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, 1997 .
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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 .
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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: $239,251,194
(Computed by reference to the closing price of the Registrant's Common Stock
on March 5, 1998, as reported on the New York Stock Exchange-Composite Tape.) <PAGE>
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 5, 1998
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Common Stock, no par value 7,386,780
The following documents have been incorporated by reference:
1. Annual Report to Shareholders for the year ended December 31,
1997--PART I, Item 1; PART II, Item 5, Item 6, Item 7 and Item 8;
PART IV.
2. Definitive Proxy Statement, dated March 25, 1998, for the Annual
Meeting of Shareholders to be held on April 29, 1998--PART III.
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PART I
ITEM I. BUSINESS
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General
Aquarion Company (Aquarion or the Company) 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).
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 real estate subsidiary formed
in 1969 to assist BHC 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 Operation
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On March 25, 1997, the Company executed the stock purchase agreement,
effective December 31, 1996, completing the sale of Industrial and
Environmental Analysts, Inc. (IEA), its environmental testing laboratory
business for approximately $10,000,000. Accordingly, IEA's results were
recorded as a discontinued operation for the years ended December 31, 1996 and
1995. The Company recorded an after tax loss of $4,255,000 or $0.61 per share
from the sale of the discontinued operation for the year ended December 31,
1996.
Merger
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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 consists of an Eastern division,
formerly Bridgeport Hydraulic Company, and a Western division, formerly SWC,
NCWC and RWSC.
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Real Estate
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In February 1997, Aquarion and its BHC subsidiary entered into a
contract to sell its 730-acre Trout Brook Valley property for approximately
$14,000,000, contingent on the buyer's receipt of the required permits from
various local and state agencies to develop the property. The buyer has
applied for the necessary project permits. Trout Brook Valley consists of 640
acres owned by BHC and 90 acres owned by Aquarion. Because BHC property is
included, the sale must also by approved by the DPUC. The anticipated
closing date is expected to be in 1999, but could be extended because of
regulatory appeals. The Company anticipates that the after-tax gain from this
transaction will be approximately $6,000,000 over an applicable amortization
period, assuming similar treatment is allowed by the DPUC as in the past with
regard to the sharing of proceeds between the shareholders and the ratepayers.
Certain environmental groups and others have opposed the granting of the
required permits and approvals. No assurances can be given at this time that
such permits and approvals will be granted.
In March 1997, the Company also entered into a non-binding letter of
intent with the City of Shelton, Connecticut to sell six parcels of land
located in Shelton for approximately $7,000,000. The purchase is contingent
upon the execution of a contract of sale, regulatory and Board approvals. The
anticipated closing date is expected to be late 1998. The Company anticipates
that the after-tax gain from this transaction will be approximately $2,500,000
over an applicable amortization period, assuming similar treatment is allowed
by the DPUC as in the past with regard to the sharing of proceeds between
shareholders and the ratepayers. No assurances can be given at this time that
the required contingencies will be satisfied.
MSSC presently owns a two-third share, through a joint venture, of
approximately 7.7 acres of real property in Shelton, Connecticut. In December
1997, the joint venture was formally notified of an eminent domain action
undertaken on behalf of the City of Shelton, with an accompanying notice of
value of approximately $95,000. Based on this notice of value, the loss on
this transaction will be approximately $387,000. The Company plans to
negotiate a higher value or appeal this notice of value.
Rates. On July 31, 1997, BHC's Eastern Division received a
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decision from the DPUC approving a 12.7 percent water service rate increase,
which became effective on August 1, 1997, designed to provide an $8,300,000
increase in annual water service revenues. This increase which replaced the
Construction-Work-In-Progress (CWIP) rate surcharge, which was 9.49 percent,
prior to July 1, 1997, resulting in a 3.2 percent marginal increase in water
rates. BHC's Eastern and Western Divisions' rates reflect the repeal of the
Connecticut gross earnings tax for services rendered after July 1, 1997, which
resulted in a 5.0 percent reduction in rates and expenses.
Financing Activities. On February 3, 1997, BHC converted
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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 variable rate to a fixed rate. The bonds bear
interest at 6.15 percent and are due on April 1, 2035.
Utility Construction Program
The Utilities expended $27,633,000, $37,185,000 and $38,600,000 in 1997,
1996 and 1995 respectively, for plant additions and modifications of existing
plant facilities, excluding an allowance for funds used during construction
(AFUDC). The 1997 expenditures were made primarily for construction of a
water treatment plant at Hemlocks reservoir and installation of water mains,
service connections and meters. On July 2, 1997, the William S. Warner Water
Treatment Plant at
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Hemlocks Reservoir was fully operational and put into
service. Utility budgeted capital expenditures for 1998 are approximately
$17,300,000. Management cannot predict whether future federal, state or local
regulation will require additional material 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 issuances. 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. The consolidated operating revenues of the Company for the year
ended December 31, 1997 were derived from the following sources: 81 percent
from public water supply, 15 percent from timber processing, 3 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, 1997, 1996 and 1995, 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,
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treatment 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.
BHC also sells, as requested, water for redistribution to customers of the
Second Taxing District Water Department 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, 1997 have a
population of approximately 500,000, and the total number of customer accounts
as of that date was approximately 139,000. 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 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, 1997 were derived from the following sources: 62 percent from residential
customers, 16 percent from commercial customers, 4 percent from industrial
customers, 14 percent from fire protection customers, and 4 percent from other
sources.
Seasonality. The business of the Utilities is subject to
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seasonal 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
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subsurface sources. During 1997,
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approximately 88 percent of the water supplied by the Utilities
was provided by impounding reservoirs, 11 percent by
producing wells and 1 percent by purchased water. As of December 31, 1997,
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 1997 was 68 million
gallons per day (MGD). The reservoirs of the Utilities have an aggregate
storage capacity of 30.4 billion gallons.
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 its
own customers and to offer relief to supplement the supplies of 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, greater than 50,000 gallons
per day, without a permit from the state Department of Environmental
Protection (DEP). Although this law "grandfathers" 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
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are subject to 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 Safe Drinking Water Act (SDWA). See "Environmental Regulations."
The surcharge is adjusted quarterly, subject to DPUC approval, to reflect
increased CWIP expenditures for SDWA facilities. BHC has no current plans to
apply for such a surcharge, which has been granted to BHC in the past.
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."
The profitability of the operations of the water utility industry
generally and of the Utilities (and hence the Company) is largely dependent on
the timeliness and adequacy of the rates allowed by
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utility regulatory commissions. In addition, profitability is dependent
on numerous factors over which the Utilities have little or no control, such as
the quantity of rainfall and temperature in a given period of time, industrial
demand, prevailing rates of interest for short and long-term borrowings, energy
rates, and compliance with environmental and water quality regulations. In
addition, inflation and other factors beyond the Company's or the Utilities'
control impact the cost of construction, materials and employee costs.
Franchises and Competition. Consistent with most water
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companies in 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 public 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 is 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. SCWC faces competition from municipal and public authority
systems whose service areas, in some cases, overlap portions of SCWC's service
area.
Environmental Regulations. The Utilities are subject to
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regulation by 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 Utilities are subject to regulation of discharges to the environment
(air, water, land, underground storage tanks and hazardous materials) under
the provisions of the Federal Clean Air Act, Clean Water Act and other
legislation which provides for the establishment of various environmental
regulations by the EPA. 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 drinking water quality under
the SDWA, which
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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 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. On July 1, 1997, the Warner Treatment Plant at Hemlocks
Reservoir was fully operational and placed into service. 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 is presently addressing these issues with the
DPH. 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 is presently addressing, with the DPH, an issue of elevated radium
levels in a small system purchased in July 1997. 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.
The Utilities believe that they are in substantial compliance with the
SDWA regulations promulgated by the EPA and DPH, as currently applied.
Although the Utilities cannot predict either the substance of the regulations
required by the 1996 SDWA amendments which have not yet been promulgated or
their impact on the Utilities, the primary impact on the Utilities is expected
to be in the area of increased monitoring and reporting, although it is
possible that such regulations may require modifications to existing
filtration facilities. Construction of new facilities may be required
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for certain groundwater sources. It is possible that costs of compliance by
the Utilities could be substantial.
Aquifer protection legislation in Connecticut requires each water
utility to conduct ongoing groundwater data collection and to map critical
wellfield recharge areas. The DEP, in consultation with the DPH and DPUC, has
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
cannot be determined at this time. However, if BHC were to adopt
recommendations to purchase additional land around its wellfield, 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
supplies, 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 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.
Timber Processing
The Company is engaged in the timber processing business through Timco,
which operates a sawmill complex in New Hampshire. 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. Lumber produced by Timco 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 lumber 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
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management services, including contract management
and operations, information services, water and wastewater billing and
collections and various engineering, operations and management consulting
services. AMS clients are private and municipal water and wastewater
utilities, including 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 BHC intends to market as appropriate, see "Item 2 Properties."
Employees
As of December 31, 1997, the Company and it's subsidiaries employed
approximately 393 persons on a full-time basis, including 266 in the Public
Water Supply business, 124 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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The properties of the Utilities consist of land, easements, rights
(including water rights), buildings, reservoirs, standpipes, dams, wells,
supply lines, treatment plants, pumping plants, transmission and distribution
mains and conduits, mains and other facilities and equipment used for the
collection, purification, storage and distribution of water. The Utilities
own their principal properties in fee. The Utilities believe that their
properties are in good operating condition. Water mains are located, for the
most part, in public streets and, in a few instances, are located on land
owned by the Utilities in fee and land occupied under easements, most of which
are perpetual and valid and sufficient for the purpose for which they are
held. Although it is impractical to investigate the validity of the title to
some of the easements held by the Utilities for distribution mains or to clear
title in the cases where such distribution easements titles have been found
defective, any such irregularities or defects in title which may exist do not
materially impair the use of such properties in the businesses of the
Utilities.
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, 1997, BHC owned in the aggregate 17 active reservoirs,
59 producing wells and approximately 1,984 miles of water mains, of which
approximately 83 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 six filtration
plants for treatment of its reservoir system. These plants have capacities
ranging from .75 to 50 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 water mains.
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Aquarion owns nonutility land totaling approximately 99 acres in Easton
and Litchfield, Connecticut. BHC owns approximately 20,000 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 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 2,700 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.
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.
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. The Equitable
Sharing Statute 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. Ratepayers do not share in gains from the
sale of land that has never been in rate base.
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, 1997 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. <PAGE>
Dividends, when declared, are normally paid on the 30th day of
9
<PAGE>
<PAGE>
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
(Aquarion Note). As of December 31, 1997, the applicable restrictions would
have permitted payment of additional dividends on Aquarion's common stock of
up to $40,133,000.
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, 1997, 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,
1997, which is incorporated by reference herein pursuant to Rule 12b-23 of the
Act and Instruction G(2) to Form 10-K.
ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The consolidated financial statements, together with the report thereon
of Price Waterhouse LLP, dated January 28, 1998, appearing on Pages 15 - 29,
the inside front cover ("Selected Financial Data") and Pages 30 - 31
("Supplemental Financial Data") of the accompanying 1997 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.
