SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 .
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission file number 1-8060.
AQUARION COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 06-0852232
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
835 Main Street, Bridgeport, Connecticut 06604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 335-2333
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, no par value New York Stock Exchange
Series A Junior
Participating Preferred New York Stock Exchange
Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part IV of this Form 10-K or any amendment to
this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant: $182,565,435 (Computed by reference to the closing price of the
Registrant's Common Stock on March 12, 1997, as reported on the New York Stock
Exchange-Composite Tape.)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 12, 1997
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Common Stock, no par value 7,046,382
The following documents have been incorporated by reference:
1. Annual Report to Shareholders for the year ended December 31, 1996--
PART I, Item 1; PART II, Item 5, Item 6, Item 7 and Item 8; PART IV.
2. Definitive Proxy Statement, dated March 20, 1997, for the Annual Meeting
of Shareholders to be held on April 22, 1997--PART III.
PART I
ITEM 1. BUSINESS
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General
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 subsidiaries, BHC Company (BHC) and Sea Cliff Water
Company (SCWC) (collectively the Utilities) collect, treat and distribute
water to residential, commercial and industrial customers, to other utilities
for resale and for private and municipal fire protection. The Utilities
provide water to customers in 30 communities with a population of
approximately 500,000 people in Connecticut and Long Island, New York. These
communities include those served by other utilities to which water is made
available by the Company's Utilities on a wholesale basis for back-up supply
or peak demand purposes through the Southwest Regional Pipeline. BHC is the
largest investor-owned water company in Connecticut and with SCWC is among the
10 largest investor-owned water companies in the nation. The Utilities are
regulated by several state agencies, including the Connecticut Department of
Public Utility Control (DPUC) and the New York Public Service Commission
(PSC).
Aquarion is also engaged in various nonutility activities. The Company
owns Timco, Inc. (Timco), a timber processing company based in New Hampshire.
At Timco's sawmill complex, lumber is cut and packaged for sale to wholesalers
and retailers. Aquarion is also engaged in the utility management service
business through Aquarion Management Services, Inc. (AMS) and owns Main Street
South Corporation (MSSC), a small real estate subsidiary formed in 1969 to
assist the Utilities in marketing surplus land.
The Company was incorporated in Delaware as The Hydraulic Company in
1969 to become the parent company to BHC, a Connecticut corporation founded in
1857. The corporate name was changed to Aquarion Company in 1991. The
Company's executive offices are located at 835 Main Street, Bridgeport,
Connecticut 06604-4995, and its telephone number is (203) 335-2333.
Recent Developments
Discontinued Operations. On March 25, 1997, the Company sold the
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operations of Industrial and Environmental Analysts, Inc. (IEA), its
environmental testing laboratory business for approximately $10,000,000.
In connection with the sale, the Company retained liabiity for
environmentatal matters arising before the date of sale. IEA has been
recorded as a discontinued operation for the years ended December
31, 1996, 1995 and 1994. The Company recorded an after tax loss of $4,255,000
or $.61 per share from the sale of the discontinued operation for
the year ended December 31, 1996. Net losses from the discontinued operation
were $580,000 in 1996, $410,000 in 1995 and $257,000 in 1994, respectively and
are shown separately on the consolidated statements of income.
Merger. Effective at the close of business on December 31, 1996,
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Bridgeport Hydraulic Company merged with its wholly-owned subsidiaries
Stamford Water Company (SWC), New Canaan Water Company (NCWC) and Ridgefield
Water Supply Company (RWSC). Bridgeport Hydraulic Company is the surviving
corporation and has changed its name to BHC Company (BHC). BHC will consist of
an Eastern Division, formerly Bridgeport Hydraulic Company and a Western
Division, formerly SWC, NCWC and RWSC.
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Rates. On January 17, 1997, BHC's Eastern Division filed an a
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application with the DPUC for a Construction-Work-in-Progress (CWIP) rate
surcharge of 8.94 percent of current revenues to recover 90 percent of the
carrying costs through December 31, 1996, of capital used in the construction
of a filtration 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 $48,500,000. This application
updated the CWIP rate surcharge of 8.05 percent granted in December 1996.
BHC's Eastern Division will continue to file quarterly applications for
increases in the CWIP rate surcharge as construction continues until its
completion in 1997, at which time the filtration facilities are expected to be
operational and subject to general ratemaking regulations.
On July 31, 1996, BHC's Eastern Division received approval from the DPUC
for a 6.5 percent water service rate increase designed to provide a $4,000,000
increase in annual water service revenues. As part of the decision, BHC's
Eastern Division will be allowed to re-open the application in 1997 to include
the full cost of construction of the Hemlocks filtration plant, as well as all
corresponding operating expenses, property taxes and depreciation expense. If
approved, water service rates at that time will increase by approximately an
additional 3.5 percent, which is net of the reduction for the repeal of the
Connecticut gross earnings tax, plus a cumulative CWIP rate surcharge, which
is estimated to be 10 percent at that time.
On April 3, 1996, BHC's Western Division collectively, received a final
decision from the DPUC, which became effective on April 25, 1996, allowing for
a 5.1 percent increase, designed to provide a $782,000 increase in annual
water service revenues. As part of the decision, the DPUC approved BHC's
Western Division's proposal to equalize the meter rates and service charges
for SWC, NCWC and RWSC.
