SECURITIES AND EXCHANGE COMMISSION Washington, D. c. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1985

Commission file number 0-4831.

THE HYDRAULIC COMPANY (Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)

835 Main Street, Bridgeport, Connecticut (Address of principal executive offices)

06-0852232 (I.R.S. Employer Identification No.)

06601 (Zip Code)

Registrant's telephone number, including area code (203) 367-6621

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Common Stock, no par value

Name of each exchange on which registered New York Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act:

None (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports reqQired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO

The aggregate market value of the voting stock held by nonaffiliates of the registrant. $91,133,229 (Computed by reference ~o the closing price of the Registrant's Common Stock on March 10, 1986, as published in The Wall Street Journal report of the New York Stock Exchange-Composite Transactions).

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

Class Common Stock, no par .value

Outstanding at March 10, 1986 2,812,701 shares

The following documents have been incorporated by reference:

1. Annual Report to Stockholders for the year ended December 31, 1985 -Part I, Item 1, Item 2: Part II, Item 5, Item 6, Item 7 and Item 8: Part IV.

2. Definitive Proxy Statement, Dated March 27, 1986 for Annual Meeting of Stockholders to be held April 22, 1986 - Part III.

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PART I.

ITEM 1. BUSINESS

General

The Hydraulic Company (the "Company") is a Delaware holding corporation with its principal office at 835 Main Street, Bridgeport, Connecticut 06601 (telephone number: (203) 367-6621). The Comp~ny was organized in 1969. and is the parent of Bridgeport Hydraulic Company ("BHC") and its subsidiary Stamford Water Company ("SWC"), acquired in March 1984, both of which are Connecticut public service water companies regulated by the Connecticut Department of Public Utility Control (the "DPUC"). The Company is also engaged in non-utility businesses through its other subsidiaries, including Timco, Inc. {"Time~"), which is involved in the forest products industry, and Main Street South Corporation ("MSSC"), a small subsidiary which has various real estate interests. The Company provides administrative and management services to its subsidiaries, for which it is compensated.

Following the affirmative vote of holders of more than two-thirds of the outstanding shares of common stock of SWC and approval by the DPUC, the Company completed its acquisition of the common stock of SWC in March 1984 for approximately $7,300,000, including acquisition costs. 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 thereto, is now the sole stockholder of SWC's common stock. SWC is engaged in the sale and distribution of water for residential, commercial, industrial, municipal and fire protection purposes in the City of Stamford, Connecticut.

In March 1983, the DPUC approved BHC's application filed December 15, 1982 to merge its wholly owned subsidiary Litchfield County Water Company ("LCWC") into BHC. Effective May 31, 1983, LCWC was merged into BHC. All references herein to BHC include its Litchfield County Division. See "DPUC Regulation."

Construction Program

Utility

BHC and SWC engage in a continuing construction program based upon present legislative and regulatory requirements and anticipated future water requirements of their customers. BHC during the years 1983 through 1985, and SWC in 1984 and 1985 expended an aggregate of $34,368,000 for plant additions and modifications of existing plant facilities, excluding an allowance for funds used during construction ("AFUDC"). The expenditures were primarily made for installations of water mains and meters, the construction and alteration of wells and pumping stations and the construction of such special projects as the southwest regional pipeline interconnection, the Naugatuck Valley regional pipeline interconnection and SWC's filtration facility. BHC, through the southwestern Connecticut regional pipeline interconnection, supplies water to communities in lower Fairfield County and the lower

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Naugatuck Valley regional pipeline interconnection will replace BHC's Seymour reservoir supply. It is expected that SWC will complete construction of its water filtration plant required by the federal Safe Drinking Water Act of 1974 ("SDWA") in 1986. As of December 31, 1985, expenditures on the water filtration plant amounted to $13,286,740, excluding an allowance for funds used during construction.

It is anticipated that during 1986 BHC and SWC will spend approximately $13,100,000 for construction programs. Management cannot currently predict the aggregate additional capital expenditures that may be required under future federal, state or local regulation. If, however, all of the major surface water supplies of BHC required filtration due to government regulation or deterioration in existing water quality, substantial additional capital expenditures would be· required. Under such circumstances, management estimates these costs could e~ceed $80,00~,000 through 1991.

Non-Utility

From 1983 through 1985, Timco expended an aggregate of approximately $2,891,000, excluding capitalized interest, on plant improvements. The largest expenditure was made for the installation of a second cogeneration unit consisting of a 30,000 pound boiler and a 4 megawatt turbine located in Center Barnstead, New Hampshire. It is anticipated that in 1986 the non-utility construction program will total approximately $3,200,000.

Financing Requirements

The consolidated overall capital requirements of the Company, and sources of capital, for the years 1983 through 1985 and as presently estimated for 1986 are outlined on page 17 of the Company's Annual Report to Stockholders for the year ended December 31, 1985, incorporated by reference herein.

Management anticipates that the 1986 capital requirements of $17,200,000, which represents $16,300,000 of construction expenditures and $900,000 of debt maturities and sinking fund obligations, 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 $19,000,00-0 of unused bank lines of credit and approximately $2,400,000 of cash and short-term investments.

Internally generated funds provided a substantial portion of the Company's construction expenditures. The Company's ratio of net internal cash flow to gross property additions, exclud!ng AFUDC, was 81%, 60% and 60%, respectively for 1983, 1984 and 1985. The public utility industry is capital-intensive and, because BHC and SWC represent the largest operating segment of the Company, management believes this ratio is one of the key measurements of liquidity, or cash adequacy.

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The Company's ability to finan~e future utility construction programs depends in part on future rate relief. Rate relief will have an impact on both internally genera~ed funds and the ability to obtain external financings. In additiont rate relief is required in order to maintain certain debt and preferred stock coverage ratios which, combined with common stock dividends, are necessary to allow the issuance of debt and equity securities. The type and amount of new financings will be based on the Company's general financial policies regarding capitalization and payout ratios, as well as on market conditions and other economic factors.

Provisions of the $7,700,000 tax exempt financing prohibit the incurrence or the guaranty of any debt (in excess of $3,000,000 of short-term debt) by the Company or its subsidiaries unless consolidated earnings available.for fixed charges (defined in the financing agreement) during a period of twelve consecutive calendar months within the fifteen calendar months immediately preceding the first day of the month in which the proposed debt is to be incurred or guaranteed are not less than 200% of pro forma fixed charges (as defined in the financing) for such twelve-month period. As of December 31, 1985, on the basis of this test, the Company and its subsidiaries could have issued or guaranteed additional long-term debt in the amount of $49,200,000 as permitted by this coverage requirement (making available a total of $52,200,000 in short and long-term borrowing capacity of the Company) •

Under the terms of BHC's Preferred Stock, of which on December 31, 1985 there were 53,750 shares outstanding, no additional preferred stock can be issued (other than to refinance all outstanding Preferred Stock) unless, under the provisions currently in effect, income of BHC before interest charges for twelve consecutive months ending not more than ninety days prior to the issuance thereof is at least 1-1/2 times the aggregate of the annual interest charges on all indebtedness and the annual dividend requirements on all preferred stock on a pro forma basis immediately after the issuance of such shares. On December 31, 1985, based on the net earnings of BHC, the Preferred Stock coverage ratio was 2.28.

