Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 1998
--------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _____________
Commission File Number 1-8060
-------------
AQUARION COMPANY
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0852232
------------------------ ---------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
835 Main Street, Bridgeport, Connecticut 06604-4995
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 335-2333
------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changes since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of sharesshare outstanding of each of the issuer's classes of
common stock as of August 7,November 9, 1998:
Common Stock
No Par Value (Stated Value: $1) 7,446,785
--------------------------------- ------------------7,478,424
---------------------------------- ------------------------------
Class Number of Shares
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
_________________________________---------------------------------
AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
Quarter Ended June 30, SixNine Months Ended
JuneSeptember 30, ---------------------- -------------------------September 30,
--------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ---------- ---- ---- ----
(In thousands, except share data)
Operating revenues $26,827 $26,522 $52,210 $49,911
------- ------- ------- -------$29,968 $29,226 $82,178 $79,137
--------- --------- --------- ---------
Costs and expenses:
Operating 7,214 7,415 14,685 13,5497,527 7,857 22,212 21,406
General and administrative 3,734 3,892 7,587 8,0123,322 3,199 10,909 11,211
Depreciation 3,543 2,959 7,068 5,9383,532 3,247 10,600 9,185
Interest expense 2,658 2,936 5,344 5,8122,619 3,025 7,963 8,837
Taxes other than income taxes 2,411 3,189 4,943 6,419
------- ------- ------- -------2,016 1,905 6,959 8,324
--------- --------- --------- ---------
Total costs and expenses 19,560 20,391 39,627 39,730
------- ------- ------- -------
7,267 6,131 12,583 10,18119,016 19,233 58,643 58,963
--------- --------- --------- ---------
10,952 9,993 23,535 20,174
Allowance for funds used during
construction 42 214 89 451
------- ------- ------- -------64 237 153 688
--------- --------- --------- ---------
Income before income taxes 7,309 6,345 12,672 10,63211,016 10,230 23,688 20,862
Income taxes 3,301 2,809 5,629 4,708
------- ------- ------- -------4,891 4,498 10,520 9,206
--------- --------- --------- ---------
Net income $4,008 $3,536 $7,043 $5,924
======= ======= ======= =======$ 6,125 $ 5,732 $13,168 $11,656
========= ========= ========= =========
Basic earnings per share $0.54 $0.50 $0.95 $0.84
======= ======= ======= =======
Weighted$0.82 $0.80 $1.78 $1.64
========= ========= ========= =========
Basic weighted average common shares
outstanding 7,408,374 7,094,729 7,387,445 7,065,8377,441,638 7,171,520 7,405,701 7,101,451
========= ========= ========= =========
Diluted earnings per share $0.53 $0.49 $0.93 $0.83$0.80 $0.79 $1.74 $1.62
========= ========= ========= ========
Weighted=========
Diluted weighted average common
shares outstanding 7,579,111 7,166,573 7,558,181 7,137,6817,620,938 7,243,980 7,579,212 7,173,912
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
-2-
AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
UNAUDITED
Quarter Ended June 30, SixNine Months Ended
JuneSeptember 30, ---------------------- -------------------------September 30,
------------------- ------------------
1998 1997 1998 1997
------ ------ ------ ---------- ---- ---- ----
(In thousands, except share data)
Beginning of period $19,628 $15,852$20,586 $16,491 $19,624 $16,324
Net Income 4,008 3,536 7,043 5,924income 6,125 5,732 13,168 11,656
------- ------- ------- -------
23,636 19,388 26,667 22,24826,711 22,223 32,792 27,980
Deduct: Cash dividends declared on
common stock, $.415 per
share for the third quarter
1998, $.41 per share for
each ofall other quarters in 1998,
$.41 per share for the
1st and 2nd quarters
1998third quarter 1997 and
$.405 per share for
each of the 1st and 2ndall other quarters in 1997 3,050 2,897 6,081 5,7573,087 2,948 9,168 8,705
------- ------- ------- -------
End of period $20,586 $16,491 $20,586 $16,491$23,624 $19,275 $23,624 $19,275
