THE BATON ROUGE WATER WORKS COMPANY CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1993 AND 1992 TOGETHER WITH AUDITORS' REPORT

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1 CONSOLDATED FNANCAL STATEMENTS AS OF DECEMBER 31, 1993 AND 1992 TOGETHER WTH AUDTORS' REPORT

2 AUDTED CONSOLDATED FNANCAL STATEMENTS December 31, 1993 TABLE OF CONTENTS Report of ndependent Public Accountants Consolidated Balance Sheets Consolidated Statements of ncome Consolidated Statements of Changes in Retained Earnings Consolidated Statements of Cash Flows Consolidated Statements of Capitalization Notes to Consolidated Financial Statements ll

3 Ll ARTHUR ANDERSEN & Co. lll ll Ll To the Stockholders of The Baton Rouge Water Works Company: Report of ndependent Public Accountants,, We have audited the accompanying consolidated balance sheets of The Baton Rouge Water Works Company (a Louisiana corporation) and subsidiar'ies as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in retained earnings, cash flows and capitalization for the years then ended. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. n our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Baton Rouge Water Works Company and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. New Orleans, Louisiana February 18, 1994

4 CONSOLDATED BALANCE SHEETS THE BATON ROUGE VATER WORKS COMPANY CONSOLDATED BALANCE SHEETS - Continued THE BATON ROUGE VATER WORKS COMPANY ASSETS Utility Plant Utility Plant in Service Construction Work in Progress less Accumulated Depreciation Dece ber $124,367, ,954,564 < > 86,436,980 $118,989, ,390,010 < > 84,054,205 CAPTALZATON AND LABLTES CAPTALZATON Common Stockholders' Equity Preferred Stock Long-term Debt DECEMBER $ 40,704,346 $40,456,928 1,306,896 1,306, ,158,075 82,720,122 RESTRCTED FUND CURRENT ASSETS cash Temporary cash nvestments Accounts Receivable Due From Affiliates ncome Taxes Receivable Deferred ncome Taxes Materials and Supplies Prepaid Expenses OTHER ASSETS AND DEFERRED CHARGES Unamortized Debt Expense Other Assets and Deferred Charges 13,310,566 4,191,236 4,478,803 2,059,881 10, , , , ,664, , ,497,393 1,655,350 5,412,260 1,874, , , ,487, , CURRENT LABLTES Current Portion of Long-term Debt Accounts Payable and Accrued Liabilities Customer Deposits Accrued Taxes - ncome Accrued nterest Dividends Declared DEFERRED CREDTS AND OTHER LABLTES Advances for Construction Contributions in Aid of Construction Regulatory Liability Deferred ncome Taxes 1,680,000 1,680, , ,744 2,284,623 2,123,265 62,084 1,236,947 1,232, ,591,728 5,849,549 1,722,502 1,013,499 14,110,612 13,904,934 2,731, $ $ $ $ See notes to consolidated financial state ents. 2 See notes to consolidated financial state ents. 3

5 CONSOLDATED STATEMENTS OF NCOME Year Ended Dece ber l tl OPERATNG REVENUES Metered Sales Fire Protection Fees and Service OPERATNG EXPENSES Delivery to Customers Expenses Customer Service and General Administration Depreciation and Amortization ncome Taxes Taxes Other Than ncome Taxes Operating ncome NON-OPERATNG NCOME Contract Billing and Collecting - nterest ncome Miscellaneous ncome NCOME DEDUCTONS nterest on Long-term Debt Amortization of Debt Expense Other nterest and Fee Expenses Net $27,168,332 $24,370, , , ,871,074 25,807,032 5,959,674 5,727,212 5,529,755 5,245,658 3,709,176 3,593,482 3,387,679 2,525, ,723,112 6,154, , ,367 1,023, , ,803,013 1,133,152 3,542,264 2,894,851 68,162 27, $ $ See notes to consolidated financial state ents. 4