Industry Segment Information

The Company's operations are grouped into three industry segments public water supply, forest products and real estate. For

information concerning operating revenues, operating income, identifiable assets, capital expenditures and depreciation expense for each segment for each of the years ended December 31, 1985, 1984 and 1983, see Note 11 of the Notes to Consolidated Financial Statements of the Company's Annual Report to Stockholders for the year ended December 31, 1985, incorporated by reference herein. The consolidated operating revenues of the Company for the year ended December 31, 1985 were derived from the following sources: 85% from public water supply, 14% from forest products and 1% from real estate. Additional information with respect to the three industry segments follows.

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Public Water Supply

Service Areas

BHC is engaged in the collection, purification and distribution of water for residential, commercial, industrial and fire protection services in the Cities of Bridgeport and Shelton and the contiguous Towns of Easton, Fairfield, Monroe, Stratford, Trumbull, Wilton and Westport, all located in Fairfield County, and the Towns of Seymour, Beacon Falls and Oxford, all located in New Haven County, and the Towns of Litchfield, Salisbury, North Canaan, Norfolk and Cornwall, all located in Litchfield County, Connecticut. BHC also sells, as requested, water for redistribution to the First and Second Taxing Districts of the City of Norwalk, Connecticut and sells water to the New Canaan Water Company through the Southwest regional pipeline.

SWC services the City of Stamford in Fairfield County and also supplies Connecticut-American Water Company, a public utility located in the adjacent Town of Darien, with a portion of that company's water requirements for distribution and resale.

The population of the communities served by BHC as of December 31, 1985 was approximately 372,000 persons, and the total number of accounts as of that date was approximately 96,000. The residential characteristics of the area have changed, indicating an increase in the percentage of apartment dwellings and condominium units. Management presently anticipates little or. no growth in industrial water deliveries on a long-term basis and a relatively modest growth rate in residential consumption.

The operating revenues of BHC for the twelve months ended December 31, 1985 were derived from the following sources: 60.6% from residential customers, 13.9% from commercial customers, 10.4% from industrial customers, 14.8% from municipal fire protection customers and .3% from other customers.

SWC's service area has an estimated total population of 82,000 persons, and the total number of accounts as of December 31, 1985 was approximately 18,400.

The business of BHC and SWC is subject to seasonal fluctuations. The demand for water during the warmer months is generally greater than during the cooler months due primarily to additional water requirements of industrial and residential cooler systems, private and public swimming pools and lawn sprinklers. Throughout the year, and particularly during the warmer months, demand will vary with rainfall and temperature levels.

Water Supply

Water is available from both surface and subsurface sources. During 1985, approximately 85% of the supply of BHC was provided by impounding reservoirs and 15% by producing wells. BHC's surface and storage facilities are separated into five area systems: the Hemlocks,

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Easton, Trap Falls, Seymour and Lit~hfield Systems. As of December 31, 1985, BHC's reservoirs and well fields had an aggregate storage capacity of 24.8 billion ga~lons and a maximum daily safe yield of 78.1 million gallons. Safe yield is an estimate of the supply capability during an extended drought.

All of BHC's reservoirs and active wells are located on property owned by it in fee. BHC believes it has an adequate water supply to satisfy current and projected needs of its customers within its territorial service area at least through 1990 and further believes that it has identified all the water supply sources needed to meet the needs of its service area through the year 2030. Substantially all of the land included in identified future water supply areas is owned by BHC. During the pervasive dry spell which affected the northeastern region of the United States in late 1980 through the first half of 1981, B~C was able to accommodate the needs of its own customers and to offer· relief to others via water sales to neighboring utilities. Continuous studies are made to determine BHC's supply and distribution needs, and BHC continues to explore and develop additional ground water supplies and study alternative surface water sources to meet anticipated future water requirements.

SWC owns, in fee, five reservoirs, together with contiguous land in the watershed, located in the City of Stamford and in the Town of New Canaan, in the State of Connecticut, and in the Towns of Pound Ridge and Lewisboro, in the State of New York. The aggregate capacity of the reservoirs is approximately 5.1 billion gallons with flashboards. SWC has a maximum daily safe yield of 17.5 million gallons per day. SWC and the Company are currently reviewing the best means of satisfying SWC's projected water needs. In this regard, it is currently expected that the proposed regional pipeline interconnection from BHC would provide additional water to SWC in future years.

In 1982, the Connecticut Water Diversion Policy Act was enacted which requires that all future diversions of surface and ground water receive a permit from the Connecticut Department of Environmental Protection ("DEP"). This law "grandfathers" existing surface and ground water supplies, requiring that these be registered with the DEP. BHC and SWC have filed registrations for all of their supplies. While it is expected that the DEP will accept all of BHC's and SWC's existing supplies for registration, it is possible that there could be some question as to the capacity of the supplies being registered, which could have a negative effect on future planning.

Minimum Stream Flow Standards established by the DEP in 1980 require operators of water supply impoundments and reservoirs to release certain amounts of water from such impoundments and reservoirs into downstream waters. The effect of the release of such water from BHC'c and SWC's reservoirs is minimal, and, in the opinion of management, does not impair the ability of BHC and SWC to supply water to their respective customers. However, the DEP has proposed changes in these standards which, if implemented as proposed, could have a significant adverse effect on BHC's and SWC's supply capacities.

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DPUC Regulation

BHC and SWC are subject to regulation by the DPUC, which has jurisdiction with respect to rates, service, accounting procedures, issuance of securities, dispositions of utility property and other related matters. The five members of the DPUC are appointed by the Governor of the State of Connecticut with the advice and consent of both houses of the Connecticut legislature.

