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.
Effective at the close of business on December 31, 1996, 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.
On February 19, 1997, the Company announced that it had entered into an
agreement in principle to sell the operations of Industrial and Environmental
Analysts, Inc. (IEA), its environmental testing laboratory business for
approximately $10,000,000. The sale is subject to the execution of a
definitive agreement and other conditions. Accordingly, IEA's results have
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
$0.61 per share from the anticipated 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 and are shown
separately on the consolidated statements of income. Revenues from discontinued
operations were approximately $22,800,000 in 1996, $23,700,000 in 1995 and
$24,300,000 in 1994, respectively. (Note 2)
Capital resources and liquidity
Capital expenditures. The Company invested $38,600,000 in property, plant and
equipment in 1996, compared with $41,600,000 in 1995 and $19,800,000 in 1994.
Aquarion's utility subsidiaries, BHC and Sea Cliff Water Company (SCWC)
(collectively, the Utilities) accounted for approximately 93 percent of plant
additions during the three-year period. Management estimates that capital
expenditures will total $28,200,000 in 1997, of which approximately
$27,100,000 will be for water utility construction programs.
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, engineering for the
construction of filtration facilities at BHC's Hemlocks Reservoir commenced
during 1992, and construction
-9-
began in October 1994. The total expected cost of construction through
completion in 1997 will approximate $48,500,000. Expenditures totaling
$38,400,000 have been made for the Hemlocks filtration project through
December 31, 1996. BHC's Litchfield Division's filtration facilities were
completed and placed in service in 1996 at a total project cost of $8,700,000.
Financing activities. The Company's capital expenditures have historically
been financed from several sources including internally generated funds, rate
relief, proceeds from debt financings, sale of common stock, and short-term
borrowings under the Company's revolving credit agreements.
The percentage of capital expenditures financed by net cash from
operating activities was 61 percent, 54 percent and 100 percent for the years
ended December 31, 1996, 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 $3,449,000 from issuances of Common Stock
under its Dividend Reinvestment and Common Stock Purchase Plan (the Plan) in
1996 versus $2,696,000 and $2,902,000 in 1995 and 1994, respectively. The
Utilities also received $2,626,000 from advances and contributions in aid of
construction from developers and customers in 1996.
During 1996, BHC's Eastern and Western divisions received approval from
the Connecticut Department of Public Utility Control (DPUC) for water service
rate increases as well as BHC's Eastern division's quarterly Construction-
Work-in-Progress (CWIP) rate surcharges for SDWA projects. (Note 3)
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 Connecticut
Development Authority of an equal amount of tax-exempt Water Facilities
Revenue Bonds. These bonds bear interest at 6.0 percent and have a 40-year
maturity. (Note 7)
Aquarion has revolving credit agreements that provide $50,000,000 of
short-term credit availability on a committed basis. (Note 8) The Company
borrows on a short-term basis and periodically refinances through long-term
debt or equity issues.
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
125 percent and 85 percent in 1996 and 1995, respectively, and 48 percent as
a percentage of net cash provided by operating activities in 1996 and 1995,
respectively.
Future financing requirements. As in the past, the Company's ability to
finance future capital expenditures depends on rate relief, in addition to the
Company's general financial policies regarding capitalization, market
conditions and other economic factors. Rate relief has an impact on cash flow
since sufficient operating cash flows are necessary to maintain debt coverage
ratios to allow for the issuance of
-10-
additional debt securities and to provide a reasonable return in the form of
dividends to Aquarion's shareholders.
The Company's ability to obtain funding from external sources will be
affected by the terms of certain of its existing obligations. Under BHC's
First Mortgage Indenture (BHC Indenture), approximately $5,000,000 of First
Mortgage Bonds were outstanding at December 31, 1996. 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 Aquarion 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 its 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 2,600 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 have been in a utility's rate base
must be reinvested in 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. (Note 4)
Other.
Inflation. Inflation, as measured by the Consumer Price Index, increased
3.3 percent, 2.5 percent and 2.7 percent in 1996, 1995 and 1994, respectively,
and primarily affects the Utilities. The regulatory authorities allow the
recovery of depreciation through revenues solely on the basis of the
historical cost of plant. The replacement cost of utility plant would be
significantly higher than the historical cost. While the regulatory
authorities give no recognition in the 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
1996 compared with 1995
Overview. The Company's consolidated net income for 1996 was $9,005,000
compared with net income of $12,886,000 in 1995. Net income per share was
$1.30 in 1996 based on a weighted average of 6,931,388 common shares
outstanding, compared with $1.90 in 1995 based on a weighted average of
6,794,400 common shares outstanding. For the year ended December 31,1996, the
Company recorded an after tax loss of $4,255,000 from the anticipated sale of
IEA. (Note 2) For the year ended December 31, 1996, net income from
continuing operations was
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$13,840,000, or $2.00 per share, versus $13,296,000, or $1.96 per share in
1995. Operating results in 1996 reflect the Utilities improved operating
efficiencies as well as a lower tax obligation and improved receivable
collections, partially offset by lower property sales in 1996. Property sales
in 1995 include an after-tax gain of approximately $1,100,000, or $0.16 cents
per share, as a result of the property-exchange agreement in connection with
the acquisition of NCWC and RWSC on October 12, 1995.(Note 5).
Operating revenues. Consolidated operating revenues of $94,804,000 in 1996
were $235,000 higher than 1995. Revenues from the Utilities increased
$3,020,000, due to additional CWIP rate surcharge revenues, BHC's Eastern and
Western divisions' rate increases that became effective in 1996 and the
acquisition of SCWC, partially offset by a wetter than normal year in 1996.
Timber processing experienced an increase in revenues during 1996 of
$1,461,000 primarily due to increased lumber sales volume. Revenues from
property sales decreased $4,259,000 due to the sale of NCWC's reservoir in
1995 and lower volume in the land sales program in 1996, partially offset by
the revenues recognized from the condemnation of the former SWC headquarters
in 1996. (Note 4)
Operating expenses. Operating expenses for 1996 were $24,017,000, an increase
of $743,000 over 1995. Timber processing experienced increased operating
expenses of $1,334,000 compared with 1995 primarily due to
higher costs associated with the increased sales volume. The Utilities
experienced an increase in operating expenses of $614,000, principally due to
additional expenses associated with water treatment and distribution.
