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 $19,800,000 in
property, plant and equipment in 1994, compared with $17,900,000
in 1993 and $24,700,000 in 1992. Aquarion's utility subsidiary,
Bridgeport Hydraulic Company (BHC), and BHC's subsidiary,
Stamford Water Company (SWC), (collectively, the Utilities) ac-
counted for approximately 89 percent of plant additions during
the three-year period, with the balance being invested primarily
in the Company's environmental testing laboratories (Laboratories
or IEA) and forest products and electric cogeneration operations
(Forest Products or Timco). Nonutility capital expenditures
totaled approximately $2,100,000 in 1994. Management estimates
that capital expenditures will total $41,000,000 in 1995, of
which approximately $38,300,000 will be for water utility
construction programs. Nonutility capital expenditures will
approximate $2,700,000 in 1995.
- ----------------------------------------------------------------
Utility Capital Expenditures
(Dollars in thousands)
1992 1993 1994
----- ----- -----
Filtration $12,200 $ 8,000 $ 4,600
Non-Filtration 9,500 8,300 13,100
------- ------- -------
Total $21,700 $16,300 $17,700
- ----------------------------------------------------------------
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 began in October 1994. The total expected cost of
construction through completion in 1997 will approximate
$50,000,000, without adjustment for inflation. Management
estimates that the future costs of construction on BHC's
Litchfield Division unfiltered surface water supplies, expected
to be completed by 1996, will approximate $6,000,000 without
adjustment for inflation. Expenditures totaling $6,500,000 have
been made for the Hemlocks, Lakeville and Norfolk Reservoirs'
filtration programs through December 31, 1994. 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
construction programs and the capital-intensive nature of the
public water supply 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.
Connecticut Department of Public Utility Control (DPUC)
regulations allow water utilities to implement a Construction-
Work-in-Progress (CWIP) water rate surcharge to water bills in
order to recover 90 percent of the carrying costs of capital used
in mandated federal SDWA projects, until such time as these
projects are completed and placed into rate base. On December 7,
1994, the DPUC approved a 0.82 percent CWIP rate surcharge in
connection with the construction of the Hemlocks Reservoir
filtration facilities in Fairfield, Connecticut. In January
1995, BHC filed an application to increase this surcharge to
1.26 percent. BHC will file these applications quarterly as
construction continues through 1997, at which time the facility
is expected to be operational and subject to general ratemaking
regulations.
Effective August 1, 1993, the DPUC awarded a 21 percent
water service rate increase designed to provide a $10,400,000
annual increase in revenues and
-15-
an 11.6 percent return on common equity. The new rates became
effective at the same time the Easton Lake filtration
construction project was placed into service thereby eliminating
the CWIP rate surcharge for that project. During 1993, BHC
derived revenues of $1,937,000 from the CWIP rate surcharge for
the Easton Lake project, prior to the new rates becoming
effective (Note 2).
The percentage of capital expenditures financed by net cash
from operating activities was 100 percent, 100 percent and
81 percent for the years ended December 31, 1994, 1993 and 1992,
respectively. (See "Consolidated Financial Statements-
Consolidated Statements 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 1994, Aquarion renewed
unsecured revolving credit agreements with five banks. These
agreements, which are renewed annually, provide $50,000,000
($10,000,000 with each bank) of short-term credit availability on
a committed basis. At December 31, 1994, there were no
outstanding short-term borrowings under the agreements (Note 7).
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities
(Dollars in thousands)
1992 1993 1994
----- ----- -----
$10,091 $25,183 $33,726
- -----------------------------------------------------------------
In April 1994, the Company filed a Form S-3 registration
statement with the Securities and Exchange Commission to enhance
its Dividend Reinvestment and Common Stock purchase plan (the
Plan) and include an additional 750,000 shares (Note 12). As a
result, the Company obtained funds of $2,902,000 through the Plan
in 1994 versus $1,841,000 and $1,564,000 in 1993 and 1992,
respectively. The Utilities also received $1,985,000 from
advances and contributions in aid of construction from developers
and customers in 1994.
- -----------------------------------------------------------------
Proceeds from Div. Reinv. Plan
(Dollars in thousands)
1992 1993 1994
----- ----- -----
$1,564 $1,841 $2,902
- -----------------------------------------------------------------
In June 1993, the Company completed a common stock offering
of 460,000 shares at $25.875 per share. Proceeds of $11,350,500
were realized after deducting underwriting discounts and
commissions of $552,000. Net proceeds of approximately
$11,200,500 were realized after deducting all other expenses of
the issuance. 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.
Over the past two years, the Company took advantage of lower
interest rates through several debt refinancings. In 1994, BHC
redeemed its $10,000,000, 10-3/4 percent note and issued a
$10,000,000, 6.05 percent note. During 1993, 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 September 1993, SWC issued an
$8,980,000 unsecured note at 5.3 percent. SWC used the proceeds
to redeem its $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 has recognized
annual consolidated interest expense savings of approximately
$1,300,000.
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,
1994, the Utilities' combined capitalization structure
approximated 57.5 percent equity and 42.5 percent debt, while the
Company's consolidated capitalization structure approximated
50.9 percent equity and 49.1 percent debt.
-16-
The Company has a target dividend payout ratio, over the
long term, of 75 to 80 percent. The dividend payout as a
percentage of net income was 87 percent and 92 percent in 1994
and 1993, respectively, and 31 percent and 40 percent as a
percentage of net cash provided by operating activities in 1994
and 1993, respectively.
- -----------------------------------------------------------------
Interest Expense
(Dollars in thousands)
1992 1993 1994
----- ----- -----
$9,327 $9,242 $8,368
- -----------------------------------------------------------------
Total Debt.
(Dollars in thousands)
1992 1993 1994
----- ----- -----
Total Debt $127,932 $121,153 $115,543
Long-term debt 105,463 115,591 111,466
- -----------------------------------------------------------------
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 has 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 shareholders. 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, 1994. 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
Senior Notes if it meets a similar 66 2/3 percent long-term debt
to total capitalization test.
