<PAGE>
Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
----------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _____________
Commission File Number 1-8060
-------------
AQUARION COMPANY
------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0852232
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
835 Main Street, Bridgeport, Connecticut 06604-4995
---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 335-2333
----------------
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changes since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
-----
Indicate the number of share outstanding of each of the issuer's classes of
common stock as of November 5, 1999:
Common Stock
No Par Value (Stated Value: $1) 11,508,123
--------------------------------- -------------------------
Class Number of Shares
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
---------------------------------
AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30, September 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
(In thousands, except per share date)
<S> <C> <C> <C> <C>
Operating revenues $ 43,899 $ 29,968 $ 97,185 $ 82,178
---------------- ---------------- ---------------- ----------------
Costs and expenses:
Operating 12,847 7,527 27,652 22,212
General and administrative 4,701 3,322 12,745 10,909
Depreciation 3,525 3,532 10,827 10,600
Interest expense 2,451 2,619 7,456 7,963
Taxes other that income taxes 2,350 2,016 7,474 6,959
---------------- ---------------- ---------------- ----------------
Total costs and expenses 25,874 19,016 66,154 58,643
---------------- ---------------- ---------------- ----------------
18,025 10,952 31,031 23,535
Allowance for funds used during
construction 63 64 115 153
---------------- ---------------- ---------------- ----------------
Income before income taxes 18,088 11,016 31,146 23,688
Income taxes 6,400 4,891 11,540 10,520
---------------- ---------------- ---------------- ---------------
Net income $ 11,688 $ 6,125 $ 19,606 $ 13,168
================ ================ ================ ===============
Basic earnings per share $ 1.02 $ 0.55 $ 1.73 $ 1.19
================ ================ ================ ===============
Basic weighted average shares
outstanding 11,418,795 11,162,457 11,352,124 11,108,552
================ ================ ================ ===============
Diluted earnings per share $ 0.97 $ 0.54 $ 1.66 $ 1.16
================ ================ ================ ===============
Diluted weighted average common
shares outstanding 11,991,663 11,431,407 11,836,923 11,368,818
================ ================ ================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
UNAUDITED
<TABLE>
<CAPTION>
Quarter ended September 30, Nine months ended September 30,
----------------------------------------------------------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
(In thousands, except share data)
<S> <C> <C> <C> <C>
Beginning of period $28,913 $20,586 $27,297 $19,624
Net income 11,688 6,125 19,606 13,168
------------- ------------- ------------- --------------
40,601 26,711 46,903 32,792
Deduct: Cash dividends declared on common stock,
$.28 per share for 3rd quarter 1999, $.2775
per share for 1st and 2nd quarters 1999,
$.2767 for 3rd quarter 1998 and $.2733 per 3,212 3,087 9,514 9,168
share for 1st and 2nd quarters 1998
------------- ------------- ------------- --------------
End of period $37,389 $23,624 $37,389 $23,624
============= ============= ============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ---------------
(Unaudited)
(In thousands)
<S> <C> <C>
Property, plant and equipment $ 506,806 $ 493,279
Less: accumulated depreciation 156,023 146,034
----------- -----------
Net property, plant and equipment 350,783 347,245
----------- -----------
Current assets:
Cash and cash equivalents 3,370 654
Accounts receivable from customers 16,673 11,325
Less: allowance for doubtful accounts 2,379 1,976
----------- -----------
14,294 9,349
Accrued revenues 10,610 9,406
Inventories 3,961 4,526
Prepaid expenses 16,208 12,924
Other current assets 6,196 4,626
----------- -----------
Total current assets 54,639 41,485
----------- -----------
Prepaid taxes 11,819 11,834
Recoverable income taxes 38,813 39,022
Other assets 13,699 17,894
----------- -----------
$ 469,753 $ 457,480
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
(In thousands, except share data)
<S> <C> <C>
Shareholders' equity:
Preferred stock, no par value, authorized $ - $ -
2,500,000 shares not to exceed aggregate value of
$25,000,000, issuable in series-none issued
Common stock, stated value: $1
Authorized-16,000,000 shares
Issued-11,478,400 shares in 1999 and
11,260,797 shares in 1998 11,478 11,261
Capital in excess of stated value 113,579 108,381
Retained earnings 37,389 27,297
Less: minimum pension liability adjustment 99 99