Operating expenses from property sales decreased by $1,347,000 due to the
decreased activity in the land sales program.
General & administrative expenses. General and administrative expenses
totaled $16,196,000, a $2,759,000 decrease over 1995. This decrease reflects
the improved operating efficiencies at the Utilities, reduced bad debt expense
in 1996 and the non-recurring retirement benefits for the former chairman in
1995, partially offset by increased costs for health insurance, employee
benefits and other administrative expenses in 1996 and a non-recurring
insurance rebate in 1995.
Depreciation expense. Depreciation expense in 1996 was $954,000 higher than
1995, which was largely the result of general plant additions at the Utilities
and a higher composite annual depreciation rate for BHC's eastern division
effective August 1, 1996.
Interest expense. Interest expense for 1996 was $842,000 higher than 1995 due
to the interest expense associated with the May 1995 and October 1996 debt
issuances by BHC of $30,000,000 each and higher average short-term
borrowings, primarily associated with filtration projects.
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Taxes other than income taxes. Taxes other than income taxes were $760,000
higher than 1995. Increased property taxes of $468,000 as well as higher
payroll and gross earnings taxes of $292,000 in 1996 account for this
increase.
Income taxes. Income taxes for 1996 were $598,000 lower than 1995, primarily
due to lower state business taxes and a lower federal income tax obligation.
Significant changes in balance sheet accounts. Net property, plant and
equipment increased by $27,634,000, due primarily to construction at the
filtration plants and general utility plant additions.
The increase in other current assets of $16,838,000 was primarily the
result of the amount due the Company from the anticipated sale of IEA. (Note
2)
The decrease of $9,293,000 in goodwill was largely attributable to the
treatment of IEA as a discontinued operation.
Long-term debt increased by $16,496,000 which was primarily the result
of BHC's $30,000,000 debt issue in 1996, partially offset by the transfer of
Aquarion's $15,000,000 note, due June 1, 1997, to current maturities of long-
term debt.
1995 compared with 1994
Overview. 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. Revenues from electricity cogeneration were $3,000,000 in
1994.
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.
Operating revenues. Consolidated operating revenues of $94,569,000 in 1995
were $3,122,000 lower than 1994. Timber processing experienced decreased
revenues during 1995 of $11,986,000 primarily due to the termination of the
rate order with PSNH and corresponding loss of cogeneration revenues.
Revenues from the Utilities increased $5,428,000, principally due to the
addition of
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NCWC and RWSC's revenues, the CWIP rate surcharge and increased consumption
due to a hot, dry summer in 1995. Revenues from property sales increased
$3,480,000 due to the sale of NCWC's reservoir and the Company's continued
commitment to sell surplus land.
Operating expenses. Operating expenses for 1995 were $23,274,000, a decrease
of $5,358,000 over 1994. Timber processing had lower operating expenses of
$7,549,000 compared with 1994, primarily due to the costs associated with the
termination of the rate order in 1994. Operating expenses from property sales
increased by $1,205,000 due to the increased activity in the land sales
program. The Utilities experienced an increase in operating expenses of
$1,216,000, principally due to the additional expenses associated with NCWC
and RWSC and higher expenses associated with purchased water, fuel purchases
and maintenance.
General & administrative expenses. General and administrative expenses
totaled $18,955,000, a $591,000 increase over 1994. This increase is
primarily the result of increased expenses of $2,321,000 for the Utilities due
to the acquisition of NCWC and RWSC, partially offset by a $1,900,000 charge
in 1994 related to the investment in the Partnership.
Depreciation expense. Depreciation expense in 1995 was $271,000 higher than
1994. This increase is attributable to the additional depreciation from NCWC
and RWSC, partially offset by the retirement of the cogeneration plant at the
Timco facility in 1994.
Interest expense. Interest expense for 1995 was $999,000 higher then 1994 due
to the interest expense associated with the 1995 debt issuance by BHC of
$30,000,000 and higher short-term borrowing rates.
Taxes other than income taxes. Taxes other than income taxes were $149,000
higher than 1994. Increased payroll and gross earnings taxes of $441,000
offset by lower property taxes of $292,000 in 1995 account for this increase.
Income taxes. Income taxes for 1995 were $289,000 lower than 1994, primarily
due to the non-recurring charge recorded in 1994 related to the Partnership.
Seasonality. The Company's operating results are subject to weather
variations and seasonal fluctuations, due to an increased demand for water in
the warmer months. (See Supplemental Financial Information to Consolidated
Financial Statements for selected quarterly data for 1996 and 1995.)
In addition to the historical information contained herein, this report
contains a number of "forward-looking statements," within the meaning of the
Securities and Exchange Act of 1934. Such statements address future events
and conditions concerning the adequacy of water supply and utility plant,
capital expenditures, earnings on assets, liquidity and capital resources and
accounting matters. Actual results in each case could differ materially from
those projected in such statements.