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JuneSeptember 30, December 31,
1998 1997
---------------------- ------------
(Unaudited)
(In thousands)
(In thousands)
Property, plant and equipment $491,099$489,358 $481,833
Less: accumulated depreciation 149,037146,034 142,125
-------- --------
Net property, plant and equipment 342,062343,324 339,708
======== ========-------- --------
Current assets:
Cash and cash equivalents 334544 851
-------- --------
Accounts receivable from customers 10,83512,963 10,789
Less: allowance for doubtful accounts 2,0372,085 1,782
-------- --------
8,79810,878 9,007
Accrued revenues 10,51010,477 10,411
Inventories 4,0183,608 3,740
Prepaid expenses 11,17413,677 10,980
Other current assets 6,3981,409 6,443
-------- --------
Total current assets 41,23240,593 41,432
-------- --------
Prepaid taxes 12,35412,391 12,354
Recoverable income taxes 41,76641,770 41,741
Other assets 18,89019,008 19,774
-------- --------
$456,304$457,086 $455,009
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JuneSeptember 30, December 31,
1998 1997
--------- ------------------------- -----------
(Unaudited)
(In thousands, except share data)
Shareholders' equity:
Preferred stock, no par value, authorized
2,500,000 shares not to exceed
aggregate value of $25,000,000, $ $
issuable in series-none issued $ - $ -
Common stock, stated value: $1
Authorized-16,000,000 shares
Issued-7,427,073Issued-7,455,727 shares in 1998 and
7,330,721 shares in 1997 7,4277,456 7,331
Capital in excess of stated value 109,665110,571 107,004
Retained earnings 20,58623,624 19,624
Less: minimum pension liability adjustment 81 97
-------- ------------------ ---------
Total shareholders' equity 137,597141,570 133,862
-------- ------------------ ---------
Long-term debt and other obligations 141,380 151,380
-------- ------------------ ---------
Current liabilities
Short-term borrowings, unsecured 6,100- 9,000
Current maturities of long-term debt 15,000 5,000
Accounts payable and accrued liabilities 13,75413,063 15,592
Dividends payable 3,0443,094 3,005
Accrued interest 3,0332,606 3,011
Taxes other than income taxes 848670 755
Income taxes 1,8164,616 2,018
--------- --------
Total current liabilities 43,59539,049 38,381
--------- --------
Advances for construction 25,06525,632 24,263
Contributions in aid of construction 31,04431,088 30,951
Deferred land sale gains 413421 384
Accrued postretirement benefit cost 5,3615,165 4,664
Recoverable income taxes 6,067 6,052
Deferred taxes 65,78266,714 65,072
--------- --------
--------
$456,304$457,086 $455,009
================= ========
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
Nine Months Ended September 30,
-------------------------------
1998 1997
-------- --------
(In thousands)
Cash flows from operating activities:
Net income $7,043 $ 5,924$13,168 $11,656
Adjustments reconciling net income to net cash
provided by operating activities:
Depreciation and amortization 7,426 6,38011,157 9,600
Allowance for funds used during construction (89) (451)(153) (688)
Provision for losses on accounts receivable 221 175310 482
Deferred and prepaid income taxes, net 700 (4,743)1,591 (4,447)
Proceeds from sale of surplus land, net of gains 1,457 1642,048 533
Change in assets and liabilities (Note 3) (3,128) 5,979
------- -------(2,036) 5,131
-------- --------
Net cash provided by operating activities 13,630 13,428
------- -------26,085 22,267
-------- --------
Cash flows from investing activities:
Capital additions, excluding an allowance for
funds used during construction (9,251) (12,761)(14,080) (22,749)
Advances and contributions in aid of construction 1,130 1,4641,805 2,328
Refunds on advances for construction (235) (190)(299) (295)
Proceeds from disposition of subsidiary - 8,5658,631
Other investing activities 394 (208)
------- -------569 (482)
--------- --------
Net cash used in investing activities (7,962) (3,130)
------- -------(12,005) (12,567)
--------- --------
Cash flows from financing activities:
Principal payments inon short-term borrowings (2,900)(9,000) -
Net proceeds from short-term borrowings - 1,2004,000
Proceeds from the issuance of common stock, net 2,757 1,6073,692 2,492
Principal payments on long-term debt - (15,000)
Proceeds from the issuance of long-term debt - 7,893
