Item 1. Business ORGANIZATION E'town Corporation (E'town or Corporation) was originally incorporated under the laws of the State of New Jersey in 1985 to serve as a holding company for Elizabethtown Water Company (Elizabethtown or Company) and its wholly owned subsidiary, The Mount Holly Water Company (Mount Holly). Elizabethtown and Mount Holly are regulated water utilities which, as a consolidated entity, are referred to herein as Elizabethtown Water Company (Elizabethtown Water Company). Applied Wastewater Management (AWWM) is a regulated wastewater utility acquired in June 1998 as part of the acquisition of E'town's joint venture partner (discussed below) and is engaged in the ownership and operation of wastewater facilities. Elizabethtown, Mount Holly and AWWM are public utilities and are regulated by the New Jersey Board of Public Utilities (BPU). Elizabethtown, Mount Holly and AWWM comprise the regulated utilities segment of the business for financial and management reporting purposes. Liberty Water Company (Liberty) is a wholly owned, non-regulated subsidiary of E'town formed in July 1998 to operate the water system of the City of Elizabeth, New Jersey under a 40-year operating contract. Edison Water Company (Edison) is a wholly owned, non-regulated subsidiary of E'town formed in July 1997 to operate the water system of the Township of Edison, New Jersey under a 20-year operating contract. Edison and Liberty comprise the contract operations segment of the business for financial and management reporting purposes. E'town Properties, Inc. (Properties) was incorporated in 1987 as a wholly owned and non-regulated subsidiary of E'town to acquire, develop and sell real estate holdings. E'town and Properties comprise the financing and investing segment of the business for financial and management reporting purposes. E'town provides the financing for its non-regulated subsidiaries through issuance of short- and long-term debt as well as through public equity offerings for capital contributions to all subsidiaries. In June 1998 E'town acquired the operations of Applied Wastewater General Partnership (AWG), E'town's joint venture partner. The newly-acquired companies are now comprised of Applied Water Management, Inc. (AWM) and AWWM. AWM is engaged in the design and construction of wastewater facilities as well as in the pumping and hauling of wastewater materials. This entity represents the Engineering, Operations and Construction segment of the business for financial and management reporting purposes.
Elizabethtown is a New Jersey corporation, one of whose predecessors was first incorporated in 1854. The present corporation was formed in 1961 as a result of a consolidation of Elizabethtown Water Company Consolidated and Plainfield-Union Water Company. Elizabethtown owns all of the common stock of Mount Holly. The assets and operating results of Elizabethtown constitute the predominant portions of E'town's assets and operating results. Mount Holly contributed 3% and Liberty, AWM and Edison each contributed 4% of the Corporation's consolidated operating revenues for 1998.
Regulated Utilities Segment SERVICE AREA AND CUSTOMERS At December 31, 1998, Elizabethtown and Mount Holly furnished water service on a retail basis to general customers and to industrial customers totaling 200,348 in 54 municipalities in the counties of Union, Middlesex, Somerset, Mercer, Hunterdon, Ocean, Morris and Burlington in New Jersey. AWWM serves 188 wastewater and 97 water customers.
Elizabethtown also provides, on a wholesale basis, a portion of the water requirements of eight additional municipalities with their own retail water systems and, of three other investor-owned water companies. Water for fire protection service is provided to 53 municipalities and also to commercial and industrial establishments.
At December 31, 1998, Edison and Liberty served 37,391 customers under their contracts to operate the water systems of the Township of Edison and the City of Elizabeth, both in New Jersey.
The operating revenues of E'town by major classification of customer for the twelve months ending December 31, 1998 are as follows:
General customers 60.3% Other water systems 11.0% Industrial wholesale customers 5.6% Fire service/miscellaneous 11.6% Contract operations 7.5% Engineering, operations and construction 4.0%
The water systems are substantially all metered except for fire service.
AWM provides a variety of services for internal purposes as well as for external customers. Engineering services are provided internally for the construction division of AWM in the design and building of wastewater facilities for developers, as well as for a variety of external customers for various wastewater projects. The operations division of AWM performs a variety of wastewater pumping and hauling services. These services include sludge hauling for commercial, industrial and governmental customers under contract, as well as septic cleaning for residential and other customers.
Additional operating statistics appear in Item 6.
WATER SUPPLY The water supply systems of Elizabethtown and Mount Holly are physically separate. During 1998, Elizabethtown's pumpage averaged 131.7 million gallons per day (MGD) and Mount Holly's pumpage averaged 3.7 MGD. Elizabethtown and Mount Holly believe they have sufficient water supply sources to meet the current needs of their customers. Mount Holly is constructing additional facilities, as discussed below, to augment its water supplies.
In 1998, surface water sources supplied approximately 90% of Elizabethtown's supply with wells supplying the remaining 10%. All of Mount Holly's water is produced from wells although beginning in March 1998, 1.0 million gallons per day is being purchased by Mount Holly from another purveyor on a temporary basis from surface sources (see below).
Substantially all of Elizabethtown's surface water is purchased under a long-term contract with the New Jersey Water Supply Authority (NJWSA) which requires Elizabethtown to purchase (i) 32 MGD from the state-owned Delaware and Raritan Canal which transports water from the Delaware River Basin plus (ii) 70 MGD from the Raritan River Basin which includes the state-owned Spruce Run-Round Valley Reservoir System. The safe yield of the Raritan River Basin and the Delaware and Raritan Canal is 225 MGD of which 150 MGD is presently allocated to Elizabethtown and others. The NJWSA has available, and Elizabethtown purchases, water above the Company's minimum purchase obligation on an as-needed basis.
Mount Holly has historically obtained all of its water from wells drilled into an aquifer, which has been subject to over-pumping. The state adopted legislation requiring all local purveyors, including Mount Holly, to obtain alternate supplies and reduce their withdrawals from the affected parts of the aquifer. Mount Holly designed a project to obtain water from outside the affected part of the aquifer for delivery into the Mount Holly system. Management has determined that this project (the "Mansfield Project") is the most cost effective method for Mount Holly to comply with the state's regulations.
By September 1995, Mount Holly had obtained all New Jersey Department of Environmental Protection (DEP) approvals for the Mansfield Project and was ready to begin construction when New Jersey-American Water Company (NJAM) appealed the granting of Mount Holly's permits for the project. Under an August 1997 settlement among Mount Holly, the DEP and NJAM, Mount Holly will purchase 1 million gallons per day from NJAM for a period to include the later of January 1, 2000 or the date the Mansfield Project is placed into service. Purchases began during March of 1998.
Mount Holly has taken steps necessary to recover in rates both the costs of purchased water and the costs of the Mansfield Project (see Rate Matters below). On May 27, 1998 the BPU adopted a Stipulation signed by the parties to a petition filed in September 1997 for a Purchased Water Adjustment Clause (PWAC) for an increase in annual revenues $1.29 million or 38.9%. Mount Holly has deferred the increase in purchased water cost between March 19, 1998 and May 27, 1998 as Other Unamortized Expenses. Recovery of this amount will be addressed in the next PWAC petition expected in 1999. On October 6, 1998, the BPU issued an Order adopting a Stipulation signed by the parties to Mount Holly's proceeding for a review of the prudence of constructing the Mansfield Project. The Stipulation indicated that the project provides the most cost-effective alternative available to Mount Holly customers for meeting the requirements for an alternative source of supply for the Mount Holly system. On January 29, 1999 Mount Holly filed a petition with the BPU for an increase in annual operating revenues of $2.1 million or 40.5%. This request is intended to cover increases in capital expenditures as well as increases in operating expenses since rates were last established in January 1996. The majority of the increase in capital expenditures relates to the construction of the initial phase of the Mansfield Project.
WATER TREATMENT FACILITIES AND WATER QUALITY REGULATIONS Elizabethtown owns and operates two treatment plants at the confluence of the Raritan and Millstone Rivers adjacent to the Delaware and Raritan Canal to treat surface water purchased from the NJWSA. The plants can withdraw water from any of the above sources, which is an advantage in the event that one source becomes temporarily contaminated. The Raritan-Millstone Plant (RM Plant) was placed in service in 1931 and has continually been upgraded since that time. The RM Plant has a production capacity of 155 MGD. The Canal Road Water Treatment Plant (Plant) was placed in service in October 1996 to increase Elizabethtown's sustainable production capacity and provide the ability to continue to meet water quality regulations. The Plant has an initial rated production capacity of 40 MGD. Elizabethtown also operates smaller treatment facilities to treat groundwater produced by certain wells. Mount Holly operates similar groundwater treatment facilities.
Both the United States Environmental Protection Agency (EPA) and the DEP regulate the operation of Elizabethtown's and Mount Holly's water treatment and distribution systems and the quality of the water Elizabethtown and Mount Holly deliver to their customers. Currently, Elizabethtown and Mount Holly believe they are in compliance, in all material respects, with all present federal and state water quality standards, including all regulations promulgated to date by the EPA pursuant to the Federal Safe Drinking Water Act, as amended (SDWA), and by the DEP pursuant to similar state legislation. Elizabethtown has included certain capital projects in its three-year capital expenditure plans which it anticipates will be necessary to comply with regulations that have been proposed by the EPA and DEP. Recovery of the financing and operating costs of such improvements, plus those costs for any additional projects which cannot be foreseen at this time, will be requested in rates.
Elizabethtown has responded in recent years to water quality regulations promulgated by DEP and the EPA by replacing groundwater supplies with increased supplies of surface water. The Company expects this trend to continue because it is preferable from the standpoint of operational efficiency and cost to modify treatment processes and facilities at one or two large plants than to constantly upgrade treatment facilities at multiple well sites.
Water Quality Regulations As required by the SDWA, the EPA has established maximum contaminant levels (MCLs) for various substances found in drinking water. As authorized by similar state legislation, the DEP has set MCLs for certain substances which are more restrictive than the MCLs set by the EPA. In certain cases, the EPA and DEP have also mandated that certain treatment procedures be followed in addition to satisfying MCLs established for specific contaminants. The DEP is also the USEPA's agent for enforcing the SDWA in New Jersey and, in that capacity, monitors the activities of Elizabethtown and Mount Holly and reviews the results of water quality tests performed by Elizabethtown and Mount Holly for adherence to applicable regulations. Regulations generally applicable to water utilities, including Elizabethtown and Mount Holly, include the Lead and Copper Rule (LCR), the MCLs established for various volatile organic compounds (VOCs), the MCLs proposed for radionuclides and the Surface Water Treatment Rule (SWTR).
Lead and Copper Rule The LCR requires Elizabethtown and Mount Holly to test the quantity of lead and copper in drinking water at the customer's tap and, if certain contaminant levels (action levels) are exceeded, to notify customers and initiate a public information campaign advising customers how to minimize exposure to lead and copper. The LCR also requires Elizabethtown to add corrosion inhibitors to water to minimize leaching of lead from piping, faucets and soldered joints into water consumed at the tap. Results from two separate tests completed during 1992 within Elizabethtown and Mount Holly's systems did not indicate lead and copper concentrations above the action levels. Accordingly, public notification and a public information campaign have not been required. Corrosion inhibitor facilities for Elizabethtown were completed in 1996. The Company is in compliance with LCR requirements.
