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, 1998
---------------------------------------.
( ) 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
incorporation or organization) Identification No.)
835 Main Street, Bridgeport, Connecticut 06604
- ---------------------------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 335-2333
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
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
------------------------------------------------------
(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
----- -----
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: $240,254,030 (Computed by
reference to the closing price of the Registrant's Common
Stock on March 12, 1999, as reported on the New York Stock
Exchange-Composite Tape.)
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date.
Class Outstanding at March 12, 1999
- ------------- -----------------------------
Common Stock, no par value 7,531,211
The following documents have been incorporated by
reference:
1. Annual Report to Shareholders for the year ended
December 31, 1998--PART I, Item 1; PART II, Item 5,
Item 6, Item 7 and Item 8; PART IV.
2. Definitive Proxy Statement, dated March 15, 1999,
for the Annual Meeting of Shareholders to be held on
April 20, 1999--PART III.
<PAGE>
<PAGE>
PART I
ITEM I. BUSINESS
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 more than 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 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'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.
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
Stock Split
-----------
On February 16, 1999, the Board of Directors approved a
3-for-2 stock split of the Company's common stock. The split
was effected in the form of a 50 percent stock distribution on
the Company's common stock, payable on March 22, 1999 to all
shareholders of record as of March 1, 1999.
Financing Activities. On November 1, 1998, BHC redeemed
--------------------
its Series R, 6.875 percent first mortgage bonds, which were
issued in 1968. On January 4, 1999, the Company repaid
Aquarion's 5.95 percent unsecured Senior Note, issued in 1994,
in the amount of $10,000,000.
Real Estate
-----------
In June 1998, the Aspetuck Land Trust, a non-profit land
preservation organization, exercised a statutory right of
first refusal allowing it to purchase, at the original
contract terms, substantially all of the Trout Brook Valley
property owned by BHC for approximately $12,400,000.
Connecticut statutes afford the buyer fifteen months to close,
or until September 8, 1999. As of December 31, 1998, the
Company received $1,400,000 on deposit from the Aspetuck Land
Trust. Prior to this exercise, in February 1997, the Company
had entered into a contract to sell the Trout Brook Valley
property for approximately $14,000,000 to a private developer.
The sale has been approved by the DPUC. The Town of Weston,
Connecticut has notified the Company of its intention to
purchase, for approximately $820,000, the approximately 45
acre portion of BHC s Trout Brook Valley property located in
Weston pursuant to its statutory right of first refusal.
Although both BHC and the Aspetuck Land Trust have no
objection to this purchase, BHC has indicated that it will only
1
<PAGE>
<PAGE>
sell the Weston portion at or after the closing of the
sale of the remainder of its Trout Brook Valley property. BHC
has recently filed a request with the DPUC for a declaratory
ruling to the effect that the Town of Weston is not entitled
to purchase only the Weston property.
The Company anticipates that the after-tax gain from the
current sale will be approximately $6,000,000, to be
recognized over an applicable amortization period. In its
decision approving the original sale, the DPUC granted the
Company a 10-year amortization period, which provides
ratepayers with 55 percent and shareholders with 45 percent of
the after-tax gain on approximately 60 percent of BHC s
portion of the property. Due to the change in purchaser and
its intended use of the property as open space, the Company is
considering filing an amended application with the DPUC
seeking a shorter amortization period.
In December 1998, five parcels of land located in
Shelton, Connecticut and totaling 401 acres, were sold 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. The
sale of an additional 30-acre parcel of land, originally
scheduled to be included in the December 1998 sale, is
expected to close in early 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 Connecticut Department of Environmental
Protection over regulatory approvals. Although several
appeals have been withdrawn, certain issues remain open. The
Company anticipates closing this transaction sometime in 1999,
however, the closing could be delayed due to opposition to
granting the required permits and approvals. No assurances
can be given at this time that such permits and approvals will
be granted.
Rates. On March 17, 1999, BHC's Western division
-----
received a final decision from the DPUC for a 3.97 percent
water service rate increase designed to provide a $607,000
increase in annual water service revenues.
Regulatory Matters. On October 1, 1996, the Ridgefield
------------------
Water Supply 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 Agreement now permits DEP to
require BHC to pay certain fines. BHC's potential maximum
exposure to such fines could be in excess of $4,000,000. BHC
has recently been informed that this matter has been referred
by DEP to the Office of the Connecticut Attorney General for
further action. BHC is unable to assess at this time what
impact the DEP referral to the Attorney General will have on
BHC's ability to re-negotiate the Consent Agreement or on its
potential for such civil penalties.
Utility Construction Program
The Utilities expended $21,200,000 $27,633,000 and
$37,185,000 in 1998, 1997 and 1996 respectively, for plant
additions and modifications of existing plant facilities,
excluding an allowance for funds used during construction
(AFUDC). Utility budgeted capital expenditures for 1999 are
approximately $27,000,000. Management cannot predict whether
future federal, state or local regulation will require
additional material capital expenditures.
2
<PAGE>
<PAGE>
The Company's ability to finance its future construction
programs depends in part on future rate relief, the level of
Construction-Work-In-Progress (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, 1998 were derived from the following sources: 78 percent
from public water supply, 12 percent from timber processing, 9
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, 1998, 1997 and 1996,
see "Note 11" of "Notes to Consolidated Financial Statements"
and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Public Water Supply
Service Area. The Utilities are engaged in the
collection, treatment 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, 1998 have a population of more than 500,000, and the total
number of customer accounts as of that date was approximately
141,000. 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
as 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, 1998 were derived from the following
sources: 63 percent from residential customers, 16 percent
from commercial customers, 3 percent from industrial
customers, 13 percent from fire protection customers, and 5
percent from other sources.
Seasonality. The business of the Utilities is subject
-----------
to 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
------------
subsurface sources. During 1998, approximately 87 percent of
the water supplied by the Utilities was provided by impounding
reservoirs, 12 percent by producing wells and 1 percent by
purchased water. As of December 31, 1998, the Utilities'
reservoirs, well fields and interconnections with other water
utilities had an aggregate safe daily yield of 120 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 1998 was 67 million gallons per
day (MGD). The reservoirs of the Utilities have an aggregate
storage capacity of 30.4 billion gallons.
3
<PAGE>
<PAGE>
BHC has sufficient supply to meet current and projected
demands for 98 percent of its customers. The remaining
customers are in two recently acquired systems. BHC currently
has plans in progress to resolve supply shortages in these
systems within the next five years. 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
--------------------
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 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
--------------------------
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.
4
<PAGE>
<PAGE>
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 may, upon payment of
compensation, 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, in some cases, overlap portions
of BHC's franchise areas. At the present time, except as
noted above, there are no publicly owned utilities,
cooperatives or other private utility companies competing with
BHC in the areas now served, although within certain areas
there are wells owned by individuals or private industries.
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
-------------------------
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
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 Environmental Protection Agency (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 provides for the establishment
of uniform minimum national quality standards by 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 mandated 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
5
<PAGE>
<PAGE>
water produced from the Round Pond reservoir in Ridgefield,
Connecticut or substitute alternative ground water supply by
December 31, 1999. 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 for such water quality parameters as
disinfection by-products, radon and enhanced surface water
treatment will become effective between December 2001 and May
2005. It is impossible to determine at this time the ultimate
impact these regulations will have on the Utilities.
In 1996, the SDWA was reauthorized by Congress and signed
into law. Several of the schedules for implementation of
various regulations have been changed. The new law eliminated
the requirement to regulate 25 new contaminants every three
years and replaced it with a requirement that the EPA consider
five new contaminants for regulation every five years. The
1996 law also requires that the EPA, in proposing any new
drinking water regulations, show that such regulations will
improve public health. In addition, such regulations must be
subjected to a cost-benefit analysis.
Water quality tests are made continuously at all of the
Utilities' water supply sources, and the Utilities believe
they are in substantial compliance with regulations
promulgated in connection with the organic chemical, inorganic
chemical, physical, and bacteriological standards for drinking
water. BHC has been voluntarily monitoring for giardia and
cryptosporidium, radon and disinfection by-products, which are
water quality concerns that will be addressed by future
regulations.
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 treatment
facilities. Construction of new facilities may be required
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.
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 DEC. 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
6
<PAGE>
<PAGE>
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.
Federal and State regulations and controls concerning
environmental matters, water quality, pollution and the
effluent from treatment facilities are still in the process of
being developed and it is not possible to predict the scope or
enforceability of regulations or standards which may be
established in the future, or the cost and affect of existing
and potential regulations and legislation upon any of the
existing and proposed facilities and operations of the
Utilities. Further, recent and possible future developments
with respect to the identification and measurement of various
elements in water supplies and concern with respect to the
impact of one or more of such elements on public health may in
the future require the Utilities to replace or modify all or
portions of its various water supplies, to develop replacement
supplies and/or to implement new treatment techniques. In
addition, the Company anticipates that environmental concerns
including threatened contamination of the Utilities' water
sources will become an increasing problem in the future. Any
of the aforesaid developments may significantly increase the
Utilities' operating costs and capital requirements. Since
the DPUC's and NYPSC's rate setting methodology permit a
utility to recover through rates prudently incurred expenses
and investments in plant, based upon past practice, the
Company expects that 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.
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 a range of integrated utility management services,
including contract management and operations, information
services 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 business is 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, 1998, the Company and it's
subsidiaries employed approximately 384 persons
7
<PAGE>
<PAGE>
on a full-time basis, including 264 in the Public Water Supply business,
116 in the Timber Processing business and 4 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
- -------------------
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, 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 easement
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, a
44,370-square-foot Operations Center in Bridgeport and 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, 1998, BHC owned in the aggregate 17
active reservoirs, 63 producing wells and approximately 2,059
miles of water mains, of which approximately 158 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.
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.
The DPH regulates Company lands in Connecticut according
to a three-tiered classification system. Class I lands cannot
be sold, leased or transferred, except to other water
companies, the State of Connecticut, or municipalities for
water supply or protection purposes. 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.
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, the State of Connecticut and
nonprofit land-holding organizations, in that order.
Additionally, the disposition of the proceeds of any
permissible sale is subject to state law.
8
<PAGE>
<PAGE>
Since 1989, BHC has identified approximately 3,400 acres
of land it believes are surplus to its water supply needs.
Almost all of this acreage is off-watershed and has either
been determined to be Class III land by the DPH or would
qualify for such designation. Approximately 800 acres of this
land have never been in the Company's rate base.
Approximately 1,300 acres of the identified surplus land have
been sold since 1989, of which 470 acres were never in rate
base. Approximately 2,150 acres, including 330 which have
never been in rate base, are still available for sale,
although all of this acreage may not be marketable.
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 land, that has
at any time been 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 land that has at any time been in rate base shall be
allocated "substantially in favor" of shareholders when 25
percent or more of the land sold is to be preserved in
perpetuity for open space or recreational purposes and shall
allocate up to 100 percent of the benefits to the shareholders
if 100 percent of the land in the sale 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 19 of the Company's Annual Report to Shareholders
for the year ended December 31, 1998 is incorporated by
reference herein pursuant to Rule 12b-23 of the Securities and
Exchange Act of 1934 (the Act) and to Instruction G(2) to Form
10-K.
Aquarion has declared and paid quarterly dividends on its
common stock without interruption since its organization in
1969 and, prior thereto, BHC paid dividends annually on its
common stock without interruption since 1890. Dividends, when
declared, are normally paid on the 30th day of January,
April, July and October.
The earnings of Aquarion are derived from its investments
in its subsidiaries, particularly BHC. Aquarion's future
ability to pay dividends to holders of its Common Stock is
dependent upon the continued payment by BHC of dividends to
Aquarion. BHC's ability to pay dividends will depend upon
timely and adequate rate relief, compliance with restrictions
under certain of the BHC debt instruments and other factors.
Dividends on Aquarion common stock can be paid only from
its net profits and surplus. As of December 31, 1998, the
applicable restrictions would have permitted payment of
additional dividends on Aquarion's common stock of up to
$43,705,000.
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".
9
<PAGE>
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
See the front page ("1998 Financial Highlights") and Page
18 ("Supplemental Financial Information") of the Company's
Annual Report to Shareholders for the year ended December 31,
1998, 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 front page ("1998 Financial Highlights") and
Pages 8 - 10 of the Company's Annual Report to Shareholders
for the year ended December 31, 1998, 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 PricewaterhouseCoopers LLP, dated January
27, 1999, appearing on Pages 11 - 18 , the front page ("1998
Financial Highlights") and Pages 18 - 19 ("Supplemental
Financial Data") of the accompanying 1998 Annual Report to
Shareholders of Aquarion Company are incorporated by reference
herein pursuant to Rule 12b-23 of the Act and Instruction G(2)
to Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ---------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
- -----------------------------------
The registrant has nothing to report for this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information as to directors required by Item 10 is
set forth at Pages 1 - 7 of the Company's Definitive Proxy
Statement, dated March 15, 1999 relating to the proposed
Annual Meeting of Shareholders to be held on April 20, 1999,
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 29, 1998, except as otherwise noted, for a term
expiring with the 1999 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.
10
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Served
as
Office, Business Experience Officer
Executive Officer Age During Past Five Years Since
- ---------------- --- --------------------------- -------
<S> <C> <C> <C>
Richard K.Schmidt 54 President and Chief Executive Officer 1993
(since October 1995),formerly Senior
Vice President (1993-1995) of the
Company; President (1992-1995 and
Chief Executive Officer (since 1992
of IEA); formerly President and Chief
Operating Officer (1984-1992) of
Mechanical Technology, Inc.
Janet M. Hansen 56 Executive Vice President (since 1983
October 1995), Chief Financial
Officer (since April 1992), Treasurer
(since 1988) and Senior Vice
President (1993-1995) of the Company
and Vice President (since 1989),
Chief Financial Officer (since April
1991) and Treasurer (since 1985) of
BHC; Mrs. Hansen is Chairman of the
Board and Chief Executive Officer
(since April 1992) of Timco. Mrs.
Hansen is also Director, Vice
President, Chief Financial Officer
and Treasurer of certain of the
Company's other subsidiaries.
James S. McInerney 61 Senior Vice President (since April 1989
1992) of the Company; President
(since April 1991), Chief Executive
Officer (since April 1995 and Chief
Operating Officer (January 1990 to
April 1995) of BHC. Executive Vice
President (1990 to April 1991) of
BHC. Mr. McInerney is a Director,
President or Vice President of
certain of the Company's other
subsidiaries.
Larry L. Bingaman 49 Vice President, Corporation Relations 1990
and 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 1 - 8 of the Company's Definitive Proxy Statement,
dated March 15, 1999, relating to the proposed Annual Meeting
of Shareholders to be held on April 20, 1999, 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 15, 1999, relating to the proposed Annual Meeting
of Shareholders to be held on April 20, 1999, filed with the
Commission pursuant to Regulation 14 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.
11
<PAGE>
<PAGE>
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, 1998 11
Consolidated Balance Sheets at December 31,
1998 and 1997 11
Consolidated Statements of Cash Flows for the
three years ended December 31, 1998 12
Consolidated Statements of Shareholders' Equity
for the three years ended December 31, 1998 12
Notes to Consolidated Financial Statements 13 - 17
Report of Independent Accountants 18
Selected Financial Data Front Page
Supplemental Financial Information 18 - 19
</TABLE>
* Incorporated by reference from the indicated pages of the
1998 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, 1998.
(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 Incorporationof Aquarion, as amended.
*3(b) By-laws of Aquarion, as amended.