Common dividends paid (6,042) (5,703)(9,079) (8,601)
Bond finance charges - (281)
------0 (298)
------- --------
Net cash used in financing activities (6,185) (10,284)
------(14,387) (9,514)
------- --------
Net (decrease) increase in cash and cash equivalents (517) 14(307) 186
Cash and cash equivalents, beginning of period 851 470
------------- -------
Cash and cash equivalents, end of period $ 334544 $ 484
======656
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
AQUARION COMPANY
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
UNAUDITED
---------
Aquarion Company (Aquarion or the Company) is a holding company whose
subsidiaries are engaged both in the regulated utility business of public
water supply and in various nonutility businesses. Aquarion's utility
subsidiaries, BHC Company (BHC), which consists of an Eastern division,
formerly Bridgeport Hydraulic Company, and a Western division, formerly
Stamford Water Company, New Canaan Water Company and Ridgefield Water Supply
Company, and Sea Cliff Water Company (SCWC) (collectively, the Utilities),
collect, treat and distribute water for residential, commercial and industrial
customers, for other utilities for resale and for private and municipal fire
protection. The Utilities provide water to customers in 30 communities with a
population of approximately 500,000 people in Connecticut and Long Island, New
York, including communities served by other utilities to which BHC makes water
available on a wholesale basis for back-up supply or 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 ten largest
investor-owned water companies in the nation. The Utilities are regulated by
several Connecticut and New York agencies, including the Connecticut
Department of Public Utility Control (DPUC) and the New York Public Service
Commission (PSC). The Company 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).
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X and, as applied in the case of rate-regulated public utilities,
comply with the Uniform System of Accounts and ratemaking practices prescribed
by the Company's regulating authorities. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for
-7-
complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of
operations are not necessarily indicative of the results of operations for the
calendar year. Water consumption is less in the first quarter of the year
than during the warmer months. Other factors affecting the comparability of
various accounting periods include the timing of rate increases granted the
Utilities and the timing and magnitude of property sales. The consolidated
financial informationstatements contained herein should be read in conjunction with the
consolidated financial statements and accompanying footnotesnotes included in the
Company's 1997 Annual Report to Shareholders and incorporated by reference in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
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 earnings per share. SFAS 128 is effective for
financial statements issued for -7-
periods ending after December 15, 1997.
Adoption of SFAS 128 did not materially affect the financial statements for
the quarter and sixnine months ended JuneSeptember 30, 1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income",Income," which establishes standards for the reporting and displaydisplaying of
comprehensive income and its components, such as minimum pension liability, in
a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Adoption of
this statement did not have a significant impact on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for the
method of reporting information about operating segments in annual financial
statements and in interim reports issued to shareholders. This statement is
effective for financial statements for periods beginning after December 15,
1997, although quarterly disclosure is not required until the first quarter of
1999. The Company does not expect adoption of this statement to have a
significant impact on future disclosures of segment related information.
-8-
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes a new model for
accounting for derivative 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.