There is no certainty that any given rate increase will produce the
intended level of revenues or the allowed return on equity. See "Public Water
Supply--Rates and Regulations."
Utility Acquisition. On May 30, 1996, the Company acquired Sea Cliff
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Water Company (SCWC), a subsidiary of Emcor Group, Inc., for approximately
$2,600,000 in cash. SCWC, which has approximately 4,300 customers, serves a
portion of Nassau County in Long Island, New York, and has approximate annual
revenues of $2,000,000.
Financing Activities. On February 3, 1997, BHC converted the interest
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rate on its $30,000,000 unsecured note, issued in 1995, in consideration for a
loan of the proceeds from the issuance by the Connecticut Development
Authority (CDA) of an equal amount of tax-exempt Water Facilities Revenue
Bonds, from a weekly variable rate to a fixed rate. The bonds will bear
interest at 6.15 percent and will be due on April 1, 2035.
On October 3, 1996, BHC issued a $30,000,000 unsecured note in
consideration for a loan of the proceeds from the issuance by the CDA of an
equal amount of tax-exempt Water Facilities Revenue Bonds (CDA bonds). The
tax-exempt CDA bonds, bearing interest at 6.0 percent, have a 40 year
maturity. BHC has the option to have these bonds redeemed at a price ranging
from 102 percent on September 1, 2006 to 100 percent on September 1, 2010 and
thereafter. The proceeds of this bond issuance are to be used to offset costs
incurred in the construction of the Hemlocks Reservoir Filtration Project, the
filtration facilities at BHC's Lakeville and Norfolk Reservoirs and other
facilities consisting of transmission and distribution mains, service lines,
meters and hydrants for the purpose of supplying safe potable water to the
general public within the Company's service area. Under the terms of the CDA
bonds, proceeds are to be requisitioned from a construction fund held by a
trustee for planned capital improvements.
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Utility Construction Program
The Utilities are engaged in a continuing construction program mandated
by legislative and regulatory requirements, as well as for infrastructure
replacements. The Utilities expended $37,185,000, $38,600,000, and
$17,739,000 in 1996, 1995 and 1994, respectively, for plant additions and
modifications of existing plant facilities, excluding an allowance for funds
used during construction (AFUDC). The 1996 expenditures were made primarily
for construction of water treatment plants at the Hemlocks, Lakeville and
Norfolk reservoirs and installation of water mains, service connections and
meters.
Utility budgeted capital expenditures for 1997 are approximately
$27,100,000. The total cost of the SDWA mandated water filtration project at
the Hemlocks Reservoir through December 31, 1996 was approximately
$38,400,000. Management estimates that the total of such costs for 1997 will
approximate $10,100,000, without adjustment for inflation. Part of the cost
associated with the Hemlocks facility is expected to be offset by CWIP rate
surcharges which, at the DPUC's discretion, permit the recovery of 90 percent
of the carrying cost of capital used in construction of a SDWA-mandated water
treatment facility. Management cannot predict whether future federal, state
or local regulation will require additional capital expenditures.
The Company's ability to finance its future construction programs
depends in part on future rate relief, the level of CWIP rate surcharges and
future debt and equity issues. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources
and Liquidity" and "Business--Public Water Supply--Rates and Regulation."
Industry Segment Information
The Company's operations are grouped into four industry segments: public
water supply; timber processing; real estate; and utility management services,
which formerly included environmental testing laboratories (IEA). The
consolidated operating revenues from continuing operations of the Company for
the year ended December 31, 1996 were derived from the following sources: 86
percent from public water supply, 11 percent from timber processing, 2 percent
from real estate, including both MSSC and surplus utility land sales, and
1 percent from utility management services. For additional information
concerning each segment for each of the years ended December 31, 1996, 1995,
and 1994, see "Note 10" of "Notes to Consolidated Financial Statements" and
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Public Water Supply
Service Area. The Utilities are engaged in the collection, treatment
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and distribution of water for public and private use to residential,
commercial, and industrial users, and for municipal and private fire
protection services in 30 communities in parts of Fairfield, Litchfield and
New Haven counties in Connecticut and Nassau County in Long Island, New York.
The Utilities also sell, as requested, water for redistribution to customers
of the First and Second Taxing Districts' Water Departments of the City of
Norwalk, Connecticut, and Connecticut-American Water Company through the
Southwest Regional Pipeline in Fairfield County.
The communities served by the Utilities as of December 31, 1996 have a
population of approximately 500,000, and the total number of customer accounts
as of that date was approximately 136,000. The Utilities' service areas,
primarily residential in nature, have experienced an average growth in
accounts of approximately 1 percent per year over the last 10 years.
Industrial use has declined significantly in that time period, and the
residential characteristics of the area have changed, indicating an increase
in the percentage of apartment dwellings and condominium units. Management
does not anticipate
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any significant growth in residential consumption in the foreseeable future,
and expects continued decline in industrial use and little or no commercial
growth.