6 CONSOLDATED STATEMENTS OF CHANGES N RETANED EARNNGS Year Ended Dece ber Balance at Beginning of Year $32,791,848 $29,562,459 Net ncome ,617, ,859,971 Retirement of Treasury Stock <290,272> Cash Dividends Paid or P~yable Common: $5.745 per share $2.000 per share <5,460,634> <950,502> Preferred: $2.16 per share $2.16 per share Balance at End of Year <117,621> $32.748,987 < > $ See notes to consolidated financial state ents. 5

7 CONSOLDATE~STATEMENTS OF CASH FLOUS THE BATON ROUGE YATER UORKS COMPANY.t.1 t OPERATNG ACTVTES Net ncome Adjustments to Reconcile Net ncome to Net Cash Provided by Operating Activities: Depreciation and Amortization Provision for Deferred ncome Taxes Provision for Regulatory Liability Provision for Pension Expense Changes in Operating Assets and Liabilities: Decrease <ncrease> in Receivables Decrease <ncrease> in nventories and Prepaid Expenses ncrease <Decrease> in Accounts Payable and Accrued Expenses ncrease in Customer Deposits ncrease in Deferred Charges Net Cash Provided by Operating Activities NVESTNG ACTVTES Purchase of Utility Plant Proceeds from Restricted Fund Reinvestment of nterest ncome n Restricted Fund Net Cash Used in nvesting Activities FNANCNG ACTVTES Principal Payments on Long-term Debt Payment of Dividends Net Proceeds from Advances and Contributions in Aid of Construction Net Cash Used in Financing Activities ncrease in Cash and Cash Equivalents CASH AND CASH EQUVALENTS BEGNNNG OF YEAR CASH AND CASH EQUVALENTS END OF YEAR Year Ended Dece.ber $ 5,825,666 $4,297,512 3,777,338 3,621, , ,313 <101,122> <217,777> <212,654> <172,390> 289,323 <44,524> < 32,179> 1,580,821 88, ,358 94,729 <2.064,868> < > 8,871,385 7,780,962 <5,982,745> <3,573,274> 5,344,024 < > <231118> < 795,918> <3,596,392> <1,809,465> <5,796,903> <5,578,255> <1,068,123> < > < > 1,602,429 <2,056,539> $ $ See notes to consolidated financial state.ents. 6

8 r-----~ CONSOLDA~ED STATEMENTS Of CAPTALZATON ~ ~ 1 ], 1,.~. 1 1 Co on Stockholders' Equity common Stock, No Par Value Authorized 1,000,000 Shares 1993 ssued 950,502 Shares 1993 Outstanding - 950,502 Shares 1992 ssued 529,705 Shares 1992 outstanding - 475,251 Shares Retained Earnings Less Treasury Stock, at cost - Preferred Stock series A Non-Voting, cumulative $24 Par Value, 9%, ssued and Outstanding 54,454 Shares Long-ter Debt The Baton Rouge Water Works Company F i r s t Mortgage Bonds Series H, 8.750% Due 2/1/98 Series, % Due 8/1/98 Series J, % Due 2/1/99 Series K, % Due 8/1/03 Series L, 6.060% Due 2/1/10 54,454 Shares $ 7,955,359 32,748,987 40,704,346 1,306,896 3,300,000 3,000,000 6,000,000 5,000, ,300,000 $ 8,866,880 32,791,848 <1 1201,800> 40,456,928 1,306,896 3,480,000 4,000,000 6,000,000 5,500, ,980,000 Utility Properties, nc. Collateral Mortgage Note, 10.25% 4,526,833 4,656,298 Less current Portion of Long-term Debt < > < > Total Capitalization $ $ See notes to consolidated financial state ents. 7

