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 and is engaged in the ownership and operation of water and 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. Also acquired in June 1998, Applied Water Management, Inc. (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. 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 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. E'town and Properties comprise the Financing and Investment segment of the business for financial and management reporting purposes.
PENDING MERGER On November 21, 1999, E'town entered into an agreement (Merger Agreement) with Thames Water Plc (Thames Water) under which Thames Water has agreed, subject to certain conditions, to acquire E'town for $68 per share in cash or approximately $607 million. Thames Water will also assume the debt of E'town. The acquisition will take the form of a merger (Merger) of E'town with a newly formed subsidiary of Thames Water and E'town will be the surviving company.
Regulated Utilities Segment 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. - -1-
SERVICE AREA AND CUSTOMERS At December 31, 1999, Elizabethtown and Mount Holly furnished water service on a retail basis to general customers and to industrial customers totaling 203,711 in 54 municipalities in the counties of Union, Middlesex, Somerset, Mercer, Hunterdon, Ocean, Morris and Burlington in New Jersey. AWWM serves 1,145 wastewater and 166 water customers.
Elizabethtown also provides, on a wholesale basis, a portion of the water requirements of seven additional municipalities with their own retail water systems and, of three other investor-owned water companies. Water for fire protection service is provided to various municipalities and also to commercial and industrial establishments.
At December 31, 1999, Edison and Liberty served 29,051 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, 1999 are as follows:
General customers 57.1% Other water systems 13.3% Industrial wholesale customers 4.6% Fire service/miscellaneous 10.5% Contract operations 7.0% Engineering, operations and construction 7.5% ----- Total 100.0% =====
The water systems are substantially all metered except for fire service.
Additional operating statistics appear in Item 6.
WATER SUPPLY The water supply systems of Elizabethtown and Mount Holly are physically separate. During 1999, Elizabethtown's pumpage averaged 134.8 million gallons per day (MGD) and Mount Holly's pumpage averaged 3.9 MGD. Elizabethtown and Mount Holly believe they have sufficient water supply sources to meet the current and expected future needs of their customers.
In 1999, surface water sources supplied approximately 90% of Elizabethtown's supply with wells supplying the remaining 10%. All of Mount Holly's water had been produced from wells until March,1998 at which time it began purchasing 1.0 million gallons per day from another purveyor on a temporary basis.
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.
In 1998, Mount Holly commenced a construction project, called the Mansfield Project, to comply with New Jersey legislative restrictions to obtain alternative water supplies, thereby reducing its water pumpage from an aquifer, which had been subject to over-pumping by Mount Holly and various local purveyors in a portion of southern New Jersey. A portion of this project was placed into service in the third quarter of 1998 and the remaining portion of the project was placed into service in late December 1999. - -2-
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 unavailable due to poor water quality. The Raritan-Millstone Plant (Plant), Elizabethtown's primary water treatment plant, was placed in service in 1931 and has continually been upgraded since that time. The Plant has a production capacity of 155 MGD. The Canal Road Water Treatment Plant (Canal Road), Elizabethtown's secondary water treatment 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. Canal Road has an initial rated production capacity of 40 MGD. In September 1999, Tropical Storm Floyd flooded the Plant which required the facility to be withdrawn from service for approximately 3 days. During that time, water demands were met by Canal Road, wells and by purchasing additional water from adjacent water utilities.
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 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 EPA'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. Corrosion inhibitor facilities for Elizabethtown were completed in 1996. The Company is in compliance with LCR requirements. - -3-
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 may occur. 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 consider closing such wells, thereby increasing the Company's 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 19 MGD.
In 1999 Elizabethtown removed certain wells from service due to an exceedance of MCLs. The customers of these wells were then connected to the Elizabethtown system.
Surface Water Treatment Rule The operations of Elizabethtown's Plant and Canal Road are subject to the SWTR.Improvements to the facilities are made when necessary in order to maintain compliance with the SWTR.
TRANSMISSION AND DISTRIBUTION As of December 31, 1999, Elizabethtown Water Company's transmission and distribution system included 2,998 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 proper service. Mount Holly has also been able to construct all facilities and obtain all necessary diversion authorizations. - -4-
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 A substantial portion of the operating personnel of Elizabethtown and Mount Holly, or less than half of all E'town employees, are 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 to 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.
In accordance with the terms of the pending Merger Agreement with Thames Water, Elizabethtown will postpone filing for rate relief to recover additional construction and financing costs incurred since base rates were last established in October 1996 until at least August 2000.
Mount Holly In 1998, Mount Holly commenced a construction project, called the Mansfield Project, to comply with New Jersey legislative restrictions to obtain alternative water supplies, thereby reducing its water pumpage from an aquifer, which had been subject to over-pumping by Mount Holly and various local purveyors in a portion of southern New Jersey. A portion of this project was placed into service in the third quarter of 1998 and the remaining portion of the project was placed into service in late December 1999.
To settle an appeal initiated by another water purveyor in 1995 concerning the diversion rights for the Mansfield Project, Mount Holly signed a Stipulation in 1997 with the purveyor, the DEP and other parties, requiring Mount Holly to purchase one million gallons per day from the other purveyor during the two-year period that the Mansfield Project was being constructed. Purchases began during March of 1998, after completion of an interconnection and ended in January 2000 shortly after the Mansfield Project went into service.
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 the other purveyor under the aforementioned Stipulation Agreement. In May 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%. - -5-
Effective January 1, 2000, Mount Holly received an increase in annual rates of $1.9 million. This increase included costs for Mount Holly's Mansfield Project that was placed in service at the end of December 1999. The rate decision also reflected the elimination of the PWAC. After the elimination of the PWAC the net rate increase was $.5 million. This increase also reflects additional construction and financing costs, as well as increases in operating costs, since base rates were last established in January 1996.
REAL ESTATE MATTERS Financing and Investment Segment E'town is in the process of selling its remaining parcels of undeveloped land. Several parcels have been sold and the proceeds are being invested into water and wastewater projects. The eventual sale of these parcels is contingent upon the purchaser obtaining various approvals for development. This process could take up to several years. As of December 31, 1999, all the remaining properties are under contract to be sold.
Contract Operations Segment In July 1998 E'town, through Liberty, entered into a contract with the City of Elizabeth (Elizabeth), New Jersey to operate its water system under a 40-year contract serving approximately 17,600 customers. Under the contract, Liberty made payments to Elizabeth of $19.7 million in 1998 and $12 million in 1999 and is obligated to make a payment of $19 million in June 2000. Also under the terms of the contract, Liberty will deposit $57.8 million from customer collections over the 40-year contract into a fund administered by Elizabeth (Fund Deposits), of which $52.3 million is due after 2012, to be used by Elizabeth to pay for capital improvements or for other water system purposes. Liberty is responsible for $7.45 million of construction expenditures, primarily for meter replacements, over the life of the contract. Of these total commitments, approximately $2.5 million is expected to be expended in the next three years. Over the life of the contract, E'town will receive all water revenues from billing the customers of the water system in accordance with rate increases set forth in the contract except for the Fund Deposits discussed above. 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.
In 1997 E'town, through Edison, entered into a contract with the Township of Edison, New Jersey to operate its water system under a 20-year contract serving approximately 11,500 customers. Edison bills and receives all water revenues generated as a result of operating the water system and pays: (i) all operating and maintenance expenses for the water system, (ii) certain annual payments to the Township of Edison and (iii) costs of specific capital improvements. Aggregate annual payments and the estimated costs of capital improvements are expected to be approximately $25 million during the 20-year life of the contract of which $12.5 million has been spent as of December 31, 1999. Of the total, approximately $2.9 million is expected to be expended in the next three years. An initial payment of $5.7 million was made upon the closing in June 1997. Performance by Edison of the contract provisions is guaranteed by E'town.