--------------- --------------
Total shareholders' equity 162,347 146,840
--------------- --------------
Long-term debt and other obligations 141,380 141,380
--------------- --------------
Current liabilities:
Current maturities of long-term debt - 10,000
Accounts payable and accrued liabilities 13,039 14,868
Dividends payable 3,212 3,115
Accrued interest 2,198 2,834
Taxes other than income taxes 1,169 887
Income taxes 7,500 3,782
--------------- --------------
Total current liabilities 27,118 35,486
--------------- --------------
Advances for construction 20,369 19,638
Contributions in aid of construction 40,255 38,097
Deferred land sale gains 761 1,658
Accrued postretirement benefit cost 5,479 5,165
Recoverable income taxes 5,721 5,930
Deferred taxes 66,323 63,286
--------------- --------------
$ 469,753 $ 457,480
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------
1999 1998
--------------- ---------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,606 $ 13,168
Adjustments reconciling net income to net cash provided by
operating activities:
Depreciation and amortization 11,344 11,157
Allowance for funds used during construction (115) (153)
Provision for losses on accounts receivable 686 310
Deferred and prepaid income taxes, net 3,052 1,591
Proceeds from sale of surplus land, net of gains 7,515 1,438
Change in assets and liabilities (Note 3) (11,190) (96)
------------ ------------
Net cash provided by operating activities 30,887 27,415
------------ ------------
Cash flows from investing activities:
Capital additions, excluding an allowance for funds used
during construction (16,888) (14,080)
Advances and contributions in aid of construction 3,276 1,805
Refunds on advances for construction (97) (299)
Other investing activities (462) (761)
------------ ------------
Net cash used in investing activities (14,171) (13,335)
------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt (10,000) -
Principal payments on short-term borrowings - (9,000)
Proceeds from the issuance of common stock, net 5,415 3,692
Common dividends paid (9,415) (9,079)
------------ ------------
Net cash used in financing activities (14,000) (14,387)
------------ ------------
Net increase(decrease) in cash and cash equivalents 2,716 (307)
Cash and cash equivalents, beginning of period 654 851
------------ ------------
Cash and cash equivalents, end of period $ 3,370 $ 544
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
AQUARION COMPANY
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
UNAUDITED
---------
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 for 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 over 500,000 people in
Connecticut and Long Island, New York. BHC is the largest investor-owned water
company in Connecticut and, with SCWC, is among the ten 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's non-utility subsidiaries include: Timco, Inc. (Timco), a
timber processing company based in New Hampshire; Aquarion Management Services,
Inc. (AMS), a utility management services business; and Main Street South
Corporation (MSSC), a real estate subsidiary formed in 1969 to assist BHC in
marketing surplus land.
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X and, as applied in the case of rate-regulated public utilities,
comply with the Uniform System of Accounts and ratemaking practices prescribed
by the Company's regulating authorities. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. The results of operations are not
necessarily indicative of the results of operations for the calendar year.
Water consumption is less in the first quarter of the year than during the
warmer months. Other factors affecting the comparability of various accounting
periods include the timing of rate increases granted the Utilities and the
timing and magnitude
7
<PAGE>
of property sales. The consolidated financial statements contained herein should
be read in conjunction with the consolidated financial statements and
accompanying notes included in the Company's 1998 Annual Report to Shareholders
and incorporated by reference in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) which establishes a new model
for accounting for derivative and hedging activities and supersedes and amends a
number of existing standards. In June 1999, the FASB issued SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133", which delayed the
implementation of SFAS 133 for one year. SFAS 133 is now effective for fiscal
years beginning after June 15, 2000. Upon initial application, all derivatives
are required to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. In addition, all
hedging relationships must be reassessed and documented pursuant to the
provisions of SFAS 133. The Company does not expect adoption of this statement
to have a significant impact on its financial position or results of operations.