The following table sets forth information as to recent rate increases granted by the DPUC to BHC and SWC:

Date of Appli­cation

Amount Requested

% Increase Effective Requested Date

Total Increase Granted

Bridgeport Hydraulic Company:

6/29/81 $9,400,000

10/20/83 8,200,000

Stamford Water Company:

9/30/81

3/22/85

$2,112,309

4,959,038

34%

24%

47%

43%

12/08/81 $5,963,000

3/14/84 4,736,000

3/1/82 $1,334,553

7/29/85 449,676

0 '0

Increase Granted

21%

14%

27%

7%

Allowed Return Allowed

on Return Common on Rate Equity Base

15.17% 11.62%

15.00% 11.26%

16.00% 12.25%

14.80% 11.39%

In connection with the DPUC's approval of the merger of LCWC into BHC (see "General") the DPUC approved a three-phase equalization of water service rates between BHC and LCWC. The first phase of rate equalization went into effect May 31, 1983, yielding additional annual revenue of $50,632 which represents an 8.7% increase for LCWC customers. The second phase in the rate equalization went into effect March 27, 1984, yielding additional annual revenue of $118,178 which represents an 18.6% increase, and the third phase will occur when BHC's next rate incre~se is approved by the DPUC. BHC, on March 14, 1986, filed a rate application with the DPUC requesting an increase of $7,153,000 or 18% over existing rates. A decision on this application is expected to be rendered by the DPUC by August 1986.

In 1979, the DPUC approved a surcharge to be applied to rates charged by SWC, in order to provide a current cash return on the major portions of SWC's construction work in progress ("CWIP") applicable to the water filtration plant required by the federal Safe Drinking Water Act of 1974 ("SDWA"). The surcharge, which has been collected since 1981, is adjusted quarterly, subject to DPUC approval, to reflect increased CWIP expenditures for SDWA facilities. The DPUC has granted SWC the full amount of each quarterly adjustment requested by SWC. On March 11, 1986, SWC was authorized by the DPUC to increase the surcharge to 46.51% of base rates for service rendered to all customers on and after March 9, 1986 pursuant to the provisions of the CWIP

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procedures of the DPUC. In SWC's July 29, 1985 rate order, the DPUC denied SWC's request for inclusion in permanent,rates of costs attributed to the filtration facility until such time as the facility is placed in service. However, the DPUC allowed SWC to continue its CWIP surcharge until final rates are approved. The DPUC stated SWC may apply for a re-opening of this rate case docket for the limited purpose of adjusting its rates following satisfactory confirmation of its in-service status of the filtration facility and the finalization of associated costs.

BHC and SWC continuously review the necessity of filing applications for increases in rates charged for water service. Connecticut law gives the DPUC 150 days (and the possibility of a thirty-day extension thereafter) to act upon a proposed rate increase. If the DPUC does not act within the time allowed, the proposed rates may be put into effect subject to possible refund.

Pursuant to the first rate orders issued with respect to each company by the DPUC after the passage of the Economic Recovery Tax Act of 1981 ("ERTA"), BHC and SWC use the normalized method of accounting with respect to the accelerated cost recovery system depreciation and the investment tax credit associated with 1981 and subsequent plant additions, as required by ERTA for eligibility for such depreciation and credit. This use of the normalized method is an exception to the DPUC regulations which otherwise require that BHC and SWC apply the "flow-through" method of accounting for certain current tax reductions. The flow-through method is based on the expectation that any additional federal income taxes which may be payable in future years will be allowed for ratemaking purposes.

The Company is not an operating utility company nor a "public service company" within the meaning of the Connecticut General Statutes and is not presently subject to general regulation by the DPUC. DPUC approval is necessary, however, before the Company may acquire or exercise control over any Connecticut public service company. DPUC approval is also required before any other entity can acquire or exercise, or attempt to exercise, control of the Company.

Environmental Regulations

BHC and SWC are also subject to regulation by the Connecticut Department of Health Services ("DHS") with respect to water quality matters, use of water from surface and underground sources, and the· location, construction and operation of water supply facilities and the sale of certain utility property. Plans for new water supply systems or enlargement of existing water supply systems also must be submitted to the DHS for approval. The DEP is authorized to regulate the operations of BHC and SWC with respect to water pollution abatement, diversion of water from surface and underground sources, and the location, construction and alteration of dams and other water obstructions.

The Federal Clean Water Act requires permits for dis.charges of effluents into navigable waters and requires that all discharges of

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pollutants comply with federally approved State water quality standards. DEP has adopted, and the Federal government has approved, water quality standards for receiving waters. A joint Federal and State permit system has been established to insure that applicable effluent limitations and water quality standards are met in connection with the construction and operation of facilities which affect or discharge into State or interstate waters. BHC and SWC have received the necessary discharge permits with respect to all of their water treatment facilities requiring such permits.

BHC and SWC are subject to regulation of water quality under the SDWA. The SDWA provides for the establishment of uniform minimum national quality standards by the United States Environmental Protection Agency (the "EPA"), as well as governmental authority to specify the type of treatment process to be used for public drinking water. EPA has published interim primary and certain secondary drinking water standards pursuant to the SDWA, but has not yet adopted treatment techniques. The EPA regulations set limits for, among other things, certain organic and inorganic chemical contaminants, odor,

·turbidity, microbiological contaminants, radioactivity and color. The DHS adopted regulations which are in some cases more stringent than the fe~eral regulations.

BHC's surface supplies are derived from protected upland sources which yield relatively high quality water. As a result of the advent ·in 1974 of the SDWA, more stringent federal and state standards evolved which necessitated the installation of mechanical filtration at BHC's Trap Falls reservoir supply, as well as SWC's supply system. Also, in 1985, a pipeline interconnection with an adjoining system delivering filtered water was completed as a replacement for the Seymour reservoir system, which is scheduled to be retired in 1986. The two remaining large BHC surface supplies, Hemlocks and Easton, are in material compliance with current standards and mechanical filtration has not heretofore been required.

Emerging federal and state regulations will likely require mechanical filtration of the Hemlocks and Easton reservoirs in the near future. The Company currently estimates that capital costs of such filtration facilities could exceed $80,000,000 (in 1985 dollars) through the year 1991. The Company is engaged in studies to determine treatability and to identify optimum design alternatives so that it will be in a position to proceed with filtration for the Hemlocks and Easton supplies when the need arises.

BHC and SWC believe they are in substantial compliance with regulations promulgated by the EPA and the DHS, as currently applied, for the control of certain organic chemical contaminants in drinking water. The EPA is required to review its interim primary drinking water regulations as stipulated by SDWA and revise the regu~ations as may be indicated. A notice of proposed rule making has been issued by the EPA which could lead to more stringent revised regulations requiring costly mechanical filtration, as noted above. However, the Company cannot presently predict the final form of these revised regulations or their impact on BHC and SWC.

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Federal and State regulations .and controls concerning water quality, pollution and the effluent from treatment facilities are still in the process of development and it is not possible to predict the scope of regulations or standards which may be established in the future, or the cost and effect of existing and potential regulations and legislation upon any of the existing and proposed facilities and operations of BHC and SWC. Further, recent and possible future developments with respect to the identification and measurement of various elements in water supplies and concern with respect to the impact of one or more of such elements on public health, together with possible contamination of wells and other water sources, may in the future require BHC and SWC to replace or modify all or portions of their various water supplies, to develop replacement supplies and/or to implement new treatment techniques. Any such developments would significantly increase BHC's and SWC's operating costs and capital require~ents. The Company expects, however, that all such expenditures and costs should ultimately be recoverable through rates for water service, but there can be no assurance that this will be the case.