NOTE 2 - INVENTORY
- ------------------
JuneSeptember 30, December 31,
1998 1997
----------------------- ------------
(Unaudited)
Lumber and logs $2,928$2,494 $2,561
Materials and supplies 1,0901,114 1,179
------ ------
$4,018$3,608 $3,740
====== ======
-8--9-
NOTE 3 - SUPPLEMENTAL DISCLOSURE FOR CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------
Changes in assets and liabilities and supplemental cash flow information
for the six-month periodnine-month periods ended JuneSeptember 30, are set forth below (in
thousands):
1998 1997
------- -------
(Unaudited)
Changes in assets and liabilities:
Increase in accounts receivable $ (111) $(1,659)
Increase$(2,247) $(2,257)
Decrease (increase) in inventory (278) (957)132 (1,109)
Increase in prepayments (194) (763)(2,697) (2,835)
Decrease in other current assets 45 7,4825,034 7,463
(Decrease) increase in accounts payable and
accrued liabilities (1,838) 274
Decrease(2,529) 959
Increase in interest and taxes payable (87) (554)2,108 1,231
Net changes in other noncurrent balance sheet
items (665) 2,156(1,837) 1,679
------- -------
$(3,128)$(2,036) $ 5,9795,131
======= =======
Supplemental cash flow information:
Cash paid for:
Interest $ 5,2148,203 $ 5,1408,190
Income taxes $ 5,0455,950 $ 3,3504,700
NOTE 4 - SALE AND DISCONTINUED OPERATIONS
- -----------------------------------------
On March 25, 1997, the Company executed a 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.
For the period January 1, 1997 through March 25, 1997, operating revenues from
discontinued operations were approximately $4,984,000 and the pre-tax
operating loss was approximately $86,000. Losses for the period from
January 1, 1997 through March 25, 1997 were fully reimbursed by the purchaser
in conjunction with the terms of the stock purchase agreement.
-10-
NOTE 5 - RATE 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 fourth quarter of
1998.
-9-
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 Construction Work
In Progress water service rate surcharge, which was 9.49 percent prior to
July 1, 1997, and resulted 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 rates and expenses.
On October 1, 1996, the Ridgefield Water Company, which has subsequently
been merged into BHC, entered into a Consent Agreement with the State of
Connecticut, Department of Environmental Protection (DEP), relating to certain
water supply sources located in the Town of Ridgefield. The Consent Agreement
requires BHC to meet various milestones by particular dates in order to bring
BHC's Ridgefield water system into compliance with DEP's diversion
regulations. BHC's failure to timely comply with many of the requirements of
the Consent Order now permits DEP to require BHC to pay certain fines.
Although BHC does not presently believe that imposition of such fines is
likely, BHC potential maximum exposure to such fines could be in excess of
$4,000,000. BHC presently believes that it will be able to demonstrate
substantial compliance in the future with respect to the Consent Agreement and
that such demonstrated compliance should substantially eliminate the existing
potential for civil penalties. Any significant failure by BHC in the future
to meet such requirements might result in DEP's commencement of action to
enforce and collect such substantial penalties.
-11-
NOTE 6 - SALE OF SURPLUS LAND
- -----------------------------
For the first sixnine months of 1998, the Company sold approximately 2029
acres of surplus land with proceeds totaling $2,023,000.$2,858,000. Total gains,
including recognition of deferred gains from prior land sales of $65,000,$97,000,
approximated $608,000.$762,000.
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, the 640 acre portion 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.
Prior to this exercise, in February 1997, Aquarion and its BHC subsidiary had
entered into a contract to sell the entire Trout Brook Valley property for
approximately $14,000,000 to a private developer. The Trout Brook Valley
property consists of 640 acres owned by BHC and 90 acres owned by Aquarion,
which will not be purchased by the Aspetuck Land Trust. The sale has been
approved by the DPUC. 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.
-10-
In July 1998, the Company entered into a contract with the City of
Shelton, Connecticut to sell six parcels of land located in Shelton for
approximately $7,000,000. The purchase is contingent upon regulatory and
Board approvals. The anticipated closing date is expected to be in late 1998 or early
1999. The Company anticipates that the after-tax gain from this transaction
will be approximately $4,500,000, to be recognized over an applicable
amortization period, assuming similar treatment is allowed by the DPUC as in
the past with regard to the sharing of proceeds between the shareholders and
the ratepayers. The Company will receive a tax deduction for a charitable
contribution based on the difference between the sale price and the fair
market value
-12-
of the property. No assurances can be given at this time that
the required contingencies will be satisfied and the sale closed.
