EXHIBIT 13(a)
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.
Capital resources and liquidity
-------------------------------
Capital Expenditures. The Company invested $17,900,000 in property,
plant and equipment in 1993, compared with $24,700,000 in 1992 and
$17,450,000 in 1991. Aquarion's utility subsidiary, Bridgeport
Hydraulic Company (BHC), and BHC's subsidiary, Stamford Water Company
(SWC), (collectively, the Utilities) accounted for approximately 87
percent of plant additions during the three-year period, with the
balance being invested primarily in the Company's environmental testing
laboratories (Laboratories), IEA, and forest products and electric
cogeneration operations (Forest Products), Timco. Nonutility capital
expenditures totaled approximately $1,800,000 in 1993. Management
estimates that capital expenditures will total $36,500,000 in 1994, of
which approximately $34,200,000 will be for water utility construction
programs. Nonutility capital expenditures will approximate $2,300,000
in 1994.
- --------------------------------------------------------------------------
Actual Utility Capital Expenditures
(Dollars in thousands)
1991 1992 1993
---- ---- ----
Filtration $ 7,200 $12,200 $ 8,000
Non-Filtration 6,800 9,500 8,300
------- ------- -------
Total $14,000 $21,700 $16,300
======= ======= =======
- --------------------------------------------------------------------------
Projected Utility Capital Expenditures
(Dollars in thousands)
1994 1995 1996
---- ---- ----
Filtration $15,300 $28,700 $ 6,000
Non-Filtration 18,900 13,135 12,935
------- ------- -------
Total $34,200 $41,835 $18,935
======= ======= =======
- -------------------------------------------------------------------------
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,
construction of filtration facilities for BHC's Easton Lake Reservoir
began in 1990 and those facilities were completed and placed in service
in 1993 at a total project cost of $26,800,000. Engineering for the
construction of filtration facilities at BHC's Hemlocks Reservoir
commenced during 1992 and construction is anticipated to begin in May
1994. The total expected cost of construction through completion in
1996 will approximate $50,000,000, without adjustment for inflation.
Management estimates that the future costs of construction on other
unfiltered surface water supplies, expected to be completed by 1996,
will approximate $2,400,000 without adjustment for inflation.
Expenditures totaling $28,400,000 have been made under the filtration
program through December 31, 1993. Management can not predict whether
future federal, state or local regulations will require additional
capital expenditures.
Financing Activities. Due to the magnitude of the Company's construc-
tion programs and the capital-intensive nature of the public water sup-
ply business, financing has been provided by both internal and external
sources. Historically, the Company's ability to finance its capital
expenditures has depended substantially on rate relief.
On February 5, 1993, BHC filed a rate application with the
Connecticut Department of Public Utility Control (DPUC) for a 35 percent
water service rate increase designed to provide a $17,500,000 increase
in annual water service revenues and a return on common equity of 12.75
percent. The request included the replacement of a construction work in
progress water service rate surcharge (CWIP rate surcharge) previously
granted to BHC pursuant to DPUC regulations to recover 90 percent of the
carrying costs of capital used in its SDWA-mandated Easton Lake
Filtration Construction Project. Prior to the final decision, BHC
lowered its original request by a total of $1,400,000 to $16,100,000,
based on reduced annual interest costs achieved through the
restructuring of long-term debt and on reduced property taxes and other
miscellaneous expenses. Effective August 1,
17
1993, the DPUC awarded BHC
a 21 percent water service rate increase designed to provide a
$10,400,000 annual increase in revenues and an 11.6 percent return on
common equity. Prior to the time the new rates became effective, the
CWIP rate surcharge was 7.35 percent of revenues. During 1993, BHC
derived revenues of $1,937,000 from the CWIP rate surcharge which ended
with respect to the Easton Filtration Project when the new rates became
effective.
On February 8, 1991, SWC filed with the DPUC an application for a
$3,646,000, 36.5 percent increase in annual water service revenues.
Effective August 28, 1991, SWC received approval from the DPUC for a
22.5 percent rate increase designed to provide increased annual revenues
of $2,276,000, and a 12.85 percent return on common equity.
The percentage of capital expenditures financed by net cash from
operating activities was 100 percent, 81 percent and 67 percent for the
years ended December 31, 1993, 1992 and 1991, respectively. (See
"Consolidated Financial Statements-Consolidated Statement of Cash
Flows.") The remainder has been provided from external financing
sources.
Funds from external sources historically have been borrowed on a
short-term basis and periodically refinanced through long-term debt or
equity issues. In May 1993, Aquarion entered into unsecured revolving
credit agreements with five banks to provide $50,000,000 ($10,000,000
with each bank) of short-term credit availability on a committed basis.
At December 31, 1993, $5,500,000 of short-term borrowings under the
agreements was outstanding at a weighted average annual interest rate of
3.49 percent (Note 8).
In June 1993, the Company completed a common stock offering of
460,000 shares at $25.875 per share. The proceeds of the issue, after
all expenses, amounted to $11,200,500. In addition, BHC issued a 5.6
percent $10,000,000 unsecured note under a tax-exempt financing with the
Connecticut Development Authority. Proceeds from both transactions were
used to reduce short-term borrowings, which had been incurred in
connection with the construction of BHC's Easton Lake Reservoir
Filtration Plant.
During 1993, the Company took advantage of lower interest rates
through several debt refinancings. BHC redeemed its $12,000,000, 7.4
percent Series T First Mortgage Bonds and its $7,700,000, 7-3/4 percent
unsecured note and issued unsecured notes of $12,000,000 and $7,700,000
at 5.5 percent and 5.8 percent, respectively. In addition, BHC entered
into a Forward Purchase Agreement to issue a $10,000,000, 6.05 percent
note which will be used to refund the $10,000,000, 10-3/4 percent note
which BHC plans to call for early redemption in October 1994. In
September 1993, SWC issued a $8,980,000 unsecured note at 5.3 percent.
SWC used the proceeds to redeem its
- ---------------------------------------------------------------------------
Total Debt
(Dollars in thousands)
1991 1992 1993
---- ---- ----
Total $136,221 $127,932 $121,153
Long-term 95,283 105,463 115,591
- ---------------------------------------------------------------------------
$3,000,000, 7-1/2 percent and $5,980,000, 7.6 percent unsecured notes.
Additionally, Aquarion issued a $10,000,000, 5.95 percent Senior Note on
January 4, 1994, the proceeds of which were used to redeem the $10,000,000,
8.5 percent Senior Notes which matured on January 1, 1994. As a result of
the above refinancings, the Company will recognize annual consolidated
interest expense savings of approximately $1,300,000.
18
The Utilities' financing activities are targeted over the long term
to maintain an approximate capitalization structure of 50 percent equity
and 50 percent long-term debt. At December 31, 1993, the Utilities'
combined capitalization structure approximated 55.5 percent equity and
44.5 percent debt, while the Company's consolidated capitalization
structure approximated 49.0 percent equity and 51.0 percent debt.
Future Financing Requirements. As in the past, the Company's ability to
finance future capital expenditures 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, since sufficient operating cash flows are necessary
to maintain debt coverage ratios to allow for the issuance of additional
debt securities. 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 Aquarion's stockholders.
In light of the Company's substantial need for additional funds, the
Company will need additional debt and equity capital to finance future
utility construction. 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.
The Company's ability to obtain funding from external sources will
be affected by the terms of certain of the Company's existing
obligations. Under BHC's First Mortgage Indenture (BHC Indenture),
approximately $9,000,000 of First Mortgage Bonds were outstanding at
December 31, 1993. No additional bonds have been issued under the BHC
Indenture since 1980. Substantially, all of BHC's properties are
subject to the lien of the BHC Indenture.
Additional long-term debt may be issued by the Company under the
terms of the Senior Notes as long as consolidated long-term debt
(including capitalized lease obligations) does not exceed 66 2/3 percent
of its consolidated total capitalization, as defined. BHC may issue
additional long-term debt under the BHC Notes if it meets a similar 66
2/3 percent long-term debt to total capitalization test.
The Company's need for future external financing may also be
affected by future net proceeds from its land disposition program. BHC
has identified in excess of 2,000 acres of off-watershed land, most of
which was previously in its rate base, as surplus to utility operations.
Under Connecticut law, net proceeds from the sale of land which has ever
been in a utility's rate base must be reinvested in the utility plant,
and profits from such transactions are allocated by the DPUC between the
utility's customers and shareholders pursuant to legislative and
regulatory criteria. Net income from sales of BHC's surplus, off-
watershed land amounted to approximately $312,000, or 5 cents per share,
in 1993.
Recent Accounting Developments.
-------------------------------
Income Taxes. In February 1992, the Financial Accounting Standards Board
(FASB)issued Statement No. 109, "Accounting for Income Taxes" (SFAS 109).
The Company adopted SFAS 109 effective for the first quarter of 1992. Prior
years' financial statements have not been restated for the adoption.
SFAS 109 requires that deferred income taxes be recorded for the
difference between the tax basis of assets and liabilities and the
amounts at which such assets and liabilities are carried in the
financial statements, based on the enacted tax rates expected to be in
effect when such temporary differences are expected to reverse. The
most significant impact of adoption on the income statement was the
recording of a cumulative reduction of deferred income taxes payable
associated with the nonutility subsidiaries, principally due to the
lowering of the federal tax rate. This reduction resulted in a credit
to income of $791,000, or 14 cents per share, in 1992. (Note 6).