Water quality tests are made continuously at all of BHC's and SWC's water sources, and all sources presently are producing water of acceptable quality. The Company believes that BHC and SWC are presently in material compliance with all Federal, State and local regulations concerning water quality.

BHC and SWC are subject to the requirements of the National Dam Inspection Act which requires the United States Army Corps of Engineers to inspect certain dams. BHC owns 19 dams and SWC owns 5 dams. To date, 16 of said dams have been inspected and, although certain modifications and further studies have been required, no material problems with respect to these dams have been reported. While the Company recognizes that a certain degree of risk attaches to BHC's and SWC's ownership of dams in connection with their water collection systems, the Company believes that BHC and SWC will be able to comply with any modifications to their dams that are likely to be required as a result of these inspections. The Company does not presently believe that the cost of such compliance will be substantial.

While the construction of dams, reservoirs and other facilities necessary to the impounding, storage and withdrawal of water in connection with public water supplies is a permitted use under the Connecticut Inland Wetlands and Water Courses Act, BHC and SWC are required, pursuant to other statutory provisions, to obtain permits· from the Connecticut Commissioner of the DEP ("Commissioner") for the location, construction or alteration of any dam or reservoir and to secure the approval of the Commissioner for the diversion and use of water from any surface or ground source for public use. Various criteria must be satisfied under the respective statutes and regulations of the DEP in order to obtain such permits or approvals and the Commissioner has the power to impose such conditions as he deems reasonably necessary in connection with such permits or approvals in order to assure compliance with such statutes. BHC and SWC have taken all compliance actions required to date.

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SWC may be subject to health, safety and environmental regulation by various state and local authorit1es in New York State with respect to its properties located in New York. SWC does not provide water to any customers in New York. ·

Forest Products

In September 1979, the Company activated Timco to engage in the forest products industry. On October 7, 1981, Timco acquired all of the outstanding common stock of Pittsfield Box & Lumber Co., Inc. ("PB&L") and on October 15, 1981, PB&L was merged into Timco. Timco's operations are based in New Hampshire and consist of a sawmill complex, a box shop and a wood-waste energy cogeneration plant. The sawmill complex processes primarily Eastern white pine into boards of various sizes for use in exterior and interior construction, which are sold through independent brokers, distributors, lumber yards and retail. outlets~ On a more limited scale, the sawmill complex also processes hardwood, primarily red oak, for use in furniture manufacturing. The box shop produces wooden crates used primarily in the commercial fishing trade. Timco obtains the timber used in its products from land with respect to which it has purchased stumpage rights, and from independent loggers. The cogeneration plant, which is located at the sawmill complex, produces low-cost steam for drying lumber and heating mills, and generating electricity which is sold to Public Service Company of New Hampshire. Timco's second cogeneration unit, which began construction in 1985, has experienced start-up problems, but will provide increased sales of electricity when it becomes fully operational later this year.

Timco's products are marketed in the Northeast and Mid-Atlantic regions. The demand for Timco's lumber and box products is traditionally lower during the winter season when inventory is accumulated in anticipation of increases in demand during warm weather. The demand for wooden crates used by the fishing industry is also dependent upon conditions in the commercial fishing industry in New England. The areas of the forest products industry in which Timco operates have been experiencing increasin~ timber costs which have not been offset by increases in the prices of finished products due to highly competitive market conditions. These industry conditions have adversely affected Timco's operations.

Timco presently owns approximately 120 acres at its Center Barnstead location, 7.5 acres at its Pittsfield location, and 122 acres located in New Hampshire. Timco sold 68 acres located in Maine in 1982 and sold 191 acres in New Hampshire during 1983 and 1985.

Real Estate

MSSC, a small non-utility subsidiary with various real estate interests, presently owns, either directly or in an equal joint venture, approximately 25 acres of real property in Shelton, Connecticut for sale or development. In 1985, MSSC sold the remaining 100 acres out of the original 194 acres purchased through joint venture

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arrangements ln 1980 and 1981 for single-family residential development in Southbury, Connecticut.

Competition

BHC's and SWC's operations are relatively free from competition by other water companies. The forest products processing and marketing activities of Timco, as well as MSSC's real estate activities, are highly competitive, particularly with respect to pricing.

Employee Relations

As of December 31, 1985, the Company and its subsidiaries employed a total of 407 persons.

ITEM 2.· PROPERTIES

The Company

The Company's main office is located in Bridgeport, Connecticut. The Company does not directly own any real property, as its properties are owned by its operating subsidiaries.

Operating Authority

BHC and SWC were incorporated under and operate as public water utilities by virtue of authority granted by Special Acts adopted by the Connecticut Legislature. These Acts have granted a non-exclusive franchise, unlimited in duration, to provide public water supply to private and public customers in designated municipalities and adjacent areas. The Acts also authorize BHC and SWC to lay their mains and conduits in any public street, highway, ·or public ground in their respective territories, to use the water of any river, stream, or other waters in Fairfield County, certain locations along and in the Housatonic River and its tributaries, without infringing on vested rights of others in such waters, subject.to such consents and approvals of public authorities and others as may be required by law, and to exercise the power of eminent domain in connection with lands, springs, streams or ponds,and any rights of interests therein which are expedient to or necessary for furnishing public water supply. In the event of the exercise of such condemnation powers, BHC and SWC must pay appropriate compensation to those injuriously affected by such taking.

Property

BHC owns approximately 19,700 acres of real property located in Fairfield, New Haven, and Litchfield Counties, Connecticut, most of which consists of reservoirs and surrounding watershed. The remaining portion of the property is owned by it in fee. Such property is subject to the first lien arising under the Indenture securing BHC's outstanding first mortgage bonds, except that under the Indenture approximately 1,360 specified· acres may be sold by BHC without property substitutions.

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SWC owns approximately 2,400 ~cres of real property located in Stamford and New Canaan, Connecticut, and in Pound Ridge and Lewisboro, New York, which is used almost exclusively for reservoirs and surrounding watershed, pumps, standpipes and building facilities. Substantially all of SWC's property is subject to the first lien arising under the Indenture securing SWC's outstanding first mortgage bonds.