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Aquarion Company and Subsidiaries
Consolidated Statements of Income
In thousands, except share data
Year ended December 31 1996 1995 1994
- ------------------------------- ---- ---- ----
Operating revenues $ 94,804 $ 94,569 $ 97,691
--------- --------- ---------
Costs and expenses:
Operating 24,017 23,274 28,632
General and administrative 16,196 18,955 18,364
Depreciation 11,077 10,123 9,852
Interest expense 9,311 8,469 7,470
Taxes other than income 12,202 11,442 11,293
--------- --------- ---------
Total costs and expenses 72,803 72,263 75,611
--------- --------- ---------
22,001 22,306 22,080
Allowance for funds used during
construction 1,123 872 569
--------- --------- --------
Income before income taxes 23,124 23,178 22,649
Income taxes 9,284 9,882 10,171
--------- --------- --------
Net income before discontinued
operations 13,840 13,296 12,478
Discontinued operation:
Loss from discontinued operations,
less applicable income tax benefit/
(expense) of $66, $(19) and $(100) (580) (410) (257)
Loss on disposal of discontinued
operations, less applicable income
tax benefit of $5,695 (4,255) - -
--------- --------- ---------
Net income $ 9,005 $ 12,886 $ 12,221
========= ========= =========
Earnings (loss) per share:
Per share from continuing operations $ 2.00 $ 1.96 $ 1.91
Per share from discontinued
operations (0.09) (0.06) (0.04)
Per share from disposal of
discontinued operations (0.61) - -
--------- --------- ---------
Per Share $ 1.30 $ 1.90 $ 1.87
========= ========= =========
Weighted average common shares
outstanding 6,931,388 6,794,400 6,532,627
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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Aquarion Company and Subsidiaries
Consolidated Balance Sheets
Assets
In thousands
December 31, 1996 1995
- ------------------------------------- ---- ----
Property, plant and equipment $454,716 $432,480
Less: accumulated depreciation 131,328 136,726
-------- --------
Net property, plant and equipment 323,388 295,754
-------- --------
Current assets:
Cash and cash equivalents 470 635
-------- --------
Accounts receivable 10,796 15,859
Less: allowance for doubtful accounts 1,253 2,916
-------- --------
9,543 12,943
Accrued revenues 9,893 9,108
Inventories 2,883 4,105
Prepaid expenses 8,732 7,737
Other current assets 18,101 1,263
-------- --------
Total current assets 49,622 35,791
-------- --------
Goodwill 977 10,270
Recoverable income taxes 44,938 44,922
Other assets 30,167 27,243
-------- --------
$449,092 $413,980
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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Aquarion Company and Subsidiaries
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
In thousands, except share data
December 31, 1996 1995
- ------------------------------------ ---- ----
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 7,080,355 shares in 1996 and 6,936,574
shares in 1995 7,080 6,937
Capital in excess of stated value 101,360 98,213
Retained earnings 16,324 18,583
Less: minimum pension liability adjustment 104 -
Less: treasury stock, at cost 1,709 2,231
-------- --------
Total shareholders' equity 122,951 121,502
-------- --------
Redeemable preferred stock of subsidiaries - 285
-------- --------
Long-term debt and other obligations 148,487 131,991
-------- --------
Current liabilities:
Short-term borrowings, unsecured 8,300 11,600
Current maturities of long-term debt 15,000 62
Accounts payable and accrued liabilities 15,654 15,221
Dividends payable 2,843 2,776
Accrued interest 2,484 2,023
Taxes other than income taxes 1,927 1,713
Income taxes 1,555 1,805
-------- --------
Total current liabilities 47,763 35,200
-------- --------
Advances for construction 28,017 26,264
Contributions in aid of construction 24,354 23,959
Deferred land sale gains 471 620
Accrued postretirement benefit cost 4,125 3,065
Recoverable income taxes 6,346 5,944
Deferred income taxes 66,578 65,150
Commitments & contingencies (Note 16) - -
-------- --------
$449,092 $413,980
======== ========
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
In thousands,
Year ended December 31 1996 1995 1994
- --------------------------------- ---- ---- ----
Cash flows from operating activities:
Net income $ 9,005 $12,886 $12,221
Adjustments reconciling net income to net cash
provided by operating activities
Depreciation and amortization 13,797 12,979 12,542
Proceeds from sale of surplus land, net of gains 778 2,798 1,372
Loss on disposal of segment 4,255 - -
Gain on disposition of property - (2,033) -
Provision for losses on accounts receivable (29) 842 1,067
Deferred tax provision 45 1,261 662
Allowance for funds used during construction (1,123) (872) (569)
Change in assets and liabilities (Note 15) (3,239) (5,524) 6,431
-------- -------- -------
Net cash provided by operating activities 23,489 22,337 33,726
-------- -------- -------
Cash flows from investing activities:
Capital additions, excluding an allowance for
funds used during construction (38,600) (41,646) (19,766)
Acquisition of business, less cash acquired (2,598) - -
Advances and contributions in aid of
construction 2,626 3,054 1,985
Refunds on advances for construction (933) (288) (465)
Other investing activities (1,202) (25) (178)
-------- -------- --------
Net cash used in investing activities (40,707) (38,905) (18,424)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 31,518 20,588 -
Proceeds from the issuance of common stock, net 3,290 2,644 2,836
Net (repayments) borrowings of short-term debt (5,000) 11,600 (5,500)
Common dividends paid (11,198) (10,830) (10,554)
Principal and premium payments on long-term debt (52) (7,682) (68)
Debt issuance costs (1,220) (407) (726)
Payments for redemption of preferred stock (285) (45) (45)
-------- -------- --------
Net cash provided by (used in) financing
activities 17,053 15,868 (14,057)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents (165) (700) 1,245
Cash and cash equivalents, beginning of year 635 1,335 90
-------- -------- --------
Cash and cash equivalents, end of year $ 470 $ 635 $ 1,335
======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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Aquarion Company and Subsidiaries
Consolidated Statements of Shareholders' Equity
Capital Minimum Total
Common Stock in excess pension Treasury Stock share-
---------------- ---------------
In thousands, except share Number Stated of stated Retained liability Number holders
- --------------------------
data of Shares value value earnings adjustment of Shares Amount equity
- --- --------- ----- ----- -------- ---------- --------- ------ ------
Year ended December 31, 1994
Balance, December 31, 1993 6,564,533 $6,565 $91,441 $15,015 $ - 92,291 $(2,540) $110,481
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(1) - - - - - (7,299) 202 202
--------- ----- ------- ------- ------ ------ ------ -------
Balance, December 31, 1994 6,690,013 6,690 94,152 16,628 - 84,992 (2,338) 115,132
--------- ----- ------ ------- ------ ------ ------ -------
Year ended December 31, 1995
Net income - - - 12,886 - - - 12,886
Shares issued for Acquisi-
tion of NCWC & RWSC 123,053 123 1,540 - - - - 1,663
Dividends on common stock - - - (10,931) - - - (10,931)
Dividend reinvestment plan 123,508 124 2,521 - - - - 2,645
Treasury stock transactions - - - - - (3,701) 107 107
--------- ----- ------ ------- ------ ------ ------ -------
Balance, December 31, 1995 6,936,574 6,937 98,213 18,583 - 81,291 (2,231) 121,502
--------- ----- ------ ------- ------ ------ ------ -------
Year ended December 31, 1996
Net income - - - 9,005 - - - 9,005
Dividends on common stock - - - (11,264) - - - (11,264)
Dividend reinvestment plan 143,781 143 3,147 - - - - 3,290
Minimum Pension liability
adjustment (Note 11) - - - - (104) - - (104)
Treasury stock transactions(1) - - - - - (19,793) 522 522
--------- ------ -------- ------- ----- ------- ------- --------
Balance, December 31, 1996 7,080,355 $7,080 $101,360 $16,324 $(104) 61,498 $(1,709) $122,951
========= ====== ======== ======= ===== ======= ======= ========
(1) Includes exercise of stock options.