Employee Benefits. In December 1990, the FASB issued Statement No. 106,
"Employers' Accounting for Post-Retirement Benefits Other Than Pensions"
(SFAS 106). The Company adopted SFAS 106 effective for the first quarter of
1993. Prior years' financial statements have not been restated for the
adoption.
SFAS No. 106 requires that an employer's obligation for
postretirement benefits expected to be provided to or for an employee be
19
fully accrued by the date that the employee attains full eligibility for
all benefits expected to be received by that employee, any beneficiaries
and covered dependents, even if the employee is expected to render
additional service beyond that date. Prior to adoption, the Company
recorded the costs of providing such benefits when paid. As allowed by
SFAS 106, the Company has elected to recognize the unfunded accumulated
postretirement benefit obligation of $10,471,000 at January 1, 1993 over
20 years. The annual post-retirement benefits expense for 1993 amounted
to $650,000. The remaining cost has been recorded as a regulatory
asset. BHC received approval for recovery of these costs in its water
service rates from the DPUC in the rate decision effective August 1,
1993. SWC expects recovery of these costs in future rate proceedings.
The effect on the Company's nonutility operations did not materially
impact the results of operations (Note 12).
In November 1992 the FASB issued Statement No. 112, "Employers'
Accounting for Postemployment Benefits" (SFAS 112), effective for fiscal
years beginning after December 15, 1993. SFAS 112 will require the
Company to accrue the cost of providing future benefits to former or
inactive employees after employment but before retirement. These
benefits would be recognized over the employees' years of service or at
the date of the event giving rise to such benefits. The impact of this
new standard is not expected to have a material effect on the Company's
financial condition or results of operations.
Other.
------
Inflation. Inflation, as measured by the Consumer Price Index, increased
2.7 percent, 2.9 percent and 3.1 percent in 1993, 1992 and 1991,
respectively, and primarily affects the Utilities. The DPUC allows the
recovery of depreciation through revenues solely on the basis of the
historical cost of plant. The replacement cost of utility plant would
be significantly higher than the historical cost. While the DPUC gives
no recognition in its ratemaking process to the current cost of
replacing utility plant, the Company believes that, based on past
practices, the Utilities will continue to be allowed to earn a return on
the increased cost of their net investment when prudent replacement of
facilities actually occurs.
Subsequent Event. Electricity produced at the cogeneration plant operated by
Timco has been sold to Public Service Company of New Hampshire (PSNH) under a
20-year rate order of the New Hampshire Public Utilities Commission
(PUC) applicable to Small Power Producers (the Rate Order). In January
1988, PSNH sought protection under Chapter 11 of the U.S. Bankruptcy
Code. PSNH emerged from bankruptcy in June 1991, managed by Northeast
Utilities (NU). As part of the PSNH reorganization plan, NU was ordered
to restructure the Rate Order. In January 1994, PSNH and Timco reached
an agreement by which PSNH, in order to terminate its obligations to buy
electricity from Timco under the Rate Order, will pay Timco $8,600,000,
subject to adjustment depending upon the date on which such payment, if
approved by the PUC, is made. In return, Timco will not be able to draw
customers from the systems of PSNH or its NU affiliates. PSNH has filed
an application with the PUC for approval of the agreement, and there is
no assurance that the agreement will be approved.
Results of operations
---------------------
1993 Overview. The Company's consolidated net income for 1993 was
$10,990,000 compared with net income of $9,400,000 in 1992. Net income
per share was $1.76 in 1993 on a weighted average of 6,237,875 common
shares outstanding, compared with $1.65 in 1992 on a weighted average of
5,690,853 common shares outstanding. Operating results during 1993 were
favorably affected by improved earnings from the Utilities and continued
effective control of expenses through various cost-containment programs
throughout the Company.
The 1992 results included a nonrecurring credit of $791,000, or 14
cents per share, from the cumulative effect of the Company's adoption of
SFAS 109, which changed its method of accounting for income taxes.
20
The following table sets forth information about Aquarion's
operations by industry segment for the years ended December 31, as
follows:
1993 1992 1991
(In thousands, except percentages) Amount % Amount % Amount %
________ ___ ________ ___ _______ ___
Operating revenues:
Public water supply $ 71,280 66.4% $ 63,702 62.4% $63,829 64.5%
Environmental laboratories
and utility management
services 23,132 21.5 26,061 25.5 24,358 24.7
Forest products 12,298 11.5 12,001 11.8 10,515 10.6
Real estate 645 0.6 262 0.3 196 0.2
________ _____ ________ _____ _______ _____
Total operating revenues $107,355 100.0% $102,026 100.0% $98,898 100.0%
======= ===== ======= ===== ====== =====
Operating income (loss)(1)
Public water supply $26,475 $22,475 $22,241
Environmental laboratories
and utility management
services(2) (1,107) (431) (20,221)
Forest products 1,496 1,437 1,396
Real estate 40 170 174
_______ _______ _______
Total operating income $26,904 $ 23,651 $ 3,590
Unallocated interest, AFUDC and
other expenses, net (9,249) (9,410) (9,352)
_______ _______ _______
Income (loss) before income taxes
and cumulative effect of a change
in accounting method $17,655 $14,241 $(5,762)
====== ====== =====
(1) Operating income (loss) is defined as operating revenues less
total costs and expenses, other than interest expenses, income
taxes, allowance for funds used during construction (AFUDC),
subsidiary preferred dividends and unallocated corporate
(expense) income.
(2) Includes special charges of $15,000,000 in 1991 and goodwill
amortization of $474,000, $474,000 and $878,000 in 1993, 1992
and 1991, respectively. See Note 5 of Not Statements.
- ----------------------------------------------------------------------------
1993 Operating Revenues Per Business Segment
(Dollars in thousands)
Amount
------
Public water supply $71,280
Environmental labs and
utility mgmt. services 23,132
Forest products 12,298
Real estate 645
- ----------------------------------------------------------------------------
1992 Operating Revenues Per Business Segment
(Dollars in thousands)
Amount
------
Public water supply $63,702
Environmental labs and
utility mgmt. services 26,061
Forest products 12,001
Real estate 262
- ----------------------------------------------------------------------------
1991 Operating Revenues Per Business Segment
(Dollars in thousands)
Amount
------
Public water supply $63,829
Environmental labs and
utility mgmt. services 24,358
Forest products 10,515
Real estate 196
- ----------------------------------------------------------------------------
21
1993 compared with 1992
-----------------------
Operating Revenues. Consolidated operating revenues of $107,355,000 in
1993 were $5,329,000 higher than 1992. Revenues from the Utilities
increased $7,579,000, principally due to a 21 percent water service rate
increase for BHC which became effective August 1, 1993, increased
consumption that resulted from the hot, dry summer weather and, to a
lesser extent, increased CWIP rate surcharge revenues recognized during
the first seven months of the year. Revenues from the Laboratories
decreased $2,945,000 in 1993, reflecting the revenue impact of the sale
of a laboratory in the first and the Air Services Division in the fourth
quarter of 1993 as part of a previously announced restructuring plan, as
well as increased price competition throughout the environmental testing
industry. Revenues from property sales increased $382,000 due to the
sale of surplus, off-watershed land during 1993. Forest Products
experienced increased revenues during 1993 of $297,000 principally due
to improved lumber volume and cogeneration output.
Operating Income. Operating income for 1993 increased $3,253,000 over
1992 levels. The increase consisted primarily of $4,000,000 from the
Utilities due to higher operating revenues offset by increased
operating, depreciation and property tax expenses associated with the
Easton Lake Reservoir Water Treatment Plant, increased costs associated
with the recognition of SFAS 106, as well as higher gross earnings
taxes. Operating income for 1993 was unfavorably affected by a decrease
of $676,000 at the Laboratories due to the impact of increased price
competition. The remainder was attributable to the increase of revenues
in the Forest Products and real estate segments.
Operating Expenses. Operating expenses decreased $1,401,000 in 1993.
The Laboratories had lower operating costs of $2,215,000 compared with
1992 primarily due to the sale of a laboratory in the first quarter of
1993 and general cost-containment measures. Offsetting this decrease
were increased costs of $558,000 from the Utilities including fuel costs
associated with increased pumpage during the summer months, and an
increase in water main repair costs, as well as higher chemical expenses
resulting from the operation of BHC's Easton Lake Reservoir Water
Treatment Plant, which was placed in service in June 1993. Additional
costs associated with Forest Products and real estate sales account for
the remainder of the variance.
General & Administrative Expenses. General and administrative expenses
totaled $18,205,000 in 1993, a $1,633,000 increase over 1992. Increased
expenses associated with BHC's recognition of FASB Statement No.106
effective August 1, 1993, increased property and liability insurance,
pension and payroll-related costs, partially offset by lower expenses
associated with leases for the Utilities, account for $801,000 of the
increase. An additional increase of $411,000 from real estate
operations resulted from increased expenses associated with the reserve
for an uncollectible note from a prior year sale. The Laboratories had
increased expenses of $241,000 primarily attributable to higher outside
consulting costs. Increased costs associated with unallocable legal
expenses account for the remainder of the variance.
Depreciation Expense. Depreciation expense in 1993 was $1,103,000
higher than 1992. This increase is attributable to routine utility
plant additions, a higher composite annual depreciation rate for BHC
effective August 1, 1993, and BHC's Easton Lake Reservoir Water
Treatment Plant, which was placed in service in June 1993.
Interest Expense. Interest expense for 1993 decreased $85,000 primarily
due to lower borrowing rates on relatively constant average outstanding
total debt throughout the year.