Volatile Organic Compounds VOCs include various substances (primarily synthetic organic solvents) which have percolated into groundwater aquifers from surface sources. Elizabethtown has found VOCs in excess of the applicable MCLs in certain of its wells and has either suspended the use of such wells or constructed aeration towers which remove such contaminants from the water by venting them into the atmosphere. Because underground water flows are difficult to map, it is difficult to predict when and where contamination will occur in the future. To the extent that contamination in excess of applicable MCLs occurs at wells lacking aeration towers, Elizabethtown will consider building aeration towers if feasible and cost effective, or closing such wells, thereby increasing its reliance on surface water. To date, Mount Holly has not been affected by VOC contamination.
Radionuclides Radionuclides are naturally occurring radioactive substances (primarily radon) found in groundwater. Like VOCs, radon can be removed from groundwater using aeration towers. If the MCLs proposed for all radionuclides are finally adopted, Elizabethtown believes that it will abandon wells with aggregate production capacity of approximately 5 MGD, thereby further increasing Elizabethtown's reliance on surface water. Elizabethtown currently owns and operates wells with an aggregate safe daily yield of 22 MGD.
Surface Water Treatment Rule The operation of Elizabethtown's Raritan-Millstone treatment plant is subject to the SWTR. Elizabethtown has assessed the plant's sustainable production capacity, assuming operation consistent with the requirements of the SWTR, and determined that improvements to the existing plant were necessary. Specifically, Elizabethtown has installed additional pumps to increase capacity and reliability at peak times and has constructed a new building to house offices and lab facilities. Also, Elizabethtown has replaced existing chlorine gas disinfection facilities with liquid sodium hypochlorite to improve community and employee safety and has installed corrosion inhibitor facilities in conformance with the LCR.
The Canal Road Water Treatment Plant has been designed and is being operated for compliance with the SWTR.
TRANSMISSION AND DISTRIBUTION As of December 31, 1998, Elizabethtown Water Company's transmission and distribution system included 2,955 miles of transmission and distribution mains. Mains range in size up to 60 inches, substantially all of which are either ductile iron, cast iron or pre stressed concrete pipe. Elizabethtown conducts an ongoing program to clean and line its older cast iron mains the cost of which is capitalized and has been included in rate base in stipulations settling recent rate cases. On an ongoing basis, Elizabethtown assesses the capacity of its system to maintain adequate pressures and initiates plans to construct pumping, transmission and storage facilities as needed.
ENERGY SUPPLY Elizabethtown pumps most of its water with electric power purchased from two major electric utilities. The Company has replaced certain electric pumps with natural gas-fired pumps over the last several years to reduce energy costs. Elizabethtown also has other diesel powered pumping and generating facilities at its major treatment plants and at certain transfer stations to provide basic service during possible electrical shortages. Elizabethtown has not, to date, experienced any shortage of electric energy, natural gas or diesel fuel to operate its pumps and has cooperated with its electric suppliers during their peak periods by operating non-electrical pumping facilities upon request.
ENVIRONMENTAL MATTERS Elizabethtown and Mount Holly are also subject to regulation by the DEP with respect to water supply plans and specifications for the construction, improvement, alteration and operation of public water supply systems and with respect to the quality of any residuals from treatment plants.
As a normal byproduct of treating surface water, Elizabethtown's existing surface water treatment plants generate silt removed from untreated river water plus residue from chemicals used in the treatment process. Historically, Elizabethtown had disposed of this material in landfills. As a result of revised regulations governing landfills, Elizabethtown has been reusing this material on site for flood protection and is presently removing some material off-site for beneficial reuse.
Under New Jersey law, environmental matters are addressed by the DEP before diversion allowances or other water supply projects are authorized. To date, Elizabethtown has been able to construct all plant facilities and obtain all diversion authorizations necessary to maintain customer service. Mount Holly has also been able to construct all facilities and obtain all diversion authorizations including the diversion permit for the Mansfield Project discussed previously.
FRANCHISES The property and franchises of Elizabethtown and Mount Holly are subject to rights of eminent domain of the State of New Jersey. These rights have been delegated by statutes now in effect to municipalities or groups of municipalities and have been or may be delegated to various public agencies. No such rights of eminent domain have been exercised since 1931.
EMPLOYEE RELATIONS As of December 31, 1998, the Corporation had a total of 505 full-time employees, of which 224 were covered by union contracts. The contracts between the Company and the Utility Workers Union of America (A.F.L.-C.I.O.) were renegotiated on February 1, 1999 and will expire on January 31, 2003. The contract provides for wage increases of 1.5% on the first of February and August beginning in 1999 through August of 2002. The Company considers relations with both union and nonunion employees to be satisfactory.
RATE MATTERS Elizabethtown, Mount Holly and AWWM are subject to regulation by the New Jersey Board of Public Utilities (BPU) with respect to the issuance and sale of securities, rates and service, classification of accounts, mergers, and other matters. Rate relief is sought periodically cover the cost of increased operating expenses, increases in financing expenses due to additional investments in utility plant, and other costs of doing business.
Elizabethtown In December 1997 the BPU adopted a Stipulation for rate increases for Elizabethtown and Mount Holly, effective January 1, 1998, for the full recovery of costs associated with SFAS No. 106 "Accounting for Employer's Postretirement Benefits," on an accrual basis less the costs associated with SFAS No. 106 expenses previously recovered in rates. The total increases in annual operating revenues resulting from these Stipulations are $.39 million for Elizabethtown and $.02 million for Mount Holly.
Elizabethtown expects to file for rate relief later in 1999 to recover additional construction and financing costs since base rates were last established in October 1996.
Mount Holly On October 6, 1998, the BPU issued an Order adopting a Stipulation signed by the parties to Mount Holly's proceeding for a review of the prudence of constructing a new well field, treatment plant and pipeline to provide an alternate water source required due to State mandated restrictions. This project is known as the Mansfield Project. The Stipulation indicated that the Mansfield project provides the most cost-effective alternative available to Mount Holly customers for meeting the requirements for an alternative source of supply for the Mount Holly system. Effective in March 1998, Mount Holly began purchasing 1 million gallons per day from NJAM and will continue to purchase this water until the later of January 1, 2000 or the date the Mansfield Project is placed into service. The annual cost of the purchased water is $1.16 million.
In September 1997 Mount Holly filed a petition with the BPU to establish a PWAC to reflect the cost of water purchased from NJAM. On May 27, 1998 the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.29 million or 38.9%. Mount Holly has deferred the increase in purchased water cost between March 19 and May 27 as Other Unamortized Expenses. Recovery of this amount has been requested in the rate increase discussed below. As of December 31, 1998, Mount Holly has deferred $.08 million of these costs.
On January 29, 1999, Mount Holly filed a petition with the BPU for a $2.09 million or 40% rate increase, which reflects additional construction and financing costs, as well as increases in operating costs since base rates were last established in January 1996. This rate case also includes $8.96 million in costs with a corresponding rate increase of $1.30 million, for the portion of the Mansfield Project that was placed in service in the third quarter of 1998. A decision is expected during the fall of 1999. Mount Holly expects to file an additional rate case later in 1999 for the remaining cost of the Mansfield Project, to coincide with the completion of the project and the expiration of the agreement to purchase water from NJAM and the cancellation of the PWAC.
Financing and Investment Segment REAL ESTATE MATTERS E'town Properties and E'town Corporation own various parcels of undeveloped land in New Jersey carried as investments of $11.3 million in Non-Utility Property and Other Investments - Net, in the Consolidated Balance Sheets of E'town at December 31, 1998. E'town and Properties are proceeding with plans to sell such properties and expect to invest the sale proceeds into water and wastewater utility investments that produce a current return.
One of the real estate parcels was sold in 1997 for $.4 million, resulting in a gain of less than $.1 million. Two other parcels were sold in 1998 for $1.7 million resulting in a gain of less than $.1 million. Cash proceeds of $1.2 million were received in 1998 and the balance was financed with a one-year mortgage at an interest rate of 8%, with full payment due in 1999. In the first quarter of 1999, Properties sold a parcel of land which has been under contract since 1995 in Green Brook, New Jersey for $5.83 million, at a gain of $2.08 million net of taxes or approximately $.25 per share. Cash proceeds of $1.5 million were received in 1999 and the balance was financed with a 7.75% mortgage for the remaining $4.33 million, to be paid over two years. Properties has entered into contracts for sale for all of its remaining parcels. The eventual sale of these parcels is contingent upon the purchaser obtaining various approvals for development. This process could take up to several years. The carrying value of each parcel includes the original cost plus any real estate taxes, interest and, where applicable, direct costs capitalized while rezoning or governmental approvals were being sought. Such costs were capitalized until the property was offered for sale, after which time such costs were expensed. Based upon independent appraisals received at various times prior to 1997 and the expected sales prices for properties under contract to be sold, the estimated net realizable value of each property exceeds its respective carrying value as of December 31, 1998.
Contract Operations Segment OTHER DEVELOPMENTS Effective July 1, 1998, E'town, through Liberty, has entered into a contract with the City of Elizabeth (Elizabeth), New Jersey to operate its water system under a 40-year contract serving 17,900 customers. Under the contract, Liberty made a payment to Elizabeth of $19.7 million in 1998 and is contractually obligated to make payments to Elizabeth of $12 million in June 1999 and $19 million in June 2000. Also under the terms of the contract, Liberty will deposit $57.8 million from revenues earned over the 40-year contract, of which $52.4 million is due after 2012, into a fund administered by Elizabeth to be used by Elizabeth to pay for capital improvements to the water system. In addition, Liberty is responsible for $7.8 million of construction expenditures, primarily for meter replacements, over the life of the contract. These construction expenditures, as they are incurred, are being amortized on a straight-line basis over the remaining life of the contract. Of these total commitments, approximately $4.0 million is expected to be expended in the next three years. E'town will receive all the revenues from operating the system in accordance with rate increases set forth in the contract. E'town is also responsible for all operating expenses as well as the capital expenditures discussed above. Performance by Liberty of the contract provisions is guaranteed by E'town.
E'town also performs the commercial billing operations for the wastewater system of Elizabeth. E'town does not operate the wastewater system. E'town does the wastewater billing for Elizabeth and remits all cash collected to Elizabeth.
In 1997 E'town formed a wholly-owned subsidiary, Edison Water Company (Edison), for the purpose of managing the assets and operations of the Edison Township water system under a 20-year contract. Edison serves approximately 11,600 residential, commercial and industrial customers. Edison bills and receives all water revenues generated as a result of operating the water system of the Township of Edison, New Jersey and pays all the expenses under the contract. Edison expects to make expenditures of approximately $25 million during the 20-year life of the contract of which $10.16 million has been spent to-date. Expenditures include capital improvements to the water system as well as contract payments to the Township of Edison. Of the total, approximately $3.6 million is expected to be expended in the next three years of the contract. An initial payment of $5.7 million was made upon the closing in June 1997 and has been included in concession fees on privatization contracts, net of amortization. Performance by Edison of the contract provisions is guaranteed by E'town.