4(a) Rights Agreement between Aquarion and the ChaseMellon
Shareholder Services, LLC, 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)
12
<PAGE>
<PAGE>
10(b) Seventeenth Supplemental Mortgage of BHC dated as
September 1, 1960. (2)
10(c) Twentieth Supplemental Mortgage of BHC dated as of November 1,
1968. (1)
10(d) Loan and Trust Agreement of Timco as of November 1, 1984. (1)
10(e) Note Agreement of BHC dated January 24, 1991. (10)
10(f) Note Agreement of Aquarion dated as of May 19, 1992. (5)
10(g) Aquarion Long-Term Incentive Plan. (1)
10(h) Joint Venture Agreement between John J. Brennan, Jr.,
William A. Brennan and Main Street South Corporation dated
February 23, 1979. (3)
10(i) Joint Venture Agreement amendment between John J. Brennan, Jr.,
William A. Brennan and Main Street South Corporation dated
January 1, 1994. (10)
**10(j) Employment Agreement between Aquarion and James S. McInerney,
dated June 1, 1990. (4)
**10(k) Employment Agreement between Aquarion and Janet M. Hansen dated
November 1, 1992. (5)
**10(l) Employment Agreement between Aquarion and Jack E. McGregor
dated 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) Employment Agreement between Aquarion and Richard K. Schmidt
dated July 1, 1997.
10(p) Loan Agreement of BHC dated as of June 1, 1990. (4)
10(q) Loan Agreement of BHC dated as of June 1, 1993. (6)
10(r) Loan Agreement of BHC dated September 1, 1993. (7)
10(s) Loan Agreement of BHC dated December 1, 1993. (8)
10(t) Note Agreement of Aquarion dated January 4, 1994. (8)
**10(u) Aquarion Stock Incentive Plan. (8)
13
<PAGE>
<PAGE>
10(v) Loan Agreement of BHC dated April 1, 1995. (10)
10(w) Loan Agreement of BHC dated September 1, 1996 (12)
*10(x) Twenty-fifth Supplemental Mortgage of BHC dated
December 1, 1998
*13(a) Annual Report to Shareholders for the year ended
December 31, 1998.
*21(a) Subsidiaries of Aquarion
*23(a) Consent of Independent Accountants
*27(a) Financial Data Schedule
-------------------------
(1) Filed as part of Aquarion's Form 8 Amendment to its
Form 10-Q for the quarter ended September 30, 1991, filed
February 19, 1992.
(2) Filed as an Exhibit to BHC's 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.
14
<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 23, 1999
-------------------------------
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 23, 1999
---------------------------------------
George W. Edwards, Jr.
Chairman of the Board of Directors
and Director
By /S/RICHARD K. SCHMIDT March 23,1999
---------------------------------------
Richard K. Schmidt
President, Chief Executive Officer
and Director
By /S/JACK E. MCGREGOR March 23, 1999
--------------------------------------
Jack E. McGregor
Director
By /S/GEOFFREY ETHERINGTON March 23, 1999
--------------------------------------
Geoffrey Etherington
Director
By /S/JANET D. GREENWOOD March 23, 1999
--------------------------------------
Janet D. Greenwood
Director
By /S/EDGAR G. HOTARD March 23, 1999
-------------------------------------
Edgar G. Hotard
Director
By /S/G. JACKSON RATCLIFFE March 23, 1999
-------------------------------------
G. Jackson Ratcliffe
Director
By /S/JOHN A. URQUHART March 23, 1999
-------------------------------------
John A. Urquhart
Director
By March 23, 1999
-------------------------------------
Donald M. Halsted, Jr
Director
15
<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
16
<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 27, 1999, appearing on Page 18 of the Annual Report to
Shareholders, which is incorporated by reference in the Annual
Report on Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 23, 1999
17
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, a wholly owned subsidiary of
Aquarion 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. 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 for the
year ended December 31, 1996 (see Note 2 to the financial
statements).
Capital Resources and Liquidity.
Capital expenditures. The Company invested $21,200,000 in
property, plant and equipment in 1998, compared with
$28,700,000 in 1997 and $38,600,000 in 1996. 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
$28,000,000 in 1999, of which approximately $27,000,000 will
be for water utility construction projects.
<PAGE>
<TABLE>
Capital Expenditures
<CAPTION>
(In thousands)
<S> <C> <C>
1994 $19,900
1995 $41,600
1996 $38,600
1997 $28,700
1998 $21,200
1999 Projected $28,000
</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, on July 1, 1997, the Warner Water Treatment
Plant at Hemlocks Reservoir was fully operational and put into
service at a total project cost of approximately $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, issuances of common stock, and short-term
borrowings under the Company's revolving credit agreements.
<TABLE>
<CAPTION>
Cash Flow from Operations Per Share
<S> <C> <C>
1994 $5.16
1995 $3.29
1996 $3.39
1997 $5.43
1998 $4.99
</TABLE>
The percentage of capital expenditures financed
by net cash from operating activities was
100 percent, 100 percent and 62 percent for the
years ended December 31, 1998, 1997 and 1996,
respectively. (See "Consolidated Financial
Statements-Consolidated Statements of Cash Flows.")
In 1996, the remainder was provided by external
financing sources.
The Company obtained funds of $3,934,000 from
the issuance of 119,865 shares of common stock under
its Dividend Reinvestment and Common Stock Purchase
Plan (the Plan) in 1998, versus $3,504,000 (135,829
shares) and $3,449,000 (143,781 shares) in 1997 and
1996, respectively. The Company also obtained funds
of $1,373,000 for 56,612 stock options exercised in
1998 and $2,398,000 for 114,537 stock options
exercises in 1997. There were no stock option
exercises in 1996. The Utilities received
$3,011,000 from advances and contributions in aid of
construction from developers and customers in 1998
compared to $3,217,000 in 1997 and $2,626,000 in 1996.
On November 1, 1998, BHC redeemed, at maturity,
its Series R, 6.875 percent first mortgage bonds,
which were issued in 1968.
Aquarion has revolving credit agreements that
provide $40,000,000 of short-term credit
availability (see Note 9 to the financial
statements). 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 percent of net income.
The dividend payout as a percentage of net income
was 62 percent and 78 percent in 1998 and 1997,
respectively, and 33 percent and 30 percent as a
percentage of net cash provided by operating activities
in 1998 and 1997, respectively.
<TABLE>
<CAPTION>
Dividend Payout Ratio
<S> <C> <C>
1994 87%
1995 85%
1996 125%
1997 78%
1998 62%
</TABLE>
<PAGE>
Future financing requirements. In addition to the Company's
general financial policies regarding capitalization, market
conditions and other economic factors, the Company's ability
to finance future capital expenditures depends on rate relief.
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. Additional long-term debt may be issued
by BHC under the terms of its Senior Notes (BHC Senior Notes)
as long as it meets a 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 identified approximately 2,700 acres
of off-watershed land, 2,150 of which are remaining at
December 31, 1998, as surplus to utility operations. Most of
this land was previously in BHC s rate base. 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
Connecticut Department of Public Utility Control (DPUC)
between the utility's customers and shareholders pursuant to
legislative and regulatory criteria (see Note 4 to the
financial statements).
Other
Year 2000. The Company is currently evaluating its exposure to the Year
2000 problem and taking steps to be Year 2000 compliant. 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 is currently evaluating the
Company's exposure to the Year 2000 problem and is preparing 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 informed the Company that it will
review the Company's Year 2000 preparations.
8
<PAGE>
<PAGE>
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 significance 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 repaired or replaced
items, and (e) designing and implementing contingency plans.
The Company, in the ordinary course of business, is in the
process of replacing its corporate information system and several
other systems that are 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 is expected
to be completed during the first quarter of 1999. The Company
intends to perform independent Year 2000 testing of these
systems, which is expected to be completed during the first
quarter of 1999.
The Company has completed its preliminary inventory of other
systems, equipment and items that potentially present a Year 2000
problem. The Year 2000 consultant is reviewing this inventory
and anticipates that such review will be completed by the end of
February 1999. The Company intends to begin internal testing,
and seeking outside certification, of critical inventoried items
by the end of the first quarter of 1999, and expects to complete
such assessment by the end of the second quarter of 1999. While
the Company will not know the nature and extent of required
repairs and replacements of non-compliant systems and equipment
until such assessment is completed, it currently anticipates
completing and testing such repairs and replacements by the end
of September 1999.
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 third parties. These parties
include banks, telecommunications service providers and electric
and other utilities. The Company has compiled a preliminary list
of such parties and has contacted these parties to determine the
extent to which they are vulnerable to the Year 2000 problem.
The Company does not currently have sufficient information about
the Year 2000 exposure or remediation plans of such parties to
predict the risk they pose to the Company. If the third parties
with which the Company interacts have Year 2000 problems that are
not remedied, resulting problems for the Company 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 may be unsuccessful in preparing its internal systems and
equipment for the Year 2000, the Company is developing
contingency plans for dealing with its most reasonably likely
worst-case scenario. Such plans will likely 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 scenario and the exact nature and
scope of its contingency plans will be affected by the Company's
continued Year 2000 assessment. The Company expects to complete
such assessment and contingency planning during the third quarter
of 1999, and to have all contingency systems in place and fully
tested by the fourth quarter of 1999.
The Company estimates that, as of December 31, 1998, its
costs of addressing the Year 2000 problem have been less than
$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 or results of operations. The Company has
funded, and expects to continue to fund, the costs of its Year
2000 remediation efforts from 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.
Inflation. Inflation, as measured by the Consumer Price Index,
increased 1.6 percent, 1.7 percent and 3.3 percent in 1998, 1997
and 1996, 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 will 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
1998 compared with 1997
Overview. The Company s consolidated net income for 1998 was
$19,959,000 compared with net income of $15,011,000 in 1997.
Basic earnings per share was $2.69 in 1998 based on a weighted
average of 7,423,460 common shares outstanding, compared with
$2.10 in 1997 based on a weighted average of 7,139,894 common
shares outstanding. Diluted earnings per share for 1998 was
$2.62 based on a weighted average of 7,611,723 common shares
outstanding compared to diluted earnings per share of $2.08 in
1997 based on a weighted average of 7,215,626 common shares
outstanding. Operating results in 1998 reflect increased real
estate sales, primarily the sale of land to the City of Shelton,
Connecticut, which contributed $3,510,000 to net income.
<TABLE>
CAPTION>
Book Value Per Share
<S> <C> <C>
1994 $17.43
1995 $17.72
1996 $17.52
1997 $18.26
1998 $19.56
</TABLE>
Operating revenues. Consolidated operating revenues were
$115,669,000 in 1998, an increase of $8,567,000 from 1997. The
increase in real estate sales of $6,747,000 was primarily
attributable to the sale of land to the City of Shelton. Revenues
from the Utilities increased $3,333,000 due to rate relief granted to
BHC's Eastern Division effective August 1, 1997,
partially offset by the reduction in rates associated with the
repeal of the Connecticut gross earnings tax. Revenue from timber
processing decreased by $1,587,000 in 1998, the result of reduced
lumber prices due to market conditions and reduced sales volume.
Operating expenses. Operating expenses for 1998 were
$31,919,000, an increase of $1,116,000 from 1997. Operating
expenses from real estate sales increased by $2,138,000 due to
the increased activity in the land sales program. Operating
expenses from the Utilities increased $850,000 due to higher
operating expenses associated with the Warner Water Treatment
Plant, which was placed into service on July 1, 1997. Timber
processing experienced reduced operating expenses of $1,938,000
compared to 1997.
General and administrative expenses. General and administrative
expenses totaled $16,236,000 in 1998 compared to $15,620,000 in
1997, an increase of $616,000. Contributing to this increase was
a non-recurring charge incurred to release the Company from a
guarantee regarding a commercial lease on a former rental
property and a reserve related to the joint venture property
located in Shelton, Connecticut (see Note 4 to the financial
statements). Offsetting these provisions were reduced insurance
costs, lower healthcare costs and a higher pension credit.
9
<PAGE>
<PAGE>
Depreciation expense. Depreciation expense increased by
$1,146,000 to $13,770,000 in 1998, principally due to the Warner
Water Treatment Plant, which was placed into service on July 1,
1997, and general utility plant additions.
<TABLE>
<CAPTION>
Depreciation Expense
(In thousands)
<S> <C> <C>
1994 $9,852
1995 $10,123
1996 $11,077
1997 $12,624
1998 $13,770
</TABLE>
Interest expense. Interest expense for 1998 was $10,507,000, a
decrease of $680,000 from 1997, due to reduced long-term and
short-term debt.
Taxes other than income taxes. Taxes other than income taxes for
1998 decreased $1,317,000 from 1997 due primarily to the repeal
of the Connecticut Gross Earnings Tax for services rendered after
July 1, 1997, partly offset by higher property taxes.
<TABLE>
<CAPTION>
Earnings Before Interest, Taxes,
Depreciation and Amortization
<S> <C> <C>
1994 $42,661
1995 $43,754
1996 $45,109
1997 $51,549
1998 $58,424
</TABLE>
Allowance for funds used during construction. Allowance for funds
used during construction decreased by $559,000 to $200,000 in
1998 compared to 1997. The reduction was the result of the
Warner Water Treatment Plant being placed into service on July 1,
1997.
Income taxes. Income taxes for 1998 increased $2,179,000
compared to 1997, the result of higher taxable income.
Significant Changes in Balance Sheet Accounts.
The decrease in notes payable to banks of $9,000,000
reflects a reduction in short term debt, the result of increased
cash flow from operating activities net of capital additions and
proceeds received from land sales.
1997 compared with 1996
Overview. The Company's consolidated net income for 1997 was
$15,011,000 compared with consolidated 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. Diluted earnings per share for 1997
was $2.08 based on a weighted average of 7,215,626 common shares
outstanding compared to diluted earnings per share of $1.29 in
1996 based on a weighted average of 6,974,563 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
(see Note 2 to the financial statements).
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 Warner Water Treatment Plant for six
months and drier weather, which increased earnings from the
Company's water utility segment.
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. Aquarion 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 and 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 a non-recurring increase in bad debt expense
in 1997.
Depreciation expense. Depreciation expense increased $1,547,000
in 1997, which was largely the result of the 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.
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.
Allowance for funds used during construction. Allowance for funds
used during construction decreased by $364,000 to $759,000 in
1997 compared to 1996. The reduction was the result of the
Warner Water Treatment Plant being placed into service on July 1,
1997.
Income taxes. Income taxes for 1997 increased $2,632,000 as a
result of higher taxable income.
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 1998 and 1997.)
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 and Exchange Act of 1934.
Words such as "estimates", "expects", "anticipates", "intends",
plans and similar expressions identify forward-looking
statements. 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, rates and accounting matters. Actual results in each
could differ materially from those included in such forward-
looking statements.