If the Elizabeth or Edison contracts were terminated by either the Township of Edison or the City of Elizabeth, the unamortized balance of the concession fees and amounts paid for additional capital improvements would be refunded to Liberty and Edison in accordance with the contracts.
Engineering/ Operations and Construction Segment In June 1998 the Corporation purchased AWM which provides "one-stop shopping" for water and wastewater services to residential and commercial developers. These services include the design, construction and operation of water and wastewater facilities and, in some instances, purchase of such utilities from developers at project build-out by AWWM, thereby adding to E'town's regulated utility customer base. AWM expects to incur capital expenditures of $2.0 million during the next three years. These expenditures consist primarily of vehicles and equipment used in the construction and waste hauling operations. In 1999, AWM acquired a septic services business for $.7 million and a group of small, non-regulated wastewater treatment facilities for $1.0 million. - -6-
OTHER MATTERS In August 1999 the Governor of the State of New Jersey declared a "Water Emergency" for the entire state and issued mandatory restrictions on outdoor, nonessential water use. Due to unusually low levels of rainfall during June and July the Governor deemed these measures necessary to preserve the integrity of several of the state's reservoir and well supplies. Customers of Elizabethtown, Mount Holly, Edison and Liberty were subject to these restrictions. The water systems operated by E'town's subsidiaries at all times had, and continue to have, adequate supplies of water to meet the needs of their customers. These restrictions affected the amount of water consumed by a substantial number of the Corporation's customers. The restrictions were lifted in October 1999.
In September 1999, Elizabethtown withdrew its primary water treatment plant, the Raritan-Millstone Water Treatment Plant, from service as a result of flooding from Tropical Storm Floyd. For several days, Elizabethtown had difficulty maintaining adequate water pressure in portions of its distribution system because overall system production levels were substantially less than normal. Customers in portions of a few municipalities were without water service for approximately 3 days. Costs incurred to repair and replace equipment damaged by the flood and to respond to inquiries by customers, regulatory bodies and the media have been deferred and are expected to be recoverable through insurance. The Company has incurred $7.0 million of flood-related expenditures and has received an advanced reimbursement of $2.0 million from its insurance carrier. The remaining $5.0 million of flood-related expenditures is reported on the Consolidated Balance Sheets as a deferred charge at December 31, 1999. The loss of revenues due to below normal water consumption is not recoverable through insurance.
In June 1999 Mount Holly purchased Homestead Water Utility, Inc. and AWWM purchased Homestead Treatment Utility, Inc. for a combined purchase price of $1.8 million. The entities provide water and wastewater services to approximately 800 customers of the Homestead community in southern New Jersey.
Executive Officers of the Corporation and Elizabethtown
See Item 10 for disclosure of the executive officers of E'town and Elizabethtown. - -7-
Item 2.
Item 2. Properties
All principal plants and other materially important units of property of the Corporation are owned in fee. The Corporation considers such property to be in good operating condition.
Item 3.
Item 3. Legal Proceedings
On September 23, 1999, two parties filed separate class action lawsuits for compensatory damages and related fees on behalf of themselves and similarly situated residential and commercial customers against Elizabethtown Water Company, Edison Water Company and Liberty Water Company. The lawsuit alleges negligence regarding the quantity and quality of water services provided by the Corporation during the period in September 1999 when Elizabethtown's primary water treatment plant was flooded from Tropical Storm Floyd and was withdrawn from service for approximately 3 days. Elizabethtown has notified its insurance carrier of the lawsuit and has filed a motion for summary judgment to dismiss the lawsuit as a class action proceeding prior to answering the allegations. In March 2000, the New Jersey Superior Court (NJSC) ruled that in the event the lawsuit is not dismissed, the case be referred to the BPU for purposes of investigating the matter and reporting its findings to the NJSC. The NJSC, in view of the BPU's findings, will then determine what, if any, damages were suffered by the plaintiffs and what liability, if any, rests with Elizabethtown. E'town Corporation maintains that such allegations are without merit and believes that the plaintiffs' chances of prevailing are not significant.
The Corporation, in the ordinary course of business, periodically becomes involved in litigation. There is currently no litigation in progress, other than the items discussed above, regarding environmental or other issues in which an outcome adverse to the Corporation could 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. - -8-
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
1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- Utility Plant (Thousands) Utility Plant - net $ 650,771 $ 604,899 $ 572,785 $ 560,024 $ 507,858 Construction Expenditures (excluding AFUDC) 56,635 43,500 24,612 55,125 73,789 Total Assets 741,187 683,328 646,318 640,779 580,808 Capitalization (Thousands) Shareholder's Equity 220,461 208,573 193,354 182,293 176,685 Preferred Stock 12,000 12,000 12,000 12,000 12,000 Debt (1) 296,823 267,178 249,974 250,963 208,952 Total Capitalization $ 529,284 $ 487,751 $ 455,328 $ 445,256 $ 397,637 Capitalization Ratios Common Stock 42% 43% 42% 41% 44% Preferred Stock 2% 2% 3% 3% 3% Debt (1) 56% 55% 55% 56% 53% Earnings to Fixed Charges Ratio 2.94 3.33 2.91 2.40 2.77 Earnings to Fixed Charges and Preferred Dividends 2.73 3.09 2.71 2.22 2.54 Earnings Applicable to Common Stock (Thousands) $ 20,592 $ 23,955 $ 20,092 $ 15,942 $ 16,512
Operating Statistics Revenues (Thousands) General Customers $ 92,111 $ 87,698 $ 85,195 $ 68,797 $ 67,455 Other Water Systems 21,597 22,181 21,900 18,929 18,720 Industrial Wholesale 7,531 8,148 8,451 7,869 7,947 Fire Service/Miscellaneous 17,067 16,820 16,242 14,763 14,276 Total Revenues $ 138,306 $ 134,847 $ 131,788 $ 110,358 $ 108,398
Water Sales - Millions of Gallons (mg) General Customers 25,842 24,609 24,333 22,890 23,999 Other Water Systems 13,806 14,397 14,504 15,049 15,569 Industrial Wholesale 3,270 3,482 3,533 3,567 3,673 System Use and Unaccounted For 7,717 6,933 6,948 6,444 6,402 Total Water Sales 50,635 49,421 49,318 47,950 49,643 System Delivery by Source - mg Surface 44,520 48,067 42,585 41,485 42,646 Wells 5,729 1,072 6,689 6,328 6,764 Purchased 386 282 44 137 233 Total System Delivery 50,635 49,421 49,318 47,950 49,643 Millions of Gallons Pumped: Average Day 139 135 135 131 136 Maximum Day 230 196 205 170 183 General Information Customers 203,711 200,251 197,663 195,482 192,617 Miles of Main 2,998 2,953 2,926 2,899 2,869 Fire Hydrants Served 17,644 16,402 16,228 16,012 15,650
================================================================================ (1) Includes long-term debt, notes payable and long-term debt-current portion.
See Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations and Notes to Consolidated Financial Statements appearing elsewhere in this report. - -9-
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 4% of the Company's consolidated operating revenues for 1999. The following analysis sets forth significant events affecting the financial condition of Elizabethtown at December 31, 1999, and the results of operations for the years ended December 31, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures Program Elizabethtown In 1999 net capital expenditures were $55.2 million, primarily for water utility plant. Elizabethtown's three-year capital program includes $62.0 million for routine projects (services, hydrants, system rehabilitation and main extensions not funded by developers) and $73.1 million for transmission system upgrades, a new operations center, expansion of the Canal Road Water Treatment Plant (Canal Road) and other projects. Canal Road will be expanded to provide for enhanced system reliability and to accomodate customer growth. Canal Road was designed as a 40 million gallon per day (MGD) plant, expandable to 200 MGD.