10
<PAGE>
<PAGE>
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 25, 1998
relating to the proposed Annual Meeting of Shareholders to be held on April
29, 1998, 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 22, 1997, except as
otherwise noted, for a term expiring with the 1998 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. 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>
Served
<CAPTION>
Office, Business Experience as Officer
Executive Age During Past Five Years Since
Officer
-------------- ------ --------------------------------------------- ------
<S> <C> <C> <C>
Richard K. 53 President and Chief Executive Officer (since 1993
Schmidt October 1995),formerly Senior Vice President
(1993-1995) of the Company; President (1992-
1995 and Chief Executive Officer (since 1992
o f IEA); formerly President and Chief
Operating Officer (1984-1992) of Mechanical
Technology, Inc.
Janet M. Hansen 55 E x ecutive 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
P r esident (since 1989), Chief Financial
Officer (since April 1991) and Treasurer
(since 1985) of BHC; Mrs. Hansen is 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. 60 Senior Vice President (since April 1992) of 1989
McInerney 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.
11
<PAGE>
<PAGE>
Larry L. 48 Vice President, Corporation Relations and 1990
Bingaman 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
25, 1998, relating to the proposed Annual Meeting of Shareholders to be held
on April 29, 1998, 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 25,
1998, relating to the proposed Annual Meeting of Shareholders to be held on
April 29, 1998, 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 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:
<TABLE>
<CAPTION>
Page in Annual
Report*
------
<S> <C>
(1) Consolidated Statements of Income for
the three years
ended December 31, 1997 15
Consolidated Balance Sheets at December 16 - 17
31, 1997 and 1996
Consolidated Statements of Cash Flows
for the three years ended December 31, 18
1997
Consolidated Statements of Shareholders'
Equity for the three years ended 19
December 31, 1997
Notes to Consolidated Financial 20 - 28
Statements
Report of Independent Accountants 29
Selected Financial Data Inside Front Cover
12
<PAGE>
<PAGE>
Supplemental Financial Information 30 - 31
* Incorporated by reference from the indicated pages of the
1997 Annual Report to Shareholders.
-----------------------------------
(b) Reports of Form 8-K.
The Company did not file a report on Form 8-K for the fourth
quarter of the year ended December 31, 1997.
(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 (**).
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)
13
<PAGE>
<PAGE>
**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 July 1, 1997.
**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)
* **10(p)Employment Agreement between Aquarion and
Richard K. Schmidt dated July 1, 1997. (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 (12)
*13(a)Annual Report to Shareholders for the year
ended December 31, 1997.
*21(a)Subsidiaries of Aquarion
*23(a)Consent of Independent Accountants
14
<PAGE>
<PAGE>
*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 Registrant 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.
(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.
(12) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 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 24, 1998
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 24,1998
George W. Edwards, Jr.
Chairman of the Board of Directors
and Director
By /S/RICHARD K. SCHMIDT
-----------------------------------------------------
March 24,1998
Richard K. Schmidt
President, Chief Executive Officer
and Director
By /S/JACK E. MCGREGOR
-----------------------------------------------------
March 24, 1998
Jack E. McGregor
Director
By /S/GEOFFREY ETHERINGTON
-----------------------------------------------------
March 24, 1998
Geoffrey Etherington
Director
By /S/JANET D. GREENWOOD
----------------------------------------------------
March 24, 1998
Janet D. Greenwood
Director
By /S/DONALD M. HALSTED, JR.
----------------------------------------------------
March 24, 1998
Donald M. Halsted, Jr.
Director
By /S/EDGAR G. HOTARD
-----------------------------------------------------
March 24, 1998
Edgar G. Hotard
Director
By /S/G. JACKSON RATCLIFFE
------------------------------------------------------
March 24, 1998
G. Jackson Ratcliffe
Director
By /S/JOHN A. URQUHART
--------------------------------------------------------
March 24, 1998
John A. Urquhart
Director
16
<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
- THC Acquisition Corp., incorporated in the State of Delaware
- Aquarion Management Services, Inc., incorporated in the State
of Delaware
17
<PAGE>
<PAGE>
EXHIBIT 23(A)
-------------
Consent of Independent Accountants
-----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement of Form S-3 (No. 33-52973) and in the Registration Statement on Form
S-8 (No. 33-53473) and the related prospectus of Aquarion Company of our
report dated January 28, 1998, appearing on Page 29 of the Annual Report to
Shareholders, which is incorporated by reference in the Annual Report on Form
10-K.
Price Waterhouse LLP
New York, New York
March 24, 1998
18
<PAGE>
</TABLE>
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 consists of an Eastern
division, formerly Bridgeport Hydraulic Company, and a Western division,
formerly SWC, NCWC and RWSC.
On March 25, 1997, the Company executed the stock purchase agreement,
effective December 31, 1996, completing the sale of Industrial and
Environmental Analysts, Inc. (IEA), its environmental testing laboratory
business for approximately $10,000,000. Accordingly, IEA's results were
recorded as a discontinued operation for the years ended December 31, 1996 and
1995. The Company recorded an after-tax loss of $4,255,000 or $0.61 per share
from the sale of the discontinued operation for the year ended December 31,
1996 (Note 2).
Capital resources and liquidity.
- --------------------------------
Capital expenditures. The Company invested $28,700,000 in property, plant and
- --------------------
equipment in 1997, compared with $38,600,000 in 1996 and $41,600,000 in 1995.
Aquarion's utility subsidiaries, BHC and Sea Cliff Water Company (SCWC)
(Collectively, the Utilities) accounted for approximately 95 percent of plant
additions during the three-year period. Management estimates that capital
expenditures will total $18,300,000 in 1998, of which approximately
$17,300,000 will be for water utility construction projects.
<TABLE>
<S> <C> <C>
Capital Expenditures
(In thousands)
1993 $18,100
1994 $19,900
1995 $41,600
1996 $38,600
1997 $28,700
1998 Projected $18,300
</TABLE>
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 on July 1, 1997, the William S. Warner Water Treatment Plant
at Hemlocks Reservoir was fully operational and put into service at a total
project cost of $46,300,000.
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.
-9-
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Cash Flow from Operations Per Share
1993 $4.04
1994 $5.16
1995 $3.29
1996 $3.39
1997 $5.43
</TABLE>
The percentage of capital expenditures financed by net cash from
operating activities was 100 percent, 61 percent and 54 percent for the years
ended December 31, 1997, 1996 and 1995, respectively. (See "Consolidated
Financial Statements-Consolidated Statements of Cash Flows.") The remainder
has been provided from external financing sources.
<TABLE>
<S> <C> <C>
% of Capital Expenditures Financed by
Internally Generated Funds*
1993 86%
1994 126%
1995 30%
1996 30%
1997 104%
* Internally generated funds are comprised of cash flow from opertions
less dividends paid.
</TABLE>
The Company obtained funds of $3,504,000 from issuances of Common Stock
under its Dividend Reinvestment and Common Stock Purchase Plan (the Plan) in
1997 versus $3,449,000 and $2,696,000 in 1996 and 1995, respectively. The
Company also obtained funds of $2,398,000 from stock options exercised in
1997. The Utilities received $3,217,000 from advances and contributions in
aid of construction from developers and customers in 1997.
On July 31, 1997, BHC's Eastern Division received approval from the
Connecticut Department of Public Utility Control (DPUC) for a 12.7 percent
water service rate increase effective August 1, 1997 (Note 3).
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 of an equal amount
of tax-exempt Water Facilities Revenue Bonds, from a weekly rate to a fixed
rate. These bonds bear interest at 6.15 percent and are due on April 1, 2035
(Note 8).
Aquarion has revolving credit agreements that provide $50,000,000 of
short-term credit availability on a committed basis (Note 9). The Company
borrows on a short-term basis and periodically refinances through long-term
debt or equity issuances.
The Company has a target dividend payout ratio, over the long term, of
75 to 80 percent of net income. The dividend payout as a percentage of net
income was 78 percent and 125 percent in 1997 and 1996, respectively, and
30 percent and 48 percent as a percentage of net cash provided by operating
activities in 1997 and 1996, respectively.
-10-
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Dividend Payout Ratio
1993 92%
1994 87%
1995 85%
1996 125%
1997 78%
</TABLE>
Future financing requirements. 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 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, 1997. 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 5.95 percent Senior Note (Aquarion Senior Note) as long as
consolidated long-term debt (including capitalized lease obligations) does not
exceed 66 2/3 percent of Aquarion's consolidated total capitalization, as
defined. BHC may issue additional long-term debt under its Senior Notes (BHC
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 2,700 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
- -----
Year 2000. The Company has assessed its year 2000 issues and has been assured
- ---------
by its computer software providers that all programs the Company currently
owns will function properly in the year 2000. Any maintenance or modification
costs the Company incurs will be expensed, while the costs of any new software
will be capitalized and amortized over the software's useful life. It is not
anticipated that such costs will materially affect the Company's earnings per
share. However, the Company cannot predict the effect on the Company of any
year 2000 problems of other entities such as suppliers, customers and service
providers.
-11-
<PAGE>
<PAGE>
Inflation. Inflation, as measured by the Consumer Price Index, increased
- ----------
1.7 percent, 3.3 percent and 2.5 percent in 1997, 1996 and 1995, 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 practice,
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
- ---------------------
1997 compared with 1996
- -----------------------
Overview. The Company's consolidated net income for 1997 was $15,011,000
- ---------
compared with net income of $9,005,000 in 1996. Basic earnings per share was
$2.10 in 1997 based on a weighted average of 7,139,894 common shares
outstanding, compared with $1.30 in 1996 based on a weighted average of
6,931,388 common shares outstanding. For the year ended December 31, 1996,
the Company recorded an after-tax loss of $4,255,000 from the sale of IEA
(Note 2).
For the year ended December 31, 1997, net income from continuing
operations was $15,011,000, or $2.10 per share, versus $13,840,000, or $2.00
per share in 1996. Operating results in 1997 reflect the increase in water
service rates to cover the operating costs of the William S. Warner Water
Treatment Plant and drier weather which increased earnings from the Company's
water utility segment.
<TABLE>
<S> <C> <C>
Book Value Per Share
1993 $17.07
1994 $17.43
1995 $17.72
1996 $17.52
1997 $18.26
</TABLE>
Operating revenues. Consolidated operating revenues of $107,102,000 in 1997
- -------------------
were $12,298,000 higher than 1996. Revenues from the Utilities increased
$5,609,000, due to the increase in water service rates, drier weather and the
May 1996 acquisition of SCWC. Timber processing experienced an increase in
revenues during 1997 of $4,898,000 primarily due to increased sales to a
leading retailer in the home improvement industry. The Company also had
increased property sales revenues of $1,325,000 in 1997.
Operating expenses. Operating expenses for 1997 were $30,803,000, an increase
- -------------------
of $6,786,000 over 1996. Timber processing experienced increased operating
expenses of $4,376,000 compared with 1996 primarily due to higher costs
associated with the increased sales volume. Operating expenses from property
sales increased by $1,255,000 due to the increased activity in the land sales
program.
General & administrative expenses. General and administrative expenses
- ---------------------------------
totaled $15,620,000, a $576,000 decrease from 1996. This decrease was
primarily attributable to a higher pension credit, as well as lower health
care costs at the Utilities partially offset by increased bad debt expense in
1997.