10
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Aquarion Company and Subsidiaries
Consolidated Statements of Income
In thousands, except share data 1998 1997 1996
Year ended December 31
- ----------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Operating revenues $115,669 $107,102 $94,804
Costs and expenses:
Operating 31,919 30,803 24,017
General and administrative 16,236 15,620 16,196
Depreciation 13,770 12,624 11,077
Interest expense 10,507 11,187 9,311
Taxes other than income 9,383 10,700 12,202
-------- -------- -------
Total costs and expenses 81,815 80,934 72,803
-------- -------- -------
33,854 26,168 22,001
Allowance for funds used during
onstruction 200 759 1,123
------- ------- -------
Income before income taxes 34,054 26,927 23,124
Income taxes 14,095 11,916 9,284
------- ------- -------
Net income from continuing operations 19,959 15,011 13,840
Discontinued operations:
Loss from discontinued operations,
less applicable income tax
benefit of $66 - - (580)
Loss on disposal of discontinued
operations, less applicable - - (4,255)
income tax benefit of $5,695
-------- -------- ---------
Net income $ 19,959 $ 15,011 $ 9,005
======== ======== =========
Basic earnings (loss) per share:
From continuing operations $ 2.69 $ 2.10 $ 2.00
From discontinued operations - - (0.09)
From disposal of discontinued
operations - - (0.61)
-------- -------- ---------
Basic earnings per share $ 2.69 $ 2.10 $ 1.30
-------- -------- ---------
Weighted average common shares
outstanding 7,423,460 7,139,894 6,931,388
========= ========= =========
Diluted earnings (loss) per share:
From continuing operations $ 2.62 $ 2.08 $ 1.98
From discontinued operations - - (0.08)
From disposal of discontinued operations - - (0.61)
-------- -------- ---------
Diluted earnings per share (Note 7) $ 2.62 $ 2.08 $ 1.29
-------- -------- ---------
Weighted average common shares
outstanding 7,611,723 7,215,626 6,974,562
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
<CAPTION>
Aquarion Company and Subsidiaries
Consolidated Balance Sheets
Assets
In thousands 1998 1997
December 31,
- ----------------------------------------- -------- --------
<S> <C> <C>
Property, plant and equipment $493,279 $481,833
Less: accumulated depreciation 146,034 142,125
-------- --------
Net property, plant and equipment (Note 347,245 339,708
14)
Current assets:
Cash and cash equivalents 654 851
-------- --------
Accounts receivable 11,325 10,789
Less: allowance for doubtful accounts 1,976 1,782
-------- --------
9,349 9,007
Accrued revenues 9,406 10,411
Inventories (Note 15) 4,526 3,740
Prepaid expenses 12,924 10,980
Other current assets 4,626 6,443
-------- --------
Total current assets 41,485 41,432
Prepaid taxes 11,834 12,354
Recoverable income taxes 39,022 41,741
Other assets 17,894 19,774
-------- --------
$457,480 $455,009
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
Aquarion Company and Subsidiaries
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
In thousands, except share data 1998 1997
December 31,
- -------------------------------------------------- ---------- ----------
<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 7,507,198 shares in 1998 and 7,507 7,331
7,330,721 shares in 1997
Capital in excess of stated value 112,135 107,004
Retained earnings 27,297 19,624
Less: minimum pension liability adjustment 99 97
--------- ---------
Total shareholders' equity 146,840 133,862
--------- ---------
Long-term debt 141,380 151,380
--------- ---------
Current liabilities:
Short-term borrowings, unsecured - 9,000
Current maturities of long-term debt 10,000 5,000
Accounts payable and accrued liabilities 14,868 15,592
Dividends payable 3,115 3,005
Accrued interest 2,834 3,011
Taxes other than income taxes 887 755
Income taxes 3,782 2,018
-------- --------
Total current liabilities 35,486 38,381
-------- --------
Advances for construction 19,638 24,263
Contributions in aid of construction 38,097 30,951
Deferred land sale gains 1,658 384
Accrued postretirement benefit cost 5,165 4,664
Recoverable income taxes 5,930 6,052
Deferred income taxes 63,286 65,072
Commitments & contingencies (Note 17)
-------- -------
$457,480 $455,009
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
11
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Aquarion Company and Subsidiaries
Consolidated Statements of Cash Flows
In thousands 1998 1997 1996
Year ended December 31
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $19,959 $15,011 $ 9,005
Adjustments reconciling net income to net
cash provided by operating activities
Depreciation and amortization 14,532 13,435 13,797
Proceeds from sale of surplus land, net of
gains 5,490 1,796 778
Loss on disposal of discontinued operation - - 4,255
Provision for losses on accounts
receivable 397 894 (29)
receivable
Deferred tax provision 1,331 1,214 45
Allowance for funds used during
construction (200) (759) (1,123)
Change in assets and liabilities (Note 16) (4,453) 7,166 (3,239)
------- ------ ------
Net cash provided by operating activities 37,056 38,757 23,489
------ ------ ------
Cash flows from investing activities:
Capital additions, excluding an allowance
for funds used during construction (21,245) (28,729) (38,600)
Acquisition of business, less cash acquired - - (2,598)
Advances and contributions in aid of
construction 3,011 3,217 2,626
Refunds on advances for construction (490) (374) (933)
Other investing activities, net 2,340 (153) (1,202)
------ ------- ------
Net cash used in investing activities (16,384) (26,039) (40,707)
======= ======= =======
Cash flows from financing activities:
Proceeds from the issuance of long-term debt - 7,893 31,518
Proceeds from the issuance of common 5,307 5,895 3,290
stock, net
Net (repayments) borrowings of short-term (9,000) 700 (5,000)
debt
Common dividends paid (12,176) (11,549) (11,198)
Principal and premium payments on long- (5,000) (15,000) (52)
term debt
Debt issuance costs - (276) (1,220)
Payments for redemption of preferred stock - - (285)
------- -------- -------
Net cash (used in) provided by
financing activities (20,869) (12,337) 17,053
------- -------- -------
Net (decrease) increase in cash and cash
equivalents (197) 381 (165)
Cash and cash equivalents, beginning of year 851 470 635
year
------- -------- --------
Cash and cash equivalents, end of year $ 654 $ 851 $ 470
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
Aquarion Company and Subsidiaries
Consolidated Statements of Shareholders' Equity
In thousands, except share data
Minimun Treasury Stock Total
Common Stock Capital pension share-
Number Stated in excess of Retained liabiity Number holders'
of Shares value stated value Earnings adjustment of shares Amount equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 - - - - - (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 -
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
--------- ----- ------- ------- ------ ----- -------- ---------
Year ended December 31, 1998
Net income - - - 19,959 - - - 19,959
Dividends on common stock - - - (12,286) - - - (12,286)
Dividend reinvestment plan 119,865 120 3,814 - - - - 3,934
Minimum pension liability - - - - (2) - - (2)
adjustment (Note 12)
Stock options exercised 56,612 56 1,317 - - - - 1,373
--------- ------ -------- ------- ------ ----- ------- --------
Balance, December 31, 1998 7,507,198 $7,507 $112,135 $27,297 $ (99) $ - $146,840
========= ====== ======== ======= ====== ===== ======== ========
(1) Includes exercise of stock options
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Aquarion Company (Aquarion or the Company) 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 33
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 backup 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 services 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, include SFAS 71 Accounting for
the Effects of Certain Types of Regulation and 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.
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,
with any resulting gain or loss 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. The equivalent composite
depreciation rate was 3.0 percent for 1998 and 1997. 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 and directors fees paid in common stock
units. Each common stock unit is convertible into one share of
common stock at the holder s discretion. 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 (see
Note 7 to the financial statements).
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. 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
over periods allowed by the regulatory authority. 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.
Fair value of financial instruments. The carrying amount of cash and cash
equivalents, trade accounts receivable, trade accounts payable and short-term
borrowings approximate their fair values due to their short-term nature. The
fair value of long-term debt, which 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, was as follows at December 31:
<TABLE>
<CAPION>
(In thousands) 1998 1997
<S> <C> <C>
Fair Value $141,311 $138,970
Carrying Value 141,380 151,380
</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 temporary differences
between financial statement and tax bases of assets and
liabilities at current tax rates. 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 (see Note 6 to the financial statements).
Accounting for long-lived assets. SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," (SFAS 121) requires that certain assets be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. SFAS 121 amends SFAS 71 to require that
regulatory assets be charged to earnings if such assets are no
longer considered probable of recovery. At December 31, 1998,
the Company considers these assets probable of recovery.
Segment related information. In June 1997, the FASB issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which establishes standards for the
method of reporting information about operating segments in
annual financial statements and in interim reports issued to
shareholders (see Note 11 to the financial statements). 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.
Accounting for derivative instruments. 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 derivatives and hedging activities and supersedes
and amends a number of existing standards. SFAS 133 is effective
for fiscal years beginning after June 15, 1999. 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.
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.
13
<PAGE>
<PAGE>
Note 3 - Regulatory Matters
Rates. On March 16, 1998, BHC s Western division filed an
application with the DPUC for a 4.1 percent water service rate
increase designed to provide a $620,000 increase in annual water
service revenues. It is anticipated that the new rates, if
approved, will become effective in the first quarter of 1999.
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 replaced the CWIP rate surcharge, which was
9.5 percent prior to July 1, 1997, resulting in a 3.2 percent
marginal increase.
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 both rates and expenses.
On July 31, 1996, BHC s Eastern division received approval
from the DPUC for a 6.5 percent water service rate increase
designed to provide a $4,000,000 increase in annual water service
revenues.
On October 1, 1996, the Ridgefield Water Supply 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
require BHC to pay certain fines. BHC s potential maximum
exposure to such fines could be in excess of $4,000,000. BHC has
recently been informed that this matter has been referred by DEP
to the Office of the Connecticut Attorney General for further
action. BHC is unable to assess at this time what impact the DEP
referral to the Attorney General will have on BHC s ability to
re-negotiate the Consent Agreement or on its potential liability
for such civil penalties.
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.
The Company sold 436 acres of surplus land in 1998. On
December 18, 1998, five parcels of land, located in Shelton,
Connecticut and totaling 401 acres, were sold 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. 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 this sale, is expected to
close in early 1999, after BHC receives the necessary permits
from the Connecticut Department of Health Services.
In addition, the Company sold approximately 35 acres of
surplus land with proceeds totaling $3,067,000. Total gains,
including recognition of deferred gains from prior land sales of
$130,000, approximated $826,000.
In June 1998, the Aspetuck Land Trust, a non-profit land
preservation organization, exercised a statutory right of first
refusal allowing it to purchase, at the original contract terms,
substantially all of the Trout Brook Valley property for
approximately $12,400,000. Connecticut statutes afford the buyer
fifteen months to close, or until September 8, 1999. As of
December 31, 1998, the Company received $1,400,000 on deposit
from the Aspetuck Land Trust. Prior to this exercise, in
February 1997, the Company had entered into a contract to sell
the Trout Brook Valley property for approximately $14,000,000 to
a private developer. The sale has been approved by the DPUC. The
Town of Weston, Connecticut has notified the Company of its
intention to purchase, for approximately $820,000, the
approximately 45 acre portion of BHC s Trout Brook Valley
property located in Weston pursuant to its statutory right of
first refusal. Although both BHC and the Aspetuck Land Trust
have no objection to this purchase, BHC has indicated that it
will only sell the Weston portion at or after the closing of the
sale of the remainder of its Trout Brook Valley property. BHC
has recently filed a request with the DPUC for a declaratory
ruling to the effect that the Town of Weston is not entitled to
purchase only the Weston property. The Company anticipates that
the after-tax gain from the current sale will be approximately
$6,000,000, to be recognized over an applicable amortization
period. In its decision approving the original sale, the DPUC
granted the Company a 10-year amortization period, which provides
ratepayers with 55 percent and shareholders with 45 percent of
the after-tax gain on approximately 60 percent of BHC s portion
of the property. Due to the change in purchaser and its intended
use of the property as open space, the Company is considering
filing an amended application with the DPUC seeking a shorter
amortization period.
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 Connecticut
Department of Environmental Protection over regulatory approvals.
Although several appeals have been withdrawn, certain issues
remain 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-third's 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.
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 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.
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.
Note 6 - Income taxes
Income tax expense for the three years ended December 31,
consisted of the following:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- ---------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Current:
Federal $10,012 $ 8,477 $ 1,199
State 2,839 2,692 2,234
------- -------- --------
Total current 12,851 11,169 3,433
Deferred:
Federal 1,099 991 277
State 145 (244) (187)
------- -------- -------
Total deferred 1,244 747 90
------- -------- -------
Total income tax expense $14,095 $11,916 $3,523
======= ======= =======
</TABLE>
A reconciliation of income tax expense at the statutory
federal income tax rate to the actual income tax expense for the
three years ended December 31, is as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- ----------------------------------------------- ------- -------- --------
<S> <C> <C> <C>
Tax at statutory rate $11,919 $9,424 $4,384
Increase (reductions) in taxes resulting from:
State taxes, net of federal income taxes 1,940 1,592 1,331
Excess depreciation and basis amortization 858 840 700
Investment tax credit (152) (152) (152)
Excess tax basis on disposition - - (2,213)
Charitable contribution (910) - -
Other items, net 440 212 (527)
------- ------- -------
Actual income tax expense $14,095 $11,916 $3,523
------- ------- -------
</TABLE>
Deferred tax liabilities (assets) at December 31, were
comprised of the following:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- --------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Utility temporary difference $37,827 $40,507 $43,679
Depreciation 22,766 22,573 20,168
Investment tax credits 1,391 1,409 1,225
Other 1,302 583 1,506
------- ------- -------
Gross deferred tax liabilities 63,286 65,072 66,578
------- ------- -------
Contributions in aid of construction (7,244) (7,315) (7,934)
Other (4,590) (5,039) (4,237)
------- ------- -------
Gross deferred tax assets (11,834) (12,354) (12,171)
-------- -------- -------
$51,452 $52,718 $54,407
======== ======= ========
</TABLE>
14
<PAGE>
<PAGE>
Note 7 - Earnings per share
In accordance with SFAS 128, the following table presents
the calculation of the basic and diluted earnings per share for
income from continuing operations:
<TABLE>
<CAPTION>
In thousands, except share data Income Shares Per-Share
(Numerator) (Denominaotr) Amount
<S> <C> <C> <C>
For the year ended December 31, 1998
Basic earnings per share
Net income from continuing operations $19,959 7,423 $2.69
------
Effect of dilutive common stock
equivalents - 189
- ------------------------------------------------------------------
Diluted earnings per share
Net income from continuing operations
giving effect to dilutive common
stsock equivalents $19,959 7,612 $2.62
- ------------------------------------------------------------------------------
For the year ended December 31, 1997
Basic earnings per share
Net income from continuing operations $15,011 7,140 $2.10
Effect of dilutive common stock
equivalents - 76
- ------------------------------------------------------------------
Diluted earnings per share
Net income from continuing operations
giving effect to dilutive common
stock equivalents $15,011 7,216 $2.08
- ----------------------------------------------------------------------------
For the year ended December 31, 1996
Basic earnings per share
Net income from continuing operations $13,840 6,931 $2.00
-----
Effect of dilutive common stock
equivalents - 43
- ------------------------------------------------------------------
Diluted earnings per share
Net income from continuing operations
giving effect to dilutive common
stock equivalents $13,840 6,974 $1.98
- --------------------------------------------------------------------------------
</TABLE>
Options to purchase 159,200 shares of Common Stock at $37.75
per share were outstanding at December 31, 1998 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 December 14,
2008.
Note 8 - Long-term debt
<TABLE>
<CAPTION>
Long-term debt at December 31, consisted of the following:
In thousands 1998 1997
<S> <C> <C>
First mortgage bonds
Series R, 6.875%, due November 1, 1998 $ - $ 5,000
Notes payable - unsecured
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 30,000 30,000
4.00% note due November 1, 2004 (d) 5,700 5,700
--------- --------
$151,380 $156,380
Less: Amounts due within one year 10,000 5,000
------- --------
$141,380 $151,380
======== ========
</TABLE>
(a) BHC has the option to redeem this note at a redemption price
ranging from 102 percent on June 1, 2000, to 100 percent on June 1, 2002 and
thereafter.
(b) These BHC financings are insured as to the payment of principal
and interest by Municipal Bond Investors Assurance Corporation.
(c) On February 3, 1997, BHC converted the interest rate on its
$30,000,000 unsecured note from a weekly rate to a fixed rate of 6.15 percent.
(d) 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, 1998, the interest rate changed to 4.0 percent from 4.25 percent.
Bondholders may elect to have their bonds redeemed at a price equal to 100
percent of the principal amount on each November 1, until conversion of the
interest rate on the bonds to a fixed rate.
The Aquarion and subsidiaries note 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 note. At December 31, 1998,
approximately $43,705,000 was available to pay dividends as
defined under the Aquarion Note. The aggregate maturities and
sinking fund requirements on long-term debt for each of the five
years succeeding December 31, 1998 are as follows: 1999-
$10,000,000; 2000, 2001, 2002 and 2003-zero.
Note 9 - Short-term borrowings
Short-term borrowings result from Aquarion s relationships
with three banks, which provide, on an uncommitted basis, credit
availability aggregating $40,000,000 at December 31, 1998.