The operating revenues of the Utilities for the 12 months ended December
31, 1996 were derived from the following sources: 61 percent from residential
customers, 16 percent from commercial customers, 4 percent from industrial
customers, 14 percent from fire protection customers, and 5 percent from other
sources.
Seasonality. The business of the Utilities is subject to seasonal
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fluctuations and weather variations. The demand for water during the warmer
months is generally greater than during the cooler months, primarily due to
additional water requirements of industrial, commercial and residential
cooling systems, and various private and public outdoor uses such as lawn and
golf course sprinkling. From year to year and season to season, demand will
vary with rainfall and temperature levels.
Water Supply. Water is available from both surface and subsurface
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sources. During 1996, approximately 91 percent of the water supplied by the
Utilities was provided by impounding reservoirs, 8 percent by producing wells
and 1 percent by purchased water. As of December 31, 1996, the Utilities'
reservoirs, well fields and interconnections with other water utilities had an
aggregate safe daily yield of 113 million gallons. Safe yield is an estimate
of the supply capability during an extended drought. The average daily demand
for water from the Utilities in 1996 was 66 million gallons per day (MGD).
The reservoirs of the Utilities have an aggregate storage capacity of 30.4
billion gallons.
All of the Utilities' reservoirs and active wells are located on
property owned by the Utilities. Management believes it has an adequate water
supply to satisfy the current and projected needs of its customers within its
territorial service area through at least the year 2040. During historical
drought periods in the northeastern United States, BHC has been able to
accommodate the needs of their own customers and to offer relief to supplement
the supplies to neighboring communities by water sales to utilities with which
it has pipeline interconnections. Supply and distribution needs of the
Utilities undergo constant review, and the Utilities continue to explore and
develop additional ground water-supplies and study alternative surface water
sources to meet anticipated future water requirements.
The Connecticut Water Diversion Policy Act, enacted in 1982, prohibits
any future diversions of surface or ground water without a permit from the
state Department of Environmental Protection (DEP). Although this law
"grandfathers" existing surface and ground-water supplies that existed when it
was enacted, any subsequent water diversion that might be effected by BHC is
subject to a lengthy permit application process and approval by the DEP.
Diversion permits granted pursuant to this law are subject to renewal when
their terms, which typically run from five to ten years, expire.
Rates and Regulation. The Company's utility subsidiaries are subject to
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regulation by state regulatory commissions having jurisdiction over their
respective service areas. BHC is subject to regulation by the DPUC, while
SCWC is subject to regulation by the PSC. The authorities have jurisdiction
with respect to rates, service, accounting procedures, issuance of securities,
dispositions of utility property and other related matters. Rates charged by
the Utilities are subject to approval by the DPUC or the PSC. The Utilities
continually review the need for increases in water rates, and historically
have sought rate relief in a timely manner in light of increases in investment
in utility plant, operating costs and related financing costs, as well as
other factors.
The DPUC may allow a surcharge to be applied to rates in order to
provide a current cash return to water utilities on the major portions of CWIP
applicable to facilities, including filtration plants, required for compliance
with the SDWA. See "Environmental Regulations." The surcharge is adjusted
quarterly, subject to DPUC approval, to reflect increased CWIP expenditures
for SDWA facilities.
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Aquarion is neither an operating utility company nor a "public service
company" within the meaning of any state and is not currently subject to
general regulation by the DPUC or PSC. Regulatory approval is necessary,
however, before Aquarion may acquire or exercise control over any public
service company. Regulatory approval is also required before any other entity
can acquire or exercise, or attempt to exercise, control over Aquarion.
Connecticut regulations govern the sale of water company land in
Connecticut and treatment of land sale proceeds. See "Item 2. Properties."
Franchises and Competition. In common with most water companies in
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Connecticut, BHC derives its rights and franchises to operate from special
acts of the Connecticut General Assembly, which are subject to alteration,
amendment or repeal by the General Assembly and which do not grant exclusive
rights to BHC in its service areas.
Subject to such power of alteration, amendment or repeal by the
Connecticut General Assembly and subject to certain approvals, permits and
consents of public authority and others prescribed by statute and by its
charter, BHC has, with minor exceptions, valid franchises free from burdensome
restrictions and unlimited as to time, and is authorized to sell potable water
in the towns (or parts thereof) in which water is now being supplied by BHC.
In addition to the right to sell water as set forth above, the
franchises of BHC include rights and powers to erect and maintain certain
facilities on public highways and grounds, all subject to such consents and
approvals of public authority and others as may be required by law. Under the
Connecticut General Statutes, BHC, upon payment of compensation, may take and
use such lands, springs, streams or ponds, or such rights or interests therein
as the Connecticut Superior Court, upon application, may determine is
necessary to enable BHC to supply potable water for pubic or domestic use in
its franchise areas.
BHC faces competition, presently not material, from a few private water
systems operated within, or adjacent to, its franchise areas and from
municipal and public authority systems whose service areas in some cases
overlap portions of BHC's franchise areas. At the present time, except as
noted above, there are no publicly owned utilities, cooperatives or other
private utility companies competing with BHC in the areas now served, although
within certain areas there are wells owned by individuals or private
industries.