9 NOTES TO CONSOLDATED FNANCAL STATEMENTS Dece ber 31, 1993 NOTE 1: SGNFCANT ACCOUNTNG POLCES Organization and Principles of Consolidation: The consolidated financial statements include the accounts of The Baton Rouge Water Works Company ("Company") and its wholly owned subsidiaries, Parish Water Company, nc. ("Parish"> and Utility Properties, nc. ("UP"). All significant intercompany accounts and transactions have been eliminated. The Company is a majority owned subsidiary of Utility Holdings, nc. Certain balances in prior year have been reclassified to conform with the current year's presentation. Regulation: The Company and Parish are regulated by the Louisiana Public Service Commission ("LPSC"), and their accounting policies conform to the uniform system of accounts prescribed by the LPSC and to generally accepted accounting principles as applicable to rate regulated public utilities. Utility Plant and Depreciation: Utility plant is stated at cost. The cost of additions to utility plant includes contracted work, direct labor and materials, allocable overhead, and an allowance for the composite cost of funds used during construction. The cost of units of property retired or replaced is removed from utility plant and such costs plus removal costs, less salvage, are charged to accumulated depreciation. Maintenance and repairs of property determined to be less than whole units of property are charged to operating expenses. Depreciation for financial reporting purposes is computed using the straight-line method based upon the estimated service lives of the properties as approved by the LPSC. For Federal income tax purposes, depreciation is calculated using the most advantageous rates permitted under the nternal Revenue Code applicable at the time the assets were acquired. Custo ers Advances and Contributions in Aid of Construction: Customers advances for construction represent amounts advanced by real estate developers and others for the construction of water mains. Refunds are made to those making the deposits on the basis of customer service connections over specified periods of time. All amounts not refunded at the expiration of the contract period become the property of the Company, and are credited to the contributions in aid of construction account. 8

10 NOTES TO CONSOLDATED FNANCAL STATEMENTS NOTE 1: SGNFCANT ACCOUNTNG POLCES - Continued Contributions in aid of construction represents amounts credited from customers advances for construction expired contracts and direct contributions from customers for certain plant improvements.. ~ ll ll t lnco e Taxes: Certain items of income and expense are recognized in one reporting period for financial statement purposes and another for income tax purposes. Deferred income taxes are provided on these temporary differences which principally include unbilled revenue, depreciation of utility plant, prepaid tank painting, extraordinary property losses, pension plan assets, and regulatory liabilities Statement of Financial Accounting Standards ( 11 SFAS 11 ) number 109, 11 Accounting for ncome Taxes 11, was issued in February of 1992 and became effective in the 1993 fiscal year. SFAS number 109 significantly changes accounting for income taxes and revises the computation of deferred income taxes. The Company has recorded a regulatory liability representing the amount of deferred income taxes in excess of the FAS number 109 deferred tax liability. The regulatory liability will be amortized at the Company's and the subsidiary's, respective, composite depreciation rates. The Company and its subsidiaries have elected to file consolidated federal income tax returns with its controlling stockholder, Utility Holdings, nc. Under the terms of an arrangement between Utility Holdings, nc. and the Company, the Company and its subsidiaries have recognized federal income tax expense and the related liabilities as if they were filing separate returns. Revenues and Accounts Receivable: For financial reporting purposes, revenues for metered sales are recognized in the period in which the meters are read. Other revenues are recognized in the period in which the bills are rendered. The Louisiana Public Service Commission approved a rate increase to produce $2,051,190 in additional revenues per annum for the Company on and effective December 22, Cash Equivalents: Cash equivalents are defined as short-term, highly liquid investments both readily convertible to known amounts of cash and so near maturity that there is insignificant risk of changes in value because of changes in interest rates. 9

11 NOTES TO CONSOLDATED FNANCAL STATEMENTS THE BATON ROUGE VATER WORKS COMPANY l J.1.1 NOTE 2: UTLTY PLANT The Company's utility plant is distributed among its corporate entities as follows: The Baton Rouge Water Works Company S 93,650,728 Parish Water Company, nc. 25,031,823 Utility Properties, nc. 5, $ The estimated costs to complete construction work December 31, 1993, was $1,649, ~1~9~9~3~ ~1~9~9~2 s 90,102,621 23,201, $ ,067 in progress at NOTE 3: OTHER ASSETS AND DEFERRED CHARGES The balance of Other Assets includes deferred charges and $1,544,486 deposited to fund a split-dollar life insurance policy covering the Company's chief executive officer. The deferred charges consist of regulatory assets established for the unamortized portion of extraordinary property losses and prepaid tank painting costs. These regulatory assets and their scheduled annual amortization have been approved by the LPSC. NOTE 4: COMMON STOCKHOLDERS' EQUTY Retained earnings, in part, are restricted as to the payment of cash dividends by the Restated First Mortgage, Deed of Trust, and Security Agreement. At December 31, 1993, $18,047,601 of consolidated retained earnings was so restricted. n March of 1993, the Company retired its 54,454 shares of Treasury Stock which resulted in a $209,272 reduction of retained earnings. The reduction of retained earnings represents the difference in the basis of the Treasury Stock and the related basis of the outstanding Common Stock. The Company's Board of Directors declared a two-for-one common stock split as of March 30, 1993, record date. The stock split resulted in the issuance of 475,251 additional shares of common stock which increased the total issued and outstanding shares of common stock to 950,