The Company's need for future external financing may also be
affected by future net proceeds from its land-disposition
program. BHC has identified approximately 2,700 acres of off-
watershed land, most of which was previously in its rate base, as
surplus to utility operations. Under Connecticut law, net
proceeds from the sale of land which 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. The after tax gain from the sales of BHC's
surplus, off-watershed land amounted to approximately $813,000,
or 13 cents per share, in 1994 (Note 3).
Other.
- -----
Inflation. Inflation, as measured by the Consumer Price Index,
increased 2.7 percent, 2.7 percent and 2.9 percent in 1994, 1993
and 1992, 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 signifi-
-17-
cantly 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.
Results of operations
- ---------------------
1994 Overview. The Company's consolidated net income for 1994
was $12,221,000 compared with net income of $10,990,000 in 1993.
Net income per share was $1.87 in 1994 on a weighted average of
6,532,627 common shares outstanding, compared with $1.76 in 1993
on a weighted average of 6,237,875 common shares outstanding.
Operating results during 1994 were favorably affected by higher
water rates from BHC due to a 21 percent rate increase, effective
August 1, 1993, and the gain related to the sales of surplus off-
watershed land.
- -----------------------------------------------------------------
Percentage of Revenues by Expense category
(Dollars in thousands)
1994
-----
Operating Expenses 38.9%
General & Administrative 16.6%
Depreciation 9.5%
Interest Expense 6.4%
Other Taxes 10.2%
Income Taxes 8.4%
Net Income 10.0%
(1) Interest expense reduced by AFUDC
- -----------------------------------------------------------------
In 1994 two nonrecurring transactions occurred. On
November 8, 1994, Timco agreed to terminate its long-term rate
order with Public Service Company of New Hampshire (PSNH) under
which Timco sold PSNH electricity produced at its cogeneration
plant. Under the agreement, PSNH paid Timco $8,195,105 in
exchange for the assignment of the rate order to PSNH and a
release of PSNH's obligations to buy power from Timco. The net
after-tax gain on this transaction, after providing for
unrecoverable costs and expenses, was $1,902,000, which
approximates the present value of the income stream Timco would
have received over the remaining life of the contract. As a
result, Timco will not have these revenues in the future.
Revenues from electricity cogeneration were $3,000,000 in 1994
and $3,500,000 in 1993.
Aquarion also recorded a charge of $1,900,000 related to the
Company's investment in a rehabilitation housing unit in
New Hampshire (the "Partnership"). Aquarion has been informed
that the Partnership may require additional capital from each of
the five limited partners beyond the amounts originally agreed
upon. At present, it is not known whether the limited partners
will make the necessary capital contributions to sustain the
operation of the Partnership. Based upon the risk of continued
funding and the project's poor performance, the Company no longer
believes that the value of its Partnership investment is
recoverable. The after-tax effect of these two transactions had
no impact on Aquarion's earnings in 1994.
-18-
The following table sets forth information about Aquarion's
operations by industry segment for the years ended December 31,
as follows:
1994 1993 1992
--------------------- -------------------- -------------------
(In thousands, except percentages) Amount % Amount % Amount %
Operating revenues: -------- ------- --------- ------ ---------- -------
Public water supply $ 73,060 59.9% $71,280 66.4% $63,702 62.4%
Environmental laboratories
and utility management
services 24,925 20.4 23,132 21.5 26,061 25.5
Forest products 21,310 17.5 12,298 11.5 12,001 11.8
Real estate 2,678 2.2 645 0.6 262 0.3
-------- ----- -------- ----- --------- -----
Total operating revenues $121,973 100.0% $107,355 100.0% $102,026 100.0%
======== ===== ======== ===== ======== =====
Operating income (1)
Public water supply $ 25,862 $ 26,475 $ 22,475
Environmental laboratories
and utility management
services 933 (705) (29)
Forest products 5,015 1,496 1,437
Real estate 1,605 40 170
------- ------- ---------
Total operating income 33,415 27,306 24,053
Unallocated interest, AFUDC and
other expenses, net (2) (10,923) (9,651) (9,812)
------- ------- --------
Income before income taxes and
cumulative effect of a change in
accounting method $ 22,492 $ 17,655 $ 14,241
======== ======== ========
<FN>
(1) Operating income is defined as operating revenues less total
costs and expenses, other than interest expense, income taxes,
allowance for funds used during construction (AFUDC
dividends and other expenses, net.
(2) Includes goodwill amortization of $402,000 in 1994, 1993 and
1992, and a Partnership charge of $1,900,000 in 1994.
</FN>
-19-
1994 compared with 1993
- -----------------------
Operating revenues. Consolidated operating revenues of
$121,973,000 in 1994 were $14,618,000 higher than 1993. Forest
Products experienced increased revenues during 1994 of $9,012,000
principally due to the termination of the rate order with PSNH,
and to a lesser extent, increased volume and sales prices for
lumber. Revenues from property sales increased $2,033,000 due
to the Company's continued commitment to sell surplus land.
Revenues from the Laboratories increased $1,793,000 in 1994,
reflecting higher sampling receipts in 1994, partially offset by
the sale of the Air Services Division in the fourth quarter of
1993. Revenues from the Utilities increased $1,780,000,
principally due to a 21 percent water service rate increase for
BHC which became effective August 1, 1993, partially offset by
CWIP rate surcharge revenues recorded during the first seven
months of 1993.
- -----------------------------------------------------------------
Percentage of Revenues from Utility Operations
(Dollars in thousands)
1994
-----
Residential 58.9%
Commercial 16.8%
Industrial 5.1%
Fire Protection 13.9%
Wholesale & Municipalities 5.3%
-----
Total 100.0%
- -----------------------------------------------------------------
Operating income. Operating income for 1994 increased $6,109,000
over 1993 levels. The increase was primarily the result of
Forest Products' termination of the rate order with PSNH,
increased property sales in 1994 and higher operating revenues at
the Utilities and Laboratories.
Operating expenses. Operating expenses for 1994 were
$47,416,000, an increase of $7,140,000 over 1993. Forest
Products had higher operating expenses of $5,459,000 compared
with 1993 primarily due to the costs associated with the
termination of the cogeneration operation and higher production
costs associated with an increased sales volume. Operating
expenses from property sales increased by $791,000 due to the
increased activity in the land sales program. The Utilities
experienced an increase in operating expenses of $726,000
principally due to higher costs associated with BHC's Easton Lake
Reservoir Water Treatment Plant, which was placed in service in
June 1993, and higher maintenance costs in 1994. Additional
costs associated with the Laboratories and Utility Management
Services businesses account for the remainder of this variance.