22
Taxes Other Than Income Taxes. Taxes other than income taxes were
$610,000 higher than 1992. Increased payroll and gross earnings taxes
of $415,000 as well as higher property taxes of $195,000 attributable to
a higher property base in 1993, account for the variance.
Income Taxes. Income taxes for 1993 were $1,033,000 higher than 1992
primarily due to higher taxable income. The Revenue Reconciliation Act
of 1993 increased the top corporate tax rate from 34 percent to 35
percent, effective for tax years beginning on or after January 1, 1993.
The higher tax rate had an immaterial effect on overall operating
results.
1992 Compared with 1991.
------------------------
Operating Revenues. Consolidated operating revenues of $102,026,000 in
1992 were $3,128,000 higher than the comparable 1991. Revenues from the
Utilities decreased by $127,000, primarily due to exceptionally cool,
wet summer weather in 1992 and the continuing erosion of the commercial
and industrial sectors, offset by an increase in the CWIP rate surcharge
revenues over 1991 levels. Revenues from the Laboratories increased
$1,488,000 due in large part to increased volume generated through the
restructuring efforts in sales and marketing undertaken in late 1991 and
early 1992. Forest Products experienced increased revenues during 1992
of $1,486,000 principally due to lumber sales in an expanding market
base. Revenues from property sales and utility management service
businesses account for the remainder of the increase.
Operating Income. Operating income for 1992 increased by $5,061,000
over 1991 levels, excluding the 1991 special charges of $15,000,000.
The increase consisted primarily of $2,724,000 from the Laboratories due
to a higher volume of revenues and various cost-containment programs.
An additional $490,000 was provided by reductions in goodwill
amortization and corporate allocations. In addition, 1991 operating
income included $1,300,000 in costs associated with the development of
WaterFacts, a home water-testing kit. The remainder was attributable to
a cost containment program company-wide.
Operating Expenses. Operating expenses decreased $538,000 from 1991.
The Utilities had lower operating expenses of $1,292,000 compared with
1991. Decreased costs associated with purchased water, purchased power
and periodic meter changes principally account for the variance. Forest
Products operating costs increased $1,352,000 due principally to higher
levels of production. The Laboratories experienced decreased operating
costs of $540,000 in 1992 due principally to the effect of various cost-
containment programs. Additional costs of $436,000 associated with the
utility management service businesses were due primarily to increased
payroll costs. This increase was offset by 1991 operating expenses of
$1,300,000 associated with the development of WaterFacts, net of a
reduction of $806,000 which represented the recognition of a previously
deferred pretax land sale gain as the result of a favorable court
ruling.
General & Administrative Expenses. General and administrative expenses
for 1992 decreased by $1,876,000 from 1991. Expenses from the Public
Water Supply segment decreased by $396,000 compared with 1991 primarily
due to reductions in conservation kit expenditures and payroll. The
Laboratories incurred lower general and administrative expenses of
$1,005,000 compared with 1991 due principally to a decrease in payroll
and related expenses. A decrease in goodwill amortization and corporate
expenses provided an additional $490,000. Increased costs associated
with Forest Products and other utility management service businesses
account for the remainder of the variance.
Depreciation Expense. Depreciation expense for 1992 was $639,000 higher
than 1991. Routine plant additions by the Utilities and the
Laboratories principally account for this variance.
Interest Expense. Interest expense was $217,000 lower than 1991
primarily due to lower short-term borrowing rates as well as lower
outstanding total debt.
Taxes Other Than Income Taxes. Taxes other than income taxes for 1992
increased $394,000 from 1991. Higher property taxes of $460,000, offset
by a decrease in payroll taxes, accounted for the variance.
Income Taxes. Income taxes for 1992 were $2,926,000 higher than 1991
due primarily to higher taxable income in 1992. The 1992 operating
results benefitted from the cumulative effect of a change in accounting
related to the adoption of SFAS 109, which contributed an additional
$791,000, or 14 cents per share, to 1992 net income.
Seasonality. The Company's operating results are subject to weather
variations and seasonal fluctuations due to an increased demand for both
water and environmental testing procedures in the warmer months (See
supplemental Financial Information to Consolidated Financial Statements
for selected quarterly data for 1993 and 1992.)
23
Aquarion Company and Subsidiaries
Consolidated Statements of Income
In thousands, except share data
Year ended December 31 1993 1992 1991
Operating revenues $ 107,355 $ 102,026 $ 98,898
------- ------- --------
Costs and expenses:
Operating 40,276 41,677 42,215
General and administrative 18,205 16,572 18,448
Depreciation 10,623 9,520 8,881
Interest expense 9,242 9,327 9,544
Taxes other than income 11,977 11,367 10,973
Special charges - - 15,000
------- ------ -------
Total costs and expenses 90,323 88,463 105,061
====== ====== =======
17,032 13,563 (6,163)
Allowance for funds used during
construction 623 678 401
------- ------ ------
Income (loss) before income taxes and
cumulative effect of a change in
accounting method 17,655 14,241 (5,762)
Income taxes 6,665 5,632 2,706
------- ------ ------
Income (loss) before cumulative effect
of a change in accounting method 10,990 8,609 (8,468)
Cumulative effect of a change in
accounting method - 791 -
------- ------ ------
Net income (loss) $ 10,990 $ 9,400 $ (8,468)
====== ===== =====
Per share before cumulative effect
of a change in accounting method $ 1.76 $ 1.51 $ (1.75)
Cumulative effect of a change in
accounting method - .14 -
------- ------ -------
Per share $ 1.76 $ 1.65 $ (1.75)
======= ==== ====
Weighted average common shares
outstanding 6,237,875 5,690,853 4,834,317
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
24
Aquarion Company and Subsidiaries
Consolidated Balance Sheets
Assets 1993 1992
In thousands
December 31,
Property, plant and equipment $367,564 $351,759
Less: accumulated depreciation 117,191 108,610
-------- --------
Net property, plant and equipment 250,373 243,149
-------- --------
Current assets:
Cash and cash equivalents 90 319
-------- --------
Accounts receivable:
Customers 14,422 16,045
Miscellaneous 2,439 3,840
-------- --------
16,861 19,885
Less: allowance for doubtful accounts 2,935 2,440
-------- --------
13,926 17,445
Accrued revenues 8,995 7,781
Inventories 2,885 3,113
Prepaid expenses 6,698 5,634
-------- --------
Total current assets 32,594 34,292
-------- --------
Goodwill 10,709 11,182
Recoverable income taxes 46,377 41,137
Other assets 22,819 18,571
-------- --------
$362,872 $348,331
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
25
Aquarion Company and Subsidiaries
Consolidated Balance Sheets
Liabilities and Shareholders' Equity 1993 1992
In thousands, except share data
December 31,
------------------------------------ ------ ------
Shareholders' equity:
Preferred stock, no par value, authorized
2,500,000 shares not to exceed aggregate value
of $25,000,000, issuable in shares--none issued $ - $ -
Common stock, stated value: $1
Authorized--16,000,000 shares
Issued 6,564,533 shares in 1993 and 6,032,109
shares in 1992 6,565 6,032
Capital in excess of stated value 91,441 79,129
Retained earnings 15,015 14,327
------- -------
113,021 99,488
Less: treasury stock, at cost 2,540 2,323
------- -------
Total shareholders' equity 110,481 97,165
------- -------
Redeemable preferred stock of subsidiaries 375 420
------- -------
Long-term debt and other obligations 115,591 105,463
------- -------
Current liabilities:
Short-term borrowings, unsecured 5,500 17,600
Current maturities of long-term debt 62 4,869
Accounts payable and accrued liabilities 10,790 10,215
Dividends payable 2,621 2,410
Accrued interest 2,240 2,586
Taxes other than income taxes 1,354 1,104
Income taxes 976 1,121
------- -------
Total current liabilities 23,543 39,905
------- -------
Advances for construction 22,593 23,062
Contributions in aid of construction 20,883 19,433
Recoverable income taxes 6,123 6,067
Deferred income taxes 63,283 56,816
Commitments - -
-------- --------
$362,872 $348,331
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
26
Aquarion Company and Subsidiaries
Consolidated Statements of Cash Flows
In thousands, except share data
Year ended December 31 1993 1992 1991
------------------------------- ---- ---- ----
Cash flows from operating activities:
Net income (loss) $10,990 $ 9,400 $(8,468)
Adjustments reconciling net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 11,588 10,799 10,305
Provision for losses on accounts receivable 1,707 1,169 1,182
Deferred and prepaid net taxes 1,528 1,693 497
Cumulative effect of change in accounting method - (791) -
Proceeds from sale of surplus land, net of gains 333 120 (416)
Special charges - - 15,000
Allowance for funds used during construction (623) (678) (401)
Change in assets and liabilities (Note 16) (340) (1,621) (6,058)
------- ------- -------
Net cash provided by operating activities 25,183 20,091 11,641
------- ------- -------
Cash flows from investing activities:
Capital additions, excluding an allowance for funds
used during construction (17,898) (24,710) (17,454)
Advances and contributions in aid of construction,
net of refunds 981 747 1,111
Other investing activities (605) 1,079 (5,785)
------- ------- -------
Net cash used in investing activities (17,522) (22,884) (22,128)
------- ------- -------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 10,000 15,000 -
Proceeds from the issuance of common stock, net 12,845 21,395 1,246
Net (repayments of) proceeds from short-term
borrowings (12,100) (19,600) 12,370
Common dividends paid (10,091) (9,137) (7,795)
Principal and premium payments on long-term debt (5,241) (3,688) (2,743)
Debt issuance costs (2,174) (85) (205)
Purchase of treasury stock (1,084) - -
Payments for redemption of preferred stock (45) (1,745) (345)
------- ------ -------
Net cash (used in) provided by financing
activities (7,890) 2,140 2,528
------- ------ -------