NOTE 2 - INVENTORY
- ------------------
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
Lumber and logs $ 2,886 $ 3,534
Materials and supplies 1,075 992
------------- ------------
$ 3,961 $ 4,526
============= ============
</TABLE>
8
<PAGE>
NOTE 3 - SUPPLEMENTAL DISCLOSURE FOR CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------
Changes in assets and liabilities and supplemental cash flow information
for the nine-month period ended September 30, are set forth below (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- ------------
(Unaudited)
<S> <C> <C>
Changes in assets and liabilities:
Increase in accounts receivable $ (6,835) $ (2,247)
Decrease in inventory 565 132
Increase in prepayments (3,284) (2,697)
(Increase)decrease in other current assets (1,570) 5,034
Decrease in accounts payable and accrued liabilities (1,831) (2,529)
Decrease in interest and taxes payable 3,364 2,108
Net changes in other noncurrent balance sheet items (1,599) (1,837)
-------------- ------------
$ (11,190) $ (2,036)
============== ============
Supplemental cash flow information:
Cash paid for:
Interest $ 8,092 $ 8,203
Income taxes $ 6,150 $ 5,950
</TABLE>
NOTE 4 - REGULATORY MATTERS
- ----------------------------
Rates. On March 17, 1999, BHC's Western division received a final decision from
the DPUC approving a 3.97 percent water service rate increase designed to
provide a $607,000 increase in annual water service revenues. The new rate
became effective on the date of approval.
On October 1, 1996, the Ridgefield Water Company, which has subsequently
been merged into BHC, entered into a Consent Agreement with the State of
Connecticut, Department of Environmental Protection (DEP), relating to certain
water supply sources located in the Town of Ridgefield. The Consent Agreement
requires BHC to meet various milestones by particular dates in order to bring
BHC's Ridgefield water system into compliance with DEP's diversion regulations.
BHC's failure to timely comply with many of the requirements of the Consent
Order now permits DEP to demand certain fines from BHC. This matter has been
referred by
9
<PAGE>
DEP to the Office of the Connecticut Attorney General for further action. BHC is
presently in the process of negotiating a revised Consent Agreement and its
potential liability for civil penalties with the Attorney General's office. BHC
is unable to assess the ultimate outcome of these negotiations at this time, but
presently expects that any civil penalties will be less than $1,000,000.
NOTE 5 - SALE OF SURPLUS LAND
- -----------------------------
On September 2, 1999, BHC sold the Trout Brook Valley property, consisting
of approximately 758 acres, to the Aspetuck Land Trust, a non-profit land
preservation organization, and the Town of Weston, Connecticut for a total of
approximately $11,571,000. The after-tax net gain attributable to the sale
amounted to $6,215,000 with $4,869,000 recognized in 1999. In a subsequent
decision approving the sales, the DPUC amended its original decision and granted
the Company a three year amortization period, which provides shareholders with
83 percent and ratepayers with 17 percent of the after tax gain on approximately
60 percent of BHC's portion of the property. The Company will receive a tax
deduction for a charitable contribution based on the difference between the sale
price and the fair market value of the property.
In addition, the Company sold approximately 12 acres of surplus land with
proceeds totaling $921,000 for the first nine months of 1999. Total gains,
including recognition of deferred gains from prior land sales of $309,000,
approximated $538,000.
On December 18, 1998, the Company sold five parcels of land, located in
Shelton, Connecticut and totaling 401 acres, to the City of Shelton for
approximately $6,800,000. The Company received $2,268,000 in cash and a note
receivable for the balance, which will be paid in two equal installments of
$2,266,500 in December 1999 and July 2000. The after-tax net gain attributable
to the sale amounted to $3,510,000. A 30-acre parcel of land, originally
scheduled to be included in the sale, is expected to close in 1999 after BHC
receives the necessary permits from the Connecticut Department of Health
Services.
In 1995, the Company entered into an agreement with a local developer to
sell a 40-acre parcel of land located in New Canaan, Connecticut, for
approximately $1,950,000. The Company anticipates that the after-tax gain from
this transaction will be approximately $1,100,000. The sale has been approved by
the DPUC. The buyer has been involved in litigation and appeals with several
residents, environmental groups and the DEP over regulatory approvals. Although
several appeals have been withdrawn, certain issues remain
10
<PAGE>
open. The Company anticipates closing this transaction sometime in 1999,
however, the closing could be delayed due to the opposition to granting the
required permits and approvals. No assurances can be given at this time that
such permits and approvals will be granted.