General & administrative expenses. General and administrative
expenses totaled $20,209,000, a $2,004,000 increase over 1993.
This variance is primarily the result of a $1,900,000 charge
related to the investment in the Partnership. Increased expenses
associated with BHC's adoption of Financial Accounting Standards
Board (FASB) Statement No. 106 "Employers' Accounting for
Postretirement Benefits other than Pensions," effective for the
first quarter of 1993, partially offset by lower costs associated
with worker's compensation insurance, outside services and
miscellaneous expenses at the Utilities, account for $203,000 of
this variance. The Laboratories, Forest Products, Real Estate,
Corporate and Utility Management Services businesses account for
the remainder of the variance.
- -----------------------------------------------------------------
Pre-tax Income
(Dollars in thousands)
1992 1993 1994
----- ----- -----
$14,241 $17,655 $22,492
- -----------------------------------------------------------------
Depreciation expense. Depreciation expense in 1994 was
$1,013,000 higher than 1993. This increase is attributable to
the addition of BHC's Easton Lake Reservoir Water Treatment
Plant, which was placed in service in June 1993; a higher
composite annual depreciation rate for BHC effective August 1,
1993; and, routine plant additions by the Utilities, Laboratories
and Forest Products.
-20-
Interest expense. Interest expense for 1994 decreased $874,000
primarily due to lower average total debt outstanding coupled
with lower long-term borrowing rates due to the debt refinancing
in 1993.
Taxes other than income taxes. Taxes other than income taxes
were $444,000 higher than 1993. Increased payroll and gross
earnings taxes of $271,000 as well as higher property taxes of
$173,000 attributable to a higher property base in 1994, account
for the variance.
Income taxes. Income taxes for 1994 were $3,606,000 higher than
1993 primarily due to higher taxable income and increased state
taxes on the termination of the cogeneration operation.
Significant changes in balance sheet accounts. Customer accounts
receivable increased by $1,524,000 due primarily to increased
sampling receipts at the Laboratories in the fourth quarter of
1994.
The decrease in miscellaneous receivables results from the
allocation of tax benefits realized from deductions associated
with the laboratory business acquisitions, which serve to reduce
the amount owed to Aquarion by the former shareholders.
The increase in prepaid expense of $1,308,000 was largely
the result of the increase in the net pension credit calculated
under FASB No. 87 "Employers' Accounting for Pensions" (Note 11).
The decrease in short-term borrowings of $5,500,000 is
primarily attributable to the reduction of short-term debt with
the proceeds received from PSNH in connection with the
termination of the cogeneration operation.
Accounts payable and accrued liabilities incurred an
increase of $3,224,000 which was principally the result of higher
general accounts payable at December 31, 1994 and accrued
operational costs associated with the termination of the PSNH
rate order.
The increase of $3,195,000 in income taxes payable is the
result of higher taxable income related to the sale of the rate
order, which occurred in the fourth quarter and did not have to
be reflected in earlier estimated tax payments.
Accrued postretirement benefit cost increased by $1,049,000
due to the Company implementing FASB No. 106 in 1993, whereby the
Company recognizes a net postretirement liability representing
the cumulative difference between each year's charges against
operating results for net periodic postretirement benefit cost,
and each year's cash payments for retiree health care and life
insurance benefits (Note 11).
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 quarter and the Air
Services Division in the fourth quarter of 1993 as part of a
previously announced restructuring plan, and 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 adoption of FASB 106, and
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
-21-
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 adoption of FASB
Statement No. 106 for the first quarter of 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 uncollectable 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 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.
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.
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
1994 and 1993.)
-22-
Aquarion Company and Subsidiaries
Consolidated Statements of Income
In thousands, except share data
Year ended December 31 1994 1993 1992
- ------------------------------- ------ ------ ------
Operating revenues $ 121,973 $ 107,355 $ 102,026
--------- --------- ---------
Costs and expenses:
Operating 47,416 40,276 41,677
General and administrative 20,209 18,205 16,572
Depreciation 11,636 10,623 9,520
Interest expense 8,368 9,242 9,327
Taxes other than income 12,421 11,977 11,367
--------- --------- --------
Total costs and expenses 100,050 90,323 88,463
--------- --------- --------
21,923 17,032 13,563
Allowance for funds used during
construction 569 623 678
--------- --------- --------
Income before income taxes and
cumulative effect of a change in
accounting method 22,492 17,655 14,241
Income taxes 10,271 6,665 5,632
--------- --------- --------
Income before cumulative effect of a
change in accounting method 12,221 10,990 8,609
Cumulative effect of a change in
accounting method - - 791
--------- --------- --------
Net income $ 12,221 $ 10,990 $ 9,400
========= ========= ========
Per share before cumulative effect
of a change in accounting method $ 1.87 $ 1.76 $ 1.51
Cumulative effect of a change in
accounting method - - .14
--------- --------- --------
Per share $ 1.87 $ 1.76 $ 1.65
--------- --------- --------
Weighted average common shares
outstanding 6,532,627 6,237,875 5,690,853
========= ========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
-23-
Aquarion Company and Subsidiaries
Consolidated Balance Sheets
Assets
In thousands
December 31, 1994 1993
- ----------------------------- ------ ------
Property, plant and equipment $378,708 $367,564
Less: accumulated depreciation 123,166 117,191
-------- --------
Net property, plant and equipment 255,542 250,373
-------- --------
Current assets:
Cash and cash equivalents 1,335 90
------- --------
Accounts receivable:
Customers 15,946 14,422
Miscellaneous 1,158 2,439
------- -------
17,104 16,861
Less: allowance for doubtful accounts 2,762 2,935
------- -------
14,342 13,926
Accrued revenues 9,596 8,995
Inventories 3,077 2,885
Prepaid expenses 8,006 6,698
------- -------
Total current assets 36,356 32,594
------- -------
Goodwill 10,283 10,709
Recoverable income taxes 47,099 46,377
Other assets 22,665 22,819
------- -------
$371,945 $362,872
======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
-24-
Aquarion Company and Subsidiaries
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