Mount Holly During the next three years, Mount Holly expects to spend $4.7 million, of which $3.3 million is for routine projects (services, hydrants and main extensions not funded by developers).
In 1998 Mount Holly commenced a construction project, called the Mansfield Project, to comply with New Jersey legislative restrictions to obtain alternative water supplies, thereby reducing its water pumpage from an aquifer, which had been subject to over-pumping by Mount Holly and various local purveyors in a portion of southern New Jersey. A portion of this project was placed into service in the third quarter of 1998 and the remaining portion of the project was placed into service in late December 1999.
To settle an appeal initiated by another water purveyor in 1995 concerning the diversion rights for the Mansfield Project, Mount Holly signed a Stipulation in 1997 with the purveyor, the New Jersey Department of Environmental Protection (DEP) and other parties, requiring Mount Holly to purchase one million gallons per day from the other purveyor during the two-year period that the Mansfield Project was being constructed. Purchases began during March of 1998, after completion of an interconnection and ended in January 2000 shortly after the Mansfield Project went into service.
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 the other purveyor under the aforementioned Stipulation agreement. In May 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%. - -10-
Effective January 1, 2000, Mount Holly received an increase in annual rates of $1.9 million. This increase included costs for Mount Holly's Mansfield Project that was placed in service at the end of December 1999. The rate decision also reflected the elimination of the PWAC. After the elimination of the PWAC the net rate increase was $.5 million. This increase also reflects additional construction and financing costs, as well as increases in operating costs, since base rates were last established in January 1996.
Capital Resources During 1999 Elizabethtown financed 38.2% 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, 2002, Elizabethtown estimates that 52% 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 the sale of E'town common stock or capital contributions from Thames Water after the pending Merger, long-term debt, proceeds of tax-exempt New Jersey Economic Development Authority (NJEDA) bonds and short-term borrowings. 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 loan agreements that will make available up to $13.2 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 $7.3 million, is through the New Jersey Environmental Infrastructure Trust (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. The State is participating in the Safe 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 2.6%. The proceeds of the loans will be used to repay short-term debt incurred to finance a portion of the Mansfield Project. The Company expects to request these funds from the Trust in the second quarter of 2000.
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, 1999, a hypothetical single percentage point change in interest rates would result in a $.5 million change in interest costs and earnings before tax related to short-term and variable rate debt.
RESULTS OF OPERATIONS Earnings Applicable to Common Stock for 1999 was $20.6 million as compared to $24.0 million for 1998. The 1999 decrease of $3.4 million in net income is comprised of (i) a decrease of $.7 million for lost revenues net of expenses from reduced consumption as a result of New Jersey State-imposed water restrictions in August for drought conditions, (ii) a decrease of $.4 million from flooding in September of Elizabethtown's Raritan-Millstone Plant caused by Tropical Storm Floyd (Floyd) (see Other Matters), (iii) a decrease of $2.5 million from additional operating expenses, primarily labor and benefits and (iv) a decrease of $1.6 million from higher interest costs and depreciation. These decreases were partially mitigated by the favorable impact of an increase of $1.8 million in revenues, net of related expenses for higher water consumption related to an extended dry period in the spring and early summer of 1999.
Earnings Applicable to Common Stock 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.
Operating Revenues increased $3.5 million or 2.6% in 1999 over the comparable 1998 amount.Revenues increased $4.2 million due to higher water consumption related to an extended dry period in the spring and early summer of 1999. This favorable factor was somewhat offset by $1.6 million of lower water consumption resulting from State-mandated water restrictions in August and by $1.0 million from flooding in September caused by Floyd. New customers and the PWAC rate increase for Mount Holly contributed the remaining $1.9 million to the increase in revenues.
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.
Operation Expenses increased $5.0 million or 11.1% in 1999 over 1998. The increase consists of (i) an increase of $2.7 million in labor, including $.8 million attributable to raises, an increase of $.7 million due to overtime because of the weather conditions, and an increase of $.3 million due to an increased number of employees, (ii) an increase of $.7 million for power, of which $.1 million was attributable to the weather conditions while the remainder was due to adverse operating conditions resulting from flooding by Floyd, (iii) an increase of $.6 million in leasing costs as conversion continues from ownership to leasing of all vehicles, (iv) an increase of $.3 million in purchased water by Mount Holly while the Mansfield Project was being constructed and (iv) an increase of $.7 million from various other operating expenses.
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.
Maintenance Expenses increased $.6 million or 11.4% in 1999 as compared to 1998 primarily due to additional waste residual removal costs.
Maintenance Expenses decreased $.9 million or 13.3% in 1998, as compared to 1997 due to improved procurement procedures and preventative maintenance programs.
Depreciation Expense increased $.9 million or 7.4% in 1999 and $.2 million or 1.7% in 1998 due to depreciation on utility plant additions in both years.
Revenue Taxes increased $.5 million or 2.9% in 1999 and $.2 million or 1.1% in 1998 due to the taxes on increases in operating revenues discussed above.
Real Estate, Payroll and Other Taxes increased $.5 million or 19.4% in 1999 primarily due to increased payroll taxes as a result of payrol taxes on higher labor costs.
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 Canal Road Plant. - -12-
Federal Income Taxes as a component of operating expenses decreased $1.6 million or 12.3% in 1999 as compared to 1998 and increased $1.7 million or 15.0% in 1998 over 1997 due to changes in the components of taxable operating income discussed herein.
Other Income (Expense) increased $.1 million or 8.5% in 1999 compared to 1998.
Other Income (Expense) increased $.3 million or 70.5% in 1998 over 1997 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.
Total Interest Charges increased $.9 million or 5.7% in 1999. The increase consists of $.4 million for Mount Holly's issuance of long-term notes in November 1998 through the New Jersey Environmental Infrastructure Trust Financing Program to finance a portion of the construction of its Mansfield Project and $.5 million for increased short-term borrowings to finance Elizabethtown's construction program.
Total Interest Charges decreased $1.0 million or 6.1% in 1998 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.
OTHER MATTERS In August 1999 the Governor of the State of New Jersey declared a "Water Emergency" for the entire state and issued mandatory restrictions on outdoor, nonessential water use. Due to unusually low levels of rainfall during June and July the Governor deemed these measures necessary to preserve the integrity of several of the states reservoir and well supplies. Customers of Elizabethtown and Mount Holly were subject to these restrictions. The water systems operated by E'town's subsidiaries had and continue to have adequate supplies of water to meet the needs of their customers. These restrictions affected the amount of water consumed by a substantial number of the Corporation's customers and reduced net income in 1999 by approximately $.68 million. The restrictions were lifted in October 1999.
In September 1999 Elizabethtown took its primary water treatment plant, the Raritan-Millstone Water Treatment Plant, out of service as a result of flooding from Floyd. For several days, Elizabethtown had difficulty maintaining adequate water pressure in portions of its distribution system as the Canal Road Plant, Elizabethtown's secondary water treatment plant, was supplying the predominant portion of the water needs of Elizabethtown's customers. Overall system production levels were substantially less than normal. Customers in portions of a few municipalities were without water service for a period of approximately 3 days. Costs incurred to repair and replace equipment damaged by the flood and to respond to inquiries by customers, regulatory bodies and the media are being deferred and are expected to be recoverable through insurance. The loss of revenues due to below normal water consumption is not recoverable through insurance and adversely affected net income by approximately $.39 million for 1999.
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, the closing of the pending merger with Thames Water, changes in environmental regulation and associated costs of compliance and other claims or assessments made upon the Company. - -13-
Elizabethtown In accordance with the terms of the pending Merger Agreement, Elizabethtown will postpone filing for rate relief needed to recover additional construction and financing costs incurred since base rates were last established in October 1996 until at least August 2000. Therefore, earnings from Elizabethtown will be substantially lower in 2000 than in 1999 due to an assumed return to normal weather conditions and postponement of the rate filing.
