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THE HYDRAULIC COMPANY ANNUAL REPORT 1985
THE HYDRAULIC COMPANY 835 MAIN STREET BRIDGEPORT, CONNECTICUT 06601 (203) 367-6621
ANNUAL REPORT • 1985
The Hydraulic Company
Bridgeport Hydraulic Company Stamford Water Company
Timco, Inc. Main Street South Corporation
About lhe cover: Welter, wood, and land arc principal clements in the diversified natural resources business activities of The Hydraulic Company. Dawn at Saugatuck Reservoir is the setting of our cover photograph.
Table of contents
President's message 1 Financial charts 2, 4 Natural Resources: Water 7 Natural Resources: Land 13 Natural Resources: Wood 15 Management's discussion 17 Financial statements 19 Notes to financial statements 25 Report of independent
accountants 33 Performance statistics 33 Stockholder information 36 Directors and officers 38
SELECTED FINANCIAL DATA (Thousands of dollars, except per share)
1985 1984
Operating revenues $ 58,154 $ 56,968 Earnings before income taxes 14,843 13,837
Net income 8,362 7,246
Net income per share of common stock 3.01 2.93
Cash dividends declared per share of common stock 2.00 1.92
Total assets at year-end 184,304 174,173
Long-term debt and redeemable preferred stock 81,264 76,676
Weighted average common shares outstanding 2,779,726 2,474,137
- ._- ----~--=---:--~~-.::_·_-~,--."",~OO::Iol;·~;:.c-:~~·?:i!~~"'~.:.;,-""_,..._-~~~
1983 1982 $ 43,927 $ 40,781
10,098 7,656 5,730 5,280
2.65 2.51
1.84 1.76 140,333 137,277
58,102 66,105
2,159,449 2,107,722
1981 $ 32,987
5,780 4,821
2.78
1.68 126,579
60,342
1,732,345
To the Stockholders, Employees and Other Friends of the Company:
Wise and productive use of natural resources, a theme symbolized by the photograph on the cover of this annual report, was·an important element in our success in 1985 and will remain crucial to the future profitability of The Hydraulic Company (THC).
THC achieved record earnings of $8.4 million in 1985, up 15% from those of 1984 on revenues of $58.2 million, a 2% increase. This was our seventh consecutive year of record earnings.
Earnings per share increased 3% to $3.01 from $2.93 in 1984, in spite of a 12% increase in the weighted average of common shares outstanding. Major factors influencing these results are detailed in the financial pages of this report.
We continued our record of uninterrupted dividend payments dating back to 1890 and increased the total of dividends declared in 1985 to $2.00 from $1.92 in 1984.
The market value of THC common shares increased substantially over the year, as intensified investor interest in the public water supply industry was apparent in the prices of water utility stocks. We believe that growing national awareness of water's importance as a resource, the beneficial effect of reduced inflation and declining interest rates, and the proven ability of your company's utility subsidiaries to meet water supply challenges are factors in this favorable trend in the market price of THC stock.
PRESIDENT'S MESSAGE
l~fecord earnings achieved for 7th year in a row
Increased market value of TJIC common stock
reflects high interes(f in water utility stocks
1
Operating Revenues (Millions of dollars)
81 ll2 83 84 ll5
Net Income per Weighted Average Share
Ill 82 83 ll4 ll5
Book Value per Share
81 82 83 84 85
60
50
40
30
20
10
$0
3.20
3.00
2.80
2.60
2.40
2.20
$2.00
22
21
20
19
18
17
$16
Earnings before Income Taxes (Millions of dollars)
15.0
12.5
10.0
7.5
5.0
2.5
LJ'~L~LJ Ill 82 ll3 ll4 85 $0
Dividends Declared per Share
2.10
2.00
1.90
l.llO
1.70
1.60
$1.50
Price/Earnings Ratio
12
11
10
81 82 83 84 85
Net Income (Millions of dollars)
Ill ll2 ll3 ll4 85
High/Low Common Stock Prices
81 82 83 84 85
9.0
7.5
6.0
4.5
3.0
1.5
$0
36.50
35.00
33.50
32.00
30.50
29.00
27.50
26.00
24.50
23.00
21.50
20.00
18.50
17.00
15.50
14.00
$12.50
Continuing to meet these challenges and further improving the performance of our non utility forest products and real estate development businesses remain at the top of our agenda in 1986. Another key objective is enhancement of our long-term prospects for realizing increased stockholder value from land assets through the development of regulatory provisions that will allow us to profitably and responsibly dispose of utility land no longer required for water supply purposes.
Achievement of this land sales objective will require the cooperation and support of both the Connecticut Department of Public Utility Control (DPUC) and the Connecticut Department of Health Services (DHS). In the past, the DPUC has ruled that our gains from the sale of utility lands that have been utilized in setting water service rates must be used solely to reduce future rates. The DHS exercises regulatory jurisdiction over both water quality and the use and sale of utility-owned watershed lands.
The resolution of long-standing impediments related to land sales is imperative in view of increasingly stringent water quality standards imposed by government agencies and the likelihood that our Bridgeport Hydraulic Company subsidiary over the next decade will be required to install additional filtration facilities, the capital costs of which could exceed $80 million. Filtration, in our view, will reduce the amount of land needed for watershed protection.
Enhancing pro§pea:ff§ f?Jrr profitable d/i§t,uX1JJ§(j)Jk ([){
unused ut!lllity; f([}jr;wJ iJ§ ([}j f([})f() jf!}§(fj) rg}([)(JI/1
Stricter quality sf(!j[(!jd([}jfr([IY§ hastening £/he vl([Jj.&J
of mandated fiiffrt@JIJ([]Jrlo
3
Total Assets (Millions of dollars)
185
175
165
155
145
135
81 82 83 84 85 $125
Number of Common Stockholders
7500
7200
6900
6600
6300
6000
H1 H2 83 H4 85 5700
Construction Expenditures* (Millions of dollars)
17.0
15.5
14.0
12.5
11.0
9.5
81 82 83 84 85 $8.0
·Excludes an allowance for funds used during construction, as well as the acquisition of Pittsfield Box & Lumber Co., Inc. in 1981 and Stamford Water Company in 1984.
Internally Generated Funds (Millions of dollars)
Stockholders' Equity (Millions of dollars)
10
$4
65
60
55
50
45
40
81 82 83 84 85 $35
Number of Customer Accounts*
ll5,000
llO,OOO
105,000
100,000
95,000
90,000
81 82 83 84 85 85,000
• Figures for 1984 and 1985 include Stamford Water Company. Data for 1983 and prior years are restated to reflect updated account information.
Capitalization (o/o)
60.0
57.5
55.0
52.5
50.0
47.5
45.0
42.5
40.0
37.5
35.0
32.5
30.0
27.5
25.0
22.5
20.0
17.5
15.0
12.5
10.0
7.5
5.0
2.5
81 82 83 84 85
• Excludes current maturities.
The convergence of these factors strongly suggests the need for equitable utilization of land sales profits to benefit our investors by increasing the value of equity ownership and also to ease the substantial financial burden that filtration will impose on the Company and its customers.
We believe that our utility land sales objective is in the long-ferm best interests of our stockholders and customers alike, and we presently are exploring actions to obtain the necessary regulatory concurrence and approvals. We believe, further, that the substantial financing needs imposed by filtration, coupled with our established record of responsible public water supply management and demonstrated commitment to the interests of the various constituencies we serve, will encourage the adoption by our regulators of reasonable land sales policies. We will keep you informed of our progress.
We value the continuing support of our stockholders, employees and customers, which made possible the solid performance achieved by your company in 1985.
WilliamS. Warner President & Chief Executive Officer
March 7, 1986
Equitable sharing of land sales benefits serves
best interests of stockholders, customers
5
A utility worker insrwcb the interior oF a chemical storage silo prior to start-up of operations at Stamford Water Company's new $15-million
N01th SlamCord Resen,oir water treatment plant, which will provide improved water quality to a population of more than 82.000 itl Stamford.
~
Water, the Company's prime natural resource prod-uct, was in ample supply for customers of our Bridgeport Hydraulic Company (BHC) subsidiary during a year in which a number of suppliers in the tri-state region faced water shortages.
Although some utilities in Connecticut, New York and New Jersey were forced to implement water conservation measures, BHC' s supplies again proved fully sufficient to meet the needs of the more than 370,000 people the Company serves in 17 Connecticut communities- despite record low precipitation in Fairfield County during the ninemonth period of August 1984-April1985. BHC's reservoir storage capacity of more than 24.5 billion gallons, supplemented by excellent groundwater sources, provides the Company with substantial reserves that can be sold to neighboring suppliers to the extent allowed by pipeline interconnections.
