the term of such contract and the denominator of which is the
economic life of the Project, exceeds 10%. In the case of a person
who purchases output of an electric or thermal energy, gas, water or
other similar facility, such person is a principal customer if the
total output purchased by such person during any one year period
beginning with the date the facility is placed in service is more than
10% of the facility's output during each such period. Co-owners or
co-lessees who are shareholders in a corporation or who are
collectively treated as a partnership subject to subchapter K under
section 761(a) of the Code are not treated as Principal Users merely
by reason of their ownership of corporate or partnership interests.
"Related Person" means, with respect to any Principal User,
a person which is a related person (as defined in Section 144(a)(3) of
the Code, and by reference to Sections 267, 707(b) and 1563(a) of the
Code, except that 50% is to be substituted for 80% in Section
1563(a)).
"Substantial User" means any substantial user of the Project
within the meaning of Section 147(a) of the Code.
Section 1.2. Interpretation. In this Agreement:
--------------
(1) The terms "hereby", "hereof", "hereto", "herein",
"hereunder" and any similar terms, as used in this Agreement,
refer to this Agreement, and the term "hereafter" means after,
and the term "heretofore" means before, the date of this
Agreement.
(2) Words of the masculine gender mean and include
correlative words of the feminine and neuter genders and words
importing the singular number mean and include the plural number
and vice versa.
(3) Words importing persons include firms, associations,
partnerships (including limited partnerships), trusts,
corporations and other legal entities, including public bodies,
as well as natural persons.
(4) Any headings preceding the texts of the several
Articles and Sections of this Agreement, and any table of
contents appended to copies hereof, shall be solely for
convenience of reference and shall not constitute a part
-6-
<PAGE>
<PAGE>
of this Agreement, nor shall they affect its meaning, construction or
effect.
(5) Nothing contained in this Agreement shall be construed
to cause the Borrower to become the agent for the Authority or
the Trustee for any purpose whatsoever, nor shall the Authority
or the Trustee be responsible for any shortage, discrepancy,
damage, loss or destruction of any part of the Project wherever
located or for whatever cause.
(6) All approvals, consents and acceptances required to be
given or made by any person or party hereunder shall be at the
sole discretion of the party whose approval, consent or
acceptance is required.
(7) All notices to be given hereunder shall be given in
writing within a reasonable time unless otherwise specifically
provided.
(8) This Agreement shall be governed by and construed in
accordance with the applicable laws of the State.
(9) If any provision of this Agreement shall be ruled
invalid by any court of competent jurisdiction, the invalidity of
such provision shall not affect any of the remaining provisions
hereof.
(10) All references to the Bank, the Reimbursement Agreement
or the Credit Facility in this Agreement, the Note, the
Indenture, and the Bonds shall be ineffective until such time as
there is delivered to the Trustee or Paying Agent a Credit
Facility and shall remain effective thereafter until: (a) the
date upon which there is no Credit Facility in effect; and (b)
the Trustee has received a certificate from the Bank stating that
all amounts payable to the Bank under the Reimbursement Agreement
have been paid in full.
-7-
<PAGE>
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1. Representations by the Authority. The
--------------------------------
Authority represents and warrants that:
(1) It is a body corporate and politic constituting a
public instrumentality and political subdivision of the State,
duly organized and existing under the laws of the State including
the Act. The Authority is authorized to issue the Bonds in
accordance with the Act and to use the proceeds thereof to
finance the Project.
(2) The Authority has complied with the provisions of the
Act and has full power and authority pursuant to the Act to
consummate all transactions contemplated by the Bonds, the
Indenture and the Financing Documents.
(3) By resolution duly adopted by the Authority and still
in full force and effect, the Authority has authorized the
execution, delivery and due performance of the Bonds, the
Indenture and the Financing Documents, and the taking of any and
all action as may be required on the part of the Authority to
carry out, give effect to and consummate the transactions
contemplated by this Agreement and the Indenture, and all
approvals necessary in connection with the foregoing have been
received.
(4) The Bonds have been duly authorized, executed,
authenticated, issued and delivered, constitute valid and binding
special obligations of the Authority payable solely from revenues
or other receipts, funds or monies pledged therefor under the
Indenture and from any amounts otherwise available under the
Indenture, and are entitled to the benefit of the Indenture.
Neither the State nor any municipality thereof is obligated to
pay the Bonds or the interest thereon. Neither the faith and
credit nor the taxing power of the State nor any municipality
thereof is pledged for the payment of the principal, and premium,
if any, of and interest on the Bonds.
(5) The execution and delivery of the Bonds, the Indenture
and the Financing Documents and compliance with the provisions
thereof, will not conflict with or constitute on the part of the
Authority a violation of, breach of or default under its by-laws
or any statute, indenture, mortgage, deed of trust, note
agreement or other agreement or instrument to which the Authority
is a party or by which the Authority is bound, or, to the
knowledge of the Authority, any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the
Authority or any of its activities or properties, and all
consents, approvals,
-8-
<PAGE>
<PAGE>
authorizations and orders of governmental or
regulatory authorities which are required for the consummation by
the Authority of the transactions contemplated thereby have been
obtained.
(6) Subject to the provisions of this Agreement and the
Indenture, the Authority will apply the proceeds of the Bonds to
the purposes specified in the Indenture and the Financing
Documents.
(7) There is no action, suit, proceeding or investigation
at law or in equity before or by any court, public board or body
pending or threatened against or affecting the Authority, or to
the best knowledge of the Authority, any basis therefor, wherein
an unfavorable decision, ruling or finding would adversely affect
the transactions contemplated hereby or by the Indenture, or
which, in any way, would adversely affect the validity of the
Bonds, or the validity of or enforceability of the Indenture or
the Financing Documents, or any agreement or instrument to which
the Authority is a party and which is used or contemplated for
use in consummation of the transactions contemplated hereby and
by the Indenture.
(8) It has not made any commitment or taken any action
which will result in a valid claim for any finders or similar
fees or commitments in respect of the transactions contemplated
by this Agreement.
(9) The representations of the Authority set forth in the
Tax Regulatory Agreement are by this reference incorporated in
this Agreement as though fully set forth herein.
Section 2.2. Representations by the Borrower. The Borrower
-------------------------------
represents and warrants that:
(1) The Borrower has been duly incorporated and validly
exists as a corporation in good standing under the laws of the
State of Connecticut, is not in violation of any provision of its
certificate of incorporation or its by-laws, has corporate power
to enter into and perform the Financing Documents, and by proper
corporate action has duly authorized the execution and delivery
of the Financing Documents.
(2) The Financing Documents constitute valid and legally
binding obligations of the Borrower, enforceable in accordance
with their respective terms, except to the extent that such
enforceability may be limited by bankruptcy or insolvency or
other laws affecting creditors' rights generally or by general
principles of equity.
-9-
<PAGE>
<PAGE>
(3) Neither the execution and delivery of the Financing
Documents, the consummation of the transactions contemplated
thereby, nor the fulfillment by the Borrower of or compliance by
the Borrower with the terms and conditions thereof is prevented
or limited by or conflicts with or results in a breach of, or
default under the terms, conditions or provisions of any
contractual or other restriction of the Borrower, evidence of its
indebtedness or agreement or instrument of whatever nature to
which the Borrower is now a party or by which it is bound, or
constitutes a default under any of the foregoing. No event has
occurred and no condition exists which, upon the execution and
delivery of any Financing Documents, constitutes an Event of
Default hereunder or an event of default thereunder or, but for
the lapse of time or the giving of notice, would constitute an
Event of Default hereunder or an event of default thereunder.
(4) There is no action or proceeding pending or, to the
knowledge of the Borrower, threatened against the Borrower before
any court, administrative agency or arbitration board that may
materially and adversely affect the ability of the Borrower to
perform its obligations under the Financing Documents and all
authorizations, consents and approvals of governmental bodies or
agencies required in connection with the execution and delivery
of the Financing Documents and in connection with the performance
of the Borrower's obligations hereunder or thereunder have been
obtained.
(5) The execution, delivery and performance of the
Financing Documents and any other instrument delivered by the
Borrower pursuant to the terms hereof or thereof are within the
corporate powers of the Borrower and have been duly authorized
and approved by the board of directors of the Borrower and are
not in contravention of law or of the Borrower's certificate of
incorporation or by-laws, as amended to date, or of any
undertaking or agreement to which the Borrower is a party or by
which it is bound.
(6) The Borrower represents that it has not made any
commitment or taken any action which will result in a valid claim
for any finders' or similar fees or commitments in respect of the
transactions described in this Agreement other than the fees to
various parties to the transactions contemplated hereby which
have been heretofore paid or provided.
(7) The Project is included within the definition of a
"project" in the Act, and its estimated cost is equal to or in
excess of $30,000,000. The Borrower intends the Project to be
and continue to be an authorized project under the Act during the
Term of this Agreement.
-10-
<PAGE>
<PAGE>
(8) All amounts shown in Schedule D of the Tax Regulatory
Agreement are eligible costs of a project financed by bonds
issued by the Authority under the Act, and may be financed by
amounts in the Project Fund under the Indenture. None of the
proceeds of the Bonds will be used directly or indirectly as
working capital or to finance inventory.
(9) The Project is in material compliance with all
applicable federal, State and local laws and ordinances
(including rules and regulations) relating to zoning, building,
safety and environmental quality the non-compliance with which
would materially adversely affect the performance by the Borrower
of any of its obligations hereunder.
(10) The Borrower has obtained, or will obtain, all
necessary material approvals from any and all governmental
agencies requisite to the Project, and has also obtained all
material occupancy permits and authorizations from appropriate
authorities authorizing the occupancy and use of the Project for
the purposes contemplated hereby. The Borrower further
represents and warrants that it will complete the Project in
accordance with all material federal, State and local laws,
ordinances and regulations applicable thereto.
(11) The Borrower does not presently intend to lease the
Project.
(12) The Borrower will not take or omit to take any action
which action or omission will in any way cause the proceeds of
the Bonds to be applied in a manner contrary to that provided in
the Indenture and the Financing Documents as in force from time
to time.
(13) The Borrower has not taken and will not take any action
and knows of no action that any other person, firm or corporation
has taken or intends to take, which would cause interest on the
Bonds to be includable in the gross income of the recipients
thereof for federal income tax purposes. The representations,
certifications and statements of reasonable expectation made by
the Borrower in the Tax Regulatory Agreement and relating to
Project description, composite issues, bond maturity and average
asset economic life, use of Bond proceeds, arbitrage and related
matters are hereby incorporated by this reference as though fully
set forth herein.