-12-
<PAGE>
<PAGE>
Depreciation expense. Depreciation expense increased $1,547,000 in 1997,
- ---------------------
which was largely the result of the William S. Warner Water Treatment Plant
being placed into service on July 1, 1997, and a higher composite annual
depreciation rate for BHC's Eastern Division effective August 1, 1996.
<TABLE>
<S> <C> <C>
Depreciation Expense
(In thousands)
1993 $8,760
1994 $9,852
1995 $10,123
1996 $11,077
1997 $12,624
</TABLE>
Interest expense. Interest expense for 1997 was $1,876,000 higher than 1996
- -----------------
due to the interest expense associated with the October 1996 debt issuance by
BHC of $30,000,000 and the interest rate conversion on the 1995 $30,000,000
unsecured note of BHC from a variable rate to a fixed rate of 6.15 percent.
Taxes other than income taxes. Taxes other than income taxes for 1997 were
- ------------------------------
$1,502,000 lower than 1996, due primarily to the repeal of the Connecticut
gross earnings tax for services rendered after July 1, 1997.
Income taxes. Income taxes for 1997 increased $2,632,000 as a result of
- -------------
higher taxable income.
Significant changes in balance sheet accounts.
- ----------------------------------------------
The decrease in other current assets of $11,658,000 was primarily the
result of the proceeds received from the sale of IEA in March 1997 (Note 2).
Results of operations
- ---------------------
1996 compared to 1995
- ---------------------
Overview. The Company's consolidated net income for 1996 was $9,005,000
- ---------
compared with net income of $12,886,000 in 1995. Basic earnings 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 sale of IEA
(Note 2).
For the year ended December 31, 1996, net income from continuing
operations was $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 revenues in
1996. Property sales revenues in 1995 included 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,
-13-
<PAGE>
<PAGE>
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 from 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.
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.
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 1997 and 1996.)
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>
Aquarion Company and Subsidiaries
Consolidated Statements of Income
---------------------------------
<TABLE>
<CAPTION>
In thousands, except share data
Year ended December 31 1997 1996 1995
- ------------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
Operating revenues $ 107,102 $ 94,804 $ 94,569
Costs and expenses:
Operating 30,803 24,017 23,274
General and administrative 15,620 16,196 18,955
Depreciation 12,624 11,077 10,123
Interest expense 11,187 9,311 8,469
Taxes other than income 10,700 12,202 11,442
--------- ---------- ----------
Total costs and expenses 80,934 72,803 72,263
--------- ---------- ----------
26,168 22,001 22,306
Allowance for funds used during construction 759 1,123 872
--------- ---------- ----------
Income before income taxes 26,927 23,124 23,178
Income taxes 11,916 9,284 9,882
--------- ---------- ----------
Net income from continuing operations 15,011 13,840 13,296
Discontinued operations:
Loss from discontinued operations, less
applicable income tax benefit/(expense)
of $66 and $(19) - (580) (410)
Loss on disposal of discontinued
operations, less applicable income
tax benefit of $5,695 - (4,255) -
--------- ---------- ----------
Net income $ 15,011 $ 9,005 $ 12,886
========= ========== ==========
Basic earnings (loss) per share:
Per share from continuing operations $ 2.10 $ 2.00 $ 1.96
Per share from discontinued operations - (0.09) (0.06)
Per share from disposal of discontinued
operations - (0.61) -
-------- --------- ---------
Basic earnings per share $ 2.10 $ 1.30 $ 1.90
======== ========= =========
Weighted average common shares outstanding 7,139,894 6,931,388 6,794,400
========== ========= =========
Diluted earnings (loss) per share:
Per share from continuing operations $ 2.08 $ 1.98 $ 1.95
Per share from discontinued operations - (0.08) (0.06)
Per share from disposal of discontinued
operations - (0.61) -
-------- --------- ---------
Diluted earnings per share (Note 7) $ 2.08 $ 1.29 $ 1.89
======== ========= =========
Weighted average common shares outstanding 7,215,626 6,974,563 6,804,522
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-15-
<PAGE>
<PAGE>
Aquarion Company and Subsidiaries
Consolidated Balance Sheets
---------------------------------
<TABLE>
<CAPTION>
Assets
In thousands
December 31, 1997 1996
- ----------------------------------------------- -------- --------
<S> <C> <C>
Property, plant and equipment $481,833 $454,716
Less: accumulated depreciation 142,125 131,328
-------- --------
Net property, plant and equipment (Note 14) 339,708 323,388
Current assets:
Cash and cash equivalents 851 470
-------- --------
Accounts receivable 10,789 10,796
Less: allowance for doubtful accounts 1,782 1,253
-------- -------
9,007 9,543
Accrued revenues 10,411 9,893
Inventories (Note 15) 3,740 2,883
Prepaid expenses 10,980 8,732
Other current assets 6,443 18,101
-------- -------
Total current assets 41,432 49,622
Prepaid taxes 12,354 12,171
Recoverable income taxes 41,741 44,938
Other assets 19,774 18,973
-------- --------
$455,009 $449,092
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-16-
<PAGE>
<PAGE>
Aquarion Company and Subsidiaries
Consolidated Balance Sheets
----------------------------------
<TABLE>
Liabilities and Shareholders' Equity
- ------------------------------------
<CAPTION>
In thousands, except share data
December 31, 1997 1996
- ----------------------------------------------------- ------ ------
<S> <C> <C>
Shareholders' equity:
Preferred stock, no par value, authorized
2,500,000 shares not to exceed aggregate value of
$25,000,000--none issued $ - $ -
Common stock, stated value: $1
Authorized--16,000,000 shares
Issued 7,330,721 shares in 1997 and
7,080,355 shares in 1996 7,331 7,080
Capital in excess of stated value 107,004 101,360
Retained earnings 19,624 16,324
Less: minimum pension liability adjustment 97 104
Less: treasury stock, at cost - 1,709
--------- ---------
Total shareholders' equity 133,862 122,951
--------- ---------
Long-term debt and other obligations 151,380 148,487
--------- ---------
Current liabilities:
Short-term borrowings, unsecured 9,000 8,300
Current maturities of long-term debt 5,000 15,000
Accounts payable and accrued liabilities 15,592 15,654
Dividends payable 3,005 2,843
Accrued interest 3,011 2,484
Taxes other than income taxes 755 1,927
Income taxes 2,018 1,555
-------- --------
Total current liabilities 38,381 47,763
-------- --------
Advances for construction 24,263 28,017
Contributions in aid of construction 30,951 24,354
Deferred land sale gains 384 471
Accrued postretirement benefit cost 4,664 4,125
Recoverable income taxes 6,052 6,346
Deferred income taxes 65,072 66,578
Commitments & contingencies (Note 17)
-------- --------
$455,009 $449,092
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-17-
<PAGE>
<PAGE>
Aquarion Company and Subsidiaries
Consolidated Statements of Cash Flows
-------------------------------------
<TABLE>
<CAPTION>
In thousands
Year ended December 31 1997 1996 1995
- ------------------------------------------------------ --------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15,011 $ 9,005 $ 12,886
Adjustments reconciling net income to net cash
provided by operating activities
Depreciation and amortization 13,435 13,797 12,979
Proceeds from sale of surplus land, net of gains 1,796 778 2,798
Loss on disposal of segment - 4,255 -
Gain on disposition of property - - (2,033)
Provision for losses on accounts receivable 894 (29) 842
Deferred tax provision 1,214 45 1,261
Allowance for funds used during construction (759) (1,123) (872)
Change in assets and liabilities (Note 16) 7,166 (3,239) (5,524)
--------- -------- --------
Net cash provided by operating activities 38,757 23,489 22,337
--------- -------- --------
Cash flows from investing activities:
Capital additions, excluding an allowance for funds
used during construction (28,729) (38,600) (41,646)
Acquisition of business, less cash acquired - (2,598) -
Advances and contributions in aid of construction 3,217 2,626 3,054
Refunds on advances for construction (374) (933) (288)
Other investing activities, net (153) (1,202) (25)
-------- -------- --------
Net cash used in investing activities (26,039) (40,707) (38,905)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 7,893 31,518 20,588
Proceeds from the issuance of common stock, net 5,895 3,290 2,644
Net borrowings (repayments) of short-term debt 700 (5,000) 11,600
Common dividends paid (11,549) (11,198) (10,830)
Principal and premium payments on long-term debt (15,000) (52) (7,682)
Debt issuance costs (276) (1,220) (407)
Payments for redemption of preferred stock - (285) (45)
--------- -------- -----------
Net cash (used in) provided by financing
activities (12,337) 17,053 15,868
--------- ------- -----------
Net increase (decrease) in cash and cash equivalents 381 (165) (700)
Cash and cash equivalents, beginning of year 470 635 1,335
--------- --------- -----------
Cash and cash equivalents, end of year $ 851 $ 470 $ 635
======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-18-
<PAGE>
<PAGE>
Aquarion Company and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Capital Minimum Treasury Stock Total
------------------- in excess pension ------------------- share-
Number Stated of stated Retained liability Number holders'
In thousands, except share data of shares value value earnings adjustment of shares Amount equity
- ------------------------------------ --------- ------- ---------- --------- ---------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1995 6,690,013 $ 6,690 $ 94,152 $ 16,628 - 84,992 $(2,338) $ 115,132
- ----------------------------
Net income - - - 12,886 - - - 12,886
Shares issued for Acquisition 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 12) - - - - (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
--------- ------- --------- ------- --------- ------- ------- ----------
Year ended December 31, 1997
- ----------------------------
Net income - - - 15,011 - - - 15,011
Dividends on common stock - - - (11,711) - - - (11,711)
Dividend reinvestment plan 135,829 136 3,361 - - - - 3,497
Minimum pension liability
adjustment (Note 12) - - - - 7 - - 7
Stock options exercised 114,537 115 2,283 - - (61,280) 1,703 4,101
Treasury stock transactions (1) - - - - - (218) 6 6
--------- ------- ---------- -------- ---------- ------- ------ ----------
Balance, December 31, 1997 7,330,721 $ 7,331 $ 107,004 $ 19,624 $ (97) - - $ 133,862
========= ======= ========== ======== ========== ======= ====== ==========
</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
Connecticut 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). The Company conducts
a timber processing business, Timco, Inc (Timco), owns a real estate
subsidiary, Main Street South Corporation (MSSC) and provides utility
management service business through Aquarion Management Services, Inc. (AMS).
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
3 to 85 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. In February
1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128,
"Earnings Per Share" (SFAS 128), which establishes new standards for computing
and presenting basic and diluted earnings per share. The Company has adopted
SFAS 128 effective for financial statements issued for periods ending after
December 15, 1997 (Note 7).
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 recognize revenue as customers are billed
- --------------------
periodically for water consumed. The Utilities also accrue revenue for the
estimated amount of water consumed but not billed at the end of each period.
-20-
<PAGE>
<PAGE>
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 value,
- ------------
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 deferred financing charges,
- -------------
rate case and other expenses 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.
Accounts payable. Accounts payable at December 31, 1997 and 1996, included
- -----------------
liabilities in the amount of $391,000 and $2,263,000, respectively, 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 is 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:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -------------------------- -------- ---------
<S> <C> <C>
Fair Value $ 138,970 $ 132,982
Carrying Value 151,380 148,487
</TABLE>
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 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 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 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.