In thousands, except share data
December 31, 1994 1993
- ------------------------------------------ ------ ------
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 6,690,013 shares in 1994 and 6,564,533
shares in 1993 6,690 6,565
Capital in excess of stated value 94,152 91,441
Retained earnings 16,628 15,015
-------- --------
117,470 113,021
Less: treasury stock, at cost 2,338 2,540
-------- --------
Total shareholders' equity 115,132 110,481
-------- --------
Redeemable preferred stock of subsidiaries 330 375
-------- --------
Long-term debt and other obligations 111,466 115,591
-------- --------
Current liabilities:
Short-term borrowings, unsecured - 5,500
Current maturities of long-term debt 4,077 62
Accounts payable and accrued liabilities 12,832 9,608
Dividends payable 2,675 2,621
Accrued interest 2,035 2,240
Taxes other than income taxes 1,532 1,354
Income taxes 4,171 976
------- -------
Total current liabilities 27,322 22,361
------- -------
Advances for construction 23,407 22,593
Contributions in aid of construction 21,589 20,883
Deferred land sale gains 427 24
Accrued postretirement benefit cost 2,231 1,182
Recoverable income taxes 6,005 6,123
Deferred income taxes 64,036 63,259
Commitments & contingencies (Note 9) - -
-------- --------
$371,945 $362,872
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
-25-
Aquarion Company and Subsidiaries
Consolidated Statements of Cash Flows
In thousands,
Year ended December 31 1994 1993 1992
- ------------------------------------- ------ ------ ------
Cash flows from operating activities:
Net income $12,221 $10,990 $ 9,400
Adjustments reconciling net income to net cash
provided by operating activities:
Depreciation and amortization 12,542 11,588 10,799
Provision for losses on accounts receivable 1,067 1,707 1,169
Deferred tax provision 662 1,610 1,693
Cumulative effect of change in accounting method - - (791)
Proceeds from sale of surplus land, net of gains 1,372 333 120
Allowance for funds used during construction (569) (623) (678)
Change in assets and liabilities (Note 15) 6,431 (422) (1,621)
------- ------- -------
Net cash provided by operating activities 33,726 25,183 20,091
------- ------- -------
Cash flows from investing activities:
Capital additions, excluding an allowance for
funds used during construction (19,766) (17,898) (24,710)
Advances and contributions in aid of
construction 1,985 1,398 1,180
Refunds on advances for construction (465) (417) (433)
Other investing activities (178) (605) 1,079
------- ------- -------
Net cash used in investing activities (18,424) (17,522) (22,884)
------- ------- -------
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 2,836 12,845 21,395
Net repayments of short-term borrowings (5,500) (12,100) (19,600)
Common dividends paid (10,554) (10,091) (9,137)
Principal and premium payments on long-term debt (68) (5,241) (3,688)
Debt issuance costs (726) (2,174) (85)
Purchase of treasury stock - (1,084) -
Payments for redemption of preferred stock (45) (45) (1,745)
-------- ------- -------
Net cash (used in) provided by financing
activities (14,057) (7,890) 2,140
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents 1,245 (229) (653)
Cash and cash equivalents, beginning of year 90 319 972
------- ------- -------
Cash and cash equivalents, end of year $ 1,335 $ 90 $ 319
======= ======= =======
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
-26-
Aquarion Company and Subsidiaries
Consolidated Statements of Shareholders' Equity
Common Stock Capital Treasury Stock Total
---------------- in excess --------------- share-
In thousands, except share Number Stated of stated Retained Number holders'
of Shares Value value earnings of Shares Amount equity
- ---------------------------- --------- ------ -------- -------- --------- ------ -------_
Year ended December 31, 1992
Balance, December 31, 1991 4,961,168 $4,961 $58,805 $14,505 98,185 $(2,751) $ 75,520
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)
--------- ----- ------ ------- ------- ------- -------
Year Ended December 31, 1993 6,564,533 6,565 91,441 15,015 92,291 (2,540) 110,481
--------- ----- ------ ------- ------- ------- -------
Year ended December 31, 1994
Net income - - - 12,221 - - 12,221
Dividends on common stock - - - (10,608) - - (10,608)
Dividend reinvestment plan 125,480 125 2,711 - - - 2,836
Treasury stock transactions - - - - (7,299) 202 202
--------- ------ ------- ------- ------- ------- --------
Balance, December 31, 1994 6,690,013 $6,690 $94,152 $16,628 84,992 $(2,338) $115,132
========= ====== ======= ======= ====== ======= ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
-27-
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 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. (IEA) family of six laboratories
which analyze contaminants in hazardous waste, soil, air and
water. 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 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 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 significant 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
-28-
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
Statements of Income.
For financial reporting purposes, depreciation is provided
for principally by use of the straight-line method over the
estimated service lives of the respective assets. Depreciation
is computed based on estimated useful lives of 3 to 81 years for
utility plant and equipment and 3 to 20 years for nonutility
plant and equipment. For income tax depreciation purposes, the
Company, for all property, plant and equipment placed in service
from January 1, 1981 to December 31, 1986, is using the
Accelerated Cost Recovery System. 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 share is based on the annual
weighted average number of shares outstanding and common share
equivalents. Common share equivalents consist of outstanding
employee stock options, 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, 1994) 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. In October
1994, BHC filed with the DPUC an application to implement a CWIP
rate surcharge in connection with the construction of its
Hemlocks Reservoir filtration facilities in Fairfield,
Connecticut. BHC will continue to file applications quarterly to
increase this surcharge as construction continues through 1997,
at which time the filtration facilities are expected to be
operational and subject to general ratemaking regulations. 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).
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 consummated 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.
-29-
Deferred rate case expenses are amortized over periods
allowed by the DPUC, generally one to three years. Deferred
financing charges are amortized over the lives 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,
1994 and 1993 was $10,283,000 and $10,709,000 respectively, net
of accumulated amortization of $3,339,000 and $2,913,000.