Mount Holly Mount Holly had a negative rate of return on common equity of 2.6% in 1999, compared to an authorized rate of return of 11.25%, established in its 1996 base rate case. Mount Holly earned significantly below its authorized return in 1999 and 1998 as the Company was precluded from filing for needed rate relief due to recently settled litigation with another purveyor. Management expects Mount Holly to contribute positively to Elizabethtown's net income as a result of a Stipulation Agreement approved by the BPU whereby a rate increase of $1.9 million, or a net increase of $.5 million after elimination of the PWAC, was effective January 1, 2000.
New Accounting Pronouncements See Note 3 of Elizabethtown's Notes to Consolidated Financial Statements for a discussion of new accounting standards that were effective in 1999.
Year 2000 State of Readiness The Company assessed its significant business systems, as well as non-critical, peripheral support systems for compliance with the Year 2000 computer challenge. 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. The assessment had identified certain modifications to peripheral support systems that have since been implemented.
The Costs To Address The Corporation'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 required the Company to incur costs of approximately $.4 million to bring them into compliance.
At the turn of the century and to-date, the Company experienced no disruption in the services it provides to its customers and processed transactions in its financial, customer billing and customer services systems in the normal course of business. Management is not currently aware of any Year 2000-related problems associated with its internal business systems or software or with the systems or software of its vendors.
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 - -14-
PART III Item 10.
Item 10. Directors and Executive Officers of the Registrant
Director Term Name Age Since Expires Position - ------------------------------------------------------------------------------- Gail P. Brady 54 N/A N/A Treasurer; Senior Vice President, Chief Financial Officer and Treasurer of Elizabethtown Walter M. Braswell 50 N/A N/A Secretary; Vice President, General Counsel and Secretary of Elizabethtown Thomas J. Cawley 69 1992 2002 Director Andrew M. Chapman 44 1995 2001 Director,President; President, Elizabethtown Anthony S. Cicatiello 52 1996 2002 Director Edward A. Clerico 45 See Note Below Director; President, Applied Water Management, Inc. Dennis W. Doll 41 N/A N/A Controller; Vice President and Controller of Elizabethtown Anne Evans Estabrook 55 1982 2001 Director, Chairman of the Board, E'town Corporation and Elizabethtown James W. Hughes 56 1997 2000 Director John Kean 70 1957 2002 Director Robert W. Kean, III 52 1989 2001 Director, Vice President Barry T. Parker 67 1983 2001 Director Hugo M. Pfaltz 68 1980 2000 Director Chester A. Ring, 3rd 72 1982 2002 Director Joan Verplanck 53 1997 2000 Director Norbert Wagner 64 N/A N/A Senior Vice President-Operations of Elizabethtown
Family Relationships. Robert W. Kean, Jr., (Director Emeritus) is a cousin of John Kean, Director and father of Robert W. Kean, III, Director.
Gail P. Brady has been 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. She is a trustee of Ramapo College. She has been with Elizabethtown since 1971.
Thomas J. Cawley was Vice Chairman of Elizabethtown until his retirement in December 1996. From August 1992 to January 1996 he served as President of Elizabethtown. He joined Elizabethtown in 1969 and served in a variety of operating positions until elected President in 1992.
Andrew M. Chapman has been President of the Corporation since May 1997, Chief Financial Officer of the Corporation from August 1989 until May 1997 and Treasurer of the Corporation from November 1990 until May 1997. He has been President of Elizabethtown since January 1996, Executive Vice President of Elizabethtown from May 1994 to December 1995, Senior Vice President of Elizabethtown from April 1993 to May 1994, Chief Financial Officer of Elizabethtown from November 1990 to December 1995, and Treasurer of Elizabethtown from August 1989 to May 1994. He is a member of the Regional Advisory Board of PNC Bank, N.A., New Jersey and is a member of the Board of Directors of the Damon G.Douglas Company, a general construction company. - -15-
Anthony S. Cicatiello is the Chairman of CN Communications International, Inc., a public relations and advertising firm, a firm he founded in 1977.
Edward A. Clerico was appointed Director of the Corporation in August 1998. He was not nominated for election as Director in May 1999. In July 1999 he was reappointed as Director of the Corporation and will remain as such until the next election of Directors. He is President of Applied Wastewater Management, Inc. and was the owner and founder since 1984 . The Applied Group of companies was purchased by E'town in June 1998.
Dennis W. Doll has been Controller of the Corporation since 1997, Vice President and Controller of Elizabethtown since 1998 and Controller of Elizabethtown since 1994. He joined the company in 1985.
Anne Evans Estabrook has been the owner of Elberon Development Co. (a real estate holding company) since 1984 and is President of David O. Evans, Inc. (a construction management company). She is a Director of Summit Bancorp and its subsidiary, Summit Bank. She is a Public Member of the Governing Board, New Jersey Economic Development Authority. She is a Trustee Emeritus of Cornell University.
James W. Hughes has been Dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. He has been the Director of the Rutgers Regional Report since 1988, and has been a member of the Rutgers University Faculty since 1971.
John Kean is Chairman of the Board and a Director of NUI Corporation. He was President and Chief Executive Officer of NUI Corporation until his retirement in April 1995, and until October 1994, Chairman of the Board and Director of Elizabethtown Gas Company, which was previously a subsidiary of NUI Corporation. He is also an Honorary President of the International Gas Union.
Robert W. Kean, III has been Vice President of the Corporation since 1997 and Executive Vice President of Properties since July 1987.
Barry T. Parker is of counsel to the law firm of Parker, McCay & Criscuolo, P.C. since December 1997, where he had been a partner since 1967.
Hugo M. Pfaltz has been a principal of the law firm of Pfaltz & Woller, P.A. since 1976.
Chester A. Ring, 3rd, was President of Elizabethtown until his retirement in August 1992. He served as President of Elizabethtown since June 1987.
Joan Verplanck has been President of the New Jersey Chamber of Commerce since 1994. Prior to that she served as President of the Morris County Chamber of Commerce.
Norbert Wagner has been Senior Vice President-Operations of Elizabethtown since 1992 and has been with Elizabethtown since 1963.
The Directors of E'town also serve as Directors of Elizabethtown.
Section 16(a) Beneficial Ownership Reporting Compliance. None. - -16-
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
The following table provides certain summary information concerning the compensation for the past three years of the Chairman of the Board and each of the other four most highly compensated executive officers of the Corporation (the "named executive officers").
Option/SAR Grants in Last Fiscal Year
The following table provides information regarding individual grants of stock options and stock appreciation rights made during 1999 to the persons named in the Summary Compensation Table, above.
Aggregated Option/SAR Exercises in Last Fiscal Year and Year-End Option/SAR Values
The following table provides information regarding the pre-tax value realized from the exercise of options and stock appreciation rights during 1999 and the value of unexercised in-the-money options and stock appreciation rights held at December 31, 1999 by the persons named in the Summary Compensation Table, above.
(1) No Stock Appreciation Rights were granted under the 1987 Stock Option Plan, which expired in 1997.
(2) Based on the price of $62.25 per share, the closing price of the Common Stock on the New York Stock Exchange, Inc. on December 31, 1999. - -18-
Pensions
The following table shows, for the salary levels and years of service indicated, the annual pension benefits payable to employees, including officers, upon retirement at age 65, under Elizabethtown's non-contributory defined benefit retirement plan. The compensation taken into account under a tax-qualified plan is subject to a maximum annual limit under the Internal Revenue Code of 1986, as amended, adjusted annually for cost of living increases ($160,000 in 1997, 1998 and 1999, and $170,000 in 2000).