Engineering/Operations/Construction Segment In 1995 the Corporation entered into a three-year joint venture agreement with AWG to form a New Jersey limited liability company, Applied Watershed Management, LLC. AWG was a unit of several privately held and affiliated companies providing design, engineering, construction and operating services for water and wastewater facilities. E'town exercised an option to purchase the operations of AWG to provide a full complement of water and wastewater services and consequently closed on the transaction in June 1998. The purchase price was $6.61 million (185,005 restricted common shares) for the three companies that now comprise AWM and $.04 million (1,305 restricted common shares) for AWWM, a regulated wastewater utility, in a stock-for-stock transaction. Of the shares issued, 20% are being held in escrow. The purchase price is subject to a potential downward post-closing adjustment based upon a multiple of earnings for the twelve months ended March 31, 1998. As required by the purchase contract, E'town has undertaken an audit of AWG for such period. Therefore, the amount of any downward post-closing adjustment is not yet determinable.
Executive Officers of the Corporation and Elizabethtown
Name Age Positions Held
Anne Evans Estabrook 54 Chairman of the Corporation since 1997. Vice President of the Corporation since 1987. Owner of the Elberon Development Co., (a real estate holding company)and President of David 0. Evans, Inc. (a construction company).
Andrew M. Chapman 43 President of the Corporation since 1997, Chief Financial Officer of the Corporation from 1989 until 1997 and Treasurer of the Corporation from 1990 to 1997. President of Elizabethtown since 1996 and Executive Vice President of Elizabethtown from 1994 to 1995. He served as Senior Vice President of Elizabethtown from 1993 to 1994, Chief Financial Officer of Elizabethtown from 1990 to 1995 and Treasurer of Elizabethtown from 1989 to 1994.
Gail P. Brady 53 Treasurer of the Corporation since 1997, Senior Vice President, Chief Financial Officer and Treasurer of Elizabethtown since 1998 and Vice President - Finance, Regulatory Affairs and Treasurer of Elizabethtown since 1994.
Dennis W. Doll 40 Controller of the Corporation since 1997, Vice President and Controller of Elizabethtown since 1998 and Controller of Elizabethtown since 1994.
Norbert Wagner 63 Senior Vice President - Operations of Elizabethtown since 1992.
Item 2.
Item 2. Properties
All principal plants and other materially important units of property of Elizabethtown and Mount Holly are owned in fee. The Company considers that the properties of Elizabethtown and Mount Holly are in good operating condition.
Item 3.
Item 3. Legal Proceedings
Their are environmental matters that are inherent in the production, transmission and distribution of water as well as in the treatment of wastewater. The Corporation is sensitive to these issues and mitigates the environmental impact of these activities to the extent required by the laws and regulations under which these activities are governed and makes efforts to exceed the regulatory requirements where practical.
The Corporation, in the ordinary course of business, periodically becomes involved in litigation. There is currently no litigation in progress regarding environmental or other issues in which an outcome adverse to the Corporation would have a material impact on the financial statements.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5.
Item 5. Market for the Corporation's Common Stock and Related Stockholder Matters
This information is included in Exhibit 13, filed herewith, and is incorporated herein by reference. All of the common stock of Elizabethtown Water Company is owned by E'town.
Item 6.
Item 6. Selected Financial Data E'town Corporation
This information is included in Exhibit 13, filed herewith, and is incorporated herein by reference.
Elizabethtown Water Company
1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------ Utility Plant (Thousands) Utility Plant - net $604,899 $572,785 $560,024 $507,858 $437,456 Construction Expenditures (excluding AFUDC) 43,500 24,612 55,125 73,789 69,981 Total Assets 683,328 646,318 640,779 580,808 502,848 Capitalization (Thousands) Shareholder's Equity 208,573 193,354 182,293 176,685 151,624 Preferred Stock 12,000 12,000 12,000 12,000 12,000 Debt (1) 267,178 249,974 250,963 208,952 164,951 Total Capitalization $487,751 $455,328 $445,256 $397,637 $328,575 Capitalization Ratios Common Stock 43% 42% 41% 44% 46% Preferred Stock 2% 3% 3% 3% 4% Debt (1) 55% 55% 56% 53% 50%
Earnings Applicable to Common Stock (Thousands) $ 23,955 $ 20,092 $ 15,942 $ 16,512 $ 13,369
Operating Statistics Revenues (Thousands) General Customers $ 87,698 $ 85,195 $ 68,797 $ 67,455 $ 62,923 Other Water Systems 22,181 21,900 18,929 18,720 18,082 Industrial Wholesale 8,148 8,451 7,869 7,947 7,458 Fire Service/Miscellaneous 6,820 16,242 14,763 14,276 13,570 Total Revenues $134,847 $131,788 $110,358 $108,398 $102,033
Water Sales - Millions of Gallons (mg) General Customers 24,609 24,333 22,890 23,999 23,551 Other Water Systems 14,397 14,504 15,049 15,569 15,691 Industrial Wholesale 3,482 3,533 3,567 3,673 3,568 System Use and Unaccounted 6,933 6,948 6,444 6,402 6,570 Total Water Sales 49,421 49,318 47,950 49,643 49,380 System Delivery by Source - mg Surface 48,067 42,585 41,485 42,646 42,534 Wells 1,072 6,689 6,328 6,764 6,690 Purchased 282 44 137 233 156 Total System Delivery 49,421 49,318 47,950 49,643 49,380 Millions of Gallons Pumped: Average Day 135 135 131 136 135 Maximum Day 196 205 170 183 182 General Information Customers 200,251 197,663 195,482 192,617 189,440 Miles of Main 2,953 2,926 2,899 2,869 2,828 Fire Hydrants Served 16,402 16,228 16,012 15,650 15,291
============================================================================== (1) Includes long-term debt, notes payable and long-term debt-current portion.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
E'town Corporation
This information is included in Exhibit 13, filed herewith, and is incorporated by reference.
Elizabethtown Water Company and Subsidiary
The water utility operations of Elizabethtown Water Company (Elizabethtown) and its subsidiary, The Mount Holly Water Company (Mount Holly), presently constitute the major portion of E'town Corporation (E'town or Corporation), assets and earnings. Elizabethtown and Mount Holly are regulated water companies which, as a consolidated entity are referred to herein as Elizabethtown Water Company (Company). Mount Holly contributed about 3% of the Company's consolidated operating revenues for 1998. The following analysis sets forth significant events affecting the financial condition of Elizabethtown at December 31, 1998, and the results of operations for the years ended December 31, 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures Program In 1998, capital expenditures were $43.5 million, primarily for water utility plant. For the three years ending December 31, 2001, capital and investment requirements for Elizabethtown are estimated to be $124.5 million, primarily for water utility plant consisting of $107.5 million for Elizabethtown and $17.0 million for Mount Holly.
Elizabethtown While Elizabethtown's projected capital outlays have dropped from recent years now that the Canal Road Water Treatment Plant (Plant) is completed, Elizabethtown's facilities will continue to be upgraded and expanded to handle customer growth. Elizabethtown's three-year capital program includes $50.6 million for routine projects (services, hydrants and main extensions not funded by developers) and $56.9 million for transmission system upgrades, a new operations center and other projects. Elizabethtown expects to file for rate relief later in 1999 and periodically thereafter to ensure that such costs are adequately reflected in rates (see Economic Outlook).
Mount Holly During the next three years, Mount Holly expects to spend $17.0 million, primarily for an additional supply source to comply with state regulations designed to prevent further depletion of a local aquifer. Mount Holly currently obtains all of its water from wells drilled into an aquifer, which has been subject to over-pumping by various users in a portion of southern New Jersey. The state adopted legislation requiring all local purveyors, including Mount Holly, to obtain alternate supplies and reduce their withdrawals from the affected parts of the aquifer. Mount Holly designed a project to obtain water from outside the affected part of the aquifer for delivery into the Mount Holly system. In August 1998, the New Jersey Board of Public Utilities (BPU) adopted a Stipulation among Mount Holly and other parties concluding that this project (the "Mansfield Project") is the most cost effective method for Mount Holly to comply with the state regulations.
To settle an appeal initiated by New Jersey-American Water Company (NJAM) concerning the diversion rights for the Mansfield Project, Mount Holly signed a Stipulation with NJAM, the New Jersey Department of Environmental Protection (DEP) and other parties, requiring Mount Holly to purchase one million gallons per day from NJAM during the two-year period that the Mansfield Project is being constructed. Purchases began during March of 1998, after completion of an interconnection.
In September 1997, Mount Holly filed a petition with the BPU to establish a Purchased Water Adjustment Clause (PWAC) to reflect the cost of water purchased from NJAM under the agreement discussed above. On May 27, 1998 the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.3 million or 38.9%. Mount Holly has deferred the increase in purchased water cost between March 19 and May 27. Recovery of this amount has been requested in the rate increase discussed below. As of December 31, 1998, Mount Holly has deferred $.1 million of these costs.
Mount Holly filed for a rate increase in January 1999 to reflect a portion of the expenditures for the Mansfield Project, as well as to increase the rates of return realized and, therefore, the contribution to E'town's earnings per share.
Capital Resources During 1998, Elizabethtown financed 56.3% of its capital expenditures from internally generated funds (after payment of common stock dividends). The balance was financed with a combination of short-term borrowings under lines of credit and proceeds from capital contributions from E'town (funded by issuances of Common Stock under the Corporation's Dividend Reinvestment and Stock Purchase Plan).
For the three-year period ending December 31, 2001, Elizabethtown estimates that 67.5% of its currently projected capital expenditures are expected to be financed with internally generated funds (after payment of common stock dividends). The balance will be financed with a combination of proceeds from capital contributions from E'town sales of common stock, proceeds from tax-exempt New Jersey Economic Development Authority (NJEDA) bonds and short-term borrowings. Mount Holly's Mansfield Project will be financed from requisitions from the New Jersey Environmental Infrastructure Trust Financing Program (see below). The NJEDA has granted preliminary approval for the financing of almost all of Elizabethtown's major projects during the next three years. Elizabethtown expects to pursue additional tax-exempt financing to the extent that final allocations are granted by the NJEDA.
In November 1998, Mount Holly closed on two loans that will provide up to $13.2 million in 2.60% financing for the Mansfield Project through the New Jersey Environmental Infrastructure Trust Financing Program. The first loan, in the amount of $7.3 million, is through the New Jersey Environmental Infrastructure Trust, which issued tax-exempt bonds with average interest rates of 4.7%. The second loan, in the amount of $5.9 million, is from the State of New Jersey, acting through the New Jersey Department of Environmental Protection funded by federal monies at no interest cost. The effective interest rate for the combined notes is approximately 2.60%.
Interest Rate Risk The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Company manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. As of December 31, 1998, a hypothetical single percentage point change in interest rates would result in a $.9 million change in interest costs and earnings before tax related to short-term and variable rate debt.