Short-term borrowings for the years ended December 31, were as
follows:
<TABLE>
<CAPTION
In thousands 1998 1997 1996
<S> <C> <C> <C>
Borrowings outstanding at December 31 $ - $9,000 $8,300
Weighted average interest rate at December 31 - 5.69% 6.06%
Maximum outstanding during the year $10,000 $14,300 $29,200
Average outstanding during the year $5,125 $7,550 $16,292
Weighted average interest rate during the year 5.59% 5.59% 5.51%
</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 or more position, each holder of a right, other than
rights beneficially owned by the 15 percent holder, will thereafter have the
right to receive upon exercise of a right at the then current exercise price
of the right, that number of shares of Common Stock having a market value of
two times the exercise price of the right. If, after a person or group has
acquired 15 percent or more of the outstanding Common Stock, the Company were
to be acquired in a merger or other business combination transaction, each
right would entitle its holder (other than a 15 percent or greater
shareholder) to receive, upon payment of the exercise price, that number of
shares of the acquiring company having a market value equal to twice the
exercise price.
The Company may redeem the rights at $.01 per right at any
time before a 15 percent position has been acquired. Until such
time as these rights become exercisable, they will have no
dilutive effect on the Company's earnings per share.
Note 11 - Industry segment information
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 is as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- ------------------------------------------------ ------ ------- --------
<S> <C> <C> <C>
Operating income (loss):
Public water supply $37,572 $35,007 $29,485
Timber processing 1,430 1,200 968
Real estate 5,065 727 1,420
Utility management services (190) (133) (219)
------- ------- -------
Industry segment operating income 43,877 36,801 31,654
Interest expense (10,507) (11,187) (9,311)
Allowance for funds used during construction 200 759 1,123
Other income (expenses), net 484 554 (342)
------- -------- -------
Income before income taxes $34,054 $26,927 $23,124
======= ======== =======
</TABLE>
The Company's operations take place in North America and no
single customer accounts for 10 percent or more of total
operating revenues.
15
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- ----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Segment assets:
Public water supply $435,746 $430,425 $415,045
Timber processing 10,549 9,066 6,773
Real estate 4,583 4,162 4,451
Utility management services 338 1,002 813
-------- -------- --------
Subtotal 451,216 444,655 427,082
Reconciling items 6,264 10,354 22,010
-------- -------- --------
Total consolidated items $457,480 $455,009 $449,092
-------- -------- --------
Capital Expenditures:
Public water supply 20,195 $27,633 $37,185
Timber processing 1,047 1,075 666
Utility management services 3 21 749
-------- -------- -------
Total capital expenditures $21,245 $28,729 $38,600
-------- -------- -------
Depreciation expense:
Public water supply $13,272 $12,171 $10,668
Timber processing 481 434 389
Real estate 11 11 11
Utility management services 6 8 9
------- ------- -------
Total depreciation expense $13,770 $12,624 $11,077
======= ======== ========
</TABLE>
Reconciling items include assets of the parent company,
which are not allocated to 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. Plan assets are primarily invested in
U.S. and foreign equities and debt securities issued by the U.S.
government and corporations. 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.
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. 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 $352,000 and $300,000 for
1998 and 1997, respectively. Plan assets are primarily invested
in U.S. Government and Agency obligations.
Pension and postretirement benefits funded status and costs.
The following table sets forth the funded status of the
Company's retirement plans and postretirement health care
benefits at December 31, the latest valuation date:
<TABLE>
<CAPTION>
Postretirement
Retirement Plans Health Care Benefits
------------------- -------------------
In thousands 1998 1997 1998 1997
------------------- ------------------
<S> <C> <C> <C> <C>
Changes in benefit obligation
Benefit obligation at beginning of $29,671 $26,182 $10,666 $13,834
year
Service cost 958 878 278 315
Interest cost 2,136 1,938 749 701
Amendments 956 442 (534) -
Actuarial loss (gain) 1,792 1,789 1,362 (3,513)
Benefits paid (1,757) (1,558) (590) (671)
-------- ------- ------- -------
Benefit obligation at end of year 33,756 29,671 11,931 10,666
-------- ------- ------- -------
Change in plan assets
Fair value of plan assets at
beginning of year 46,465 41,407 1,446 1,258
Actual return on plan assets 6,024 6,479 32 34
Employer contributions 125 137 244 154
Benefits paid (1,757) (1,558) - -
------- -------- -------- -------
Fair value of plan assets at end of
year 50,857 46,465 1 ,722 1,446
------- -------- -------- ------
Funded status 17,101 16,794 (10,209) (9,220)
Unrecognized actuarial (gain) loss (8,618) (8,666) (1,981) (3,505)
Unrecognized net (asset)/obligation (1,214) (1,672) 7,025 7,853
Unrecognized prior service cost 2,173 1,492 - 208
Accumulated other comprehensive
income(expense) (163) (160) - -
-------- -------- ------- --------
Net amount recognized $ 9,279 $ 7,788 $ (5,165) $(4,664)
-------- -------- -------- --------
Amounts recognized in the statement of
financial position consists of:
Prepaid benefit cost $ 9,441 $ 7,948 $ - $ -
(Accrued) benefit liability (897) (979) (5,165) (4,664)
Intangible asset 735 819 - -
------- -------- ------- -------
Net amount recognized $ 9,279 $ 7,788 $(5,165) $(4,664) <PAGE>
------- -------- ------- -------
</TABLE>
The projected benefit obligation and accumulated benefit
obligation for the Company s unfunded retirement plans were
$3,886,000 and $3,143,000, respectively, as of December 31, 1998
and $3,218,000 and $2,729,000, respectively, as of December 31,
1997.
The provisions of SFAS No. 132, "Employers Disclosure about
Pensions and Other Postretirement Benefits," require recognition
in the balance sheet of an additional minimum liability comprised
of an intangible asset and other comprehensive income for pension
plans with accumulated benefit obligations in excess of plan
assets. At December 31, 1998 and 1997, the liability exceeded
the unrecognized prior service cost, resulting in a minimum
liability adjustment, net of taxes of $99,000 and $97,000,
respectively, recorded as a reduction of the Company's equity.
The components of net periodic benefit costs for all
retirement plans for the years ended December 31, in addition to
the plan's weighted average assumptions as of December 31, were
as follows:
<TABLE>
<CAPTION>
Retirement Plans
---------------------------
In thousands 1998 1997 1996
---------------------------
<S> <C> <C> <C>
Components of net periodic benefit costs
Service cost $ 958 $ 879 $ 839
Interest cost 2,136 1,938 1,832
Expected return on plan assets (4,021) (3,620) (3,219)
Amortization of unrecognized asset at
transition date (458) (458) (458)
Amortization unrecognized of prior service
cost 274 169 164
Amortization of prior experience (gains) (258) (207) (51)
------- ------- --------
Net periodic benefit credit $(1,369) $(1,299 $ (893)
------- ------- -------
Weighted-average assumptions
Discount rate 6.75% 7.00% 7.50%
Expected return on plan assets 8.80% 8.90% 8.60%
Rate of compensation increase 5.00% 5.00% 5.00%
</TABLE>
The components of net periodic benefit costs for the
postretirement health care benefits for the years ended December
31, and the plan s weighted average assumptions as of December
31, were as follows:
<TABLE>
<CAPTION>
Postretirement Health Care Benefits
-----------------------------------
In thousands 1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Components of net periodic benefit costs
Service cost $ 278 $ 315 $ 493
Interest cost 749 701 954
Expected return on plan assets (68) (60) (45)
Amortization of unrecognized obligation
at transition date 502 524 524
Amortization of prior service cost - 18 18
Amortization of prior experience
(gain)/loss (134) (218) 6
------- ------- -------
Net periodic benefit cost $ 1,327 $ 1,280 $ 1,950
------- ------- -------
Weighted-average assumptions
Discount rate 6.75% 7.00% 7.50%
Expected return on plan assets (net of 5.00% 5.00% 5.00%
taxes)
</TABLE>
Expense recognized for the years ended December 31, 1998,
1997, and 1996 amounted to $1,327,000, $1,280,000 and $1,848,000,
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.
For measurement purposes, a 7.8 percent annual increase in
the per capita cost of covered health care benefits is assumed
for 1998 (8.4 percent and 9.0 percent for 1997 and 1996,
respectively). This rate was assumed to decrease gradually to
6.0 percent for 2001 and remain at that level thereafter. A one-
percentage-point change to the assumed health care cost trend
rates for 1998 would have the following effects:
<TABLE>
<CAPTION>
One-Percentage One-Percentage
Point Increase Point Decrease
--------------- ---------------
<S> <C> <C>
In thousands
Effect on total of service and
interest cost Components $ 198 $ (153)
Effect on postretirement benefit
obligation $1,636 $(1,378)
</TABLE>
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.
16
<PAGE>
<PAGE>
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
could 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
under this plan 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, 1998,
571,196 shares were exercisable under the Stock Plan. The
following options have been awarded to key executives:
<TABLE>
<CAPTION>
In thousands Number of Option Price
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-$28.28
Granted in 1998 (a) 156,200 $37.75
Expired in 1998 (2,900) $23.50-$30.88
Exercised in 1998 (56,612) $20.63-$28.28
---------
Outstanding at December 31, 1998 864,092 $20.63-$37.75
---------
</TABLE>
(a) These options were granted on October 13, 1995, December 5, 1995,
December 4, 1996, December 2, 1997 and December 14, 1998. 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," (SFAS 123) 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 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 1998 1997
<S> <C> <C>
Net Income
As reported $19,959 $15,011
Pro forma $19,494 14,776
Earnings per share
As reported $2.69 $2.10
Pro forma $2.63 $2.07
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 1998,
1997 and 1996: dividend yield of 4.4 percent; expected
volatility of 24 percent; risk-free interest rate of
4.46 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 1,428,283 shares were
issued at December 31, 1998.
Note 14 - Property, plant and equipment
Net property, plant and equipment at December 31, consisted
of the following components:
</TABLE>
<TABLE>
<CAPTION>
In thousands 1998 1997
<S> <C> <C>
Source of supply $33,331 $33,995
Pumping 21,992 20,477
Water treatment 102,922 102,060
Transmission and distribution 278,097 266,368
General 34,432 36,419
Construction work in progress 6,245 7,068
Utility plant held for future use 466 466
Nonutility property 15,794 14,980
------- --------
493,279 481,833
Less: accumulated depreciation 146,034 142,125
------- -------
$347,245 $339,708
======== ========
</TABLE>
Note 15 - Inventories
Inventories at December 31, comprised the following:
<TABLE>
<CAPTION>
In thousands 1998 1997
<S> <C> <C>
Lumber and logs $3,534 $2,561
Materials and supplies 992 1,179
------ ------
$4,526 $3,740
====== ======
Note 16 - Statement of cash flows
Changes in assets and liabilities and supplemental cash flow
information for the years ended December 31, are set forth below:
</TABLE>
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
<S> <C> <C> <C>
Decrease (increase) in accounts receivable $266 $(876) $5,364
Decrease (increase) in other current assets 1,817 11,658 (11,592)
(Increase) decrease in inventory (786) (857) 579
Increase in prepayments (1,944) (2,248) (1,082)
(Decrease) increase in accounts payable and
accrued liabilities (724) (62) 2,094
Increase (decrease) in interest and taxes
payable 1,719 (182) 398
Net changes in other noncurrent balance sheet
items (4,801) (267) 1,000
-------- ------ --------
$(4,453) $7,166 $(3,239)
======== ====== ========
Supplemental cash flow information:
Cash paid for:
Interest $10,434 $10,374 $ 9,336
Income taxes $10,225 $ 8,221 $10,602
</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.
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.
Note 18 - Subsequent event
On February 16, 1999, the Board of Directors approved a 3-
for-2 split of the Company s issued common stock. The stock
split was effected in the form of a 50 percent stock distribution
on the Company s common stock, payable on March 22, 1999 to all
shareholders of record on March 1, 1999. No financial
information contained in the report has been adjusted to reflect
the impact of the common stock split.
The following represents the pro forma effect of the stock
split as of December 31, 1998:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Basic earnings per share $1.79 $1.40 $0.87
Weighted average common shares
outstanding 11,135,190 10,709,841 10,397,083
Diluted earnings per share $1.75 $1.39 $0.86
Weighted average common shares
outstanding 11,417,585 10,823,439 10,461,845
</TABLE>
17
<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, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1998, 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.
PricewaterhouseCoopers LLP
New York, NY
January 27, 1999, except as to Note 18, which is as of
February 16, 1999
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.
Richard K. Schmidt
President & Chief Executive Officer
Janet M. Hansen
Executive Vice President,
Chief Financial Officer
& Treasurer
January 27, 1999
SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Book value per share $19.56 $18.26 $17.52 $17.72 $17.43
Payout ratio (per share) 61.5% 77.6% 124.6% 85.3% 86.6%
Price/earnings ratio (1) 15.2 16.5 21.4 13.4 12.6
Capitalization:
Long-term debt 49.0% 53.1% 54.7% 52.0% 49.1%
Preferred stock of
subsidiaries - - - .1 0.2
Common equity 51.0 46.9 45.3 47.9 50.7
------ ------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
(1) Computed at December 31
Quarterly Financial Data
(Unaudited)
<TABLE>
<CAPTION>
Income
In thousands, except share data Operating before Net Per Share
revenues income income (1)
taxes
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
First quarter $ 25,383 $ 5,363 $ 3,035 $0.41
Second quarter 26,827 7,309 4,008 0.54
Third quarter 29,968 11,016 6,125 0.82
Fourth quarter 33,491 10,366 6,791 0.92
-------- ------- -------
Total $115,669 $34,054 $19,959
======== ======= =======
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
======== ======= =======
</TABLE>
(1) Quarterly earnings per share are based on weighted average shares
outstanding during each quarter.
18
<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, 1998, there were 8,138 shareholders of record
compared to 8,017 shareholders of record at December 31, 1997.