Reporting comprehensive income. In June 1997, the FASB issued SFAS No. 130,
- -------------------------------
"Reporting Comprehensive Income", which establishes standards for reporting
and display of comprehensive income and its components, such as minimum
pension liability, in a full set of general-purpose financial statements.
This statement is effective for fiscal years beginning after December 15,
1997. Adoption of this statement did not have a significant impact on the
Company financial statements.
Segment related information. In June 1997, the FASB issued SFAS No. 131,
- ----------------------------
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the method of reporting information about operating
segments in annual financial statements and in interim reports issued to
shareholders. This statement is effective for financial statement periods
beginning after December 15, 1997. Adoption of this statement did not have a
significant impact on the Company's disclosures of segment related
information.
Estimates. The accompanying consolidated financial statements reflect
- ----------
judgements and estimates made in preparation of these statements and in the
application of the above accounting policies. Actual results may differ from
these estimates.
Note 2 - Sale and Discontinued Operations
- -----------------------------------------
On March 25, 1997, the Company executed the stock purchase agreement,
effective December 31, 1996, completing the stock sale of Industrial and
Environmental Analysts, Inc. (IEA), its environmental testing laboratory
business for approximately $10,000,000. Accordingly, IEA's results were
recorded as a discontinued operation for the year ended December 31, 1996.
The Company recorded an after tax loss of $4,255,000, or $0.61 per share, from
the sale of the discontinued operation in 1996. For the period January 1,
1997 through March 25, 1997, operating revenues from discontinued operations
were approximately $4,984,000 and the pre-tax operating loss was approximately
$86,000 compared to a pre-tax operating loss of $49,000 for the period ended
March 31, 1996. Losses for the period from January 1, 1997 through March 25,
1997, were fully reimbursed by the purchaser in conjunction with the terms of
the stock purchase agreement.
-21-
<PAGE>
<PAGE>
Note 3 - Regulatory Matters
- ---------------------------
Rates. On July 31, 1997, BHC's Eastern Division received a decision from the
- ------
DPUC approving a 12.7 percent water service rate increase, which became
effective on August 1, 1997, designed to provide an $8,300,000 increase in
annual water service revenues. This increase which replaced the CWIP rate
surcharge, which was 9.49 percent, prior to July 1, 1997, resulting in a 3.2
percent marginal increase.
BHC's Eastern and Wester Divisions' rates reflect the repeal of the
Connecticut gross earnings tax for services rendered after July 1, 1997, which
resulted in a 5.0 percent reduction in rates and expenses.
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.
Note 4 - Sale of surplus land
- -----------------------------
Proceeds from the sale of land are recorded as revenue at the time of
closing, and portions of pre-tax 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 1997, the Company sold approximately 134 acres of surplus land with
proceeds totaling $3,224,000. Total gains, including recognition of deferred
gains from prior land sales of $133,000, approximated $743,000.
In February 1997, Aquarion and its BHC subsidiary entered into a
contract to sell its 730-acre Trout Brook Valley property for approximately
$14,000,000, contingent on the buyer's receipt of the required permits, from
various local and state agencies to develop the property. The buyer has
applied for the necessary project permits. Trout Brook Valley consists of 640
acres owned by BHC and 90 acres owned by Aquarion. Because BHC property is
included, the sale must also be approved by the DPUC. The anticipated closing
date is expected to be in 1999, but could be extended because of regulatory
appeals. The Company anticipates that the after-tax gain from this
transaction will be approximately $6,000,000 over an applicable amortization
period, assuming similar treatment is allowed by the DPUC as in the past with
regard to the sharing of proceeds between the shareholders and the ratepayers.
Certain environmental groups and others have opposed the granting of the
required permits and approvals. No assurances can be given at this time that
such permits and approvals will be granted.
In March 1997, the Company also entered into a non-binding letter of
intent with the City of Shelton, Connecticut to sell six parcels of land
located in Shelton for approximately $7,000,000. The purchase is contingent
upon the execution of a contract of sale, regulatory and board approvals. The
anticipated closing date is expected to be late 1998. The Company anticipates
that the after-tax gain from this transaction will be approximately $2,500,000
over an applicable amortization period, assuming similar treatment is allowed
by the DPUC as in the past with regard to the sharing of proceeds between the
shareholders and the ratepayers. No assurances can be given at this time that
the required contingencies will be satisfied.
MSSC presently owns a two-third share, through a joint venture of
approximately 7.7 acres of real property in Shelton, Connecticut. In December
1997, the joint venture was formally notified of an eminent domain action
undertaken on behalf of the City of Shelton, with an accompanying notice of
value of approximately $95,000. The Company does not concur with this value
and plans to negotiate a higher value or appeal this notification. Based on
this notice of value, the loss to be recognized by the Company on this
transaction will be approximately $387,000.
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. In addition,
the Company recognized a gain of $320,000 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. 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 in the fourth quarter of 1995.
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
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
-22-
<PAGE>
<PAGE>
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 in 1995.
Note 6 - Income taxes
- ---------------------
Income tax expense for the three years ended December 31, consisted of
the following:
<TABLE>
<CAPTION>
In thousands 1997 1996 1995
- ---------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 8,477 $ 1,199 $ 6,297
State 2,692 2,234 2,343
--------- --------- ---------
Total current 11,169 3,433 8,640
Deferred:
Federal 991 277 1,542
State (244) (187) (281)
--------- --------- ---------
Total deferred 747 90 1,261
--------- --------- ---------
Total income tax expense $ 11,916 $ 3,523 $ 9,901
========= ========= =========
</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 1997 1996 1995
- --------------------------------------------- --------- --------- -------
<S> <C> <C> <C>
Tax at statutory rate $ 9,424 $ 4,384 $ 7,975
Increase (reductions) in taxes resulting from:
State taxes, net of federal income taxes 1,592 1,331 1,340
Excess depreciation and basis amortization 840 700 683
Investment tax credit (152) (152) (162)
Excess tax basis on disposition - (2,213) -
Other items, net 212 (527) 65
--------- --------- -------
Actual income tax expense $ 11,916 $ 3,523 $ 9,901
========= ========= =======
</TABLE>
Deferred tax liabilities (assets) at December 31, were comprised of the
following:
<TABLE>
<CAPTION>
In thousands 1997 1996 1995
- --------------------------------------------- --------- --------- -------
<S> <C> <C> <C>
Utility temporary difference $ 40,507 $ 43,679 $43,770
Depreciation 22,573 20,168 18,944
Investment tax credits 1,409 1,225 1,233
Other 583 1,506 1,203
--------- --------- -------
Gross deferred tax liabilities 65,072 66,578 65,150
--------- --------- -------
Contributions in aid of construction (7,315) (7,934) (6,503)
Other (5,039) (4,237) (3,168)
--------- --------- -------
Gross deferred tax assets (12,354) (12,171) (9,671)
--------- --------- -------
$ 52,718 $ 54,407 $55,479
========= ========= =======
</TABLE>
Note 7 - Earnings per share
- ---------------------------
In accordance with SFAS 128, the following table presents the
calculation of the basic and diluted earnings per share computations for
income from continuing operations:
<TABLE>
<CAPTION>
Per-
Income Shares Share
In thousands, except share data (Numerator) (Denominator) Amount
- -------------------------------------------- ------------ ------------- ------
<S> <C> <C> <C>
For the year ended December 31, 1997
- ------------------------------------
Basic earnings per share
Income before discontinued operations $ 15,011 7,140 $ 2.10
========
Effect of dilutive stock options - 76
----------- --------
Diluted earnings per share
Income before discontinued operations
giving effect to dilutive stock
options $ 15,011 7,216 $ 2.08
=========== ===== ========
For the year ended December 31, 1996
- ------------------------------------
Basic earnings per share
Income before discontinued operations $ 13,840 6,931 $ 2.00
========
Effect of dilutive stock options - 43
----------- -----
Diluted earnings per share
Income before discontinued operations
giving effect to dilutive stock
options $ 13,840 6,974 $ 1.98
=========== ===== ========
For the year ended December 31, 1995
- ------------------------------------
Basic earnings per share
Income before discontinued operations $ 13,296 6,794 $ 1.96
========
Effect of dilutive stock options - 10
----------- -----
Income before discontinued operations
giving effect to dilutive stock
options $ 13,296 6,804 $ 1.95
=========== ===== ========
</TABLE>
Options to purchase 26,000 and 136,800 shares of Common Stock at $28.28
and $30.88 per share, respectively, were outstanding at December 31, 1997, but
were not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the
Common Shares. These options expire on June 14, 2000 and December 2, 2007,
respectively.
Note 8 - Long-term debt
- -----------------------
Long-term debt at December 31, consisted of the following:
<TABLE>
<CAPTION>
In thousands 1997 1996
- -------------------------------------------------- -------- --------
<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
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
6.15% note due April 1, 2035 (c) 30,000 30,000
6.00% note due September 1, 2036 (d) 30,000 30,000
4.25% note due November 1, 2004 (e) 5,700 5,700
-------- --------
$156,380 $171,380
Less: Amounts due within one year 5,000 15,000
Balance of note proceeds held by trustee - 7,893
-------- --------
$151,380 $148,487
======== ========
</TABLE>
-23-
<PAGE>
<PAGE>
(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 Municipal Bond Investors Assurance Corporation.
(c) 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.
(d) 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. Under
the terms of these CDA bonds, proceeds were requisitioned from a construction
fund held by a trustee for planned capital improvements.
(e) 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, 1997, the interest rate did not change from 4.25 percent at
November 1, 1996. 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.
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 BHC Senior
Notes and the 5.95 percent unsecured Aquarion Senior Note 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, 1997, approximately
$40,133,000 was available to pay dividends as defined under the Aquarion
notes. The aggregate maturities and sinking fund requirements on long-term
debt for each of the five years succeeding December 31, 1997 are as follows:
1998-$5,000,000; 1999-$10,000,000; 2000, 2001 and 2002-$0.
Note 9 - Short-term borrowings
- ------------------------------
The Company has available unsecured revolving credit agreements with
four banks totaling $50,000,000. The Company pays a commitment fee of .125 of
1 percent on the average daily unused portion of the loan. 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.
Short-term borrowings for the years ended December 31, were as follows:
<TABLE>
<CAPTION>
In thousands 1997 1996 1995
- ------------------------------------------------------ ------ ------ -------
<S> <C> <C> <C>
Borrowings outstanding at December 31 $9,000 $8,300 $11,600
Weighted average interest rate at December 31 5.69% 6.06% 5.96%
Maximum outstanding during the year $14,300 $29,200 $12,500
Average outstanding during the year $7,550 $16,292 $7,383
Weighted average interest rate during the year 5.59% 5.51% 5.41%
</TABLE>
Note 10 - Redeemable preferred stock and rights
- -----------------------------------------------
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.
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
Aquarion 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 of 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 per
share.
Note 11 - 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;
-24-
<PAGE>
<PAGE>
Timber processing--processing, marketing and distribution of lumber
-----------------
products;
Real Estate--ownership and sale of real property; and,
-----------
Utility management services--nonregulated water-related services.