The accompanying notes are an integral part of these consolidated financial
statements.
-19-
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 as well
as 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 in
Connecticut and Long Island, New York, 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 SCWC, is
among the 10 largest investor-owned water companies in the nation. The
Utilities are regulated by several Connecticut and New York agencies,
including the Connecticut Department of Public Utility Control (DPUC) and the
New York Public Service Commission (PSC). Aquarion and its subsidiaries
(collectively, the Company) are also engaged in nonutility activities. The
Company is engaged in the utility management service business through Aquarion
Management Services, Inc. (AMS), and owns a timber processing business,
Timco, Inc. (Timco) and 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 regulatory authorities. 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. All
significant intercompany accounts and transactions have been eliminated.
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 employee benefits. BHC also capitalizes 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 (CWIP) water service rate surcharge.
Modifications and improvements to units of property are capitalized.
Expenditures for repairs and maintenance are charged to expense as incurred.
At the time depreciable utility property is retired or disposed of, the
book cost together with the related costs of removal, less salvage, is charged
to the reserve for depreciation in accordance with the Uniform System of
Accounts prescribed by the regulatory authorities. 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 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 8 to 81
years for utility plant and equipment and 3 to 20 years for nonutility plant
and equipment. For income tax purposes, the Company uses various accelerated
tax lives and rates as allowed under the Internal Revenue Code.
Cash equivalents. 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 a non-cash credit to
income with a corresponding charge to utility plant which represents the cost
of borrowed funds and a return on equity funds utilized to fund plant under
construction. BHC records AFUDC to the extent permitted by regulatory
authorities.
Construction-work-in-progress surcharge. The 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.
Revenue recognition. The Utilities accrue revenue for the estimated amount of
water consumed but not billed at the end of each period. Timber processing
revenues are recognized as the related timber products are shipped. Revenues
from sales of real estate are recognized when the transaction is consummated
and title has passed.
Inventories. Inventories are recorded at the lower of cost or market values,
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. Other assets consist primarily of prepaid taxes, deferred
financing charges, rate case and other expenses, as well as certain items to
be amortized, subject to regulatory approval, over their anticipated period of
recovery.
Deferred rate case expenses are amortized over periods allowed by the
regulatory authority, generally one to three years. Deferred financing
charges are amortized over the lives of the related debt issues, primarily 30
to 40 years.
-20-
Accounts payable. Accounts payable at December 31, 1996 included
liabilities in the amount of $2,263,000 for checks issued but not yet
presented for collection, net of the related bank balance.
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) 1996 1995
-------------- ---- ----
Fair Value $132,982 $122,212
Carrying Value 148,487 131,991
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 period as water revenues are earned from those new customers. Any
remaining unrefunded balances are reclassified to contributions in aid of
construction for BHC and Utility Plant for SCWC in the consolidated balance
sheets and are no longer refundable.
Income taxes. The Company and its eligible subsidiaries file a consolidated
federal income tax return. Federal income taxes are deferred under the
liability method in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the liability
method, deferred income taxes are provided for all differences between
financial statement and tax bases of assets and liabilities. Additional
deferred income taxes and offsetting regulatory assets or liabilities are
recorded to recognize that income taxes will be recoverable or refundable
through future revenues.
Investment tax credits arising from property additions are deferred and
amortized over the estimated service lives of the related properties (Note 6).
Accounting for long-lived assets. The Company has adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," in 1996. The statement requires that long-lived assets
and certain identifiable intangible assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The effect of the adoption of this standard did
not have a material impact on the Company's financial statements.
Estimates. The accompanying consolidated financial statements reflect
judgements and estimates made in the application of the above accounting
policies. Actual results may differ from these estimates.
Reclassification. Certain prior year amounts have been reclassified to
conform with the current year presentation.
Note 2 - Sale and Discontinued Operations
On February 19, 1997, the Company announced that it had entered into an
agreement in principle to sell the operations of Industrial and Environmental
Analysts, Inc. (IEA), its environmental testing laboratory business for
approximately $10,000,000. The Company anticipates the sale will take place
before the end of March 1997. The sale is subject to the execution of a
definitive agreement and other conditions. Accordingly IEA's results have
been recorded as a discontinued operation for the years ended December 31,
1996, 1995 and 1994. It is anticipated that proceeds from this transaction
will be used to reduce debt.
The Company recorded an after tax loss of $4,255,000 or $.61 per share
from the anticipated 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. Revenues from
discontinued operations were approximately $22,800,000 in 1996, $23,700,000 in
1995 and $24,300,000 in 1994, respectively.
Note 3 - Regulatory matters
Rates. On January 17, 1997, BHC's Eastern division filed an application with
the DPUC for a 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 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 received a final decision from
the DPUC, which became effective on April 25, 1996, allowing for a 5.1
percent rate 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 Stamford Water Company (SWC), New Canaan Water Company (NCWC) and
Ridgefield Water Supply Company (RWSC).
-21-
Note 4 - 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 BHC's operating expenses over various time periods
as stipulated by the DPUC.
In 1996, the Company sold approximately 32 acres of surplus land with
proceeds totaling $929,500. Total gains, including recognition of deferred
gains from prior land sales of $134,000, approximated $434,000 or
$0.06 cents per share. In addition, the Company recognized a gain of $320,000
or $0.05 cents per share from the condemnation, by the City of Stamford, of
the former headquarters of SWC.
In 1995, the Company sold approximately 90 acres of surplus land with
proceeds totaling $3,957,500. Total gains, including recognition of deferred
gains from prior land sales of $80,000, approximated $1,160,000, or
$0.17 cents per share. In addition, on October 12, 1995, BHC completed the
acquisition of NCWC and RWSC. As the result of the related property-exchange
agreement, Aquarion recorded an after-tax gain of approximately $1,100,000, or
$0.16 cents per share, in the fourth quarter of 1995.