MSSC owns a two-third'stwo-thirds share, through a joint venture, of approximately
7.7 acres of real property in Shelton, Connecticut. In December 1997, the
joint venture was formally notified of an eminent domain action undertaken on
behalf of the City of Shelton, with an accompanying notice of value of
approximately $95,000. The Company does not agree with this value and has
initiated an appeal process to obtain a higher value for this property. Based
on this notice of value, the loss to be recognized by the Company on this
transaction would be approximately $387,000.
NOTE 7 - EARNINGS PER SHARE
- ---------------------------
In accordance with SFAS 128, the following table presents the
calculation of the basic and diluted earnings per share computations for the quarterquarters and sixnine
months ended JuneSeptember 30, 1998 and 1997, respectively.
-11-1997.
-13-
Income Shares Per-Share
In thousands, except per share data (Numerator) (Denominator) Amount
--------------- ----------------------------------- ----------- ------------- ----------------
For the quarter ended JuneSeptember 30, 1998
Basic earnings per share
Net income $ 4,008 7,4086,125 7,442 $ 0.54
============0.82
Effect of dilutive stock options - 171
--------------- -----179
----------- ------ --------
Diluted earnings per share
Net income giving effect to dilutive
stock options $ 4,008 7,5796,125 7,621 $ 0.53
============== ===== ============0.80
=========== ====== ========
For the quarter ended JuneSeptember 30, 1997
Basic earnings per share
Net income $ 3,536 7,0955,732 7,172 $ 0.50
============0.80
Effect of dilutive stock options - 72
-------------- ---------------- ------ --------
Diluted earnings per share
Net income giving effect to dilutive
stock options $ 3,536 7,1675,732 7,244 $ 0.49
============== ===== ============0.79
=========== ====== ========
For the sixnine months ended
JuneSeptember 30, 1998
Basic earnings per share
Net income $ 7,043 7,38713,168 7,406 $ 0.95
============1.78
Effect of dilutive stock options - 171
--------------- -----173
----------- ------ --------
Diluted earnings per share
Net income giving effect to dilutive
stock options $ 7,043 7,55813,168 7,579 $ 0.93
============== =====1.74
=========== ====== ========
For the sixnine months ended
JuneSeptember 30, 1997
Basic earnings per share
Net income $ 5,924 7,06611,656 7,101 $ 0.84
============1.64
Effect of dilutive stock options - 72
-------------- -----73
---------- ------ --------
Diluted earnings per share
Net income giving effect to dilutive
stock options $ 5,924 7,13811,656 7,174 $ 0.83
============== ===== ===========1.62
========== ====== ========
-14-
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Management's Discussion and Analysis of the Financial Condition and Results
of Operations and Financial Condition contained in Aquarion's 1997 Annual Report to Shareholders
-12-
and
incorporated by reference in Aquarion's Annual Report on Form 10-K for the
year ended December 31, 1997 should be read in conjunction with the discussion
below.
Capital Resources and Liquidity
- -------------------------------
Capital Expenditures
-----------------------------------------
The Company invested $9,251,000$14,080,000 in property, plant and equipment in the
first sixnine months of 1998, compared with $12,761,000$25,921,000 for the same 1997 period.
The Utilities accounted for approximately $13,362,000 of plant additions
during the current nine month period. The 1997 period includes $4,700,000$7,216,000
related to the Warner Water Treatment Plant, which was placed in service on
July 1, 1997. The Utilities accounted
for approximately $8,600,000 of plant additions during the current six month
period. Management estimates that capital expenditures will total
$18,000,000$19,000,000 in 1998, of which approximately $17,000,000$18,000,000 will be for water
utility construction programs.
Financing Activities
--------------------
The Company's capital expenditures have historically been financed from
several sources, including internally generated funds, rate relief, proceeds
from debt financings, sales of common stock, and short-term borrowings under
the Company's revolving credit agreements.
Due to its declining capital requirements, the Company did not renew its
unsecured revolving committed credit agreements which expired on May 10, 1998
and has negotiated with some of its lenders to establish $40,000,000 of
uncommitted lines of credit to finance short-term borrowings.