Environmental Regulations. The Utilities are subject to regulation by
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the Connecticut Department of Public Health (DPH) and the County of Nassau
Department of Health (CNDH) with respect to water quality matters, use of
water from surface and subsurface sources, the location, construction and
operation of water supply facilities and the sale of certain utility property.
Plans for new water supply systems or expansion of existing water supply
systems also must be submitted to the DPH or CNDH for approval. The
Connecticut Department of Environmental Protection (DEP) is authorized to
regulate the operations of BHC, while the New York Department of Environmental
Conservation (DEC) Regulates the operations of SCWC, with respect to
environmental pollution abatement, diversion of water from surface and
subsurface sources, and the location, construction and alteration of dams and
other water obstructions.
The Federal Clean Water Act (the Clean Water Act) of 1972, as amended,
regulates discharges to air, water and land, as well as the management of
underground storage tanks and hazardous materials. A joint federal and state
permit system has been established to ensure that the impact to the
environment from operations is minimized.
The Utilities are subject to regulation of water quality under the SDWA,
which provides for the establishment of uniform minimum national quality
standards by the Environmental Protection Agency (the EPA), as well as
governmental authority to specify the type of treatment process to be used for
public
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drinking water. EPA regulations issued pursuant to the SDWA set limits for,
among other things, certain organic and inorganic chemical, physical,
microbiological and radiological contaminants. The SDWA provides that the
states have the primary enforcement responsibility for public drinking water
systems, as long as the states' regulations are no less stringent than those
adopted pursuant to SDWA. For certain of these water quality standards the
DPH has adopted regulations that in some instances impose standards more
stringent than those imposed under the federal regulations.
EPA regulations pursuant to SDWA include the Surface Water Treatment
Rule (SWTR), the Total Coliform Rule (TCR) and the Lead and Copper Rule (LCR)
and other rules covering organic and inorganic chemicals. The water treatment
requirements of SWTR mandate the construction of the filtration plant at BHC's
Hemlocks Reservoir. BHC also has entered into a consent agreement with the
DPH establishing timetables for construction of the filtration facility at the
Hemlocks reservoir and penalties if the facility is not completed within such
timetable. The Hemlocks plant must be completed by June 29, 1998 or a
$250,000 penalty will be imposed. The Company anticipates that construction
will be completed by the middle of 1997. BHC has entered into a consent
agreement with the DPH to filter the water produced from the Round Pond
reservoir in Ridgefield, CT or substitute alternative ground water supply by
June 30, 1998. The company has chosen the ground water alternative and will
complete this project by 1998. The TCR affects the Utilities by the imposition
of requirements for additional biological sampling and monitoring. The
stringent requirements of the TCR may also result in increased public
notification relating to water quality. The LCR establishes corrosion control
techniques and requires monitoring to determine compliance with prescribed
lead and copper levels in drinking water. If such levels are exceeded, a
multi-year program involving additional monitoring, public notification,
state-supervised corrosion control and treatment and replacement of lead
service lines could result. All of the Utilities systems are in compliance
with the LCR, and the Utilities continue to monitor these systems
periodically. The DPH has determined that BHC is in compliance with Synthetic
Organic Chemical and Inorganic Chemical requirements, thereby avoiding
additional potentially significant treatment process construction costs.
Further SDWA-related regulations are anticipated for such water quality
parameters as disinfection by-products, radon and enhanced surface water
treatment. It is impossible to determine at this time the ultimate impact
these regulations will have on the Utilities.
In 1996 the SDWA was reauthorized by Congress and signed into law.
Several of the schedules for implementation of various regulations have been
changed. The new law eliminated the requirement to regulate 25 new
contaminants every three years and replaced it with a requirement that the EPA
consider five new contaminants for regulation every five years.
The 1996 law also requires that the EPA, in proposing any new drinking
water regulations, show that such regulations will improve public health. In
addition, such regulations must be subjected to a cost-benefit analysis.
Water quality tests are made continuously at all of the Utilities' water
supply sources, and the Utilities believe they are in substantial compliance
with regulations promulgated in connection with the organic chemical,
inorganic chemical, physical, and bacteriological standards for drinking
water. BHC has been voluntarily monitoring for giardia and cryptosporidium,
radon and disinfection by-products, which are water quality concerns that will
be addressed by future regulations.
Aquifer protection legislation in Connecticut requires each water
utility to conduct on going groundwater data collection and to map critical
wellfield recharge areas. The DEP, in consultation with the DPH and DPUC, have
discussed recommendations for land use restrictions adjacent to public water
supply wellfields and possible acquisition of land to enhance protection. The
discussions have not lead to additional regulations and, therefore, any impact
can not be determined at this time. However, if BHC were to adopt
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recommendations to purchase additional land around its wellfields, the cost
could range from minimal to substantial.
Developments with respect to the identification and measurement of
various elements in water supplies and concern about the effect of such
elements on public health, together with possible contamination of water
sources, may in the future require the Utilities to modify all or portions of
their various water supplies, to develop replacement supplies or to implement
new treatment techniques. Any such developments may significantly increase
the Utilities' operating costs and capital requirements. The Company expects
that all such expenditures and costs should ultimately be recoverable through
rates for water service, but there can be no assurance that this will be the
case.