MSSC owns a two-thirds 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. Although the Company does not concur with this value and has initiated
an appeal process to obtain a higher value for this property, the Company
reserved for the difference between the carrying value of the investment and its
estimated net realizable value.
11
<PAGE>
NOTE 6 - EARNINGS PER SHARE
- ---------------------------
In accordance with SFAS 128, the following table presents the calculation
of basic and diluted earnings per share for the quarter and nine months ended
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
In thousands, except per share data Income Shares Per-share
(numerator) (denominator) amount
- --------------------------------------------- -------------- ----------------- -----------
<S> <C> <C> <C>
For the quarter ended September 30, 1999
Basic earnings per share
Net income $ 11,688 11,419 $ 1.02
===========
Effect of dilutive stock options - 573
----------- ------------
Diluted earnings per share
Net income giving effect to dilutive
stock options $ 11,688 11,992 $ 0.97
========== ============ ===========
For the quarter ended September 30, 1998
Basic earnings per share
Net income $ 6,125 11,162 $ 0.55
===========
Effect of dilutive stock options - 269
----------- ------------
Diluted earnings per share
Net income giving effect to dilutive
stock options $ 6,125 11,431 $ 0.54
=========== ============ ===========
For the nine months ended September 30, 1999
Basic earnings per share
Net income $ 19,606 11,352 $ 1.73
===========
Effect of dilutive stock options - 485
Diluted earnings per share ----------- ------------
Net income giving effect to dilutive
stock options $ 19,606 11,837 $ 1.66
=========== ============ ===========
For the nine months ended September 30, 1998
Basic earnings per share
Net income $ 13,168 11,109 $ 1.19
===========
Effect of dilutive stock options - 260
----------- ------------
Diluted earnings per share
Net income giving effect to dilutive
stock options $ 13,168 11,369 $ 1.16
=========== ============ ===========
</TABLE>
12
<PAGE>
NOTE 7 - INDUSTRY SEGMENT INFORMATION
- -------------------------------------
In 1998, Aquarion adopted Statement of Financial Accounting Standards No.
131 (SFAS 131) "Disclosure about Segments of and Enterprise and Related
Information", which requires the reporting of certain financial information by
business segment.
In accordance with SFAS 131, the Company's four industry segments are:
Public water supply--collection, purification and distribution of water for
domestic, commercial and industrial use, and for private and municipal fire
protection service;
Timber processing--processing, marketing and distribution of lumber
products;
Real Estate--ownership, rental and sale of real property; and,
Utility management services--nonregulated water-related services.
The Company's industry segment information for the nine months ended
September 30 is as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998
- ------------------------------------------------------ ------------- -------------
<S> <C> <C>
Operating income (loss): $ 29,414 $ 29,554
Public water supply 978 968
Timber processing 8,488 1,331
Real estate (76) (75)
Utility management services ----------- -----------
Industry segment operating income 38,804 31,778
Interest expense 7,456 7,963
Allowance for funds used during construction 115 153
Other income (expenses), net 423 410
---------- -----------
Income before income taxes $ 31,146 $ 23,688
========== ===========
</TABLE>
The Company's operations take place in North America and no single customer
accounts for 10 percent or more of total operating revenues.
13
<PAGE>
<TABLE>
<CAPTION>
In thousands 1999 1998
- ------------------------------------------------------ ------------- -------------
<S> <C> <C>
Segment assets:
Public water supply $445,640 $434,751
Timber processing 9,695 8,914
Real estate 4,965 4,708
Utility management services 352 334
------------- -------------
Subtotal 460,652 448,707
Reconciling items 9,101 8,773
------------- -------------
Total consolidated items $469,753 $457,480
------------- -------------
Capital Expenditures:
Public water supply 16,598 13,362
Timber processing 290 718
Utility management services - -
------------- -------------
Total capital expenditures $ 16,888 $ 14,080
------------- -------------
Depreciation expense:
Public water supply $ 10,395 $ 10,226
Timber processing 419 362
Real estate 8 8
Utility management services 5 4
------------- -------------
Total depreciation expense $ 10,827 $ 10,600
============= =============
</TABLE>
Reconciling items include assets of the parent company, which are not
allocated to a specific industry segment.