The percentage of capital expenditures financed by net cash from
operating activities was 100 percent and 98 percent for the sixnine months ended
JuneSeptember 30, 1998 and 1997.1997, respectively.
-15-
In addition, the Company obtained funds of $1,648,000$2,554,000 from issuances of
Common Stockcommon stock under its Dividend Reinvestment and Common Stock Purchase Plan
for the sixnine months ended JuneSeptember 30, 1998. The Company also obtained funds
of $1,083,000$1,100,000 from stock options exercised for the sixnine months ended
JuneSeptember 30, 1998. The Utilities also received $1,130,000$1,805,000 from advances and
contributions in aid of construction from developers and customers for the
sixnine months ended JuneSeptember 30, 1998.
-13-
On February 3, 1997, BHC converted the interest rate on its $30,000,000
unsecured note, issued in 1995 in consideration for a loan of the proceeds
from the issuance by the Connecticut Development Authority of an equal amount
of tax-exempt Water Facilities Revenue Bonds, from a variable rate to a fixed
rate of 6.15 percent, for a term of 38 years.
Future Financing Requirements
-----------------------------------------------------------
The Company's ability to finance future utility construction programs
depends substantially on rate relief. Rate relief has an impact on cash flow
from operating activities and consequently affects the Company's ability to
obtain external financing. Additionally, rate relief will have an impact on
the Company's ability to generate sufficient cash flows to provide a
reasonable return in the form of dividends to the Company's shareholders. The
type, amount and timing of new financings will be based on the Company's
general financial policies regarding capitalization, as well as on market
conditions and other economic factors.
Year 2000 Compliance
- --------------------
The Company is currently evaluating its exposure to the Year 2000
problem. In general terms, the problem arises from the fact that many existing
computer systems and other equipment containing date-sensitive embedded
technology (including non-information technology equipment and systems) use
only two digits to identify a year in the date field, with the assumption that
the first two digits of the year are always "19". As a result, such systems
may misinterpret dates after December 31, 1999, which may result in
miscalculations, other malfunctions or the total failure of such systems.
Additional problems arise from the fact that the Year 2000 is a special case
leap year. Because the Company is dependent upon the proper functioning of
computer systems and
-16-
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 anticipates that a preliminary written plan will be
completed by the end of this year. The Company is in the final stages of
interviewing outside consultants to assist it in preparing and implementing
its Year 2000 compliance and contingency plans and anticipates selecting and
engaging such a consultant by the end of November 1998. In addition, the
Connecticut Department of Public Utility Control has informed the Company that
it will review the Company's Year 2000 preparations.
The Company's general process of addressing the Year 2000 problem will
consist of the following steps: (a) inventorying systems, equipment and other
items (including relationships with third parties) that potentially present a
Year 2000 problem, (b) determining the materiality of such items to the
Company and assessing the Year 2000 compliance of the material items through
internal testing and outside certification, (c) repairing, replacing or
preparing for the failure of material items that are determined to be non-
compliant, (d) testing repaired or replaced items, and (e) designing and
implementing contingency plans.
The Company is in the process of replacing its corporate information
system and several other systems which has determined that
our core business applications are compliant based on vendor's written
compliance statements. Testingnot Year 2000 compliant. These
systems had been scheduled for thesereplacement for reasons unrelated to the Year
2000 problem. The integration of the new systems is expected to be completed
by December 1998. Several ancillary systems were identified as non-compliant
and had already been scheduled for replacement by December, 1998.
In addition, other critical computerized operations, including treatment
plant automation systems, have been inventoried by Company personnel who are
currently assessing our risk and will make a reportduring the first quarter of 1999. The company intends to senior management by
year end. The Company is currently interviewing outside consultants to review
it'sperform independent
Year 2000 compliance and contingency plan and make any necessary
recommendations,testing of these systems, which are expected by year end. Interfaces used to exchange
information with outside vendors will also be tested to ensure compliance.