Net (decrease) in cash and cash equivalents (229) (653) (7,959)
Cash and cash equivalents, beginning of year 319 972 8,931
------- ------- -------
Cash and cash equivalents, end of year $ 90 $ 319 $ 972
======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
27
Aquarion Company and Subsidiaries
Consolidated Statements of Shareholders' Equity
Capital Total
in excess share-
In thousands, except share Number Stated of stated Retained Number holders'
data of Shares value value earnings of Shares Amount equity
-------------------------- --------- ------ --------- -------- --------- ------ --------
Year ended December 31, 1991
Balance, December 31, 1990 4,904,053 $4,904 $57,616 $30,816 101,352 $(2,833) $90,503
Net loss - - - (8,468) - - (8,468)
Dividends on common stock - - - (7,843) - - (7,843)
Dividend reinvestment plan 57,115 57 1,189 - - - 1,246
Treasury stock transactions - - - (3,167) 82 82
--------- ------ ------- ------- ------- ------- -------
Balance, December 31, 1991 4,961,168 4,961 58,805 14,505 98,185 (2,751) 75,520
--------- ------ ------- ------- ------- ------- -------
Year ended December 31, 1992
Net income - - - 9,400 - - 9,400
Proceeds from the issuance of
common stock, net 1,000,000 1,000 18,851 - - - 19,851
Dividends on common stock - - - (9,578) - - (9,578)
Dividend reinvestment plan 70,941 71 1,473 - - - 1,544
Treasury stock transactions - - - - (16,751) 428 428
--------- ------ ------- ------- ------- ------- -------
Balance, December 31, 1992 6,032,109 6,032 79,129 14,327 81,434 (2,323) 97,165
--------- ------ ------- ------- ------- ------- -------
Year ended December 31, 1993
Net income - - - 10,990 - - 10,990
Proceeds from the issuance of
common stock, net 460,000 460 10,741 - - - 11,201
Dividends on common stock - - - (10,302) - - (10,302)
Dividend reinvestment plan 72,424 73 1,571 - - - 1,644
Treasury stock transactions - - - - 10,857 (217) (217)
--------- ------ ------- ------- ------ ------- -------
Balance, December 31, 1993 6,564,533 $6,565 $91,441 $15,015 92,291 $(2,540) $110,481
========= ===== ====== ====== ====== ===== =======
The accompanying notes are an integral part of these consolidated financial statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
---------------------------------------------------
Aquarion Company (Aquarion) is a holding company whose subsidiaries are
engaged both in the regulated utility business of public water supply and in
various nonutility businesses. Aquarion's utility subsidiary, Bridgeport
Hydraulic Company (BHC) and BHC's subsidiary, Stamford Water Company (SWC),
(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 22 communities in Fairfield, New Haven, and Litchfield
Counties in Connecticut, including communities served by other utilities to
which water is available on a wholesale basis for back-up supply and peak
demand purposes through BHC's Southwest Regional Pipeline. BHC is the
largest investor-owned water company in Connecticut and, with its SWC
subsidiary, is among the ten largest investor-owned water companies in the
nation. The Utilities are regulated by several Connecticut agencies,
including the Connecticut Department of Public Utility Control (DPUC).
Aquarion and its subsidiaries (collectively, the Company) are also engaged in
nonutility activities. The Company conducts an environmental testing
laboratory business through its Industrial and Environmental Analysts, Inc.
family of six laboratories which analyze contaminants in hazardous waste,
soil, air and water (IEA). Additionally, the Company is engaged in various
utility management service businesses through Hydrocorp, Inc. (Hydrocorp) and
Aquarion Management Services, Inc. (AMS), owns a small forest products and
electricity cogeneration business through Timco, Inc. (Timco) and owns a
small real estate subsidiary, Main Street South Corporation (MSSC).
The Company's accounting policies conform to generally accepted
accounting principles and, as applied in the case of rate-regulated public
utilities, comply with the Uniform System of Accounts and ratemaking
practices prescribed by the DPUC. A description of Aquarion's principal
accounting policies follows.
Principles of consolidation. The consolidated financial statements include
the accounts of the Company and of its majority-owned subsidiaries.
Investments in entities in which the Company owns more than 20 percent but 50
percent or less are accounted for by the equity method and investments in
entities in which the Company owns less than 20 percent are accounted for at
cost. All non majority-owned investments are included within the caption
"Other assets" in the Consolidated Balance Sheets.
All material intercompany accounts and transactions have been
eliminated. Certain prior year amounts have been reclassified in order to
conform to the current year presentation.
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 pension benefits. The Utilities
also capitalize an allowance for funds used during construction (AFUDC)
equivalent to the cost of funds devoted to plant under construction, except
for the portion of federal Safe Drinking Water Act (SDWA) projects for which
it may receive a construction work in progress water service rate surcharge
(CWIP rate surcharge).
Modifications and improvements to units of property are capitalized.
Expenditures for repairs and maintenance are charged to expense as incurred.
At the time depreciable utility property is retired or disposed of, the
book cost together with the related costs of removal, less salvage, is
charged to the reserve for depreciation in accordance with the Uniform System
of Accounts prescribed by the DPUC. Upon disposal or retirement of
depreciable nonutility property, the appropriate plant accounts and
accumulated depreciation are reduced by the related costs. Any resulting
gain or loss is recognized in the Consolidated Statement of Income.
For financial reporting purposes, depreciation is provided for
principally by use of the
29
straight-line method over the estimated service lives of the respective
assets. For income tax depreciation purposes, the Company, from January 1,
1981 to December 31, 1986, used the Accelerated Cost Recovery System for all
property, plant and equipment. As a result of the Tax Reform Act of 1986,
all plant additions subsequent to December 31, 1986 have used the Modified
Accelerated Cost Recovery System.
Statement of cash flows. For purposes of reporting cash flows, 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 common share are based on the annual
weighted average number of shares outstanding and common share equivalents.
Common share equivalents consist of employee stock options, which do not have
a significant impact on the calculation.
Allowance for funds used during construction. AFUDC is recognized by the
Utilities by applying the last allowed rate of return on rate base approved
by the DPUC (9.62 percent for BHC and 10.69 percent for SWC at December 31,
1993) to construction projects exceeding $10,000 and requiring more than one
month to complete. AFUDC represents the net cost of borrowed funds used for
construction purposes for the period of construction and a reasonable rate of
return on other funds when so used. AFUDC represents a noncash credit to
income.
Utility plant under construction is not recognized as part of the
Utilities' rate base for ratemaking purposes until such facilities are placed
in service. Accordingly, the Utilities capitalize AFUDC as a portion of the
construction cost of utility plant until it is completed. Capitalized AFUDC
is recovered through water service rates over the service lives of the
facilities.
Construction work in progress surcharge. 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. BHC
implemented a CWIP rate surcharge in 1990 in connection with the construction
of its Easton Lake Reservoir filtration facilities in Easton, Connecticut.
The CWIP rate surcharge was replaced in August 1993 by permanent rates (Note
2).
BHC intends to file an application with the DPUC in the first quarter of
1994 to ascertain CWIP eligibility in connection with the construction of its
SDWA-mandated Hemlocks Reservoir filtration facility.
Revenue recognition. The Utilities accrue revenue for the estimated amount
of water sold but not billed at the end of each period. Certain
environmental testing laboratory revenues are recognized on a percentage-of-
completion basis. Forest products and electricity cogeneration revenues are
recognized as the related forest products are shipped or the electricity is
transmitted to customers. Revenues from sales of real estate are recognized
when the transaction is completed and title has passed.
Inventories. Inventories are valued at the lower of cost or market, 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. Deferred charges consist primarily of financing charges, rate
case and other expenses. Other assets also include preliminary survey and
investigation costs and certain items amortized, subject to DPUC approval,
over their anticipated period of recovery.
Deferred rate case expenses are amortized over periods allowed by the
DPUC, generally one to three years. Deferred financing charges are amortized
over the lines of the related debt issues.
Goodwill. The excess of the cost of investments in subsidiaries over the
fair value of the net assets acquired at December 31, 1993 and 1992 was
$10,709,000 and $11,182,000 respectively, net of accumulated amortization of
$2,913,000 and $2,439,000. In December 1991, the Company reduced goodwill by
$12,000,000 to more appropriately reflect the then current value of its
continuing investment in the environmental testing laboratories (Note 5).
Amortization is computed on a straight-line basis over periods ranging from
10 to 30 years.
30
Amortization expense totaled $474,000, $474,000 and $878,000
for the years ended 1993, 1992 and 1991, respectively.
Fair value of financial instruments. The carrying amount of cash and cash
equivalents, trade accounts receivable, and short-term borrowings approximate
their fair values due to their short-term nature. The fair value of long-
term debt based on the quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of the same remaining
maturities at December 31 was as follows:
(In thousands) 1993 1992
-------------- ------ ------
Fair Value $104,918 $105,490
Carrying Value 115,591 105,463
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 contract 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.