Amortization is computed on a straight-line basis over periods
ranging from 10 to 30 years. Amortization expense totaled
$426,000, $474,000 and $474,000 for the years ended December 31,
1994, 1993, and 1992, respectively. At each balance sheet date,
the Company evaluates the realizability of goodwill based upon
estimated undiscounted cash flows for each subsidiary having a
significant goodwill balance. Based upon its most recent
analysis, the Company believes that no impairment of goodwill
exists at December 31, 1994.
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) 1994 1993
- --------------- ------ ------
Fair Value $ 90,278 $104,918
Carrying Value 111,466 115,591
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.
Income taxes. In accordance with FASB Statement No. 109,
"Accounting for Income Taxes," 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 of accounting, is consistent with ratemaking
policies of the DPUC. Management believes that these deferred
taxes will be recovered through the rate-making process.
Accordingly, the Company has recorded an off-setting regulatory
asset included in the accompanying Consolidated Balance Sheets as
"Recoverable income taxes." Deferred investment tax credits are
amortized ratably based upon the book life of the property (Note 5).
Note 2 - Regulatory matters
- ---------------------------
Rates. On October 20, 1994, BHC filed with the DPUC an
application to implement a CWIP rate surcharge in order to
recover 90 percent of the carrying costs of capital used in the
construction of a federally mandated filtration plant at its
Hemlocks Reservoir in Fairfield, Connecticut, which is estimated
to cost approximately $50,000,000. BHC will file applications
with the DPUC quarterly to increase this surcharge as
construction continues through 1997, at which time the filtration
facilities are expected to be operational and subject to general
ratemaking regulations. On December 7, 1994, a 0.82 percent CWIP
rate surcharge was approved that will increase BHC's revenues by
$496,000 on an annual basis. In January 1995, BHC filed an
application to increase this surcharge to 1.26 percent, which
would increase BHC's revenues by $762,000 on an annual basis.
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. On August 1,
1993, the DPUC awarded BHC a 21 percent water
-30-
service rate increase designed to provide a $10,400,000 annual
increase in revenues and an 11.6 percent return on common equity.
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 1994, the Company sold approximately 43 acres of surplus
land consisting of 14 building lots from three different
subdivisions located in Shelton and Weston, Connecticut. The
proceeds from these sales totaled $2,185,000. Total gains,
including recognition of deferred gains from prior land sales of
$10,000, approximated $813,000 or 13 cents per share. In
addition, the Company recognized a gain of $283,000 or 4 cents
per share for the sale of a 50 percent ownership interest,
through a joint venture, in a commercial building located in
Cary, North Carolina.
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.
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.
Upon acquiring SRK, Aquarion paid $2,900,000 in cash at
closing, and accrued an additional $6,000,000 as the maximum
amount to be paid upon final settlement of the sale of the
nonlaboratory businesses (the final settlement). All proceeds
upon sale or liquidation of the nonlaboratory businesses were to
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 is 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 $210,000 at December 31, 1994, 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 - Income taxes
- ---------------------
In 1992, the Company elected early adoption of the method of
accounting for income taxes pursuant to FASB Statement No. 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 1994 consists
of $2,284,000 in state taxes and $7,987,000 in federal income
taxes.
Income tax expense for the three years ended December 31,
consisted of the following:
-31-
(In thousands) 1994 1993 1992
- ------------------------ ------ ------ ------
Current:
Federal $ 7,006 $3,441 $2,770
State 2,603 1,614 1,169
------- ------ ------
Total current 9,609 5,055 3,939
Deferred:
Federal 981 1,833 1,809
State (319) (223) (116)
------- ------ ------
Total Deferred 662 1,610 1,693
------- ------ ------
Total income tax expense $10,271 $6,665 $5,632
======= ====== ======
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:
(In thousands) 1994 1993 1992
- --------------------------------------- ------ ------ ------
Tax at statutory rate $ 7,874 $6,181 $4,842
Increases (reductions) in taxes resulting
from:
State taxes, net of federal income taxes 1,485 904 695
Contribution deduction-sale of surplus land (105)
Excess depreciation and basis amortization 662 630 541
Partnership investment 665 - -
Bond premium costs (455) (423) 17
Investment tax credit (152) (152) (152)
Developmental computer costs (71) (235) (175)
Amortization and write-down of goodwill 146 163 136
Other items, net 222 (272) 154
------- ------ ------
Actual income tax expense $10,271 $6,665 $5,632
======= ====== ======
Deferred tax liabilities (assets) at December 31, were comprised
of the following:
1994 1993 1992
------ ------ ------
Utility temporary differences $46,703 $45,981 $41,137
Depreciation 15,398 14,712 12,691
Investment tax credits 990 1,023 1,189
Other 945 1,543 1,756
------- ------- -------
Gross referenced tax liabilities 64,036 63,259 56,773
------- ------- -------
Contributions in aid of construction (6,229) (5,654) (5,309)
Alternative minimum tax - (1,279) (1,403)
Other (2,813) (2,215) (2,554)
------- ------- -------
Gross deferred tax assets (9,042) (9,148) (9,266)
------- ------- -------
$54,994 $54,111 $47,507
======= ======= =======
Note 6 - Long-term debt
- -----------------------
Long-term debt at December 31, consisted of the following:
(In thousands) 1994 1993
- ----------------------------------- ------ ------
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 5000
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
5.95% senior note due January 4, 1999 10,000 -
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
10 3/4% note due October 15, 2014 - 10,000
5.5% note due June 1, 2028 (b) 12,000 12,000
5.6% note due June 1, 2028 (b) 10,000 10,000
5.8% note due March 1, 2029 (b) 7,700 7,700
6.05% note due March 1, 2029 (b) 10,000 -
5.3% note due September 1, 2028 8,980 8,980
4 3/4% note due November 1, 2004 (c) 5,700 5,700
7.4%-14.1% capital lease obligations 163 185
-------- --------
115,543 123,265
Less: Amounts due within one year 4,077 62
Balance of 5.8% note proceeds held by trustee - 7,612
-------- --------
$111,466 $115,591
<FN>
(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.
(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, 1994, the interest rate was adjusted from 3 1/2 percent to
4 3/4 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.
</FN>
-32-
In August 1994, BHC issued a $10,000,000 unsecured note at
6.05 percent due on March 1, 2029. BHC has the option to redeem
these bonds at a redemption price ranging from 102 percent on
August 1, 2004 to 100 percent on August 1, 2006 and thereafter.