---------------------------
The following table sets forth information about the Company's
operations by industry segment for the years ended December 31:
<TABLE>
<CAPTION>
In thousands 1997 1996 1995
- --------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Operating Revenues:
Public water supply $ 87,117 $ 81,508 $ 78,488
Timber processing 15,683 10,785 9,324
Real estate 3,267 1,941 6,200
Utility management services 1,035 570 557
--------- --------- ---------
Total operating revenues $ 107,102 $ 94,804 $ 94,569
========= ========= =========
Operating income:
Public water supply $ 35,007 $ 29,485 $ 26,895
Timber processing 1,200 968 945
Real estate 727 1,420 3,938
Utility management services (133) (219) (92)
-------- -------- --------
Industry segment operating income 36,801 31,654 31,686
Other expenses, net (1) 554 (342) (911)
Interest expense (11,187) (9,311) (8,469)
Allowance for funds used during construction 759 1,123 872
--------- --------- ---------
Income before income taxes $ 26,927 $ 23,124 $ 23,178
========= ========= =========
</TABLE>
(1) Includes acquisition costs of $573,000 in 1995.
Operating revenues are comprised of sales to unaffiliated customers.
The Company's operations 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 income (expenses),
income taxes and AFUDC.
<TABLE>
<CAPTION>
In thousands 1997 1996 1995
- --------------------------------------------- ---------- ---------- ---------
<S> <C> <C> <C>
Identifiable assets:
Public water supply $ 430,425 $ 415,045 $ 372,244
Timber processing 9,066 6,773 6,585
Real estate 4,162 4,451 4,509
Corporate 10,354 22,010 9,137
Utility management services (1) 1,002 813 21,505
---------- ---------- ---------
Total identifiable assets $ 455,009 $ 449,092 $ 413,980
========== ========== =========
Capital Expenditures
Public water supply $ 27,633 $ 37,185 $ 38,600
Timber processing 1,075 666 1,327
Utility management services (1) 21 749 1,719
---------- ---------- ---------
Total capital expenditures $ 28,729 $ 38,600 $ 41,646
========== ========== =========
Depreciation expense:
Public water supply $ 12,171 $ 10,668 $ 9,757
Timber processing 434 389 341
Real estate 11 11 11
Utility management services 8 9 14
---------- ---------- ---------
Total depreciation expense $ 12,624 $ 11,077 $ 10,123
========== ========== =========
</TABLE>
(1) 1995 includes environmental laboratories (IEA).
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.
Note 12 - Employee benefit plans
- --------------------------------
Retirement plans - The Company and certain of its subsidiaries have a
- ----------------
noncontributory defined retirement 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 and a directors' retirement
plan both of which are unfunded defined benefit plans. 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 the Company's
retirement plans at December 31, the latest valuation date:
<TABLE>
<CAPTION>
Assets Accumulated
Exceed Benefits
1997 Accumulated Exceed
In thousands Benefits Assets
- ---------------------------------------------------- ----------- ------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 22,074 $ 2,700
Nonvested benefit obligation 239 29
----------- -----------
Accumulated benefit obligation $ 22,313 $ 2,729
=========== ===========
Projected benefit obligation $ (26,453) $ (3,218)
Plan assets at fair value 46,465 -
----------- -----------
Funded status at plan year end 20,012 (3,218)
Unrecognized prior service cost 515 983
Unrecognized net assets existing at January 1, 1986 (1,672) -
Unrecognized net actuarial (gain) loss (9,157) 485
Adjustment to recognize minimum liability - (979)
----------- -----------
Prepaid pension cost (pension liability) $ 9,698 $ (2,729)
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Assets Accumulated
Exceed Benefits
1996 Accumulated Exceed
In thousands Benefits Assets
- ----------------------------------------------------- ------------ ------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 19,084 $ 2,248
Nonvested benefit obligation 944 -
----------- -----------
Accumulated benefit obligation $ 20,028 $ 2,248
=========== ===========
Projected benefit obligation $ (23,651) $ (2,366)
Plan assets at fair value 41,407 -
----------- -----------
Funded status at plan year end 17,756 (2,366)
Unrecognized prior service cost 581 687
Unrecognized net assets existing at January 1, 1986 (2,129) -
Unrecognized net actuarial (gain) loss (8,300) 291
Adjustment to recognize minimum liability - (860)
----------- -----------
Prepaid pension cost (pension liability) $ 7,908 $ (2,248)
=========== ===========
</TABLE>
-25-
<PAGE>
<PAGE>
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, 1997 and 1996, the
liability exceeded the unrecognized prior service cost, resulting in a minimum
liability adjustment, net of taxes of $97,000 and $104,000, respectively,
recorded as a reduction of the Company's equity.
Net pension credit for all retirement plans for the years ended December
31, included the following components:
<TABLE>
<CAPTION>
In thousands 1997 1996 1995
- -------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost - benefits earned during the
period $ 879 $ 839 $ 640
Interest cost on projected benefit obligation 1,938 1,832 1,703
Actual return on plan assets (6,479) (4,661) (7,601)
Net amortization and deferral 2,363 1,097 4,588
Non-recurring charge for Ad Hoc benefit
increase - - 554
--------- --------- --------
Net pension credit $ (1,299) $ (893) $ (116)
========= ========= ========
</TABLE>
The weighted average discount rate used to measure the projected benefit
obligation was 7.00, 7.50 and 7.00 percent for 1997, 1996, and 1995,
respectively. The expected long-term rate of return on assets was 8.9, 8.6
and 8.7 percent for 1997, 1996 and 1995, respectively. 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
1997, 1996 and 1995. Plan assets are primarily invested in U.S. and foreign
equities and debt securities issued by the U.S. government and U.S.
corporations.
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. Postretirement 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 to the VEBA was $300,000
and $423,000 for 1997 and 1996, respectively.
The net periodic postretirement benefit cost for the years ended
December 31, was as follows:
<TABLE>
<CAPTION>
In thousands 1997 1996 1995
- -------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost-benefits earned during the
period $ 315 $ 493 $ 365
Interest cost on benefit obligation 701 954 932
Actual return on plan assets (60) (45) (19)
Net amortization and deferral 324 548 531
--------- --------- ---------
Net periodic postretirement benefit cost $ 1,280 $ 1,950 $ 1,809
========= ========= =========
</TABLE>
Expenses recognized for the years ended December 31, 1997, 1996, and
1995 amounted to $1,280,000, $1,848,000 and $1,679,000, respectively. The
difference between the net periodic postretirement cost and expense recognized
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.
The combined funded status and the related accrual for postretirement
benefits other than pensions as of December 31, 1997 and 1996, were as
follows:
<TABLE>
<CAPTION>
In thousands 1997 1996
- -------------------------------------------------------------- -------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 4,258 $ 6,208
Active plan participants eligible for retirement 2,227 2,825
Other active participants 4,181 4,748
------- -------
Net obligations 10,666 13,781
Plan assets at fair value 1,446 1,258
------- -------
Accumulated excess postretirement obligation over plan assets (9,220) (12,523)
Unrecognized net obligation existing at January 1, 1993 7,853 8,377
Unrecognized net (gain) or loss from past experience (3,505) (205)
Unrecognized prior service cost 208 226
------- -------
Accrued postretirement benefit cost $(4,664) $(4,125)
======= =======
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1997, 1996 and 1995 was 7.0,
7.5 and 7.0 percent, respectively. The expected long-term rate of return on
assets, net of tax, was 5.0 percent for 1997, 1996 and 1995.
For measurement purposes, an 8.4 percent annual increase in the per
capita cost of covered health care benefits is assumed for 1997 (9.0 percent
and 9.6 percent for 1996 and 1995, 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, 1997
would increase by 16.0 percent
-26-
<PAGE>
<PAGE>
and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year ended December 31, 1997
would increase by 21.0 percent.
Postemployment benefits. In accordance with SFAS No. 112 "Employers'
- ------------------------
Accounting For Postemployment Benefits," the Company accrues the cost of
providing benefits to former or inactive employees after employment but before
retirement. These benefits are recognized over the employees' years of
service or at the date of the event giving rise to such benefits.
Note 13 - 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 nonqualified 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. In 1997, shareholders approved an
amendment to the Incentive Plan to increase the number of shares by 300,000 to
bring the total number of shares authorized for use under the plan to 825,000
shares. 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, conditioned on
continued employment, from the date of the grant. As of December 31, 1997,
490,404 shares were exercisable under the Stock Plan. The following options
have been awarded to key executives:
<TABLE>
<CAPTION>
Number Option Price
In thousands of Shares per Share
- ------------------------------------------ --------- -------------
<S> <C> <C>
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) 167,900 $25.25
Expired in 1996 (17,701) $21.75-$27.13
Exercised in 1996 (19,528) $20.63-$24.63
--------
Outstanding at December 31, 1996 820,721 $20.63-$28.28
Granted in 1997 (a) 136,800 $30.88
Expired in 1997 (14,300) $23.50-$27.13
Exercised in 1997 (175,817) $20.63-$28.28
--------
Outstanding at December 31, 1997 767,404 $20.63-$30.88
========
</TABLE>
(a) These options were granted on October 13, 1995, December 5, 1995,
December 4, 1996 and December 2, 1997. 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 became
exercisable immediately upon the sale of that business.
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 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 1997 1996
- ------------------------------------ -------- --------
<S> <C> <C>
Net Income
As reported $ 15,011 $ 9,005
Pro forma 14,776 8,749
Earnings per share
As reported $2.10 $1.30
Pro forma $2.07 $1.26
</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 1997, 1996 and 1995: dividend yield of
6.49 percent; expected volatility of 17 percent; risk-free interest rate of
5.79 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 1,308,733 shares were issued at December 31, 1997.
-27-
<PAGE>
<PAGE>
Note 14 - Property, plant and equipment
- ---------------------------------------
Net property, plant and equipment at December 31, consisted of the
following components:
<TABLE>
<CAPTION>
In thousands 1997 1996
- ---------------------------------------- -------- --------
<S> <C> <C>
Organization $ 185 $ 185
Source of supply 33,995 29,785
Pumping 20,477 16,756
Water treatment 102,060 62,230
Transmission and distribution 266,368 249,328
General 36,234 34,417
Construction work in progress 7,068 47,787
Utility plant held for future use 466 466
Nonutility property 14,980 13,762
--------- ---------
481,833 454,716
Less: accumulated depreciation 142,125 131,328
--------- ---------
$ 339,708 $ 323,388
========= =========
</TABLE>
Note 15 - Inventories
- ---------------------
Inventories at December 31, were comprised of the following:
<TABLE>
<CAPTION>
In thousands 1997 1996
- ----------------------------------------- -------- --------
<S> <C> <C>
Lumber and logs $ 2,561 $ 1,565
Materials and supplies 1,179 1,318
-------- --------
$ 3,740 $ 2,883
======== ========
</TABLE>
Note 16 - 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 1997 1996 1995
- -------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
(Increase) decrease in accounts receivable $ (876) $ 5,364 $ (140)
Decrease (increase) in other current assets 11,658 (11,592) 545
(Increase) decrease in inventory (857) 579 (919)
Increase in prepayments (2,248) (1,082) (744)
(Decrease) increase in accounts payable and accrued
liabilities (62) 2,094 2,883
(Decrease) increase in interest and taxes payable (182) 398 (2,383)
Net changes in other noncurrent balance sheet items (267) 1,000 (4,766)
------- ------- -------
$ 7,166 $(3,239) $(5,524)
======= ======= =======
Supplemental cash flow information:
Cash paid for:
Interest $ 10,374 $ 9,336 $ 8,749
Income taxes $ 8,221 $ 10,602 $10,694
</TABLE>
Supplemental disclosure of non-cash investing and financing activities
- ----------------------------------------------------------------------
The sale of the discontinued operation (IEA) 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 17 - Commitments and contingencies
- ---------------------------------------
The Company from time to time is involved in legal actions arising in
the ordinary course of its business. In the opinion of management, none of
these matters will have a material adverse impact on the Company.