RESULTS OF OPERATIONS Net Income for 1998 was $24.0 million as compared to $20.1 million for 1997. Net income increased by $3.9 million, primarily comprised of (i) $.6 million due to an extended dry period in the summer of 1998 resulting in higher water consumption than in 1997 (ii) $1.3 million from lower operating expenses due to a combination of a mild winter in 1998, more efficient use of our work force, lower employee benefit costs and success with our ongoing cost control efforts (iii) $.7 million as a result of new customers and (iv) $.5 million related to refinancing short-term debt at lower interest rates. Capitalized construction interest accounted for an increase in net income of $.5 million.
Net Income for 1997 was $20.1 million as compared to $15.9 million for 1996. The increase in net income and earnings per share is attributable to the $21.8 million rate increase for the new Plant in October 1996, which was offset by the operating and financing costs of the Plant. Net income also increased $1.4 million, primarily due to variations in the weather, specifically the dry summer of 1997, as compared to the wet summer of 1996.
Operating Revenues increased $3.1 million or 2.3% in 1998 over the comparable 1997 amount. The increase is primarily comprised of $1.4 million from water service to residential and wholesale customers attributable to increased water consumption as a result of warmer, drier weather in the summer of 1998 than in 1997. New customers accounted for $.7 million of the increase. The PWAC rate increase for Mount Holly accounted for the remainder of the increase.
Operating Revenues increased $21.4 million or 19.4% in 1997 over the comparable 1996 amount. The increase is primarily comprised of $17.7 million from a rate increase for Elizabethtown, effective October 1996 and $3.1 million from increased water consumption. The increase in water consumption is primarily due to the dry summer of 1997.
Operation Expenses decreased $.2 million or .4% in 1998 from 1997. The Company experienced a decrease of $1.0 million from lower operating costs due to a mild winter, greater work force utilization, ongoing cost control efforts and decreased employee benefit costs. These decreases were partially offset by an increased cost of labor, purchased water for Mount Holly and variable costs for the higher water sales.
Operation Expenses increased $1.6 million or 3.6% in 1997 over the comparable 1996 amount. Increases resulting from variable costs associated with the increase in water consumption totaled $.3 million. Labor costs increased $.6 million. The remainder of the increase is attributable to various items, including operating costs for the Plant, information technology and other administrative costs.
Maintenance Expenses decreased $.9 million or 13.3% in 1998, as compared to 1997 due to improved procurement procedures and preventative maintenance programs.
Maintenance Expenses increased $.7 million or 11.8% in 1997 over the comparable 1996 amount. This increase is primarily attributable to costs associated with the maintenance of the Plant. The increase also includes $.4 million related to the costs of determining the most cost-effective method for disposing of byproducts (waste residuals) generated from the water treatment process at the Raritan-Millstone Plant.
Depreciation Expense increased $.2 million or 1.7% in 1998 compared to 1997 due to depreciation on utility plant additions.
Depreciation Expense increased $2.3 million or 23.7% in 1997 compared to 1996. The increase includes $2.1 million for the Plant and $.8 million for other utility plant additions. A decrease of $.6 million resulted from Elizabethtown no longer being required by the BPU to depreciate utility plant acquired through Contributions In Aid of Construction and Customers' Advances for Construction. This change was agreed to by the parties to Elizabethtown's last rate case for which an increase was effective in October 1996.
Revenue Taxes increased $.2 million or 1.1% in 1998 and $2.7 million or 19.8% in 1997 due to the taxes on increases in operating revenues discussed above.
Real Estate, Payroll and Other Taxes decreased $.5 million or 14.7% in 1998. This overall decrease was comprised of additional payroll taxes due to additional labor costs which were offset by decreases from lower than anticipated property taxes on the Plant. These taxes increased $.2 million or 6.8% in 1997 due to additional labor costs, as well as additional property taxes.
Federal Income Taxes as a component of operating expenses increased $1.7 million or 15.0% and $3.7 million or 49.8% as compared to 1997 and 1996, respectively, due to the changes in the components of taxable income for all segments discussed herein.
Other Income (Expense) increased $.3 million or 70.5% due to a $.4 million increase in Allowance for Funds Used During Construction (AFUDC), primarily for Elizabethtown's western operations center. Federal income taxes increased $.1 million for the taxes on the AFUDC.
Other Income (Expense) decreased $2.3 million or 83.0% compared to the 1996 amount. A decrease in the equity component of Allowance for Funds Used During Construction (AFUDC) of $3.5 million resulted from no longer capitalizing the financing costs associated with the Plant as the facility was placed in service in October 1996. An increase of $1.2 million for other miscellaneous items, as well as the offsetting federal income taxes associated with the Other Income (Expense), account for the remainder of the decrease.
Total Interest Charges decreased $1.0 million or 6.1% due primarily to refinancing short-term debt at lower interest rates. In addition, the debt component of AFUDC increased $.3 million, resulting in lower interest expense, as a result of higher construction expenditures, primarily for Elizabethtown's new western operations center.
Total Interest Charges increased $3.8 million or 29.8% in 1997 over the comparable 1996 amount. The increase includes $3.0 million due to a reduction in capitalized interest as a result of the Plant being placed in service in October 1996. Interest expense also increased due to increased borrowings incurred to finance capital expenditures.
ECONOMIC OUTLOOK Forward Looking Information Information in this report includes certain forward looking statements within the meaning of the federal securities laws. Any forward looking statements are based upon information currently available and are subject to future events, risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. Such events, risks and uncertainties include, without limitation, actions of regulators, the effects of weather on water consumption, changes in historical patterns of water consumption and demand, including changes through increased use of water-conserving devices, conditions in capital markets, increases in operating expenses due to factors beyond the Company's control, changes in environmental regulation and associated costs of compliance and other claims or assessments made upon the Company.
Elizabethtown and Mount Holly Over the next several years, management will seek to increase earnings by maximizing earned returns through expansion efforts to increase sales and through cost control measures. Capital to finance water investments will be raised from external sources and from capital contributions from E'town.
Earnings will vary going forward due to the effect of weather on costs and pumpage, timing and adequacy of rate relief, time elapsed since the last rate increase and other factors. For 1999, the Company expects earnings to be somewhat lower than in 1998, based on an assumed return to normal weather patterns after the unusually dry summers in 1998 and 1997. In particular, Elizabethtown's return should be somewhat lower in 1999 given that this year will be the third year since the last rate adjustment.
Elizabethtown expects to petition the BPU for an increase in rates in 1999 to reflect the increases in construction, financing and operating costs since base rates were last established in October 1996.
Mount Holly earned a rate of return on common equity of 4.7% in 1998, compared to an authorized rate of return of 11.25%, established in its most recent rate proceeding. Mount Holly earned significantly below its authorized return in 1998 and 1997 as the Company was precluded from filing for needed rate relief due to ongoing litigation with NJAM. Management expects Mount Holly to increase its return later in 1999 and into 2000 upon receipt of additional rate relief from the rate increase filed in January 1999, so that Mount Holly can realize rates of return comparable to authorized levels.
New Accounting Pronouncements See Note 2 of Elizabethtown's Notes to Consolidated Financial Statements for a discussion of new accounting standards that were effective in 1998.
Year 2000 State of Readiness The Company has assessed its significant business systems, as well as non-critical, peripheral support system for compliance with the Year 2000. The assessment concluded that all significant business systems (i.e. customer billing and service, financial, water treatment operating and control, water quality laboratory information and telemetric data acquisition systems) are Year 2000 compliant. The assessment also included inquiries as to the state of readiness of significant vendors whose services to the Company could have an impact on the Company's ability to deliver service to its customers. Management concluded that the delivery of electric power as well as chemicals used in the water treatment process are two areas of significant importance and received documentation from the vendors who provide these services that indicates their ability to provide service. Therefore, the Company expects no disruption in the services it provides to its customers and expects to process transactions in its financial, customer billing and customer services systems. The assessment did identify certain peripheral support systems that need to be addressed. An implementation plan has been developed and is being implemented.
The Costs to Address The Company's Year 2000 Issues The significant business systems of the Company defined above are Year 2000 compliant and have been operational for up to several years. Therefore, no further costs are expected to be incurred in connection with bringing these systems into compliance. The peripheral support systems that are being addressed will require the Company to incur costs to bring them into compliance. The present estimates place the total of these costs at less than $.2 million.
Risks Associated With The Company's Year 2000 Issues Management believes that all identifiable issues with respect to Year 2000 compliance have been addressed, or will be addressed, in sufficient time and in sufficient detail to preclude any disruption in service or adverse effect on the Company's financial profile. Management therefore believes that risks associated with this issue are minimal with respect to those areas, which are internal to the Company and, over which management exercises complete control. Those areas that are external to the Company i.e., issues associated with our vendors, have been mitigated to the extent possible through inquiry of our vendors, tests of their claims of Year 2000 compliance and development of contingency plans as considered appropriate.
Contingency Plan There are operational contingency plans in place on an ongoing basis to address issues, such as natural disasters, that could result in a disruption of service. These procedures would be activated in the event that certain physical facilities were not operable as a result of failures by our vendors associated with Year 2000 issues. In addition, Elizabethtown Water Company has alternative electric, natural gas and diesel generation capacity that could sustain a significant level of pumping capacity for an indefinite period of time.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information for E'town is included in Exhibit 13, filed herewith, and is incorporated herein by reference.
The information for Elizabethtown Water Company is contained in Appendix I hereto, incorporated by reference herein.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III Item 10.
Item 10. Directors and Executive Officers of the Registrant Information with respect to directors of E'town and Elizabethtown is included in E'town's Proxy Statement for the 1999 Annual Meeting of Stockholders, and is incorporated herein by reference.
Information regarding the executive officers of both E'town and Elizabethtown is included under Item I in Part I of this Form 10-K.
Item 11.
Item 11. Executive Compensation
This information for E'town and Elizabethtown is included in E'town's Proxy Statement for the 1999 Annual Meeting of Stockholders, and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information is included in E'town's Proxy Statement for the 1999 Annual Meeting of Stockholders, and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
This information for E'town and Elizabethtown is included in E'town's Proxy Statement for the 1999 Annual Meeting of Stockholders, and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed as part of this report:
1. Financial Statements: Elizabethtown Water Company
Statements of Consolidated Income for the years ended December 31, 1998, 1997 and 1996.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Statements of Consolidated Capitalization as of December 31, 1998 and 1997.
Statement of Consolidated Shareholder's Equity for the years ended December 31, 1998, 1997 and 1996.
Statements of Consolidated Cash Flows for the years ended December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
E'town Corporation
A portion of the 1998 Annual Report to Shareholders which includes Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Other Financial and Statistical Data is filed herewith as Exhibit 13 and is herein incorporated by reference.
Elizabethtown Water Company
The Independent Auditors' Report and Elizabethtown Water Company's consolidated financial statements and notes thereto are contained in Appendix I hereto, incorporated by reference herein.
2. Financial Statement Schedules:
E'town Corporation Elizabethtown Water Company
Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997 and 1996.
Supplemental Schedule of Property, Plant and Equipment at December 31, 1998 and 1997.
Other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or the notes accompanying each Company's financial statements.
3. Exhibits
(a) Exhibits for E'town and Elizabethtown Water Company are listed in the Exhibit Index, which is incorporated by reference herein.
(b) Reports on Form 8-K: None
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.