Connecticut law presently imposes the following restrictions upon the disposition of property owned by public water companies: (a) no property may be sold or otherwise transferred without the prior approval of the DPUC; (b) the sale, transfer and change in the use of watershed lands (lands draining into a public water supply) and certain non-watershed lands which are contiguous to reservoirs and their tributaries are subject to regulation by the DHS; (c) when a water company intends to transfer or dispose of an interest in any present, potential or abandoned water supply source, other water companies which might reasonably be expected to utilize the source are given the opportunity through the DHS to seek to acquire such source; and (d) subject to such acquisition opportunities by other water companies as to water supply sources, when a water company intends to transfer or dispose of an interest in its unimproved real property, the municipality in which such property is located and then the State of Connecticut must first be offered the option to acquire such interest. If the municipality or the State chooses to exercise that option, and the purchase price cannot be established by agreement, the acquisition may be accomplished by eminent domain. Based upon prior dispositions by BHC of its excess land, management believes that acquisition of excess land by the State or municipalities would be for a price essentially equivalent to the price which would be received from a private sale.

The DHS classifies public water company lands. Class I lands cannot be sold, leased or transferred. Pursuant to DHS regulations with respect to the sale of public water company land, the DHS may authorize a transfer or change in use of. Class II lands only upon a finding that there will be no adverse impact upon the public water supply and that any use restrictions required as a condition of the transfer are enforceable against ~ubsequent owners and occupants of the lands. The remaining non-watershed lands, which are designated as Class III lands, are not presently subject to regulation by the DHS. Approximately 3,300 acres are Class III lands. However, BHC estimates that of such lands, less than 1,000 acres are presently commercially saleable.

Gains from the sale of land no longer used for water purposes, but which at one time had been so used and included in rate base, are required under current DPUC regulations to be offset against operating expenses. In a ratemaking proceeding, the DPUC has customarily implemented these regulations by substituting profits from the sale of such lands for revenues which would otherwise have been allowed BHC and SWC through increased customer rates. Effectively, this means that BHC's and SWC's customers, rather than its stockholders, obtain the

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economic benefit of profits arising from the sale of such land. Finally, the DEP is authorized to conduct a study and coordinate the possible acquisition of certain water company lands by the State of Connecticut, or political subdivisions thereof, and requires water companies to file with the DEP five and twenty-year forecasts, with biennial revisions, of proposed sales and development of water company lands.

BHC owns a filtration plant for treatment of its Trap Falls Reservoir System, which plant has a capacity of 25 million gallons per day (mgd). At December 31, 1985, BHC owned in the aggregate approximately 1,529 miles of water mains, substantially all of which are made of cast iron in diameters ranging from one to 60 inches and of which approximately 81 miles have been laid in the past five years. The rights to locate and maintain water transmission and distribution mains are secured by charter, easement and permit and are generally of a perpetual nature. Water is delivered to the distribution system from four major and two minor reservoirs and forty-two producing wells. Eight additional reservoirs are used for storage purposes and are interconnected with the distribution reservoirs. Delivery from the surface supply system is made by gravity, with the exception of the Trap Falls System which utilizes a combination of electric and stand-by diesel pumping facilities. BHC currently owns and operates throughout its system 138 pumps having pumping capacities of 63 mgd for supply service, 120 mgd for high lift service and 92 mgd for booster service.

Plant additions (excluding allowance for funds used during construction) from January 1, 1983 through December 31, 1985 are described under Item 1 - "Business - Construction Program."

Certain non-utility properties owned by the Company's subsidiaries, MSSC and Timco, are described under Item 1 - "Business -Forest Products" and "Business - Real Estate."

ITEM 3. LEGAL PROCEEDINGS

Information pertaining to the investigation by the DPUC into BHC's meter testing and meter test reporting practices has been reported in the Company's report on Form 10-K for the year ended December 31, 1984 and on Form 10-Q for the quarter ended September 30, 1985. Public hearings by the DPUC were concluded in December 1985 and a decision is expected in April 1986. If the DPUC finds allegations of improprieties in BHC's testing and reporting of meters to be true, it may order rebates, in accordance with DPUC regulations, in instances of over-registration. Management does not believe that the allegations, if and to the extent substantiated, would result in a materially adverse impact upon the Company's financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The registrant has nothing to report for this item.

- 14 -

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the registrant are listed below. These officers were elected to the offices indicated on April 23, 1985, except as otherwise noted, for a term expiring with the 1986 annual meeting of directors. Except as indicated, all have been with registrant and its predecessors in an executive capacity for more than five years. There are no family relationships between members of the executive office. There were no arrangements or undertakings between any of the officers listed below and any other person pursuant to which he or she was selected as an officer.

Executive Officer

William S. Warner

Jack E. McGregor

Joseph J. Murphy

Anthony M. Macleod

Charles w. Horsfall

61

51

47

38

Office, Business Experience During Past Five Years

President and Chief Executive Officer of the Company (1981 to 1982, Vice Chairman, prior to 1981 Executive Vice President); President and Chief Executive Officer of Bridgeport Hydraulic Company; Chairman of the Board, President and Chief Executive Officer of Timco, Inc.; Chairman of the Board of Main Street South Corporation.

Executive Vice President of the Company (1981 to 1984, President, Hampton-Douglas Corp; Chairman, Caribbean Basin Corporation; Chairman, International Water Resources, Ltd.).

Executive Vice President, Treasurer and Chief Financial Officer of the Company; Executive Vice President and Treasurer of Bridgeport Hydraulic Company.

Vice President and General Counsel of the Company and of Bridgeport Hydraulic Company (1982-1983, Vice President, Secretary and Chief Counsel of The Flintkote Company; 1980-1982, Secretary and Chief Counsel).

63 ·Secretary of the Company; Sr. Vice President and Secretary of Bridgeport Hydraulic Company.

- 15 -

Served as

Officer Since

1956

1985

1979

1984

1964

Russell B. Hintz

Martha W. Bodurtha

Janet M. Hansen

Robert H. Reinert

Raymond C. Smedberg

41 Controller of the Company; Vice President and Controller of Bridgeport Hydraulic Company.

61 Assistant Secretary of the Company and Bridgeport Hydraulic Company.

43 Assistant Treasurer of the Company and Bridgeport Hydraulic Company (1981 to 1984, Manager of Budgets and Planning of Bridgeport Hydraulic Company and beginning in 1983 Assistant Treasurer of Bridgeport Hydraulic Company.)

50 Executive Vice President of Bridgeport Hydraulic Company.

41 Executive Vice President of Bridgeport Hydraulic Company (1980 to 1983, Vice President of Operations).

- 16 -

1975

1979

1983

1963

1979

PART. II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Page 35 of the Company's Annual Report to Stockholders for the year ended December 31, 1985 is incorporated by reference herein pursuant to Instruction G(2) to Form 10-K.

The Company's present ability to pay dividends to holders of its Common Stock is dependent primarily upon the continued payment by BHC of dividends to the Company. While the Board of Directors intends to continue the practice of declaring cash dividends on a quarterly basis, no assurance can be given as to future dividends since they will be determined in the light of earnings, the financial requirements of the Company. and other factors. Dividends can only be paid out of net profits and surplus of the Company. Payment of dividends on the Company's Common Stock is further restricted under the terms of the $7,700,000 tax exempt financing. Unrestricted retained earnings amounted to $11,449,000 at December 31, 1985, under the provisions of this financing.