This testing is expected to be completed induring
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 Company
intends to have its Year 2000
-17-
consultant review this inventory, once such consultant is selected and
engaged, and anticipates that such review will be completed by year-end.
The Company intends to begin internal testing, and seeking outside
certification, of material inventoried items by the end of 1998, and expects
to complete such assessment by the end of the first 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 June 1999.
In accordance withaddition to its accounting policies,own systems and equipment, the Company capitalizes
softwaredepends upon
the proper function of computer systems and computerother date-sensitive equipment of
outside parties. These parties include banks, telecommunications service
providers and electric and other utilities. The Company has compiled a
preliminary list of such parties. The Company intends to contact such parties
by the end of 1998 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 could include the loss of telecommunications and electrical service.
Due to the uncertainties presented by such third party Year 2000
problems, and the possibility that, despite its efforts, the Company is
unsuccessful in preparing its internal systems and equipment for the Year
2000, the Company is developing contingency plans for dealing with the most
reasonably likely worst-case scenario. Such plans will likely include manual
back-up 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 effected by the
Company's continued Year 2000 assessment. The Company expects to complete
such assessment and contingency planning during the second 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 September 30, 1998, its costs and expenses maintenance costs. Itof
addressing the Year 2000 problem have been less than $100,000. While the
Company is currently unable to
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estimate future costs of addressing the Year 2000 problem, it does not
anticipatedbelieve that thesesuch costs will be -14-
material or affectto the Company's earnings per share.financial
condition. The Company cannot
predicthas funded, and expects to continue to fund, the
effect on it's businesscosts of anyits Year 2000 problemsefforts through operating cash flow.
This description of matters relating to the Year 2000 problem contains a
number of forward-looking statements. See "Forward looking information". 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 entities such as suppliers, customersfactors. The Company can give no
assurance that these estimates will be achieved, and service providers.actual results could
differ materially from those currently anticipated. In addition, there can be
no assurance that the Company's Year 2000 program will be effective or that
its contingency plans will be sufficient. Specific factors that might cause
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
relevant computer software codes and embedded technology, the results of
internal and external testing and the timeliness and effectiveness of
remediation efforts of third parties.
Results of Operations for the sixnine months and
--------------------------------------------- ---------------------------------------------
three months ended JuneSeptember 30, 1998 and 1997
------------------------------------------ ----------------------------------------------
Net income for the sixnine months ended JuneSeptember 30, 1998 was $7,043,000$13,168,000
compared with $5,924,000$11,656,000 for the same 1997 period. Net income for the three
months ended JuneSeptember 30, 1998 was $4,008,000$6,125,000 versus $3,536,000$5,732,000 for the
comparable 1997 period. Operating results during the first sixnine months of
1998 are higher due to increased land sales and improved results from the Company's Utility operations.operations
and increased land sales.
Operating revenues increased $2,299,000$3,041,000 and $305,000$742,000 for the sixnine months
and three months ended JuneSeptember 30, 1998, respectively, from the comparable
1997 periods. This
increase wasThese increases were primarily attributable to higher revenues
from the Utilities, which increased real estate sales of
$1,691,000$2,207,000 and $507,000$1,286,000 for the sixnine
months and three months ended JuneSeptember 30, 1998, and higher revenues from the Utilities of $921,000 and $216,000 for the
six months and three months ended June 30, 1998,respectively, due to rate
relief granted BHC's Eastern Division effective August 1, 1997. This1997, and
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increases in revenue from real estate sales of $1,759,000 and $68,000 for
the nine months and three months ended September 30, 1998, respectively.
The increase in water service rates was partially offset by the reduction
in rates associated with the repeal of the Connecticut gross earnings tax.
The increased utility revenue and land sales revenue were partially offset by
reduced revenue from the timber processing business.