(14) The Borrower has good and marketable title to the
Project subject only to Permitted Encumbrances and to
irregularities or defects in title which may exist which do not
materially impair the use of such properties in the Borrower's
business.
-11-
<PAGE>
<PAGE>
(15) As of the date of execution hereof, except for the
Mortgage, neither the Borrower, nor to its knowledge anyone
acting on behalf of the Borrower, has entered into negotiations
with any person for the purpose of undertaking any borrowing
concurrently with or subsequent to the issuance of the Bonds and
to be secured wholly or partially by a lien or encumbrance on the
Project or any part thereof, and the Borrower has no present
intention of undertaking any such borrowing.
(16) The Borrower will use all of the proceeds of the Bonds
to finance the Project Costs.
-12-
<PAGE>
<PAGE>
ARTICLE III
THE LOAN
Section 3.1. Loan Clauses. (A) Subject to the conditions
------------
and in accordance with the terms of this Agreement, the Authority
agrees to make a loan to the Borrower from the proceeds of the Bonds
in the amount of $30,000,000 and the Borrower agrees to borrow such
amount from the Authority.
(B) The loan shall be made at the time of delivery of the
Bonds and receipt of payment therefor by the Authority against receipt
by the Authority of the Note duly executed and delivered to evidence
the pecuniary indebtedness of the Borrower hereunder. As and for the
loan the Authority shall apply the proceeds of the Bonds as provided
in the Indenture on the terms and conditions therein prescribed.
(C) On or before 11:00 a.m. of each due date for the
payment of the principal of or interest on the Bonds, until the
principal or Redemption Price, if any, of and interest on the Bonds
shall have been fully paid or provision for the payment thereof shall
have been made in accordance with the Indenture, the Borrower shall
make loan payments to the Trustee for the account of the Authority in
an amount which, when added to any moneys then on deposit in the Debt
Service Fund and available therefor, shall be equal to the amount
payable on such due date with respect to the Bonds as provided in
Section 5.3 of the Indenture, including amounts due for the payment of
the principal of and interest on the Bonds. In addition, the Borrower
shall pay to the Trustee, as and when the same shall become due, all
other amounts due under the Financing Documents, together with
interest thereon at the then applicable rate as set forth herein in
Section 6.2(G). The Borrower shall have the option to prepay its loan
obligation in whole or in part at the times and in the manner provided
in Article VIII hereof. The Borrower shall also pay to the
Remarketing Agent amounts in accordance with and pursuant to Section
9.18(B) of the Indenture.
(D) Anything herein to the contrary notwithstanding any
amount at any time held in the Debt Service Fund by the Trustee
pursuant to this Section shall be credited against the next succeeding
loan payment obligation of the Borrower as provided in subsection
3.1(c) hereof. If, on any due date for payments with respect to the
Bonds, the balance in the Debt Service Fund is insufficient to make
such payments, the Borrower agrees forthwith to pay to the Trustee no
later than 11:00 a.m. the amount of the deficiency. If at any time
the amount held by the Trustee in the Debt Service Fund shall be
sufficient to pay or provide for the payment of the Bonds in
accordance with Section 12.1 of the Indenture, the Borrower shall not
be obligated to make any further payments under the foregoing
provisions.
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(E) The payment obligations of the Borrower while the Bonds
are in the Daily, Weekly or Flexible Modes in this Section 3.1 are
subject in all respects to the provisions of Sections 3.7 and 3.8
hereof regarding the use of Priority Amounts and the effect of
drawings under the Credit Facility.
Section 3.2. Other Amounts Payable. (A) The Borrower
---------------------
hereby further expressly agrees to pay to the Trustee as and when the
same shall become due, (i) an amount equal to the initial and annual
fees of the Trustee for the ordinary services of the Trustee rendered
and its ordinary expenses incurred under the Indenture, including fees
and expenses as Paying Agent and the fees and expenses of Trustee's
counsel, including fees and expenses as registrar and in connection
with preparation and delivery of new Bonds upon exchanges or
transfers, (ii) the reasonable fees and expenses of the Trustee and
any Paying Agents on the Bonds for acting as paying agents as provided
in the Indenture, including fees and expenses of Paying Agent as
registrar and in connection with the preparation of new Bonds upon
exchanges, transfers or redemptions, (iii) the reasonable fees and
charges of the Trustee for extraordinary services rendered by it and
extraordinary expenses incurred by it under the Indenture, including
reasonable counsel fees and expenses, and (iv) fees and expenses of
Bond Counsel and the Authority for any future action requested of
either.
(B) The Borrower also agrees to pay all amounts payable by
it under the Financing Documents at the time and in the manner therein
provided.
(C) The Borrower agrees to pay all Rebate Amounts (and
penalties, if any) due to the United States of America pursuant to
Section 148 (f) of the Code.
(D) The Borrower also agrees to pay directly to the
Authority on the date of issuance of the Bonds and on each anniversary
date thereafter, a fee equal to 1/12 of 1% of the principal amount of
the Bonds Outstanding, such fee to be payable, without notice, demand
or invoice of any kind at the Authority's address as set forth herein
or at such other address and to the attention of such other person, or
to such account as the Authority may stipulate by written notice to
the Borrower.
Section 3.3. Manner of Payment. The payments provided for
-----------------
in Section 3.1 hereof shall be made by any reasonable method providing
immediately available funds at the time and place of payment directly
to the Trustee for the account of the Authority and shall be deposited
in the Debt Service Fund. The additional payments provided for in
Section 3.2 shall be made in the same manner directly to the entitled
party or to the Trustee for its own use or disbursement to the Paying
Agents, as the case may be.
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Section 3.4. Obligation Unconditional. The obligations of
------------------------
the Borrower under the Financing Documents shall be absolute and
unconditional, irrespective of any defense or any rights of setoff,
recoupment or counterclaim it might otherwise have against the
Authority or the Trustee. The Borrower will not suspend or
discontinue any such payment or terminate this Agreement (other than
in the manner provided for hereunder) for any cause, including,
without limiting the generality of the foregoing, any acts or
circumstances that may constitute failure of consideration, failure of
title, or commercial frustration of purpose, or any damage to or
destruction of the Project, or the taking by eminent domain of title
to or the right of temporary use of all or any part of the Project, or
any change in the tax or other laws of the United States, the State or
any political subdivision of either thereof, or any failure of the
Authority or the Trustee to perform and observe any agreement or
covenant, whether expressed or implied, or any duty, liability or
obligation arising out of or connected with the Financing Documents.
Section 3.5. Securities Clauses. The Authority hereby
------------------
notifies the Borrower and the Borrower acknowledges that, among other
things, the Borrower's loan payments and all of the Authority's right,
title and interest under the Financing Documents to which it is a
party (except its rights under Section 6.2 hereof) are being
concurrently with the execution and delivery hereof endorsed, pledged
and assigned without recourse by the Authority to the Trustee as
security for the Bonds as provided in the Indenture.
Section 3.6. Issuance of Bonds. The Authority has
-----------------
concurrently with the execution and delivery hereof sold and delivered
the Bonds under and pursuant to a resolution adopted by the Authority
on September 18, 1996, authorizing their issuance under and pursuant
to the Indenture. The proceeds of sale of the Bonds shall be applied
as provided in Articles IV and V of the Indenture.
Section 3.7. Use of Priority Amounts. The Borrower and the
-----------------------
Authority acknowledge their intention to minimize the risk that any
payment made to a Bondowner from amounts provided by or on behalf of
the Borrower may be determined by a bankruptcy court to constitute a
preference. To this end the parties agree that payments to Bondowners
on Bonds supported by a Credit Facility shall be made only from
Priority Amounts, except when and to the extent no Priority Amounts
are available for the purpose as provided in Section 5.9(E) of the
Indenture.
Section 3.8. Effect of Drawings Under Credit Facility. The
----------------------------------------
payment of obligations of the Borrower under this Agreement and the
Note with respect to the Bonds shall be completely satisfied to the
extent of all drawings made under
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a Credit Facility for the purpose of satisfying such obligations.
Section 3.9. Effective Date and Term. (A) This Agreement
-----------------------
shall become effective upon its execution and delivery by the parties
hereto, shall remain in full force from such date and, subject to the
provisions hereof (including particularly Articles VII and VIII),
shall expire on such date as the Indenture shall be discharged and
satisfied in accordance with the provisions of subsection 12.1(A)
thereof. The Borrower's obligations under Sections 6.2 and 6.3
hereof, however, shall survive the expiration of this Agreement in
accordance with the provisions of such Sections.
(B) Within 60 days of such expiration the Authority shall
deliver to the Borrower any documents and take or cause the Trustee,
at the Borrower's expense, to take any such reasonable actions as may
be necessary to effect the cancellation, release and satisfaction of
the Indenture and the Financing Documents.
Section 3.10. Borrower's Purchase of Bonds. Pursuant to
----------------------------
Section 5.9(F) of the Indenture, if the amount drawn on the Credit
Facility and deposited with the Paying Agent, together with all other
amounts (including remarketing proceeds) received by the Paying Agent
for the purchase of Bonds supported by a Credit Facility and tendered
pursuant to Sections 2.3(G)(1)(b), 2.3(G)(1)(c), 2.3(G)(2)(b), (c) or
(d), or 2.3(G)(3)(b), (c) or (d), of the Indenture, is not sufficient
to pay the Purchase Price of such Bonds on the Purchase Date, the
Paying Agent shall before 3:30 P.M. on such Purchase Date, notify the
Borrower, the Remarketing Agent and the Trustee of such deficiency by
telephone promptly confirmed in writing. The Borrower shall pay to
the Paying Agent in immediately available funds by 4:00 P.M. on the
Purchase Date an amount equal to the Purchase Price of such Bonds less
the amount, if any, available to pay the Purchase Price in accordance
with Section 9.18 of the Indenture from the proceeds of the
remarketing of such Bonds or from drawings on a Credit Facility, as
reported by the Paying Agent. Bonds purchased entirely with moneys
furnished by the Borrower shall be Borrower Bonds.
Section 3.11. Credit Facility. The Borrower is to arrange,
prior to but effective with the Conversion Date to a Daily, Weekly or
Flexible Mode, for the delivery to the Paying Agent, together with a
copy of the related Reimbursement Agreement, of a Credit Facility,
having a term expiring three years from the date of such conversion,
and providing for the Paying Agent to be entitled to draw on or prior
to the Termination Date (as defined therein), an amount that is not
less than the sum of the aggregate principal amount (or that portion
of the purchase price corresponding to principal) of the Outstanding
Bonds so converted, and up to forty-five (45)
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<PAGE>
days of interest accrued on such Bonds (or that portion of the purchase
price corresponding to interest) if such Bonds were issued at the Maximum
Interest Rate.