Certain dams owned by the Utilities are subject to inspection under the
National Dam Inspection Act as well as the Connecticut Dam Registration Act,
and dams owned by SWC in New York are subject to inspection by the New York
State Department of Environmental Conservation. The Utilities own 29 dams, 16
of which are subject to federal inspection. Although certain modifications
and further studies have been required, no material problems with respect to
these dams have been reported to the Company.
The Utilities are required to obtain permits from the respective
regulatory authority for the location, construction or alteration of any dam
or reservoir, and to secure the approval of the regulatory authority for the
diversion and use of water from any surface or ground source for public use.
The Utilities have taken all compliance actions required to date.
IEA receives and uses various small quantities of hazardous chemicals
in its operations and is a licensed hazardous waste handler. Pursuant to the
agreement relating to the sale of IEA, the Company has retained responsibility
for environmental liabilities arising before the date of sale under federal
and applicable state laws and regulations.
Timber Processing
The Company is engaged in the timber processing business through Timco,
which has operations in New Hampshire consisting of a sawmill complex. The
sawmill complex processes and markets kiln-dried, finished eastern white pine
and other lumber. Timco also provides custom kiln drying services for pine
mills in Maine and southern New Hampshire. The product is used in the
remodeling and do-it-yourself markets and, to a lesser extent, in the
construction of new homes. It is marketed in the Northeast and Mid-Atlantic
regions through lumber wholesalers, distributors and, in some instances,
directly to large volume retailers. Wholesalers and distributors, in turn,
sell the product to the construction trade and to retail outlets. Timco
obtains the timber used in its products from independent loggers and from
purchased timber rights.
Traditionally, the demand for Timco's lumber is lower in the winter
months and inventories are built up in anticipation of the busier spring and
summer season. The lumber products industry is very competitive, on the basis
of quality and price. Timco faces competition on the basis of both quality
and price from domestic and foreign forest product companies, many of which
have greater resources than the Company.
Utility Management Services
The Company through its AMS subsidiary, provides clients with an
integrated range of utility management services, including contract management
and operations, information services, water and wastewater billing and
collections and various engineering, operations and management consulting
services.
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AMS clients are private and municipal water and wastewater
utilities, including municipal systems engaged in privatization initiatives.
The utility management services businesses are highly competitive.
Real Estate
The Company treats real estate as a separate business segment in order
to distinguish the earnings impact from sales of surplus utility land from the
results of utility operations. For a discussion of the surplus off-watershed
land which the Utilities intend to market as appropriate, see "Item 2.
Properties."
Employees
As of December 31, 1996, the Company employed approximately 399 persons
on a full-time basis, including 277 in the Public Water Supply business, 119
in the Timber Processing business and 3 in the Utility Management Services
business. None of the Company's employees is covered by collective bargaining
arrangements, and the Company believes its relations with its employees are
satisfactory.
ITEM 2. PROPERTIES
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BHC owns a 20,000-square-foot headquarters building and a 44,370-square-
foot Operations Center in Bridgeport, a 28,000-square-foot office building in
Monroe, Connecticut and leases an additional 22,000-square feet of office,
laboratory and garage space in Bridgeport for utility operations.
At December 31, 1996, BHC owned in the aggregate 17 active reservoirs,
53 producing wells and approximately 1,966 miles of water mains, of which
approximately 76 miles have been laid in the past five years. The rights to
locate and maintain water transmission and distribution mains are secured by
charter, easement and permit and are generally perpetual. Water is delivered
to the distribution system from three major reservoir systems, comprised of
several smaller reservoirs and producing wells. BHC owns five filtration
plants for treatment of its reservoir systems. These plants have capacities
ranging from .75 to 25 MGD, respectively.
SCWC owns four acres of land in Long Island, New York in four separate
locations that are occupied by an office and pump station, two well sites and
a tank site. SCWC also owns 54 miles of main.
Aquarion owns nonutility land totaling approximately 99 acres in Easton
and Litchfield, Connecticut. BHC owns approximately 21,400 acres of real
property, most of which consists of reservoirs and surrounding watershed,
located in Fairfield, New Haven, and Litchfield counties in Connecticut and in
Pound Ridge and Lewisboro New York. All but 1,360 specified acres of such
property are subject to the first lien arising under the BHC Indenture
securing its First Mortgage Bonds.
The DPH regulates Connecticut company lands according to a three-tiered
classification system. Class I lands cannot be sold, leased or transferred.
The DPH may authorize a transfer or change in use of Class II lands only upon
a finding that there will be no adverse impact upon the public water supply
and that any use restrictions required as a condition of transfer are
enforceable against subsequent owners and occupants of the lands. Class III
lands, which are off-watershed, are not currently subject to regulation by the
DPH. BHC has identified approximately 2,600 acres of land it believes are
surplus to its water supply needs, and therefore would qualify as Class III
land. All of this Class III land, which includes approximately 570 acres that
have never been in rate base, is available for sale, although all of it may
not be marketable. Up to 530 additional acres could become available if the
DPH approves the abandonment of a former reservoir system in New Haven County
and reclassifies that existing watershed property as Class III land, as
requested by the Company.