-28-
<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 cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Aquarion
Company and its subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, 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.
/S/PRICE WATERHOUSE LLP
- -----------------------------
Price Waterhouse LLP
New York, NY
January 28, 1998
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 which evaluates existing controls and
recommends changes and improvements deemed necessary.
The Board of Directors' Audit Committee, which is comprised of four
nonmanagement directors, meets periodically with the Company's senior
officers, independent accountants and the Company's Management. 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, independent accountants and the Audit
Committee, provide you, the shareholder, with reasonable assurance as to the
integrity of the Company's consolidated financial statements.
/S/RICHARD K. SCHMIDT
- -------------------------------------
Richard K. Schmidt
President & Chief Executive Officer
/S/JANET M. HANSEN
- -------------------------------------
Janet M. Hansen
Executive Vice President,
Chief Financial Officer
& Treasurer
January 28, 1998
-29-
<PAGE>
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
- -----------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Book value per share $18.26 $17.52 $17.72 $17.43 $17.07
Payout ratio (per share) 77.6% 124.6% 85.3% 86.6% 92.0%
Price/earnings ratio (1) 16.5 21.4 13.4 12.6 16.2
Capitalization:
Long-term debt 53.1% 54.7% 52.0% 49.1% 51.0%
Preferred stock of subsidiaries - - .1 0.2 0.2
Common equity 46.9 45.3 47.9 50.7 48.8
------- ------- ------- ------- -------
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 Per
Operating income Net share
In thousands, except share data revenues taxes income (1)
- ------------------------------- ---------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
- ----
First quarter $ 23,389 $ 4,287 $ 2,388 $0.34
Second quarter 26,522 6,345 3,536 0.50
Third quarter 29,226 10,230 5,732 0.80
Fourth quarter 27,965 6,065 3,355 0.46
---------- ------- -------
Total $ 107,102 $26,927 $15,011
========== ======= =======
1996
- ----
First quarter (2) $ 20,993 $ 3,998 $ 2,074 $0.30
Second quarter (2) 23,013 5,418 3,165 0.46
Third quarter (2) 25,499 7,373 4,136 0.60
Fourth quarter 25,299 6,335 (370) (0.06)
---------- ------- -------
Total $ 94,804 $23,124 $ 9,005
========== ======= =======
</TABLE>
(1) Quarterly earnings per share are based on weighted average shares
outstanding during each quarter.
(2) 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, 1997, there were 8,017 shareholders of
record.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Period Closing sales prices Dividends paid
- ------------------------------------------------------------------
High Low
- ------------------------------------------------------------------
<S> <C> <C> <C>
1997
- ----
First quarter 28 1/2 $27 $ .405
Second quarter 27 3/4 24 3/4 .405
Third quarter 28 1/8 25 1/8 .405
Fourth quarter 36 1/2 27 .41
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
</TABLE>
-31-
<PAGE>
EMPLOYMENT AGREEMENT
between
AQUARION COMPANY
and
RICHARD K. SCHMIDT
dated as of July 1, 1997
<PAGE>
<PAGE>
THIS AGREEMENT, made effective as of July 1, 1997 by and
between AQUARION COMPANY (the "Company"), a Delaware
corporation, and RICHARD K. SCHMIDT, of 99 Governor s Lane,
Fairfield, Connecticut (the "Executive"),
W I T N E S S E T H T H A T :
WHEREAS:
1. The Executive is a principal officer of the Company
and an integral part of its senior management who participates
in the decision-making process relative to short- and long-
term planning and policy for the Company;
2. The Board of Directors of the Company, at its
meeting on June 24, 1997, determined that it would be in the
best interests of the Company and its shareholders to assure
continuity in the management of the Company's administration
and operations by entering into an employment agreement to
retain the services of the Executive on an extended basis; and
3. The Executive is willing to continue to serve the
Company as a member of its senior management on the terms and
conditions set forth herein.
NOW, THEREFORE, it is hereby agreed by and between the
parties hereto as follows:
1. Employment. The Company agrees to continue the
----------
Executive in its employ, and the Executive agrees to remain
in the employ of the Company, for the period stated in
Paragraph 3 hereof and upon the other terms and conditions
herein provided.
2. Position and Responsibilities. During the period of
-----------------------------
his employment hereunder, the Executive agrees to serve as
President of the Company for the period for which he is and
shall from time to time be elected, and as its Chief Executive
Officer, and to be responsible for the general management of
the affairs of the Company, reporting directly to the Board of
Directors of the Company. During said period the Executive
agrees to perform such services not
<PAGE>
<PAGE>
-2-
inconsistent with his position as shall from time to time be requested of
him by the Board of Directors including service, if elected, as an
officer and director of any subsidiary or affiliate of the
Company.
3. Term and Duties.
---------------
(a) Term of Employment. The term of the
------------------
Executive's employment under this Agreement shall be deemed to
have commenced as of the date first above written and shall
continue for a period of 24 full calendar months thereafter,
subject to extension as hereinafter provided. On the first
day of each month following the date first above written, the
term of the Executive's employment under this Agreement shall
be automatically extended unless prior thereto the Company
shall deliver to the Executive or the Executive shall deliver
to the Company written notice that such term of employment
shall not be extended, in which case such term shall end at
the expiration of the then existing term of employment under
this Agreement, including any previous extensions, and shall
not be further extended except by agreement of the Company and
the Executive. Any such automatic extension shall be for one
additional full calendar month (for a total term upon such
extension of 24 full calendar months), unless the Executive
will attain age 65 prior to completion of 24 full calendar
months following the extension date, in which case the term of
the Executive's employment under this Agreement shall
terminate on the last day of the month in which the Executive
attains age 65.
(b) Duties. During the period of employment
------
hereunder and except for illness or incapacity and reasonable
vacation periods (which shall not be less than 20 days in any
calendar year), the Executive's business time, attention,
skill and efforts shall be exclusively
<PAGE>
<PAGE>
-3-
devoted to the business and affairs of the Company and its subsidiaries;
provided, however, that nothing in this Agreement shall preclude the
Executive from devoting time during reasonable periods
required for:
(i) serving as an officer, director or member of a
committee of any company or organization involving
no conflict of interest with the Company or any of
its subsidiaries or affiliates,
(ii) delivering lectures and fulfilling speaking
engagements, and
(iii) engaging in charitable and community activities,
provided that such activities do not materially
affect or interfere with the performance of the
Executive's obligations to the Company.
4. Compensation.
------------
(a) For all services rendered by the Executive in
any capacity during employment under this Agreement, including
services as an executive, officer, director, or member of any
committee of the Company or any subsidiary or affiliate
thereof, the Company shall pay the Executive a minimum base
annual salary equal to $240,000. The Board of Directors of
the Company may increase the Executive s minimum base annual
salary during the term of this Agreement, and, when increased,
such higher amount shall then be the minimum base annual
salary hereunder; such minimum base annual salary shall not be
reduced below the highest minimum base annual salary fixed
from time to time by the Board of Directors of the Company.
Such salary shall be payable in accordance with the customary
payroll practices of the Company, but in no event less
frequently than monthly.
<PAGE>
<PAGE>
-4-
(b) Executive shall be entitled to participate in
the Company s annual incentive plan or any Company incentive
or bonus plan covering some or all of its executive officers
that is in effect during the period of his employment
hereunder and to receive benefits thereunder on a basis
consistent with the overall administration and intent of any
such plan and with past practice, if any, under such plan.
(c) Nothing in this Agreement shall preclude or
affect any rights or benefits that may now or hereafter be
provided for the Executive or for which the Executive may be
or become eligible under any other form of compensation or
employee benefit plan now existing or that may hereafter be
adopted or awarded by the Company or mandated by law.
Specifically, the Executive shall:
(i) participate in the Company's Retirement Plan as well
as any related program under any "excess benefit
plan" that may be adopted during the period of the
Executive's employment hereunder and in which the
Executive is designated by the Company's Board of
Directors to participate (hereinafter referred to
collectively as the "Retirement Program");
(ii) participate to the permitted extent the Executive
wishes in The Employee Savings and Investment Plan
of the Company and any related program under any
excess benefit plan (hereinafter referred to
collectively as the "Thrift and Savings Program");
<PAGE>
<PAGE>
-5-
(iii) participate in any Employee Stock Ownership Plan
that may subsequently be adopted by the Company;
(iv) participate in the salary continuation program in
the event of death in accordance with Board policy
for Company officers;
(v) participate in the Company's death and disability
benefit plans and its medical, dental and health and
welfare plans; and
(vi) participate in equivalent successor plans of the
Company for which senior management employees are
eligible;
provided, however, that, subject to Paragraph 7(c)(iv),
nothing in this Agreement shall preclude the Company from
amending or terminating any such plan or program, on the
condition that such amendment or termination is applicable to
all of the Company's senior management employees generally.
5. Business Expenses. The Company shall pay or
-----------------
reimburse the Executive for all reasonable travel and other
expenses incurred in connection with the performance of the
Executive's duties under this Agreement in accordance with
such procedures as the Company may from time to time
establish. The Company further agrees to furnish the
Executive with a private office and a private secretary and
such other assistance and accommodations, including an
automobile and appropriate club memberships in Connecticut and
North Carolina, as shall be suitable to the character of the
Executive's position with the Company and adequate for the
performance of the Executive's duties under this Agreement.
<PAGE>
<PAGE>
-6-
6. Additional Benefits. Nothing in this Agreement
-------------------
shall affect the Executive's eligibility to participate in all
group health, dental, hospitalization, life, travel or
accident or other insurance plans or programs and all other
perquisites, fringe benefits or retirement plans or additional
compensation, including termination pay programs, which the
Company may now or hereafter, in its sole and absolute
discretion, make available to its senior management employees
generally, and the Executive shall be eligible to receive,
during the period of employment under this Agreement, all
benefits and emoluments for which key employees are eligible
under every such plan, program, perquisite or arrangement to
the extent permissible under the general terms and provisions
thereof.