Section 3.12. Requirements for Delivery of a Substitute
-----------------------------------------
Credit Facility. (A) The Borrower may, upon satisfaction of the
- ---------------
requirements set forth in this Section, at its option (except during
the period between the giving of notice of mandatory tender for
purchase on account of the expiration of a Credit Facility and the
Purchase Date), provide for the delivery to the Paying Agent of a
substitute Credit Facility; provided, however, that (1) the Credit
-------- -------
Facility being replaced shall in no event be terminated or released
until the Borrower has given not less than forty-five (45) days'
written notice to the Authority, the Trustee, the Paying Agent and the
Remarketing Agent, and further the Paying Agent has received the
proceeds of all outstanding drawings on the Credit Facility being
replaced, (2) if any Bonds supported by the Credit Facility being
replaced are in the Daily Mode, or the Weekly Mode the Paying Agent
has given not less than (30) days' written notice of the termination
or release of the Credit Facility to owners of such Bonds in the Daily
Mode or the Weekly Mode and (3) if any of the Bonds supported by the
Credit Facility being replaced are in the Flexible Mode, such Credit
Facility shall in no event be terminated or released earlier than on
the second Business Day after an Effective Date for all such Bonds or
such earlier day on or after such Effective Date on which the full
Purchase Price for such Bonds is received by the Paying Agent. Any
notice given pursuant to clause (1) or (2) above shall specify the
expiration date of the Credit Facility being replaced and the name of
the entity providing the substitute Credit Facility and shall advise
that the Credit Facility being replaced will terminate on the date
stated in such notice.
(B) Each substitute Credit Facility must:
(i) be an irrevocable, unconditional obligation of a
financial institution;
(ii) be on terms no less favorable to the Paying
Agent than the Credit Facility being replaced
and entitle the Paying Agent to draw upon or
demand payment and receive in immediately
available funds an amount equal to the sum of
the principal amount of the Bonds supported by
the Credit Facility being replaced, any premium
applicable thereto, and forty-five (45) days'
accrued interest at the Maximum Interest Rate on
the principal amount of Bonds then Outstanding
in the Daily Mode, the Weekly Mode or the
Flexible Mode; and
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(iii) provide for a term which may not expire in less
than 360 days and which may not expire or be
terminated prior to the fifth Business Day after
the mandatory tender for purchase as provided in
Section 2.3(G)(1)(c), 2.3(G)(2)(d) or
2.3(G)(3)(d) of the Indenture. The Borrower
shall not enter into any Reimbursement Agreement
or agree to any amendment of a Reimbursement
Agreement which in any way limits the obligation
of the Bank to provide funds under the
substitute Credit Facility without the prior
written consent of the Holders of 100% of the
principal amount of the Bonds Outstanding and
entitled to the benefit thereof.
(C) No substitute Credit Facility may be delivered to the
Trustee for any purpose under this Agreement or the Indenture unless
accompanied by the following documents: (i) an opinion of counsel for
the issuer of the substitute Credit Facility to the effect that it
constitutes a legal, valid and binding obligation of the issuer
enforceable in accordance with its terms; (ii) an opinion of Bond
Counsel to the effect that the issuance of a substitute Credit
Facility will not adversely affect the exclusion of interest on the
Bonds from gross income for federal income tax purposes and that such
Credit Facility is permitted under the Indenture; (iii) an opinion of
counsel to the Borrower satisfactory to the Trustee, stating that the
delivery of such substitute Credit Facility is authorized under this
Agreement and complies with the terms hereof; (iv) a certificate of
the Bank that all amounts due under the Reimbursement Agreement
relating to the outstanding Credit Facility have been paid and that
the Borrower has fulfilled all its obligations arising out of such
agreement; (v) an executed copy of the Reimbursement Agreement entered
into with respect to the substitute Credit Facility; (vi) copies of
any other documents, agreements or arrangements entered into directly
or indirectly between the Borrower and the entity issuing the
substitute Credit Facility with respect to the transactions
contemplated by the substitute Credit Facility and related
Reimbursement Agreement; and (vii) such other documents and opinions
as the Trustee or the Authority may reasonably request. Notice of the
substitution, replacement, termination or extension of a Credit
Facility shall be sent by the Paying Agent to S&P and shall include
the new expiration date of the Credit Facility and the name of the
entity providing the substitute Credit Facility.
The substitute Credit Facility, related Reimbursement
Agreement and other documents, agreements and arrangements entered
into and delivered with respect to the delivery of a substitute Credit
Facility shall not include any
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<PAGE>
provisions less favorable to the owners
of the Bonds than the provisions of the Credit Facility being replaced
and related Reimbursement Agreement, documents, agreements and
arrangements, including provisions regarding the acceleration of the
Bonds, any right of setoff of assets of the account party by the
entity issuing the substitute Credit Facility, and any direct or
indirect pledge of collateral which is not pledged on a priority or
parity basis to the owners of the Bonds.
Section 3.13. Securities Laws. In any remarketing of Bonds
---------------
under this Agreement, the Borrower shall at all times comply with
applicable federal and state securities laws.
Section 3.14. No Additional Bonds. No Additional Bonds on
-------------------
a parity with the Bonds may be issued under the Indenture.
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ARTICLE IV
THE PROJECT
Section 4.1. Completion of the Project. (A) The Borrower
-------------------------
agrees that it will undertake and complete or cause to be undertaken
and completed the Project for the purposes and in the manner intended
hereby and by the Borrower's application for assistance to the
Authority and in accordance with the plans and specifications therefor
which have been prepared by or on behalf of the Borrower and placed on
file in the principal office of the Borrower and with the Trustee, and
that it will cause such improvements to be made to the Project as are
necessary for the operation thereof in the manner herein provided.
(B) The Borrower may modify, alter and amend the plans and
specifications for the Project from time to time and at any time,
provided that such modifications, alterations and amendments do not
materially impair the operation of the Project as water treatment
facilities under the Act and provided that no material modifications,
alterations or amendments shall be made unless the Borrower shall have
theretofore delivered to the Trustee an opinion of counsel acceptable
to the Trustee to the effect that such amendment, modification or
alteration and the expenditure of amounts from the Project Fund in
connection therewith will not cause interest on the Bonds to be
subject to federal income taxation, together with any written
representations or certifications of fact made by or on behalf of the
Borrower upon which such counsel has relied in rendering such opinion.
(C) The Borrower affirms that it shall bear all of the
costs and expenses in connection with the preparation of the Financing
Documents and the Indenture, the preparation and delivery of any legal
instruments and documents necessary in connection therewith and their
filing and recording, if required, and all taxes and charges payable
in connection with any of the foregoing. Such costs and all other
costs of the Project shall be paid by the Borrower in the manner and
to the extent provided in the Indenture.
(D) The Borrower hereby agrees that in order to effectuate
the purposes of the Financing Documents, it will make, execute,
acknowledge and deliver any contracts, orders, receipts, writings and
instructions with any other persons, firms, or corporations and in
general do all things which may be requisite or proper, all for the
purpose of carrying out and completing the Project. The Borrower will
use its best efforts to complete the Project with all reasonable
dispatch. If for any reason the completion of such work does not
occur within this period, there shall be no liability on the part of
the Authority and no diminution in or postponement of the
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<PAGE>
payments required in Section 3.1 hereof to be paid by the Borrower.
(E) The Borrower has obtained or shall obtain all necessary
approvals from any and all governmental agencies requisite to the
undertaking and completion of the Project and in compliance with all
federal, State and local laws, ordinances and regulations applicable
thereto. Upon completion of the Project, the Borrower shall obtain
all required permits and authorizations from appropriate authorities,
if any be required, authorizing the operation and uses of the Project
for the purposes contemplated hereby, where failure to obtain such
approvals, permits and authorizations would have a material adverse
effect on the transactions contemplated hereby.
(F) The Borrower covenants that it will take such action
and institute such proceedings as shall be necessary to cause and
require all contractors and material suppliers to complete their
contracts diligently in accordance with the terms of the contracts,
including, without limitation, the correcting of any defective work.
(G) Upon the occurrence of a default by any contractor or
subcontractor or supplier under any contract made by it in connection
with the Project, the Borrower will promptly proceed, to the extent it
deems appropriate in the circumstances, either separately or in
conjunction with others, to exhaust the remedies of the Borrower
against each surety for the performance of such contract.
(H) The Borrower will have good and marketable title in fee
simple to the Project Realty, subject only to Permitted Encumbrances,
sufficient for the purposes of this Agreement.
Section 4.2. Payment of Additional Project Costs by Borrower.
-----------------------------------------------
In the event that moneys in the Project Fund are not
sufficient to pay Project Costs in full, the Borrower shall
nonetheless complete the Project and shall pay that portion of the
Project Costs as may be in excess of the moneys available therefor in
the Project Fund and shall not be entitled to any reimbursement
therefor from the Authority or from the Trustee or from the holders of
any of the Bonds, nor shall it be entitled to any diminution of the
amounts payable under the Financing Documents.
Section 4.3. No Warranty Regarding Condition, Suitability
--------------------------------------------
or Cost of Project. Neither the Authority, nor the Trustee, nor any
- ------------------
Bondholder makes any warranty, either expressed or implied, as to the
Project or its condition or that it will be suitable for the Borrower's
purposes or needs, or that the insurance required hereunder will be
adequate to protect the Borrower's business or interest, or that the
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<PAGE>
proceeds of the Bonds will be sufficient to complete the Project.
Section 4.4. Taxes. (A) The Borrower will pay when due
-----
all material (1) taxes, assessments, water rates and sewer use or
rental charges, (2) payments in lieu thereof which may be required by
law, and (3) governmental charges and impositions of any kind
whatsoever which may now or hereafter be lawfully assessed or levied
upon the Project or any part thereof, or upon the rents, issues, or
profits thereof, whether directly or indirectly. With respect to
special assessments or other governmental charges that may lawfully be
paid in installments over a period of years, the Borrower shall be
obligated to pay only such installments as are required to be paid
during the Term.