Total water supplied by BHC declined in 1985, continuing a downward trend caused by reduced industrial water use that began in 1971, when system-wide usage peaked at an average of 71 million gallons a day (mgd). With 1985 usage averaging 55 mgd, vs. a system-wide capacity of 76 mgd, BHC retains a reserve capacity of some 21 mgd.
NATURAL RESOURCES: WATER
Extended dry spell again shows BHC has ample water supplies
7
1\ crew inst~1lls l)l·id.geport Hydraulic Colllpany's Southwest Hegional J Pipeline, which, as Lhe tlrst multi-utility Interconnection project
of its [(lnd in Connecticut. supplies wate1· to New Canaan.
===-~~---------===-==::_==....--==--=-==-=---.--~----=----- :-=-----=- --~-===---::_ ====---·
BHC expanded its ability to market its surplus supply with completion of the Wilton-to-New Canaan stage of its Southwest Regional Pipeline in 1985. This $1.4-million interconnection is a cooperative venture of BHC and three water companies serving lower Fairfield County communities. It enables BHC to sell water to New Canaan Water Company and, by year-end 1989, is expected to be extended to permit sales to BHC' s Stamford Water Company (SWC) subsidiary and to Connecticut-American Water Company, which serves Greenwich and Darien, helping to resolve long-standing water supply problems in these areas.
In early 1986, BHC furthered this concept of regional cooperation with completion of a $3-million pipeline interconnection with the South Central Connecticut Regional Water Authority that will improve the quality and enlarge the supply of water for BHC customers in the lower Naugatuck Valley.
At year-end, SWC was in the final stages of testing its new $15-million filtration plant, which will provide improved water quality for the population of 82,000 it serves in Stamford.
The geographical area served by BHC and SWC continued to demonstrate robust economic health in 1985. This region includes Stamford, which has by far the largest tax base of any community in the state, and Connecticut's largest city, Bridgeport, which is undergoing substantial growth and revitalization, and is recapturing recognition as the hub of a prosperous metropolitan area.
Southwest pipeline (}pens up new market
for §urplus water
Stamford to receive improved quality water
9
~~~~-~=-·~~ .. ~----------------------------------------------------~
1------
Operation of a pilot filtration plant at Easton Lake Reservoir is one loollhe Company is utilizing to e1'aluate alternative
treatment processes for its presently unfiltered reservoir systems.
Installation of water mains to serve new BHC and SWC customers - one indicator of future sales -moved forward at a rapid pace during 1985. Coupled with sustained economic vitality, this is a favorable sign for future water sales in the region we serve.
Increasingly stringent water quality regulations are bringing closer the day when BHC will be required to filter its Easton Lake and Hemlocks reservoir systems, which are its largest surface supplies. We are developing strategies to address the substantial capital demands of filtration, which, as reported, could exceed $80 million.
In order to maintain its strong financial position and improve its earnings, BHC is seeking Connecticut Department of Public Utility Control (DPUC) approval of an increase in water service rates. New rates are expected to become effective in August 1986.
In another area of activity, BHC is constructing a new operations center in Bridgeport that will consolidate operations, engineering and customer relations functions currently housed at several separate locations, and that will provide for better and more efficient service to customers.
Healthy ecorfPJ[})fffl7lPJ) l[})l th A c rlo ;1
sou wes1I _ 01fllfrilr2(CICI?rt:1/)JI(
signals favot!t(}J/h!e 1[))11Jlfl!ll[})l[})/t for future WifJJer §{f}j!/e§
BHC seeks rate ir11u::rre(l)j§e 2«JJ maintain linanci!al §itte'ilar!J!Ma
11
I
:I
Modification of the regulatory policy that limits the Company from realizing profits from disposal of salable utilily lands is important
to our evolving strategy addressing new water quality concerns.
----------------------------------~~=======----.=-==-·==-~-·~--~~
Land, an asset with significant potential for improved profitability in both our nonutility and utility business segments, is an important area of focus in 1986 as the Company continues to refine its real estate marketing strategy.
Main Street South Corporation (MSSC), our non-utility real estate development subsidiary, in 1985 reduced its inventory of properties and lowered its associated debt. Sale of remaining holdings and review of profitable joint venture opportunities are MSSC's prime 1986 objectives.
Most of the substantial acreage owned by our largest utility company, BHC, is watershed land that, as described earlier, is subject to ownership and use restrictions enforced by the Connecticut Department of Health Services (DHS). This utility land also is subject to DPUC policy under which in the past we have been ordered to apply gains from the sale of land that has been used in the setting of water service rates to reduce our rate requirements. As noted in the "President's Message," in 1986 we will be seeking regulatory modifications to ease current constraints as they relate to at least some of our utility land parcels.
In the meantime, BHC plans in 1986 to complete the sale, postponed from 1985 due to local planning and zoning commission requirements, of 135 acres of undeveloped, off-watershed land. Because this property is not on the watershed and has never been in "rate base," its sale is not subject to the DHS and DPUC constraints that apply to most BHC land.
The magnitude and timing of future utility land sales will be governed to a great extent by the development with our regulators of mutually acceptable land sales policies.
NATURAL RESOURCES: LAND
Regulators hold key to resolution of
utility land sales issue
Company seeks easing of state's constraints on
utility land sales
13
'. . ·' 1 ,/ !/
I /.;'./· I ,
I .
,/I
Timco's principul New Hampshire forest products complex includes severul timber mills, a lumber-drying kiln fucilitv and an energy cogeneration
plant that burns wooclwaste to rmduce electricity. which is sold at favorable 1·atcs under a 20-ycar-cuntract with Public Service Company of New Hampshire.
Wood, a renewable natural resource of many uses, is the key ingredient in the lumber and energy production operations of our forest products subsidiary, Timco, IHc.
Timco, which operates a New Hampshire-based lumber mill complex and box plant, achieved nearbreak-even results in 1985, despite poor market conditions for New England sawmill operations. While our sales volume was up and productivity improved, stiff competition from Canadian and western U.S. mills drove down the prices paid for grades of lumber that made up the greater portion of Tim co's lumber revenues in 1985. In view of the continuing imbalance between lumber supply and demand, Timco is adjusting its operations to become more responsive to the changing marketplace.
Timco burns wood waste from its sawmill to produce steam to kiln-dry lumber and generate electricity that it sells to Public Service Company of New Hampshire under the favorable rates of a 20-year contract that became effective in September 1985. This energy cogeneration capability provides an income stream that is helping to stabilize Tim co's revenue and earnings base against the cyclical nature of the forest products market. A second, larger cogeneration unit installed by Timco has experienced start-up problems, but will provide for substantially increased sales of electricity when it becomes fully operational later this year.
NATURAL RESOURCES: WOOD
Timcr:([]J «!ffi/Cr[JiJJJJnlierf'e!TJi
t "Ctf a,u~u c'' i/ s lu com[OX2~BtW{])fr7! 9 tC((}JfV{((JI!!!i
fili/IJ!Jfrt~f(,!C'9 !Jffll )] f!j)§!J;.
Cyclireal ilf'ffi<CC[})fftfl)e §alt:Zi[Jif(fj(J
from b!!rf!rPJberr stabi!ize(f)J r[))f}j!
fu@u1ill CC@1Jj!'!ffur2[((1)1!()([}!ffi1
15
Low-cost steam from Timco's expanded cogeneration facilitv is used to heat kilns and power turbines, while surplus stea~ is
rired to sprinlder apporatus ot iln outdoor basin, where the water 1•aror cools, condenses, and is then recirculated to the boiler unit.
i I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital resources and liquidity
The Company's overall consolidated capital requirements for the period 1983 through 1985 totaled $62,300,000. During this three-year period, the Company invested $44,700,000 in property, plant and equipment, including the acquisition of Stamford Water Company (SWC), and retired $17,600,000 of long-term debt and preferred stock through maturities and sinking fund obligations.
Internally generated funds continued to finance a substantial portion of the Company's construction expenditures. Internally generated funds consist of net income, depreciation, amortization and other non-cash operating items, less dividends. The Company's ratio of net internal cash flow to gross property additions, excluding an allowance for funds used during construction, was 81%, 60% and 60% for the years ended December 31, 1983, 1984 and 1985, respectively. The public utility industry is a capital-intensive industry, and, because Bridgeport Hydraulic Company (BHC) and SWC are public utilities and represent the largest operating segment of the Company, management believes this ratio is one of the key measurements of liquidity, or cash adequacy.