On October 17, 1994, BHC's $10,000,000, 10.75 percent unsecured
note was redeemed at 103 percent.
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.
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 were
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 this 5.8 percent note at a redemption price
ranging from 102 percent on December 1, 2003 to 100 percent on
December 1, 2005 and thereafter.
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 indenture. The Aquarion and
subsidiaries mortgage bond and note-purchase agreements contain
certain covenants typical of such agreements, the most
restrictive of which are under the 9.55 percent unsecured Senior
Notes (BHC Notes) and the 7.8 percent and 5.95 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, 1994, approximately $35,000,000 was available to
pay dividends as defined under the Aquarion notes. The
aggregate maturities and sinking fund requirements on long-term
debt, exclusive of capital lease obligations (Note 9), for each
of the five years suc-
-33-
ceeding December 31, 1994 are as follows: 1995-$4,000,000; 1996-
$0; 1997-$15,000,000; 1998-$5,000,000; 1999-$10,000,000.
Note 7 - 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. In May 1994,
the terms of these agreements were renegotiated. The Company
must now pay a commitment fee of .125 of 1 percent, previously
.225 of 1 percent, on the average daily unused portion of the
commitment for each day during which any unused portion exists.
The utilization fee of .075 of 1 percent was eliminated. 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 of the agreements.
Short-term borrowings for the years ended December 31, were
as follows:
1994 1993 1992
- ------------------------------------------- ------ ------ ------
(In thousands)
Borrowings outstanding at December 31 - $ 5,500 $17,600
Weighted average interest rate at December 31 N/A 3.49% 4.04%
Maximum outstanding during the year $15,100 $22,300 $42,200
Average outstanding during the year $5,725 $11,983 $19,358
Weighted average interest rate during the year* 4.84% 4.06% 5.34%
<FN>
* Determined by dividing annual interest expense by average
amount outstanding during the year
</FN>
Note 8 - Redeemable preferred stock and rights
- ----------------------------------------------
SWC is authorized to issue 60,000 shares of preferred
stock. SWC had outstanding 6,600 and 7,500 shares at December
31, 1994 and 1993, 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 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.
-34-
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 9 - 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
$5,775,000 at December 31, 1994. Certain facility leases
contain renewal options. Annual payments for each of the five
succeeding fiscal years for future minimum rentals are: 1995 -
$1,395,000; 1996 - $814,000; 1997 - $798,000; 1998 - $719,000;
1999 - $396,000; thereafter - $1,653,000.
Future minimum lease payments under capital leases
approximated $198,000 at December 31, 1994.
Aquarion has proposed to acquire The New Canaan Water
Company (NCWC) and Ridgefield Water Supply Company (RWSC) for
Aquarion common stock with a market value of $3,500,000 and the
repayment of certain indebtedness of The New Canaan Company
(NCC) in an amount not to exceed $130,000, less the amount of
certain transaction costs and liabilities to be paid by Aquarion
at closing. The acquisition and a related property exchange
have been approved by the DPUC but remain contingent upon the
approval of the Department of Public Health and Addiction
Services (DPHAS) for the transfer of the reservoir from the NCWC
to the Second Taxing District (STD). A reservoir transfer
permit is pending. The DPUC subsequently reopened its approval
proceeding to consider the potential impact of the proposed NCWC
land sale on NCWC's ability to retire an existing $1.25 million
loan from a third party lender and appropriate regulatory
treatment of any shortfall between the net proceeds from such a
sale and the amount of the debt and to consider certain
anticipated costs associated with reregistration of RWSC supply
sources. No final decision has yet been issued in the reopened
proceeding. BHC and NCC have agreed that the Acquisition will
close whether or not the sale of land by NCWC and the retirement
of NCWC debt takes place. However, the effect on the
acquisition of any other terms and provisions of a DPUC
approval, not contemplated by the agreement between BHC and NCC,
cannot be predicted. The parties have agreed to extend their
acquisition agreement and the related property exchange
agreement until March 31, 1995. There is no certainty that the
parties will agree to further extensions if the transaction has
not closed by that time.
At December 31, 1994, Aquarion had guaranteed a mortgage
indenture of $1,500,000 in connection with the disposition of
the SRK non-laboratory businesses (Note 4).
Note 10 - 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.
The following table sets forth information about the
Company's operations by industry segment for the years ended
December 31:
(In thousands) 1994 1993 1992
- ----------------------------------- ------ ------ ------
Operating revenues:
Public water supply $ 73,060 $ 71,280 $ 63,702
Environmental laboratories and
utility management services 24,925 23,132 26,061
Forest products 21,310 12,298 12,001
Real estate 2,678 645 262
-------- -------- --------
Total operating revenues $121,973 $107,355 $102,026
======== ======== ========
-35-
Operating income:
Public water supply $ 25,862 $ 26,475 $ 22,475
Environmental laboratories and
utility management services 933 (705) (29)
Forest products 5,015 1,496 1,437
Real estate 1,605 40 170
-------- -------- --------
Industry segment operating income 33,415 27,306 24,053
Other (expenses) income, net (1) (3,097) (1,002) (976)
Interest expense (8,368) (9,242) (9,327)
Allowance for funds used
during construction 569 623 678
Subsidiary preferred dividends (27) (30) (187)
-------- -------- --------
Income before income taxes and
cumulative effect of a change
in accounting method 22,492 17,655 14,241
======== ======== ========
Identifiable assets:
Public water supply 332,498 321,431 300,713
Environmental laboratories and
utility management services 26,751 25,941 29,733
Forest products 4,469 7,718 8,526
Real estate 4,587 5,678 5,537
Corporate 3,640 2,104 3,822
-------- -------- --------
Total identifiable assets $371,945 $362,872 $348,331
======== ======== ========
Capital expenditures:
Public water supply $ 17,739 $ 16,300 $ 21,727
Environmental laboratories and
utility management services 1,525 1,072 2,303
Forest products 502 526 665
Real estate 123 169 154
-------- ------- --------
Total capital expenditures $ 19,889 $ 18,067 $ 24,849
======== ======== ========
Depreciation expense:
Public water supply 9,139 8,054 6,973
Environmental laboratories and
utility management services 1,815 1,895 1,910
Forest products 671 663 626
Real estate 11 11 11
-------- -------- --------
Total depreciation expense $ 11,636 $ 10,623 $ 9,520
======== ======== ========
<FN>
(1) Includes goodwill amortization $402,000 in 1994, 1993 and 1992, and
Partnership charge of $1,900,000 in 1994.