E'TOWN CORPORATION March 31, 1999 By: /s/ Anne Evans Estabrook Chairman and Director
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 indicated on March 31, 1999.
Chairman and Director /s/ Anne Evans Estabrook
President and Director /s/ Andrew M Chapman
Director /s/ Thomas J. Cawley
Director /s/ Anthony S. Cicatiello
Director /s/ James W. Hughes
Director /s/ Barry T. Parker
Director /s/ Hugo M. Pfaltz, Jr.
Director /s/ Chester A. Ring III
Director /s/ Joan Verplanck
Director /s/ Edward A. Clerico
Treasurer /s/ Gail P. Brady (Principal Financial Officer)
Controller /s/ Dennis W. Doll (Principal Accounting Officer)
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.
ELIZABETHTOWN WATER COMPANY March 31, 1999 By: /s/ Anne Evans Estabrook Chairman and Director
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 indicated on March 31, 1999.
Chairman and Director /s/ Anne Evans Estabrook
President and Director /s/ Andrew M. Chapman
Director /s/ Thomas J. Cawley
Director /s/ Anthony S. Cicatiello
Director /s/ James W. Hughes
Director /s/ Barry T. Parker
Director /s/ Hugo M. Pfaltz, Jr.
Director /s/ Chester A. Ring III
Director /s/ Joan Verplanck
Director /s/ Edward A. Clerico
Vice President - Finance & Treasurer /s/ Gail P. Brady (Principal Financial Officer)
Controller /s/ Dennis W. Doll (Principal Accounting Officer)
INDEPENDENT AUDITORS' REPORT
E'TOWN CORPORATION:
We have audited the consolidated financial statements of E'town Corporation and its subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 24, 1999; such consolidated financial statements and report are included in your 1998 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of E'town Corporation and its subsidiaries, listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
February 24, 1999 Parsippany, New Jersey
Schedule II E'TOWN CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Additions Balance at Charged to Balance at Beginning of Costs and Deductions End of Description: Period Expenses (A) Period - ------------------------------------------------------------------- Reserve for Uncollectible Accounts:
Year Ended 12/31/98 $612,000 $995,940 (B)$542,940 $1,065,000
Year Ended 12/31/97 $566,000 $607,929 $561,929 $612,000
Year Ended 12/31/96 $532,000 $600,242 $566,242 $566,000
(A) Write-off of uncollectible accounts, net of recoveries.
(B) Includes reserves for Liberty Water Company, ($39,970) and Applied Water Management, Inc., ($344,630), acquired in 1998 and Edison Water Company ($37,400 acquired in 1997).
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Additions Balance at Charged to Balance at Beginning of Costs and Deductions End of Description: Period Expenses (A) Period - ------------------------------------------------------------------ Reserve for Uncollectible Accounts:
Year Ended 12/31/98 $612,000 $573,940 $542,940 $643,000
Year Ended 12/31/97 $566,000 $607,929 $561,929 $612,000
Year Ended 12/31/96 $532,000 $600,242 $566,242 $566,000
(A) Write-off of uncollectible accounts, net of recoveries.
E'town Corporation & Subsidiaries Supplemental Elizabethtown Water Company and Subdidiary Schedule Property, Plant & Equipment As of December 31, 1998 (In Thousands)
Elizabethtown Water Company and Subsidiary 1998 1997 - ------------------------------------------ ---- ---- Utility Plant In Service: Intangible Plant $251 $251 Source of Supply Plant 21,688 20,513 Pumping Plant 62,578 57,498 Water Treatment Plant 160,259 156,601 Transmission & Distribution Plant 450,100 422,284 General Plant 18,778 19,994 Leasehold Improvements 15 136 Acquisition Adjustments 632 632 -------- -------- Utility Plant In Service 714,301 677,909 Construction Work In Progress 15,694 9,300 -------- -------- Total Utility Plant 729,995 687,209 ======== ========
Non-Utility Property - Net 7,315 79 -------- -------- Total $737,310 $687,288 ======== ========
E'town Corporation and Subsidiaries - ----------------------------------- Utility Plant (from above) 729,995 687,209 Utility Plant (AWWM) 3,684 Construction Work In Progress (AWWM) 886 -------- -------- Total Utility Plant $734,565 $687,209
Non-utility Property and Other Investments-Net 84,945 20,570 -------- -------- Total $819,510 $707,779 ======== ========
EXHIBIT INDEX
Certain of the following exhibits, designated with an asterisk(*), are filed herewith. The exhibits not so designated have heretofore been filed with the Commission and are incorporated herein by reference to the documents indicated in brackets following the description of such exhibits. Exhibits designated with a (1) are management contracts or compensatory plans or arrangements.
E'town Corporation
Exhibit No. Description
3(a) - Certificate of Incorporation of E'town Corp. [Registration Statement No. 33-42509, Exhibit 4(a)]
*3(b) - By-Laws of E'town Corp.
3(c) - Certificate of Incorporation of E'town Properties, Inc. [Registration Statement No. 33-32143, Exhibit 4(j)]
3(d) - By-laws of E'town Properties, Inc. [Registration Statement No. 33-32143, Exhibit 4(n)]
4(a) - Rights Agreement dated as of February 4, 1991 between E'town and the Rights Agent [Registration Statement No. 33-38566, Exhibit 4(n)]
4(b) - Indenture dated as of January 1, 1987 from E'town Corporation to Boatmen's Trust, Trustee, relating to the 6 3/4% Convertible Subordinated Debentures due 2012 [Registration Statement No. 33-32143, Exhibit 4(a)]
4(c) - Note Purchase Agreement relating to the 6.79% Senior Notes due December 15, 2007
10(a) - Incentive Stock Option Plan [Registration Statement No. 2-99602, Exhibit 28(a)] (1)
10(b) - Savings and Investment Plan - 401(k) [Form 10-K for the year 1994, Exhibit 10(b)]
10(c) - E'town's 1987 Stock Option Plan [Registration Statement No. 33-42509, Exhibit 28] (1)
10(d) - Management Incentive Plan [Registration Statement No. 33-38566, Exhibit 10(i)] (1)
10(e) - E'town's 1998 Stock Option Plan [Definitive Proxy Statement for 1998 Annual Meeting of Stockholders, filed pursuant to Rule 14a-6(b)] (1)
10(f) - E'town's 1998 Directors Stock Plan [Definitive Proxy Statement for 1998 Annual Meeting of Stockholders, filed pursuant to Rule 14a-6(b)] (1)
10(g) - E'town's 1990 Performance Stock Program [Registration Statement No. 33-46532, Exhibit 10(k)] (1)
Exhibit No. Description
10(h) - E'town's Dividend Reinvestment and Stock Purchase Plan [Registration No. 333-69549, Dated December 23, 1998]
10(i) - Change of Control Agreement for Andrew M. Chapman [Form 10-Q for the quarter ended March 31, 1995, Exhibit 10] (1)
10(j) - Contract Between Edison Water Company, E'town Corporation and the Township of Edison to Operate the Water System of the Township of Edison, New Jersey dated as of June 25, 1997 [Form 10-Q for the quarter ended June 30, 1997, Exhibit 10(a)]
10(k) - Employment Contract Between E'town Corporation and Anne Evans Estabrook [Form 10-K for the year 1997, Exhibit 10(k)] (1)
10(l) - Change in Control Agreement for Anne Evans Estabrook [Form 10-K for the year 1997, Exhibit 10(k)] (1)
10(m) - Contract with the City of Elizabeth, New Jersey for the Operation by E'town Corporation of the City's Water System [Form 10-Q for the quarter ended September 30, 1998, Exhibit 10(m)]
10(n) - Employment Agreement between Applied Water Management, Inc. and Edward A. Clerico [Form 10-Q for the quarter ended September 30, 1998, Exhibit 10(n)]
*10(o) - Change in Control Agreement for certain officers
*12 - Computation of Ratio of Earnings to Fixed Charges
*13 - Portion of the 1998 Annual Report to Shareholders which includes Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Other Financial and Statistical Data and is herein incorporated by reference.
*21 - Subsidiaries of the Corporation
*23 - Consent of Deloitte & Touche LLP, Independent Auditors
*27 - Financial Data Schedule
Elizabethtown Water Company
Exhibit No. Description
3(a) - Form of Restated Certificate of Incorporation of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1994, Exhibit 3(a)]
*3(b) - By-laws of Elizabethtown Water Company
4(a) - Indenture dated as of November 1, 1994 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 7 1/4% Debentures due 2028 [Form 10-K for year ended December 31, 1994, Exhibit 4(a)]
4(b) - Indenture dated as of September 1, 1992 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 8% Debentures due 2022 [Form 10-K for year ended December 31, 1993, Exhibit 4(a)]
4(c) - Indenture dated as of October 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 8 3/4% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(f)]
4(d) - Indenture dated as of August 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 6.60% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(g)]
4(e) - Indenture dated as of August 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 6.70% Debentures due 2021[Registration Statement No. 33-46532, Exhibit 4(h)]
4(f) - Indenture dated as of October 1, 1990 from Elizabethtown Water Company to Citibank, N.A., Trustee, relating to the 7 1/2% Debentures due 2020 [Registration Statement No. 33-38566, Exhibit 4(e)]
4(g) - Indenture dated as of December 1, 1989 from Elizabethtown Water Company to Citibank, N.A., Trustee, relating to the 7.20% Debentures due 2019 [Registration Statement No. 33-38566, Exhibit 4(f)]
4(h) - Indenture dated as of December 1, 1995 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 5.60% Debentures due 2025
4(i) - Indenture dated as of June 1, 1997 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to Variable Rate Demand Debentures, due 2027 (Series B) [Form 10-Q for the quarter ended September 30, 1997, Exhibit 4(i)]
4(j) - Indenture dated as of June 1, 1997 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to Variable Rate Demand Debentures, due 2027 (Series A) [Form 10-Q for the quarter ended September 30, 1997, Exhibit 4(j)]
*4(k) - Loan Agreement Dated November 1, 1998 Between the State of New Jersey, Acting Through the New Jersey Department of Environmental Protection, and The Mount Holly Water Company
Exhibit No. Description
*4(l) - Loan Agreement Dated November 1, 1998 Between the New Jersey Environmental Infrastructure Trust and The Mount Holly Water Company
10(a) - Contract for service to Middlesex Water Company. [Registration Statement No. 33-38566, Exhibit 10(a)]
10(b) - Contract for service to Edison Township. [Form 10-Q for the quarter ended June 30, 1997, Exhibit 10(b)
10(c) - Contract for service to New Jersey-American Water Company. [Form 10-K for the year ended December 31, 1993, Exhibit 10(c)]
10(d) - Contract for service to City of Elizabeth. [Form 10-K for the year ended December 31, 1992, Exhibit 10(d)]
10(e) - Contract for service to Franklin Township.[Registration Statement No. 33-46532, Exhibit 10(e)]
10(f) - Contract with the New Jersey Water Supply Authority for the purchase of water from the Raritan Basin. [Registration Statement No. 33-32143, Exhibit 10(e)]
10(g) - Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1992, Exhibit 10(g)] (1)
10(h) - Medical Reimbursement Plan of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1992, Exhibit 10(h)] (1)
10(i) - Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-Q for the year ended September 30, 1995, Exhibit 10]
10(k) - Employment Contract Between Elizabethtown Water Company and Anne Evans Estabrook [Form 10-K forthe year 1997, Exhibit 10(k)] (1)
*10(l) - Amendment to Supplemental Executive Retirement Plan of Elizabethtown Water Company (1)
*12(a) - Computation of Ratio of Earnings to Fixed Charges
*12(b) - Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends
*21 - Subsidiaries of the Company
*23 - Consent of Deloitte & Touche LLP, Independent Auditors
*27 - Financial Data Schedule.