(B) The Borrower may, at its expense and in its own name,
in good faith contest any such taxes, assessments and other charges
and payments in lieu of taxes including assessments and, in the event
of such contest, may permit the taxes, assessments or other charges or
payments in lieu of taxes, including assessments so contested to
remain unpaid, provided either (1) prior written notice thereof has
been given to the Trustee and reserves to the extent required by the
Reimbursement Agreement, if any, are maintained during the period of
such contest and any appeal therefrom, or (2) such contest is
conducted in full compliance with Connecticut General Statutes Section
12-53a(d) unless, in either case, by nonpayment of such taxes,
assessments or other charges or payments, the Project or any part
thereof will be subject to loss or forfeiture, and as a result thereof
a lien or charge will be placed upon any payment pursuant to this
Agreement or the value or operation of the Project will be materially
impaired, in which event such taxes, assessments or other charges or
payments shall be paid forthwith. Nothing herein shall preclude the
Borrower, at its expense and in its own name and behalf, from applying
for any tax exemption allowed by the federal government, the State or
any political or taxing subdivision thereof under any existing or
future provision of law which grants or may grant such tax exemption.
Section 4.5. Insurance. (A) The Borrower shall insure the
---------
Project against loss or damage by fire, flood, lightning, windstorm,
vandalism and malicious mischief and other hazards, casualties,
contingencies and extended coverage risks in such amounts and in such
manner as is required by the Mortgage while the Mortgage is in effect
and thereafter as is customary with companies in the same or similar
business, and shall pay when due the premiums thereon. In the event
of loss or damage to the Project Realty or Project Equipment the Net
Proceeds of any insurance provided under this subsection shall be
deposited with the Mortgage Trustee as required by the Mortgage while
the Mortgage is in effect and thereafter shall be applied to the
manner set forth in Article V hereof. Any
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<PAGE>
excess proceeds of insurance remaining after application as required by
this Section shall be paid to the Borrower, but only if the Borrower is not
in default under this Agreement. At least ten days prior to the
expiration of any policy required under this Section the Borrower
shall furnish evidence satisfactory to the Authority and the Trustee
that such policy has been renewed or replaced.
(B) The Borrower further agrees that it will at all times
carry public liability insurance with respect to the Project to the
extent required by the Mortgage while the Mortgage is in effect, and,
thereafter, in a minimum amount of $5,000,000 with provisions for a
deductible amount not in excess of five percent of the amount of
coverage thereunder. In the event of a public liability occurrence,
the Net Proceeds of the insurance provided under this subsection shall
be applied to satisfy or extinguish the liability, subject to the
Mortgage.
(C) As an alternative to the hazard insurance and public
liability insurance requirements of subsections (A) or (B) above the
Borrower may self-insure against hazard or public liability risks if
(1) self-insurance is the Borrower's customary method of insurance
against such risks in similar circumstances, and (2) the Borrower
maintains self-insurance reserves adequate and available to meet such
risks, subject to the terms of the Mortgage while the Mortgage is in
effect. Amounts available under any such self-insurance arrangement
upon the occurrence of an insured event shall be applied in the same
manner as the Net Proceeds of any insurance maintained pursuant to
such subsections would have been applied.
(D) The insurance coverage required by this Section may be
effected under overall blanket or excess coverage policies of the
Borrower or any affiliate and may be carried with any insurer other
than an unauthorized insurer under the Connecticut Unauthorized
Insurers Act. The Borrower shall furnish evidence satisfactory to the
Authority or the Trustee, promptly upon the request of either, that
the required insurance coverage is valid and in force.
Section 4.6. Compliance with Law. The Borrower will
-------------------
observe and comply with all material laws, regulations, ordinances,
rules, and orders (including without limitation those relating to
zoning, land use, environmental protection, air, water and land
pollution, wetlands, health, equal opportunity, minimum wages,
worker's compensation and employment practices) of any federal, state,
municipal or other governmental authority relating to the Project
except during any period during which the Borrower at its expense and
in its name shall be in good faith contesting its obligation to comply
therewith.
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<PAGE>
Section 4.7. Maintenance and Repair. At its own expense,
----------------------
the Borrower will keep and maintain or cause the Project to be kept
and maintained in accordance with sound utility operating practice and
in good condition, working order and repair, will not commit or suffer
any waste thereon, and will make all material repairs and replacements
thereto which may be required in connection therewith. Nothing in
this Section 4.7 shall (1) apply to any portion of the Project beyond
its useful or economic life or (2) apply to the use and disposition by
the Borrower of any part of the Project in the ordinary course of its
business.
Section 4.8. Disposition of Project by Borrower. (A) The
----------------------------------
Borrower shall not sell, assign, encumber (other than Permitted
Encumbrances), convey or otherwise dispose of its interest in the
Project Realty or any part thereof during the Term without the prior
written consent of the Authority, except as permitted hereby or by the
Mortgage while the Mortgage is in effect.
(B) The Borrower may, however, grant such rights of way or
easements over, across, or under, the Project Realty as shall be
necessary or convenient for the operation or use of the Project
Realty, including but not limited to easements or rights-of-way for
utility, roadway, railroad or similar purposes in connection with the
Project Realty, or for the use of the real property adjacent to or
near the Project and owned by or leased to the Borrower, but only if
such rights-of-way or easements shall not materially or adversely
affect the value and operation of the Project Realty.
(C) In the event the Authority consents to any disposition
of the Borrower's interest in the Project Realty, the proceeds of the
disposition shall be deposited with the Mortgage Trustee while the
Mortgage is in effect and thereafter in the Redemption Account of the
Debt Service Fund for the redemption of the Bonds used to finance the
portion of the Project then being disposed of under the Indenture. No
conveyance or release effected under the provisions of this Section
shall entitle the Borrower to any abatement or diminution of the
amounts payable hereunder or under the Note, or relieve the Borrower
of the obligation to perform all of its covenants and agreements under
the Financing Documents.
Section 4.9. Leasing of the Project Realty and the Project
---------------------------------------------
Equipment. The Borrower may not lease the Project Realty or the
- ---------
Project Equipment to any person during the Term of this Agreement
without the prior written consent of the Authority, except as may be
permitted by the Mortgage while the Mortgage is in effect. No lease
shall relieve the Borrower from primary liability for any of its
obligations hereunder, and in the event of any such lease the Borrower
shall continue to remain primarily liable for payment of the
applicable amounts specified in Article III hereof and for
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<PAGE>
performance and observance of the other agreements on its part herein
provided to be performed and observed by it to the same extent as though
no lease had been made.
Section 4.10. Project Equipment. (A) The Borrower shall
-----------------
have the right to install, operate, use, remove and dispose of the
Project Equipment in the normal and ordinary course of its business
operations, and shall not be required to replace any item of Project
Equipment which is discarded or sold for scrap. The Borrower shall
not, however, either in one transaction or a series of transactions
sell, convey, transfer, remove or otherwise dispose of more than 20%
by value of the Project Equipment without prior notice to and the
consent of the Authority, unless such Project Equipment is replaced by
property of similar value and utility, provided that such dispositions
may be made as permitted by the Mortgage while the Mortgage is in
effect.
(B) The Borrower shall maintain with the Trustee separate
and reasonably detailed descriptions of each item of property
constituting the Project Equipment. Without limiting the foregoing,
the Project Equipment list appended hereto at the date of execution
and delivery of this Agreement shall be modified to the extent
required by this Section in connection with any disbursement for
Project Equipment from the Project Fund and any replacement of
material items of Project Equipment under this Section or under
Section 5.2 hereof.
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<PAGE>
ARTICLE V
CONDEMNATION
DAMAGE AND DESTRUCTION
Section 5.1. No Abatement of Payments Hereunder. If the
----------------------------------
Project Realty or Project Equipment shall be damaged or either
partially or totally destroyed, or if title to or the temporary use of
the whole or any part thereof shall be taken or condemned by a
competent authority for any public use or purpose, there shall be no
abatement or reduction in the amounts payable by the Borrower
hereunder and the Borrower shall continue to be obligated to make such
payments. In any such case the Borrower shall promptly give written
notice thereof to the Authority and the Trustee.
Section 5.2. Project Disposition Upon Condemnation, Damage
---------------------------------------------
or Destruction. In the event of any such condemnation, damage or
- --------------
destruction the Borrower, except as otherwise permitted by the
Mortgage while the Mortgage is in effect shall:
(1) At its own cost, repair, restore or reconstruct the
Project Realty and Project Equipment to substantially its
condition immediately prior to such event or to a condition of at
least equivalent value, regardless of whether or not the proceeds
of any and all policies of insurance covering such damage or
destruction, or the amount of the award or compensation or
damages recovered on account of such taking or condemnation,
shall be available or sufficient to pay the cost thereof; comply
with the applicable provisions of the Mortgage concerning the
repair, reconstruction or restoration of the Project or give
notice to Authority of its decision not to so comply; and or
(2) At its own cost, replace or relocate the Project Realty
and Project Equipment at its site in such fashion as to render
the replacement or relocated structures, improvements and items,
machinery, equipment or other property of equivalent value to the
Project Realty and Project Equipment immediately prior to such
event; or
(3) If and as permitted by Section 8.1 hereof, exercise its
option to prepay its loan obligation in full.
Section 5.3. Application of Net Proceeds of Insurance or
-------------------------------------------
Condemnation. (A) The Net Proceeds from any insurance or
- ------------
condemnation award with respect to the Project Realty or Project
Equipment shall be deposited with the Mortgage Trustee while the
Mortgage is in effect and thereafter shall be deposited either (1) in
the Renewal Fund
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<PAGE>
and applied to pay for the cost of making such
repairs, restorations, reconstructions, replacements or relocations,
or to reimburse the Borrower, the Authority or the Trustee for payment
therefor from time to time as provided in the Indenture or (2) if
prepayment of the loan is then permitted and the Borrower exercises
its option to prepay the loan, in the Debt Service Fund and applied to
the payment of the Note and redemption of the Bonds.
(B) Notwithstanding the provisions of subsection (A) of
this Section, any insurance or condemnation proceeds attributable to
improvements, machinery, equipment and other property installed in or
about the Project Realty and the Project Equipment, but which do not
constitute a portion of the Project Realty and the Project Equipment,
shall be paid directly to the Borrower. The Trustee and the Authority
agree to execute such documents as may be reasonably necessary to
accomplish the purposes of this subsection.
(C) The Borrower, the Authority and the Trustee shall
cooperate and consult with each other in all matters pertaining to the
settlement or adjustment of any and all claims and demands for damages
on account of any taking or condemnation of the Project Realty or the
Project Equipment or pertaining to the settlement, compromising or
arbitration of any claim on account of any damage or destruction
thereof.