Funds from external sources periodically must be obtained in order to meet the Company's consolidated capital requirements. Specifically, during the three-year period 1983 through 1985, the Company raised $30,700,000 in capital through a combination of tax-exempt debt financings, a common stock offering and proceeds from the Company's Dividend Reinvestment and Common Stock Purchase Plan. The Company also received advances and contributions in aid of construction of $6,300,000 during this period.
Management estimates that in 1986 the Company will spend approximately $13,100,000 for its utility and $3,200,000 for its nonutility construction programs. Additional expenditures of $900,000 will be required for payment of debt maturities and sinking fund obligations. Management anticipates that the 1986 capital requirements of$17,200,000 will be financed through internally generated funds, advances and contributions in aid of construction, cash and short-term investments held at December 31, 1985, and short-term debt. At year-end, the Company had available $19,000,000 of unused bank lines of credit and approximately $2,400,000 of cash and short-term investments.
It should be noted that management currently cannot predict the aggregate additional capital expenditures that may be required under future federal, state or local regulation. If, however, all of the surface water supplies of BHC required filtration due to increased government regulation or deterioration in existing water quality, substantial additional capital expenditures would be required. Under such circumstances, management estimates these costs could exceed $80,000,000 through 1991.
The Company's ability to finance future utility construction programs depends in part on future rate relief. Rate relief will have an impact both on internally generated funds and the Company's ability to obtain external financings. Future rate relief will be required in order to maintain certain debt and preferred stock coverage ratios, which, coupled with common stock dividends, is necessary to allow the issuance of debt and equity securities. On February 5, 1986, BHC filed a notice of intent with the Connecticut Department of Public Utility Control announcing its intention to seek an increase in water service rates designed to generate additional annual revenues of approximately $6,700,000.
The Company's financing activity is planned to ultimately achieve a capitalization structure of 50% equity and 50% debt. At year-end 1985, the Company's capitalization structure approximated 43% common equity, 4% preferred stock and 53% debt. Financing activity also is designed to maintain the Company's strong debt ratings. BHC's Series T first mortgage bonds are rated "A+" by Standard & Poor's Corporation (S&P). Also, S&P awarded "A" ratings to unsecured notes issued in 1984 to the Connecticut Development Authority and New Hampshire Industrial Development Authority. The type and amount of new financings also will take into account the Company's targeted payout ratios, as well as market conditions and other economic factors.
An explanation of the impact of inflation and changing prices on the Company is found on page 31 of this report.
18
Results of operations
Consolidated earnings in 1985 were $8,362,000, an increase of 15% from 1984 net income of $7,246,000. Earnings per share in 1985 were $3.01, compared with $2.93 earned in 1984, on a weighted average of2,779,726 common shares outstanding, a 12% increase from the weighted average of 2,474,137 shares outstanding in 1984.
The Company's 1985 performance benefited from inclusion of a full year's earnings of SWC, which was acquired in March 1984, and from investment and energy tax credits associated with 1985 expansion of the energy cogeneration plant operated by the Company's forest products subsidiary, Timco, Inc. These gains were partially offset, however, by higher corporate expenses and by the erosion of operating earnings of BHC, which, as noted above, subsequently has taken steps to increase its water service rates. In addition, 1985 land sales executed by the Company's real estate development subsidiary, Main Street South Corporation (MSSC), trailed those of 1984.
Operating revenues. Consolidated operating revenues in 1985 were $1,186,000 higher than in 1984, due to increases in the revenues of SWC and BHC. SWC's revenue contribution in 1985 was $2,338,000 higher than in 1984 due to inclusion of a full year of SWC revenues, to the increased effect in 1985 of a construction-work-in-progress water service rate surcharge, and to a general rate increase granted SWC in August 1985. BHC revenues were $1,627,000 higher than in 1984, principally due to the full-year effect of rate relief granted in March 1984. These revenue gains were partially offset by a 1985 decrease of $2,916,000 in MSSC property sales. Consolidated revenues in 1984 were $13,041,000 higher than in 1983, largely due to the inclusion of $7,023,000 of water sales by SWC, as well as to a $3,447,000 increase in MSSC property sales and to higher BHC revenues resulting from the March 1984 rate increase.
Operating expenses. Operating expenses in 1985 were $16,053,000, which was $1,309,000 lower than in 1984, principally due to a decrease of $2,519,000 in expenses associated with MSSC property sales. This decrease was somewhat offset by an increase of $696,000 in BHC operating expenses, which was attributable to higher water main maintenance costs, higher pumping power charges, a general wage increase, and a full year's inclusion ofSWC operating expenses. Operating expenses in 1984 were $4,862,000 higher than in 1983, principally due to increased expenses of $3,021,000 associated with 1984 MSSC property sales and to inclusion of $1,207,000 of SWC expenses.
General and administrative. General and administrative charges in 1985 were $784,000 higher than in 1984 due to an increase of $218,000 in corporate and professional expenses, to an increase of $130,000 in liability insurance charges and to a full year's inclusion ofSWC expenses. General and administrative expenses in 1984 were $1,538,000 higher than in 1983. The inclusion ofSWC expenses of $1,054,000, as well as general increases in wages and other corporate expenses, were the principal reasons for this variance.
Depreciation. Depreciation expense in 1985 was $392,000 higher than in 1984, principally due to routine utility plant additions by BHC and to a full year's inclusion ofSWC depreciation. Depreciation expense in 1984 was $842,000 higher than in 1983. Principal reasons were higher depreciation rates granted BHC effective with the March 1984 rate order, as well as routine utility plant additions by BHC, and the inclusion ofSWC depreciation of $340,000.
Interest expense. Interest expense in 1985 was $31,000 higher than in 1984. Major factors in this increase were a rise of $652,000 in interest costs that relate to a $10,000,000 October 1984 note agreement, and an increase of $186,000 that results from a full year's SWC interest expense. These factors to a great degree were offset by a decrease of $514,000 in interest charges attributable to repayment of the Company's 1981 term loan, and by a decrease of $287,000 attributable to refinancing of a Tim co 1981 tax-exempt bond issue. Interest expense in 1984 was $1,180,000 higher than in 1983. Principal reasons for the increase were inclusion of SWC interest of $884,000, as well as short-term interest expense pertaining to the acquisition of SWC. Interest charges associated with the $10,000,000 note agreement also contributed to this variance.
Taxes other than income taxes. Taxes other than income taxes in 1985 were $333,000 higher than 1984, primarily due to higher gross earnings taxes for both BHC and SWC, which reflected their higher revenues, as well as to the inclusion of SWC expenses for the full year. Taxes other than income taxes in 1984 were $1,088,000 higher than in 1983, largely due to the inclusion of SWC taxes totaling $1,055,000.
Income taxes. Income taxes in 1985 were $110,000 lower than in 1984. Energy and investment tax credits associated with Timco's 1985 cogeneration plant expansion, as well as other flow-through items, more than offset the effects of higher taxable income. Income taxes in 1984 were $2,223,000 higher than in 1983. Higher taxable income and reduced
, flow-through items were the major reasons for this variance.
CONSOLIDATED STATEMENT OF INCOME The Hydraulic Company and subsidiaries
1985 Year ended December 31
1984 1983 (Thousands of dollars, except per share)
Operating revenues $58,154 $56,968 $43,927
Costs and expenses Operating 16,053 17,362 12,500 General and administrative 8,886 8,102 6,564 Depreciation 4,838 4,446 3,604 Interest expense 6,712 6,681 5,501 Subsidiary preferred dividends 636 665 652 Taxes other than income taxes 6,844 6,511 5,423
Total costs and expenses 43,969 43,767 34,244 14,185 13,201 9,683
Allowance for funds used during construction 658, 636 415
Earnings before income taxes 14,843 13,837 10,098
Income taxes 6,481 6,591 4,368 Net income $ 8,362 $ 7,246 $ 5,730
Per share $ 3.01 $ 2.93 $ 2.65
Weighted average common shares outstanding 2,779,726 2,474,137 2,159,449
See accompanying notes to consolidated financial statements.