12 OTES TO COSOLDATED FACAL STATEMENTS THE BATO ROUGE VATER YORKS COMPAY OTE 4: COMMO STOCKHOLDERS' EQUTY - Continued The 1992 cash dividends paid or payable per common stock share have not been adjusted to reflect the stock split. Also, the number of common stock shares issued and outstanding for 1992 do not reflect the stock split. t ' t, ' OTE 5: OTE 6: PREFERRED STOCK The Company, in June 1987, issued Series A Preferred Stock with a cumulative dividend rate of 9 percent per annum. The Series A Preferred Stock is nonvoting, non convertible, and callable at par at the option of the Company after 15 years following the date of issue. The Series A Preferred Stock has a preferential value in the Amount of $24.00 per share in- the event of liquidation. LOG-TERM DEBT The Company entered into an Exchange Agreement and the Restated First Mortgage, Deed of Trust, and Security Agreement ("Restated Mortgage") dated as of August 1, The Exchange Agreement replaced purchase agreements with the individual bondholders for the outstanding bonds. Likewise, the Restated Mortgage replaced The New First Mortgage and Deed of Trust ("Old Mortgage") dated as of August 1, The terms of the bonds outstanding under the Old Mortgage are essentially identical to the terms under the Restated Mortgage. The long-term debt of the Company is secured by the Restated Mortgage which pledges substantially all operating properties of the Company and Parish and all of the capital stock of Parish and UP to the Whitney National Bank, as Trustee. The long-term debt of UP is collateralized by a first mortgage on its land and building and between UP and its parent. a pledge of its interest in the lease The aggregate maturities subsequent to December 31, of long-term debt for 1993, are as follows: 1,680,000 1,680,000 2,310,000 1,340,000 3,775,000 the five years 11

13 NOTES TO CONSOLDATED FNANCAL STATEMENTS THE BATON ROUGE VATER WORKS COMPANY NOTE 6: LONG-TERM DEBT - Continued nterest paid was $3,426,296 and $2,854,126 in 1993 and 1992, respectively. As a result of the Series L bond issue, $13,310,566 of the proceeds and interest income were in a restricted fund at December 31, 1993, as follows: $1,840,794 in the Debt Service Reserve Account; $11,466,006 in the Project Account to be withdrawn as the components of the specified projects are completed over the next three years; and $3,766 in the Debt Service Account which was used in the interest payment on February 1, As of December 31, 1993, the market value of the investments in the Debt Reserve Account was $1,972,456. NOTE 7: NCOME TAXES ll ll ll ll ' The components of the provision for income taxes are summarized as follows: Current: Federal State Deferred ncome taxes paid and payments in lieu $3,406,476 and $2,205,000 in 1993 and 1992, $2,808, ,238, $ $ 2,030, ,381, $ of income taxes respectively. As of December 31, 1993, the Company has deferred $1,765,624 and tax liabilities of $9,374,096. The excess deferred taxes transferred to the regulatory January 1, 1993 was $2,832,306. tax assets amount of liability were of the on 12