7. Termination of Employment. Notwithstanding any
-------------------------
other provision of this Agreement, the Executive's employment
under this Agreement may be terminated:
(a) by the Company, in the event of the Executive's
conviction of, or plea of nolo contendere to, a felony or
crime involving moral turpitude or perpetration of a common
law fraud which has resulted or is likely to result in
material economic damage to the Company or any of its
subsidiaries, by written notice to the Executive, specifying
the event relied upon for such termination;
(b) by either the Company or the Executive, if the
Executive accepts employment or a consulting position with
another company; or
(c) by the Executive, in the event of any (i)
failure to elect or reelect or to appoint or reappoint the
Executive to the offices of President and Chief Executive
Officer of the Company or other material change by the Company
of the Executive's functions, duties or
<PAGE>
<PAGE>
-7-
responsibilities which change would cause the Executive's position with
the Company to become of less dignity, responsibility, importance or scope
from the position and attributes thereof described in
Paragraph 2 above, (ii) assignment or reassignment by the
Company or by one of its subsidiaries of the Executive to
another place of employment outside of Fairfield County,
Connecticut, (iii) the occurrence of a Change of Control, as
defined in subparagraph (d) below, or (iv) reduction in the
Executive's total compensation and benefits, as specified in
Paragraph 4 above and as currently provided, or other material
breach of this Agreement by the Company or any of its
subsidiaries, by 30 days written notice to the Company,
specifying the event relied upon for such termination and
given within 180 days after such event.
(d) For purposes of this Agreement, a "Change of
Control" shall mean the occurrence of any of
the following events:
(i) the acquisition by any individual, entity, or group
(within the meaning of Section 13(d)(3) or Section
14(d)(2) of the Securities Exchange Act of 1934, as
amended (hereinafter referred to as the "Exchange
Act")) (hereinafter referred to as a "Person") of
beneficial ownership (within the meaning of Rule 1
3d-3 promulgated under the Exchange Act) of twenty
percent (20%)or more of either (A) the then
outstanding shares of common stock of the Company
(hereinafter referred to as the "Outstanding Company
Common Stock"), or (B) the combined voting power of
the then outstanding voting securities of the
Company entitled to vote generally in the election
of directors (hereinafter referred to as the
<PAGE>
<PAGE>
-8-
"Outstanding Company Voting Securities"); provided,
however, that for purposes of this subparagraph (i),
the following acquisitions shall not constitute a
Change of Control: (A) any acquisition directly from
the Company; (B) any acquisition by the Company; (C)
any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the
Company or any corporation controlled by the
Company; or (D) any acquisition by any corporation
pursuant to a transaction which complies with
subparagraphs (A), (B), and (C) of subparagraph
(iii) below; or
(ii) individuals who, as of the date of this Plan,
constitute the Board of Directors (hereinafter
referred to as the "Incumbent Board") cease for
any reason to constitute at least a majority of
the Board; provided, however, that any
individual becoming a director subsequent to
the date of this Agreement whose election, or
nomination for election by the Company's
shareholders, was approved by a vote of at
least a majority of the directors then
comprising the Incumbent Board shall be
considered as though such individual were a
member of the Incumbent Board, but excluding,
for this purpose, any such individual whose
initial assumption of office occurs as a result
of an actual or threatened election contest
with respect to the election or removal of
directors or other actual or threatened
solicitation of proxies or consents by or on
behalf of a Person other than the Board;
<PAGE>
<PAGE>
-9-
(iii) consummation of a reorganization, merger,
or consolidation or sale or other
disposition of all or substantially all of
the assets of the Company or the
acquisition of assets of another
corporation (hereinafter referred to as a
"Business Combination"), in each case,
unless, following such Business
Combination, (A) all or substantially all
of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company
Voting Securities immediately prior to such
Business Combination benefically own, directly or
indirectly, more than eighty percent (80%) of,
respectively, the then outstanding shares of
common stock and the combined
voting power of the then outstanding
voting securities entitled to vote
generally in the election of directors, as
the case may be, of the corporation
resulting from such Business Combination
(including, without limitation, a
corporation which as a result of such
transaction owns the Company or all or
substantially all of the Company's assets
either directly or through one or more
subsidiaries) in substantially the same
proportions as their ownership,
immediately prior to such Business
Combination of the Outstanding Company
Common Stock and Outstanding Company
Voting Securities, as the case may be, (B)
no Person (excluding any corporation
resulting from such Business Combination
or any employee benefit plan (or related
trust) of the Company or such corporation
resulting from such
<PAGE>
<PAGE>
-10-
Business Combination) beneficially owns, directly
or indirectly, twenty percent (20%) or more of,
respectively, the then outstanding shares
of common stock of the corporation
resulting from such Business Combination
or the combined voting power of the then
outstanding voting securities of such
corporation except to the extent that such
ownership existed prior to the Business
Combination, and (C) at least a majority
of the members of the board of directors
of the corporation resulting from such
Business Combination were members of the
Incumbent Board at the time of the
execution of the initial agreement, or of
the action of the Board, providing for
such Business Combination;
(iv) approval by the shareholders of the Company of
a complete liquidation or dissolution of the
Company.
8. Payments Upon Termination of Employment. In the
---------------------------------------
event of any termination by the Executive pursuant to
Paragraph 7(c) above, or in the event the Executive's
employment under this Agreement is terminated by the Company
for any reason other than one of those specified in Paragraphs
7(a) or 7(b) above, the Company shall, as liquidated damages
or severance pay, or both, promptly pay to the Executive and
provide the Executive and the dependents, beneficiaries and
estate of the Executive as follows:
(a) The Company shall pay the Executive in equal
monthly installments over the unexpired portion of the term of
employment provided for in Paragraph 3(a) above or, at the
Company's option, in a lump sum calculated without any
discount, a cash amount equal to the
<PAGE>
<PAGE>
-11-
excess of (i) the salary provided in Paragraph 4(a) above, including
the increases therein provided, for the unexpired portion of the term of
employment provided for in Paragraph 3(a) above (commencing
with the month in which termination shall have occurred) less
the amounts, if any, the Executive would have paid in cash in
respect of employee benefits provided for in Paragraph 4(c)(v)
above if the Executive were still employed, over (ii) the
amounts, if any, paid to the Executive pursuant to any
severance or termination pay program or arrangement of the
Company or any of its subsidiaries; provided, however, if the
Executive s termination occurs after a Change of Control, such
payment shall be in the form of a lump sum, calculated without
any discount.
(b) The Company shall also pay the Executive in a
lump sum a cash amount equal to the average incentive award
earned by the Executive in accordance with the provisions of
the Company s annual incentive plan over the two calendar
years immediately preceding the Executive s termination.
(c) The Company shall also pay the Executive a lump
sum cash amount equal to the sum of (i) and (ii), where (i) is
the present value of the aggregate contributions or payments,
if any, that would have been made by the Company or any of its
subsidiaries under the Thrift and Savings Program and Employee
Stock Ownership Plan described in Paragraph 4(c)(ii) and (iii)
above or any successor program of the Company in effect on the
date on which termination shall have occurred, if the
Executive had continued to be employed, and to participate on
a fully vested basis in the Thrift and Savings Program and
Employee Stock Ownership Plan or such successor programs to
the same extent as the Executive participated for
<PAGE>
<PAGE>
-12-
the last month during which the Executive was permitted to participate,
during the unexpired portion of the term of employment
provided for in Paragraph 3(a) above at an annual rate of
compensation equal to that used to calculate the payments
provided by Paragraph 8(a) above; and (ii) is the value, if
any, of that portion of the Executive s accounts under the
Thrift and Savings Program and Employee Stock Ownership Plan
or such successor programs that would not have been forfeited
upon the Executive s termination of employment if the
Executive s service with Industrial and Environmental
Analysts, Inc. had been taken into account for vesting
purposes under said Thrift and Savings Program, Employee Stock
Ownership Plan or successor plans.
(d) For purposes of calculating the lump sum cash
payments provided by Paragraph 8 (c) above, present value
shall be determined by using a discount factor equal to one
percentage point below the prime rate as published in The Wall
Street Journal as of the date on which termination shall have
occurred.
(e) For the unexpired portion of the term of the
Executive s employment provided for in Paragraph 3(a) above
(commencing with the month in which termination shall have
occurred), the Executive shall continue to be entitled to all
employee benefits provided for in Paragraph 4(c)(v) above as
may be in effect on the date of termination, as if the
Executive were still employed during such period under this
Agreement, with benefits based upon the compensation used to
calculate the payments provided by Paragraph 8(a) above, and
if and to the extent that such benefits shall not be payable
or provided under any such plan, the Company shall pay or
provide such benefits on an individual basis. The medical,
dental, health and
<PAGE>
<PAGE>
-13-
welfare benefits provided for in Paragraph
4(c)(v) above, in accordance with this Paragraph 8(e) shall be
secondary to any comparable benefits provided by another
employer provided that an appropriate refund is made of any
reduction in the amount paid pursuant to Paragraph 8(a)(i)
which had assumed that such benefits would be primary.
(f) All stock options granted to the Executive
pursuant to the Company's stock option plan shall become
immediately vested and exercisable, to the extent permitted by
said plan.
9. Supplemental Pension Benefit.
----------------------------
(a) In recognition of the Executive s past service
to the Company, upon termination of the Executive s employment
with the Company for any reason during the term of this
Agreement, the Company shall pay to the Executive an annual
supplemental pension benefit having a value equal to the
excess of (i) over (ii), where:
(i) is the aggregate annual benefit that would be
payable to the Executive under the Retirement
Program described in Paragraph 4(c)(i) above as a
life annuity as of the date of termination of the
Executive s employment, calculated by: (A) giving
the Executive credit for his service with Industrial
and Environmental Analysts, Inc. for eligibility,
vesting and benefit purposes under the Retirement
Program; (B) crediting the Executive with service
for the unexpired portion of the term of the
Executive s employment provided for in Paragraph
3(a) above if the Executive is entitled to payments
upon termination of employment pursuant to Paragraph
8 above; and (C) doubling the Executive's
<PAGE>
<PAGE>
-14-
service, as increased pursuant to (A) and (B) above, for
benefit purposes under the Retirement Program,
including without limitation, for purposes of
determining any reductions in benefits under the
Retirement Program on account of the Executive's
retirement before having attained normal retirement
age under the Retirement Program; and
(ii) is the annual benefit payable to the Executive
under the Retirement Program as a life annuity as of
the date of the Executive s termination of
employment, calculated in accordance with the terms
of the Retirement Program.
If the Executive is entitled to credit for service for the
unexpired portion of the term of the Executive s employment
pursuant to clause (a)(i)(B) of this Paragraph 9, for purposes
of calculating the Executive s supplemental pension benefit
under this Paragraph 9, the Executive shall be presumed to
have continued employment for the unexpired portion of the
term of the Executive s employment at an annual rate of
compensation equal to the sum of the amounts used to calculate
the payments provided by clauses (a) and (b) of Paragraph 8
above.
(b) The actuarial equivalent of the supplemental
pension benefit payable under clause (a) of this Paragraph 9
shall be paid in the same form of benefit applicable to the
Executive and his joint annuitant, if any, under the
Retirement Program and shall commence at the same time payment
to the Executive commences under the Retirement Program.
Actuarial equivalency shall be determined in the same manner
as provided under the Retirement Program.
