Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission File Number 1-8060
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AQUARION COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0852232
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
835 Main Street, Bridgeport, Connecticut 06601
- ----------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 335-2333
----------------
- ----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of May 2, 1995:
Common Stock
No Par Value (Stated Value: $1) 6,659,730
--------------------------------- -----------------
Class Number of Shares
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
Three Months Ended March 31,
---------------------------------
1995 1994
------ ------
(In thousands, except share data)
Operating revenues $25,602 $25,850
------- -------
Costs and expenses:
Operating 9,346 9,397
General and administrative 3,953 4,100
Depreciation 2,909 2,982
Interest expense 2,050 2,144
Taxes other than income taxes 3,220 3,140
------- -------
Total costs and expenses 21,478 21,763
------- -------
4,124 4,087
Allowance for funds used during
construction 112 86
------- -------
Income before income taxes 4,236 4,173
Income taxes 1,845 1,599
------- -------
Net income $ 2,391 $2,574
======= =======
Per share $ 0.36 $ 0.40
======= =======
Weighted average common shares
outstanding 6,621,946 6,485,996
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
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AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
UNAUDITED
Three Months Ended March 31,
----------------------------
1995 1994
------ ------
(In thousands, except share data)
Beginning of period $16,628 $15,015
Net income 2,391 2,574
------- -------
19,019 17,589
Deduct: Cash dividends declared
on common stock, $.405
per share per quarter
in 1995 and 1994 2,688 2,666
------- -------
End of period $16,331 $14,923
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
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AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
March 31, December 31,
ASSETS 1995 1994
--------- ------------
(In thousands)
Property, plant and equipment $387,740 $378,708
Less: accumulated depreciation 126,032 123,166
-------- --------
Net property, plant and
equipment 261,708 255,542
-------- --------
Current assets:
Cash and cash equivalents 527 1,335
-------- --------
Accounts receivable:
Customers 14,896 15,946
Miscellaneous 1,442 1,158
-------- --------
16,338 17,104
Less: allowance for doubtful
accounts 3,024 2,762
-------- --------
13,314 14,342
Accrued revenues 8,898 9,596
Inventories 3,253 3,077
Prepaid expenses 9,330 8,006
-------- --------
Total current assets 35,322 36,356
-------- --------
Goodwill 10,181 10,283
Recoverable income taxes 46,874 47,099
Other assets 22,968 22,665
-------- --------
$377,053 $371,945
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
LIABILITIES AND March 31, December 31,
SHAREHOLDERS' EQUITY 1995 1994
--------- ------------
(In thousands, except share data)
Shareholders' equity:
Preferred stock, no par value,
authorized 2,500,000 shares
not to exceed aggregate
value of $25,000,000,
issuable in series-none
issued $ - $ -
Common stock, stated value: $1
Authorized-16,000,000 shares
Issued-6,719,701 shares in
1995 and 6,690,013 shares in
1994 6,720 6,690
Capital in excess of stated value 94,734 94,152
Retained earnings 16,331 16,628
--------- ---------
117,785 117,470
Less: cost of treasury stock,
81,462 shares in 1995 and
84,992 shares in 1994 2,236 2,338
--------- ---------
Total shareholders' equity 115,549 115,132
--------- ---------
Redeemable preferred stock of 330 330
--------- ---------
Long-term debt and other obligations 111,446 111,466
--------- ---------
Current liabilities:
Short-term borrowings, unsecured 8,800 -
Current maturities of long-term 4,077 4,077
Accounts payable and accrued 10,750 12,832
Dividends payable 2,688 2,675
Accrued interest 1,925 2,035
Taxes other than income taxes 1,348 1,532
Income taxes 1,569 4,171
-------- --------
Total current liabilities 31,157 27,322
-------- --------
Advances for construction 23,798 23,407
Contributions in aid of 21,609 21,589
Deferred land sale gains 333 427
Accrued postretirement benefit 2,706 2,231
Recoverable income taxes 6,005 6,005
Deferred taxes 64,120 64,036
-------- --------
$377,053 $371,945
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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AQUARION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
Three Months Ended March 31,
----------------------------
1995 1994
------ ------
(In thousands)
Cash flows from operating activities:
Net income $2,391 $2,574
Adjustments reconciling net income to net cash
provided by operating activities:
Depreciation and amortization 3,157 3,217
Allowance for funds used during construction (112) (86)
Provision for losses on accounts receivable 223 299
Deferred and prepaid income taxes, net 310 289
Proceeds from sale of surplus land,
net of gains 264 215
Change in assets and liabilities (Note 3) (4,659) (3,038)
------ ------
Net cash provided by operating activities 1,574 3,470
------ ------
Cash flows from investing activities:
Capital additions, excluding an allowance
for funds used during construction (9,153) (2,339)
Advances and contributions in aid of
construction 485 311
Refunds on advances for construction (74) (243)
Other investing activities (357) (270)
------ ------
Net cash used in investing activities (9,099) (2,541)
------ ------
Cash flows from financing activities:
Net proceeds from short-term borrowings 8,800 1,800
Proceeds from the issuance of common
stock, net 612 407
Principal payments on long-term debt (20) (19)
Common dividends paid (2,675) (2,621)
------ ------
Net cash provided by (used in)
financing activities 6,717 (433)
------ ------
Net (decrease) increase in cash and cash
equivalents (808) 496
Cash and cash equivalents, beginning of
period 1,335 90
------ ------
Cash and cash equivalents, end of period $527 $586
====== ======
The accompanying notes are an integral part of these consolidated
financial statements.