19
20
CONSOLIDATED BALANCE SHEET The Hydraulic Company and subsidiaries
ASSETS 1985
December 31 1984
(Thousands of dollars)
Property, plant and equipment Less: accumulated depreciation
Net property, plant and equipment
Current assets Cash and short-term investments
Accounts receivable Customers Miscellaneous
Less: allowance for doubtful accounts
Accrued utility revenues Inventories Prepaid expenses
Total current assets
Land held for resale Long-term investments
(At cost, which approximates market) Investment in joint venture Notes receivable Other assets
$222,02511 II
59,542 il 162,483 il
,I ll
11
2,36511 q II II !I
6,163 fi 834 !J
6,997iJ
686 ~ 6,311
1
~ 4,835 fj
3,0771
1
651 ji
17,23911 :I
297:! it !i
11011 95!1 83:1
3,99711 $184,304 il
See accompanying notes to consolidated financial statements. ,
$206,713 55,095
151,618
2,775
5,290 941
6,231 627
5,604 4,773 2,798
685 16,635
726
90 142 643
4,319 $174,173
LIABILITIES AND STOCKHOLDERS' EQUITY December31
1985 1984 (Thousands of dollars)
Stockholders' equity Preferred stock, no par value, authorized
2,500,000 shares not to exceed aggre-gate value of $25,000,000, issuable in series - none issued
Common stock, no par value (stated at $10 per share) Authorized - 4,000,000 shares Outstanding $ 28,025 $ 27,485
Capital in excess of par or stated value 13,820 12,974 Retained earnings 18,959 16,167
60,804 56,626
Redeemable preferred stock of subsidiaries 6,110 6,493
Long-term debt and other obligations 75,154 70,183
Current liabilities Accounts payable and accrued liabilities 4,149 3,846 Current maturities of long-term debt 553 3,803 Dividends payable 1,539 1,466 Accrued interest 1,473 1,459 Taxes other than federal income taxes 1,887 2,540 Federal income taxes 567 436
Total current liabilities 10,168 13,550
Advances for construction 11,994 10,209 Contributions in aid of construction 10,353 9,313 Deferred taxes 9,721 7,799
$184,304 $174,173
See accompanying notes to consolidated financial statements.
21
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY The Hydraulic Company and subsidiaries
Shares
Year ended December 31, 1983 Balance, December 31, 1982 2,129,565
Net income Dividends on common stock
($1.84 per share) Dividend reinvestment plan 53,087
Employee stock ownership plan 3,949
Balance, December 31, 1983 2,186,601
Year ended December 31, 1984 Net income Dividends on common stock
($1. 92 per share) Dividend reinvestment plan 60,487
Employee stock ownership plan 1,427
Issuance of common stock 500,000
Balance, December 31, 1984 2,748,515
Year ended December 31, 1985 Net income Dividends on common stock
($2.00 per share) Dividend reinvestment plan 53,031
Employee stock ownership plan 938
Balance, December 31, 1985 2,802,484
See accompanying notes to consolidated financial statements. ,
Common stock
Amount
$21,296
531 39
21,866
605 14
5,000 27,485
530 10
$28,025
Capital in excess of Total
par or stated Retained stockholders' value earnings equity
(Thousands of dollars)
$ 7,846 $12,158 $41,300 5,730 5,730
(3,980) (3,980)
454 985 43 82
8,343 13,908 44,117
7,246 7,246
(4,987) (4,987) 526 1,131
13 27 4,092 9,092
12,974 16,167 56,626
8,362 8,362
(5,570) (5,570) 827 1,357
19 29 $13,820 $18,959 $60,804
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-+
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION The Hydraulic Company and subsidiaries
Sources of funds Internally generated
Net income Depreciation and amortization Deferred investment credit Deferred income taxes Allowance for funds used during construction
Funds provided from operations Deduct common dividends declared
Internally generated funds
External financing Issuance of common stock, net of expense Issuance of long-term debt Advances and contributions in aid of construction, net of refunds Increase (decrease) in short-term borrowings Repayment of long-term debt Redemption of preferred stock
Funds obtained from external financing
Other sources (uses) Acquisition of Stamford Water Company (less working capital of$ 76)
Property, plant and equipment Other assets Goodwill Long-term liabilities assumed
(Increase) decrease in working capital, excluding short-term borrowings Current maturities of long-term debt Collections of notes receivable Net changes in other noncurrent balance sheet items
Total other sources (uses) of funds
Gross property additions, excluding an allowance for funds used during construction
See accompanying notes to consolidated financial statements.
1985
$ 8,362 5,220
726 1,225 (658)
14,875 5,570 9,305
1,386 ,: 5,575 2,825
(3,854) (383)
5,549
(3,986) 3,250
761 522 547
$15,401
Year ended December 31 1984 1983 (Thousands of dollars)
$ 7,246 $ 5,730 4,720 4,015
715 323 1,175 1,036
(636) (415) 13,220 10,689
4,987 3,980 8,233 6,709
10,250 1,067 11,526 50
2,372 1,128 (1, 750) 1,750 (9,004) (3,595)
(383) (338) 13,011 62
(21,358) (519) (629)
14,445 (6,068) 5,080 4,410 (4,120) 1,462 383
680 161 (7,577) 1,504
$13,667 $ 8,275
23
24
ANALYSIS OF CHANGES IN WORKING CAPITAL The Hydraulic Company and subsidiaries
(Excluding short-term borrowings)
Increase (decrease) in current assets Cash Temporary cash investments Inventories Accounts receivable, net Other current assets
Total
Increase (decrease) in current liabilities Accounts payable and accrued liabilities Current maturities of long-term debt Taxes payable Other current liabilities
Total
Increase (decrease) in working capital, excluding short-term borrowings
See accompanying notes to consolidated financial statements.
1985
$ (410)1j -11
279 fl
769 ~ :, ~)ll
604 ii ii
! 303 i
I
(3,250) l-i
(522) 11
87[' (3,382)~ --~
$3,986 f =I
Year ended December 31 1984 1983 (Thousands of dollars)
$2,324 $ (475) (2,489)
430 186 760 1,578 407 106
3,921 {1,094)
1,953 (315) (4,410) 4,120
(186) (58) 496 239
(2,147) 3,986
$6,068 $(5,080)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
The Company's utility subsidiaries are subject to regulation by the Connecticut Department of Public Utility Control (DPUC) with respect to their rates for service and the maintenance of their accounting records. The Company's accounting policies conform to generally accepted accounting principles and, as applied in the case of regulated public utilities, are in accordance with the accounting requirements and ratemaking practices of the DPUC. A description ofthe Company's principal accounting policies follows.
Nature of business. The Company is engaged predominantly in the collection, purification and distribution of water for domestic, commercial, industrial and fire protection services. The Company also operates a forest products subsidiary and a subsidiary that develops and manages real estate. All of these activities take place within the United States.
Principles of consolidation. The financial statements include the accounts of the Company and its subsidiary companies, all of which are wholly owned. The principal subsidiary is Bridgeport Hydraulic Company (BHC). All intercompany items have been eliminated in consolidation.
Property, plant and equipment. The cost of additions to utility plant and replacements of retirement units of property is capitalized. Cost includes direct material, labor, services and charges for such indirect costs as engineering, supervision, payroll taxes and pension benefits. The Company also capitalizes an allowance for funds used during construction equivalent to the cost of funds devoted to plant under construction, except for that portion of federal Safe Drinking Water Act (SDWA) projects for which the Company receives a rate surcharge.
Renewals and betterments of units of property are charged to plant accounts, and expenditures for maintenance and repairs are charged against income as incurred.
For financial reporting purposes, all subsidiary companies provide depreciation principally by use of the straight-line method based on estimated service lives. The amount of such provisions for 1985 and 1984 on property, plant and equipment was equivalent to approximately 2.53% and 2.46%, respectively, of the original cost of the depreciable plant.
For federal income tax purposes, the utility subsidiary has, from 1954 through 1980, used accelerated depreciation methods for eligible property, plant and equipment, while nonutility subsidiaries have maintained the straight-line method. Since January 1, 1981, the Accelerated Cost Recovery System (ACRS) has been used for all property, plant and equipment.
At the time that depreciable utility property is retired or otherwise disposed of, the book cost together with cost of removal, less salvage, is charged to t!)e reserve for depreciation. This procedure is in accordance with the requirements of the Uniform System of Accounts prescribed by the DPUC.
At the time depreciable non utility property is retired or otherwise disposed of, the accumulated depreciation, together with any amounts realized on disposal, are offset against the cost of the applicable assets, and the resulting profit or loss is recognized in the Consolidated Statement of Income.