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Real property may not be sold or transferred by a water utility without
the prior approval of the DPUC and compliance with other restrictions imposed
by Connecticut law. State laws and regulations govern, among other things,
to whom certain water company lands may be transferred, with preference
given to other water companies, the municipality in which the property is
located and the State of Connecticut, in that order. Additionally, the
disposition of the proceeds of any permissible sale is subject to state law.
Until changed by statute in 1988, it had been the practice of the DPUC
to apply gains from the sale of surplus water company land that had ever been
in the rate base to ratepayers. In effect, these gains served as an offset
against operating expenses, thereby substituting profits from the sale of such
land for revenues that would otherwise be provided through rates. Legislation
enacted in 1988, the Equitable Sharing Statute, required the DPUC to use an
accounting treatment to "equitably allocate" the economic benefits of the net
proceeds from the sales of Class III land that was previously in the utility's
rate base between the Company's ratepayers and its shareholders. Ratepayers do
not share in gains from the sale of land that has never been in rate base.
The Equitable Sharing Statute was clarified by a 1990 amendment which
provides that the economic benefits from the sale of former rate base, Class
III land shall be allocated "substantially in favor" of shareholders when
25 percent or more of the land sold is to be used for open space or
recreational purposes.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The registrant has nothing to report for this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The registrant has nothing to report for this item.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-----------------------------------------------------------------------
MATTERS
-------
Page 31 of the Company's Annual Report to Shareholders for the year
ended December 31, 1996 is incorporated by reference herein pursuant to Rule
12b-23 of the Securities and Exchange Act of 1934 (the Act) and to Instruction
G(2) to Form 10-K.
Aquarion has declared and paid quarterly dividends on its common stock
without interruption since its organization in 1969 and, prior thereto, BHC
paid dividends annually on its common stock without interruption since 1890.
Dividends, when declared, are normally paid on the 30th day of January, April,
July and October.
The earnings of Aquarion are derived from its investments in its
subsidiaries, particularly BHC. Aquarion's future ability to pay dividends to
holders of its Common Stock is dependent upon the continued payment by BHC of
dividends to Aquarion. BHC's ability to pay dividends will depend upon timely
and adequate rate relief, compliance with restrictions under certain of the
BHC debt instruments and other factors.
Dividends on Aquarion common stock can be paid only from its net profits
and surplus. Aquarion's ability to pay dividends is further restricted by the
terms of Aquarion's 5.95 percent unsecured Senior Note due January 1999 and
7.8 percent unsecured Senior Notes due June 1997 (the "Aquarion Notes"). As
of
- 9 -
December 31, 1996, the applicable restrictions would have permitted payment
of additional dividends on Aquarion's common stock of up to $33,700,000.
While Aquarion's Board of Directors intends to continue the practice of
declaring cash dividends on a quarterly basis, no assurance can be given as to
future dividends or dividend rates since they will be determined in light of a
number of factors, including earnings, cash flow, and Aquarion and BHC's
financial requirements. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Capital Resources and
Liquidity."
ITEM 6. SELECTED FINANCIAL DATA
- -----------------------------------
See the inside front cover ("Selected Financial Data") and Pages 30 - 31
("Supplemental Financial Data") of the Company's Annual Report to Shareholders
for the year ended December 31, 1996, which is incorporated by reference
herein pursuant to Rule 12b-23 of the Act and Instruction G(2) to Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
See the inside front cover ("Selected Financial Data") and Pages 9 - 14
of the Company's Annual Report to Shareholders for the year ended December 31,
1996, which is incorporated by reference herein pursuant to Rule 12b-23 of the
Act and Instruction G(2) to Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------------------------------------------------------
The consolidated financial statements, together with the report thereon
of Price Waterhouse LLP, dated February 18, 1997, appearing on Pages 15 - 28,
the inside front cover ("Selected Financial Data") and Pages 30 - 31
("Supplemental Financial Data") of the accompanying 1996 Annual Report to
Shareholders of Aquarion Company are incorporated by reference herein pursuant
to Rule 12b-23 of the Act and Instruction G(2) to Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ---------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The registrant has nothing to report for this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------
The information as to directors required by Item 10 is set forth at
Pages 1 - 7 of the Company's Definitive Proxy Statement, dated March 20, 1997
relating to the proposed Annual Meeting of Shareholders to be held on April
22, 1997, filed with the Commission pursuant to Regulation 14a under the Act,
and is incorporated by reference herein pursuant to Rule 12b-23 of the Act and
Instruction G(3) to Form 10-K.
Executive Officers
The executive officers of the registrant are listed below. These
officers were elected to the offices indicated on April 23, 1996, except as
otherwise noted, for a term expiring with the 1997 annual meeting of
directors. Except as indicated, all have been with registrant and its
predecessors in an executive capacity for more than five years. There are no
family relationships among members of the executive officers.
- 10 -
There were no arrangements or undertakings between any of the officers
listed below and any other person pursuant to which he or she was
selected as an officer.