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ARTICLE VI
COVENANTS
Section 6.1. The Borrower to Maintain its Corporate
--------------------------------------
Existence; Conditions under which Exceptions Permitted. (A) The
- ------------------------------------------------------
Borrower covenants and agrees that, during the Term of this Agreement
it will maintain its corporate existence, will continue to be a
corporation either organized under the laws of or duly qualified to do
business as a foreign corporation in the State and in all
jurisdictions necessary in the operation of its business, will not
dissolve or otherwise dispose of all or substantially all of its
assets and will not consolidate with or merge into another corporation
or permit one or more other corporations to consolidate with or merge
into it, except as permitted by the Mortgage while the Mortgage is in
effect.
(B) The Borrower may, however, without violating the
agreements contained in this Section, consolidate with or merge into
another corporation or permit one or more other corporations to
consolidate with or merge into it, or sell or otherwise transfer to
another corporation all or substantially all of its assets as an
entity and thereafter liquidate or dissolve, if (a) the Borrower is
the surviving, resulting or transferee corporation, as the case may
be, or (b) in the event the Borrower is not the surviving, resulting
or transferee corporation, as the case may be, such corporation (i) is
a solvent corporation either organized under the laws of or duly
qualified to do business as a foreign corporation subject to service
of process in the State and (ii) assumes in writing all of the
obligations of the Borrower herein, and under the Note.
Section 6.2. Indemnification, Payment of Expenses, and
-----------------------------------------
Advances. (A) The Borrower agrees to protect, defend and hold
- --------
harmless the Authority, the State, agencies of the State and their
members, servants, agents, directors, officers and employees (the
"Authority Indemnified Parties"), and the Paying Agent, the Trustee
and their officers, directors and employees (the "Indemnified
Parties") from any claim, demand, suit, action or other proceeding and
any liabilities, costs, and expenses whatsoever by any person or
entity whatsoever, arising or purportedly arising from or in
connection with the Financing Documents, the Indenture, the Bonds,
or the transactions contemplated thereby or acions taken thereunder
by any person (including without limitation the fiing of any
information, form or statement with the Internal Revenue
Service), except for any wilful and material misrepresentation,
wilful miconduct or gross negligence on the part of the Authority
Indemnified Parties or the Indemnified Parties and except for any
bad faith on the part of any Indemnified Party other than an
Authority Indemnified Party.
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<PAGE>
The Borrower agrees to indemnify and hold harmless any
ten information provided by the Borrower in connection with the issuance of
the Bonds or incorporated by reference therein or caused by any omission or
alleged omission from such information of any material fact required to be
stated therein or necessary in order to make the statements made therein
in the light of the circumstances under which they were made, not misleading.
(B) The Authority and the Trustee shall not be liable for
any damage or injury to the persons or property of the Borrower or its
members, directors, officers, agents, servants or employees, or any
other person who may be about the Project Realty and the Project
Equipment due to any act or omission of any person other than the
Authority or the Trustee or their respective members, directors,
officers, agents, servants and employees.
(C) The Borrower releases each Indemnified Party from,
agrees that no Indemnified Party shall be liable for, and agrees to
hold each Indemnified Party harmless against, any attorney fees and
expenses, expenses or damages incurred because of any investigation,
review or lawsuit commenced by the Trustee or the Authority in good
faith with respect to the Financing Documents, the Indenture, the
Bonds and the Project Realty and the Project Equipment, and the
Authority or the Trustee shall promptly give written notice to the
Borrower with respect thereto.
(D) All covenants, stipulations, promises, agreements and
obligations of the Authority and the Trustee contained herein shall be
deemed to be the covenants, stipulations, promises, agreements and
obligations of the Authority and the Trustee and not of any member,
director, officer or employee of the Authority or the Trustee in its
individual capacity, and no recourse shall be had for the payment of
the Bonds or for any claim based thereon or hereunder against any
member, director, officer or employee of the Authority or the Trustee
or any natural person executing the Bonds.
(E) In case any action shall be brought against one or more
of the Indemnified Parties based upon any of the above and in respect
of which indemnity may be sought against the Borrower, such
Indemnified Party shall promptly notify the Borrower in writing,
enclosing a copy of all papers served, but the omission so to notify
the Borrower of any such action shall not relieve it of any liability
which it may have to any Indemnified Party otherwise than under this
Section 6.2. In
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<PAGE>
case any such action shall be brought against any
Indemnified Party and it shall notify the Borrower of the commencement
thereof, the Borrower shall be entitled to participate in and, to the
extent that it shall wish, to assume the defense thereof with counsel
satisfactory to such Indemnified Party, and after notice from the
Borrower to such Indemnified Party of the Borrower's election so to
assume the defense thereof, the Borrower shall not be liable to such
Indemnified Party for any subsequent legal or other expenses
attributable to such defense, except as set forth below, other than
reasonable costs of investigation subsequently incurred by such
Indemnified Party in connection with the defense thereof. The
Indemnified Party shall have the right to employ its own counsel in
any such action, but the fees and expenses of such counsel shall be at
the expense of such Indemnified Party unless (i) the employment of
counsel by such Indemnified Party has been authorized by the Borrower;
(ii) the Indemnified Party shall have reasonably concluded that there
may be a conflict of interest between the Borrower and the Indemnified
Party in the conduct of the defense of such action (in which case the
Borrower shall not have the right to direct the defense of such action
on behalf of the Indemnified Party); or (iii) the Borrower shall not
in fact have employed counsel reasonably satisfactory to the
Indemnified Party to assume defense of such action; provided, however,
that Borrower shall not be responsible for the fees and expenses of
more than one such law firm unless an Indemnified Party shall have
reasonably concluded that there may be a conflict of interest between
such Indemnified Party and any other Indemnified Party requiring the
use of separate counsel, or Borrower has not employed counsel which is
satisfactory to each Indemnified Party. The Borrower shall not be
liable for any settlement of any action or claim effected without its
consent.
(F) The Borrower also agrees to pay all reasonable or
necessary out-of-pocket expenses of the Authority in connection with
the issuance of the Bonds, the administration of the Financing
Documents and the enforcement of its rights thereunder.
(G) In the event the Borrower fails to pay any amount or
perform any act under the Financing Documents, the Trustee or the
Authority may pay the amount or perform the act, in which event the
costs, disbursements, expenses and reasonable counsel fees and
expenses thereof, together with interest thereon from the date the
expense is paid or incurred at the prime interest rate generally
prevailing among banks in the State on the date of the advance plus 1%
shall be an additional obligation hereunder payable upon demand by the
Authority or the Trustee.
(H) Any obligation of the Borrower to the Authority under
this Section shall be separate from and independent of the other
obligations of the Borrower hereunder, and may be
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<PAGE>
enforced directly by the Authority against the Borrower irrespective
of any action taken by or on behalf of the owners of the Bonds.
(I) The obligations of the Borrower under this section,
notwithstanding any other provisions contained in the Financing
Documents, shall survive the termination of this Agreement and shall
be recourse to the Borrower, and for the enforcement thereof any
Indemnified Party shall have recourse to the general credit of the
Borrower.
Section 6.3. Incorporation of Tax Regulatory Agreement:
------------------------------------------
Payments Upon Taxability. (A) For purpose of this Section, the term
- ------------------------
owner means the Beneficial Owner of the Bonds so long as the
Book-Entry System is in effect.
(B) The representations, warranties, covenants and
statements of expectation of the Borrower set forth in the Tax
Regulatory Agreement are by this reference incorporated in this
Agreement as though fully set forth herein.
(C) If any owner of the Bonds receives from the Internal
Revenue Service a notice of assessment and demand for payment with
respect to interest on any Bond (except a notice and demand based upon
the assertion that the owner of the Bonds is a Substantial User or
Related Person), an appeal may be taken by the owner of the Bonds at
the option of the Borrower. Without limiting the generality of the
foregoing, the Borrower shall have the right to direct the Trustee to
direct the owner of the Bonds to take such appeal or not to take such
appeal. In that case all expenses of the appeal including reasonable
counsel fees and expenses shall be paid by the Borrower, and the owner
of the Bonds and the Borrower shall cooperate and consult with each
other in all matters pertaining to any such appeal, except that no
owner of the Bonds shall be required to disclose or furnish any
non-publicly disclosed information, including, without limitation,
financial information and tax returns.
(D) If any Bonds are paid at maturity, redeemed after the
date of a Determination of Taxability, or redeemed or sold during the
taxability period, the former owners of such Bonds, upon establishing
the ownership of such Bonds and upon establishing their tax liability
in connection with the interest payable on such Bonds, shall be
entitled to receive such amount equal to such liability.
(E) Not later than 180 days following a Determination of
Taxability, the Borrower shall pay to the Trustee an amount
sufficient, when added to the amount then in the Debt Service Fund and
available for such purpose, to retire and redeem all Bonds then
Outstanding, in accordance with Section 2.4 of the Indenture.
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(F) The obligation of the Borrower to make the payments
provided for in this Section shall be absolute and unconditional, and
the failure of the Authority or the Trustee to execute or deliver or
cause to be executed or delivered any documents or to take any action
required under this Agreement or otherwise shall not relieve the
Borrower of its obligation under this Section. Notwithstanding any
other provision of this Agreement or the Indenture, the Borrower's
obligations under this Section shall survive the termination of this
Agreement and the Indenture.
(G) The occurrence of a Determination of Taxability shall
not be an Event of Default hereunder but shall require only the
performance of the obligations of the Borrower stated in this Section,
the breach of which shall constitute an Event of Default as provided
in Section 7.1 hereof.
(H) At any time after the issuance of the Bonds, the
Authority shall, upon (1) the release of a published Revenue Ruling by
the Internal Revenue Service and the receipt by the Authority of an
opinion of Bond Counsel to the effect that such ruling may adversely
affect the exclusion of interest on the Bonds from gross income for
federal income tax purposes, and (2) receipt from the Borrower, within
30 days after the Authority has mailed copies of such ruling and such
opinion to the Borrower, of a written request to proceed in accordance
with this Section, proceed to apply for and use its best efforts to
obtain a ruling from the Internal Revenue Service, pursuant to Revenue
Procedure 88-33 or any other procedures subsequently established by
the Internal Revenue Service, as to the qualification or continued
qualification of interest on the Bonds for exclusion from gross income
for federal income tax purposes. The Authority and the Borrower shall
cooperate and consult with each other in all matters pertaining to
such ruling request. All expenses of the Authority in connection with
such application including reasonable counsel fees shall be paid by
the Borrower.
Section 6.4. Further Assurances and Corrective Instruments.
----------------------------------------------
The Authority and the Borrower agree that they will, from time to
time, execute, acknowledge and deliver, or cause to be executed,
acknowledged and delivered, such supplements hereto and such further
instruments as may reasonably be required for correcting any
inadequate or incorrect description of the Project Realty or Project
Equipment or for carrying out the intention of or facilitating the
performance of this Agreement.