NOTE 8 - ACQUISITIONS AND SALE OF THE COMPANY
- ---------------------------------------------
On May 31, 1999, the Board of Directors of the Company approved an
agreement to be acquired by Yorkshire Water plc, which has subsequently been
renamed Kelda Group plc (Kelda), of Leeds, England, for $37.05 per share in
cash. As a result, Aquarion will be merged with a subsidiary of Kelda. The value
of the transaction is $446 million in cash, net of assumed proceeds from
unexercised stock options, based on approximately 12.6 million fully diluted
shares outstanding, plus the assumption by Kelda of $141 million in debt. The
merger was approved by the Company's shareholders on September 21, 1999. The
DPUC issued a draft decision approving the merger on November 4, 1999. The New
York PSC is currently considering approval of the merger. Final approvals from
these agencies are expected in late 1999 or early 2000, and the Company
anticipates that the merger will close in early 2000. After the merger is
completed, Aquarion will maintain its corporate identity, but will be a wholly
owned subsidiary of Kelda.
14
<PAGE>
On June 1, 1999, BHC signed a definitive merger agreement to acquire the
remaining stock of the closely held Village Water Company (Village) in Simsbury,
Connecticut. In 1998, BHC acquired 9 percent of Village's common stock. Terms of
the agreement call for BHC to pay Village shareholders $150 per share. The value
of the transaction is $6,500,000, which includes payment for outstanding
debentures that may be converted to common shares prior to closing. Village has
approximately 5,000 customers and annual revenues of $1,800,000. Village
shareholders have approved the sale.
On November 3, 1999, the DPUC denied without prejudice BHC's request to
purchase Village. The DPUC stated that it could not make a final decision on
BHC's application to acquire Village without first rendering its final decision
on the Kelda/Aquarion merger as well as a land sale application Village has
before the DPUC. The DPUC has issued favorable draft decisions on both of these
applications. BHC anticipates filing a new application to acquire Village after
the DPUC renders its final decisions on these applications.
NOTE 9 - STOCK SPLIT
- --------------------
On March 22, 1999, the Company declared a three-for-two split on the
Company's common stock, effected in the form of a 50 percent stock distribution
to holders of record on March 1, 1999. This resulted in the issuance of
3,764,181 additional shares of common stock. Shareholders' equity has been
restated to give retroactive recognition to the stock split for all periods
presented by reclassifying the par value of the new shares issued from capital
in excess of stated value to common stock. In addition, all references in the
financial statements to number of shares, per share amounts, stock option data,
and market price of the Company's common stock for all periods presented have
been restated to reflect this stock split.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in Aquarion's 1998 Annual Report to Shareholders and
incorporated by reference in Aquarion's Annual Report on Form 10-K for the year
ended December 31, 1998 should be read in conjunction with the discussion below.
15
<PAGE>
Capital Resources and Liquidity
- -------------------------------
Capital Expenditures
--------------------
The Company invested $16,888,000 in property, plant and equipment in the
first nine months of 1999, compared to $14,080,000 for the same period in 1998.
The Utilities accounted for the majority of capital additions in both periods.
Management estimates that capital expenditures will total $22,000,000 in 1999,
of which approximately $21,000,000 will be for water utility construction
programs.
Financing Activities
- --------------------
The Company's capital expenditures have historically been financed from
several sources, including internally generated funds, rate relief, proceeds
from debt financings, sales of common stock and short-term borrowings under the
Company's revolving credit agreements.
The Company currently has $30,000,000 of uncommitted lines of credit with
two lenders to finance short-term borrowings.
On January 4, 1999, the Company repaid Aquarion's 5.95% unsecured Senior
Note, issued in 1994, in the amount of $10,000,000.