BHC's Series A and Series B Preferred Stock ("Preferred Stock") also restrict the payment of dividends on its common stock. Under the most restrictive provisions of the Preferred Stock, $21,403,000 of BHC's retained earnings were available for payment of dividends on its common stock as of December 31, 1985. In addition, no dividends on BHC's common stock can be paid during any period in which Preferred Stock dividends are in arrears. Amendments under BHC's First Mortgage Indenture, which are expected to take effect at a future date, would also include dividend restrictions comparable to those of the most restrictive provisions of the Preferred Stock.

ITEM 6. SELECTED FINANCIAL DATA

See the page opposite page one of the Company's Annual Report to Stockholders for the year ended December 31, 1985, which is incorporated by reference herein pursuant to Instruction G(2) to Form 10-K.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Pages 17 and 18 of the Company's Annual Report to Stockholders for the year ended December 31, 1985 are incorporated by reference herein pursuant to Instruction G(2) to Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements, together with the report thereon of Price Waterhouse, dated February 4, 1986, appearing on pages 19-30 and 33 and the supplementary data appearing on the page opposite

- 17 -

page one and pages 31-35 of the accpmpanying 1985 Annual Report to Stockholders of The Hydraulic Company are incorporated by reference herein pursuant to Instruction G(2) to Form 10-K.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The registrant has nothing to report for this item.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information as to directors required by Item 10 is set forth at pages 3-6 of the Company's Definitive Proxy Statement, dated March 27, 1986, relating to the proposed Annual Meeting of Stockholders to be held on April 22, 1986, filed with the Commission pursuant to Regulation 14a under the Securities Exchange Act of 1934, and is incorporated by reference herein pursuant to Instruction G(3) to Form 10-K.

For information with respect to the executive officers of the registrant, see "Executive Officers of the Registrant" at the end of Part I.

ITEM 11. EXECUTIVE COMPENSATION

Pages 8-9 of the Company's Definitive Proxy Statement, dated March 27, 1986, relating to the proposed Annual Meeting of Stockholders to be held on April 22, 1986, filed with the Commission pursuant to Regulation 14a under the Securities Exchange Act of 1934 are incorporated by reference herein pursuant to Instruction G(3) to Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Pages 3-6 of the Company's Definitive Proxy'Statement, dated March 27, 1986, relating to the proposed Annual Meeting of Stockholders to be held on April 22, 1986, filed with the Commission pursuant to Regulation 14a under the Securities Exchange Act of 1934, are incorporated by reference herein pursuant to Instruction G(3) to Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The registrant has nothing to report for this item.

- 18 -

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

Page in Annual Report*

(1) Financial Statements of the Company:

Consolidated Statement of Income for the three years ended December 31, 1985

Consolidated Balance Sheet at December 31, 1985 and 1984

Consolidated Statement of Stockholders' Equity for the three years ended December 31, 1985

Consolidated Statement of Changes in Financial Position for the three years ended December 31, 1985

Analysis of Changes in Working Capital for the three years ended December 31, 1985

Notes to Consolidated Financial Statements Report of Independent Accountants Selected Financial Data

19

20-21

22

23

24 25-30 33

Opposite page one

*Incorporated by reference from the indicated pages of the 1985 Annual Report to Stockholders.

(2) Financial Statement Schedules:

Report of Independent Accountant~ on Financial Statement Schedules, see page F-2 hereto.

Index to Additional Financial Information, see page F-1 hereto.

The Financial Statement Schedules above should be read in conjunction with the Consolidated Financial Statements in the 1985 Annual Report to Stockholders. All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

(b) Reports on Form 8-K.

The Company filed a report on Form 8-K dated December 23, 1985 with the Securities and Exchange Commission reporting certain amendments to the Retirement Plan for Employees of The Hydraulic Company. The amendments provide that in the event of any Plan

- 19 -

termination prior to December 31, 1995, any Plan assets rema1n1ng after satisfaction of Plan liabilities will, up to an amount equivalent to the excess of the fair market value of Plan assets as of December 31, 1985 over Plan liabilities on said date, be used only to provide increased retirement benefits to participants and beneficiaries of the Plan as of the time of termination.

(c) Exhibits:

In the following exhibit list, each document is incorporated by reference to the files of the Commission, unless the reference to the document in the list is preceded by an asterisk.

Exhibit No.

* 3 (a)

* 3 (b)

4-1

4-2

4-3

4-4

Document

Restated Certificate of Incorporation of The Hydraulic Company (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1985) •

By-laws of The Hydraulic Company, as last amended April 23, 1985 (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1985).

Specimen of Common Stock Certificate (filed as part of Amendment No. 1 to The Hydraulic Company Registration Statement on Form S-7 Registration No. 2-74305, dated November 5, 1981).

First Mortgage Indenture of Bridgeport Hydraulic Company dated June 1, 1924 (filed as part of Amendment No. 1 to Bridgeport Hydraulic Company Registration Statement on Form S-1, Registration No. 2-23434, dated April 26, 1965).

Fourteenth Supplemental Mortgage of Bridgeport Hydraulic Company dated as of October 1, 1952 (filed as part of Amendment No. 1 to Bridgeport Hydraulic Company Registration Statement on Form S-1, Registration No. 2-23434, dated April 26, 1965).

Sixteenth Supplemental Mortgage of Bridgeport Hydraulic Company dated as of September 1, 1957 (filed as part of Amendment No. 1 to Bridgeport Hydraulic Company Registration Statement on Form S-1, Registration No. 2-23434, dated April 26, 1965).

4-5 Seventeenth Supplemental Mortgage of Bridgeport Hydraulic Company dated as of September 1, 1960 (filed as part of Amendment No. 1 to Bridgeport Hydraulic Company Registration Statement on Form S-1, Registration No. 2-23434, dated April 26, 1965).

4-6 Eighteenth Supplemental Mortgage of Bridgeport Hydraulic Company dated as of August 1, 1962 (filed as part of

- 20 -

4-7

4-8

4-9

4-10

4-11

4-12

4-13

*4-14

4-15

4-16

Amendment No. 1 to Bridgeport Hydraulic Company Registration Statement on Form S-1, Registration No. 2-23434, dated April 26, 1965).

Nineteenth Supplemental Mortgage of Bridgeport Hydraulic Company dated as of August 1, 1965 (filed as part of Bridgeport Hydraulic Company Form 8-K, dated September 9, 1965) •

Twentieth Supplemental Mortgage of Bridgeport Hydraulic Company dated as of November 1, 1968 (filed as part of Bridgeport Hydraulic Company Form 8-K, dated December 9, 1968).