Employee benefits. The Company and certain of its subsidiaries have
noncontributory pension programs covering qualified employees. Aquarion's
policy is to fund pension costs accrued. In addition, certain subsidiaries
have established defined contribution salary deferral plans under Section
401(k) of the Internal Revenue Code. The computation of pension costs and
other required disclosures are presented in Note 12.
In addition to providing pension benefits, the Company also provides
certain health and life insurance benefits for retired employees. BHC, SWC
and Aquarion employees may become eligible for these benefits if they reach
retirement age while working for the Company. Several different health care
plans are offered. Generally, the plans pay stated percentages of covered
expenses after a deductible is met. Both active and retired employees are
required to contribute toward the cost of these benefits.
On January 1, 1993, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 106, "Employers' Accounting for Post-Retirement
Benefits Other than Pensions" (SFAS 106). This statement requires that an
employer's obligation for postretirement benefits expected to be provided to
or for an employee be fully accrued by the date that the employee attains
full eligibility for all benefits expected to be received by that employee
and any beneficiaries and covered dependents, even if the employee is
expected to render additional service beyond that date. Prior to adoption,
the Company recorded the costs of providing such benefits when paid. The
computation of postretirement benefit costs and other disclosures required by
SFAS 106 are also presented in Note 12.
In November 1992, the FASB issued Statement No. 112, "Employers'
Accounting for Postemployment Benefits" (SFAS 112), effective for fiscal
years beginning after December 15, 1993. SFAS 112 will require the Company
to accrue the cost of providing future benefits to former or inactive
employees after employment but before retirement. These benefits would be
recognized over the employees' years of service or at the date of the event
giving rise to such benefits. The impact of this new standard is not
expected to have a material effect on the Company's financial condition or
results of operations.
Income taxes. In accordance with FASB Statement No. 109, "Accounting for
Income Taxes,"(SFAS 109), which was adopted in the first quarter of 1992, the
Company provides deferred taxes for all temporary book-tax differences using
the liability method. The liability method requires that deferred tax
balances be adjusted to reflect enacted future tax rates that are anticipated
to be in effect when the temporary differences reverse. In accordance with
generally accepted accounting principles for regulated industries, the
Company reflects as income tax expense the amount of tax currently payable,
except for accelerated depreciation since 1981 and the tax effect of post-
1986 contributions in aid of construction, for which deferred income taxes
have been provided on an annual basis. This method, known as the flow-
through method
31
of accounting, is consistent with ratemaking policies of the
DPUC. The Company has established assets and liabilities that reflect
anticipated future ratemaking effects of deferred tax provisions arising from
the implementation of SFAS No. 109 for its utility subsidiaries. Deferred
investment tax credits are amortized ratably based upon the book life of
property. (Note 6)
Note 2 - Regulatory matters
---------------------------
Rates. On February 5, 1993, BHC filed a rate application with the DPUC for a
35 percent water service rate increase designed to provide a $17,500,000
increase in annual water service revenues and a return on common equity of
12.75 percent. The request included the replacement of a CWIP rate surcharge
previously granted to BHC pursuant to DPUC regulations to recover 90 percent
of the carrying costs of capital used in its SDWA-mandated Easton Lake
Filtration Construction Project. Prior to the final decision, BHC lowered
its original request by a total of $1,400,000, to $16,100,000, by
restructuring long-term debt to reduce annual interest costs and by reducing
property taxes and other miscellaneous expenses. Effective August 1, 1993,
the DPUC awarded BHC a 21 percent water service rate increase designed to
provide a $10,400,000 annual increase in revenues and an 11.6 percent return
on common equity. Prior to the time the new rates became effective, the CWIP
rate surcharge was 7.35 percent of revenues. Total revenues from the CWIP
rate surcharge were $1,937,000, $1,532,000 and $501,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
On February 8, 1991, SWC filed with the DPUC an application for a
$3,646,000, 36.5 percent water service rate increase. On July 31, 1991, a
final decision was issued by the DPUC, which became effective August 28,
1991, allowing a $2,276,000, or 22.5 percent, increase in annual water
service rate charges.
Note 3 - Sale of surplus land
-----------------------------
Proceeds from the sale of land are recorded as revenue at the time of
closing, and portions of pretax gains required to be deferred by the DPUC are
amortized as a reduction in the Utilities' operating expenses over various
time periods as stipulated by the DPUC.
In 1993, the Company sold approximately nine acres of surplus land in
three separate transactions totaling $645,000. Total gains, including
recognition of deferred gains from prior land sales of $19,000, approximated
$312,000, or 5 cents per share.
During 1992, the Company sold approximately 60 acres of surplus land in
three separate transactions for a total of $263,000. Total gains, including
recognition of deferred gains from prior land sales of $24,000, approximated
$143,000, or 2.5 cents per share.
In 1991, the Company sold approximately 10 acres of surplus land in
three separate transactions for $196,000. Total gains, including recognition
of deferred gains on prior land sales of $52,000 in accordance with decisions
previously set forth by the DPUC, amounted to $119,000, or 2 cents per share.
During 1991, the Company also recognized a gain of $493,000, or 10 cents per
share, as a result of a Connecticut superior court ruling regarding BHC's
appeal of a DPUC decision regarding the sale in 1989 of 382 acres of surplus,
off-watershed land in the Pequonnock River Valley of Trumbull, Connecticut.
As a result of the 1989 Pequonnock River Valley sale, the Company is
entitled to a charitable contribution tax deduction based on the difference
between the sales price and the fair market value of the property. Due to
annual limitations applicable to such deductions, a charitable contribution
of approximately $661,000 ($2,100,000 in 1992) has been carried forward to
reduce future taxable income. Any unused deductions expire in 1994.
Note 4 - Acquisitions
---------------------
In 1988, Aquarion acquired 25 percent of the outstanding voting equity
in SRK Holding, Inc. (SRK), an environmental services firm headquartered in
Monroe, Connecticut. In December 1990, Aquarion acquired the remaining 75
percent of SRK's voting equity. At that time, Aquarion commenced integrating
SRK's laboratories in Connecticut, New Jersey and Illinois with its existing
IEA laboratory network and announced its intention to sell the nonlaboratory
businesses of SRK.
32
Upon acquiring SRK, Aquarion paid $2,900,000 in cash at closing, and
accrued an additional amount, currently estimated at $6,000,000, to be made
upon final settlement of the sale of the nonlaboratory businesses (the final
settlement). All proceeds upon sale or liquidation of the nonlaboratory
businesses will be directed to the payment of assumed liabilities,
transaction expenses and working capital advanced by Aquarion.
In September 1991 and February 1992, the Company sold a majority of
SRK's nonlaboratory businesses for approximately $8,000,000 in cash and
certain contingent obligations of the buyer. In connection with this
transaction, the SRK selling shareholders were advanced $1,000,000 toward the
final settlement and the remaining cash was used to pay assumed liabilities
and transaction expenses. There was no gain or loss as a result of these
transactions.
The final settlement of this transaction and the liquidation of the
remaining SRK nonlaboratory assets are not expected to have a material effect
on the Company's future results. Advances to the SRK selling shareholders,
receivables from the buyer of SRK's nonlaboratory businesses and working
capital advances, which aggregated $443,000 at December 31, 1993, are
recorded in "Accounts receivable: Miscellaneous" in the accompanying
Consolidated Balance Sheets.
Results of operations of the acquired laboratory businesses since the
respective acquisition dates are included in the Consolidated Statements of
Income.
Note 5 - Special charges
------------------------
The Company recorded a pretax provision of $15,000,000 in the fourth
quarter of 1991, which had the effect of reducing after-tax earnings by $2.89
per share. The provision related to a write-down of goodwill accumulated in
the acquisition of environmental testing laboratories since 1988 and a
provision for restructuring certain operations within the environmental
testing laboratories business.
The write-down of goodwill, which totaled $12,000,000 and represented an
approximately 50 percent reduction in the carrying value of the goodwill
associated with the laboratories, was recorded to more properly reflect the
then current value of the Company's continuing investment in its
environmental testing laboratories. The restructuring provision, which
amounted to a pretax charge of $3,000,000, related primarily to certain
reorganization charges and, to a lesser extent, additional bad debt reserves
and the write-off of other assets.
Note 6 - Income taxes
---------------------
In 1992, the Company elected early adoption of the method of accounting
for income taxes pursuant to SFAS 109, which requires a change from the
deferred to the liability method of computing deferred income taxes.
The Company's provision for income taxes for 1993 consists of $1,391,000
in state taxes and $5,274,000 in federal income taxes.