Highest Consecutive Four Year Average Compensation Annual Benefits for Years of Service Indicated - -------------------------------------------------------------------------------- 10 15 20 25 30 35 40 45 years years years years years years years years - -------------------------------------------------------------------------------- $ 75,000 $12,000 $18,000 $24,000 $30,000 $36,000 $42,000 $48,000 $54,000 100,000 16,000 24,000 32,000 40,000 48,000 56,000 64,000 72,000 125,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 150,000 24,000 36,000 48,000 60,000 72,000 84,000 96,000 108,000 175,000 28,000 42,000 56,000 70,000 84,000 98,000 112,000 126,000 200,000 32,000 48,000 64,000 80,000 96,000 112,000 128,000 144,000 225,000 36,000 54,000 72,000 90,000 108,000 126,000 144,000 162,000 250,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000
Elizabethtown's non-contributory defined benefit retirement plan provides that a participant will receive an annual retirement benefit equal in amount to 1.6% of the participant's final average compensation for the highest four consecutive calendar years multiplied by the number of years of credited service (up to a maximum of 45). Remuneration covered under the retirement plan includes base wages only. Compensation covered by the plan for Anne Evans Estabrook, Andrew M. Chapman, Norbert Wagner and Gail P. Brady, are approximately equal to the amounts set forth under the caption "Salary" in the Summary Compensation Table above. Edward A. Clerico does not participate in this plan and neither do Directors who are not also officers or employees of the Corporation.
The annual benefit amounts shown above are not subject to any deduction for Social Security benefits or other offset amounts. The number of years of service now credited under the retirement plan (and the supplemental plans described below) are as indicated for the following officers: Anne Evans Estabrook, 12 years; Andrew M. Chapman, 10 years; Norbert Wagner, 36 years and Gail P. Brady, 28 years.
The named executive officers, with the exception of Anne Evans Estabrook and Edward A. Clerico, are entitled to either a Supplemental Executive Retirement Plan ("SERP") benefit upon the attainment of the normal retirement age of 65, or a 1995 ("1995 SERP") benefit upon the attainment of the age of 62 with a minimum of 20 years service. The benefit payable under each of these plans is an amount equal to the difference between 60% for retirement at age 65 or 55% for retirement at age 62 of the average of annual base salary and incentive compensation payments as shown in the Salary, Bonus and Restricted Stock Awards Columns in the Summary Compensation Table above plus other taxable amounts for the thirty-six months prior to retirement. The SERP provides that in the event of termination due to a change in control, a participant is credited with an additional 10 years of service for purposes of qualifying for the 1995 SERP. The 1995 SERP also provides life insurance equal to two times compensation if death occurs before age 55.
The estimated annual benefits payable upon retirement at age 65 for each named executive officer entitled to SERP or 1995 SERP benefits are as follows: Andrew M. Chapman $148,387; Norbert Wagner $17,855, and Gail P. Brady $32,824. - -19-
Compensation of Directors (1) Standard Arrangements
Directors' Fees. Directors of the Corporation who are not officers of the Corporation are paid by Elizabethtown an annual retainer of $15,000 which is paid in the form of E'town Corporation common stock, and a fee of $600 for each meeting of the Board of Directors of Elizabethtown which they attend. Such Directors also receive the per-meeting attendance fee for each meeting of the Board of the Corporation held on a day when there is not also a meeting of the Board of Elizabethtown. Properties Directors receive a $1,000 annual retainer and a fee of $600 for a Board Meeting held on days not coincident with Board meetings of Elizabethtown. Directors who are officers of the Corporation are paid a fee of $300 for each Board meeting of Elizabethtown they attend.
Members of committees who are not officers of the Corporation are paid a fee of $400 for participation at committee meetings on the same day as board meetings and a fee of $600 for committee meetings held on days other than board meetings. No fees are paid to members of the Executive Management Committee for attendance at meetings of that committee.
A Director cannot stand for re-election after his or her 72nd birthday. A retired Director with 10 or more years' service on the Board of Directors (of the Corporation or Elizabethtown) becomes eligible at age 72 to receive a pension for life equal to the annual retainer in effect at the date the Director becomes eligible for the pension. A retired Director with 5 to 9 years of service will receive a pension equal to the annual retainer in effect at the date the Director becomes eligible to receive the pension, payable for the same number of years that the Director served on the Board.
(2) Other Arrangements
Effective May 1997, Robert W. Kean, Jr. was appointed Chairman of the Board - Emeritus and Director Emeritus and Brendan T. Byrne and Henry S. Patterson, II were appointed Directors Emeriti. For the two year period after their appointment, which expired in May 1999, Directors Emeriti received the per-meeting Directors' fee of $600 for each Board meeting which they attended.
The Corporation and Elizabethtown have consulting agreements with Robert W. Kean, Jr. whereby he serves as Chairman Emeritus of the Boards of both companies and Chairman of the Executive Management Committee as described above, and renders such other consulting services as the Chairman may reasonably request. Robert W. Kean, Jr. was paid $75,000 in consulting fees in 1999 in addition to his pension. The Corporation also provided Mr. Kean with the use of an automobile for 1999, with a taxable value of $13,750 to Mr. Kean in that year.
Employment Agreements
E'town and Elizabethtown have each entered into an employment agreement with Anne Evans Estabrook effective May 15, 1997. The agreements continue until the earliest of (i) mutual agreement of termination, (ii) resignation, and (iii) any date on which Mrs. Estabrook no longer stands for re-election as a Director. In addition, the respective companies may terminate Mrs. Estabrook's employment for reasons of disability or cause (each as defined in the agreements).
E'town has entered into an employment agreement with Andrew M. Chapman, its current President and the President of Elizabethtown. Upon the consummation of the merger contemplated by the Merger Agreement dated as of November 21, 1999 among the Corporation, Thames Water Plc ("Thames") and Edward Acquisition Corp., as described on Form 8-K dated November 21, 1999, this new employment agreement with Mr. Chapman will become effective and will replace Mr. Chapman's existing change in control agreement with E'town, described below. - -20-
Under the terms of the new employment agreement, Mr. Chapman will be employed as President and Chief Executive Officer of both E'town and Elizabethtown after the merger on terms that include the following: (i) term of at least three years with subsequent automatic one-year renewals; (ii) a seat on the boards of E'town, Thames Water North America, Inc. and Elizabethtown, and, if Thames establishes a board of directors for its businesses in the Americas, a seat on that board; (iii) initial annual base salary of $270,000; (iv) annual bonus consisting of: (x) a performance-related bonus equal to at least 10% of Mr. Chapman's salary; (y) a bonus equal to 12 1/2% of Mr. Chapman's salary for each net increase of 7,500 customer metered connections to E'town's base customer level in the prior year; and (z) annual grant of restricted shares of the stock of Thames having a value of up to 20% of Mr. Chapman's salary with each grant vesting over a four-year period upon the attainment of certain performance goals; (v) special retention bonus, payable at the commencement of the employment agreement, equal to 20% of Mr. Chapman's salary; entitlement to participate in all benefit plans made available for senior executive officers; insurance and indemnification by E'town against expenses and liabilities incurred by Mr. Chapman; and certain non-competition and confidentiality provisions.
The agreement also provides that Mr. Chapman will receive continued salary and benefits for a period of 24 months if he voluntarily terminates his employment within a six-month period commencing on the earlier of (i) the date the first rate order is received by Elizabethtown from the New Jersey Board of Public Utilities after the merger, and (ii) the date that is 18 months after the merger. Upon termination of employment by Mr. Chapman for good reason (as defined in the agreement) or E'town terminates his employment other than for death, disability or cause (as defined in the agreement), Mr. Chapman will receive salary, incentive compensation and benefits for a period of 30 months; unvested restricted stock and stock options will immediately vest and all restrictions on any restricted stock or stock options held by him will be voided; and all retirement benefits under the SERP will fully vest if he has not attained age 65, he will be granted an additional 15 years of service for purposes of benefit accrual, and he will become entitled to make an early payout election under the SERP if he has completed 25 years of service.