<TABLE>
<CAPTION>
---------------------------------------------------------
Period Closing sales price Dividends paid
High Low
<S> <C> <C> <C>
1998
First quarter 36 1/2 31 1/2 $ .41
Second quarter 34 11/16 31 5/8 .41
Third quarter 35 7/8 33 1/8 .415
Fourth quarter 41 32 7/16 .415
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 .41
Fourth quarter 36 1/2 27 .41
</TABLE>
<TABLE>
<CAPTION>
Water supplied from Utility Operations
- ---------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Consumption: (Millions of
Gallons)
Residential 11,781 11,641 11,036 12,129 10,586
Commercial 4,720 4,674 4,275 4,606 4,815
Industrial 1,743 1,747 1,988 2,236 2,388
Other 2,219 1,960 1,949 2,467 2,255
Total 20,463 20,022 19,248 21,438 20,044
</TABLE>
19
<PAGE>
Exhibit A
BHC COMPANY
TO
STATE STREET BANK AND TRUST COMPANY, SUCCESSOR TRUSTEE
------------------------------------------------
TWENTY-FIFTH SUPPLEMENTAL MORTGAGE
----------------------------------
Dated as of December 1, 1998
Securing First Mortgage Bonds, Amending
First Mortgage 6 7/8 % Bonds Series R due November 1, 1998
and Providing for Releases of Property<PAGE>
TABLE OF CONTENTS
(Not Part of Supplemental Mortgage)
Page
Date and Parties
Recitals
Granting Clauses
Habendum
Declaration of Trusts
ARTICLE FIRST - Amendment of Series R Bonds . . . . . . 10
Section 1. Maturity Date . . . . . . . . . . . . . . 10
Section 2. Redemption of Series B Bonds . . . . . . . 11
ARTICLE SECOND - Release of Property . . . . . . . . . . 12
Section 1. Out of State Property . . . . . . . . . . 12
Section 2. Releases . . . . . . . . . . . . . . . . . 12
ARTICLE THIRD - Particular Covenants of the Company . . . 13
Section 1. . . . . . . . . . . . . . . . . . . . . 13
Section 2. . . . . . . . . . . . . . . . . . . . . 14
ARTICLE FOURTH - Miscellaneous Provisions . . . . . . . . 14
-i-<PAGE>
THIS INDENTURE dated as of the 1st day of December, 1998,
between BHC Company (formerly called BRIDGEPORT HYDRAULIC
COMPANY), a consolidated corporation chartered by the General
Assembly of the State of Connecticut by Special Act approved
May 5, 1927, and having its principal place of business in
Bridgeport, Fairfield County, Connecticut (hereinafter called
the "Company"), party of the first part (being the successor
corporation to THE BRIDGEPORT HYDRAULIC COMPANY), and STATE
STREET BANK AND TRUST COMPANY, a corporation organized and
existing under the laws of the Commonwealth of Massachusetts
and having its principal office and place of business in said
Boston, Massachusetts (hereinafter called the "Trustee"),
party of the second part (being the successor corporation to
Citytrust, The Bridgeport Trust Company, The Bridgeport-City
Trust Company, City Trust Company and City National Bank of
Connecticut);
W I T N E S S E T H:
WHEREAS, said The Bridgeport Hydraulic Company
(predecessor to the Company) duly executed a certain First
Mortgage to said The Bridgeport Trust Company (predecessor to
the Trustee), as of the first day of June, 1924, and recorded
among other towns in Volume 525, pages 1 to 86, both
inclusive, of the Land Records of said Bridgeport (hereinafter
sometimes called the "Original Mortgage", and as heretofore
supplemented, modified and confirmed by all indentures
supplemented thereto, hereinafter sometimes called the "First
Mortgage"); and
WHEREAS, twenty-four indentures (hereinafter collectively
sometimes called the "preceding Supplemental Indentures")<PAGE>
-2-
supplemental to or in modification of the Original Mortgage
have been duly executed, delivered and recorded; and
WHEREAS, in Section 2 of Article Twelfth of the Original
Mortgage it is provided, among other things, that the holders
of seventy-five percent (75%) in aggregate principal amount of
bonds outstanding under the Indenture may assent to and
authorize any modification of any of the provisions of the
First Mortgage proposed by the Company; and
WHEREAS, the execution and delivery of this Supplemental
Indenture has been in all respects duly and validly
authorized;
NOW, THEREFORE, THIS SUPPLEMENTAL MORTGAGE WITNESSETH
that, pursuant to and in execution of the powers, authorities
and obligations conferred, imposed and reserved in the First
Mortgage, and of every other power, authority and obligation
thereto appertaining or enabling, the Company, for and in
consideration of the premises and of the sum of One Dollar
($1.00) to it in hand paid by the Trustee, the receipt whereof
is hereby acknowledged, and of other valuable consideration,
in order further to secure payment of the principal and
interest of all bonds now and at any time issued and
outstanding under the First Mortgage and hereunder according
to their tenor, purport and effect, and the faithful, due and
punctual performance and observance of all the covenants and
conditions therein and herein contained, does hereby confirm
the grant, bargain, sale, assignment, mortgage, pledge,
transfer, setting over, alienation, enfeoffment, release,
conveyance and confirmation of the property set forth and<PAGE>
-3-
described or intended so to be in the Original Mortgage and in
the preceding Supplemental Indentures, as modified, and has
granted, bargained, sold, assigned, mortgaged, pledged,
transferred, set over, aliened, enfeoffed, released, conveyed
and confirmed, and by these presents does grant, bargain,
sell, assign, mortgage, pledge, transfer, set over, alien,
enfeoff, release, convey and confirm unto The State Street
Bank and Trust Company, as Trustee, and its successor or
successors in the trusts created by the First Mortgage and
hereby created and confirmed, and its and their assigns, all
and singular its property, rights, privileges and franchises,
located in the towns of Beacon Falls, Bethel, Bridgeport,
Canaan, Cornwall, Danbury, Darien, Easton, Fairfield, Goshen,
Kent, Litchfield, Monroe, New Canaan, New Fairfield, Newtown,
Norfolk, North Canaan, Norwalk, Oxford, Redding, Ridgefield,
Salisbury, Seymour, Shelton, Sherman, Southbury, Stamford,
Stratford, Torrington, Trumbull, Weston, Westport, Wilton and
Woodbridge, in the State of Connecticut; hereby making
reference (but without limiting the generality of the
foregoing) for a more particular description of said property
and rights, to the Original Mortgage and the preceding
Supplemental Indentures (except such properties or interests
therein as are specifically excepted therein or herein) and
similarly including all other property, real, personal and
mixed, located in any of said towns or elsewhere in said
Fairfield County, said Litchfield County or said New Haven
County and all rights, privileges and franchises, however
acquired, and whether now owned or hereafter acquired by the
Company (subject, in respect of property of any subsequent
successor to the Company, to the provisions of Section 3 of<PAGE>
-4-
Article Sixth of the First Mortgage, and except such
properties or interests therein as are specifically excepted).
THERE IS EXCEPTED FROM THE LIEN AND OPERATION OF THIS
SUPPLEMENTAL MORTGAGE ALL THE PROPERTY DESCRIBED IN THE
INSTRUMENTS LISTED IN THE SCHEDULES IN THE ORIGINAL MORTGAGE
ON THE PRINTED PAGES 37 TO 39, INCLUSIVE, COMMENCING WITH THE
PROPERTY LISTED UNDER THE HEADING "EASTON" AND EXTENDING TO
THE END OF THE PROPERTY LISTED UNDER THE HEADING "TOWN OF
FAIRFIELD" AND THERE IS ALSO EXCEPTED FROM THE LIEN AND
OPERATION OF THIS SUPPLEMENTAL MORTGAGE ALL PROPERTY OR
INTERESTS THEREIN SOLD OR OTHERWISE DISPOSED OF BY THE
BRIDGEPORT HYDRAULIC COMPANY OR BY BRIDGEPORT HYDRAULIC
COMPANY IN ACCORDANCE WITH THE TERMS AND PROVISIONS OF THE
FIRST MORTGAGE, OR SOLD OR DISPOSED OF BY ANY COMPANIES MERGED
WITH OR CONSOLIDATED INTO BHC COMPANY PRIOR TO THEIR MERGER OR
CONSOLIDATION INTO THE COMPANY.
The Company s property above described is subject also to
a grant by the Company to The Connecticut Light and Power
Company for the construction, operation and maintenance of
towers, poles and lines for the transmission of electricity,
the same being recorded in the land records of Bridgeport,
Volume 520, pages 487-496, Fairfield, Volume 114, pages 614-
618, and Easton, Volume 14, pages 233-239, and to a grant by
the Company to Northeastern Gas Transmission Company for the
construction, operation and maintenance of a pipeline for the
transmission of natural gas, the same being recorded in the
land records of Fairfield, Volume 270, pages 372-375, and
Shelton, Volume 125, pages 493-495.<PAGE>
-5-
Also similarly including in the mortgage, conveyance and
assignment of these presents all the right, title and interest
of the Company in the water transmission and distribution and
other mains and pipes and other equipment laid in the towns of
Beacon Falls, Bethel, Bridgeport, Canaan, Cornwall, Danbury,
Darien, Easton, Fairfield, Goshen, Kent, Litchfield, Monroe,
New Canaan, New Fairfield, Newtown, Norfolk, North Canaan,
Norwalk, Oxford, Redding, Ridgefield, Salisbury, Seymour,
Shelton, Sherman, Southbury, Stamford, Stratford, Torrington,
Trumbull, Weston, Westport, Wilton and Woodbridge, in the
State of Connecticut, including all such mains and pipes shown
on a certain map marked "Exhibit A, Revised to April, 1980,
mentioned in Twenty-Third Supplemental Mortgage," which map is
on file in the offices at Bridgeport of the Company and of the
Trustee and open to inspection and examination by any party
concerned with these presents, together with all its right,
title and interest in and to the service pipes, hydrants,
meters, valves and other appliances and apparatus physically
connected with said mains or pipes or now in use in connection
therewith, whether in the highways of the above-named towns or
on private property.
Also all machinery, engines, boilers, implements, motor
vehicles, tools, equipment, furniture, office fixtures and
machines, and other personal property situated and used in and
about the plant of the Company in the various towns above-
named in which its real estate and other property hereby
mortgaged are situated, including any and all after-acquired
property forming a part of the establishment of the Company
and connected with or situated and used therein, and also any
and all after-acquired, substituted machinery or personal<PAGE>
-6-
property of like nature to the property included in the First
Mortgage and herein.
Also all the other property, real, personal or mixed, and
all rights and franchises, now owned or which may hereafter be
acquired by the Company.
Provided, however, that there are excepted from the
property and property rights by the First Mortgage and by this
Supplemental Mortgage granted, bargained, sold, assigned,
mortgaged, pledged, transferred, set over, aliened, enfeoffed,
released, conveyed and confirmed:
(i) all properties or interests therein heretofore
released by the Trustee or sold or disposed of in whole
or in part as permitted by the provisions of the First
Mortgage;
(ii) the last day of the term of each leasehold
estate (oral or written or any agreement therefor)
enjoyed by the Company at the time of the execution of
the Original Mortgage, of the preceding Supplemental
Indentures or of this Supplemental Mortgage, or
hereafter, and whether falling within a general or
particular description of property therein or herein;
(iii) all of the following properties and rights,
whether owned at the time of the execution of the
Original Mortgage, of the preceding Supplemental
Indentures or of this Supplemental Mortgage or hereafter
acquired by the Company, unless specifically required to<PAGE>
-7-
be delivered or paid to and held by the Trustee pursuant
to some provision of the Original Mortgage, of this
Supplemental Mortgage or of some other indenture
supplemental to the Original Mortgage:
(a) all shares of stock, bonds, notes, evidences of
indebtedness and other securities,
(b) cash on hand and in banks,
(c) all claims, bills, notes and accounts
receivable, contracts, choses in action and judgments
(other than choses in action and judgments for the
recovery of real property or establishing a lien, charge
or right therein),
(d) any stock of goods, wares and merchandise,
equipment and supplies acquired for the purpose of
consumption (otherwise than by ordinary wear and tear) in
the operation, construction, maintenance or repair of any
of the properties of the Company, other than goods, wares
and merchandise, equipment and supplies acquired for the
purpose of consumption in connection with the
construction of the Facility,
(e) ice, gravel, rock, sand, hay, grain, crops,
fruits and other products, other than such as are
acquired for the purpose of incorporation in the
Facility;<PAGE>
-8-
provided, however, that if and so long as the Trustee after an
event of default shall have entered upon and remain in
possession of the mortgaged property, or if a receiver,
trustee or other official shall be designated by a court
having jurisdiction to have, and so long as any such official
shall have, possession, custody or control of the mortgaged
property, then the property and rights expressly excepted by
this subclause (iii) from the lien and operation of the First
Mortgage and this Supplemental Mortgage shall (to the extent
permitted by law) cease to be so excepted, and the Trustee or
such officials, as the case may be, may (to the extent
permitted by law) take possession of any and all of the
property described in this subclause (iii) then on hand,
subject to any lien thereon then existing, and possess, use
and administer the same to the same extent as if such property
were part of the property hereby mortgaged, unless and until
possession of the property hereby mortgaged shall be restored,
subject to any liens then existing thereon, to the Company,
its successors or assigns; and upon the taking of such
possession, until such possession shall be restored as
aforesaid, the First Mortgage and this Supplemental Mortgage
shall (to the extent permitted by law) become and be a lien
upon all of the property and rights specified in this
subclause (iii) as to which the Trustee or such official shall
take possession.
It is the intention and it is hereby agreed that all
property of the kind hereinbefore described and acquired by
the Company after the date hereof (but not including any
property of the character above excepted and excluded) shall,
except as otherwise provided herein, be as fully embraced<PAGE>
-9-
within the provisions of the First Mortgage and of this
Supplemental Mortgage, and subject to the lien thereby and
hereby created, as if all of said property had been in
existence and owned by said The Bridgeport Hydraulic Company
at the time of the execution of, and had been specifically
described in and conveyed by, the Original Mortgage, and as if
all of said property were now in existence and owned by the
Company and were specifically described herein and conveyed
hereby.
TO HAVE AND TO HOLD all and singular the property,
rights, privileges and franchises hereby granted or mentioned
or intended so to be, together with all and singular the
reversions, remainders, rents, revenues, incomes, issues and
profits, privileges and appurtenances, now or hereafter
belonging or in anywise appertaining thereto, unto the Trustee
and its successors in the trust created by the First Mortgage
and hereby, and its and their assigns, forever.
BUT IN TRUST, NEVERTHELESS, for the equal and
proportionate benefit and security of all present and future
holders of the bonds and coupons issued and to be issued under
and secured by the First Mortgage, this Supplemental Mortgage
and by all indentures supplemental thereto or hereto (except
the holders of the bonds designated Series A through Series Q
and Series S, T and U) and to secure the payment of such bonds
(except bonds of Series A through Series Q and Series S, T and
U) and the interest thereon when payable in accordance with
the provisions thereof or hereof, and to secure the
performance of and compliance with the covenants and
conditions of the First Mortgage, of this Supplemental<PAGE>
-10-
Mortgage and of all indentures supplemental thereto and
hereto, without preference, priority or distinction, except as
provided in Section 1 of Article Eighth of the Original
Mortgage, as to lien or otherwise of any one bond over any
other bond by reason of priority in the issue or negotiation
thereof, and under and subject in all respects to the terms,
conditions, provisions, covenants, reservations, rights,
powers, privileges, immunities, duties and obligations in
favor of or resting upon the Trustee, as well as those in
favor of or resting upon the Company, set forth in the First
Mortgage and herein, with the same force and effect for all
intents and purposes as if all of said property, rights,
privileges and franchises had been in existence and owned by
said The Bridgeport Hydraulic Company at the time of the
execution of, and had been specifically included in, the
Original Mortgage and specifically mortgaged, conveyed,
assigned and transferred therein and thereby, and as if all of
the bonds had been issued, sold and delivered for value
simultaneously with the execution and delivery of the Original
Mortgage.
In addition to and in confirmation of the covenants,
agreements, conditions and provisions of the First Mortgage,
insofar as the same are applicable, it is hereby further
covenanted, declared and agreed, upon the trusts and for the
purposes aforesaid, as set forth in the following further
conditions, covenants, agreements and provisions, to wit:
ARTICLE FIRST
Amendment of Series R Bonds<PAGE>
-11-
Section 1. Maturity Date. The series of bonds entitled
"First Mortgage Bonds, Series R" (herein sometimes referred to
as "Series R bonds" or "bonds of Series R"), limited in
aggregate principal amount to Five Million Dollars
($5,000,000) shall be issuable only in the form of registered
bonds without coupons of the denomination of $1,000 and
multiples thereof.
All Series R bonds as amended shall mature November 1,
2028 and shall bear interest at the rate of six and seven
eighths per cent (6 7/8%) per annum from their respective
dates, such interest to be payable semi-annually on May 1 and
November 1 in each year. Both the principal of and interest
on bonds of Series R shall be payable either (i) at the main
office of The State Street Bank and Trust Company, or at the
main office of its successor in the trusts created by First
Mortgage; or (ii) directly to the holder or holders of the
Series R Bonds.
The texts of the bonds of Series R and the Trustee s
certificate with respect to the Series R bonds shall be
respectively substantially of the tenor and purport set forth
in the Twentieth Supplemental Indenture, except as necessarily
modified by this Twenty-Fourth Supplemental Indenture.
Section 2. Redemption of Series B Bonds. The
Improvement Fund for the Series R Bonds is hereby eliminated.
At the option of the Company and upon notice given as provided
in Section 1 of Article Fourth of the Original Mortgage, the
bonds of Series R shall be redeemable in whole or, from time
to time, in part, at any time at the principal amount thereof<PAGE>
-12-
and interest accrued to the date fixed for redemption, without
premium.