APPENDIX I
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDER AND BOARD OF DIRECTORS OF ELIZABETHTOWN WATER COMPANY:
We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of Elizabethtown Water Company and its subsidiary as of December 31, 1998 and 1997, and the related statements of consolidated income, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Elizabethtown Water Company and its subsidiary at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
February 24, 1999 Parsippany, New Jersey
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED INCOME (In Thousands)
Year Ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------- Operating Revenues $ 134,847 $ 131,788 $ 110,358 - ----------------------------------------------------------------------------- Operating Expenses: Operation 45,117 45,301 43,713 Maintenance 5,674 6,548 5,859 Depreciation 12,439 12,233 9,893 Revenue taxes 16,728 16,550 13,820 Real estate, payroll and other taxes 2,613 3,064 2,869 Federal income taxes 12,678 11,026 7,360 - ----------------------------------------------------------------------------- Total operating expenses 95,249 94,722 83,514 - ----------------------------------------------------------------------------- Operating Income 39,598 37,066 26,844 - ----------------------------------------------------------------------------- Other Income (Expense): Allowance for equity funds used during construction 597 215 3,725 Federal income taxes (423) (248) (1,462) Other - net 612 494 452 - ----------------------------------------------------------------------------- Total other income (expense) 786 461 2,715 - ----------------------------------------------------------------------------- Total Operating and Other Income 40,384 37,527 29,559 - ----------------------------------------------------------------------------- Interest Charges: Interest on long-term debt 14,721 14,030 13,011 Other interest expense - net 960 2,382 2,640 Allowance for funds used during construction (456) (166) (3,208) Amortization of debt discount and expense-net 391 376 361 - ----------------------------------------------------------------------------- Total interest charges 15,616 16,622 12,804 - ----------------------------------------------------------------------------- Net Income 24,768 20,905 16,755 Preferred Stock Dividends 813 813 813 - ----------------------------------------------------------------------------- Earnings Applicable To Common Stock $ 23,955 $ 20,092 $ 15,942 ============================================================================= See Notes to Consolidated Financial Statements.
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Assets 1998 1997 - -----------------------------------------------------------------------------
Utility Plant-At Original Cost: Utility plant in service $ 714,301 $ 677,909 Construction work in progress 15,694 9,300 - ----------------------------------------------------------------------------- Total utility plant 729,995 687,209 Less accumulated depreciation and amortization 125,096 114,424 - ----------------------------------------------------------------------------- Utility plant-net 604,899 572,785 - -----------------------------------------------------------------------------
Non-utility Property (Note 4) 7,315 79 - -----------------------------------------------------------------------------
Current Assets: Cash and cash equivalents 3,598 4,226 Customer and other accounts receivable (less reserve: 1998, $670, 1997, $612) 16,952 17,283 Unbilled revenues 10,091 9,663 Infrastructure loan funds receivable (Note 4) 5,895 Materials and supplies-at average cost 2,538 1,966 Prepaid insurance, taxes, other 2,433 3,461 - ----------------------------------------------------------------------------- Total current assets 41,507 36,599 - -----------------------------------------------------------------------------
Deferred Charges: Waste residual management 1,371 936 Unamortized debt and preferred stock expenses 9,368 9,656 Taxes recoverable through future rates (Note 3) 14,226 21,439 Postretirement benefit expense (Note 10) 3,490 3,738 Other unamortized expenses 1,152 1,086 - ----------------------------------------------------------------------------- Total deferred charges 29,607 36,855 - ----------------------------------------------------------------------------- Total $ 683,328 $ 646,318 ============================================================================= See Notes to Consolidated Financial Statements.
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Capitalization and Liabilities 1998 1997 - -----------------------------------------------------------------------------
Capitalization (Note 4): Common shareholder's equity $ 208,573 $ 193,354 Mandatory redeemable cumulative preferred stock 12,000 12,000 Long-term debt - net 245,148 231,944 - ----------------------------------------------------------------------------- Total capitalization 465,721 437,298 - -----------------------------------------------------------------------------
Current Liabilities: Notes payable - banks 22,000 18,000 Long-term debt - current portion 30 30 Accounts payable and other liabilities 12,457 10,626 Customers' deposits 248 272 Municipal and state taxes accrued 16,776 16,817 Interest accrued 3,228 3,120 Preferred stock dividends accrued 59 59 - ----------------------------------------------------------------------------- Total current liabilities 54,798 48,924 - -----------------------------------------------------------------------------
Deferred Credits: Customers' advances for construction 40,874 39,131 Federal income taxes (Note 3) 64,696 67,851 Unamortized investment tax credits 7,839 8,042 Accumulated postretirement benefits (Note 10) 3,947 4,209 - ----------------------------------------------------------------------------- Total deferred credits 117,356 119,233 - -----------------------------------------------------------------------------
Contributions in Aid of Construction 45,453 40,863 - -----------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note 9) - ----------------------------------------------------------------------------- Total $ 683,328 $ 646,318 ============================================================================= See Notes to Consolidated Financial Statements.
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED CAPITALIZATION (In Thousands) December 31, 1998 1997 - -----------------------------------------------------------------------------
Common Shareholder's Equity (Note 4): Common stock without par value, authorized, 15,000,000 shares, issued 1998 and 1997, 1,974,902 $ 15,741 $ 15,741 Paid-in capital 132,753 124,560 Capital stock expense (485) (485) Retained earnings 60,564 53,538 - ----------------------------------------------------------------------------- Total common shareholder's equity 208,573 193,354 - -----------------------------------------------------------------------------
Preferred Shareholders' Equity: Mandatory Redeemable Cumulative Preferred Stock $100 par value, authorized, 200,000 shares; $5.90 series, issued and outstanding, 120,000 shares 12,000 12,000
Cumulative Preferred Stock: $25 par value, authorized, 500,000 shares; none issued - -----------------------------------------------------------------------------
Long-Term Debt: Elizabethtown Water Company: 7.20% Debentures, due 2019 10,000 10,000 7 1/2% Debentures, due 2020 15,000 15,000 6.60% Debentures, due 2021 10,500 10,500 6.70% Debentures, due 2021 15,000 15,000 8 3/4% Debentures, due 2021 27,500 27,500 8% Debentures, due 2022 15,000 15,000 5.60% Debentures, due 2025 40,000 40,000 7 1/4% Debentures, due 2028 50,000 50,000 Variable Rate Debentures, due 2027 50,000 50,000
The Mount Holly Water Company: New Jersey Department of Environmental Protection Notes 5,895 New Jersey Environmental Infrastructure Trust Notes 7,295 Notes Payable (due serially through 2000) 30 57 - ----------------------------------------------------------------------------- Total long-term debt 246,220 233,057 Unamortized discount-net (1,072) (1,113) - ----------------------------------------------------------------------------- Total long-term debt-net 245,148 231,944 - ----------------------------------------------------------------------------- Total Capitalization $ 465,721 $ 437,298 ============================================================================= See Notes to Consolidated Financial Statements.
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In Thousands)
Year Ended December 31, 1998 1997 1996 - -----------------------------------------------------------------------------
Common Stock: $ 15,741 $ 15,741 $ 15,741 - -----------------------------------------------------------------------------
Paid-in Capital: Balance at Beginning of Period 124,560 117,457 112,157 Capital contributed by parent company 8,193 7,103 5,300 - ----------------------------------------------------------------------------- Balance at End of Period 132,753 124,560 117,457 - -----------------------------------------------------------------------------
Capital Stock Expense (485) (485) (485) - -----------------------------------------------------------------------------
Retained Earnings: Balance at Beginning of Period 53,538 49,580 49,272 Net income 24,768 20,905 16,755 Dividends on common stock (16,929) (16,134) (15,634) Dividends on preferred stock (813) (813) (813) - ----------------------------------------------------------------------------- Balance at End of Period 60,564 53,538 49,580 - -----------------------------------------------------------------------------
Total Common Shareholder's Equity $ 208,573 $ 193,354 $ 182,293 ============================================================================= See Notes to Consolidated Financial Statements.
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED CASH FLOWS (In Thousands) Year Ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 24,768 $ 20,905 $ 16,755 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,439 12,233 9,893 (Decrease) increase in deferred charges (501) 690 (613) Deferred income taxes and investment tax credits-net 3,855 2,693 4,853 Allowance for funds used during construction (1,053) (381) (6,934) Other operating activities-net 252 362 68 Change in current assets and current liabilities excluding cash, short-term investments and current portion of debt: Customer and other accounts receivable 331 (558) 218 Unbilled revenues (428) (307) (1,912) Accounts payable and other liabilities 1,807 (6,495) 365 Accrued/prepaid interest and taxes 1,095 3,173 (1,955) Other (572) 78 (133) - ----------------------------------------------------------------------------- Net cash provided by operating activities 41,993 32,393 20,605 - ----------------------------------------------------------------------------- Cash Flows Used by Financing Activities: Capital contributed by parent company 7,861 7,103 5,300 Funds held in Trust by others (7,234) Proceeds from issuance of debentures 50,000 Proceeds from issuance of other long-term debt 7,295 Debt and preferred stock issuance and amortization costs 288 (667) 396 Repayment of long-term debt (27) (30) (30) Contributions and advances for construction-net 6,333 4,759 2,521 Net increase (decrease) in notes payable-banks 4,000 (51,000) 42,000 Dividends paid on common stock and preferred stock (17,637) (16,842) (16,342) - ----------------------------------------------------------------------------- Net cash provided (used) by financing activities 879 (6,677) 33,845 - ----------------------------------------------------------------------------- Cash Flows Used for Investing Activities: Utility plant expenditures (excluding allowance for funds used during construction) (43,500) (24,612) (55,125) - ----------------------------------------------------------------------------- Cash used for investing activities (43,500) (24,612) (55,125) - ----------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (628) 1,104 (675) Cash and Cash Equivalents at Beginning of Period 4,226 3,122 3,797 - ----------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 3,598 $ 4,226 $ 3,122 ============================================================================= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 14,459 $ 16,063 $ 8,481 Income taxes $ 7,723 $ 5,981 $ 5,723 Preferred stock dividends $ 708 $ 708 $ 708 See Notes to Consolidated Financial Statements.
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APPENDIX I
1. Organization Elizabethtown Water Company (Elizabethtown or Company) and its wholly owned subsidiary, The Mount Holly Water Company (Mount Holly), is a wholly owned subsidiary of E'town Corporation (E'town or Corporation). Elizabethtown and Mount Holly are regulated water companies in the State of New Jersey. E'town is also the parent of E'town Properties, Inc. (Properties), Edison Water Company (Edison), Liberty Water Company, (Liberty), Applied Water Management, Inc. (AWM) and Applied Wastewater Management, Inc. (AWWM).