Bridgeport Hydraulic Company, 9-7/8% Preferred Stock Series A Purchase Agreement dated December 7, 1970 (filed as part of The Hydraulic Company Form 8-K, dated Ma r c h 11 , 1 9 71 ) •

Twenty First Supplemental Mortgage of Bridgeport Hydraulic Company dated March 1, 1975 (filed as part of The Hydraulic Company Form 8-K, dated March 31, 1975).

Bridgeport Hydraulic Company 11% Preferred Stock Series B Purchase Agreement dated March 26, 1975 (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1974).

Twenty Second Supplemental Mortgage of Bridgeport Hydraulic Company dated September 1, 1978 (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1978).

Twenty Third Supplemental Mortgage of Bridgeport Hydraulic Company dated as of July 1, 1980 (filed as part of Amendment No. 1 to The Hydraulic Company Registration Statement on Form S-7, Registration No. 2-68751, dated September 10, 1980).

The Hydraulic Company Employee Stock Ownership Plan (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1985).

The Hydraulic Company Dividend Reinvestment and Common Stock Purchase Plan (filed as part of Registration Statement No. 2-84916, dated July 31, 1984).

The Hydraulic Company Long-Term Incentive Plan (filed as part of The Hydraulic Company Proxy Statement dated March 2 5 , 1 9 8 5 ) • ·

- 21 -

10-1

10-2

10-3

10-4

10-5

10-6

10-7

10-8

*10-9

10-10

10-11

Purchase Agreement between Timco, Inc. and each of the Stockholders of Pittsfield Box & Lumber Co., Inc., dated October 1, 1981 (filed as part of The Hydraulic Company Registratiori Statement on Form S-7 Registration No. 2-74305, dated October 5, 1981).

Plan of Merger between Timco, Inc. and Pittsfield Box & Lumber Co., Inc., effective as of October 5, 1981 (filed as part of The Hydraulic Company Form 8-K, dated October 21, 1981).

Joint Venture Agreement between John J. Brennan, Jr., William A. Brennan and Main Street South Corporation dated February 23, 1979 (filed as part of Amendment No. 1 to The Hydraulic Company Registration Statement on Form S-7, Registration No. 2-74305, dated November 5, 1981).

Loan Agreement dated as of August 1, 1982 (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1982).

Reimbursement Agreement dated as of August 1, 1982 (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1982).

Agreement of Merger among Stamford Water Company, The Hydraulic Company, Bridgeport Hydraulic Company and H-S Holdings, Inc. (filed as part of The Hydraulic Company Form 8-K, dated December 21, 1983).

Loan Agreement dated as of October 15, 1984 (filed as part of The Hydraulic Company Form 10-K dated December 31, 1984).

Loan and Trust Agreement as of November 1, 1984 (filed as part of The Hydraulic Company Form 10-K dated December 31, 1984).

Copy of Directors and Officers Liability Policy Number 949-81-71 National Union Fire Insurance Company, dated July 1, 1985, covering The Hydraulic Company and its subsidiary companies (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1985).

Employment Agreement between The Hydraulic Company and William S. Warner dated January 1, 1985 (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1984) •

Employment Agreement between The Hydraulic Company and Joseph J. Murphy dated January 1, 1985 (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1984).

- 22 -

10-12

*10-13

*10-14

*13-1

*22-1

*24-1

Employment Agreement between The Hydraulic Company and Anthony M. Macleod dated January 1, 1985 (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1984).

Employment Agreement between The Hydraulic Company and Jack E. McGregor dated January 1, 1986 (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1985).

Employment Agreement between The Hydraulic Company and Raymond C. Smedberg dated January 1, 1986 (filed as part of The Hydraulic Company Form 10-K for the year ended December 31, 1985).

Annual Report to Stockholders for the year ended December 31, 1985.

Subsidiaries of The Hydraulic Company.

Consent of Independent Accountants.

- 23 -

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

The Hydraulic Company (Registrant)

B ph J hy

ExeGU 1ve Vice President and Treasurer (Chief Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By _______ ~---L~~-~_L_-~-~-~-fi~~-~ __ ._-~+2_--________ ___

Russ e 11 B • Hint z ./ Controller (Principal Accounting Officer)

-, .:~- / L /. . .......-...:-~~ / . /

By __ ~~--~-~/<--~~~-~C~--~-------·~~0~-~~~-G?c)fftey Etherington// Director {//

)-.c_ --C(-2 ?'~ n . (

By ______ ~----·----~_-_LL_·~~-L_-_·~~--~~--_7_. ~"-~---·'---~--~>~\ Norwick R. Goodspe~d

- 24 -

-? /cJ/- /J'.'.' :-- 0 _) ' (p pate

.3 j.J, j' '/JV-~ Date

:/J~-~5 /Jy 'Date

(_3 Jv15 /J~( Date

.3 j},~i-/J- 7~~ 1Date

By __ ~~~~~--~----------------John M. Henske Director

'·')./_..;~- I,._) 7- l,_<_LL By ~:?<~·~--<·'~< <;.· / .· ,.... / /;,r t-c.y--- .. .,__.

Newman M. Marsilius Director

.- /1

By t··t h-·~-<.. .~"'" L/L. ··L. ,,,.,J_: . ..,.

Eugene H. Remmer Director

- 25 -

Date

3/r-~-; t'-Date

,3@;" /:J(J Date

·s./ 2 \ J/ (. Date

F-:1

INDEX TO ADDITIONAL FINANCIAL INFORMATION

The financial statements, together with the report thereon of Price Waterhouse, dated February 4, 1986, appearing on pages 19-30 and 33 of the accompanying 1985 Annual Report to Stockholders of The Hydraulic Company are incorporated by reference in this Form 10-K Annual Report. With the exception of the aforementioned information and the information incorporated in Items 1, 2, 5, 6, 7 and 8, the 1985 Annual Report to Stockholders is not to be deemed filed as part of this report. The following financial information should be read in conjunction with the financial statements in such 1985 Annual Report to Stockholders. Financial statement schedules not included in this Form 10-K Annpal Report have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

ADDITIONAL FINANCIAL INFORMATION

Property, plant and equipment (Schedule V) for the years 1985, 1984 and 1983

Accumulated depreciation, depletion and amortization of property, plant and equipment (Schedule VI) for the years 1985, 1984 and 1983

Short-term borrowings (Schedule IX) for the years 1985, 1984 and 1983

Supplementary income statement information (Schedule X) for the years 1985, 1984 and 1983

- 26 -

F-3

F-4

F-5

F-6

F-.2

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES

To the Board of Directors of The Hydraulic Company:

Our examination of the consolidated financial statements referred to in our report dated February 4, 1986 appearing on page 33 of the 1985 Annual Report to-Stockholders of The Hydraulic Company, (which report and financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an examination of the Financial Statement Schedules listed in the index on page F-1. In our opinion, these Financial Statement Schedules present fairly the information set forth therein when read in conjunction with the related consolidated financial statements.