</FN>
Operating revenues are comprised of sales to unaffiliated
customers. The Company's operations all take place in North
America and no single customer accounts for 10 percent or more
of total operating revenues.
Operating income (loss) is defined as operating revenues
less total costs and expenses, other than interest expense,
other (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.
Note 11 - Employee benefit plans
- --------------------------------
Retirement plans - The Company and certain of its subsidiaries
have a noncontributory pension plan 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 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) 1994 1993
- -------------------------------- ----- ------
<S)
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$15,772 in 1994 and $16,673 in
1993 $ 16,607 $ 17,605
======== ========
Projected benefit obligation $(20,669) $(22,507)
Plan assets at fair value 31,664 33,505
-------- --------
Plan assets in excess of projected
benefit obligation 10,995 10,998
Unrecognized prior service cost 932 957
Unrecognized net asset existing at
January 1, 1986 (3,045) (3,503)
Unrecognized net (gain) from past
experience (3,546) (4,070)
-------- --------
Prepaid pension cost $ 5,336 $ 4,382
======== ========
-36-
Net pension credit for the years ended December 31,
included the following components:
(In thousands) 1994 1993 1992
- ------------------------------------- ------ ------ ------
Service cost - benefits earned during
the period $ 804 $ 763 $ 860
Interest cost on projected benefit
obligation 1,574 1,510 1,485
Actual return on plan assets 675 (2,331) (1,961)
Net amortization and deferral (3,966) (807) (1,106)
------ ------ ------
Net pension credit $ (913) $ (865) $ (722)
====== ====== ======
The weighted average discount rate was 8.25 percent for
1994 and 7.25 percent for 1993 and 1992. The expected long-term
rate of return on assets was 8.7 percent for 1994 and 8.5
percent for 1993 and 1992. 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 1994 and 1993 and 6.9 percent in 1992. The Plan
invests in publicly traded stocks and bonds.
Postretirement health care benefits. In January 1993, the
Company adopted FASB No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This new standard
requires that employers recognize these benefits on an accrual
basis rather than on a cash basis. As allowed by FASB 106, the
Company has elected to recognize the transition obligation of
$10,471,000 over 20 years.
Aquarion and the Utilities provide health and life
insurance benefits for substantially all retired employees.
Only those employees who remain until retirement age are
eligible. 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.
The Company is funding its postretirement health care benefits
through contributions to a Voluntary Employee Beneficiary
Association Trust (VEBA). The Company's 1994 tax deductible
contribution was $356,000.
The net periodic postretirement benefit cost for the years
ended December 31, was as follows:
(In thousands) 1994 1993
- ---------------------------------------- ------ ------
Service cost-benefits earned during the
period $ 420 $ 344
Interest cost on benefit obligation 890 820
Net amortization and deferral 524 524
------ ------
Net periodic postretirement benefit cost $1,834 $1,688
====== ======
Expense recognized for the 12 months ended December 31,
1994 and 1993 amounted to $1,743,000 and $650,000, respectively.
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,
1994 and 1993, were as follows:
(In thousands) 1994 1993
- ------------------------------------- ------ ------
Accumulated postretirement benefit
obligation:
Retirees $ 5,576 $ 5,532
Active plan participants eligible for
retirement 2,226 2,300
Other active participants 3,852 4,111
------- -------
Net obligations 11,654 11,943
Plan assets at fair value 356 -
------- -------
Accumulated postretirement obligation
less than plan assets (11,298) (11,943)
Unrecognized net obligation existing at
January 1, 1993 9,423 9,947
Unrecognized net (gain) or loss from
past experience (356) 814
------- -------
Accrued postretirement benefit cost $(2,231) $(1,182)
======= =======
The weighted average discount rate used in determining the
accumulated postretirement benefit obligation at December 31,
1994 and 1993 was 8.25 percent and 7.5 percent, respectively.
For measurement purposes, a 10.2 percent annual increase in
the per capita cost of covered health care benefits was assumed
for 1994 (10.8 percent for 1993). This rate was assumed to
decrease gradually to six percent for 2001 and remain at that
level thereafter.
-37-
If the health care cost trend rate were increased
one percent, the accumulated postretirement benefit obligation
as of December 31, 1994 would increase by 16 percent and the
aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the 12 months ended
December 31, 1994 would increase by 21 percent.
Postemployment benefits. In January 1994, the Company adopted
FASB No. 112 " Employers' Accounting for Postemployment
Benefits," which requires the Company to accrue the cost of
providing benefits to former or inactive employees after
employment but before retirement. These benefits are to 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 had no material effect on the Company's financial
condition or results of operation.
Note 12 - 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 expired January 30, 1995.
In 1994, shareholders adopted the Aquarion Company Stock
Incentive Plan ("Incentive Plan") that provides for the granting
of non-qualified stock options, stock appreciation rights,
restricted stock, unrestricted stock and performance units
(collectively, "Awards"), but no more than an aggregate of
525,000 shares of stock may be awarded under the Incentive Plan
or purchased upon the exercise of stock options. No Awards will
be granted after April 25, 1999.
Stock options available under the Stock Plan and Incentive
Plan are exercisable at a price equal to the market value,
unless otherwise indicated, at the date of the grant and remain
exercisable for 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, 1991 273,700 $22.63-$28.28
Granted in 1992 (a) 106,750 $20.63-$24.63
Expired in 1992 (137,700) $22.63-$28.28
Exercised in 1992 (16,400) $22.63-$24.63
--------
Outstanding at December 31, 1992 226,350 $20.63-$28.28
Granted in 1993 (a) 66,550 $25.00-$26.63
Expired in 1993 (1,850) $24.63-$25.00
Exercised in 1993 (29,900) $20.63-$24.63
--------
Outstanding at December 31, 1993 261,150 $20.63-$28.28
Granted in 1994 (a) 271,100 $21.75-$27.13
Expired in 1994 (11,800) $24.63-$27.13
Exercised in 1994 (6,300) $20.63-$25.00
--------
Outstanding at December 31, 1994 514,150 $20.63-$28.28
=======
<FN>
(a) These options became or will become exercisable on
March 17, 1993, January 22, 1994, February 2, 1995 and
December 5, 1995, respectively.