Allowance for funds used during construction. An allowance for funds used during construction (AFUDC) is made by applying the last allowed rate of return on rate base (11.26% for BHC and 11.39% for Stamford Water Company [SWC] at December 31, 1985) granted by the DPUC to construction projects exceeding $10,000 and requiring more than one month to complete. AFUDC, as defined in the DPUC's Uniform System of Accounts, includes the net cost, for the period of construction, of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. AFUDC thus represents a non-cash credit to income. Utility plant under construction is not recognized as part of the utility subsidiaries' rate base for ratemaking purposes until facilities are placed in service and, accordingly, the utility subsidiaries charge AFUDC to the construction cost of utility plant until it is completed. Capitalized AFUDC is recovered through rates over the service lives of the facilities. Included in AFUDC during 1985, 1984 and 1983 were $105,000, $123,000 and $192,000, respectively, representing nonutility companies' capitalized interest.
Rate surcharge. In 1979 DPUC regulations were adopted that allow water companies to implement a rate surcharge to water bills in order to recover 90% of the carrying costs of capital used in mandated SDWA projects, until such time that these projects are placed into rate base. The rate surcharge is in lieu of AFUDC and is included in water sales.
Accrued utility revenues. BHC follows the practice of recording the estimated amount of water sold but not billed at the end of each period.
25
I I
26
Inventories. Inventories are valued at the lower of cost or market, with cost being determined on the basis of the "firstin, first-out" (FIFO) method. Materials and supplies are valued at average cost.
Excess of cost of investments in subsidiaries over the net assets acquired. The excess of the cost of investments in subsidiaries over the fair value of the net assets acquired after October 31, 1970 is being amortized on a straight-line basis over periods ranging from 10 to 40 years.
Investment in joint venture. The joint venture is accounted for on the equity method, with the Company's share of earnings or losses of the joint venture included in the Consolidated Statement of Income.
Property taxes. Substantially all of the Company's property taxes are accounted for on the ratable accrual method.
Pension program. The Company and certain of its subsidiaries have noncontributory pension programs. Prior service costs are being amortized over 10 years. The Company's policy is to fund pension costs accrued.
Note 2 - Business acquisition
On March 15, 1984, following the affirmative vote of holders of more than two-thirds of the outstanding shares of SWC and approval by the DPUC, the Company completed its acquisition of the common stock of SWC for approximately $6,800,000. Pursuant to the terms of an agreement executed in November 1983, BHC, which had owned approximately 12.7% of SWC's outstanding common stock prior to the acquisition, is now the sole holder of SWC's common stock. SWC is a public water service company engaged in the distribution and sale of water for residential, commercial, industrial, municipal and fire protection purposes in Stamford, Connecticut. The acquisition has been accounted for by the purchase method.
Note 3- Inventories
Inventories are comprised of the following:
Logs and cordwood Lumber Materials and supplies
December31 1985 1984
(Thousands of dollars)
$ 108 1,380 1,589
$3,077
$ 225 1,390 1,183
$2,798
Income taxes. The Company's general policy with respect to utility operations has been to reflect as income tax expense the amount of tax currently payable. This method, known as the flow-through method of accounting for current tax reductions, is consistent with ratemaking policies of the DPUC, and is based on the expectation that additional income taxes that may be payable in future years will be allowed for ratemaking purposes. The cumulative amount of income tax timing differences for which deferred income taxes have not been provided at December 31, 1985 was approximately $35,300,000 and will be recognized over the remaining book lives of the related assets.
With the passage of the Economic Recovery Tax Act of 1981, utilities, in order to be eligible for ACRS depreciation and the investment tax credit associated with 1981 and subsequent plant additions, can no longer flow through these tax benefits to income currently. Accordingly, effective with its first rate orders after passage of the act, BHC and SWC have deferred these tax benefits.
The non utility subsidiaries use the flow-through method of accounting for investment tax credits, and provide for deferred and prepaid taxes on timing differences.
The following unaudited pro forma consolidated results of the Company's operations have bt.en prepared as if SWC had been acquired at January 1, 1984 and January 1, 1983.
Net operating revenues Net income Net income per weighted
average common share
December 31
_ ___::_19::..::8::....::4 1983
(Thousands of dollars, except per share)
$58,129 7,293
2.95
$51,525 6,844
2.90
Note 4- Long-term debt and notes payable
First mortgage bonds
Series B, 8:lf4%, due January 1, 1992 Series M, 31/4%, due October 1, 1987 Series 0, 5%, due September 1, 1987 Series P, 41/z%, due August 1, 1992 Series Q, 45/s%, due August 1, 1995 Series R, 67/s%, due November 1, 1998 Series S, 101/zo/o, due March 1, 2000 Series T, 7.4%, due September 1, 2008 Series U, 9.375%, due July 1, 2000 Series B, 4.5%, due June 1, 1993 Series C, 7.25%, due December 1, 1993 Unamortized premium on bonds
Notes payable
103/4% unsecured note due October 15, 2014 91/s% unsecured note due August 1, 2012 71/z% unsecured note due October 1, 2009 10.25% unsecured note due December 31, 2008 12% installment note due annually to October 7,
1988 9% installment note due annually to October 7,
1988 65/so/o loan due November 1, 2004 Prime rate unsecured installment note due
March 29, 1986
Term loan
Less: Balance of proceeds of 103/4% unsecured note payable held by trustee
Amount due within one year
December 31
1985 1984
(Thousands of dollars)
$ 370 919
2,500 2,200 4,000 5,000 5,358
12,000 7,000 2,000 1,520
1
10,000 7,700 3,000 6,000
300
139 5,700
75,707
553 $75,154
$ 380 919
2,500 2,200 4,000 5,000 5,715
12,000 7,000 2,000 1,560
1
10,000 7,700 3,000 6,000
400
186 5,700
50
3,250 79,561
5,575 3,803
$70,183
The supplemental trust indentures relating to Series B 83/4%, Series C, Series S, Series U and Series T first mortgage bonds and the Connecticut Development Authority (CDA) 71/z% unsecured note contain mandatory sinking fund provisions. Contributions are deposited annually with the trustee for the retirement of principal for Series B 83/4%, Series C and Series S. Contributions for the retirement of principal for Series U, Series T and the CDA 71/2% unsecured note are not required unti11990, 2000 and 1999, respectively.
In addition to the Series S mandatory sinking fund provision, BHC has the option of redeeming an equal principal amount of Series S bonds each year beginning in 1986.
BHC's $7,700,000 tax-exempt financing contains optional and mandatory redemption provisions. The bonds will be redeemed on August 1, 1992 if an irrevocable letter of credit which expires on August 16, 1992, is not renewed or repla~ed -provided BHC has not purchased these bonds prior to their
redemption date. However, BHC has the option to have these bonds redeemed at a redemption price ranging from 102% on August 1, 1987 to 100% on August 1, 1991 and thereafter. This financing contains a provision restricting the payment of dividends on the Company's common stock. Unrestricted retained earnings amounted to $11,449,000 at December 31, 1985.
SWC's $6,000,000 tax-exempt financing also contains optional redemption provisions. SWC has the option to have the bonds redeemed at a price ranging from 105% on December 1, 1988 to 100% on December 1, 1993 and thereafter.
The aggregate maturities and sinking fund requirements on long-term debt for each of the five years after December 31, 1985 are: 1986- $553,000; 1987- $3,973,000; 1988 - $554,000; 1989- $427,000; 1990- $1,062,000.
On October 31, 1984, BHC issued a $10,000,000 unsecured note in consideration for a loan of the proceeds from the issuance of an equal amount of tax-exempt water facilities revenue bonds by the CDA. The tax-exempt CDA bonds bearing interest at 103/4 o/o have a 30-year maturation period. BHC has the option to have these bonds redeemed at a redemption price ranging from 103% on October 15, 1994 to 100% on October 15, 2000 and thereafter.
On November 29, 1984, the Industrial Development Authority (IDA) of the State of New Hampshire issued tax-exempt industrial facility revenue bonds in the principal amount of $5,700,000. The IDA loaned the principal amount of the bonds to Timco, Inc. for the purpose of refunding its 1981 tax-exempt bond series. The tax-exempt bonds will bear interest at a rate adjusted each November 1 until such time as the Company elects to convert to a fixed rate. On November 1, 1985, the interest rate was adjusted from 75/so/o to 65/s%. The tax-exempt bonds, which have a 20-year maturation period, contain optional and mandatory redemption provisions. Bondholders may elect to have their bonds redeemed at a price equal to 100% of the principal amount on each November 1 until conversion of the interest rate on the bonds to a fixed rate.
Substantially all of utility plant of BHC and SWC are subject to the lien of their first mortgage indentures.