In 1994, the Company sold approximately 43 acres of surplus land with
proceeds totaling $2,185,000. Total gains, including recognition of deferred
gains from prior land sales of $10,000, approximated $813,000 or $0.13 cents
per share. In addition, the Company recognized a gain of $283,000 or $0.04
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.
Note 5 - Acquisitions
On May 30, 1996, the Company acquired Sea Cliff Water Company, 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.
On October 12, 1995, the Company completed the acquisition of NCWC and
RWSC for 123,053 shares of Aquarion common stock with a market value of
$2,828,692 and the repayment of certain indebtedness of The New Canaan Company
(NCC) in the amount of $100,000. Immediately after the acquisition closed,
the parties completed a property exchange whereby the Monroe Environmental
Leasing Partnership (MELP) transferred to NCWC a commercial building and the
property on which it is situated, NCWC transferred a reservoir and related
property to the Second Taxing District of Norwalk (STD) and STD, in turn,
paid $2,200,000 to MELP, which also received $214,157 from Aquarion. The
property exchange resulted in net income to Aquarion of approximately
$1,100,000, or 16 cents per share in 1995. The acquisition was accounted for
as a pooling of interests, and the Company did not restate the previous year's
financial statements due to the limited impact on consolidated operating
results in 1995.
Note 6 - Income taxes
Income tax expense for the three years ended December 31, consisted of
the following:
(In thousands) 1996 1995 1994
- -------------------------------------- ---- ---- ----
Current:
Federal $1,199 $6,297 $ 7,006
State 2,234 2,343 2,603
------ ------ -------
Total current 3,433 8,640 9,609
------ ------ -------
Deferred:
Federal 277 1,542 981
State (187) (281) (319)
------ ------ -------
Total deferred 90 1,261 662
------ ------ -------
Total income tax expense $3,523 $9,901 $10,271
====== ====== =======
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) 1996 1995 1994
- ------------------------------------------- ---- ---- ----
Tax at statutory rate $4,384 $7,975 $ 7,874
Increases (reductions) in taxes resulting from:
State taxes, net of federal income taxes 1,331 1,340 1,485
Excess depreciation and basis amortization 700 683 662
Partnership investment - - 665
Bond premium costs 26 18 (455)
Investment tax credit (152) (162) (152)
Amortization of goodwill 142 141 146
Excess tax basis on disposition (2,213) - -
Other items, net (695) (94) 46
------ ------ -------
Actual income tax expense $3,523 $9,901 $10,271
====== ====== =======
Deferred tax liabilities (assets) at December 31, were comprised of the
following:
1996 1995 1994
---- ---- ----
Utility temporary differences $43,679 $43,770 $46,703
Depreciation 20,168 18,944 15,398
Investment tax credits 1,225 1,233 990
Other 1,506 1,203 945
------- ------- -------
Gross deferred tax liabilities 66,578 65,150 64,036
------- ------- -------
Contributions in aid of construction (7,934) (6,503) (6,229)
Other (4,237) (3,168) (2,813)
------- ------- -------
Gross deferred tax assets (12,171) (9,671) (9,042)
------- ------- -------
$54,407 $55,479 $54,994
======= ======= =======
-22-
Note 7 - Long-term debt
Long-term debt at December 31, consisted of the following:
(In thousands) 1996 1995
- ----------------------------------------------------- ---- ----
First mortgage bonds
Series R, 6.875%, due November 1, 1998 $ 5,000 $ 5,000
Notes payable - unsecured
7.8% senior notes due June 1, 1997 15,000 15,000
5.95% senior note due January 4, 1999 10,000 10,000
9.55% senior notes due February 1, 2021 20,000 20,000
7.25% note due June 1, 2020 (a) 7,000 7,000
5.5% note due June 1, 2028 (b) 12,000 12,000
5.6% note due June 1, 2028 (b) 10,000 10,000
5.3% note due September 1, 2028 8,980 8,980
5.8% note due March 1, 2029 (b) 7,700 7,700
6.05% note due March 1, 2029 (b) 10,000 10,000
Adjustable rate note due April 1, 2035 (d) 30,000 30,000
6.00% note due September 1, 2036 (e) 30,000 -
4.25% note due November 1, 2004 (c) 5,700 5,700
7.4%-12.5% capital lease obligations - 84
------- --------
171,380 141,464
Less: Amounts due within one year 15,000 62
Balance of note proceeds held by
trustee 7,893 9,411
-------- --------
$148,487 $131,991
======== ========
(a) BHC has the option to redeem this note at a redemption price
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, 1996, the interest rate was adjusted from 4.40 percent to 4.25
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.
(d) On February 3, 1997, BHC converted the interest rate on its
$30,000,000 unsecured note, issued in 1995 in consideration for a loan of the
proceeds from the issuance by the Connecticut Development Authority (CDA) of
an equal amount of tax-exempt Water Facilities Revenue Bonds, from a weekly
rate to a fixed rate of 6.15 percent.
(e) 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. 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. At December 31, 1996, approximately
$7,893,000 remained in this fund.
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, 1996, approximately $33,700,000
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, for each of the five years succeeding
December 31, 1996 are as follows: 1997-$15,000,000; 1998-$5,000,000; 1999-
$10,000,000; 2000-$0; 2001-$0.
Note 8 - Short-term borrowings
Annually, the Company's unsecured revolving credit agreements are
subject to renewal. The agreements provide that the Company may select among
a variety of interest rates, including a negotiated rate. The Company pays a
commitment fee of .125 of 1 percent on the average daily unused portion of
the commitment for each day during which any unused portion exists. 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. In 1996, Fleet
Bank acquired NatWest Bank, both of which were participating banks in the
agreement, leaving $20,000,000 with one bank and $10,000,000 with each of the
three remaining banks of short-term credit availability on a committed basis.