14 NOTES TO CONSOLDATED FNANCAL STATEMENTS NOTE 8: PENSON PLAN AD POSTRETREMENT BENEFTS t t Pension Plan: The Company and Louisiana Water Company (LWC), a wholly owned subsidiary of Utility Holdings, nc., maintained noncontributory defined benefit pension plans which were consolidated as one plan in 1990 retroactively to January 1, 1989 and were amended to comply with regulations issued pursuant to TRFA '86. The consolidated defined benefit pension plan covers substantially all employees providing for retirement and death benefits. The benefits are based upon years of service and the employee's compensation during the employment term. The Company and LWC's policy is to fund an amount equal to or greater than the minimum funding requirements of ERSA but not in excess of the maximum deductible amount for federal income tax purposes. The Company and LWC made no contribution to the plan in 1993 or in A summary of the components, consolidated for the Company and LWC, of net periodic pension cost is as follows: t Service cost - benefits earned during the period $ 516,491 $ 486,426 nterest cost on projected benefit obligation 672, ,248 Actual return on plan assets <1,084,431> <1,221,945> Net amortization and deferral < > <42.517> Net pension income $ < > $ < > The net pension statement was respectively. income for $<217,777> the Company as recognized in and $<212,654> for 1993 i t s and income 1992, Assumptions used in the accounting of the net periodic pension cost in 1993 and 1992 were: Weighted - average discount rate Rates of increase in compensation levels Expected long-term rate of return or assets 8% 5% 8% 13

15 NOTES TO CONSOLDATED FNANCAL STATEMENTS NOTE 8: PENSON PLAN AND POSTRETREMENT BENEFTS - Continued The following table sets forth the consolidated funded status and amounts of the plan at December 31, 1993 and 1992: Actuarial present value of benefit obligations: Vested benefit obligation s s Accumulated benefit obligation Projected benefit obligation Plan assets at fair value Projected benefit obligation less than plan assets Unrecognized prior service cost Unrecognized net <gain> Unrecognized net <asset> at December 31, 1987, net of amortization Net pension asset <liability> recognized by the Company and LWC c o n s o l i d a t e d p l a n s s <8,393,934> ,315,891 <405,214> <2,370,927> < > =$====7=6::::!:':::::2=3=3= s s <8,623,142> s 4,516,211 <448,236> <2,524,919> < > <88.096> Net pension asset recognized in the Company's balance sheets were $405,828 and $188,051 for 1993 and 1992, respectively. Assumptions used in the accounting for the Reconciliation of Funded Status in 1993 and 1992 were: Weighted-average discount rates Rates of increase in compensation levels Expected long-term rate of return on assets % 4.5% 8.0% % 5.0% 8.0% The assets of the plan consist principally of short-term investments, U. S. Government securities and corporate bonds. 14

16 NOTES TO CONSOLDATED FNANCAL STATEMENTS NOTE 8: PENSON PLAN AND POSTRETREMENT BENEFTS - Continued Postretire ent Benefits: The Company provides retiring employees the option to continue in the group health program. The group health program benefits, applied to retired employees, are reduced by the amount of any similar benefits payable under Medicare. The Company pays one half the group health premium. The cost to the Company was $29,514 and $29,423 in 1993 and 1992, respectively. n December 1990, the Financial Accounting Standards Board issued a new standard on accounting for postretirement benefits other than pensions ( 11 PBOP 11 ) SFAS number 106. This new standard requires the expected cost of these benefits be charged to expense during the years that the employees render service. This is a change from the Company's current policy of recognizing these costs on a pay-as-yougo (cash) basis. The Company is required to adopt the new accounting and disclosure rules no later than At the beginning of the fiscal year in which the standard is first applied, the Company must determine a transition obligation equal to the accumulated postretirement benefit obligation. This obligation may be recognized immediately in net income or on a delayed basis as a component of net periodic postretirement benefit cost. The Company will not adopt the method of accounting for PBOP until it is required in fiscal year The Company has not decided if it will recognize the accumulated obligation immediately or on a delayed basis. The financial impact of this new standard has not been fully determined, but the change may result in significantly greater expense being recognized. On May 17, 1993, the LPSC ordered the utilities to remain with the pay-as-you-go method of accounting for PBOP. Therefore, a regulatory asset may not be established for the difference in regulatory and financial reporting for the effects of SFAS number

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