Section 6.5. Covenant by Borrower as to Compliance with
-------------------------------------------
Indenture. The Borrower covenants and agrees that it will comply with
- ---------
the provisions of the Indenture with respect to the Borrower and that
the Trustee and the Bondholders shall have the power and authority
provided in the Indenture. The Borrower further agrees to aid in the
furnishing to the
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<PAGE>
Authority or the Trustee of opinions that may be
required under the Indenture. The Borrower covenants and agrees that
the Trustee shall be entitled to and shall have all the rights,
including the right to enforce against the Borrower the provisions of
the Financing Documents, pertaining to the Trustee notwithstanding the
fact that the Trustee is not a party to the Financing Documents.
Section 6.6. Assignment of Agreement or Note. (A) The
--------------------------------
Borrower may not assign its rights, interests or obligations hereunder
or under the Note except as may be permitted pursuant to Section
6.1(B) hereof.
(B) The Authority agrees that it will not assign or
transfer any of the Financing Documents or the revenues and other
receipts, funds and monies to be received thereunder during the Term
except to the Trustee as provided in this Agreement and the Indenture.
Section 6.7. Inspection. The Authority, the Trustee and
----------
their duly authorized agents shall have (1) the right at all
reasonable times to enter upon and to examine and inspect the Project
Realty and the Project Equipment and (2) such rights of access thereto
as may be reasonably necessary for the proper maintenance and repair
thereof in the event of failure by the Borrower to perform its
obligations under this Agreement. The Authority and the Trustee shall
also be permitted, at all reasonable times, to examine the books and
records of the Borrower with respect to the Project Realty and the
Project Equipment.
Section 6.8. Default Notification. Upon becoming aware of
--------------------
any condition or event which constitutes, or with the giving of notice
or the passage of time would constitute, an Event of Default, the
Borrower shall deliver to the Authority and the Trustee a notice
stating the existence and nature thereof and specifying the corrective
steps, if any, the Borrower is taking with respect thereto.
Section 6.9. Covenant Against Discrimination. (A) The
-------------------------------
Borrower in the performance of this Agreement will not discriminate or
permit discrimination against any person or group of persons on the
grounds of race, color, religion, national origin, age, sex, sexual
orientation, marital status, physical or learning disability,
political beliefs, mental retardation or history of mental disorder in
any manner prohibited by the laws of the United States or of the
State.
(B) The Borrower will comply with the provisions of the
resolution adopted by the Authority on June 14, 1977, as amended, and
the policy of the Authority implemented pursuant thereto concerning
the promotion of equal employment opportunity through affirmative
action plans. The resolution requires that all borrowers receiving
financial assistance
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<PAGE>
from the Authority adopt and implement an
affirmative action plan prior to the closing of the loan. The plan
shall be updated annually as long as the Bonds remain Outstanding.
Section 6.10. Authority Costs and Expenses. The Authority
----------------------------
agrees that it shall in all instances act in good faith in incurring
costs, expenses and legal fees in connection with the transactions
contemplated by this Agreement and the Indenture.
Section 6.11. Continuing Disclosure. The Borrower hereby
---------------------
covenants and agrees that it will comply with and carry out all of the
provisions of the Continuing Disclosure Agreement. Notwithstanding
any other provision of this Loan Agreement, failure of the Borrower to
comply with the Continuing Disclosure Agreement shall not be
considered an Event of Default hereunder; however, the Trustee may
(and, at the request of any Participating Underwriter (as defined in
the Continuing Disclosure Agreement) or the Holders of at least 25%
aggregate principal amount in Outstanding Bonds, shall) or any
Bondholder or Beneficial Owner may take such actions as may be
necessary and appropriate, including seeking specific performance by
court order, to cause the Borrower to comply with its obligations
under this Section 6.11. For purposes of this Section, "Beneficial
Owner" means any person which (a) has the power, directly or
indirectly, to vote or consent with respect to, or to dispose of
ownership of, any Bonds (including persons holding Bonds through
nominees, depositories or other intermediaries), or (b) is treated as
the owner of any Bonds for federal income tax purposes.
Section 6.12. Covenant Against Issuing Additional Debt
----------------------------------------
Secured By The Mortgage. The Borrower will not issue any additional
- -----------------------
debt secured by the Mortgage unless the Bonds are equally and ratably
secured by the Mortgage.
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<PAGE>
ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES
Section 7.1. Events of Default. Any on or more of
-----------------
the following shall constitute an "Eent of Default" hereunder.
(1) Any material representation or warranty made by the
Borrower in the Financing Documents or any certificate,
statement, data or information furnished in writing to the
Authority or the Trustee by the Borrower in connection with the
closing of the initial issue of the Bonds or included by the
Borrower in its application to the Authority for assistance
proves at any time to have been incorrect when made in any
material respect.
(2) Failure by the Borrower to pay any interest, principal
or premium, if any, that has become due and payable with respect
to the Bonds and the continuance of such failure for more than
five Business Days.
(3) Failure by the Borrower to pay any amount that has
become due and payable with respect to the Bonds or any other
amount due and payable pursuant to the Financing Documents and
the continuance of such failure for more than thirty days.
(4) Failure by the Borrower to comply with the default
notification provisions of Section 6.8 hereof.
(5) The occurrence of an "Event of Default" under Section
8.1(A) of the Indenture (other than an occurrence under Section
8.1(A)(2)(a)).
(6) Failure by the Borrower to observe or perform any
covenant, condition or agreement hereunder or under the Financing
Documents (except those referred to above) and (a) continuance of
such failure for a period of sixty days after receipt by the
Borrower of written notice specifying the nature of such failure
or (b) if by reason of the nature of such failure the same cannot
be remedied within the sixty day period, the Borrower fails to
proceed with reasonable diligence after receipt of the notice to
cure the failure.
(7) The Borrower shall (a) apply for or consent to the
appointment of a receiver, trustee, liquidator or custodian or
the like of itself or of its property, (b) admit in writing its
inability to pay its debts generally as they become due, (c) make
a general assignment for the benefit of creditors, (d) be
adjudicated a bankrupt or insolvent, or (e) commence a voluntary
case under the Federal bankruptcy laws of the
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<PAGE>
United States of America or file a voluntary petition or answer seeking
reorganization, an arrangement with creditors or an order for
relief or seeking to take advantage of any insolvency law or file
an answer admitting the material allegations of a petition filed
against it in any bankruptcy, reorganization or insolvency
proceeding; or corporate action shall be taken by it for the
purpose of effecting any of the foregoing; or if without the
application, approval or consent of the Borrower, a proceeding
shall be instituted in any court of competent jurisdiction,
seeking in respect of the Borrower an adjudication in bankruptcy,
reorganization, dissolution, winding up, liquidation, a
composition or arrangement with creditors, a readjustment of
debts, the appointment of a trustee, receiver, liquidator or
custodian or the like of the Borrower or of all or any
substantial part of its assets, or other like relief in respect
thereof under any bankruptcy or insolvency law, and, if such
proceeding is being contested by the Borrower in good faith, the
same shall continue undismissed, or pending and unstayed, for any
period of 90 consecutive days.
Section 7.2. Remedies on Default. (A) Whenever any Event
-------------------
of Default shall have occurred, the Trustee, or the Authority where so
provided herein, may take any one or more of the following actions:
(1) The Trustee, as and to the extent provided in Article
VIII of the Indenture, may cause all amounts payable under the
Financing Documents to be immediately due and payable without
notice or demand of any kind, whereupon the same shall become
immediately due and payable.
(2) The Authority, without the consent of the Trustee or
any Bondholder, may proceed to enforce the obligations of the
Borrower to the Authority under this Agreement.
(3) The Trustee may take whatever action at law or in
equity it may have to collect the amounts then due and thereafter
to become due, or to enforce the performance or observance of the
obligations, agreements, and covenants of the Borrower under the
Financing Documents.
(4) The Trustee may exercise any and all rights it may have
under the Financing Documents.
(B) In the event that any Event of Default or any
proceeding taken by the Authority (or by the Trustee on behalf of the
Authority) thereon shall be waived or determined adversely to the
Authority, then the Event of Default shall be annulled and the
Authority and the Borrower shall be restored
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<PAGE>
to their former rights hereunder, but no such waiver or determination
shall extend to any subsequent or other default or impair any right
consequent thereon.
Section 7.3. No Duty to Mitigate Damages. Unless otherwise
---------------------------
required by law, neither the Authority, the Trustee nor any Bondholder
shall be obligated to do any act whatsoever or exercise any diligence
whatsoever to mitigate the damages to the Borrower if an Event of
Default shall occur.
Section 7.4. Remedies Cumulative. No remedy herein
-------------------
conferred upon or reserved to the Authority or the Trustee is intended
to be exclusive of any other available remedy or remedies but each and
every such remedy shall be cumulative and shall be in addition to
every remedy given under this Agreement or now or hereafter existing
at law or in equity or by statute. Delay or omission to exercise any
right or power accruing upon any default or failure by the Authority
or the Trustee to insist upon the strict performance of any of the
covenants and agreements herein set forth or to exercise any rights or
remedies upon default by the Borrower hereunder shall not impair any
such right or power or be considered or taken as a waiver or
relinquishment for the future of the right to insist upon and to
enforce, by injunction or other appropriate legal or equitable remedy,
strict compliance by the Borrower with all of the covenants and
conditions hereof, or of the right to exercise any such rights or
remedies, if such default by the Borrower be continued or repeated.
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<PAGE>
ARTICLE VIII
PREPAYMENT PROVISIONS
Section 8.1. Optional Prepayment. (A) The Borrower shall
-------------------
have, and is hereby granted, the option to prepay its loan obligation
and to cause the corresponding optional redemption of the Bonds
pursuant to Section 2.4(A) of the Indenture at such times, in such
amounts, and with such premium, if any, for such optional redemption
as set forth in the form of the Bond, by delivering a written notice
to the Trustee in accordance with Section 8.2 hereof, with a copy to
the Authority, setting forth the amount to be prepaid, the amount of
Bonds requested to be redeemed with the proceeds of such prepayment,
and the date on which such Bonds are to be redeemed. Such prepayment
must be sufficient to provide monies for the payment of interest and
Redemption Price in accordance with the terms of the Bonds requested
to be redeemed with such prepayment and all other amounts then due
under the Financing Documents. In the event of any complete
prepayment of its loan obligation, the Borrower shall, at the time of
such prepayment, also pay or provide for the payment of all reasonable
or necessary fees and expenses of the Authority, the Trustee and the
Paying Agent accrued and to accrue through the final payment of all
the Bonds. Any such prepayments shall be applied to the redemption of
Bonds in the manner provided in Section 6.2 of the Indenture, and
credited against payments due hereunder in the same manner.