If the amounts payable by E'town to Mr. Chapman under the agreement are subject to the excise tax applicable to "parachute payments" under Sections 280G and 4999 of the Internal Revenue Code, E'town will pay Mr. Chapman an additional amount so that, after payment of such excise tax, he receives a sum equal to the original pre-tax severance payment.
Change in Control Agreements
E'town has entered into a Change in Control Agreement with each of the named executive officers (other than Edward A. Clerico) to ensure continuity in the management of E'town's operations in the event of a change in control (as defined in the agreements). The agreements provide that the named officers are entitled to a severance payment if their employment is terminated: (i) within three years of a change in control for a reason other than death, cause, or, in the case of all named officers other than Andrew M. Chapman, disability; (ii) in the case of Andrew M. Chapman only, voluntarily by Mr. Chapman within one year of a change in control; or (iii) within three years of a change in control following a material change in job duties, significant increase in travel, diminution in status, position or responsibilities, reduction in compensation and benefits or certain job relocations.
If his or her employment is terminated under those circumstances, the named officer's severance includes: continued salary, incentive compensation and benefits for a period of 18 to 30 months; payment on the date of termination of an amount equal to the greater of (i) all incentive compensation due prior to the change in control but not yet paid and (ii) all incentive compensation due prior to termination of employment and not yet paid or, in the case of Andrew M. Chapman and Anne Evans Estabrook, the sum of such incentive compensation amounts; immediate vesting of any unvested restricted stock and stock options and the voiding of all restrictions on any restricted stock or stock options held by them; and, with respect to the SERP (other than for Anne Evans Estabrook), full and immediate vesting of all retirement benefits, for any officer younger than 65, the grant of an additional 10 to 15 years of service for purposes of benefit accrual, and early payout elections in certain circumstances. With respect to the named officers other than Andrew M. Chapman and Anne Evans Estabrook, the officers are required to mitigate the amounts they would receive under these agreements by seeking other employment.
With respect to Andrew M. Chapman and Anne Evans Estabrook, if the amounts payable by E'town will be subject to the excise tax applicable to "parachute payments" under the federal tax laws, E'town will pay the named officer an additional amount so that, after payment of such excise tax, he or she receives a sum equal to the original pre-tax severance payment. For all other named officers, the amounts payable to them will be reduced, if desired by the officer, to avoid such excise tax.
Compensation Committee Interlocks and Insider Participation. None. - -21-
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following information pertains to the common stock of the Corporation that, to the knowledge of the Corporation, is beneficially owned, directly or indirectly, individually and as a group, by all Directors and Executive Officers of the Corporation and its subsidiaries, Elizabethtown Water Company ("Elizabethtown") and E'town Properties, Inc. ("Properties"), as of March 24, 2000. No shareholder has reported beneficial ownership of 5% or more of the outstanding common stock.
Title of Name of Beneficial Owner No. of Percent of Class Shares (1) Class - --------------------------------------------------------------------- Common Stock Gail P. Brady ................... 6,123 0.07 Thomas J. Cawley ................ 11,787 0.13 Andrew M. Chapman ............... 41,977 (2) 0.48 Anthony S. Cicatiello ........... 1,640 0.02 Edward A. Clerico ............... 112,388 1.28 Anne Evans Estabrook ............ 101,963 (3) 1.16 James W. Hughes ................. 1,790 0.02 John Kean ....................... 189,988 (4) 2.17 Robert W. Kean, Jr. ............. 217,148 (5) 2.48 Robert W. Kean, III ............. 1,389 0.02 Barry T. Parker ................. 3,734 0.04 Hugo M. Pfaltz .................. 10,458 (6) 0.12 Chester A. Ring, 3rd ............ 18,552 0.21 Joan Verplanck .................. 1,456 0.02 Norbert Wagner .................. 22,298 (7) 0.25 Directors and Officers as a group 785,675 8.96
- ---------------
(1) Includes shares held under the Elizabethtown Savings and Investment Plan-401 (k) (the "401(k)Plan") for the Executive Officers and those directors who retired as Executive Officers.
(2) Includes 32,000 shares subject to options which were granted to Andrew M. Chapman, of which 20,000 are not presently exercisable, under the Corporation's 1987 and 1997 Stock Option Plan.
(3) Includes 20,000 shares subject to options which were granted to Anne Evans Estabrook, and are not presently exercisable, under the Corporation's 1997 Stock Option Plan.
(4) Includes 119,532 shares held under two trusts for which John Kean is a co-trustee and John Kean shares voting and investment power with respect to these shares.
(5) Mr. Kean is not a voting member of the board of directors. Figure includes 197,567 shares held under a trust for which Robert W. Kean, Jr. is a co-trustee and Robert W. Kean, Jr. shares voting and investment power with respect to these shares.
(6) Includes 1,250 shares of Common Stock issuable upon conversion of debentures held by a partnership of which Hugo M. Pfaltz is a general partner.
(7) Includes 8,000 shares subject to options which were granted to Norbert Wagner and are presently exercisable under the Corporation's 1987 Stock Option Plan. - -22-
Item 13.
Item 13. Certain Relationships and Related Transactions
Certain Transactions.
Utility Billing Services, Inc., a subsidiary of NUI Corporation, of which John Kean is Chairman of the Board and a Director, provides data processing and related services to Elizabethtown and other subsidiaries of the Corporation. Certain of these services rendered to Elizabethtown are pursuant to a contract which expires December 31, 2000. The charges for all services totaled $1,044,732 for the year ended December 31, 1999.
Elizabethtown had a line of credit with Summit Bank, of which Anne Evans Estabrook is a Director, in the amount of $10 million. At December 31, 1999, E'town had $7 million in outstanding loans from Summit Bank. Interest charges paid to Summit Bank totaled $298,611 during 1999. Summit Bank also serves as bond trustee for Elizabethtown for which it was paid fees of $22,000 in 1999.
Elizabethtown has a line of credit with PNC Bank, N.A., New Jersey in the amount of $30 million. Andrew M. Chapman serves on the Regional Advisory Board of this bank. At December 31, 1999, there were $30 million in outstanding loans from PNC Bank. Interest charges paid to PNC Bank totaled $1,351,868 during 1999. PNC Bank also serves as trustee and recordkeeper for Elizabethtown's benefit plans for which it was paid fees of $68,515 in 1999.
The law firm of Parker, McCay & Criscuolo, P.C., of which Barry T. Parker was a partner and is now of counsel, provided legal services to the Corporation and its subsidiaries which resulted in $35,131 in legal fees being paid to the firm in 1999.
The law firm of Lindabury, McCormick & Estabrook, of which the husband of Anne Evans Estabrook is of counsel, provided legal services to the Corporation and its subsidiaries that resulted in $17,617 in legal fees being paid to the firm in 1999.
Edward A. Clerico owns land and buildings leased by a subsidiary of E'town. Mr. Clerico received total payments in 1999 of $216,530 under this lease.
It is the opinion of management that the amounts charged for these services were as favorable as those that would be charged for such services by comparable unaffiliated sources. Management periodically reviews the terms of these arrangements to ensure that the costs for these services are comparable to those that would be charged in the general market.
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, 1999, 1998 and 1997.
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Statements of Consolidated Capitalization as of December 31, 1999 and 1998.