Short-term borrowings for the years ended December 31, were as follows:
1996 1995 1994
- ----------------------------------------------------- ---- ---- ----
In thousands)
Borrowings outstanding at December 31 $8,300 $11,600 $ -
Weighted average interest rate at December 31 6.06% 5.96% N/A
Maximum outstanding during the year $29,200 $12,500 $15,100
Average outstanding during the year $16,292 $7,383 $5,725
Weighted average interest rate during the year 5.51% 5.41% 4.84%
Note 9 - Redeemable preferred stock and rights
On December 1, 1996, the former Stamford Water Company redeemed all of
the outstanding shares of its $50 par value preferred stock at a price of
$50.50 per share, in addition to the double sinking fund payment, at a price
of $50.00 per share.
The Company has reserved 100,000 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, 1/100th of a
share of Series B Junior Participating Preferred Stock, no par value (Series
B Preferred Stock), at $120.00 per 1/100th of a share.
-23-
Each share of Series B Preferred Stock, if issued, would have dividend,
voting and liquidation rights which are at least 100 times the equivalent
rights of one share of the common stock. The rights would become exercisable
only if a person or group acquires 15 percent or more of the outstanding
common stock, or if a person or group announces or commences a tender or
exchange offer for 15 percent or more of the common stock. In the event that
any person or group of affiliated or associated persons becomes the holder of
a 15 percent or more position, each holder of a right, other than rights
beneficially owned by the 15 percent holder, will thereafter have the right
to receive upon exercise of a right at the then current exercise price of the
right, that number of shares of Common Stock having a market value of two
times the exercise price of the right. If, after a person or group has
acquired 15 percent or more of the outstanding Common Stock, the Company were
to be acquired in a merger or other business combination transaction, each
right would entitle its holder (other than a 15 percent or greater
shareholder) 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.
The Company may redeem the rights at $.01 per right at any time before
a 15 percent position has been acquired. Until such time as these rights
become exercisable, they will have no dilutive effect on the Company's
earnings.
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;
Utility management services--nonregulated water-related services;
Timber processing--processing, marketing and distribution of lumber
products, and prior to November 1994, 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) 1996 1995 1994
- -------------------------------------- --------- --------- --------
Operating Revenues:
Public Water Supply $ 81,508 $ 78,488 $ 73,060
Utility management services 570 557 601
Timber processing 10,785 9,324 21,310
Real Estate 1,941 6,200 2,720
-------- -------- --------
Total operating revenues $ 94,804 $ 94,569 $ 97,691
======== ======== ========
Operating income:
Public water supply $29,485 $ 26,895 $ 25,862
Utility management services (219) (92) (253)
Timber processing 968 945 5,015
Real estate 1,420 3,938 1,647
------- ------- -------
Industry segment operating income 31,654 31,686 32,271
Other expenses, net (1) (322) (888) (2,694)
Interest expense (9,311) (8,469) (7,470)
Allowance for funds used during
construction 1,123 872 569
Subsidiary preferred dividends (20) (23) (27)
------- ------- -------
Income before income taxes $23,124 $23,178 $22,649
======= ======= =======
(1) Includes acquisition costs of $573,000 in 1995, and a Partnership
charge of $1,900,000 in 1994.
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.
(In thousands) 1996 1995 1994
- ------------------------------- ------- ------- -------
Identifiable assets:
Public water supply $415,045 $372,244 $331,423
Environmental laboratories and
utility management services (1) 813 21,505 26,751
Timber processing 6,773 6,585 4,469
Real estate 4,451 4,509 4,587
Corporate 22,010 9,137 3,640
-------- -------- --------
Total identifiable assets $449,092 $413,980 $370,870
======== ======== ========
Capital expenditures:
Public water supply $ 37,185 $ 38,600 $ 17,739
Environmental laboratories and
utility management services 749 1,719 1,525
Timber processing 666 1,327 502
Real estate - - 123
-------- -------- --------
Total capital expenditures $ 38,600 $ 41,646 $ 19,889
======== ======== ========
Depreciation expense:
Public water supply $ 10,668 $ 9,757 $ 9,139
Utility management services 9 14 31
Timber processing 389 341 671
Real estate 11 11 11
-------- -------- --------
Total depreciation expense $ 11,077 $ 10,123 $ 9,852
======== ======== ========
(1) 1996 does not include Environmental laboratories.
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.
-24-
Note 11 - Employee benefit plans
Retirement plans - The Company and certain of its subsidiaries have a
noncontributory defined benefit pension plan covering qualified employees.
In general, Aquarion's policy is to fund pension costs accrued. The Company
also has a supplemental executive retirement plan (SERP) and a directors'
retirement plan. 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) 1996 1995
- ------------------------------------------ ------- -------
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of $19,084
in 1996 and $19,385 in 1995 $ 20,028 $ 20,463
======== ========
Projected benefit obligation $(23,651) $(24,375)
Plan assets at fair value 41,407 37,973
-------- --------
Plan assets in excess of projected
benefit obligation 17,756 13,598
Unrecognized prior service cost 581 646
Unrecognized net asset existing at
January 1, 1986 (2,129) (2,587)
Unrecognized net gain from past
experience (8,300) (4,993)
-------- --------
Prepaid pension cost $ 7,908 $ 6,664
======== ========
The Company's SERP and directors' retirement plan are unfunded defined
benefit plans. The actuarial present value of benefit obligations and accrued
pension costs related to the two plans totaled $2,248,000 and $1,935,000 at
December 31, 1996 and 1995, respectively. The provisions of SFAS No. 87,
"Employees Accounting for Pensions" require recognition in the balance sheet of
an additional minimum liability and related intangible asset for pension plans
with accumulated benefit obligations in excess of plan assets. At
December 31, 1996, the liability exceeded the unrecognized prior service cost,
resulting in a minimum liability, net of taxes of $104,000, recorded as a
reduction of the company's equity. At December 31, 1995, the additional
pension liability is offset by an intangible asset, not to exceed prior
service costs of the two plans, of $650,000.