(B) The Borrower shall have, and is hereby granted, the
option to prepay its loan obligation in full at any time without
premium if any of the following events shall have occurred, as
evidenced in each case by the filing with the Trustee of a certificate
of an Authorized Representative of the Borrower to the effect that one
of such events has occurred and is continuing, and describing the
same:
(1) The Project shall have been damaged or destroyed to
such extent that (a) the Project cannot be reasonably restored
within a period of six months from the date of such damage or
destruction to the condition thereof immediately preceding such
damage or destruction, or (b) the Borrower is thereby prevented
or likely to be prevented from carrying on its normal operation
of the Project for a period of six months from the date of such
damage or destruction.
(2) Title to or the temporary use of all or substantially
all of the Project shall have been taken or condemned by a
competent authority, which taking or condemnation results or is
likely to result in the Borrower being thereby prevented or
likely to be prevented from carrying on its normal operation of
the Project for a period of six months.
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<PAGE>
(3) A change in the Constitution of the State or of the
United States of America or legislative or executive action
(whether local, state, or federal) or a final decree, judgment or
order of any court or administrative body (whether local, state,
or federal) that causes this Agreement to become void or
unenforceable or impossible of performance in accordance with the
intent and purpose of the parties as expressed herein or, imposes
unreasonable burdens or excessive liabilities upon the Borrower
with respect to the Project or the operation thereof.
(4) The operation of any of the Project shall have been
enjoined or shall otherwise have been prohibited by any order,
decree, rule or regulation of any court or of any local, state,
or federal regulatory body, administrative agency or other
governmental body for a period of not less than six months.
(5) Changes in the economic availability of raw materials,
operating supplies or facilities necessary for the operation of
the Project or technological or other changes shall have occurred
which the Borrower cannot reasonably overcome or control and
which in the Borrower's reasonable judgment renders the Project
unsuitable or uneconomic for the purposes herein specified or any
tax shall be levied upon payments due under the Note in an amount
which the Borrower in its reasonable judgment believes imposes an
unreasonable burden upon the Borrower.
In any such case the final loan payment shall be a sum sufficient,
together with other funds deposited with Trustee and available for
such purpose, to redeem all Bonds then outstanding under the Indenture
at the redemption price of 100% of the principal amount thereof plus
accrued interest to the redemption date or dates and all other amounts
then due under the Financing Documents, and the Borrower shall also
pay or provide for all reasonable or necessary fees and expenses of
the Authority, the Trustee and Paying Agent and the Remarketing Agent
accrued and to accrue through final payment for the Bonds. The
Borrower shall deliver a written notice to the Trustee, with a copy to
the Authority, requesting the redemption of the Bonds under the
Indenture, which notice shall have attached thereto the applicable
certificate of the Authorized Representative of the Borrower.
Section 8.2. Notices and Sources of Prepayment. To
---------------------------------
exercise any options granted in this Article, or to consummate the
acceleration of the loan payments as set forth in this Article, the
written notice to the Trustee shall be signed by an Authorized
Representative of the Borrower to the Trustee, the Authority and the
Paying Agent and shall specify therein the date of prepayment, which
date shall be not less than
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<PAGE>
forty-five days nor more than ninety days
from the date the notice is mailed. A duplicate copy of any written
notice hereunder shall also be filed with the Authority.
Section 8.3. Mandatory Prepayment on Taxability. The
----------------------------------
Borrower shall pay or cause the prepayment of its loan obligation
following a Determination of Taxability in the manner provided in
Section 6.3 of this Agreement.
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<PAGE>
ARTICLE IX
GENERAL
Section 9.1. Indenture. (A) Monies received from the sale
---------
of the Bonds and all loan payments made by the Borrower and all other
monies received by the Authority or the Trustee under the Financing
Documents shall be applied solely and exclusively in the manner and
for the purposes expressed and specified in the Indenture and in the
Bonds and as provided in this Agreement.
(B) The Borrower shall have and may exercise all the
rights, powers and authority given the Borrower in the Indenture and
in the Bonds, and the Indenture and the Bonds shall not be modified,
altered or amended in any manner which adversely affects such rights,
powers and authority or otherwise adversely affects the Borrower
without the prior written consent of the Borrower.
Section 9.2. Benefit of and Enforcement by Bondholders.
-----------------------------------------
The Authority and the Borrower agree that this Agreement is executed
in part to induce the purchase by others of the Bonds and for the
further securing of the Bonds, and accordingly that all covenants and
agreements on the part of the Authority and the Borrower as to the
amounts payable with respect to the Bonds hereunder are hereby
declared to be for the benefit of the holders from time to time of the
Bonds and may be enforced as provided in the Indenture on behalf of
the Bondholders by the Trustee.
Section 9.3. Force Majeure. In case by reason of force
-------------
majeure either party hereto shall be rendered unable wholly or in part
to carry out its obligations under this Agreement, then except as
otherwise expressly provided in this Agreement, if such party shall
give notice and full particulars of such force majeure in writing to
the other party within a reasonable time after occurrence of the event
or cause relied on, the obligations of the party giving such notice,
other than the obligation of the Borrower to make the payments
required under the terms hereof or of the Note, so far as they are
affected by such force majeure, shall be suspended during the
continuance of the inability then claimed which shall include a
reasonable time for the removal of the effect thereof, but for no
longer period, and such parties shall endeavor to remove or overcome
such inability with all reasonable dispatch. The term "force
majeure", as employed herein, means acts of God, strikes, lockouts or
other industrial disturbances, acts of the public enemy, orders of any
kind of the Government of the United States, of the State or any civil
or military authority, insurrections, riots, epidemics, landslides,
lightning, earthquakes, volcanoes, fires, hurricanes, tornadoes,
storms, floods, washouts, droughts, arrests, restraining of government
and people, civil
-41-
<PAGE>
<PAGE>
disturbances, explosions, partial or entire failure
of utilities, shortages of labor, material, supplies or
transportation, or any other similar or different cause not reasonably
within the control of the party claiming such inability. It is
understood and agreed that the settlement of existing or impending
strikes, lockouts or other industrial disturbances shall be entirely
within the discretion of the party having the difficulty and that the
above requirements that any force majeure shall be reasonably beyond
the control of the party and shall be remedied with all reasonable
dispatch shall be deemed to be fulfilled even though such existing or
impending strikes, lockouts and other industrial disturbances may not
be settled and could have been settled by acceding to the demands of
the opposing person or persons.
Section 9.4. Amendments. This Agreement may be amended
----------
only with the concurring written consent of the Trustee and, if
required by the Indenture, of the owners of the Bonds given in
accordance with the provisions of the Indenture.
Section 9.5. Notices. All notices, certificates or other
-------
communications hereunder shall be sufficiently given and shall be
deemed given when delivered or when mailed by registered or certified
mail, postage prepaid, addressed as follows: if to the Authority, at
845 Brook Street, Rocky Hill, Connecticut 06067, Attention: Program
Manager - Loan Administration; if to the Borrower, 835 Main Street,
Bridgeport, Connecticut 06601 Attention: Treasurer; if to the Paying
Agent, Fleet National Bank, 777 Main Street, Hartford, Connecticut,
Attention: Corporate Trust Operations CT/MO/0224; and if to the
Trustee, Fleet National Bank, 777 Main Street, Hartford, Connecticut,
Attention: Corporate Trust Administration CT/MO/0238. A duplicate
copy of each notice, certificate or other communication given
hereunder by either the Authority or the Borrower to the other shall
also be given to the Trustee. The Authority, the Borrower, the
Remarketing Agent, the Paying Agent and the Trustee may, by notice
given hereunder, designate any further or different addresses to which
subsequent notices, certificates or other communications shall be
sent.
Section 9.6. Prior Agreements Superseded. This Agreement,
---------------------------
together with all agreements executed by the parties concurrently
herewith or in conjunction with the sale of the Bonds, shall
completely and fully supersede all other prior understandings or
agreements, both written and oral, between the Authority and the
Borrower relating to the lending of money and the Project, including
those contained in any commitment letter executed in anticipation of
the issuance of the Bonds but excluding agreements entered into in
connection with the financing of the Project with other bonds
previously issued by the Authority.
-42-
<PAGE>
<PAGE>
Section 9.7. Execution of Counterparts. This Agreement may
-------------------------
be executed simultaneously in several counterparts each of which shall
be an original and all of which shall constitute but one and the same
instrument.
Section 9.8. Time. All references to times of day in this
----
Agreement are references to New York City time.
Section 9.9. Separability of Invalid Provisions. In case
----------------------------------
any one or more of the provisions contained in this Loan Agreement or
in the Note shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this
Agreement, but this Agreement shall be construed as if such invalid or
illegal or unenforceable provision had never been contained herein.
-43-
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the Authority has caused this Agreement
to be executed in its corporate name by a duly Authorized
Representative, and the Borrower has caused this Agreement to be
executed in its corporate name by its duly authorized officer all as
of the date first above written.
Connecticut Development Authority
By_________________________________
Name: Stanley R. Killinger
Authorized Representative
Bridgeport Hydraulic Company
By_________________________________
Name: Janet M. Hansen
Title: Vice President and
Chief Financial Officer
-44-
<PAGE>
<PAGE>
APPENDIX A
Bridgeport Hydraulic Company
FORM OF
PROMISSORY NOTE
No. 1 $30,000,000
Bridgeport Hydraulic Company, a corporation organized and
existing under the laws of the State of Connecticut (the "Borrower"),
for value received, hereby promises to pay to the order of the
Connecticut Development Authority (the "Authority"), the principal sum
of $30,000,000.00 together with interest on the unpaid principal
balance thereof from the date hereof until fully and finally paid, on
the applicable Interest Payment Dates together with all taxes levied
or assessed on this Note or the debt evidenced hereby against the
holder hereof. This Note shall bear interest at the rate or rates
determined in accordance with Section 2.3 of the Indenture (as
hereinafter defined) and, as long as the Bonds bear interest at the
Multiannual Rate or on and after the Fixed Rate Conversion Date, shall
be computed on the basis of a 360-day year of twelve 30-day months
and, as long as the Bonds bear interest at the Weekly, Flexible or
Daily Rate shall be computed on the basis of a 365- or 366-day year,
as appropriate for the actual number of days elapsed. In no event
shall the interest rate hereon exceed the maximum rate permitted by
law.