Income tax expense for the three years ended December 31, consisted of
the following:
(In thousands) 1993 1992 1991
-------------- ------ ------ ------
Current
Federal $3,441 $2,770 $2,057
State 1,614 1,169 769
Deferred (prepaid)
Investment tax credit (152) (152) (152)
Accelerated depreciation 1,616 1,804 1,724
Contributions in aid of construction (416) (349) (479)
Alternative minimum tax 387 (122) (572)
Special charges 121 610 (1,020)
Other 54 (98) 379
------ ------ ------
Total income tax expense $6,665 $5,632 $2,706
===== ===== =====
A reconciliation of income tax expense at the statutory federal income
tax rate to the actual income tax expense for the years ended December 31, is
as follows:
33
(In thousands) 1993 1992 1991
-------------- ----- ----- ------
Tax at statutory rate $6,181 $4,842 $(1,959)
Increases (reductions) in taxes resulting
from:
State taxes, net of federal income
taxes 904 695 452
Contribution deduction-sale of surplus
land (131) (426) (146)
Excess depreciation and basis
amortization 630 541 496
Housing and rehabilitation tax benefits - - (137)
Bond premium costs (423) 17 17
Investment tax credit (152) (152) (152)
Developmental computer costs (235) (175) (120)
Amortization and write-down of goodwill 163 136 4,376
Other items, net (272) 154 (121)
------ ------ ------
Actual income tax expense $6,665 $5,632 $2,706
===== ===== =====
Deferred tax liabilities (assets) at December 31, were comprised of the
following:
1993 1992
Utility temporary differences $45,981 $41,137
Depreciation 14,712 12,691
Investment tax credits 1,023 1,189
Other 1,567 1,799
------ ------
Gross referenced tax liabilities 63,283 56,816
------ ------
Contributions in aid of construction (5,654) (5,309)
Alternative minimum tax (1,279) (1,403)
Other (2,215) (2,554)
------ ------
Gross deferred tax assets (9,148) (9,266)
------- ------
$54,135 $47,550
====== ======
Note 7 - Long-term debt
-----------------------
Long-term debt at December 31, consisted of the following:
(In thousands) 1993 1992
-------------- ------ ------
First mortgage bonds
Series Q, 4 5/8%, due August 1, 1995 $ 4,000 $ 4,000
Series R, 6 7/8%, due November 1, 1998 5,000 5,000
Series S, 10 1/2% due March 1, 2000 - 1,074
Series T, 7 2/5%, due September 1, 2008 - 12,000
Series B, 4 1/2%, due June 1, 1993 - 2,000
Series C, 7 1/4%, due December 1, 1993 - 1,160
Notes payable - unsecured
7.8% senior notes due June 1, 1997 15,000 15,000
8 1/2% senior note due January 1, 1994 10,000 10,000
9% note due November 1, 1993 - 500
9.55% senior notes due February 1, 2021 20,000 20,000
7 1/4% note due June 1, 2020(a) 7,000 7,000
7 3/4% note due August 1, 2019 7,700 7,700
10 3/4% note due October 15, 2014 10,000 10,000
5.5% note due June 1, 2028(b) 12,000 -
5.6% note due June 1, 2028(b) 10,000 -
5.8% note due March 1, 2029(b) 7,700 -
7 3/5% note due December 1, 2018 - $ 5,980
7 1/2% note due October 1, 2009 - 3,000
5.3% note due September 1, 2028 8,980 -
3 1/2% note due November 1, 2004(c) 5,700 5,700
7.4%-14.1% capital lease obligations 185 218
-------- --------
123,265 110,332
Less: Amounts due within one year 62 4,869
Balance of 5.8% note proceeds
held by trustee 7,612 -
-------- --------
$115,591 $105,463
======= =======
(a) BHC has the option to redeem these bonds at redemption prices ranging
from 102 percent on June 1, 2000 to 100 percent on June 1, 2002 and thereafter.
34
(b) These BHC financings are insured as to the payment of principal and
interest by the Municipal Bond Investors Assurance Corporation.
(c) This Timco financing bears interest at a rate adjusted each November 1
until such time as Timco elects to convert to a fixed rate. On
November 1, 1993, the interest rate was adjusted from 3 3/4 percent to
3 1/2 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.
In June 1993, BHC issued a $10,000,000 unsecured note in consideration
for a loan of the proceeds from the issuance by the Connecticut Development
Authority (CDA) of an equal amount of tax-exempt Water Facilities Revenue
Bonds. The tax-exempt CDA bonds bearing interest at 5.6 percent, have a 35-
year maturity and are subject to alternative minimum tax. BHC has the option
to have these bonds redeemed at a price ranging from 102 percent on June 1,
2003 to 100 percent on June 1, 2005 and thereafter. The proceeds of this
bond issuance are to be used to offset costs incurred in the construction of
the Easton Lake Reservoir Water Treatment Plant. Under the terms of the CDA
bonds, proceeds are to be requisitioned from a construction fund held by a
trustee for planned capital improvements. On June 17, 1993, the Company
requisitioned the entire amount held by the trustee and used the proceeds to
reduce short-term borrowings incurred to finance the cost of construction.
BHC's $12,000,000, 7.4 percent Series T bonds due September 1, 2008,
were redeemed on September 1, 1993 at 101.5 percent. In June 1993, BHC
issued a $12,000,000 unsecured note at 5.5 percent due in 2028 in
consideration for a loan of the proceeds by the CDA of an equal amount of
Water Facilities Refunding Revenue Bonds for the purpose of refunding the
aforementioned issue. BHC has the option to redeem the unsecured note at a
redemption price ranging from 102 percent on June 1, 2003 to 100 percent on
June 1, 2005 and thereafter.
BHC's $7,700,000, 7 3/4 percent financing contained optional and
mandatory redemption provisions. The bonds have been called for redemption
on February 1, 1994 at an early redemption price of 102 percent. On December
1, 1993, BHC issued a $7,700,000 unsecured note at 5.8 percent due in 2029
for the purpose of refunding the aforementioned issue. BHC has the option to
redeem these bonds at a redemption price ranging from 102 percent on December
1, 2003 to 100 percent on December 1, 2005 and thereafter.
In June 1993, BHC entered into a separate Forward Purchase Agreement to
issue a $10,000,000, 6.05 percent unsecured note, which provides for the
issuance of tax exempt Water Facilities Refunding Revenue Bonds of the same
amount maturing in 2029. The proceeds from the $10,000,000 transaction will
be received in August, 1994 and will be used to refund the 10 3/4 percent
$10,000,000 unsecured note which BHC plans to call for early redemption in
October 1994 at a redemption price of 103 percent.
In September 1993, SWC issued a $8,980,000 unsecured note at 5.3 percent
due in 2028 in consideration for a loan of the proceeds by the CDA of an
equal amount of Water Facilities Refunding Revenue Bonds. SWC has the option
to redeem the unsecured note at a redemption price ranging from 102 percent
on September 1, 2003 to 100 percent on September 1, 2005 and thereafter. On
October 1, 1993, SWC redeemed its $3,000,000, 7 1/2 percent unsecured note at
an early redemption price of 101 percent with a portion of the proceeds from
the aforementioned issue. The remaining proceeds were used to redeem SWC's
$5,980,000, 7.6 percent unsecured note which was redeemed on December 1,
1993, at an early redemption price of 102 percent.
Substantially all of BHC's utility plant is subject to the lien of its
first mortgage indentures. The mortgage bond and note-payable agreements
contain certain covenants typical of such agreements, the most restrictive of
which are under the 9.55 percent unsecured Senior Notes (BHC Notes) and the
8 1/2 percent and 7.8 percent unsecured Senior Notes (Aquarion Notes) and
require the maintenance of total funded debt to total capital, as defined, of
no more than 66 2/3 percent. Additionally, payment of dividends on
Aquarion's common stock is restricted under the Aquarion notes. At December
31, 1993, approximately $31,000,000 was available to pay dividends as defined
under the Aquarion notes.
35
On January 4, 1994, Aquarion issued a $10,000,000, 5.95 percent
unsecured Senior Note maturing January 4, 1999. The proceeds from this
transaction were used to refund its $10,000,000, 8 1/2 percent unsecured
Senior Note due January 1, 1994. Due to this refunding, the 8 1/2 percent
Senior Note is reflected as long-term debt on the 1993 balance sheet.
On May 19, 1992, Aquarion issued the $15,000,000, 7.8 percent unsecured
Senior Note due June 1, 1997. The proceeds from this financing were used to
reduce short-term borrowings.
The aggregate maturities and sinking fund requirements on long-term
debt, exclusive of capital lease obligations (Note 10), for each of the five
years succeeding December 31, 1993 are as follows: 1994-$0; 1995-$4,000,000;
1996-$0; 1997-$15,000,000; 1998-$5,000,000.
Note 8 - Short-term borrowings
------------------------------
In May 1993, the Company entered into unsecured revolving credit
agreements with five banks totaling $50,000,000. The agreements provide that
the Company may select among a variety of interest rates, including a
negotiated rate. Under the terms of the agreements, the Company must pay a
commitment fee of .225 of 1 percent on the average daily unused portion of
the commitment and a utilization fee of .075 of 1 percent on the average
daily portion of the commitment for each day the commitment equals or exceeds
50 percent or $5,000,000 at each bank. The revolving credit agreements
contain covenants similar to those under previously issued unsecured Senior
Notes of Aquarion. The lines of credit provide for automatic renewal on an
annual basis, but may be terminated at the option of the banks or the Company
upon 90 days notice by either party prior to the annual anniversary.
Short-term borrowings for the years ended December 31 were as follows:
(In thousands) 1993 1992 1991
-------------- ------ ------ ------
Borrowings outstanding at December 31 $5,500 $17,600 $37,200
Weighted average interest rate at December 31 3.49% 4.04% 5.92%
Maximum outstanding during the year $22,300 $42,200 $37,200
Average outstanding during the year $11,983 $19,358 $28,346
Weighted average interest rate during the year* 4.06% 5.34% 7.60%
* Determined by dividing annual interest expense by average amount
outstanding during the year
Note 9 - Redeemable preferred stock and rights
----------------------------------------------
Preferred stock of BHC is issuable in series, and 110,000 shares in the
aggregate have been authorized. In December 1992, BHC redeemed the remaining
outstanding shares of its Series A preferred stock. The Series carried a par
value of $100 per share and was redeemed at a total cost of approximately
$1,700,000.