2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include Elizabethtown and its subsidiariy, Mount Holly. Significant intercompany accounts and transactions have been eliminated. Elizabethtown and Mount Holly are regulated water utilities and follow the Uniform System of Accounts, as adopted by the New Jersey Board of Public Utilities (BPU).
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
Utility Plant and Depreciation Income is charged with the cost of labor, materials and other expenses incurred in making repairs and minor replacements, and in maintaining the properties. Utility plant accounts are charged with the cost of improvements and major replacements of property. When depreciable property is retired or otherwise disposed of, the cost thereof, plus the cost of removal net of salvage, is charged to accumulated depreciation. Depreciation is generally computed on a straight-line basis at functional rates for all classes of assets. The provision for depreciation, as a percentage of average depreciable property, was 1.81% for 1998, 1.85% for 1997 and 1.73% for 1996.
Allowance for Funds Used During Construction Elizabethtown and Mount Holly capitalize, as an appropriate cost of utility plant, an Allowance for Funds Used During Construction (AFUDC), which represents the cost of financing major projects during construction. AFUDC, a non-cash credit on the Statements of Consolidated Income, is added to the construction cost of the project and included in rate base and then recovered through depreciation charges in rates during the assets' useful life. AFUDC is comprised of a debt component (credited to Interest Charges), and an equity component (credited to Other Income) in the Statements of Consolidated Income. AFUDC totaled $1.05 million, $.38 million and $6.93 million for 1998, 1997 and 1996, respectively. AFUDC increased in 1996 during the construction of the Canal Road Water Treatment Plant.
Revenues Revenues are recorded based on the amounts of water delivered to customers through the end of each accounting period. This includes an accrual for unbilled revenues for water delivered from the time meters were last read to the end of the respective accounting periods.
Federal Income Taxes Elizabethtown files a consolidated tax return with E'town. Income taxes are allocated to Elizabethtown based upon the Company's taxable income. Deferred income taxes are provided for temporary differences in the recognition of revenues and expenses for tax and financial statement purposes to the extent permitted by the BPU. Elizabethtown and Mount Holly account for prior years' investment tax credits by the deferral method, which amortizes the credits over the lives of the respective assets.
Customers' Advances for Construction and Contributions in Aid of Construction Customers' Advances for Construction (CAC) and Contributions in Aid of Construction (CIAC) represent capital provided by developers for main extensions to new real estate developments. Some portion of CAC is refunded based upon the revenues that the new developments generate. CIAC also represents CAC that, under the terms of individual main extension agreements, are no longer subject to refund.
Short-term Investments Short-term investments are stated at cost, which approximates market value.
Cash Equivalents Elizabethtown Water Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents.
New Accounting Pronouncements In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for fiscal years beginning after December 15, 1997. The pronouncement revises certain disclosure requirements for pension and other postretirement plans but does not change the measurement or recognition of expenses under those plans. The pronouncement standardizes the disclosure requirements for pensions and other postretirement benefit obligations to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates disclosures that are no longer useful. Elizabethtown has adopted these new disclosure requirements for the year ended December 31, 1998 (see Note 10).
In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP is effective for fiscal years beginning after December 15, 1998 and establishes criteria for capitalizing certain internal use software costs. Adoption of the SOP will not have an effect on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity". This Statement must be adopted by the quarter ended March 31, 2000. The Company does not believe this Statement will have any impact on its financial statements.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December15, 1997. SFAS 130 dictates that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement displayed with the same prominence as other financial statements. It also requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company adopted SFAS 130 effective January 1, 1998. The effects of adoption of SFAS 130 are not material for the Company.
Reclassification Certain prior year amounts have been reclassified to conform to the current year's presentation.
3. Federal Income Taxes The computation of federal income taxes and the reconciliation of the tax provision computed at the federal statutory rate (35%) with the amount reported in the Statements of Consolidated Income follow:
1998 1997 1996 - --------------------------------------------- (Thousands of Dollars) - --------------------------------------------- Tax expense at statutory rate $ 13,255 $ 11,262 $ 8,952 Items for which deferred taxes are not provided: Difference between book and tax depreciation 63 58 132 Other (14) 157 (56) Investment tax credits (203) (203) (205) - ---------------------------------------------- Provision for federal income taxes $ 13,101 $ 11,274 $ 8,823 ============================================== The provision for federal income taxes is composed of the following: Current $ 8,902 $ 7,212 $ 3,764 Tax on (deposits) refunds on main extensions 525 1,369 207 Deferred: Tax depreciation 3,131 2,716 3,379 Capitalized interest 91 19 1,264 Main cleaning and lining 796 612 587 Other 40 (451) (174) Investment tax credits - net (203) (203) (204) Refund from IRS (181) - --------------------------------------------- Total provision $ 13,101 $ 11,274 $ 8,823 ============================================= Elizabethtown and Mount Holly provide deferred taxes at the enacted statutory rate for all temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities irrespective of the treatment for rate-making purposes. Management believes it is probable that the accumulated tax benefits that previously have been treated as a flow-through item to Elizabethtown and Mount Holly's customers will be recovered from utility customers in the future. Accordingly, offsetting regulatory assets were established. At December 31, 1998 Elizabethtown and Mount Holly had deferred tax liabilities of $13.7 million and $.5 million. There were also, at December 31, 1998, offsetting regulatory assets for the same amounts representing the future revenue expected to be recovered through rates based upon established regulatory practices which permit recovery of current taxes payable. These amounts were determined using the enacted Federal income tax rate of 35% and were calculated in accordance with SFAS No. 109.
The tax effect of significant temporary differences representing deferred income tax assets and liabilities as of December 31, 1998 and 1997 is as follows:
1998 1997 - --------------------------------------------- (Thousands of Dollars) - --------------------------------------------- Water utility plant-net $(47,538) $(43,611) Taxes recoverable through future rates (14,226) (21,439) Prepaid pension expense (29) 75 Capitalized interest (2,683) (2,591) Waste residuals (480) (322) Other assets 541 415 Other liabilities (281) (378) - --------------------------------------------- Net deferred income tax liabilities $(64,696) $(67,851) =============================================
4. Capitalization E'town routinely makes equity contributions to Elizabethtown which represent the proceeds of common stock issued under E'town's Dividend Reinvestment and Stock Purchase Plan (DRP). Such equity contributions amounted to $7.86 million, $6.98 million and $5.30 million fir each of the three years ended December 31, 1998, 1997 and 1996, respectively.
Preferred Stock Elizabethtown's $5.90 Mandatory Redeemable Cumulative Preferred Stock is not redeemable at the option of the Company. Elizabethtown is required to redeem the entire issue at $100 per share on March 1, 2004.
Long-term Debt Elizabethtown's long-term debt indentures restrict the amount of retained earnings available to Elizabethtown to pay cash dividends (which is the primary source of funds available to the Corporation for payment of dividends on its common stock) or acquire Elizabethtown's common stock, all of which is held by E'town. At December 31, 1998, $7.56 million of Elizabethtown's retained earnings were restricted under the most restrictive indenture provision.
In November 1998 Mount Holly closed on loan agreements that will make available up to $13.19 million in proceeds from the issuance of unsecured notes through the New Jersey Environmental Infrastructure Trust Financing Program. This program provides financing through two loans. The first loan, in the amount of $7.30 million, is through the New Jersey Environmental Infrastructure Trust (Trust), which issued tax-exempt bonds with average interest rates of 4.7%. Non-utility Property includes $7.2 million of funds held in trust by others relating to this financing. The second loan, in the amount of $5.89 million, is from the State of New Jersey, acting through the New Jersey Department of Environmental Protection. The State is participating in the Drinking Water State Revolving Fund authorized by the Safe Drinking Water Act amendments of 1996 whereby the federal government is funding the state loan at no interest cost. The effective interest rate for the combined notes is approximately 2.60%. The proceeds of the loans will finance the construction of the Mansfield Project (see Note 8).
In June 1997 Elizabethtown issued a total of $50 million of 30-year Variable Rate Debentures due December 2027, $25 million of Series A and $25 million of Series B, to evidence a like amount of Variable Rate Notes issued through the New Jersey Economic Development Authority (NJEDA). The proceeds were used to repay $50 million of balances outstanding under Elizabethtown's revolving credit agreement. The NJEDA Notes are remarketed on a weekly basis, at which time the interest rates on each issue are subject to change. The rates in effect as of December 31, 1998, were 3.90% for Series A and 3.85% for Series B.
5. Lines of Credit Elizabethtown has $55 million of uncommitted lines of credit with several banks as of December 31, 1998. These lines, together with internal funds and proceeds of future issuances of debt and preferred stock, and capital contributions from proceeds from sales of common stock by E'town, are expected to be sufficient to finance the Elizabethtown's capital needs.
Information relating to bank borrowings for 1998, 1997 and 1996 is as follows:
1998 1997 1996 --------------------------------------------- (Thousands of Dollars) --------------------------------------------- Maximum amount outstanding $22,000 $69,500 $69,000 Average monthly amount outstanding $14,983 $40,886 $45,240 Average interest rate at year end 5.9% 6.0% 5.7% Compensating balances at year end $ -0- $ -0- $ -0- Weighted average interest rate based on average daily balances 5.8% 5.8% 5.8%
6. Financial Instruments The carrying amounts and the estimated fair values, as of December 31, 1998 and 1997, of financial instruments issued or held by the Company are as follows: 1998 1997 - -------------------------------------------- (Thousands of Dollars) - --------------------------------------------- Cumulative preferred stock: Carrying amount $12,000 $12,000 Estimated fair value 13,020 11,760 Long-term debt: Carrying amount $245,148 $231,944 Estimated fair value 255,087 239,585
Estimated fair values are based upon quoted market prices for these or similar securities.
7. Regulatory Assets and Liabilities Certain costs incurred by Elizabethtown and Mount Holly, which have been deferred, have been recognized as regulatory assets and are being amortized over various periods, as set forth below:
1998 1997 - ----------------------------------------------- (Thousands of Dollars) - ----------------------------------------------- Waste residual management $ 1,371 $ 936 Unamortized debt and preferred stock expense 9,368 9,656 Taxes recoverable through future rates (Note 3) 14,226 21,439 Postretirement benefit expense (Notes 10 and 12) 3,490 3,738 Safety management expense 245 331 Business process redesign 210 284 Rate case expenses 7 80 PWAC under (over) recovery 305 (8) - ----------------------------------------------- Total $29,222 $36,456 ===============================================
Waste Residual Management The costs of disposing of the byproducts generated by Elizabethtown's and Mount Holly's water treatment plants are being amortized and recovered in rates over three- and five-year periods, respectively, for ratemaking and financial statement purposes. No return is being earned on the deferred balances related to these programs.
Unamortized Debt and Preferred Stock Expenses Costs incurred in connection with the issuance or redemption of long-term debt have been deferred and are being amortized and recovered in rates over the lives of the respective issues for ratemaking and financial statement purposes. Costs incurred in connection with the issuance and redemption of preferred stock have been deferred and are being amortized and recovered in rates over a 10-year period for ratemaking and financial statement purposes.