At December 31, 1985, the Company maintained unsecured bank lines of credit of $19,000,000. The lines of credit are subj_ect to annual review by the banks and require no compensating balances. Commitment fees ranged from 0% to 3/s of 1% of the prime interest rate multiplied by the line of credit. Total commitment fees paid on lines of credit for 1985 and 1984 were $23,750 and $34,075, respectively. No amounts were outstanding under these lines of credit on December 31, 1985 and 1984.
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Note 5 - Redeemable preferred stock of subsidiaries
Preferred stock of BHC is issuable in series, and 110,000 shares have been authorized. BHC preferred stock outstanding at December 31, 1985 was 35,000 shares of Series A 97/8% and 18,750 shares of Series B 11%. Dividends are cumulative and are limited to the fixed annual rate. Both series carry a par value of $100 and, in the event of involuntary liquidation, the holders are entitled to $100 per share.
Series A stock may be redeemed voluntarily at prices ranging from $105 per share in 1985 to $100 per share after 1989. Series B voluntary redemption prices range from $105.79 per share in 1985 to $100 per share after 1994.
The terms of both series provide for sinking fund retirement at par plus accrued dividends based on the following schedule:
1976 through 1995 1996 through 2005 1980 through 1995
Note 6 - Employee stock plans
Series A (annually)
1,500 shares 2,000 shares
Series B (annually)
1,875 shares
The Company has an employee stock ownership plan (ESOP), which provides for beneficial ownership of Company common stock by substantially all employees. Current federal tax law allows the Company an additional one-half of 1 o/o payrollbased credit for its qualified ESOP. Under the terms of the plan, shares with a value equal to the payroll-based credit will be deposited with a trustee. The shares will be held in trust for the benefit of the Company's employees, and normally will be distributed to them when they retire. Of the Company's 4,000,000 authorized shares of common stock, 45,000 shares are reserved for purchase under the plan. At December 31, 1985, 25,575 of the shares had been issued.
The 1985 financial statements include a $34,000 reduction of the Company's federal tax expense as a result of this ESOP
Note 7- Dividend reinvestment and common stock purchase plan
The Company's Dividend Reinvestment and Common Stock Purchase Plan provides holders of its common stock with a method of purchasing additional shares without payment of
In addition to this mandatory requirement, BHC has the option of redeeming, at the same price, an equal number of shares each year.
Payment of dividends on the common stock of BHC to the parent company is restricted under the preferred stock agreement. Unrestricted retained earnings amounted to $21,403,000 at December 31, 1985.
SWC is authorized to issue 60,000 shares of preferred stock. At December 31, 1985, SWC had outstanding 14,700 shares of 71/8% preferred stock having a par value of $50 per share. Dividends are cumulative and are limited to the fixed annual rate. SWC is required to make annual sinking fund payments of $45,000 and has the option of doubling sinking fund payments in any one year, at par value, in addition to the right to redeem the entire issue at $50.50 per share.
SWC is authorized to issue 400,000 shares of no-par-value preference stock. None is outstanding.
credit. During the year, a corresponding charge was made to general and administrative expense and, consequently, there is no effect on the Company's earnings. Shares equivalent to this amount will be remitted to the trustee after the Company files its 1985 federal income tax return.
Similarly, the 1984 and 1983 financial statements include reductions of the Company's federal tax expense in the amounts of $29,000 and $27,000, respectively.
In April1985, stockholders adopted a long-term incentive plan that provides for the granting of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock and performance units to key executives. An aggregate of 150,000 shares of common stock may be awarded under this plan, which expires January 30, 1995. Such number of shares are being reserved for issuance.
any brokerage or service charges. The plan also provides for a 5% discount from the market price on shares purchased through automatically reinvested dividends. Of the Company's 4,000,000 authorized shares of common stock, 250,000 shares are reserved for purchase under the plan. At December 31, 1985, 220,196 shares had been issued.
Note 8 - Pension plan
The cost ofthe Company's pension plans for 1985, 1984 and 1983 was $683,000, $777,000 and $792,000, respectively, of which $100,000, $122,000 and $176,000, respectively, was capitalized.
The actuarial present value of accumulated benefits, assuming a 6% rate of return, and net assets available for benefits at January 1, 1985 and 1984, were:
Note 9 - Post-retirement benefits
The Company and certain of its subsidiaries provide health care and'life insurance benefits for retired employees. Only those employees who remain with the Company until retirement age are eligible. SWC and the Company provide these
Note 10- Income taxes
Income tax expense for the three years ended December 31 consists of the following components:
Current Federal State
Deferred (prepaid) Investment tax credit Accelerated depreciation Other
A reconciliation of the consolidated federal income tax expense at the statutory federal income tax rate of 46% to the actual consolidated federal income tax expense is as follows:
Tax at statutory rate Increases (reductions) in taxes resulting from:
State taxes, net of federal income tax Nondeductible preferred dividends of subsidiaries Excess of tax over book depreciation Investment tax credit (less amount deferred) Payroll taxes and pensions capitalized Developmental computer costs Allowance for funds used during construction Other items Actual income tax expense
Actuarial present value of accumulated plan benefits
Vested Nonvested
Net assets available for benefits
January 1
1985 1984
(Thousands of dollars)
$ 9,784 $ 8,680 773 645
$10,557 $ 9,325
$14,549 $13,216
SWC has a supplementary retirement benefit for certain retired officers. The Company recognizes the cost of providing this benefit by expensing the payments as incurred, which were $9,000 in 1985.
benefits for all their retirees. BHC provides health care benefits for all retirees and life insurance for certain retirees. The Company recognizes the cost of providing these benefits to retired employees by expensing the annual insurance premiums, which were $79,500 in 1985 and $74,100 in 1984.
1985
$2,901 1,539
661 1,342
38 $6,481
$6,828
821 293
83 (507) (222) (122) (255) (438)
$6,481
1984 1983
(Thousands of dollars)
$3,268 $1,992 1,505 1,006
789 323 1,100 1,016
____i?_!) 31 $6,591 $4,368
1985 1984
46% $6,365 46%
6% 800 6% 2% 306 2% 1% (88) (1 o/o)
(3%) (195) (1 o/o)
(2%) (214) (2%) (1 o/o) (78) (2%) (156) (1%)
(3%) (149) (1%)
44% $6,591 48%
1983
(Thousands of dollars)
$4,645 46%
534 5% 300 3% (289) (3%) (163) (2%) (233) (2%) (109) (1 o/o)
(10) (307) (3%)
$4,368 43%
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Note 11 - Industry segment information
The Company's operations are grouped into three industry segments as follows:
Public water supply- involved principally in the collection, purification and distribution of water for domestic, commercial, industrial and fire protection services;
Forest products - involved principally in the processing, marketing and distribution of lumber products, industrial boxmaking, and the generation and sale of electricity;
Real estate- involved principally in the ownership, development, management and sale of commercial, industrial and residential properties.
The following table sets forth information about the Company's operations by industry segment for the years ended December 31, 1985, 1984 and 1983.
Operating revenues Public water supply Forest products Real estate
Total operating revenues
Operating income Public water supply Forest products Real estate Industry segments
operating income Unallocated expenses Interest expense Allowance for funds used
during construction Subsidiary dividends
Earnings before income taxes
Identifiable assets Public water supply Forest products Real estate Corporate assets
Total identifiable assets
Capital expenditures Public water supply Forest products Real estate
Total capital expenditures
1985
$ 49,456 7,998
700 $ 58,154
$ 21,440 235
~)
21,617 (84)
(6,712)
1984 1983
(Thousands of dollars)
$ 45,332 8,034
~ $ 56,968
$ 20,138 490 326
20,954 (407)
(6,681)
$35,693 8,016
218 $ 43,927
$ 15,265 737
________@)
15,935 (99)
(5,501)
658 636 415
~~)~) $ 14,843 $ 13,837 $ 10,098
$171,680 11,629
892 103
$184,304
$ 13,202 2,199
$161,964 10,299
1,823 87
$174,173
$ 13,107 484
76 $ 13,667
$125,750 10,221
4,272 90
$140,333
$ 8,059 208
8 $ 8,275
Depreciation expense • Public water supply Forest products Real estate
Total depreciation expense
1985
$ 4,191 641
6 $ 4,838
1984 1983 (Thousands of dollars)
$ 3,772 668
6 $ 4,446
$ 2,964 634
6 $ 3,604
• Additional depreciation expense for the public water supply segment of $16,000, $47,000 and $25,000 in 1985, 1984 and 1983, respectively, is included in operating expenses. Additional depreciation expense for the forest products segment of $88,000, $78,000 and $105,000 in 1985, 1984 and 1983, respectively, is included in operating expenses.