Bridgeport, Connecticut February 4, 1986

- 27 -

Price Waterhouse

[\J

00

SCHEDULE V - Property, plant and equipment

Description

1985: ----c5rganization

Source of supply plant Pumping plant Water treatment Transmission and distribution plant General plant Construction work in progress Utility plant held for future use Non-utility plant

Total

1984: Organization Source of supply plant Pumping plant Water treatment Transmission and distribution plant General plant Construction work in progress Utility plant held for future use Non-utility plant

Total ,

1983: ---organization

Source of supply plant Pumping plant Water treatment Transmission and distribution plant General plant Construction work in progress Utility plant held for future use Non-utility plant

Total

Balance at beginning of

period

$ 185 20,679 8,068

15,304 127,941

10,135 12,788

1,586 10,027

$ 2 0"6,7'1'3

$ 180 15,542

6,658 14,180

106,985 8,143 2,005

309 9,515

$16~

$ 180 14,355

6,343 13,920

102,384 7,285 1,094

309 9,427

$155:29'7

F-3

Other Additions changes at cost Retirements add (deduct)

(Thousands of dollars)

$ 455 51

351 6,826 (1) 1,089 4,980 (2)

4 2,304 (3)

$16,060 --

$ 362 788 267

7,300 (1) 1,270 3,634 (2)

559 $14,180

$ 1 ,100 315 260

4,648 (1) 977 911

~ $ 8,498

$ 62

67 440

179 $ 748

$ 19

70 173

1 47

$ 310

$ 47 119

112 $~

$ (8)

8

---$ ----$ 5

4,775 641 857

13,726 895

7,149 (2) 1,278

$29,326 (4)

$ 87

~) $ __ _

(1) In 1985, 1984 and 1983, the change in transmission and distribution is d'ue to normal plant expansion.

(2) The change in work in progress is primarily due to the construction of a filtration plant for Stamford Water Company's system. Construction work in progress for 1985 also includes expenditures in connection with the Naugatuck Valley regional pipeline interconnection project.

(3) In 1985, the change in non-utility plant is primarily due to.the installation of a second cogeneration unit at Timco's Center Barnstead location.

(4) Represents the acquisition of Stamford Water Company.

Balance at end of period

$ 185 21,126

8,057 15,655

134,700 10,784 17,768 1,598

12,152 $222':025

$ 185 20,679 8,068

15,304 127,941 10;135 12,788

1,586 10,027

$ 2 0"6,7'1'3

$ 180 15,542

6,658 14,180

106,985 8,143 2,005

309 9,515

$16m

1\.)

\.0

F-4

SCHEDULE VI - Accumulated depreciation, depletion and amortization of property, plant and equipment

Balance at Additions beginning of charged to

Description period costs and expenses Retirements (Thousands of dollars)

1985: Source of supply plant $ 6,189 $ 279 $ 2 Pumping plant 2,946 287 97 Water treatment plant 2,839 473 -Transmission and distribution plant 36,513 2,530 92 General plant 4,282 609 389 Non-utility plant 2,326 763 43

Total $55,095 $4,941 $623

1984: --source of supply plant $ 4,754 $ 262 $ -

Pumping plant 2,190 276 23 Water treatment plant 1,823 429 -Transmission and distribution plant 29,088 2,342 123 General plant 3,374 433 127 Non-utility plant 1,556 782 12

Total $42,785 $4,524 $285

1983: --source of supply plant $ 4,551 $ 203 $ -

Pumping plant 1,952 238 -Water treatment plant 1,563 260 -Transmission and distribution plant 27,090 1,997 99 General plant 3,213 261 100 Non-utility plant 809 775 28

Total $39,178 $3,734 $227

(1) Billings to State of Connecticut for relocation of facilities.

(2) Represents the acquisition of Stamford Water Company.

Other Balance at changes end of

add (deduct) period

$ - $ 6,466 - 3,136 - 3,312

129 ( 1) 39,080 - 4,502 - 3,046

$ --r29 $59,542

$1,173 $ 6,189 503 2,946 587 2,839

5,206 36,513 602 4,282

- 2,326 $8,071 ( 2) $55,095

$ - $ 4,754· - 2,190 - 1,823

100 ( 1) 29,088 - 3,374 - 1,556

$ -roo $42,785 ---

w 0

F-5

SCHEDULE IX - Short-term borrowings

Maximum Average Weighted Category of Weighted amount amount average aggregate Balance average outstanding outstanding interest rate short-term at end of interest during the during the during the borrowings period rate Eeriod period(2) period(3)

(Thousands of dollarS)

1985: Bank borrowings

1984: Bank borrowings ( 1) - - $10,400 $2,950 7.8%

1983: Bank borrowings $1,750 10.8% $ 1,750 $ 292 8.4%

(1) These unsecured bank borrowings are either payable on demand or are payable in 90 days and renewed as they become due. Included in the 1984 bank borrowings was a $6,000,000 promissory note. In June 1984, the foregoing amount was repaid from the proceeds of the Company's common stock offering.

(2) Average borrowings are based on month-end balances.

(3) Weighted average interest rates, during the year, are calculated by dividing short-term interest expense by average borrowings during the year.

F-6

SCHEDULE X - Supplementary ·income statement information

1985 1984* 1983 ~ousands of dollarsr-

Maintenance and repairs $2,407 $2,230

Depreciation 4,942 4,571

Taxes other than payroll and income taxes:

Property 4,013 3,937 Gross earnings and

franchise taxes 2,462 2,248

*Results include 10 months of SWC which was acquired in March 1984.

$1,815

3,734

3,456

1,775

Other "Supplementary income statement information" that otherwise would be required has been omitted since the amounts were less than 1% of total revenues during each of the above years.

- 31 -

Exhibit 22-l Subsidiaries of the Registrant

Bridgeport Hydraulic Company, incorporated in the State of Connecticut

Stamford Water Company, a subsidiary of Bridgeport Hydraulic Company, incorporated in the State of Connecticut

Main Street South Corporation, incorporated in the State of Connecticut

Timco, Inc., incorporated in the State of Connecticut

EXHIBIT· 24-1

CONSENT OF INDEPENDENT ACCOUNTANTS FOR THE HYDRAULIC COMPANY

we hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 2-84916) of The Hydraulic Company of our report dated February 4, 1986 appearing on page 33 of the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules which appears on page F-2 of this Form 10-K •

.. -\

Bridgeport, Connecticut March 27, 1986

\. _ _. 1 ~-t [(/((.t.'-~h.-.~r~~­

Price Waterhouse