The Company obtained funds of $4,321,000 from the issuance of 141,867
shares of common stock under its Dividend Reinvestment and Common Stock Purchase
Plan (the Plan) for the nine months ended September 30, 1999 versus $2,554,000
for 79,576 shares for the same period in 1998. The Company also obtained funds
of $1,123,000 from 64,776 stock options exercised for the nine months ended
September 30, 1999 compared to $1,100,000 for 44,762 stock options exercised
during the comparable 1998 period. The Utilities received $3,167,000 and
$1,805,000 from advances and contributions in aid of construction from
developers and customers for the nine months ended September 30, 1999 and 1998,
respectively.
Future Financing Requirements
- -----------------------------
The Company's ability to finance future utility construction programs
depends substantially on rate relief. Rate relief has an impact on cash flow
from operating activities
16
<PAGE>
and consequently affects the Company's ability to obtain external financing.
Additionally, rate relief will have an impact on the Company's ability to
generate sufficient cash flows to provide a reasonable return in the form of
dividends to the Company's shareholders. The type, amount and timing of new
financings will be based on the Company's general financial policies regarding
capitalization, as well as on market conditions and other economic factors.
Year 2000 Compliance
- --------------------
The Company has enacted a program to reduce its exposure to the Year 2000
problem. In general terms, the problem arises from the fact that many existing
computer systems and other equipment containing date-sensitive embedded
technology (including non-information technology equipment and systems) use only
two digits to identify a year in the date field, with the assumption that the
first two digits of the year are always "19". As a result, such systems may
misinterpret dates after December 31, 1999, which may result in miscalculations,
other malfunctions or the total failure of such systems. Additional problems
arise from the fact that the Year 2000 is a special case leap year. Because the
Company is dependent upon the proper functioning of computer systems and other
equipment containing date-sensitive technology, a failure of such systems and
equipment to be Year 2000 compliant could have a material adverse effect on the
Company. If not remedied, potential risks include business interruption or
shutdown, financial loss, regulatory actions and legal liability.
The Company has established a Year 2000 task force comprised of senior
management and operating personnel to coordinate its Year 2000 efforts. This
task force has been evaluating the Company's exposure to the Year 2000 problem
and has prepared a plan for managing the risks and costs associated therewith.
The Company has hired an outside consultant to assist it in preparing and
implementing its Year 2000 compliance and contingency plans. In addition, the
DPUC has hired a consultant that is currently working with the Company to review
the Year 2000 preparations.
The Company's general process of addressing the Year 2000 problem consists
of the following steps: (a) inventorying systems, equipment and other items
(including relationships with third parties) that potentially present a Year
2000 problem, (b) determining the materiality of such items to the Company and
assessing the Year 2000 compliance of the material items through internal
testing and outside certification, (c) repairing, replacing or preparing for the
failure of material items that are determined to be non-compliant, (d) testing
critical systems and equipment material to operations, and (e) designing and
implementing contingency plans.
17
<PAGE>
The Company, in the ordinary course of business, replaced its corporate
information system and several other systems which were not Year 2000 compliant.
These systems had been scheduled for replacement for reasons unrelated to the
Year 2000 problem. The integration of the new systems was completed during the
first quarter of 1999. The Company completed independent Year 2000 testing of
these systems during the second quarter of 1999.
The Company has completed an inventory of other systems, equipment and
items that potentially present a Year 2000 problem. The outside consultant
completed an assessment and impact analysis of equipment critical to the
Company's operations in February 1999. The initial assessment revealed few non-
compliant items. The Company has replaced all non-compliant items and completed
testing such replacements. The Company also completed internal testing of
material inventoried items and has obtained outside certification of these
items.
In addition to its own systems and equipment, the Company depends upon the
proper functioning of computer systems and other date-sensitive equipment of
outside parties. These parties include banks, telecommunications service
providers and electric and other utilities. All Year 2000 critical supplier
programs that can impact the delivery of high quality water have been reviewed
and determined to be adequate, however, the Company's ability to assess and
address the Year 2000 problem may be affected by the success of the Year 2000
efforts of such third parties. If the third parties with which the Company
interacts have Year 2000 problems that are not remedied, resulting problems
could include the loss of telecommunications and electrical service.