Statement of Consolidated Shareholder's Equity for the years ended December 31, 1999, 1998 and 1997.
Statements of Consolidated Cash Flows for the years ended December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements. - -23-
E'town Corporation
A portion of the 1999 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, 1999, 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:
(1) A report on Form 8-K was filed on November 24, 1999 . The report included an Agreement of Merger dated November 21, 1999 among E'town Corporation, Thames Water Plc and Edward Acquisition Corp.
(2) A report on Form 8-K was filed on December 17, 1999. The report included an amendment dated November 21, 1999 to the Rights Agreement dated as of February 4, 1991 between E'town Corporation and The Bank of New York as Rights Agent.
- -24-
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 30, 2000 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 30, 2000.
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/ John Kean
Director /s/ Barry T. Parker
Director /s/ Hugo M. Pfaltz, Jr.
Director /s/ Chester A. Ring III
Director /s/ Joan Verplanck
Director /s/ Robert W. Kean III
Director /s/ Edward A. Clerico
Treasurer /s/ Gail P. Brady (Principal Financial Officer)
Controller /s/ Dennis W. Doll (Principal Accounting Officer)
- -25-
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 30, 2000 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 30, 2000.
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/ John Kean
Director /s/ Barry T. Parker
Director /s/ Hugo M. Pfaltz, Jr.
Director /s/ Chester A. Ring III
Director /s/ Joan Verplanck
Director /s/ Robert W. Kean III
Director /s/ Edward A. Clerico
Senior Vice President , Chief Financial Officer & Treasurer /s/ Gail P. Brady (Principal Financial Officer)
Vice President & Controller /s/ Dennis W. Doll (Principal Accounting Officer)
- -26-
INDEPENDENT AUDITORS' REPORT
E'TOWN CORPORATION:
We have audited the consolidated financial statements of E'town Corporation and its subsidiaries as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated March 9, 2000; such consolidated financial statements and report are included in your 1999 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 March 9, 2000 Parsippany, New Jersey
- -27-
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 12/31/99 $1,065,000 $823,569 $573,069 $1,315,500
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
(A) Write-off of uncollectible accounts, net of recoveries.
(B) Includes reserves established 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 12/31/99 $643,000 $603,939 $573,439 $673,500
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
(A) Write-off of uncollectible accounts, net of recoveries.
- -28-
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
2 Agreement and Plan of Merger, dated as of November 21, 1999, among E'town Corporation, Thames Water Plc and Edward Acquisition Corp.[Form 8-K, filed November 24, 1999, Exhibit 2.1]
3(a) - Certificate of Incorporation of E'town Corp. [Registration Statement No. 33-42509, Exhibit 4(a)]
3(b) - By-Laws of E'town Corporation [Form 10-K for the year 1998, Exhibit 3(c)]
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) - Amendment dated as of November 21, 1999 to the Rights Agreement dated as of February 4, 1991 between E'town Corporation and The Bank of New York, as Rights Agent [Form 8-K, filed December 17, 1999, Exhibit 4]
4(c) - 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(d) - Note Purchase Agreement relating to the 6.79% Senior Notes due December 15, 2007 [Form 10-K for the year 1997, Exhibit 4(c)]
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) - -29-
10(g) - E'town's 1990 Performance Stock Program [Registration Statement No. 33-46532, Exhibit 10(k)] (1)
10(h) - E'town's Dividend Reinvestment and Stock Purchase Plan [Registration No. 333-69549, Dated December 23, 1998]
10(i) - Change in 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)](1)
10(o) - Change in Control Agreement for certain officers [Form 10-K for the year 1998, Exhibit 10(o)](1)
10(p) - E'town Corporation & Subsidiaries - Form of Amended and Restated Change in Control Agreement for certain officers of E'town Corporation and Affiliated Companies [Form 10-Q for the quarter ended March 31, 1999, Exhibit 10(o)](1)
10(q) - E'town Corporation & Subsidiaries - Amendments to Change in Control Agreement For Andrew M. Chapman [Form 10-Q for the quarter ended March 31, 1999, Exhibit 10(p)](1)
10(r) - E'town Corporation & Subsidiaries - Amendments to Change in Control Agreement For Anne E. Estabrook [Form 10-Q for the quarter ended March 31, 1999, Exhibit 10(q)](1)
*10(s) - Employment Contract Between E'town Corporation and Andrew M. Chapman dated November 21, 1999 (1)
*10(t) - Amended and Restated Change in Control Agreement for Certain Officers of Affiliates of E'town Corporation dated November 20, 1999 (1)
*12 - Computation of Ratio of Earnings to Fixed Charges
*13 - Portion of the 1999 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
- -30-
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 [Form 10-K for the year 1998, Exhibit 3(b)]
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 [Form 10-K for the year 1995, Exhibit 4(h)]
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 [Form 10-K for the year 1998, Exhibit 4(k)] - -31-
4(l) - Loan Agreement Dated November 1, 1998 Between the New Jersey Environmental Infrastructure Trust and The Mount Holly Water Company [Form 10-K for the year 1998, Exhibit 4(l)]
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 1992, Exhibit 10(h)] (1)
10(i) - Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-Q for the quarter ended September 30, 1995, Exhibit 10](1)
10(k) - Employment Contract Between Elizabethtown Water Company and Anne Evans Estabrook [Form 10-K for the year 1997, Exhibit 10(k)] (1)
10(l) - Amendment to Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-K for the year 1998, Exhibit 10(l)](1)
*10(m) - Amendment to Supplemental Executive Retirement Plan of Elizabethtown Water Company dated November 1, 1999 (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. - -32-
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 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
March 9, 2000 Parsippany, New Jersey
- -1-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED INCOME (In Thousands) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Operating Revenues $ 138,306 $ 134,847 $ 131,788 - -------------------------------------------------------------------------------- Operating Expenses: Operation 50,135 45,117 45,301 Maintenance 6,321 5,674 6,548 Depreciation 13,354 12,439 12,233 Revenue taxes 17,207 16,728 16,550 Real estate, payroll and other taxes 3,119 2,613 3,064 Federal income taxes (Note 4) 11,116 12,678 11,026 - -------------------------------------------------------------------------------- Total operating expenses 101,252 95,249 94,722 - -------------------------------------------------------------------------------- Operating Income 37,054 39,598 37,066 - -------------------------------------------------------------------------------- Other Income (Expense): Allowance for equity funds used during construction (Note 3) 323 597 215 Other - net 990 612 494 Federal income taxes (Note 4) (460) (423) (248) - -------------------------------------------------------------------------------- Total other income (expense) 853 786 461 - -------------------------------------------------------------------------------- Total Operating and Other Income 37,907 40,384 37,527 - -------------------------------------------------------------------------------- Interest Charges: Interest on long-term debt 14,661 14,721 14,030 Other interest expense - net 1,780 960 2,382 Allowance for funds used during construction (338) (456) (166) Amortization of debt discount and expense-net 399 391 376 - -------------------------------------------------------------------------------- Total interest charges 16,502 15,616 16,622 - -------------------------------------------------------------------------------- Net Income 21,405 24,768 20,905 Preferred Stock Dividends 813 813 813 - -------------------------------------------------------------------------------- Earnings Applicable To Common Stock $ 20,592 $ 23,955 $ 20,092 ================================================================================
See Notes to Consolidated Financial Statements. - -2-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Assets 1999 1998 - --------------------------------------------------------------------------------
Utility Plant-At Original Cost: Utility plant in service $ 770,251 $ 714,301 Construction work in progress 17,495 15,694 - -------------------------------------------------------------------------------- Total utility plant 787,746 729,995 Less accumulated depreciation and amortization 136,975 125,096 - -------------------------------------------------------------------------------- Utility plant-net 650,771 604,899 - --------------------------------------------------------------------------------
Non-utility Property (Note 5) 7,337 7,315 - --------------------------------------------------------------------------------