Served
as
Office, Business Experience Officer
Executive Officer Age During Past Five Years Since
- ----------------- ---- --------------------------- -------
Richard K. Schmidt 52 President and Chief Executive Officer (since 1993
October 1995), formerly Senior Vice
President (1993-1995) of the Company;
President (1992-1995) and Chief Executive
Officer (since 1992) of IEA; formerly
President and Chief Operating Officer (1984-
1992) of Mechanical Technology, Inc.
Janet M. Hansen 54 Executive Vice President (since October 1983
1995), Chief Financial Officer (since April
1992), Treasurer (since 1988) and Senior
Vice President (1993-1995) of the Company
and Vice President (since 1989), Chief
Financial Officer (since April 1991) and
Treasurer (since 1985) of BHC; Mrs. Hansen
is Vice President and Treasurer (since April
1991) of IEA and Chairman of the Board and
Chief Executive Officer (since April 1992)
of Timco. Mrs. Hansen is also Director,
Vice President, Chief Financial Officer and
Treasurer of certain of the Company's other
subsidiaries.
James S. McInerney 59 Senior Vice President (since April 1992) of 1989
the Company; President (since April 1991),
Chief Executive Officer (since April 1995)
and Chief Operating Officer (January 1990 to
April 1995) of BHC. Executive Vice
President (1990 to April 1991) of BHC.
Mr. McInerney is a Director, President or
Vice President of certain of the Company's
other subsidiaries.
Larry L. Bingaman 47 Vice President, Corporate Relations and 1990
Secretary (since April 1993); Vice
President, Marketing and Communications
(1990-1993) of the Company. Mr. Bingaman is
also Director, Vice President and Secretary
of certain of the Company's other
subsidiaries.
ITEM 11. EXECUTIVE COMPENSATION
- ----------------------------------
Pages 8 - 14 of the Company's Definitive Proxy Statement, dated March
20, 1997, relating to the proposed Annual Meeting of Shareholders to be held
on April 22, 1997, filed with the Commission pursuant to Regulation 14a under
the Act are incorporated by reference herein pursuant to Rule 12b-23 of the
Act and Instruction G(3) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------
Pages 4 - 5 of the Company's Definitive Proxy Statement, dated March
20, 1997, relating to the proposed Annual Meeting of Shareholders to be held
on April 22, 1997, filed with the Commission pursuant to Regulation 14a under
the Act, are incorporated by reference herein pursuant to Rule 12b-23 of the
Act and Instruction G(3) to Form 10-K.
- 11 -
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ----------------------------------------------------------
The registrant has nothing to report for this item.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------
a) The following documents are filed as part of this report:
Page in
Annual Report*
-------------
(1) Consolidated Statements of Income for
the three years ended December 31,
1996 15
Consolidated Balance Sheets at
December 31, 1996 and 1996 16 - 17
Consolidated Statements of Cash Flows
for the three years ended
December 31, 1996 18
Consolidated Statements of
Shareholders' Equity for the three
years ended December 31, 1996 19
Notes to Consolidated Financial
Statements 20 - 27
Report of Independent Accountants 28
Selected Financial Data Inside Front Cover
Supplemental Financial Information 30 - 31
* Incorporated by reference from the indicated pages of the
1996 Annual Report to Shareholders.
______________________
(b) Reports on Form 8-K.
The Company did not file a report on Form 8-K for the
fourth quarter of the year ended December 31, 1996.
(c) Exhibits:
Each document referred to below is incorporated by
reference to the files of the Commission, unless the
reference is preceded by an asterisk (*). Each management
contract, compensatory plan or arrangement required to be
filed as an exhibit hereto is preceded by a double asterisk
(**).
- 12 -
3(a) Restated Certificate of Incorporation of
Aquarion, as amended.(1)
3(b) By-laws of Aquarion, as amended. (4)
4(a) Rights Agreement between Aquarion and The
ChaseMellon Shareholder Services, L.L.C. setting
forth description of Preferred Stock Purchase
Rights distributed to holders of Aquarion Common
Stock.(11)
10(a) First Mortgage Indenture of BHC dated June 1,
1924.(2)
10(b) Seventeenth Supplemental Mortgage of BHC dated
as September 1, 1960.(2)
10(c) Twentieth Supplemental Mortgage of BHC dated as
of November 1, 1968.(1)
10(d) Loan and Trust Agreement of Timco as of
November 1, 1984.(1)
10(e) Note Agreement of BHC dated January 24, 1991.(10)
10(f) Note Agreement of Aquarion dated as of May 19, 1992.(5)
10(g) Aquarion Long-Term Incentive Plan.(1)
10(h) Joint Venture Agreement between John J.