Except to the extent that other provision is made in this
Article, any redemption or purchase of bonds of Series R shall
be made in the manner, subject to the requirements, and with
the effects specified in Article Fourth of the Original
Mortgage.
ARTICLE SECOND
Release of Property
Section 1. Out-of-State Property. Effective upon
execution of this Twenty-Fifth Supplemental Indenture and
notwithstanding any contrary provision of the Original
Mortgage or of the First Mortgage, all property of the Company
located outside the State of Connecticut is hereby released
and discharged from the lien of the First Mortgage; and the
Trustee shall, upon request of the Company and without the
necessity of complying with any provisions of the First
Mortgage or any other requirement, from time to time execute
such instruments of disclaimer, release, quitclaim, waiver,
consent or confirmation as may be appropriate to evidence the
release of all or any portion of said out-of-state property
from the lien of the First Mortgage.
Section 2. Releases. Effective upon execution of this
Twenty-Fifth Supplemental Indenture and notwithstanding any
contrary provision of the Original Mortgage or of the First
Mortgage, the Company, with the written consent of the holders
of at least 80% of the bonds outstanding under the First<PAGE>
-13-
Mortgage, may, at any time and from time to time, obtain the
release from the lien of the First Mortgage of any part of
mortgaged property without the necessity of complying with any
provisions of the First Mortgage or of any other requirement
other than this Section 2 of Article Second of this Twenty-
Fifth Supplemental Indenture. Upon receipt by the Trustee of
(i) a written request of the Company specifying the property
to be so released; and (ii) a consent to such release executed
by the holder or holders of at least 80% of the bonds then
outstanding under the First Mortgage, the Trustee shall
execute said instruments of disclaimer, release, quitclaim,
waiver, consent or confirmation as may be appropriate to
evidence the release of such property from the lien of the
First Mortgage.
ARTICLE THIRD
Particular Covenants of the Company
Section 1. The Company covenants and agrees that,
subject to the encumbrances, reservations, easements, estates
for life and limitations expressly set forth in the granting
clauses of the Original Mortgage and the preceding
Supplemental Indentures, as modified, and of this Supplemental
Mortgage or indicated in the column headed "Remarks" in the
schedules of the real estate or parcels of real estate set
forth in said granting clauses, the Company has good title to
and is possessed of the lands and other property described in
such granting clauses and in and to the lands and other
property mortgaged by this Supplemental Mortgage and thereby
and hereby granted, and the Company will warrant and defend,
except as above stated, the aforesaid title to said lands and<PAGE>
-14-
other property as well as to any lands and other property
hereafter made subject to the lien of the First Mortgage or
hereof, or of any indenture supplemental thereto or hereto, to
the Trustee, its successors in the trust and its and their
assigns, for the benefit of the holders of bonds issued and to
be issued under the First Mortgage or any indenture
supplemental thereto, against claims and demands of all
persons whomsoever; subject, however, insofar as affected
thereby in the case of any such lands and other property
hereafter subjected to the lien of the First Mortgage or of
any indenture supplemental thereto, to the liens and
encumbrances thereon, if any, at the time they shall become
subject thereto.
Section 2. Except as so amended by Articles First and
Second hereof, the Company hereby expressly ratifies, adopts,
renews, confirms and continues in full force and effect,
without limitation, each and every covenant, agreement,
condition and provision contained in the First Mortgage.
ARTICLE FOURTH
Miscellaneous Provisions
The Trustee shall be entitled to, may exercise and shall
be protected by, where and to the full extent that the same
are applicable, all the rights, powers, privileges, immunities
and exemptions provided in the First Mortgage, as if the
provisions concerning the same were incorporated herein at
length. The Trustee under the First Mortgage shall ex officio
be Trustee hereunder. The remedies and provisions of the
First Mortgage applicable in case of any default by the<PAGE>
-15-
Company thereunder are hereby adopted and made applicable in
case of any default with respect to the properties included
herein, and, without limitation of the generality of the
foregoing, there are hereby conferred upon the Trustee the
same powers of sale and other powers over the properties
described herein as are expressed to be conferred by the First
Mortgage.
The recitals in this Supplemental Mortgage shall be taken
as recitals by the Company alone, and shall not be considered
as made by or as imposing any obligation or liability upon the
Trustee, nor shall the Trustee be held responsible for the
legality or validity of this Supplemental Mortgage, and the
Trustee makes no covenants or representations, and shall not
be responsible, as to or for the effect, authorization,
execution, delivery or recording of this Supplemental
Mortgage, except as expressly set forth in the First Mortgage.
The Trustee shall not be taken impliedly to waive by this
Supplemental Mortgage any right it would otherwise have. As
provided in the First Mortgage, this Supplemental Mortgage
shall hereafter form a part of the First Mortgage.
This Supplemental Mortgage shall become void when the
First Mortgage shall be void.
Except as amended by Articles First and Second hereof,
this Supplemental Mortgage is expressly made subject to all
the conditions, covenants and provisions of the First
Mortgage.<PAGE>
-16-
The cover of this Supplemental Mortgage and all article
headings, and the table of contents and marginal notes, if
any, are inserted for convenience of reference only, and are
not to be taken to be any part of this Supplemental Mortgage
or to control or affect the meaning, construction or effect of
the same.
This Supplemental Mortgage may be executed in any number
of counterparts, each of which shall be and shall be taken to
be an original and all collectively but one instrument.
IN WITNESS WHEREOF the Company has caused these presents
to be executed by its President or a Vice-President and its
corporate seal to be hereunto affixed, duly attested by its
Secretary or an Assistant Secretary, and the Trustee has
caused these presents to be executed by its President or by
one of its Vice Presidents, and its corporate seal to be
hereunto affixed, duly attested by its Secretary, an Assistant
Secretary or a Trust Officer, as of the day and year first
above written.
Signed, Sealed and delivered
in the presence of:
__________________________________ BHC COMPANY
__________________________________
By_________________________________
Name:
Title:
(Corporate Seal)
Attest:
_________________________________Secretary
__________________________________ STATE STREET BANK AND
TRUST COMPANY
__________________________________
By________________________________ Name:<PAGE>
-17-
Title:
(Corporate Seal)
Attest:
_________________________________
Trust Officer<PAGE>
-18-
STATE OF CONNECTICUT )
) ss: BRIDGEPORT
COUNTY OF FAIRFIELD )
On this the ______ day of December, 1998, before me,
________________________, the undersigned officer, personally
appeared _________________________, Vice President, and
_______________________, Secretary, who acknowledged
themselves to be Vice President and Secretary of BHC Company,
a corporation, and that they, as such Vice President and
Secretary, being authorized so to do, executed the foregoing
instrument for the purposes therein contained by signing the
name of the corporation by themselves as Vice President and
Secretary.
IN WITNESS WHEREOF, I have hereunto set my hand and
official seal.
____________________________________
Notary Public
(Notarial Seal)
My Commission
Expires:_______________<PAGE>
-19-
STATE OF CONNECTICUT )
) ss: HARTFORD
COUNTY OF HARTFORD )
On this the ______ day of December, 1998, before me,
_________________________, the undersigned officer, personally
appeared _________________________, Vice President, and
_______________________, Trust Officer, who acknowledged
themselves to be Vice President and Trust Officer of State
Street Bank and Trust Company, a corporation, and that they,
as such Vice President and Trust Officer, being authorized so
to do, executed the foregoing instrument for the purposes
therein contained by signing the name of the corporation by
themselves as Vice President and Trust Officer.
IN WITNESS WHEREOF, I have hereunto set my hand and
official seal.
__________________________________
Notary Public
(Notarial Seal)
My Commission
Expires:______________<PAGE>
BONDHOLDER CONSENT
The undersigned, AQUARION COMPANY, a Delaware
corporation, as owner of all of the outstanding bonds of BHC
Company issued under and pursuant to the First Mortgage
executed by the Bridgeport Hydraulic Company (predecessor to
BHC Company) and The Bridgeport Trust Company (predecessor to
The State Street Bank and Trust Company as Trustee) dated as
of June 4, 1924, as supplemented by 24 indentures supplemental
to or in modification of the original mortgage, hereby
consents to the execution by BHC Company and The State Street
Bank and Trust Company, as successor Trustee, of a Twenty-
Fifth Supplemental Indenture dated as of November 1, 1998 in
substantially the form attached hereto as Exhibit A. As the
sole holder of bonds issued under said First Mortgage, as
supplemented, the undersigned hereby consents to the amendment
of the terms of the Series R bonds and the implementation of
the release provisions, all as reflected in said Twenty-Fifth
Supplemental Indenture.
IN WITNESS WHEREOF, the undersigned has caused this
Consent to be executed by its President or Vice President and
its corporate seal to be hereunto affixed and duly attested by
its Secretary or an Assistant Secretary, as of this ___ day of
November, 1998.<PAGE>
AQUARION COMPANY
By_______________________________
Name:
Title:
(Corporate Seal)
ATTEST ___________________________
Secretary
<PAGE>
COMMONWEALTH OF CONNECTICUT )
) ss: BRIDGEPORT
COUNTY OF FAIRFIELD )
On this ____ day of December, 1998, before me
______________________________, the undersigned officer,
personally appeared __________________________, Vice
President, and _______________________, Secretary, who
acknowledge themselves to be Vice President and Secretary of
AQUARION COMPANY, a corporation, and that they, as such Vice
President and Secretary, being authorized so to do, executed
the foregoing instrument for the purposes therein contained by
signed the name of the Corporation by themselves as Vice
President and Secretary.
IN WITNESS WHEREOF, I have hereunto set my hand and
official seal.
___________________________________
(Notary Public)
(Notarial Seal)
My Commission Expires:
______________
HART01-229649-1
10309-11230
March 18, 1999 3:24 pm<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the December 31, 1998
Aquarion Company form 10-k and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 654
<SECURITIES> 0
<RECEIVABLES> 11325
<ALLOWANCES> 1976
<INVENTORY> 4526
<CURRENT-ASSETS> 41485
<PP&E> 493279
<DEPRECIATION> 146034
<TOTAL-ASSETS> 457480
<CURRENT-LIABILITIES> 35486
<BONDS> 141380
0
0
<COMMON> 7507
<OTHER-SE> 139333
<TOTAL-LIABILITY-AND-EQUITY> 457480
<SALES> 115669
<TOTAL-REVENUES> 115669
<CGS> 0
<TOTAL-COSTS> 71308
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10507
<INCOME-PRETAX> 34054
<INCOME-TAX> 14095
<INCOME-CONTINUING> 19959
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19959
<EPS-PRIMARY> 2.69
<EPS-DILUTED> 2.62
</TABLE>
RESTATED CERTIFICATE OF INCORPORATION
of
AQUARION COMPANY
----------------
Pursuant to Section 245 of the
General Corporation Law of the State of Delaware
AQUARION COMPANY, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, hereby
certifies as follows:
1. The present name of the corporation is AQUARION COMPANY (the
"Corporation"). The Corporation was originally incorporated under the
name THE HYDRAULIC COMPANY, and the date of filing of the original
Certificate of Incorporation of the Corporation with the Secretary of
State of the State of Delaware was October 17, 1968.
2. The provisions of the Certificate of Incorporation of the
Corporation are hereby restated and integrated into the single instrument
that is hereinafter set forth, and that is entitled "Restated Certificate
of Incorporation of Aquarion Company."
3. The restatement of the Certificate of Incorporation herein
certified has been duly adopted and approved by the Board of Directors
without a vote of the stockholders in accordance with the provisions of
Section 245 of the Delaware General Corporation Law.
4. The Restated Certificate of Incorporation of
Aquarion Company only restates and integrates and does not
further amend the provisions of the Corporation's Certificate
of Incorporation as heretofore amended or supplemented, and
there is no discrepancy between those provisions and the
provisions of the Restated Certificate of Incorporation of
Aquarion Company.
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
of
AQUARION COMPANY
----------------
Article 1. The name of the Corporation is AQUARION COMPANY.
----------
Article 2. The address of the Corporation's
---------
registered office in the State of Delaware is 229 South State
Street, City of Dover, County of Kent. The name of the
Corporation s registered agent at such address is The
Prentice-Hall Corporation System, Inc.
Article 3. The nature of the business and the
----------
purposes to be conducted and promoted by the Corporation are
to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the
State of Delaware.
Article 4. The amount of the total authorized capital
----------
stock of Corporation shall be 2,500,000 shares of preferred
stock, no par value, provided that the Corporation shall not
issue shares of such Preferred Stock if such issue would
increase the aggregate stated value of the Corporation s
issued and outstanding Preferred Stock to an amount in excess
of 25,000,000 and 16,000,000 shares of Common Stock, no par
value. Holders of Common Stock shall have no pre-emptive
rights to subscribe to any future issues of shares of Common
Stock. The Board of Directors shall be empowered to issue and
dispose of both the Preferred Stock and the Common Stock from
time to time with such voting powers, full or limited, or no
voting powers, and such designations, preferences and
relative, participating, optional or other special rights, and
qualifications, limitations and restrictions thereof as the
Board may provide for in the resolution or resolutions
providing for the issue of such stock adopted by the Board of
Directors.
Series B Junior Participating Preferred Stock:
---------------------------------------------
Section a. Designation and Amount. The shares of such
----------------------
series shall be designated as "Series B Junior Participating
Preferred Stock" (the "Series B Preferred Stock") and the
number of shares constituting the Series B Preferred Stock
shall be 100,000. Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided,
--------
that no decrease shall reduce the number of shares of Series B
Preferred Stock to a number less than the number of shares
then outstanding plus the number of shares reserved for
<PAGE>
-2-
issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities
issued by the Company convertible into Series B Preferred
Stock. Shares of Series B Preferred Stock shall have a stated
capital of $10.00 per share, which for purposes of Article 4
of the Certificate of Incorporation shall constitute the
"stated value" of such shares.
Section b. Dividends and Distributions.
---------------------------
(1) Subject to the rights of the holders of any shares
of any series of Preferred Stock of the Company (the
"Preferred Stock") (or any similar stock) ranking prior and
superior to the Series B Preferred Stock with respect to
dividends, the holders of shares of Series B Preferred Stock,
in preference to the holders of Common Stock, no par value ($1
per share stated value) of the Company (the "Common Stock")
and of any other stock of the Company ranking junior to the
Series B Preferred Stock, shall be entitled to receive, when,
as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable
in cash on the last day of January, April, July, and October
in each year (each such date being referred to herein as a
"Dividend Payment Date"), commencing on the first Dividend
Payment Date after the first issuance of a share or fraction
of a share of Series B Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to the greater of (a) $1
or (b) subject to the provision for adjustment hereinafter set
forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount
(payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of
Common Stock, declared on the Common Stock since the
immediately preceding Dividend Payment Date or, with respect
to the first Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series B Preferred
Stock. In the event the Company shall at any time after June
25, 1996 declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment
of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such
case the amount to which holders of shares of Series B
Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted
by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding
immediately prior to such event.
(2) The Company shall declare a dividend or distribution
on the Series B Preferred Stock as provided in paragraph (A)
of this Section immediately after it declares a dividend or
distribution on the Common Stock (other than a dividend
payable in shares of Common Stock); provided that, in the
<PAGE>
-3-
event no dividend or distribution shall have been declared on
the Common Stock during the period between any Dividend
Payment Date and the next subsequent Dividend Payment Date, a
dividend of $1 per share on the Series B Preferred Stock shall
nevertheless be payable, when, as and if declared, on such
subsequent Dividend Payment Date.