Due to the uncertainties presented by such third party Year 2000 problems,
and the possibility that, despite its efforts, the Company is unsuccessful in
preparing its internal systems and equipment for the Year 2000, the Company has
developed contingency plans, which cover mission-critical functions, for dealing
with the most reasonably likely worst-case scenarios. Such plans include manual
backup for automated systems, the use of electrical generators capable of
sustaining operations through a power failure, and enhanced transition-period
staffing to compensate for automation and communication failures. The Company's
assessment of its most reasonably likely worst-case scenarios and the exact
nature and scope of its contingency plans will be effected by the Company's
continued Year 2000 assessment. The Company's contingency plans are constantly
being fine-tuned as the State of Connecticut and the towns that we serve
finalize their plans. The Company expects to have all contingency systems in
place and fully tested by the fourth quarter of 1999.
18
<PAGE>
The Company estimates that, as of September 30, 1999, the costs of
addressing the Year 2000 problem have been approximately $200,000. While the
Company is currently unable to estimate future costs of addressing the Year 2000
problem, it does not believe that such costs will be material to the Company's
financial condition. The Company has funded, and expects to continue to fund,
the costs of its Year 2000 efforts through operating cash flow.
This description of matters relating to the Year 2000 problem contains a
number of forward-looking statements. See "Forward-Looking Statements". The
Company's assessment of the costs of its Year 2000 program and the timetable for
completing its Year 2000 preparations are based on current estimates, which
reflect numerous assumptions about future events, including the continued
availability of certain resources, the timing and effectiveness of third-party
remediation plans and other factors. The Company can give no assurance that
these estimates will be achieved, and actual results could differ materially
from those currently anticipated. In addition, there can be no assurance that
the Company's Year 2000 program will be effective or that its contingency plans
will be sufficient. Specific factors that might cause material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct relevant computer software codes
and embedded technology, the results of internal and external testing and the
timeliness and effectiveness of remediation efforts of third parties.
Results of Operations for the nine months ended September 30, 1999 and 1998
- ---------------------------------------------------------------------------
Net income for the nine months ended September 30, 1999 was $19,606,000
compared with $13,168,000 for the same 1998 period, an increase of 49 percent.
Operating results during the first nine months of 1999 are higher due to
increased land sales and improved results from the Company's Utility operations.
Operating revenues increased to $97,185,000 for the nine months ended
September 30, 1999 compared to $82,178,000 in the same 1998 period, an increase
of 18 percent. Operating revenues for the nine-month period include revenue from
a large land sale completed in September 1999. The rise in revenues also
reflects increased water sales by the Utilities due to the hot, dry spring and
summer seasons; increased sales volume at Timco; the March 17, 1999 increase in
BHC's Western division water rates; and increased revenue from management
services operations.
19
<PAGE>
Operating expenses increased to $27,652,000 for the nine months ended
September 30, 1999, an increase of $5,440,000 from the comparable 1998 period.
The increase was primarily attributable to an increase in land sale-related
expenses resulting from the September 1999 land sale. Higher operating expenses
at Timco and BHC, resulting from increased revenue, also contributed to the
increase in operating expenses.
General and administrative expenses increased $1,836,000 for the nine
months ended September 30, 1999, compared to the 1998 period. The increase was
the result of increased miscellaneous general and administrative expenses at the
Utilities.
Depreciation expense increased $227,000 for the nine months ended September
30, 1999 from the 1998 comparable period due to general plant additions.
Interest expense for the nine months ended September 30, 1999 decreased
$507,000 from the 1998 comparable period due to reduced long-term debt.
Taxes other than income taxes for the nine months ended September 30, 1999
increased $515,000 from the comparable 1998 period due to increased property tax
expense.
Income taxes increased $1,020,000 for the nine months ended September 30,
1999 from the comparable 1998 period due to the September 1999 land sale,
partially offset by a lower effective tax rate for 1999.
Significant changes in balance sheet accounts for the nine months ended
- -----------------------------------------------------------------------
September 30, 1999
- ------------------
Accounts receivable increased by $4,945,000 for the nine months ended
September 30, 1999 compared to the 1998 period due to higher billed water
revenues, increased non-water accounts receivable and timing of customer
payments.
Income tax liability increased by $3,718,000 for the nine months ended
September 30, 1999 from the comparable 1998 period due to higher taxable income,
partially offset by a lower effective tax rate for 1999.