Operating revenues are comprised of sales to unaffiliated customers. The Company's operations are domestic and no single customer accounted for 10% or more of total operating revenues.
Operating income is defined as operating revenues less operating expenses. In computing industry segment operating income, unallocated expenses, income taxes, interest expense, AFUDC and subsidiary preferred dividends are not reflected.
Identifiable assets by industry segment are assets used in the Company's operation in each industry. Corporate assets are principally cash, prepaid expenses, receivables and deferred charges not identifiable with a specific industry segment.
Capital expenditures exclude assets purchased in the acquisition of SWC in 1984.
Supplementary information on effects of changing prices (unaudited)
The following supplementary information is supplied in accordance with Statement of Financial Accounting Standards (FAS) No. 33 and No. 82, which require the Company to measure the impact of inflation on certain items in the primary financial statements. This information should be viewed as an estimate of the approximate effect of inflation, rather than as a precise measure.
The effects of changes in specific prices or current cost information restate historical costs in terms of dollars that would be paid currently to purchase assets having the same service potential. The historical cost of depreciable plant was restated by use of current industry cost guides and indices. Depreciation expense was calculated by applying the Company's book depreciation rates to the revised a<;set amounts. In calculating the current cost information, forest products inventories were estimated based on December production costs. Cost of forest products in current dollars was assumed to be incurred evenly during the year.
In accordance with FAS No. 33, no adjustment has been made to income taxes, even though reported net income has been restated for changing prices. This provision yields a significantly higher effective tax rate under current cost data than the rate reflected in the primary financial statements.
The Company's water segment is regulated by the DPUC. This regulatory agency allows the recovery of depreciation through revenues solely on the basis of the historical cost of plant. Restatement of utility plant in terms of current cost values results in a significant increase in value over the historical cost of plant. This increase is not presently recoverable in rates as depreciation, and is reflected as a reduction to net recoverable cost. While the DPUC gives no recognition in their ratemaking process to the current cost of replacing utility plant, based on past practices, the Company believes it will be allowed to earn on the increased cost of its net investment when replacement of facilities actually occurs.
During inflationary periods, holders of monetary assets (such as cash or claims to cash) suffer a loss of general purchasing po~er while holders of monetary liabilities (such as long-term debt) experience a gain. Since the Company holds a significant amount of long-term debt, primarily due to financing of property, plant and equipment, it will benefit from inflation to the extent that past purchases are paid for currently with dollars that are worth less than those originally borrowed. The Company is limited to recovery of the embedded cost of debt capital.
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Statement of consolidated income from continuing operations adjusted for changing prices for the year ended December 31, 1985
Operating revenues
Operation and maintenance expense Depreciation Interest expense and preferred stock dividend requirements Taxes other than income taxes Income taxes Allowance for funds used during construction
Income from continuing operations (excluding reduction to net recoverable cost)
Gain from decline in purchasing power of net amounts owed
Increase in specific prices of inventories and net property, plant and equipment held during the year• Reduction to net recoverable cost Effect of increase in general price level
Excess of increase in specific price level over increase in general prices after reduction to net recoverable cost
Conventional historical
cost
24,939 4,838 7,348 6,844 6,481 ~)
49,792
$ 8,362
Adjusted for changes in
specific prices (Thousands of dollars)
25,845 13,970 7,348 6,844 6,481 (658)
59,830
$ (1,676)
$ 22,521 (2,193)
(16,084)
$ 4,244
• At December 31, 1985, current cost of inventories was approximately $4,307,000 and current cost of plant and equipment, net of accumulated depreciation, was approximately $442,986,000.
Five-year comparison of selected financial data adjusted for changing prices (Average 1985 dollars) Year ended December 31
1985 1984 1983 1982 1981 (Thousands of dollars, except per share)
Operating revenues Historical $58,154 $56,968 $43,927 $40,781 $32,987 Adjusted for general inflation 58,154 59,001 47,431 45,450 39,018
Income from continuing operations (excluding reduction to net recoverable cost)
Historical 8,362 7,246 5,730 5,280 4,821 Adjusted for specific price changes (1,676) (683) 224 155 673
Net assets at year-end (net recoverable cost) 59,840 57,827 46,834 45,508 44,743 Gain from decline in purchasing power of net amounts owed 3,654 3,244 3,160 3,129 7,083 Excess of increase in specific price level over increase in general prices 4,244 1,701 19,211 (1,799) (5,368) Per share information
Income per average share of common stock (after dividend requirements on preferred stock)
Historical 3.01 2.93 2.65 2.51 2.78 Adjusted for general inflation 3.01 3.03 2.86 2.80 3.29
Cash dividends declared per share of common stock Historical 2.00 1.92 1.84 1.76 1.68 Adjusted for general inflation 2.00 1.99 1.99 1.96 1.99
Market price per common share at year-end Historical 34.38 22.25 21.50 17.63 17.50 Adjusted for general inflation 34.38 23.04 23.21 19.65 20.70
Average consumer price index 322.2 311.1 298.4 289.1 272.4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of The Hydraulic Company:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of stockholders' equity and of changes in financial position present fairly the financial position of The Hydraulic Company and its subsidiaries at December 31, 1985 and 1984, and the results of their operations and the changes in their financial position for each of the three years in the period ended December 31, 1985, in conformity with generally accepted accounting principles consistently applied. Our examinations of these statements were made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
Price Waterhouse Bridgeport, Connecticut
February 4, 1986
PERFORMANCE STATISTICS
Public water supply segment operations highlights
BHC sales (Millions of gallons) Residential Commercial Industrial Company use and unaccounted for
Subtotal SWC sales (Millions of gallons)
Total
Number of customer accounts 3
Population served 4
Full-time employees
1985 1· 2 1984 1· 2
8,935 8,733 3,112 3,061 4,778 5,465 3,774 4,622
20,599 21,881 5,724 5,508
26,323 27,389
1~4,279 112,781 454,000 449,000
286 284
1Data for 1985 and 1984 include Stamford Water Company, which was acquired in March 1984.
1983 2
9,170 3,434 5,384 4,209
22,197
22,197
93,029 363,000
233
2Data for 1983-1985 include Litchfield County Water Company, which was merged into BHC in May 1983. 3Data for 1983 and prior years have been restated to reflect updated account information.
1982
8,346 3,554 5,961 3,358
21,219
21,219
89,546 352,000
227
4Estimate of the population served by BHC was adjusted beginning in 1982 to conform with 1980 U.S. census data.
1981
8,818 4,023 6,747 2,824
22,412
22,412
88,838 374,000
234
33
..---------
PERFORMANCE STATISTICS 1985 1984 1983 1982 1981
Book value per share $21.70 $20.60 $20.18 $19.39 $18.72
Payout ratio 66.4% 65.5% 69.4% 70.1 o/o 60.4% PERFORMANCE STATISTICS
Price/earnings ratio 11.4 7.6 8.1 7.0 6.3 Quarterly financial data
Capitalization Earnings Long-term debt* 52.9% 52.6% 50.9% 55.6% 53.9% Operating before Net Per
Preferred stock of subsidiaries 4.3 4.9 5.9 5.9 6.8 revenues income taxes income share*
Common equity 42.8 42.5 43.2 38.5 39.3 (Thousands of dollars, except per share) 1985
Total 100.0% 100.0% 100.0% 100.0% 100.0% First quarter $13,414 $ 3,010 $1,666 $.60
*Excludes current maturities. Second quarter 14,604 3,421 1,908 .69 Third quarter 15,520 4,580 2,166 .78
' ~--"'-=-~-~- -~- ' --"-"-=-=-~-=----_--=-::::_::-.'!:.::_--'-- :_-=,.::-;:;-_-.:::_,~.::- 7~~=!::::.~~:-:::, ·_·:.t_~--'-<:::.~'¥~~. d~31~~~"0"·-o:..I~::r-L2:<::::.£.~ _L__;c::;:;-:__~,.._~...,--::;:-c;;__._~"""':_~";,j Fourth quarter 14,616 3,832 2,622 .94
$58,154 $14,843 $8,362
Schedule of debt and preferred stock maturities (Thousands of dollars) 1996- 1984
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 2008 First quarter $10,847 $ 1,660 $ 870 $.40 First mortgage bonds Second quarter 15,873 3,444 1,767 .79
Third quarter 15,406 4,492 2,250 .83 Series B, 8:lf4%, due 1992 $ 10 $ 10 $ 10 $ 10 10 $ 10 $ 310 Fourth quarter 14,842 4,241 2,359 .86 Series M, 31/4%, due 1987 919 $56,968 $13,837 $7,246 Series 0, 5%, due 1987 2,500
Series P, 41/2%, due 1992 2,200 *Based on a weighted average of common shares outstanding during each quarter.