SWC is authorized to issue 60,000 shares of preferred stock. SWC had
outstanding 7,500 and 8,400 shares at December 31, 1993 and 1992,
respectively, of $50 par value preferred stock. Dividends are cumulative and
are limited to the fixed annual rate of 7 1/8 percent. SWC is required to
make annual sinking fund payments of $45,000 and has the option of doubling
sinking fund payments in any one year, at par value, in addition to the right
to redeem the entire issue at $50.50 per share.
SWC is also authorized to issue 400,000 shares of no par value
preference stock, of which none is outstanding.
The Company has reserved 80,000 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, 1/150th of a
share of Series A Junior Participating Preferred Stock, no par value ("Series
A Preferred Stock"), at $83.33 per 1/150th of a share.
Each share of Series A Preferred Stock, if issued, would have dividend,
voting and liquidation rights which are at least 150 times the equivalent
rights of one share of the Common Stock. The rights would become exercisable
only if a person or group acquires 20 percent or more
36
of the outstanding
Common Stock, or if a person or group announces or commences a tender or
exchange offer for 30 percent or more of the Common Stock. If the Company
were to be acquired in a merger or other business combination transaction,
each right would entitle its holder 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. If, under certain circumstances, a 20
percent or greater shareholder acquires the Company through a transaction in
which the Company and its Common Stock survive or such shareholder engages in
certain self-dealing transactions with the Company, each right holder (other
than a 20 percent or greater shareholder) would be entitled to receive, upon
payment of the exercise price, the greater of (a) the number of shares of
Series A Preferred Stock for which such right was exercisable immediately
prior to such self-dealing transactions or (b) that number of shares of
Series A Preferred Stock having a market value equal to twice the exercise
price.
The Company may redeem the rights at $.033 per right at any time until
the tenth day after a 20 percent position has been acquired or a 30 percent
tender offer has been commenced. The redemption period is subject to
extension by the Company's Board of Directors. Until such time as these
rights become exercisable, they will have no dilutive effect on the Company's
earnings.
Note 10 - Commitments and contingencies
---------------------------------------
Future minimum rental payments required under operating leases for
leaseholds and equipment, having initial or remaining noncancellable lease
terms in excess of one year, aggregated $6,286,000 at December 31, 1993.
Certain facility leases contain renewal options. Annual payments for each of
the five succeeding fiscal years are: 1994 - $1,399,000; 1995 - $1,161,000;
1996 - $583,000; 1997 - $564,000; 1998 - $531,000; thereafter - $2,048,000.
Future minimum lease payments under capital leases approximated $286,000
at December 31, 1993.
Aquarion and BHC entered into an acquisition agreement to acquire the
net assets of The New Canaan Company (NCC), which consist primarily of NCC's
water utility subsidiaries, The New Canaan Water Company (NCWC) and
Ridgefield Water Supply Company (RWSC), for Common Stock of Aquarion with a
market value of $3,500,000 on or about the closing date. The acquisition and
a related exchange have been approved by the DPUC but remain contingent upon
certain other regulatory approvals satisfactory to the parties. The
transaction is also conditioned upon the sale of NCWC's water reservoir and
watershed lands to the Second Taxing District of the City of Norwalk
(Connecticut), a transaction which will require the approval of the State of
Connecticut Department of Public Health and Addiction Services (the DPHAS)
and the issuance of a diversion permit by the State of Connecticut Department
of Environmental Protection (the DEP). Proceedings to obtain the regulatory
approvals are pending. The parties have agreed to extend the acquisition
agreement and the related property exchange agreement until March 31, 1994.
There is no certainty that the parties will agree to further extensions if
the transaction has not closed by that time.
At December 31, 1993, Aquarion had guaranteed a mortgage indenture of
$1,500,000 and two standby letters of credit totaling $450,000 in connection
with the disposition of the SRK non-laboratory businesses (Note 4).
Note 11 - Industry segment information
--------------------------------------
The Company's operations are grouped into four industry segments as
follows:
Public water supply--collection, purification and distribution of water
for domestic commercial and industrial use, and for fire protection service;
Environmental laboratories and utility management services--
environmental testing laboratories and other nonregulated water-related
services;
Forest products--processing, marketing and distribution of lumber
products, and the generation and sale of cogenerated electricity;
Real estate--ownership and sale of real property.
37
The following table sets forth information about the Company's
operations by industry segment for the years ended December 31:
(In thousands) 1993 1992 1991
-------------- ------ ------ ------
Operating revenues:
Public water supply $ 71,280 $ 63,702 $ 63,829
Environmental laboratories and
utility management services 23,132 26,061 24,358
Forest products 12,298 12,001 10,515
Real estate 645 262 196
------- -------- --------
Total operating revenues $107,355 $102,026 $ 98,898
======= ======= =======
Operating income:
Public water supply $ 26,475 $ 22,475 $ 22,241
Environmental laboratories and
utility management services(1) (1,107) (431) (20,221)
Forest products 1,496 1,437 1,396
Real estate 40 170 174
------- ------- --------
Industry segment operating
income $ 26,904 $ 23,651 $ 3,590
Unallocated (expense) income, net (600) (574) 22
Interest expense (9,242) (9,327) (9,544)
Allowance for funds used
during construction 623 678 401
Subsidiary preferred dividends (30) (187) (231)
------- ------- -------
Income (loss) before income taxes
and cumulative effect of a
change in accounting method $ 17,655 $ 14,241 $ (5,762)
====== ====== =====
Identifiable assets:
Public water supply $321,431 $300,713 $246,603
Environmental laboratories and
utility management services 25,941 29,733 28,397
Forest products 7,718 8,526 8,525
Real estate 5,678 5,537 5,187
Corporate 2,104 3,822 5,090
-------- -------- --------
Total identifiable assets $362,872 $348,331 $293,802
======= ======= =======
Capital expenditures:
Public water supply $ 16,300 $ 21,727 $ 13,969
Environmental laboratories and
utility management services 1,072 2,303 2,953
Forest products 526 665 278
Real estate 169 154 711
-------- -------- --------
Total capital expenditures $ 18,067 $ 24,849 $ 17,911
====== ====== ======
Depreciation expense:
Public water supply $ 8,054 $ 6,973 $ 6,661
Environmental laboratories and
utility management services 1,895 1,910 1,588
Forest products 663 626 632
Real estate 11 11 11
-------- ------- --------
Total depreciation expense $ 10,623 $ 9,520 $ 8,892
====== ===== =====
(1) Includes special charges of $15,000,000 in 1991 (Note 5) and goodwill
amortization of $474,000, $474,000 and $878,000 in 1993, 1992 and
1991, respectively.
Operating revenues are comprised of sales to unaffiliated customers.
The Company's operations all take place in North America and no single
customer accounted for 10 percent or more of total operating revenues.
Operating income (loss) is defined as operating revenues less total
costs and expenses, other than interest expense, unallocated (expenses)
income, income taxes, AFUDC and subsidiary preferred dividends. Identifiable
assets by industry segment are assets used in the Company's operations in
each industry segment. Corporate assets are principally cash, prepaid
expenses, receivables and deferred charges not identifiable with a specific
industry segment.
38
Note 12 - Employee benefit plans
--------------------------------
The following table sets forth the funded status of Aquarion's
Retirement Plan For Employees (the Plan) at December 31, the Plan's latest
valuation date:
(In thousands) 1993 1992
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$16,673 in 1993 and $15,596 in
1992 $ 17,605 $ 16,493
====== ======
Projected benefit obligation $(22,507) $(22,237)
Plan assets at fair value 33,505 32,318
-------- --------
Plan assets in excess of projected
benefit obligation 10,998 10,081
Prior service cost 957 1,043
Unrecognized net asset existing at
January 1, 1986 (3,503) (3,961)
Unrecognized net gain (4,070) (3,694)
-------- -------
Prepaid pension cost $ 4,382 $ 3,469
===== =====
Net pension credit for the years ended December 31,
included the following components:
(In thousands) 1993 1992 1991
-------------- ------ ------ ------
Service cost - benefits earned during
the period $ 763 $ 860 $ 693
Interest cost on projected benefit
obligation 1,510 1,485 1,422
Actual return on plan assets (2,331) (1,961) (6,105)
Net amortization and deferral (807) (1,106) 3,470
------ ------ ------
Net pension credit $ (865) $ (722) $ (520)
=== === ===
In 1993, 1992 and 1991, the weighted average discount rate was 7.25
percent and the expected long-term rate of return on assets was 8.5 percent.
The weighted average rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
was 5.9 percent in 1993 and 6.9 percent in 1992. The Plan invests in
publicly traded stocks and bonds.
Aquarion and the Utilities provide health care benefits for
substantially all retired employees. Only those employees who remain until
retirement age are eligible. On January 1, 1993, the Company adopted
SFAS 106 (Note 1). The net periodic postretirement benefit cost for the year
ended December 31, was as follows:
(In thousands) 1993
Service cost-benefits earned during the period $ 344
Interest cost on benefit obligation 820
Net amortization and deferral 524
------
Net periodic post-retirement benefit cost $1,688
=====
Expense recognized for the 12 months ended December 31, 1993 amounted to
$650,000. The remaining cost has been recorded as a regulatory asset. BHC
received approval for recovery of these costs from the DPUC in the rate
decision effective August 1, 1993. SWC expects recovery of these costs in
future rate proceedings.