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AQUARION COMPANY
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
UNAUDITED
---------
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 for residential,
commercial and industrial customers, to other utilities for resale and
for private and municipal fire protection. The Utilities provide
water to customers in 22 communities with a population of
approximately 496,000 people in Fairfield, New Haven, and Litchfield
Counties in Connecticut, including communities served by other
utilities to which BHC makes water available on a wholesale basis for
back-up supply or peak demand purposes through BHC's Southwest
Regional Pipeline. BHC is the largest investor-owned water company in
Connecticut and, with 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 various
nonutility activities. The Company conducts an environmental testing
laboratory business through its Industrial and Environmental Analysts,
Inc. group of 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 forest products business through Timco, Inc. (Timco) and
owns a real estate subsidiary, Main Street South Corporation (MSSC).
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting
principles for interim financial information, with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X and as applied in the case
of rate-regulated public utilities, comply with the Uniform System of
Accounts and rate making practices prescribed by the DPUC.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The results of operations are
not necessarily indicative of the results of operations for the
calendar year. Water consumption is less in the first quarter of the
year than during the warmer months. The laboratory testing business
is seasonal as well with traditionally lower first quarter revenues.
Other factors affecting the comparability of various accounting
periods include the timing of rate increases granted the Utilities and
the timing and magnitude of property sales. For further information,
refer to the consolidated financial statements and accompanying
footnotes included in the Company's annual report on Form 10-K for the
year ended December 31, 1994.
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NOTE 2 - INVENTORIES
- --------------------
Inventories were comprised of the following (in thousands):
March 31, December 31,
1995 1994
--------- ------------
(Unaudited)
Lumber and logs $1,575 $1,333
Materials and supplies 1,678 1,744
------ ------
$3,253 $3,077
====== ======
NOTE 3 - SUPPLEMENTAL DISCLOSURE FOR CONSOLIDATED STATEMENTS OF CASH FLOWS
Changes in assets and liabilities for the three month period
ended March 31, are set forth below (in thousands):
CAPTION>
1995 1994
------ ------
(Unaudited)
Decrease in accounts receivable $1,502 $ 176
Increase in inventory (176) (29)
Increase in prepayments (1,324) (1,357)
Decrease in accounts payable and
accrued iabilities (1,607) (1,713)
(Decrease) increase in interest and
taxes payable (2,895) 378
Net changes in other noncurrent
balance sheet items (159) (493)
------- -------
$(4,659) $(3,038)
======= =======
Supplemental cash flow information:
Cash paid for:
Interest $2,111 $2,339
Income taxes $4,205 $ 685
NOTE 4 - SALE OF SURPLUS LAND
- -----------------------------
For the first three months of 1995, the Company sold
approximately five acres of surplus land in two separate transactions
for a total of $465,000. Total gains approximated $201,000, or $.03
per share.
NOTE 5 - ACQUISITIONS
- ---------------------
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
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but unrelated 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, described above, 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 June 30,
1995. There is no certainty that the parties will agree to further
extensions if the transaction has not closed by that time.
On February 23, 1995, the Company filed an application with the
DPUC to acquire Kent Water Company, a privately held water company
serving 315 customers in Kent, Connecticut, for $60,000 in a cash
transaction. The proposed acquisition was approved by the DPUC on
April 20, 1995, and it is scheduled to become effective in the second
quarter of 1995.
NOTE 6 - TERMINATION OF AGREEMENT
- ---------------------------------
In November 1994, Timco entered into an agreement with the Public
Service Company of New Hampshire ("PSNH") under which Timco agreed to
terminate its long-term rate order with PSNH. Under this rate order,
Timco sold electricity produced at its cogeneration plant to PSNH.