This Note has been executed under and pursuant to a Loan
Agreement dated as of September 1, 1996 between the Authority and the
Borrower (the "Agreement"). This Note is issued to evidence the
obligation of the Borrower under the Agreement to repay the loan made
by the Authority from the proceeds of its $30,000,000 6.00% Water
Facilities Revenue Bonds (Bridgeport Hydraulic Company Project - 1996
Series) (the "Bonds"), together with interest thereon and all other
amounts, fees, penalties, premiums, adjustments, expenses, counsel
fees and other payments of any kind required to be paid by the
Borrower under the Agreement. The Agreement includes provision for
mandatory and optional prepayment of this Note as a whole or in part.
Advances made pursuant to Section 6.2 of the Agreement shall bear
interest at the rate specified in accordance therewith.
The Agreement and this Note (hereinafter, together with the
Tax Regulatory Agreement, collectively referred to as the "Financing
Documents") have been assigned to Fleet National Bank (the "Trustee")
acting pursuant to an Indenture of Trust dated as of September 1, 1996
(the "Indenture") between the Authority and the Trustee. Such
assignment is
-45-
<PAGE>
<PAGE>
made as security for the payment of the Bonds issued by
the Authority pursuant to the Indenture.
As provided in the Agreement and subject to the provisions
thereof, payments hereon are to be made at the principal office of the
Trustee in Hartford, Connecticut, or at the office designated for such
payment by any successor trustee in an amount which, together with
other moneys available therefor pursuant to the Indenture, will equal
the amount payable as principal or Redemption Price, if any, of and
interest on the Bonds outstanding under the Indenture on each such due
date.
The Borrower shall make payments on this Note on the dates
and in the amounts specified herein and in the Agreement and in
addition shall make such other payments as are required pursuant to
the Financing Documents, the Indenture and the Bonds. Upon the
occurrence of an Event of Default, as defined in any of the Financing
Documents, the principal of and interest on this Note may be declared
immediately due and payable as provided in the Agreement. Upon any
such declaration the Borrower shall pay all cost, disbursements,
expenses and reasonable counsel fees of the Authority and the Trustee
in seeking to enforce their rights under any of the Financing
Documents.
THE BORROWER ACKNOWLEDGES THAT THE LOAN EVIDENCED BY THIS
NOTE IS A COMMERCIAL TRANSACTION AND WAIVES ITS RIGHTS TO NOTICE AND
HEARING UNDER CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES, OR AS
OTHERWISE ALLOWED BY ANY STATE OR FEDERAL LAW WITH RESPECT TO ANY
PREJUDGMENT REMEDY WHICH THE HOLDER HEREOF MAY DESIRE TO USE. The
Borrower further (1) waives diligence, demand, presentment for
payment, notice of nonpayment, protest and notice of protest, notice
of any renewals or extension of this Note, and all rights under any
statute of limitations, (2) agrees that the time for payment of this
Note may be changed and extended at the sole discretion of the Trustee
without impairing its liability hereon, and (3) consents to the
release of all or any part of the security for the payment thereof at
the discretion of the Trustee or the release of any party liable for
this obligation without affecting the liability of the other parties
hereto. Any delay on the part of the Authority or the Trustee in
exercising any right hereunder shall not operate as a waiver of any
such right, and any waiver granted with respect to one default shall
not operate as a waiver in the event of any subsequent default.
IN WITNESS WHEREOF, Bridgeport Hydraulic Company has caused
this Note to be executed in its corporate name by its duly authorized
officer, dated September 1, 1996.
Bridgeport Hydraulic Company
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<PAGE>
<PAGE>
By:___________________________
Name: Janet M. Hansen
Authorized Representative
-47-
<PAGE>
<PAGE>
AUTHORITY ENDORSEMENT
Pay to the order of Fleet National Bank, as Trustee, without
recourse.
Connecticut Development Authority
By:________________________________
Name: Stanley R. Killinger
Authorized Representative
-48-
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
PREAMBLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I
DEFINITIONS AND INTERPRETATION
Section 1.1. Definitions . . . . . . . . . . . . . . . . . . . 5
Section 1.2. Interpretation . . . . . . . . . . . . . . . . . . 6
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1. Representations by the Authority . . . . . . . . . 8
Section 2.2. Representations by the Borrower . . . . . . . . . 9
ARTICLE III
THE LOAN
Section 3.1. Loan Clauses . . . . . . . . . . . . . . . . . . . 13
Section 3.2. Other Amounts Payable . . . . . . . . . . . . . . 14
Section 3.3. Manner of Payment . . . . . . . . . . . . . . . . 14
Section 3.4. Obligation Unconditional . . . . . . . . . . . . . 15
Section 3.5. Securities Clauses . . . . . . . . . . . . . . . . 15
Section 3.6. Issuance of Bonds . . . . . . . . . . . . . . . . 15
Section 3.7. Use of Priority Amounts . . . . . . . . . . . . . 15
Section 3.8. Effect of Drawings Under Credit Facility . . . . . 16
Section 3.9. Effective Date and Term . . . . . . . . . . . . . 16
Section 3.10. Borrower's Purchase of Bonds . . . . . . . . . . . 16
Section 3.11. Credit Facility . . . . . . . . . . . . . . . . . 16
Section 3.12. Requirements for Delivery of a Substitute
Credit Facility . . . . . . . . . . . . . . . . . 17
Section 3.13. Securities Laws . . . . . . . . . . . . . . . . . 19
Section 3.14. No Additional Bonds . . . . . . . . . . . . . . . 19
ARTICLE IV
THE PROJECT
Section 4.1. Completion of the Project . . . . . . . . . . . . 20
Section 4.2. Payment of Additional Project Costs by Borrower . 21
Section 4.3. No Warranty Regarding Condition, Suitability or
Cost of Project . . . . . . . . . . . . . . . . . 21
Section 4.4. Taxes . . . . . . . . . . . . . . . . . . . . . . 22
Section 4.5. Insurance . . . . . . . . . . . . . . . . . . . . 22
Section 4.6. Compliance with Law . . . . . . . . . . . . . . . 23
Section 4.7. Maintenance and Repair . . . . . . . . . . . . . . 24
Section 4.8. Disposition of Project by Borrower . . . . . . . . 24
Section 4.9. Leasing of the Project Realty and the
Project Equipment . . . . . . . . . . . . . . . . 24
Section 4.10. Project Equipment . . . . . . . . . . . . . . . . 25
-i-
<PAGE>
<PAGE>
ARTICLE V
CONDEMNATION
DAMAGE AND DESTRUCTION
Section 5.1. No Abatement of Payments Hereunder . . . . . . . . 26
Section 5.2. Project Disposition Upon Condemnation, Damage
or Destruction . . . . . . . . . . . . . . . . . . 26
Section 5.3. Application of Net Proceeds of Insurance
or Condemnation . . . . . . . . . . . . . . . . . 26
ARTICLE VI
COVENANTS
Section 6.1. The Borrower to Maintain its Corporate
Existence; Conditions under which Exceptions
Permitted . . . . . . . . . . . . . . . . . . . . 28
Section 6.2. Indemnification, Payment of Expenses, and
Advances . . . . . . . . . . . . . . . . . . . . . 28
Section 6.3. Incorporation of Tax Regulatory Agreement:
Payments Upon Taxability . . . . . . . . . . . . . 31
Section 6.4. Further Assurances and Corrective Instruments . . 32
Section 6.5. Covenant by Borrower as to Compliance with
Indenture . . . . . . . . . . . . . . . . . . . . 33
Section 6.6. Assignment of Agreement or Note . . . . . . . . . 33
Section 6.7. Inspection . . . . . . . . . . . . . . . . . . . . 33
Section 6.8. Default Notification . . . . . . . . . . . . . . . 33
Section 6.9. Covenant Against Discrimination . . . . . . . . . 33
Section 6.10. Authority Costs and Expenses . . . . . . . . . . . 34
Section 6.11. Continuing Disclosure . . . . . . . . . . . . . . 34
Section 6.12. Covenant Against Issuing Additional Debt Secured
By The Mortgage . . . . . . . . . . . . . . . . . 34
ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES
Section 7.1. Events of Default . . . . . . . . . . . . . . . . 35
Section 7.2. Remedies on Default . . . . . . . . . . . . . . . 36
Section 7.3. No Duty to Mitigate Damages . . . . . . . . . . . 37
Section 7.4. Remedies Cumulative . . . . . . . . . . . . . . . 37
ARTICLE VIII
PREPAYMENT PROVISIONS
Section 8.1. Optional Prepayment . . . . . . . . . . . . . . . 38
Section 8.2. Notices and Sources of Prepayment. . . . . . . . . 39
Section 8.3. Mandatory Prepayment on Taxability . . . . . . . . 40
ARTICLE IX
GENERAL
Section 9.1. Indenture . . . . . . . . . . . . . . . . . . . . 41
Section 9.2. Benefit of and Enforcement by Bondholders . . . . 41
Section 9.3. Force Majeure . . . . . . . . . . . . . . . . . . 41
Section 9.4. Amendments . . . . . . . . . . . . . . . . . . . . 42
Section 9.5. Notices . . . . . . . . . . . . . . . . . . . . . 42
Section 9.6. Prior Agreements Superseded . . . . . . . . . . . 42
Section 9.7. Execution of Counterparts . . . . . . . . . . . . 43
Section 9.8. Time . . . . . . . . . . . . . . . . . . . . . . . 43
Section 9.9. Separability of Invalid Provisions . . . . . . . . 43
-ii-
<PAGE>
<PAGE>
APPENDICES
Appendix A - Form of Promissory Note
Appendix B - Description of Project Realty
Appendix C - Description of Project Equipment
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996, AQUARION COMPANY FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 470
<SECURITIES> 0
<RECEIVABLES> 10796
<ALLOWANCES> 1253
<INVENTORY> 2883
<CURRENT-ASSETS> 49622
<PP&E> 454716
<DEPRECIATION> 131328
<TOTAL-ASSETS> 449092
<CURRENT-LIABILITIES> 47763
<BONDS> 148487
0
0
<COMMON> 7080
<OTHER-SE> 115871
<TOTAL-LIABILITY-AND-EQUITY> 449092
<SALES> 94804
<TOTAL-REVENUES> 94804
<CGS> 0
<TOTAL-COSTS> 63492
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9311
<INCOME-PRETAX> 23124
<INCOME-TAX> 9284
<INCOME-CONTINUING> 13840
<DISCONTINUED> (4835)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9005
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
</TABLE>