Net pension credit for all pension plans for the years ended December
31, included the following components:
(In thousands) 1996 1995 1994
- -------------------------------------------- ------ ------ ------
Service cost - benefits earned during
the period $ 839 $ 640 $ 804
Interest cost on projected benefit
obligation 1,832 1,703 1,574
Actual return on plan assets (4,661) (7,601) 675
Net amortization and deferral 1,097 4,588 (3,966)
Non-recurring charge for Ad Hoc
benefit increase - 554 -
------ ------ ------
Net pension credit $ (893) $ (116) $ (913)
====== ====== ======
The weighted average discount rate used to measure the projected
benefit obligation was 7.50, 7.00 and 8.25 percent for 1996, 1995 and 1994,
respectively. The expected long-term rate of return on assets was 8.6
percent for 1996 and 8.7 percent for 1995 and 1994. The weighted average
rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation was 5.0 percent
in 1996 and 1995 and 5.9 percent in 1994. The Plan invests in publicly
traded stocks and bonds.
Postretirement health care benefits. Aquarion and the Utilities provide
health benefits for substantially all retired employees and life insurance
for a small group of retired individuals. Post retirement health benefits are
not provided to employees hired after July 1, 1996. Only those employees
hired prior to July 1, 1996 who remain until retirement age are eligible.
Effective October 1, 1995, the Company entered into an agreement with a new
health care provider to administer a preferred provider organization (PPO)
plan. Prior to that time, several health care plans were offered with the
largest plan paying a stated percentage of covered expenses after a
deductible was met. Both active and retired employees contribute a portion
of the cost of medical benefits. The Company is funding its postretirement
health care benefits through contributions to a Voluntary Employee
Beneficiary Association Trust (VEBA). The Company's tax deductible
contribution was $423,000 and $462,000 for 1996 and 1995, respectively.
The net periodic postretirement benefit cost for the years ended
December 31, was as follows:
(In thousands) 1996 1995 1994
- --------------------------------------- ------ ------ -------
Service cost-benefits earned
during the period $ 493 $ 365 $ 420
Interest cost on benefit
obligation 954 932 890
Actual return on plan assets (45) (19) -
Net amortization and
deferral 548 531 524
------ ------ ------
Net periodic postretirement
benefit cost $1,950 $1,809 $1,834
====== ====== ======
Expenses recognized for the years ended December 31, 1996, 1995 and
1994 amounted to $1,848,000, $1,679,000 and $1,743,000, respectively. The
remaining cost has been recorded as a regulatory asset. Approval for
recovery of these costs was received from the DPUC in BHC's Eastern
division's rate decision effective August 1, 1993 and BHC's Western
division's rate decision effective April 25, 1996.
-25-
The combined funded status and the related accrual for postretirement
benefits other than pensions as of December 31, 1996 and 1995, were as
follows:
(In thousands) 1996 1995
- ---------------------------------------------------- ------ ------
Accumulated postretirement benefit
obligation:
Retirees $ 6,208 $ 6,526
Active plan participants eligible for
retirement 2,825 2,836
Other active participants 4,748 5,628
------- -------
Net obligations 13,781 14,990
Plan assets at fair value 1,258 836
------- -------
Accumulated excess post-retirement obligation
over plan assets (12,523) (14,154)
Unrecognized net obligation existing at January 1,
1993 8,377 8,900
Unrecognized net (gain) or loss from past experience (205) 1,943
Unrecognized prior service cost 226 246
------- -------
Accrued postretirement benefit cost $(4,125) $(3,065)
======= =======
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1996, 1995 and 1994 was 7.5
percent, 7.0 percent and 8.25 percent, respectively. The expected long-term
rate of return on assets, net of tax, was 5.0 percent for 1996 and 1995.
For measurement purposes, a 9.0 percent annual increase in the per
capita cost of covered health care benefits is assumed for 1996 (9.6 percent
and 10.2 percent for 1995 and 1994, respectively). This rate was assumed to
decrease gradually to 6.0 percent for 2001 and remain at that level
thereafter. If the health care cost trend rate were increased 1.0 percent,
the accumulated postretirement benefit obligation as of December 31, 1996
would increase by 18.0 percent and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year
ended December 31, 1996 would increase by 24.0 percent.
Postemployment benefits. In January 1994, the Company adopted SFAS 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 implementation of this standard had no
material effect on the Company's financial condition or results of operation
for 1996 and 1995.
Note 12 - Incentive Stock Plans; Dividend Reinvestment and Common Stock
Purchase Plan
In 1985, shareholders adopted a long-term incentive plan (Stock Plan)
that provided 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 could be awarded under the Stock Plan,
which expired in January 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 10 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, 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
Granted in 1995 (a) 178,100 $23.25-$23.50
Expired in 1995 (2,200) $21.75-$27.13
-------
Outstanding at December 31, 1995 690,050 $20.63-$28.28
Granted in 1996 (a) 170,000 $25.25
Expired in 1996 (17,701) $21.75-$27.13
Exercised in 1996 (19,528) $20.74-$24.63
------
Outstanding at December 31, 1996 822,821
=======
(a) These options were granted on February 2, 1994, March 29, 1994,
December 5, 1994, October 13, 1995, December 5, 1995 and December 4, 1996.
One third of the options granted become exercisable on each of the first
three anniversaries of the grant date, except for options granted to certain
individuals employed by IEA that will become exercisable immediately upon the
sale of that business.
As of December 31, 1996, 472,455 shares were exercisable under the
Stock Plan. In addition, 334 shares of restricted stock were outstanding as
of December 31, 1996.
In accordance with SFAS No. 123 "Accounting for Stock-Based
Compensation," the Company adopted the disclosure method of accounting for
stock-based compensation. The Company continues to apply Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
in accounting for its stock-based compensation plans and accordingly, no
compensation expense has been
-26-
recognized. If the Company had recorded compensation cost based upon the
fair value at the grant date for awards under these plans consistent with
SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
(In thousands, except share data) 1996 1995
- ---------------------------------------- ---- ----
Net Income
As reported $9,005 $12,886
Pro forma $8,747 $12,634
Earnings per share
As reported $1.30 $1.90
Pro forma $1.26 $1.86
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1996, 1995 and 1994: dividend yield of
6.51 percent; expected volatility of 18 percent; risk-free interest rate of
6.12 percent; and an expected life of six years.
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 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 Plan was 1,650,000, of which 1,173,004 shares were issued at
December 31, 1996.