The combined funded status and the related accrual for postretirement
benefits other than pensions as of December 31, 1993, the latest valuation
date, was as follows:
(In thousands) 1993
-------------- ----
Accumulated postretirement benefit obligation:
Retirees $ 5,532
Active plan participants eligible for
retirement 2,300
Other active participants 4,111
-------
Net obligations 11,943
Plan Assets at Fair Value 0
-------
Accumulated postretirement obligation (11,943)
Unrecognized net obligation existing at
January 1, 1993 9,947
Unrecognized net gain 814
-------
Accrued postretirement benefit cost included
in other current liabilities $(1,182)
=====
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5 percent at December 31, 1993.
39
For measurement purposes, a 10.8 percent annual increase in the per
capita cost of covered health care benefits was assumed for 1993. This rate
was assumed to decrease gradually to six percent for 2001 and remain at that
level thereafter.
If the health care cost trend rate were increased one percent, the
accumulated postretirement benefit obligation as of December 31, 1993 would
increase by 15 percent and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the 12 months
ended December 31, 1993 would increase by 20 percent.
Note 13 - Incentive Stock Plans; Dividend Reinvestment and Common Stock
-----------------------------------------------------------------------
Purchase Plan
-------------
In 1985, Shareholders adopted a long-term incentive plan (Stock Plan)
that provides 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 may be awarded under the Stock Plan,
which expires January 30, 1995. Stock options available under the Stock Plan
are exercisable at a price equal to the market value, unless otherwise
indicated, at the date of the grant and remain exercisable for ten years,
conditional on continued employment, from the date of the grant. The
following options have been awarded to key executives:
Number Option Price
of Shares per Share
--------- ------------
Outstanding at December 31, 1990 177,500 $22.63-$28.28
Granted in 1991 (a) 98,800 $24.625
Expired in 1991 (4,850)
Outstanding at December 31, 1991 271,450 -
Granted in 1992 (a) 106,750 $20.625-$24.625
Expired in 1992 (135,450)
Exercised in 1992 (16,400)
Outstanding at December 31, 1992 226,350 -
Granted in 1993 (a) 66,550 $25.00-$26.625
Expired in 1993 (1,850)
Exercised in 1993 (29,900)
--------
Outstanding at December 31, 1993 261,150 -
=======
(a) These options became exercisable on February 19, 1992, March 17,
1993 and January 22, 1994, respectively.
As of December 31, 1993, 158,993 shares were exercisable under the Stock
Plan. In addition, 12,257 shares of restricted stock were outstanding as of
December 31, 1993.
The Company maintains a Dividend Reinvestment and Common Stock Purchase
Plan ("Reinvestment Plan") providing holders of its common stock with a
method of purchasing additional shares without payment of any brokerage or
service charges. Company common stock totaling 900,000 shares was reserved
for purchase under the Reinvestment Plan of which 780,235 shares were issued
at December 31, 1993.
Note 14 - Property, plant and equipment
---------------------------------------
Net property, plant and equipment at December 31, consisted of the
following components:
(In thousands) 1993 1992
Organization $ 185 $ 185
Source of supply 26,762 25,261
Pumping 13,395 11,696
Water treatment 52,951 30,905
Transmission and distribution 206,865 199,539
General 30,086 28,795
Construction work in progress 5,266 23,193
Utility plant held for future use 471 471
Nonutility 31,583 31,714
-------- --------
367,564 351,759
Less: accumulated depreciation 117,191 108,610
-------- --------
$250,373 $243,149
======= =======
40
Note 15 - Inventories
---------------------
Inventories at December 31, were comprised of the following:
(In thousands) 1993 1992
-------------- ------ ------
Lumber and logs $1,314 $1,477
Materials and supplies 1,571 1,636
------ ------
$2,885 $3,113
===== =====
Note 16 - Statement of cash flows
---------------------------------
Changes in assets and liabilities for the years ended December 31, net
of effects of acquisitions, are set forth below:
(In thousands) 1993 1992 1991
-------------- ------ ------ ------
Decrease (increase) in accounts
receivable $ 339 $ 129 $(3,454)
Decrease (increase) in inventory 228 (120) (264)
Increase in prepayments (1,064) (600) (1,210)
Increase (decrease) in accounts
payable and accrued liabilities 575 (551) (1,458)
(Increase) decrease in interest
and taxes payable (241) 340 825
Net changes in other noncurrent
balance sheet items (177) (819) (497)
------ ------- -------
$ (340) $(1,621) $(6,058)
=== ===== =====
Supplemental cash flow information:
Cash paid for:
Interest $9,810 $9,602 $8,938
Income taxes $5,066 $4,214 $3,986
41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Aquarion Company
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income of shareholders' equity and of
cash flows present fairly, in all material respects, the financial
position of Aquarion Company and its subsidiaries at December 31, 1993
and 1992, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1993, 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.
As discussed in Notes 1, 6 and 12, the Company changed its method of
accounting for postretirement benefits other than pensions in 1993 and
income taxes in 1992.
/s/ Price Waterhouse
Price Waterhouse
Stamford, Connecticut
January 31, 1994
42
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 delegations of
authority. In addition, the Company has an internal audit function that
evaluates existing controls and recommends changes and improvements
deemed necessary.
The Board of Directors' Audit Committee, which is comprised of five
nonmanagement directors, meets periodically with the Company's senior
officers, independent accountants and the internal auditor. The Audit
Committee reviews internal audits, financial reporting and internal
control matters, as well as the nature and extent of the audit effort.
Management believes that the Company's policies and procedures, as
well as its internal control system and activities of the internal
auditor and independent accountants and the Audit Committee, provide
you, the shareholder, with reasonable assurance as to the integrity of
the Company's consolidated financial statements.
/s/ Jack E. McGregor
Jack E. McGregor
President & Chief Executive Officer
/s/ Janet M. Hansen
Janet M. Hansen
Senior Vice President,
Chief Financial Officer
& Treasurer
January 31, 1994
43
SUPPLEMENTAL FINANCIAL INFORMATION
1993 1992 1991 1990 1989
Book value per share $17.07 $16.33 $15.53 $18.84 $18.95
Payout ratio (per share) 92.0% 98.2% N/A 108.1% 75.2%
Price/earnings ratio(1) 16.19 15.2 N/A 14.4 11.7
Capitalization:
Long-term debt 51.0% 51.9% 55.1% 51.8% 42.2%
Preferred stock of subsidiaries .2 .2 1.2 1.3 2.0
Common equity 48.8 47.9 43.7 46.9 55.8
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
(1) Computed at December 31.
Quarterly financial data
------------------------
(Unaudited)
Income
before
Operating income Net Per
(In thousands, except share data) revenues taxes income share(1)
1993
First quarter $ 24,687 $ 3,474 $ 2,162 $.36
Second quarter 26,189 4,328 2,694 .44
Third quarter 28,914 5,894 3,772 .58
Fourth quarter 27,565 3,960 2,362 .36
-------- ------- -------
Total $107,355 $17,656 $10,990
======= ====== ======
1992
First quarter $ 24,432 $ 2,743(2) $2,492(2) $.50(2)
Second quarter 25,940 3,739 2,318 .39
Third quarter 26,474 4,744 2,941 .50
Fourth quarter 25,180 3,015 1,649 .28
-------- ------- ------
Total $102,026 $14,241 $9,400
======= ====== =====
(1) Based on a weighted average of common shares outstanding during
each quarter.
(2) Includes cumulative effect of change in accounting for the adoption of
SFAS 109 of $791 or $.14 per share.
44
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, 1993, there were 6,667 shareholders of
record.
Period Closing sales prices Dividends paid
--------------------
High Low
------ ------- -------- --------------
1993
First quarter $27 3/4 $24 3/4 $.405
Second quarter 27 1/4 25 1/2 .405
Third quarter 28 25 7/8 .405
Fourth quarter 28 3/4 26 .405
1992
First quarter $24 3/4 $20 1/4 $.405
Second quarter 23 1/2 20 1/8 .405
Third quarter 24 7/8 23 1/4 .405
Fourth quarter 25 1/2 23 1/4 .405
Public water supply segment operations highlights
-------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Water supplied from utility
operations (millions of
gallons)
---------------------------
Residential 12,992 12,072 12,657 11,842 11,640
Commercial 4,995 5,269 5,812 5,919 5,933
Industrial 3,647 3,862 4,291 4,668 4,971
Company use and
unaccounted for 3,900 4,019 4,039 4,296 4,117
------ ------ ------ ------ ------
Total 25,534 25,222 26,799 26,725 26,661
====== ====== ====== ====== ======
Number of customer accounts 123,915 123,325 122,541 121,571 120,128
Population served 492,000 490,000 487,000 484,000 473,000
Full-time employees 289 283 285 292 288
- -----------------------------------------------------------------------------
1993 Water Supplied From Utility Operations
Residential 50.9%
Commercial 19.5%
Industrial 14.3%
Company use & unaccounted for 15.3%
- -----------------------------------------------------------------------------
45
GRAPHICS APPENDIX LIST
----------------------
Page in 1993 Annual Report
to Shareholders where
graphic appears Description of Graphic
- -------------------------- --------------------------------------------
Page 17 Actual Utility Capital Expenditures
Page 17 Projected Utility Capital Expenditures
Page 18 Total Debt
Page 21 1993 Operating Revenues per Business Segment
Page 21 1992 Operating Revenues per Business Segment
Page 21 1991 Operating Revenues per Business Segment
Page 22 Operating Expenses
Page 22 Interest Expense
Page 45 1993 Water Supplied From Utility Operations