As of December 31, 1994, 252,050 shares were exercisable
under the Stock Plan. In addition, 4,495 shares of restricted
stock were outstanding as of December 31, 1994, of which 1,921
shares will vest on February 2, 1995.
The Company maintains a Dividend Reinvestment and common
stock Purchase Plan (Reinvestment Plan) which provides holders
of its common stock with a method of purchasing additional
shares without payment of any brokerage or service charges. In
April 1994, the Company amended its Reinvestment Plan to allow
shareholders to make optional cash payments at a 5 percent
discount from the market price and to include an additional
750,000 shares in the plan. The total number of shares reserved
for purchase under the Reinvestment was 1,650,000, of which
905,715 shares were issued at December 31, 1994.
-38-
Note 13 - Property, plant and equipment
- ---------------------------------------
Net property, plant and equipment at December 31, consisted
of the following components:
(In thousands) 1994 1993
- ------------------------------------ ------ ------
Organization $ 185 $ 185
Source of supply 27,446 26,762
Pumping 14,296 13,395
Water treatment 53,371 52,951
Transmission and distribution 214,687 206,865
General 30,249 30,086
Construction work in progress 11,766 5,266
Utility plant held for future use 471 471
Nonutility 26,237 31,583
-------- --------
378,708 367,564
Less: accumulated depreciation 123,166 117,191
-------- --------
$255,542 $250,373
======== ========
Note 14 - Inventories
- ---------------------
Inventories at December 31, were comprised of the following:
(In thousands) 1994 1993
- ---------------------------------- ------ ------
Lumber and logs $1,333 $1,314
Materials and supplies 1,744 1,571
------ ------
$3,077 $2,885
====== ======
Note 15 - 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) 1994 1993 1992
- -------------------------------- ------ ------ ------
(Increase) decrease in accounts
receivable $(2,703) $ 339 $ 129
(Increase) decrease in inventory (192) 228 (120)
(Increase) in prepayments (1,308) (1,064) (600)
Increase (decrease) in accounts
payable and accrued liabilities 4,273 575 (551)
Increase (decrease) in interest
and taxes payable 3,168 (241) 340
Net changes in other noncurrent
balance sheet items 3,193 (259) (819)
------- ------ ------
$ 6,431 $ (422) $(1,621)
======= ====== =======
Supplemental cash flow information:
Cash paid for:
Interest $8,733 $9,810 $9,602
Income taxes $6,306 $5,066 $4,214
-39-
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, 1994 and 1993, and the results of
their operations and their cash flows for each of the three
years in the period ended December 31, 1994, 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, 5 and 11, the Company changed its
method of accounting for postretirement benefits other than
pensions in 1993 and income taxes in 1992.
Price Waterhouse LLP
Stamford, Connecticut
January 30, 1995
-40-
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.
Jack E. McGregor
President & Chief Executive Officer
Janet M. Hansen
Senior Vice President,
Chief Financial Officer
& Treasurer
January 30, 1995
-41-
SUPPLEMENTAL FINANCIAL INFORMATION
1994 1993 1992 1991 1990
- ------------------------------ ---- ---- ---- ---- ----
Book value per share $17.43 $17.07 $16.33 $15.53 $18.84
Payout ratio (per share) 86.6% 92.0% 98.2% N/A 108.1%
Price/earnings ratio 12.63 16.19 15.2 N/A 14.4
Capitalization:
Long-term debt 49.1% 51.0% 51.9% 55.1% 51.8%
Preferred stock of subsidiaries .2 .2 .2 1.2 1.3
Common equity 50.7 48.8 47.9 43.7 46.9
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
<FN>
(1) Computed at December 31.
</FN>
Quarterly financial data
(Unaudited)
Income
before
Operating income Net Per
revenues taxes income share(1)
- ---------------- --------- ------ ------ --------
(In thousands, except share data)
1994
First quarter $ 25,850 $ 4,173 $ 2,574 $.40
Second quarter 29,619 5,943 3,572 .55
Third quarter 29,649 5,626 3,419 .52
Fourth quarter 36,855 6,750 2,656 .40
-------- ------- -------
Total $121,973 $22,492 $12,221
======== ======= =======
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
======== ======= =======
<FN>
(1) Based on a weighted average of common shares outstanding
during each quarter.
</FN>
-42-
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, 1994, there were 7,207 shareholders of record.
Period Closing sales prices Dividends paid
- --------------------- ---------------------- ----------------
High Low
- --------------------- ---------- ---------
1994
First quarter $27 3/4 $24 3/4 $.405
Second quarter 26 7/8 23 .405
Third quarter 26 23 1/2 .405
Fourth quarter 26 1/8 21 5/8 .405
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
Public water supply segment operations highlights
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Water supplied from
utility operations
(millions of gallons)
Residential 12,463 12,992 12,072 12,657 11,842
Commercial 4,815 4,995 5,269 5,812 5,919
Industrial 3,289 3,647 3,862 4,291 4,668
Non-revenue water 4,369 3,900 4,019 4,039 4,296
------- ------- ------- ------- -------
Total 24,936 25,534 25,222 26,799 26,725
======= ======= ======= ======= =======
Number of customer accounts 125,015 123,915 123,325 122,541 121,571
Population served 496,000 492,000 490,000 487,000 484,000
Full-time employees 276 289 283 285 292
-43-
GRAPHICS APPENDIX LIST
----------------------
Page in 1994 Annual Report
to Shareholders where
graphic appears Description of Graphic
------------------------ ----------------------
Page 5 Actual Utility Capital Expenditures
Page 16 Net Cash Provided by Operating Activities
Page 16 Proceeds from Div. Reinv. Plan
Page 17 Interest Expense
Page 17 Total Debt
Page 18 Percentage of Revenues by Expense Category - 1994
Page 20 Percentage of Revenues by utility Operations - 1994
Page 20 Pre tax Income