Note 13 - Property, plant and equipment
Net property, plant and equipment at December 31, consisted of the
following components:
(In thousands) 1996 1995
- ------------------------------------------- -------- -------
Organization $ 185 $ 185
Source of supply 29,785 29,048
Pumping 16,756 16,126
Water treatment 62,230 54,126
Transmission and distribution 249,328 235,608
General 34,417 32,809
Construction work in progress 47,787 32,978
Utility plant held for future use 466 466
Nonutility property 13,762 31,134
------- --------
454,716 432,480
Less: accumulated depreciation 131,328 136,726
------- -------
$323,388 $295,754
======= =======
Note 14 - Inventories
Inventories at December 31, were comprised of the following:
(In thousands) 1996 1995
- --------------- ------ ------
Lumber and logs $1,565 $2,180
Materials and supplies 1,318 1,925
----- -----
$2,883 $4,105
===== =====
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) 1996 1995 1994
- ----------------------------------- ------- ------ ------
(Increase) decrease in accounts
receivable and other current assets $(6,228) $ 405 $ (2,703)
Decrease (increase) in inventory 579 (919) (192)
Increase in prepayments (1,082) (744) (1,455)
Increase in accounts payable and accrued
liabilities 2,094 2,883 4,420
Increase (decrease) in interest and
taxes payable 398 (2,383) 3,168
Net changes in other noncurrent balance
sheet items 1,000 (4,766) 3,193
--------- --------- ---------
$ (3,239) $ (5,524) $ 6,431
========= ========= =========
Supplemental cash flow information:
Cash paid for:
Interest $9,336 $8,749 $8,733
Income taxes $10,602 $10,694 $6,306
Supplemental disclosure of non-cash investing and financing activities:
The anticipated sale of the discontinued operation has been recorded as a
non-cash investing transaction for the year ended December 31, 1996.
In October 1995, the Company exchanged a reservoir, located in New Canaan,
Connecticut, for a building, located in Monroe, Connecticut, in a non-cash
transaction. The fair value of the building received was approximately
$2,500,000 and the net book value of the land exchanged was approximately
$170,000.
Note 16 - Commitments and contingencies
Minimum rental payments under operating leases aggregated $350,000 at
December 31, 1996. Annual payments for future minimum rentals are $175,000 in
1997 and 1998, respectively.
-27-
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, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, 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.
Price Waterhouse LLP
New York, NY
February 18, 1997
-28-
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 delegation 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.
Richard K. Schmidt
President & Chief Executive Officer
Janet M. Hansen
Executive Vice President,
Chief Financial Officer
& Treasurer
February 18, 1997
-29-
SUPPLEMENTAL FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
Book value per share $17.52 $17.72 $17.43 $17.07 $16.33
Payout ratio (per share) 124.6% 85.3% 86.6% 92.0% 98.2%
Price/earnings ratio (1) 21.4 13.4 12.6 16.2 15.2
Capitalization:
Long-term debt 54.7% 52.0% 49.1% 51.0% 51.9%
Preferred stock of subsidiaries - .1 0.2 0.2 0.2
Common equity 45.3 47.9 50.7 48.8 47.9
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
(1) Computed at December 31.
Quarterly financial data
(Unaudited)
Income
before
Operating income Net Per share
revenues taxes income (1) (2)
- --------------------------------------------------------------------------
(In thousands, except share
data)
1996
First quarter (3) $ 20,993 $3,998 $ 2,074 $0.30
Second quarter (3) 23,013 5,418 3,165 0.46
Third quarter (3) 25,499 7,373 4,136 0.60
Fourth quarter 25,299 6,335 (370) (0.06)
-------- ------- -------
Total $ 94,804 $23,124 $ 9,005
======== ======= =======
1995
First quarter (3) $ 19,873 $ 4,493 $ 2,391 0.35
Second quarter (3) 21,967 5,409 3,107 0.46
Third quarter (3) 24,438 6,228 3,242 0.48
Fourth quarter (3) 28,291 7,048 4,146 0.61
-------- ------- -------
Total $ 94,569 $23,178 $12,886
======== ======= =======
(1) Quarterly earnings per share are based on weighted average shares
outstanding during each quarter and the sum of the quarters may not equal
annual earnings per share.
(2) 1995 quarterly earnings per share have been restated to reflect the
pooling of interests.
(3) Quarterly amounts have been restated to reflect the discontinued
operations.
-30-
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, 1996, there were 8,072 shareholders of
record.
- ---------------------------------------------------------------------------
Period Closing sales prices Dividends paid
- ---------------------------------------------------------------------------
High Low
- ---------------------------------------------------------------------------
1996
First quarter $26 5/8 $24 5/8 $.405
Second quarter 25 1/2 23 1/4 .405
Third quarter 27 1/8 24 7/8 .405
Fourth quarter 28 1/8 24 7/8 .405
1995
First quarter $24 1/4 $22 $.405
Second quarter 23 1/2 22 .405
Third quarter 24 1/4 22 .405
Fourth quarter 25 7/8 22 5/8 .405
-31-
FINANCIAL HIGHLIGHTS (In thousands, except share data)
4 year
Compound
Annual
- --------------------------------------------------------------------------------- Growth
1996 1995 1994 1993 1992 Rate
- ---------------------------------------------------------------------------------------------
Operating revenues from
continuing operations $94,804 $94,569 $97,691 $84,860 $76,572 5.5%
Net income from
continuing operations 13,840 13,296 12,478 12,283 10,003 8.5%
Net income 9,005 12,886 12,221 10,990 9,400 ---
Net income from continuing
operations per common share $2.00 $1.96 $1.91 $1.97 $1.76 3.3%
Net income per common share $1.30 $1.90 $1.87 $1.76 $1.65 ---
Cash dividends per share
of common stock $1.62 $1.62 $1.62 $1.62 $1.62 ---
Dividend yield (Based on
market value @ December 31,) 5.81% 6.35% 6.86% 5.68% 6.48% ---
Total assets 449,092 413,980 370,870 362,872 348,331 6.6%
Shareholders equity 122,951 121,502 115,132 110,481 97,165 6.1%
Long-term debt and
redeemable preferred stock 148,487 132,276 111,796 115,966 105,883 8.8%
Weighted average
common shares outstanding 6,931,388 6,794,400 6,532,627 6,237,875 5,690,853 5.1%
Utility Customers 136,336 130,715 125,015 123,915 123,325 2.5%
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