Operating expenses increased $1,136,000$806,000 for the first sixnine months ofended
September 30, 1998, compared tofrom the comparable 1997 period. ThisThe increase was
primarily attributable to higher costs associated with increased land sales of
$1,019,000$1,074,000 and higher operating expenses at the Utilities of $517,000$791,000,
principally associated with the Warner Water Treatment Plant, which was placed
into service on July 1, 1997. These
increases wereThe increase was partially offset by lower
expenses from the timber processing due
to abusiness, the result of decreased
sales volume.revenues. Operating expenses decreased $201,000$330,000 for the three months ended
JuneSeptember 30, 1998 from the comparable 1997 period due to reduced expenses at
the timber processing business of $667,000, partially offset by higher
operating expenses at the Utilities.
General and administrative expenses decreased $302,000 for the nine
months ended September 30, 1998, compared to the 1997 period due to reduced
operating costs at Timco, partially offset by increased operatingperiod. The decrease
was primarily the result of a $309,000 reduction in expenses related to increased land sales.
General and administrative expenses decreased $425,000 and $158,000in the utility
segment for the six months and threenine months ended JuneSeptember 30, 1998 from the comparable 1997
periods. Expenses from the
-15-
Utilities decreased $468,000 and $232,000, respectively, due to decreased outside
services costs and a higher pension credit. General and administrative
expenses increased $123,000 for three months ended September 30, 1998 compared
to the 1997 period.
Depreciation expense increased $1,130,000$1,415,000 and $584,000$285,000 for the sixnine
months and three months ended JuneSeptember 30, 1998, respectively, from the 1997
comparable periods due primarilyprincipally to the Warner Water Treatment Plant being
placed into service on July 1, 1997.
Interest expense for the sixnine months and three months ended JuneSeptember
30, 1998199 was $468,000$874,000 and $278,000$406,000 lower than the 1997 comparable 1997 periods due
to reduced debt in 1998.
Taxes other than income taxes for the six months and threenine months ended JuneSeptember 30,
1998 decreased $1,476,000 and $778,000$1,365,000 from the comparable 1997 periodsperiod, due primarily to
the repeal of the Connecticut gross
-20-
earnings tax.tax for services rendered after July 1, 1997. Taxes other than income
taxes increased $111,000 for the quarter ended September 30, 1998, from the
comparable 1997 period, due to higher property taxes.
Income taxes increased $1,314,000 and $393,000 for the sixnine months and the
three months ended JuneSeptember 30, 1998, were $921,000 and $492,000 higher thanrespectively, from the comparable 1997
periods due to higher taxable income.income as well as a higher effective tax rate in
1998.
Forward looking information
- ---------------------------
In addition to the historical information contained herein, this report
contains a number of "forward-looking statements," within the meaning of the
Securities and Exchange Act of 1934. Such statements address future events
and conditions concerning capital expenditures, liquidity and capital
resources, financial condition, results of operations, gains recorded from
land sales and regulatory and accounting matters. Actual results in each case
could differ materially from those projected in such statements. Factors that
may cause actual results to differ include, without limitation, interest
rates, economic factors, weather variations, decisions of regulatory agencies,
seasonality and Year 2000 issues.
ItemITEM 3. Quantitative and Qualitative Disclosures About Market Riskqualitative disclosures about market risk
----------------------------------------------------------
Not Applicable.
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PART II. OTHER INFORMATION
Item 4.ITEM 4 Submission of Mattersmatters to a Votevote of Security Holderssecurity holders
---------------------------------------------------
Previously reported in the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1998.
Item 6.-21-
ITEM 6 Exhibits and Reportsreports on Form 8-K
-----------------------------------------------------------------
(a) Exhibits
27 Financial Data Schedule for the quarter ended JuneSeptember 30,
1998
(b) The Company did not file a report on Form 8-K during the quarter
ended JuneSeptember 30, 1998.
-17--22-
SIGNATURE
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AQUARION COMPANY
Date: August 11,November 13, 1998 By /s/JANET M. HANSEN
--------------------------- -----------------------------------------------------------
Janet M. Hansen
Executive Vice President
Chief Financial Officer and
Treasurer
-18--23-
Exhibit Index
Exhibit 127 Financial Date Schedule for the quarter ended JuneSeptember 30, 1998
-19--24-