Brennan, Jr., William A. Brennan and Main Street
South Corporation dated February 23, 1979.(3)
10(i) Joint Venture Agreement amendment between John
J. Brennan, Jr., William A. Brennan and Main
Street South Corporation dated January 1, 1994.(10)
**10(j) Employment Agreement between Aquarion and
James S. McInerney, dated June 1, 1990.(4)
**10(k) Employment Agreement between Aquarion and
Janet M. Hansen dated November 1, 1992.(5)
**10(l) Employment Agreement between Aquarion and
Jack E. McGregor dated October 1, 1995.(10)
**10(m) Form of Stock Option Award Agreement for options
granted pursuant to Long-Term Incentive Plan.(9)
**10(n) Employment Agreement between Aquarion and
Larry L. Bingaman dated June 11, 1990.(10)
10(o) Agreement for Construction Management Services
dated April 18, 1991 between BHC and Gilbane
Building Company.(1)
- 13 -
**10(p) Employment Agreement between Aquarion and
Richard K. Schmidt dated October 1, 1995.(10)
**10(q) Employment Agreement between Industrial and
Environmental Analysts, Inc. and David C. Houle
dated October 1, 1995.(10)
10(r) Loan Agreement of BHC dated as of June 1,
1990.(4)
10(s) Revolving Credit Agreement of Aquarion dated May 14,
1993.(6)
10(t) Revolving Credit Agreement amendment dated May 12,
1994.(9)
10(u) Loan Agreement of BHC dated as of June 1, 1993. (6)
10(v) Loan Agreement of BHC dated September 1,
1993.(7)
10(w) Loan Agreement of BHC dated December 1, 1993.(8)
10(x) Note Agreement of Aquarion dated January 4,
1994.(8)
**10(y) Aquarion Stock Incentive Plan.(8)
10(z) Loan Agreement of BHC dated April 1, 1995(10)
10(aa) Agreement between Aquarion and SRK, Inc. dated
January 31, 1996.(10)
*10(bb) Loan Agreement of BHC dated September 1, 1996
*13(a) Annual Report to Shareholders for the year ended
December 31, 1996.
*21(a) Subsidiaries of Aquarion
*23(a) Consent of Independent Accountants
*27(a) Financial Data Schedule
____________________
(1) Filed as part of Aquarion's Form 8 Amendment to its
Form 10-Q for the quarter ended September 30, 1991, filed February 19,
1992.
(2) Filed as an Exhibit to BHC's Registration Statement on
Form S-1, File Number 2-23434, dated April 26, 1965.
(3) Filed as part of the Amendment No. 1 to the Company's Registration
Statement as Form S-7, File No. 2-74305, dated November 5, 1981.
- 14 -
(4) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1991.
(5) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1992.
(6) Filed as part of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993.
(7) Filed as part of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
(8) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1993.
(9) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
(10) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
(11) Filed as part of the Company's Registration Statement on
Form 8-A, file #1-8060, dated June 26, 1996.
- 15 -
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Aquarion Company
- ----------------
(Registrant)
By /S/JANET M. HANSEN March 25, 1997
Janet M. Hansen
------------------------------------------
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /S/GEORGE W. EDWARDS, JR. March 25, 1997
-------------------------------------
George W. Edwards, Jr.
Chairman of the Board of Directors
and Director
By March 25, 1997
-------------------------------------
William S. Warner
Vice Chairman of the Board of Directors
and Director
By /S/RICHARD K. SCHMIDT March 25, 1997
-------------------------------------
Richard K. Schmidt
President, Chief Executive Officer
and Director
By /S/JACK E. MCGREGOR March 25, 1997
-------------------------------------
Jack E. McGregor
Director
By /S/GEOFFREY ETHERINGTON March 25, 1997
-------------------------------------
Geoffrey Etherington
Director
- 16 -
By /S/JANET D. GREENWOOD March 25, 1997
-------------------------------------
Janet D. Greenwood
Director
By /S/DONALD M. HALSTED, JR. March 25, 1997
-------------------------------------
Donald M. Halsted, Jr.
Director
By March 25, 1997
-------------------------------------
Edgar G. Hotard
Director
By /S/EUGENE D. JONES March 25, 1997
-------------------------------------
Eugene D. Jones
Director
By March 25, 1997
-------------------------------------
G. Jackson Ratcliffe
Director
By /S/JOHN A. URQUHART March 25, 1997
-------------------------------------
John A. Urquhart
Director
- 17 -
EXHIBIT 21(a)
--------------
Subsidiaries of the Registrant
------------------------------
- - BHC Company, incorporated in the State of Connecticut
- - Sea Cliff Water Company, incorporated in the State of New York
- - Main Street South Corporation, incorporated in the State of Connecticut
- - Timco, Inc., incorporated in the State of Connecticut
- - Hydrocorp, Inc., incorporated in the State of Delaware
- - Industrial and Environmental Analysts, Inc., incorporated in the State of
Vermont
- - Industrial and Environmental Analysts, Inc., Massachusetts, incorporated in
the State of Massachusetts
- - Industrial and Environmental Analysts, Inc., New Jersey, incorporated in
the State of Delaware
- - Industrial and Environmental Analysts, Inc., Illinois, incorporated in the
State of Delaware
- - Industrial and Environmental Analysts, Inc., Florida, incorporated in the
State of Florida
- - THC Acquisition Corp., incorporated in the State of Delaware
- - Aquarion Management Services, Inc., incorporated in the State of Delaware
- 18 -
EXHIBIT 23(a)
-------------
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 33-52973) and in the Registration Statement on
Form S-8 (No. 33-53473) of Aquarion Company of our report dated February 18,
1997, appearing on Page 28 of the Annual Report to Shareholders, which is
incorporated by reference in this Annual Report on Form 10-K.
Price Waterhouse LLP
New York, New York
March 25, 1997
- 19 -