Forward-looking statements
- --------------------------
In addition to the historical information contained herein, this report
contains a number of "forward-looking statements" within the meaning of the
Securities Exchange Act of 1934. Words such as "estimates", "expects",
"anticipates", "intends", "plans" and similar
20
<PAGE>
expressions identify forward-looking statements. Such statements address future
events and conditions concerning the adequacy of water supply and utility plant,
capital expenditures, liquidity and capital resources, Year 2000 issues,
financial condition, results of operations, gains recorded from land sales,
acquisition activities and regulatory and accounting matters. Actual results in
each case could differ materially from those projected in such statements.
Factors that may cause actual results to differ include, without limitation,
interest rates, economic factors, weather variations, decisions of regulatory
agencies, seasonality and Year 2000 issues.
ITEM 3. Quantitative and qualitative disclosures about market risk
----------------------------------------------------------
Not Applicable.
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings
-----------------
A class action complaint relating to the Company's proposed merger with
Kelda was filed in Delaware Chancery Court on September 10, 1999. The action
was brought by a shareholder and names Aquarion and its directors as defendants.
The action alleges flaws in the merger auction process and requests recission or
the awarding of recissory damages plus attorney fees if the merger is
consummated. The Company and its directors believe the complaint is without
merit and intend to vigorously fight the claim.
By Complaint dated September 30, 1999, the Shelton Economic Development
Corporation and the City of Shelton, Connecticut filed suit against, among
others, Main Street South Corporation with respect to property previously owned
by the Riverside Industrial Park, a joint venture including Main Street South.
In 1998, the Shelton Economic Development Corporation took ownership of the
Riverside Industrial Park property by eminent domain. The plaintiffs allege
damages in connection with underground storage tanks located on or adjacent to
the property owned by Riverside Industrial Park, claiming that they have
incurred substantial cost in removing and remediating the contamination
resulting from discharge and leakage from said storage tanks. It appears that
the City of Shelton considered the environmental condition of the property as
part of its valuation of the property in connection
21
<PAGE>
with the condemnation. That valuation is currently the subject of a separate
appeal by Main Street South.
The new litigation is in its early stages. Discovery has not yet commenced
and the extent of the damage claims is not yet known. BHC presently intends to
vigorously defend this case.
ITEM 4. Submission of matters to a vote of security holders
---------------------------------------------------
At a special meeting of shareholders of the Company held on September 21,
1999, shareholders voted 6,916,627 shares, or 61 percent of the outstanding
shares, in favor of the proposed merger agreement with Kelda Group plc. There
were 461,823 negative votes and 93,695 abstentions.
ITEM 6 Exhibits and reports on Form 8-K
--------------------------------
Exhibits
27 Financial Data Schedule for the quarter ended September 30, 1999
(a) On September 14, 1999, the Company filed a Current Report on Form 8-K
pursuant to the Securities Exchange Act of 1934, reporting an event
under Item 5 of such Form. No financial statements were filed
therewith.
22
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AQUARION COMPANY
Date: November 9, 1999 By /s/JANET M. HANSEN
----------------------------- ------------------------------
Janet M. Hansen
Executive Vice President
Chief Financial Officer and
Treasurer
23
<PAGE>
Exhibit Index
Exhibit 27 Financial Data Schedule for the quarter ended September 30, 1999
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1999 Aquarion Company form 10-Q and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3370
<SECURITIES> 0
<RECEIVABLES> 16673
<ALLOWANCES> 2379
<INVENTORY> 3961
<CURRENT-ASSETS> 54639
<PP&E> 506806
<DEPRECIATION> 156023
<TOTAL-ASSETS> 469753
<CURRENT-LIABILITIES> 27118
<BONDS> 141380
0
0
<COMMON> 11478
<OTHER-SE> 150869
<TOTAL-LIABILITY-AND-EQUITY> 469753
<SALES> 97185
<TOTAL-REVENUES> 97195
<CGS> 0
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<OTHER-EXPENSES> 0
<LOSS-PROVISION> 115
<INTEREST-EXPENSE> 7456
<INCOME-PRETAX> 31146
<INCOME-TAX> 11540
<INCOME-CONTINUING> 19606
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