(c) In the event of the Executive s death before
payment of the supplemental pension benefit under this
Paragraph 9 commences, if the spouse of the Executive is
entitled to a
<PAGE>
<PAGE>
-15-
death benefit under the Retirement Program, the
Executive s spouse shall be entitled to receive from the
Company a death benefit with respect to the supplemental
pension benefit provided under this Paragraph 9 equal to the
difference between (i) the death benefit that would be payable
to the Executive s spouse under the Retirement Program as of
the date of the Executive s death if such benefit were
calculated based on the benefit described in clause (a) of
this Paragraph 9; and (ii) the death benefit actually payable
to the Executive s spouse under the Retirement Program as of
the date of the Executive s death, calculated in accordance
with the terms of the Retirement Program. Notwithstanding
anything in this Agreement to the contrary, no death benefit
other than that set forth in this clause (c) shall be payable
with respect to the supplemental pension benefit payable under
this Paragraph 9 if the Executive dies prior to the
commencement of benefit payments under this Paragraph 9. In
the event of the Executive s death after payment of the
supplemental pension benefit under this Paragraph 9 has
commenced, payment shall be made as specified pursuant to the
benefit arrangement in force with respect to the deceased
Executive.
10. Section 280G Limit. Notwithstanding any other
------------------
provision of this Agreement, in the event that any payment or
benefit received or to be received by the Executive, whether
payable pursuant to the terms of this Agreement or any other
plan, arrangement or agreement with the Company (collectively,
the "Total Payments") would, in the determination of the
independent certified public accounting firm then retained by
the Company (the "Tax Advisor"), not be deductible (in whole
or in part) by the Company as a result of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), or any
successor to such Section,
<PAGE>
<PAGE>
-16-
payments and benefits pursuant to this Agreement shall be reduced until
no portion of the Total Payments is not deductible as a result of
Section 280G of the Code, or payments and benefits pursuant to this
Agreement are reduced to zero. For purposes of this limitation, (a) no
portion of the Total Payments the receipt of which the
Executive, in the determination of the Tax Advisor, shall have
effectively waived prior to the date which is 15 days
following termination of employment and prior to the earlier
of the date of constructive receipt and the date of payment
thereof shall be taken into account; and (b) any reduction in
the payments and benefits pursuant to this Paragraph shall be
made from the payments and benefits to be made pursuant to
clauses (a), (b), (c), (e) and (f) of Paragraph 8 and clause
(a) of Paragraph 9, in such order as may be determined by the
Executive, except to the extent that such payments and
benefits, in the determination of the Tax Advisor, are
reasonable compensation within the meaning of Section 280G of
the Code. The determination of the Tax Advisor as to the
deductibility of the Total Payments shall be completed not
later than 45 days following the Executive's termination of
employment, and such determination shall be communicated in
writing to the Company, with a copy to the Executive, within
said 45-day period. The determination of the Tax Advisor as
to the deductibility of the Total Payments shall be deemed
conclusive and binding on the Company and the Executive. The
Company shall pay the fees and other costs of the Tax Advisor
hereunder.
11. Source of Payments; Interest. All payments provided
----------------------------
for in Paragraphs 4, 5, 6, 8 and 9 above shall be paid in cash
from the general funds of the Company. Any benefits payable
under this Agreement shall be "unfunded," as that term is used
in any applicable sections of the
<PAGE>
<PAGE>
-17-
Employee Retirement Income Security Act of 1974, as amended, with respect
to unfunded arrangements maintained primarily for the purpose of providing
deferred compensation to a select group of management or
highly compensated employees. The Company shall not be
required to segregate or earmark any of its assets for the
benefit of the Executive or his spouse or other beneficiary,
and each such person shall have only a contractual right
against the Company for benefits under this Agreement. Any
payments not made within 30 days after termination of the
Executive s employment or such time as they may otherwise be
due hereunder shall bear interest at the interest rate used to
establish the discount factor provided for in Paragraph 8(d).
12. Litigation Expenses.
-------------------
In the event of any litigation, arbitration or
other proceeding between the Company and the Executive with
respect to the subject matter of this Agreement and the
enforcement of rights hereunder, the Company shall reimburse
the Executive for all reasonable costs and expenses relating
to such litigation, arbitration or other proceeding, including
reasonable attorneys' fees and expenses, provided that such
litigation, arbitration or proceeding results in any:
(i) settlement requiring the Company to make a payment
to the Executive, or
(ii) judgement or order in favor of the Executive
enforcing any provision of this Agreement or
awarding any payment or other consideration to the
Executive, regardless of whether such
<PAGE>
<PAGE>
-18-
judgement or order is subsequently reversed on appeal or in a
collateral proceeding.
In no event shall the Executive be required to reimburse the
Company for any of the costs and expenses relating to such
litigation, arbitration or other proceeding. The obligation of
the Company under this Paragraph 10 shall survive the
termination for any reason of this Agreement (whether such
termination is by the Company, by the Executive, upon the
expiration of this Agreement or otherwise).
13. Income Tax Withholding. The Company may withhold
----------------------
from any payments made under this Agreement all federal,
state, city or other taxes as shall be required pursuant to
any law or governmental regulation or ruling.
14. Non-Disclosure of Proprietary Information. The
-----------------------------------------
Executive will gain, with respect to the Company and its
affiliates, detailed knowledge of all affairs, trade secrets,
discoveries, plans, development work in process, cost
information, outstanding bid and bid proposal information,
customer requirements, contractual provisions, employee
capabilities and proposed marketing initiatives, other
confidential information and the like (the "Proprietary
Information") in the course of the Executive's employment
hereunder and under any prior employment agreement with the
Company or an affiliate, and the Executive will necessarily
continue to have the fullest knowledge of such matters.
Disclosure to or utilization of such knowledge and Proprietary
Information to any person, firm, business, organization,
corporation, agency or other entity, whether or not engaged in
any line of business competing in any respect with the
business of the Company as now constituted, or as the same may
be developed will
<PAGE>
<PAGE>
-19-
cause irreparable injury and damage to the
business of the Company. The Executive covenants and agrees
that he will not at any time, during and after the period of
his employment hereunder, except as may be required by law,
disclose any of the Proprietary Information to, or utilize
such information on behalf of, any person, firm, business,
organization, corporation, agency or other entity (other than
an employee or agent of the Company entitled to receive the
same). The Executive's obligations under this Paragraph 14
shall not apply to information which is or becomes part of the
public domain through no fault of the Executive. Further,
upon termination of his employment hereunder, the Executive
agrees that he will deliver to the Company, or any affiliated
company designated by the Company, any and all records, files,
lists or other documents containing information within the
scope of the foregoing description, including, without
limitation, the Executive's records of contracts with
customers and potential customers, and all copies of the same,
and shall not retain any copies of Proprietary Information.
15. Entire Understanding. This Agreement contains the
--------------------
entire understanding between the Company and the Executive
with respect to the subject matter hereof and supersedes any
prior employment agreement between the Company and the
Executive, including the employment agreement dated as of
October 1, 1995, except that this Agreement shall not affect
or operate to reduce any benefit or compensation inuring to
the Executive of a kind elsewhere provided and not expressly
provided in this Agreement.
16. Severability. If, for any reason, any one or more
------------
of the provisions or part of a provision contained in this
Agreement shall be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part
<PAGE>
<PAGE>
-20-
of a provision of this Agreement not held so invalid, illegal
or unenforceable, and each other provision or part of a
provision shall to the full extent consistent with law
continue in full force and effect. If this Agreement is held
invalid or cannot be enforced, then to the full extent
permitted by law any prior agreement between the Company and
the Executive shall be deemed reinstated as if this Agreement
had not been executed.
17. Consolidation, Merger, or Sale of Assets. Nothing
----------------------------------------
in this Agreement shall preclude the Company from
consolidating or merging into or with, or transferring all or
substantially all of its assets to, another corporation or
acquiring entity which assumes this Agreement and all
obligations and undertakings of the Company hereunder. Upon
such a consolidation, merger or transfer of assets and
assumption, the term, "the Company", as used herein shall mean
such other corporation or acquiring entity and this Agreement
shall continue in full force and effect.
18. Notices. All notices, requests, demands and other
-------
communications required or permitted hereunder shall be given
in writing and shall be deemed to have been duly given if
delivered or mailed, postage prepaid, first class as follows:
(a) to the Company:
Aquarion Company
835 Main Street
Bridgeport, Connecticut 06601
Attention: Secretary
(b) to the Executive:
Richard K. Schmidt
99 Governors Lane
<PAGE>
<PAGE>
-21-
Fairfield, Connecticut 06430
or to such other address as either party shall have previously
specified in writing to the other.
19. No Attachment. Except as required by law, no right
-------------
to receive payments under this Agreement shall be subject to
anticipation, commutation, alienation, sale, assignment,
encumbrances, charge, pledge, or hypothecation or to
execution, attachment, levy, or similar process or assignment
by operation of law, and any attempt, voluntary or
involuntary, to effect any such action shall be null, void and
of no effect.
20. Binding Agreement. This Agreement shall be binding
-----------------
upon, and shall inure to the benefit of, the Executive and the
Company and their respective permitted successors and assigns.
21. Modification and Waiver. This Agreement may not be
-----------------------
modified or amended except by an instrument in writing signed
by the parties hereto. No term or condition of this Agreement
shall be deemed to have been waived, nor shall there be any
estoppel against the enforcement of any provision of this
Agreement except by written instrument signed by the party
charged with such waiver or estoppel. No such written waiver
shall be deemed a continuing waiver unless specifically stated
therein, and each such waiver shall operate only as to the
specific term or condition waived and shall not constitute a
waiver of such term or condition for the future or as to any
act other than that specifically waived.
22. Headings of No Effect. The paragraph headings
---------------------
contained in this Agreement are included solely for
convenience of reference and shall not in any way affect the
meaning or interpretation of any of the provisions of this
Agreement.
<PAGE>
<PAGE>
-22-
23. Governing law. This Agreement and its validity,
-------------
interpretation, performance, and enforcement shall be governed
by the laws of the State of Connecticut.
IN WITNESS WHEREOF, the Company has caused this Agreement
to be executed and its seal to be affixed hereunto by its
officers thereunto duly authorized, and the Executive has
signed this Agreement, all as of the date first above written.
AQUARION COMPANY
ATTEST:
/S/LARRY L. BINGAMAN By: /S/GEORGE W. EDWARDS
- ------------------------- -------------------------
Secretary Its Chairman of the Board
/S/RICHARD K. SCHMIDT
------------------------
RICHARD K. SCHMIDT
HART01-146489-2
44519-80130
March 23, 1998 4:29 pm <PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997, AQUARION COMPANY FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 851
<SECURITIES> 0
<RECEIVABLES> 10789
<ALLOWANCES> 1782
<INVENTORY> 3740
<CURRENT-ASSETS> 41432
<PP&E> 481833
<DEPRECIATION> 142125
<TOTAL-ASSETS> 455009
<CURRENT-LIABILITIES> 38381
<BONDS> 151380
0
0
<COMMON> 7331
<OTHER-SE> 126531
<TOTAL-LIABILITY-AND-EQUITY> 455009
<SALES> 107102
<TOTAL-REVENUES> 107102
<CGS> 0
<TOTAL-COSTS> 69747
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11187
<INCOME-PRETAX> 26927
<INCOME-TAX> 11916
<INCOME-CONTINUING> 15011
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15011
<EPS-PRIMARY> 2.1
<EPS-DILUTED> 2.1
</TABLE>