(3) Dividends shall begin to accrue and be cumulative,
whether or not earned or declared, on outstanding shares of
Series B Preferred Stock from the Dividend Payment Date next
preceding the date of issue of such shares, unless the date of
issue of such shares is prior to the record date for the first
Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares,
or unless the date of issue is a Dividend Payment Date or is a
date after the record date for the determination of holders of
shares of Series B Preferred Stock entitled to receive a
quarterly dividend and before such Dividend Payment Date, in
either of which events such dividends shall begin to accrue
and be cumulative from such Dividend Payment Date. Accrued
but unpaid dividends shall not bear interest. Dividends paid
on the shares of Series B Preferred Stock in an amount less
than the total amount of such dividends at the time accrued
and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series B Preferred
Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not
more than 60 days prior to the date fixed for the payment
thereof.
Section c. Voting Rights. The holders of shares of
-------------
Series B Preferred Stock shall have the following voting
rights:
(1) Subject to the provision for adjustment
hereinafter set forth and except as otherwise provided in the
Certificate of Incorporation or required by law, each share of
Series B Preferred Stock shall entitle the holder thereof to
100 votes on all matters upon which the holders of the Common
Stock of the Company are entitled to vote. In the event the
Company shall at any time after June 25, 1996 declare or pay
any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the number of votes per share to
which holders of shares of Series B Preferred Stock were
entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction, the numerator of which
is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding
immediately prior to such event.
<PAGE>
-4-
(2) Except as otherwise provided herein, in the
Certificate of Incorporation or in any other Certificate of
Designations creating a series of Preferred Stock or any
similar stock, and except as otherwise required by law, the
holders of shares of Series B Preferred Stock and the holders
of shares of Common Stock and any other capital stock of the
Company having general voting rights shall vote together as
one class on all matters submitted to a vote of stockholders
of the Company.
(3) Except as set forth herein, or as otherwise
provided by law, holders of Series B Preferred Stock shall
have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for taking any
corporate action.
Section d. Certain Restrictions.
--------------------
(1) Whenever quarterly dividends or other dividends
or distributions payable on the Series B Preferred Stock as
provided in Section 2 are in arrears, thereafter and until all
accrued and unpaid dividends and distributions, whether or not
earned or declared, on shares of Series B Preferred Stock
outstanding shall have been paid in full, the Company shall
not:
(a) declare or pay dividends, or make any
other distributions, on any shares of stock ranking junior (as
to dividends) to the Series B Preferred Stock;
(b) declare or pay dividends, or make any
other distributions, on any shares of stock ranking on a
parity (as to dividends) with the Series B Preferred Stock,
except dividends paid ratably on the Series B Preferred Stock
and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(c) redeem or purchase or otherwise acquire
for consideration shares of any stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding
up) to the Series B Preferred Stock, provided that the Company
may at any time redeem, purchase or otherwise acquire shares
of any such junior stock in exchange for shares of any stock
of the Company ranking junior (as to dividends and upon
dissolution, liquidation or winding up) to the Series B
Preferred Stock or rights, warrants or options to acquire such
junior stock;
(d) redeem or purchase or otherwise acquire
for consideration any shares of Series B Preferred Stock, or
any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with
the Series B Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such
<PAGE>
-5-
shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series
and classes, shall determine in good faith will result in fair
and equitable treatment among the respective series or
classes.
(2) The Company shall not permit any subsidiary of
the Company to purchase or otherwise acquire for consideration
any shares of stock of the Company unless the Company could,
under paragraph (A) of this Section d, purchase or otherwise
acquire such shares at such time and in such manner.
Section e. Reacquired Shares. Any shares of Series B
-----------------
Preferred Stock purchased or otherwise acquired by the Company
in any manner whatsoever shall be retired and canceled
promptly after the acquisition thereof. All such shares shall
upon their retirement become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of
the Board of Directors, subject to any conditions and
restrictions on issuance set forth herein.
Section f. Liquidation, Dissolution or Winding Up. Upon
any liquidation, dissolution or winding up of the Company, no
distribution shall be made (A) to the holders of the Common
Stock or of shares of any other stock of the Company ranking
junior, upon liquidation, dissolution or winding up, to the
Series B Preferred Stock unless, prior thereto, the holders of
shares of Series B Preferred Stock shall have received $100
per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not earned or
declared, to the date of such payment, provided that the
holders of shares of Series B Preferred Stock shall be
entitled to receive an aggregate amount per share, subject to
the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount to be distributed per share to
holders of shares of Common Stock, or (B) to the holders of
shares of stock ranking on a parity upon liquidation,
dissolution or winding up with the Series B Preferred Stock,
except distributions made ratably on the Series B Preferred
Stock and all such parity stock in pro-portion to the total
amounts to which the holders of all such shares are entitled
upon such liquidation, dissolution or winding up. In the
event, however, that there are not sufficient assets available
to permit payment in full of the Series B liquidation
preference and the liquidation preferences of all other
classes and series of stock of the Company, if any, that rank
on a parity with the Series B Preferred Stock in respect
thereof, then the assets available for such distribution shall
be distributed ratably to the holders of the Series B
Preferred Stock and the holders of such parity shares in the
proportion to their respective liquidation preferences. In
the event the Company shall at any time after June 25, 1996
declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination
<PAGE>
-6-
or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the aggregate
amount to which holders of shares of Series B Preferred Stock
were entitled immediately prior to such event under the
proviso in clause (A) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section g. Consolidation, Merger, etc. In case the
--------------------------
Company shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common
Stock are converted into, exchanged for or changed into other
stock or securities, cash and/or any other property, then in
any such case each share of Series B Preferred Stock shall at
the same time be similarly converted into, exchanged for or
changed into an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 100 times the
aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or
for which each share of Common Stock is converted, exchanged
or converted. In the event the Company shall at any time
after June 25, 1996 declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in
each such case the amount set forth in the preceding sentence
with respect to the conversion, exchange or change of shares
of Series B Preferred Stock shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior
to such event.
Section h. No Redemption. The shares of Series B
-------------
Preferred Stock shall not be redeemable from any holder.
Section i. Rank. The Series B Preferred Stock shall
----
rank, with respect to the payment of dividends and the
distribution of assets upon liquidation dissolution or winding
up of the Company, junior to all other series of Preferred
Stock and senior to the Common Stock.
Section j. Amendment. If any proposed amendment to the
---------
Certificate of Incorporation (including this Certificate of
Designations) would alter, change or repeal any of the
<PAGE>
-7-
preferences, powers or special rights given to the Series B
Preferred Stock so as to affect the Series B Preferred Stock
adversely, then the holders of the Series B Preferred Stock
shall be entitled to vote separately as a class upon such
amendment, and the affirmative vote of two-thirds of the
outstanding shares of the Series B Preferred Stock, voting
separately as a class, shall be necessary for the adoption
thereof, in addition to such other vote as may be required by
the General Corporation Law of the State of Delaware.
Section k. Fractional Shares. Series B Preferred Stock
-----------------
may be issued in fractions of a share that shall entitle the
holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive dividends, participate in
distributions and to have the benefit of all other rights of
holders of Series B Preferred Stock.
Article 5. The vote of the stockholders of the
---------
Corporation required to approve any Business Combination shall
be as set forth in this Article 5. The term "Business
Combination" shall have the meaning ascribed to it in
Paragraph 1.(B) of this Article. Each other capitalized term
shall have the meaning ascribed to it in Paragraph 3 of this
Article.
1. (A) In addition to any affirmative vote required by
law or this Restated Certificate of Incorporation and except
as otherwise expressly provided in Paragraph 2 of this Article
5:
(1) any merger or consolidation of the
Corporation or any Subsidiary with (i) any Interested
Stockholder or (ii) any other Person (whether or not itself an
Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate of an Interested
Stockholder; or
(2) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition (in one transaction or a
series of transactions) to or with any Interested Stockholder
or any Affiliate of any Interested Stockholder of assets of
the Corporation or any Subsidiary having an aggregate Fair
Market Value of $5,000,000 or more; or
(3) the issuance or transfer by the
Corporation or any Subsidiary (in one transaction or a series
of transactions) of any securities of the Corporation or any
Subsidiary to any Interested Stockholder or any Affiliate of
any Interested Stockholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate
Fair Market Value of $5,000,000 or more, other than the
issuance of securities upon the conversion of convertible
securities of the Corporation or any Subsidiary which were not
acquired by such Interested Stockholder (or such Affiliate)
from the Corporation or a Subsidiary; or
<PAGE>
-8-
(4) the adoption of any plan or proposal for
the liquidation or dissolution of the Corporation proposed by
or on behalf of an Interested Stockholder or any Affiliate of
any Interested Stockholder; or
(5) any transaction involving the Corporation
or any Subsidiary (whether or not with or into or otherwise
involving an Interested Stockholder), and including, without
limitation, any reclassification of securities (including any
reverse stock split), or recapitalization or reorganization of
the Corporation, or any merger or consolidation of the
Corporation with any of its Subsidiaries or any self tender
offer for or repurchase of securities of the Corporation by
the Corporation or any Subsidiary or any other transaction
(whether or not with or into or otherwise involving an
Interested Stockholder), which in any such case has the
effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of
equity securities or securities convertible into equity
securities of the Corporation or any Subsidiary which is
directly or indirectly beneficially owned by any Interested
Stockholder or any Affiliate of any Interested Stockholder;
shall require the affirmative vote of the holders of at least
80 percent of the combined voting power of the then
outstanding shares of the Voting Stock, in each case voting
together as a single class (it being understood that for
purposes of this Article 5, each share of the Voting Stock
shall have the number of votes granted to it pursuant to
Article 4 of this Restated Certificate of Incorporation or any
designation of the rights, powers and preferences of any class
or series of Preferred Stock made pursuant to said Article 4
(a "Preferred Stock Designation")), which vote shall include
the affirmative vote of at least two-thirds (2/3) of the
combined voting power of the outstanding shares of Voting
Stock held by stockholders other than the Interested
Stockholder. Such affirmative vote shall be required
notwithstanding any provision of law or any other provision of
this Restated Certificate of Incorporation or any agreement
with any national securities exchange or otherwise which might
permit a lesser vote or no vote and in addition to any
affirmative vote required of the holders of any class or
series of Voting Stock pursuant to law, this Restated
Certificate of Incorporation or any Preferred Stock
Designation.
(B) The term "Business Combination" as used in this
Article 5 shall mean any transaction that is referred to in
any one or more clauses (1) through (5) of Paragraph 1.(A) of
this Article.
2. The provisions of Paragraph 1.(A) of this Article 5
shall not be applicable to any particular Business
Combination, and such Business Combination shall require only
such affirmative vote as is required by law, any other
provision of this Restated Certificate of Incorporation, any
Preferred Stock Designation or any agreement with any national
<PAGE>
-9-
securities exchange, if, in the case of a Business Combination
that does not involve any cash or other consideration being
received by the stockholders of the Corporation, solely in
their respective capacities as stockholders of the
Corporation, the condition specified in the following
paragraph (A) is met, or, in the case of any other Business
Combination, the conditions specified in the following
paragraph (A) or the conditions specified in the following
paragraph (B) are met:
(A) such Business Combination shall have been
approved by a majority of the Disinterested Directors, or
(B) each of the five conditions specified in the
following clauses (1) through (5) shall have been met:
(1) the aggregate amount of the cash and the
Fair Market Value as of the Consummation Date of any
consideration other than cash to be received per share by
holders of Common Stock in such Business Combination shall be
at least equal to the highest of the following (it being
intended that the requirements of this clause (B)(1) shall be
required to be met with respect to all shares of Common Stock
outstanding whether or not the Interested Stockholder has
acquired any shares of the Common Stock):
(i) if applicable, the highest per share
price (including any brokerage commissions, transfer taxes and
soliciting dealers fees) paid in order to acquire any shares
of Common Stock beneficially owned by the Interested
Stockholder which were acquired beneficially by such
Interested Stockholder (x) within the two-year period
immediately prior to the Announcement Date or (y) in the
transaction in which it became an Interested Stockholder,
whichever is higher; or
(ii) the Fair Market Value per share of
Common Stock on the Announcement Date or on the Determination
Date, whichever is higher; or
(iii) an amount which bears the same
or greater percentage relationship to the Fair Market Value of
the Common Stock on the Announcement Date as the highest per
share price determined in (B)(1)(i) above bears to the Fair
Market Value of the Common Stock on the date of the
commencement of the acquisition of the Common Stock by such
Interested Stockholder; and
(2) the aggregate amount of the cash and the
Fair Market Value as of the Consummation Date of any
consideration other than cash to be received per share by
holders of shares of any class or series of Voting Stock
(other than Common Stock) shall be at least equal to the
highest of the following (it being intended that the
requirements of this clause (B)(2) shall be required to be met
with respect to every class and series of such outstanding
Voting Stock, whether or not the Interested Stockholder has
<PAGE>
-10-
previously acquired any shares of a particular class or series
of Voting Stock):
(i) if applicable, the highest per share
price (including any brokerage commissions, transfer taxes and
soliciting dealers fees) paid in order to acquire any shares
of such class or series of Voting Stock beneficially owned by
the Interested Stockholder which were acquired beneficially by
such Interested Stockholder (x) within the two-year period
immediately prior to the Announcement Date or (y) in the
transaction in which it became an Interested Stockholder,
whichever is higher;
(ii) if applicable, the highest
preferential amount per share to which the holders of shares
of such class or series of Voting Stock are entitled in the
event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation;
(iii) the Fair Market Value per share
of such class or series of Voting Stock on the Announcement
Date or the Determination Date, whichever is higher; or
(iv) an amount which bears the same
or greater percentage to the Fair Market Value of such class
of Voting Stock on the Announcement Date as the highest per
share price in (B)(2)(i) above bears to the Fair Market Value
of such Voting Stock on the date of the commencement of the
acquisition of such Voting Stock by such Interested
Stockholder; and
(3) the consideration to be received by
holders of a particular class or series of outstanding Voting
Stock (including Common Stock) shall be in cash or in the same
form as was previously paid in order to acquire beneficially
shares of such class or series of Voting Stock that are
beneficially owned by the Interested Stockholder and, if the
Interested Stockholder beneficially owns shares of any class
or series of Voting Stock that were acquired with varying
forms of consideration, the form of consideration to be
received by each holder of such class or series of Voting
Stock shall be, at the option of such holder, either cash or
the form used by the Interested Stockholder to acquire
beneficially the largest number of shares of such class or
series of Voting Stock beneficially acquired by it prior to
the Announcement Date; and
(4) after such Interested Stockholder has
become an Interested Stockholder and prior to the consummation
of such Business Combination:
(i) such Interested Stockholder shall not
have become the beneficial owner of any additional shares of
Voting Stock of the Corporation, except as part of the
transaction in which it became an Interested Stockholder or
upon conversion of convertible securities acquired by it prior
<PAGE>
-11-
to becoming an Interested Stockholder or as a result of a pro
rata stock dividend or stock split; and
(ii) such Interested Stockholder
shall not have received the benefit, directly or indirectly
(except proportionately as a stockholder), of any loans,
advances, guarantees, pledges or other financial assistance or
tax credits or other tax advantages provided by the
Corporation or any Subsidiary, whether in anticipation of or
in connection with such Business Combination or otherwise; and
(iii) such Interested Stockholder
shall not have caused any material change in the Corporation's
business or capital structure, including, without limitation,
the issuance of shares of capital stock of the Corporation to
any third party; and
(iv) there shall have been (x) no
failure to declare and pay at the regular date therefor the
full amount of dividends (whether or not cumulative) on any
outstanding Preferred Stock, except as approved by a majority
of the Disinterested Directors, (y) no reduction in the annual
rate of dividends paid on Common Stock (except as necessary to
reflect any subdivision of the Common Stock), except as
approved by a majority of the Disinterested Directors, and (z)
an increase in such annual rate of dividends (as necessary to
prevent any such reduction) in the event of any
reclassification (including any reverse stock split),
recapitalization, reorganization, self tender offer or any
similar transaction which has the effect of reducing the
number of outstanding shares of the Common Stock, unless the
failure so to increase such annual rate was approved by a
majority of the Disinterested Directors; and
(5) a proxy or information statement
describing the proposed Business Combination and complying
with the requirements of the Securities Exchange Act of 1934
and the rules and regulations thereunder (or any subsequent
provisions replacing such Act, rules and regulations), whether
or not the Corporation is then subject to such requirements,
shall be mailed by and at the expense of the Interested
Stockholder at least thirty (30) days prior to the
consummation of such Business Combination to the public
stockholders of the Corporation (whether or not such proxy or
information statement is required to be mailed pursuant to
such Act or subsequent provisions), and shall contain at the
front thereof in a prominent place (i) any recommendations as
to the advisability (or inadvisability) of the Business
Combination which the Disinterested Directors, if any, may
choose to state, and (ii) the opinion of a reputable national
investment banking firm as to the fairness (or not) of such
Business Combination from the point of view of the remaining
public stockholders of the Corporation (such investment
banking firm to be engaged solely on behalf of the remaining
public stockholders, to be paid a reasonable fee for their
services by the Corporation upon receipt of such opinion, to
be unaffiliated with such Interested Stockholder, and, if
<PAGE>
-12-
there are at the time any Disinterested Directors, to be
selected by a majority of the Disinterested Directors).