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. As a result of this transaction, Timco will not have these
cogeneration revenues in the future. Revenues from electricity
cogeneration were $800,000 for the first quarter of 1994 and
$3,000,000 for the year-ended December 31, 1994.
NOTE 7 - RATE MATTERS
- ---------------------
On April 20, 1995, BHC filed an application with the DPUC for a
Construction-Work-in-Progress (CWIP) water rate surcharge of
1.97 percent of current revenues to recover 90 percent of the carrying
costs, through March 31, 1995, of capital used in the construction of
a filter plant at its Hemlocks Reservoir in Fairfield, Connecticut.
This plant, mandated by the Federal Safe Drinking Water Act of 1974
(SDWA), as amended, is estimated to cost approximately $50,000,000.
This application updated the CWIP rate surcharge of 1.26 percent
granted in March 1995.
BHC will continue to file quarterly applications for increases in
the CWIP rate surcharge as construction continues through 1997, at
which time the filtration facilities are expected to be operational
and subject to general ratemaking regulations.
NOTE 8 - SUBSEQUENT EVENT
- -------------------------
On May 11, 1995, BHC issued a $30,000,000 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 have
a 40-year maturity and initially bear interest at a weekly rate. At
the option of the Company, the bonds may be converted or reconverted
from time to time to or from a daily, weekly or flexible rate mode and
with the consent of the CDA to a multiannual (fixed for periods of one
year or multiples thereof) rate mode. In addition, the bonds, with
the consent of the CDA, may be converted for their remaining term to
bear interest at a fixed rate. While the bonds are in the daily,
weekly or flexible rate modes, a letter of credit facility or
substitute credit facility will be maintained. The proceeds of this
bond issuance are to be used to finance costs incurred in
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the construction of the Hemlocks Reservoir Filtration Project and the
filtration facilities at BHC's Lakeville and Norfolk Reservoirs.
Under the terms of the CDA bonds, proceeds are to be requisitioned
from a construction fund held by a trustee for planned capital
improvements and used to, at least initially, reduce short-term
borrowings incurred to finance the cost of construction.
Item 2. Management's Discussion and Analysis of Financial
- ----------------------------------------------------------
Condition and Results of Operations
- -----------------------------------
Management's Discussion and Analysis of the Results of Operations
and Financial Condition contained in Aquarion's Annual Report on Form
10-K for the year ended December 31, 1994 (1994 Form 10-K) should be
read in conjunction with the comments below.
Capital Resources and Liquidity
- -------------------------------
Capital Expenditures
- -----------------------
The Company invested $9,153,000 in property, plant and equipment
in the first three months of 1995, compared with $2,339,000 for the
same 1994 period. The Utilities accounted for approximately
$8,120,000 of plant additions during the current three month period,
including $3,507,000 expended on SDWA mandated filtration facilities,
with the balance being invested primarily in the Company's
environmental testing laboratories and forest products operations.
Management estimates that capital expenditures will total $41,500,000
in 1995, of which approximately $39,000,000 will be for water utility
construction programs. Nonutility capital expenditures will
approximate $2,500,000 in 1995, primarily for laboratory equipment at
IEA.
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 from both internal and external sources.
Historically, the Company's ability to finance its capital
expenditures has depended substantially on rate relief. Pursuant to
DPUC regulations, BHC is deriving additional revenues through the
implementation of a CWIP rate surcharge in conjunction with the
construction of its Hemlocks Reservoir filtration plant. The current
surcharge of 1.26 percent will increase the Company's revenues by
$762,000 on an annual basis. This surcharge, however, is expected to
increase quarterly as BHC will continue to file quarterly applications
during the construction period.
The percentage of capital expenditures financed by net cash from
operating activities was 17 percent and 100 percent for the three
months ended March 31, 1995 and 1994, respectively. (See
"Consolidated Financial Statements-Consolidated Statements of Cash
Flows.") The remainder has been provided from external financing
sources. The Company obtained funds of $485,000 from advances and
contributions in aid of construction from developers and customers for
the three months ended March 31, 1995.
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 1995, 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 March 31,
1995, $8,800,000 of short-term borrowings under the agreements was
outstanding.
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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. As a result, the Company
obtained funds of $636,000 through the Plan for the three months ended
March 31, 1995.
Future Financing Requirements
-----------------------------
The Company's ability to finance future utility construction
programs depends substantially on rate relief. Rate relief has an
impact on cash flow from operating activities and consequently affects
the Company's ability to obtain external financing, since sufficient
operating cash flows are necessary to maintain certain 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.
Results of Operations for the three months
- ------------------------------------------
ended March 31, 1995 and 1994
- -----------------------------
Net income for the three months ended March 31, 1995 was
$2,391,000 compared with $2,574,000 for the same 1994 period.