Series Q, 45/x%, due 1995 $4,000
Series R, 67/x•Yo, due 1998 $ 5,000
Series S, 10 1/2%, due 2000 357 357 357 357 357 357 357 357 $ 357 357 1,788
Series T. 7.4%, due 2008 12,000 Market and dividend information Series U, 9.375%, due 2000 635 635 635 635 635 640 3,185
Series B, 4.5%, due 1993 2,000 The following table, which is based on information provided by Francis Emory Fitch, Series C, 7.25%, due 1993 40 40 40 60 60 60 60 1,160 Inc., sets forth the range of market prices of The Hydraulic Company's common stock
as traded on the New York Stock Exchange, along with the dividends paid per share, Other notes on a quarterly basis. At December 31, 1985, there were 6,582 stockholders of record.
Note payable, lQ:l/4%, due 2014 10,000
Note payable, 91/Ho/o, due 2012 7,7oo· Closing Dividends Note payable, 71/2%, due 2009 3,000 Period sales prices paid Note payable, 10.25%, due 2008 6,000
High Low Note payable, 12%, due 1988 100 100 100
Note payable, 9%, due 1988 46 47 47 1985
Loan, 65/xo/o, due 2004 5,700 First quarter $261/4 $22 1/s $.48
Total debt 553 3,973 554 427 1,062 1,062 11,262 4,152 992 4,997 46,673 Second quarter 315/s 26 .50
Preferred stock Third quarter 31 267/s .50 Fourth quarter 361/2 291/2 .50
Series A, 97/xo/o, due 2005 150 150 150 150 150 150 150 150 150 150 2,000 1984
Series B, 11 o/o, due 1995 188 187 188 187 188 187 188 187 188 187 First quarter $227/s
1968 series, 71/H%, due 2002 45 45 45 45 45 45 45 45 45 45 285 $201/2 $.46
Total $936 $4,355 $937 $809 $1,445 $1,444 $11,645 $4,534 $1,375 $5,379 $48,958 Second quarter 221/2 183/4 .48 Third quarter 201/2 181/4 .48
• Letter of credit expires August 16, 1992. BHC may renew letter of credit or redeem bonds, unless purchased by BHC prior to redemption. Fourth quarter 231/s 195/s .48
-----_.- -.- -~~,;r-,-.-.r_"""'--·"'"·''.'!<··- __ - '!',.,..,_._,.,._,~---::.-_.,,.,.!'"-"!:'~...._-::_-~,_,- ,__~.J:~..::._}-.:."-:-"""" .... _."'li""'"~"'P-~,...-c:-~.·•••••rr.·-:::-2-.._~..._--,-,..,..~-.-.~--~'~-..~c:...;lf.~,._~~~~w
34 35
STOCKHOLDER INFORMATION
Corporate profile The Hydraulic Company (THC), formed in 1969, is a diversified natural resources company engaged in public water supply, forest products and real estate businesses.
THC's largest subsidiary, Bridgeport Hydraulic Company (BHC), provides public water service to approximately 96,000 customers in 17 communities in Fairfield, New Haven and Litchfield Counties in Connecticut. Founded in 1857, BHC is the largest investor-owned water company in Connecticut and is among the 10 largest investor-owned water companies in the nation.
BHC's Stamford Water Company subsidiary, established in 1868, supplies water to approximately 18,000 customers in Stamford, Connecticut.
THC's forest products subsidiary, Timco, Inc., which was formed in 1979, has lumber mill operations and energy cogeneration facilities in Center Barnstead, New Hampshire, and a box-making plant in Pittsfield, New Hampshire.
Main Street South Corporation, THC's other nonutility subsidiary, was formed in 1969, and is involved in the management and development of real estate projects.
36
Annual meeting Stockholders are cordially invited to attend the annual meeting, which will be held on Tuesday, April 22, 1986 at 9:30a.m. in the Community Room on the 11th floor of People's Bank, 855 Main Street, Bridgeport, Connecticut.
Form 10-K Stockholders may obtain, without charge, a copy ofTHC's current Form 10-K, including the financial statements and schedules filed with the Securities and Exchange Commission, by writing to:
Corporate Secretary The Hydraulic Company 835 Main Street Bridgeport, CT 06601
Dividend reinvestment and common stock purchase plan The Company offers a plan through which stockholders may invest their dividends and/or additional cash in the purchase of THC common stock. The Company issues new shares specifically for this purpose and offers a 5% discount from the market price on shares purchased through automatically reinvested dividends. No brokerage fees or commissions are charged for the purchase of shares.
As of the beginning of March 1986, 35% of all THC stockholders, representing 20% of the outstanding shares of the Company's common stock, were enrolled.
A prospectus describing THC's Dividend Reinvestment and Common Stock Purchase Plan is available on request by writing to the corporate secretary's office.
r
Stockholder inquiries Stockholders with questions concerning accounts, stock certificates or dividend checks should write to the Company's stock transfer and dividend disbursing agent, The Chase Manhattan Bank, N.A., as follows:
Fll dividend reinvestment
The Chase Manhattan Bank, N.A. Dividend Reinvestment Services P.O. Box 283 Bowling Green Station New York, NY 10275
~J change of address; check not received, or lost; direct deposit of dividends
The Chase Manhattan Bank, N.A. Shareholder Relations Department P.O. Box470 Washington Bridge Station New York, NY 10033
~"~stock certificates stolen or destroyed
The Chase Manhattan Bank, N.A. P.O. Box 467 Washington Bridge Station New York, NY 10033
n transfer of stock
The Chase Manhattan Bank, N.A. Stock Transfer Department P.O. Box469 Washington Bridge Station New York, NY 10033
or
Window facility at 67 Broad Street, 14th floor, New York City
Common stock The Company's common stock is traded on the New York Stock Exchange under the ticker symbol "THC." The stock's newspaper listing is "Hydrl."
Independent accountants Price Waterhouse Park City Plaza 10 Middle Street Bridgeport, CT 06604
Nomenclature The terms "THC," "The Hydraulic Company" and "the Company" are occasionally used in this annual report for convenience and reading ease. These terms do not in all cases describe exact intercompany relationships among THC and its subsidiaries.
37
38
DIRECTORS AND OFFICERS
Directors
Geoffrey Etherington [57] A. c President, Etherington Industries, a diversified group of manufacturing corporations
Norwick R. Goodspeed [63] B. c Chairman, People's Bank
John E.D. Grunow [66]A.c Lawyer & independent businessman
Donald M. Halsted, Jr. [59] A. B
Independent businessman
John M. Henske [62]c Chairman & Chief Executive Officer, Olin Corporation, a diversified company concentrated in chemicals, metals and applied physics
Newman M. Marsilius [68]A. B
Chairman of the Board, The Producto Machine Company, machine tool manufacturer
Officers
Frederick B. Silliman Chairman of the Board
William S. Warner President & Chief Executive Officer
Jack E. McGregor [51] Executive Vice President
Joseph J. Murphy [4 7] Executive Vice President & Treasurer
Anthony M. Macleod [38] Vice President & General Counsel
Charles W. Horsfall [63] Secretary
Russell B. Hintz [41] Controller
Martha W. Bodurtha [61] Assistant Secretary
Janet M. Hansen [43] Assistant Treasurer
Larry L. Pflieger [62] B
President & Treasurer, Wamaco, Inc., a diversified manufacturer of apparel
G.J. Ratcliffe, Jr. [49] B. c Executive Vice PresidentAdministration, Harvey Hubbell, Incorporated, electric wiring and wiring device manufacturer
Eugene H. Rem mer [62] A
President, Chemtex, Inc., man-made fiber manufacturer and supplier of chemical plants
Frederick B. Silliman [70] Chairman of the Board, The Hydraulic Company
WilliamS. Warner [61] President & Chief Executive Officer, The Hydraulic Company
Honorary directors
Roger Lewis Independent businessman
Leonard H. McKane Retired. Formerly Vice President & Treasurer, The Hydraulic Company
John J. Scanlon Retired. Formerly Executive Vice President & Chief Financial Officer, AT & T, telephone utility
1985 committees A. Member of Audit Committee. B. Member of Finance Committee. C. Member of Compensation Committee.
[Age]