3. For purposes of this Article 5:
(A) A "person" shall include, without limitation,
any individual, firm, corporation, group (as such term is used
in Regulation 13D-G of the General Rules and Regulations under
the Securities Exchange Act of 1934, as in effect on March,
1985) or other entity.
(B) "Interested Stockholder" shall mean any person
(other than the Corporation or any Subsidiary or any employee
benefit plan of the Corporation or any Subsidiary) who or
which:
(1) is the beneficial owner, directly or
indirectly, of more than 10 percent of the combined voting
power of the then outstanding shares of Voting Stock; or
(2) is an Affiliate of the Corporation and at
any time within the two-year period immediately prior to the
date in question was the beneficial owner, directly or
indirectly, of 10 percent or more of the combined voting power
of the then outstanding shares of Voting Stock; or
(3) is an assignee of or has otherwise
succeeded to the beneficial ownership of any shares of Voting
Stock that were at any time within the two-year period
immediately prior to the date in question beneficially owned
by an Interested Stockholder, if such assignment or succession
shall have occurred in the course of a transaction or series
of transactions not involving a public offering within the
meaning of the Securities Act of 1933.
(C) A person shall be a "beneficial owner" of any
Voting Stock:
(1) which such person or any of its Affiliates
or Associates beneficially owns, directly or indirectly; or
(2) which such person or any of its Affiliates
or Associates has (a) the right to acquire (whether or not
such right is exercisable immediately) pursuant to any
agreement, arrangement or understanding or upon the exercise
of conversion rights, exchange rights, warrants or options, or
otherwise, or (b) the right to vote or direct the vote
pursuant to any agreement, arrangement or understanding; or
(3) which are beneficially owned, directly or
indirectly, by any other person with which such person or any
of its Affiliates or Associates has any agreement, arrangement
or understanding for the purpose of acquiring, holding, voting
or disposing of any shares of Voting Stock.
(D) For the purposes of determining whether a
person is an Interested Stockholder pursuant to Paragraph
<PAGE>
-13-
3.(B) of this Article 5, the number of shares of Voting Stock
deemed to be outstanding shall include shares deemed owned by
such Interested Stockholder through application of Paragraph
3.(C) of this Article but shall not include any other shares
of Voting Stock that may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options, or otherwise.
(E) "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 of
the General Rules and Regulations under the Securities
Exchange Act of 1934, as in effect on March, 1985.
(F) "Subsidiary" shall mean any corporation more
than 50 percent of whose outstanding equity securities having
ordinary voting power in the election of directors is owned,
directly or indirectly, by the Corporation or by a Subsidiary
or by the Corporation and one or more Subsidiaries; provided,
however, that for the purposes of the definition of Interested
Stockholder set forth in Paragraph 3.(B) of this Article 5,
the term "Subsidiary" shall mean only a corporation of which a
majority of each class of Voting Stock is owned, directly or
indirectly, by the Corporation.
(G) "Disinterested Director" shall mean any member
of the Board of Directors of the Corporation who is
unaffiliated with, and not a nominee of, the Interested
Stockholder and was a member of the Board prior to the time
that the Interested Stockholder became an Interested
Stockholder, and any successor of a Disinterested Director who
is unaffiliated with, and not a nominee of, the Interested
Stockholder and who is recommended to succeed a Disinterested
Director by a majority of Disinterested Directors then on the
Board of Directors.
(H) "Fair Market Value" shall mean: (1) in the
case of stock, the highest closing sale price during the 30-
day period commencing on the 40th day preceding the date in
question of a share of such stock on the Composite Tape for
New York Stock Exchange-Listed Stocks, or, if such stock is
not quoted on the New York Stock Exchange-Composite Tape, on
the principal United States securities exchange registered
under the Securities Exchange Act of 1934 on which such stock
is listed, or, if such stock is not listed on any such
exchange, the highest closing sales price or bid quotation
with respect to a share of such stock during the 30-day period
commencing on the 40th day preceding the date in question on
the National Association of Securities Dealers, Inc. Automated
Quotations System or any system then in use, or if no such
quotations are available, the fair market value on the date in
question of a share of such stock as determined by a majority
of the Disinterested Directors in good faith; and (2) in the
case of stock of any class or series which is not traded on
any United States registered securities exchange nor in the
over-the-counter market or in the case of property other than
cash or stock, the fair market value of such property on the
<PAGE>
-14-
date in question as determined by a majority of the
Disinterested Directors in good faith.
(I) In the event of any Business Combination in
which the Corporation survives, the phrase "any consideration
other than cash to be received" as used in Paragraphs 2.(B)(1)
and (2) of this Article 5 shall include the shares of Common
Stock and/or the shares of any other class of outstanding
Voting Stock retained by the holders of such shares.
(J) "Announcement Date" shall mean the date of
first public announcement of the proposed Business
Combination.
(K) "Determination Date" shall mean the date on
which the Interested Stockholder became an Interested
Stockholder.
(L) "Consummation Date" shall mean the date of the
consummation of the Business Combination.
(M) The term "Voting Stock" shall mean all
outstanding shares of capital stock of all classes and series
of the Corporation entitled to vote generally in the election
of directors of the Corporation, in each case voting together
as a single class. The term "Voting Stock" as defined in this
Paragraph 3 shall apply to the term "Voting Stock" as used in
Article 6 of this Restated Certificate of Incorporation.
4. A majority of the Disinterested Directors shall have
the power and duty to determine, on the basis of information
known to them after reasonable inquiry, all facts necessary to
determine compliance with this Article 5 including, without
limitation:
(A) whether a person is an Interested Stockholder;
(B) the number of shares of Voting Stock
beneficially owned by any person;
(C) whether a person is an Affiliate or Associate
of another person;
(D) whether the requirements of Paragraph 2.(B) of
this Article 5 have been met with respect to any Business
Combination;
(E) whether the assets which are the subject of any
Business Combination have, or the consideration to be received
for the issuance or transfer of securities by the Corporation
or any Subsidiary in any Business Combination has, an
aggregate Fair Market Value of $5,000,000 or more; and
(F) such other matters with respect to which a
determination is required under this Article.
<PAGE>
-15-
The good faith determination of a majority of the
Disinterested Directors on such matters shall be conclusive
and binding for all purposes of this Article 5.
5. Nothing contained in this Article 5 shall be
construed to relieve any Interested Stockholder from any
fiduciary obligation imposed by law.
6. Notwithstanding anything contained in this Restated
Certificate of Incorporation to the contrary, the affirmative
vote of the holders of at least 80 percent of the combined
voting power of the Voting Stock, voting together as a single
class, shall be required to alter, amend, or repeal this
Article 5 or to adopt any provision inconsistent therewith
provided, however, that if there is an Interested Stockholder
on the record date for the meeting at which such action is
submitted to the stockholders for their consideration, such 80
percent vote must include the affirmative vote of at least
two-thirds (2/3) of the combined voting power of the
outstanding shares of Voting Stock held by stockholders other
than the Interested Stockholder.
Article 6. The following provisions are adopted for
the management of the business and for the conduct of the
affairs of the Corporation and for creating, defining,
limiting and regulating the powers of the Corporation, the
directors and the stockholders:
(a) Both stockholders and directors of the Corporation
shall have power to hold their meetings within or without the
State of Delaware; and the books and records of the
Corporation may be kept within or without the State of
Delaware at such place or places as may, from time to time, be
designated by the Board of Directors.
(b) (i) Except as otherwise fixed pursuant to
Article 4 of the Restated Certificate of Incorporation
relating to the rights of the holders of any class or series
of Preferred Stock having a preference over the Common Stock
as to dividends or upon liquidation to elect additional
directors under specified circumstances, the Board of
Directors shall consist of not less than nine or more than
fifteen persons, the exact number to be fixed from time to
time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of
authorized directors (whether or not there exists any
vacancies in previously authorized directorships at the time
any such resolution is presented to the Board for adoption).
The directors (other than those who may be elected by the
holders of any class or series of Preferred Stock having a
preference over Common Stock as to dividends or upon
liquidation) shall be classified, with respect to the time for
which they severally hold office, into three classes, as
nearly equal in number as possible, as shall be provided in
the manner specified in the By-Laws, one class to hold office
initially for a term expiring at the annual meeting of
stockholders to be held in 1986, another class to hold office
<PAGE>
-16-
initially for a term expiring at the annual meeting of
stockholders to be held in 1987, and another class to hold
office initially for a term expiring at the annual meeting of
stockholders to be held in 1988, with the members of each
class to hold office until their successors are elected and
qualified. At each annual meeting of the stockholders of the
Corporation, the successors to the class of directors whose
term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held
in the third year following the year of their election. The
election of directors need not be by ballot.
(ii) Advance notice of nominations for the election
of directors, other than by the Board of Directors or a
committee thereof, shall be given in the manner provided in
the By-Laws.
(iii) Except as otherwise fixed pursuant to the
provisions of Article 4 hereof relating to the rights of the
holders of any class or series of Preferred Stock having a
preference over the Common Stock as to dividends or upon
liquidation to elect directors under specified circumstances,
newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board
of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause may be
filled only by a majority vote of the directors then in
office, though less than a quorum of the Board of Directors.
If any applicable provision of the Delaware General
Corporation Law expressly confers power on stockholders to
fill such a directorship at a special meeting of stockholders,
such a directorship may be filled at such a meeting only by
the affirmative vote of at least 80 percent of the combined
voting powers of the outstanding shares of Voting Stock. Any
director elected in accordance with the two preceding
sentences shall hold office for the remainder of the full term
of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's
successor shall have been elected and qualified. No decrease
in the number of authorized directors constituting the entire
Board of Directors shall shorten the term of any incumbent
director.
(iv) Subject to the rights of the holders of
any class or series of Preferred Stock having preference over
the Common Stock as to dividends or upon liquidation to elect
directors under specified circumstances, any director, or the
entire Board of Directors, may be removed from office at any
time, but only for cause and only by the affirmative vote of
the holders of at least 80 percent of the combined voting
power of all of the then-outstanding shares of the Voting
Stock, voting together as a single class (it being understood
that for all purposes of this Article 6, each share of the
Voting Stock shall have the number of votes granted to it
pursuant to Article 4 of this Restated Certificate of
Incorporation or any Preferred Stock Designation).
<PAGE>
-17-
(c) The original By-Laws of the Corporation shall be
adopted by the Board of Directors. The Board of Directors
shall have the power to make, alter, amend and repeal the By-
Laws of the Corporation, subject to the power of the holders
of the Voting Stock to alter, amend or repeal the By-Laws;
provided, however, that, notwithstanding any other provisions
of this Restated Certificate of Incorporation or any provision
of law which might otherwise permit a lesser vote or no vote,
but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by
law, this Restated Certificate of Incorporation or any
Preferred Stock Designation, the affirmative vote of the
holders of at least 80 percent of the combined voting power of
all the then-outstanding shares of the Voting Stock, voting
together as a single class, shall be required to (i) alter,
amend or repeal any provision of the By-Laws which is to the
same effect as paragraphs (b), (c), (i) and (j) of Article 6
of this Restated Certificate of Incorporation, or Article 5 of
this Restated Certificate of Incorporation.
(d) The business of the Corporation shall be managed by
its Board of Directors, and the Board of Directors may
exercise all of the powers of the Corporation without any
action or consent by the stockholders, except as may otherwise
be provided by the statutes of the State of Delaware, by this
Restated Certificate of Incorporation, or by the By-Laws.
(e) The Board of Directors shall have the power, in its
discretion, from, time to time to fix and vary the amounts to
be maintained as surplus and as working capital and to create
and set apart reserves for any proper purposes and to abolish
any such reserves; and to fix and determine, subject to
limitations imposed by law, what portion of the consideration
received upon any issue of stock shall constitute capital and
what portion, if any, paid-in or capital surplus; and to cause
dividends to be paid from paid-in or capital surplus or from
any surplus due to appreciation in value of any property of
the Corporation; to determine whether and when dividends shall
be declared and paid and in what manner and form; and to
determine the use and disposition of any surplus or net
profits of the Corporation.
(f) The Board of Directors shall have the power to
subject the whole or any part of the real and personal
properties of the Corporation, including after-acquired
property, to liens, mortgages and encumbrances, without limit
as to amount.
(g) Any director of the Corporation may vote upon any
contract or other transaction between the Corporation and any
subsidiary or affiliated corporation without regard to the
fact that he is also a director or officer of such subsidiary
or affiliated corporation.
(h) The directors may, acting in good faith and in their
discretion, submit any contract, act or proposal for
authorization, approval or ratification at any meeting of
<PAGE>
-18-
stockholders, and any such contract, act or proposal
authorized, approved or ratified by a vote of the holders of a
majority of the shares of capital stock of the Corporation
represented in person or by proxy at such meeting and entitled
to vote shall be as valid and as binding upon the Corporation
and upon all stockholders as though it had been authorized,
approved, or ratified, as the case may be, by every
stockholder of the Corporation.
(i) Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at an annual
or special meeting of stockholders of the Corporation and may
not be effected by any consent in writing by such
stockholders. Except as otherwise required by law and subject
to the rights of the holders of any class or any series of
Preferred Stock having a preference over the Common Stock as
to dividends or upon liquidation, special meetings of
stockholders of the Corporation may be called only by the
Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether
or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to
the Board for adoption).
(j) Notwithstanding any other provision of this Restated
Certificate of Incorporation or any provision of law which
might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by
law, this Restated Certificate of Incorporation or any
Preferred Stock Designation, the affirmative vote of the
holders of at least 80 percent of the combined voting power of
all of the then-outstanding shares of the Voting Stock, voting
together as a single class, shall be required to alter, amend
or repeal this Article 6, or any provision hereof.
Article 7. No director of the Corporation shall be
personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director;
provided, however, that this Article shall not eliminate or
limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of
law, (iii) under section 174 of the Delaware General
Corporation law, or (iv) for any transaction from which the
director derived an improper personal benefit. This Article
shall not eliminate or limit the liability of a director for
any act or omission occurring prior to the date on which this
Article becomes effective. Any repeal or modification of this
Article 7 shall not adversely affect any right or protection
of a director of the Corporation existing hereunder with
respect to any act or omission occurring prior to the time of
such repeal or modification.
<PAGE>
-19-
IN WITNESS WHEREOF, the undersigned do execute this Restated
Certificate of Incorporation and affirm and acknowledge, under penalties
of perjury, that this Restated Certificate of Incorporation is their act
and deed and that the facts stated herein are true, this ____ day of
----
______________, 1998.
- --------------
_______________________________
-------------------------------
Name: Richard K. Schmidt
Title: President
Attest:
___________________________
- ---------------------------
Name: Larry L. Bingaman
Title: Secretary
END