Operating results during the first three months of 1995 reflect
the impact of lower revenues from the Utilities as well as a higher
utility effective tax rate in 1995 compared with the previous year's
quarter.
Operating revenues for the first three months of 1995 decreased
$248,000 from the comparable 1994 period. Forest Products experienced
a decrease in revenues of $752,000, due to the termination of the
cogeneration operation in November 1994. Revenues from the Utilities
decreased $431,000, principally due to reduced 1995 consumption
compared to 1994. Revenues from the Laboratories increased $846,000,
reflecting the impact of higher sampling receipts in the first quarter
of 1995. Revenues from Property Sales and Utility Management Services
businesses account for the remainder of the variance.
Operating expenses for the first three-months of 1995 decreased
$51,000 from the comparable 1994 period. Forest products experienced
a decrease in operating expenses of $497,000 which was primarily the
result of the termination of the cogeneration operation. The
Laboratories experienced an increase in operating expenses of $479,000
which was largely due to higher operating costs associated with the
increased sampling receipts in the first quarter of 1995. Operating
expenses from the Utilities, Property Sales and Utility Management
Service businesses account for the remainder of the variance.
General and administrative expenses for the first three months of
1995 decreased $147,000 from the comparable 1994 period. Expenses from
the Utilities decreased $94,000 primarily due to lower costs
associated with health insurance, pension and employee benefits
expenses partially offset by increased costs for payroll and outside
services. The Laboratories, Forest Products, Real Estate, Corporate
and the Utility Management Services businesses account for the
remainder of the variance.
-11-
Depreciation expense for the first three months of 1995 was
$73,000 lower than the 1994 comparable period. This decrease is
primarily attributable to the retirement of the Cogeneration Plant at
the Timco facility.
Interest expense for the first three months of 1995 was $94,000
lower than the 1994 comparable period. Lower outstanding average
short-term debt offset by higher short-term borrowing rates account
for this variance.
Taxes other than income taxes for the first three months of 1995
increased $80,000 over the comparable 1994 period. Increased payroll
and property taxes account for this variance.
Income taxes for the three months of 1995 were $246,000 higher
than the comparable 1994 period primarily due to 1994 tax benefits
associated with non-recurring refinancings.
Significant changes in balance sheet accounts
- ---------------------------------------------
for the three months ended March 31, 1995
- -----------------------------------------
The increase of $1,324,000 in prepaid expenses is largely the
result of prepaid property taxes that were paid in January 1995 and
will be expensed over the first half of the year as well as an
increase in the net pension credit.
Short-term borrowings increased by $8,800,000 primarily due to
increased construction costs for water filtration facilities and
normal utility construction projects. Short-term debt was reduced in
the fourth quarter 1994 with the proceeds received from PSNH in
connection with the termination of the cogeneration operation.
The decrease of $2,082,000 in accounts payable and accrued
liabilities is principally due to lower general accounts payable and
accrued payroll costs.
Income taxes payable decreased by $2,602,000 due primarily to the
payment of taxes related to the termination of the long-term rate
order with PSNH, which occurred in the fourth quarter of 1994, and did
not have to be reflected in earlier estimated tax payments.
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PART II. OTHER INFORMATION
--------------------------
ITEM 1. - LEGAL PROCEEDINGS
- ---------------------------
All legal proceedings have previously been reported on the Annual
Report on Form 10-K in Part I, Item 3 for the year ended December 31,
1994.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
At the Annual Meeting of shareholders of the Company held on
April 25, 1995, three directors were elected to a three-year term.
The shareholders elected Geoffrey Etherington with 5,462,423
affirmative votes cast and 132,511 withheld, Edgar G. Hotard with
5,448,695 affirmative votes cast and 146,239 withheld and Jack E.
McGregor with 5,458,602 affirmative votes cast and 136,332 withheld.
Shareholders ratified the selection of Price Waterhouse as
independent accountants for 1995 with 5,456,210 affirmative votes
cast, 44,114 negative votes and 94,610 abstentions.
In addition, the shareholders rejected a shareholder proposal to
declassify the Board of Directors and eliminate the election of
directors for overlapping, staggered terms with 2,118,399 negative
votes cast, 1,685,439 affirmative votes, 222,670 abstentions and
1,568,426 broker nonvotes.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits
27 Financial Data Schedule (filed herewith).
(b) The Company did not file a report on Form 8-K for the
three months ended March 31, 1995.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
AQUARION COMPANY
Date: May 12, 1995 By /s/JANET M. HANSEN
-------------------- ----------------------------
Janet M. Hansen
Senior Vice President,
Chief Financial Officer and
Treasurer
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