Other Safety management expenses and business process redesign expenses relate to studies undertaken by the Company and are being amortized and recovered in rates over five years.
Purchased Water Adjustment Clause In 1994, Elizabethtown established a Purchased Water Adjustment Clause (PWAC), to reflect the cost of water purchased from the New Jersey Water Supply Authority (NJWSA). The current rate for the PWAC is zero since the costs of purchased water were reflected in the 1996 rate case; however, because of the high pumpage in the summer of 1998, Elizabethtown has under recovered its purchased water costs and therefore, has deferred $.23 million as of December 31, 1998. As of December 31, 1998, Mount Holly has deferred $.08 million of PWAC costs (see Note 8).
Rate Case Expenses Rate case expenses are being substantially recovered in rates during two-year periods.
There were no regulatory liabilities at December 31, 1998 or 1997.
8. Regulatory Matters Elizabethtown In December 1997 the BPU adopted a Stipulation for rate increases for Elizabethtown and Mount Holly, effective January 1, 1998, for the full recovery of costs associated with SFAS No. 106 "Accounting for Employer's Postretirement Benefits" on an accrual basis less the costs associated with SFAS No. 106 expenses previously recovered in rates. The total increases in annual operating revenues resulting from these Stipulations are $.39 million for Elizabethtown and $.02 million for Mount Holly.
Elizabethtown expects to file for rate relief later in 1999 to recover additional construction and financing costs since base rates were last established in October 1996.
Mount Holly On October 6, 1998, the BPU issued an Order adopting a Stipulation signed by the parties to Mount Holly's proceeding for a review of the prudency of constructing a new well field, treatment plant and pipeline to provide an alternate water source required due to State mandated restrictions. This project is known as the Mansfield Project. The Stipulation indicated that the Mansfield Project provides the most cost-effective alternative available to Mount Holly customers for meeting the requirements for an alternative source of supply for the Mount Holly system. Effective in March 1998, Mount Holly began purchasing 1 million gallons per day from New Jersey-American Water Company (NJAM) and will continue to purchase this water until the later of January 1, 2000 or the date the Mansfield Project is placed into service.
In September 1997, Mount Holly filed a petition with the BPU to establish a PWAC to reflect the cost of water purchased from NJAM under the agreement discussed above. On May 27, 1998 the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.29 million or 38.9%. Mount Holly has deferred the increase in purchased water cost between March 19 and May 27 as Other Unamortized Expenses. Recovery of this amount has been requested in the rate increase discussed below. As of December 31, 1998, Mount Holly has deferred $.08 million of these costs.
On January 29, 1999, Mount Holly filed a petition with the BPU for a $2.09 million or 40.55% rate increase, which reflects additional construction and financing costs, as well as increases in operating costs since base rates were last established in January 1996. This rate case also includes $8.96 million in costs with a corresponding rate increase of $1.30 million, for the portion of the Mansfield Project that was placed in service in the third quarter of 1998. A decision is expected during the fall of 1999. Mount Holly expects to file an additional rate case later in 1999 for the remaining cost of the Mansfield Project, to coincide with the completion of the project and the expiration of the agreement to purchase water from NJAM and the cancellation of the PWAC.
9. Commitments and Contingent Liabilities Elizabethtown is obligated, under a contract that expires in 2013, to purchase from the NJWSA a minimum of 37 billion gallons of water annually. Effective July 1, 1997, the annual cost of water under contract is $7.86 million. The Company purchases additional water from the NJWSA on an as-needed basis. The total cost of water purchased from the NJWSA was $8.91 million, $8.79 million and $8.70 million for 1998, 1997 and 1996, respectively.
Mount Holly is obligated, under a contract, to purchase water from NJAM, at a rate of 1 million gallons per day until the Mansfield Project is completely in service in approximately January 2000. The annual cost of the purchased water is $1.16 million.
Capital expenditures of Elizabethtown and Mount Holly are estimated to be $107.54 million and $17.0 million, respectively, through 2001.
Expected future minimum rental payments required under noncancelable leases with terms in excess of one year at December 31 of each of the years 1999 through 2003 are: 1999, $.72 million; 2000, $.76 million; 2001 $.79 million; 2002, $.80 million and 2003, $.61 million. Rent expense totaled $.73 million, $.72 million and $.84 million in 1998, 1997 and 1996, respectively.
Elizabethtown leases vehicles and certain office equipment. The minimum payments required under noncancelable leases with terms in excess of one year at December 31 of each of the years 1999 through 2003 are: $1.01 million per year. The lease expense for 1998 was $.26 million. There are no lease expenses for 1997 or 1996 as vehicles were not leased during that time period.
Environmental, Legal and Other Matters There are environmental matters that are inherent in the production, transmission and distribution of water as well as in the treatment of wastewater. Elizabethtown and Mount Holly are sensitive to these issues and mitigate the environmental impact of these activities to the extent required by the laws and regulations under which these activities are governed and make efforts to exceed the regulatory requirements where practical.
The Company, in the ordinary course of business, periodically becomes involved in litigation. There is currently no litigation in progress regarding environmental or other issues in which an outcome adverse to the Company would have a material impact on the financial statements.
10. Pension Plan and Other Postretirement Benefits Pension Plan Elizabethtown has a trusteed, noncontributory retirement plan, which covers most employees.
Supplemental Pension Plan The Company also has a supplemental retirement plan for certain management employees that is not funded. Benefit payments under this plan are made directly by the Corporation. The unfunded benefit obligation at December 31, 1998 and 1997 was $1.5 million and $1.4 million, respectively.
Other Postretirement Benefits The Company provides certain health care and life insurance benefits for substantially all of its retired employees. As a result of a contract negotiated in February 1996 with the Company's bargaining unit, all union and non-union employees retiring after January 1, 1997, pay 25% of future increases in the premiums the Company pays for postretirement medical benefits.
Under SFAS No. 106, the costs of postretirement benefits are accrued for each year the employee renders service, based on the expected cost of providing such benefits to the employee and the employee's beneficiaries and covered dependents, rather than expensing these benefits on a pay-as-you-go basis.
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1998, and for 1998 was 9%. This rate decreases linearly each successive year until it reaches 3.8% in 2008, after which the rate remains constant.
The rate increases effective January 1, 1998 allows for the full recovery of costs associated with the implementation of SFAS No. 106, including an amortization over 15 years of amounts previously deferred which were in excess of amounts previously being recovered in rates. As of December 31, 1998, the amounts that have been deferred are $3.35 million and $.13 million for Elizabethtown and Mount Holly, respectively.
Based upon an independent actuarial study, the transition obligation, calculated under SFAS No. 106, was $7.26 million as of January 1, 1993, the date of adoption of SFAS No. 106. The transition obligation is being amortized over 20 years.
---Pension Plans--- Other Postretirement --------Benefits------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------- (Thousands of Dollars) Funded Status Change in benefit obligation during year Benefit obligation at beginning of year $40,172 $37,242 $6,556 $6,049 Service cost 1,391 1,302 387 383 Interest cost 2,836 2,713 482 444 Benefit payments (2,092) (1,866) Actuarial (gain) or loss 3,231 781 452 (321) - -------------------------------------------------------------------------------- Benefit obligation at end of year 45,538 40,172 7,877 6,555 ================================================================================ Change in plan assets during year Fair value of plan assets at beginning of year 46,537 40,016 1,331 764 Employer contributions 174 174 731 375 Benefit payments (2,092) (1,866) Actual return on plan assets 7,225 8,213 109 192 - -------------------------------------------------------------------------------- Fair value of plan assets at end of year 51,844 46,537 2,171 1,331 ================================================================================ Reconciliation of funded status at end of year Funded status 6,306 6,365 (5,706) (5,224) Unrecognized net transition (asset) or obligation (1,358) (1,624) 5,061 5,423 Unrecognized prior service cost 2,391 2,723 Unrecognized net (gain) or loss (7,577) (7,905) (3,064) (3,967) - -------------------------------------------------------------------------------- Accumulated postretirement benefits * (238) (441) (3,709) (3,768) ================================================================================ * Recognized in the Consolidated Balance Sheets
------Pension Plans----- -----Other Postretirement--- ------------Benefits-------- 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------------------------------- (Thousands of Dollars) Net periodic benefit cost recognized for year Service cost $1,391 $1,302 $1,341 $387 $383 $416 Interest cost 2,836 2,713 2,777 482 444 425 Expected return on plan assets (4,101) (3,520) (4,569) (109) (57) (72) Net amortization and deferral (155) 65 1,229 157 138 417 Deferred amount for regulated companies pending recovery (273) (565) - -------------------------------------------------------------------------------- Net periodic benefit cost (29) 560 778 917 635 621 ================================================================================ Weighted-average assumptions for year Discount rate 7.25% 7.50% 7.00% 7.25% 7.50% 7.00% Rate of compensation increases 4.00% 4.00% 4.00% Expected long-term rate of return on plan assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Weighted-average assumptions at end of year Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50% Rate of compensation increases 4.00% 4.00% 4.00%
A single percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1998, and the net postretirement service and interest cost by approximately $.84 million and $.19 million, respectively.
11. Related Party Transactions Utility Billing Services, Inc., a subsidiary of NUI Corporation, of which John Kean, who is an Elizabethtown Director, is Chairman of the Board and a Director, provides data processing and related services to Elizabethtown and Mount Holly. The charges for all services totaled $.72 million, $.67 million and $.65 million for 1998, 1997 and 1996, respectively. The current contract expires December 31, 2000.
Elizabethtown had a line of credit in the amount of $10 million with Summit Bank of which Anne Estabrook, who is Chairman of Elizabethtown, is a Director, which expired on June 30, 1998. Total interest charges paid to Summit Bank by Elizabethtown were $.07 million, $.35 million and $.14 million for 1998, 1997 and 1996, respectively. Summit Bank also serves as a bond trustee for Elizabethtown for which Elizabethtown paid fees of less than $.10 million in 1998, 1997 and 1996.
12. Quarterly Financial Data (Unaudited) A summary of financial data for each quarter of 1998 and 1997 follows:
Earnings Operating Operating Net Applicable Quarter Revenues Income Income to Common Stock - -------------------------------------------------------- (Thousands of Dollars ExceptPer Share Amounts) - -------------------------------------------------------- 1st $30,507 $ 8,402 $ 4,645 $ 4,442 2nd 32,739 9,334 5,687 5,484 3rd 38,821 12,226 8,689 8,486 4th 32,780 9,636 5,747 5,543 - -------------------------------------------------------- Total $134,847 $39,598 $24,768 $23,955 ======================================================== 1st $ 30,013 $ 8,092 $ 3,885 $ 3,682 2nd 32,333 8,981 4,862 4,659 3rd 37,815 11,926 7,982 7,779 4th 31,627 8,067 4,176 3,972 - -------------------------------------------------------- Total $131,788 $37,066 $20,905 $20,092 ======================================================== Water utility revenues are subject to seasonal fluctuation due to normal increased water consumption during the third quarter of each year.