Current Assets: Cash and cash equivalents 1,342 3,598 Customer and other accounts receivable (less reserve: 1999, $674, 1998, $643) 19,341 16,952 Unbilled revenues 10,578 10,091 Infrastructure loan funds receivable (Note 5) 5,657 5,895 Materials and supplies-at average cost 4,069 2,538 Prepaid federal income taxes 5,807 687 Prepaid insurance, other taxes, other 3,229 1,746 - -------------------------------------------------------------------------------- Total current assets 50,023 41,507 - --------------------------------------------------------------------------------
Deferred Charges: Waste residual management (Note 8) 1,538 1,371 Unamortized debt and preferred stock expenses (Note 8) 8,900 9,368 Taxes recoverable through future rates (Notes 4 and 8) 13,466 14,226 Postretirement benefit expense (Notes 8 and 12 ) 3,145 3,490 Flood expenditures (Note 10) 5,000 Other unamortized expenses (Note 8) 1,007 1,152 - -------------------------------------------------------------------------------- Total deferred charges 33,056 29,607 - -------------------------------------------------------------------------------- Total $ 741,187 $ 683,328 ================================================================================
See Notes to Consolidated Financial Statements. - -3-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Capitalization and Liabilities 1999 1998 - --------------------------------------------------------------------------------
Capitalization (Note 5): Common shareholder's equity $ 220,461 $ 208,573 Mandatory redeemable cumulative preferred stock 12,000 12,000 Long-term debt - net 244,842 245,148 - -------------------------------------------------------------------------------- Total capitalization 477,303 465,721 - --------------------------------------------------------------------------------
Current Liabilities: Notes payable - banks (Note 6) 51,500 22,000 Long-term debt - current portion (Note 5) 481 30 Accounts payable and other liabilities 19,989 12,457 Customers' deposits 197 248 Municipal and state taxes accrued 17,592 16,776 Interest accrued 3,745 3,228 Preferred stock dividends accrued 59 59 - -------------------------------------------------------------------------------- Total current liabilities 93,563 54,798 - --------------------------------------------------------------------------------
Deferred Credits: Customers' advances for construction 40,019 40,874 Federal income taxes (Note 4) 69,570 64,696 Unamortized investment tax credits 7,636 7,839 Accumulated postretirement benefits (Note 12) 3,399 3,947 - -------------------------------------------------------------------------------- Total deferred credits 120,624 117,356 - --------------------------------------------------------------------------------
Contributions in Aid of Construction 49,697 45,453 - --------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note 11) - -------------------------------------------------------------------------------- Total $ 741,187 $ 683,328 ================================================================================
See Notes to Consolidated Financial Statements. - -4-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED CAPITALIZATION (In Thousands Except Share Amounts) December 31, 1999 1998 - --------------------------------------------------------------------------------
Common Shareholder's Equity (Note 5): Common stock without par value, authorized, 15,000,000 shares, issued 1999 and 1998, 1,974,902 shares $ 15,741 $ 15,741 Paid-in capital 141,575 132,753 Capital stock expense (485) (485) Retained earnings 63,630 60,564 - -------------------------------------------------------------------------------- Total common shareholder's equity 220,461 208,573 - --------------------------------------------------------------------------------
Preferred Shareholders' Equity: (Note 5) 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 (Notes 5 and 7) : 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 Environmental Infrastructure Trust Notes (due serially through 2018) 7,040 7,295 New Jersey Department of Environmental Protection Notes (due serially through 2018) 5,677 5,895 9.65% Mortgage Note Payable (due 2001) 156 Note Payable (due 2000) 30 - -------------------------------------------------------------------------------- Total long-term debt 245,873 246,220 Unamortized discount-net (1,031) (1,072) - -------------------------------------------------------------------------------- Total long-term debt-net 244,842 245,148 - -------------------------------------------------------------------------------- Total Capitalization $ 477,303 $ 465,721 ================================================================================
See Notes to Consolidated Financial Statements. - -5-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In Thousands)
Year Ended December 31, 1999 1998 1997 - --------------------------------------------------------------------------------
Common Stock: $ 15,741 $ 15,741 $ 15,741 - --------------------------------------------------------------------------------
Paid-in Capital: Balance at Beginning of Period 132,753 124,560 117,457 Capital contributed by parent company from: Common Stock issued under Dividend Reinvestment and Stock Purchase Plan 8,702 7,861 6,980 Issuance of restricted and unrestricted stock stock under compensation programs 120 332 123 - -------------------------------------------------------------------------------- Balance at End of Period 141,575 132,753 124,560 - --------------------------------------------------------------------------------
Capital Stock Expense (485) (485) (485) - --------------------------------------------------------------------------------
Retained Earnings: Balance at Beginning of Period 60,564 53,538 49,580 Net income 21,405 24,768 20,905 Dividends on common stock (17,526) (16,929) (16,134) Dividends on preferred stock (813) (813) (813) - -------------------------------------------------------------------------------- Balance at End of Period 63,630 60,564 53,538 - --------------------------------------------------------------------------------
Total Common Shareholder's Equity $ 220,461 $ 208,573 $ 193,354 ================================================================================
See Notes to Consolidated Financial Statements. - -6-
APPENDIX I ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY STATEMENTS OF CONSOLIDATED CASH FLOWS (In Thousands)
Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 21,405 $ 24,768 $ 20,905 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,354 12,439 12,233 Increase in deferred charges (5,022) (501) 690 Deferred income taxes and investment tax credits-net 4,671 3,855 2,693 Allowance for funds used during construction (661) (1,053) (381) Other operating activities-net 726 252 485 Change in current assets and current liabilities excluding cash, short-term investments and current portion of debt Customer and other accounts receivable (2,086) 331 (558) Unbilled revenues (487) (428) (307) Accounts payable and other liabilities 7,459 1,807 (6,495) Accrued/prepaid interest and taxes (5,287) 1,095 3,173 Other (1,493) (572) 78 - -------------------------------------------------------------------------------- Net cash provided by operating activities 32,579 41,993 32,516 - --------------------------------------------------------------------------------
Cash Flows Provided (Used) by Financing Activities: Capital contributed by parent company 8,702 7,861 6,980 Proceeds from issuance of debentures 50,000 Funds held in Trust by others (30) (7,234) Proceeds from issuances of other long-term debt 7,295 Debt and preferred stock issuance and amortization costs 474 288 (667) Repayment of long-term debt (32) (27) (30) Repayment of current portion of long-term debt (30) Contributions and advances for construction 5,206 10,908 7,275 Refunds of advances for construction (2,896) (4,575) (2,516) Net increase (decrease) in notes payable - banks 29,500 4,000 (51,000) Dividends paid on common stock and preferred stock (18,234) (17,637) (16,842) - -------------------------------------------------------------------------------- Net cash provided (used) by financing activities 22,660 879 (6,800) - -------------------------------------------------------------------------------- Cash Flows Used for Investing Activities: Utility plant expenditures (excluding allowance for funds used during construction) (56,635) (43,500) (24,612) Purchase of company (860) - -------------------------------------------------------------------------------- Cash used for investing activities (57,495) (43,500) (24,612) - -------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (2,256) (628) 1,104 Cash and Cash Equivalents at Beginning of Period 3,598 4,226 3,122 - -------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 1,342 $ 3,598 $ 4,226 ================================================================================ Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 16,377 $ 14,459 $ 16,063 Income taxes $ 9,700 $ 7,723 $ 5,981 Preferred stock dividends $ 708 $ 708 $ 708 Noncash capital contribution by parent company $ 120 $ 332 $ 123
See Notes to Consolidated Financial Statements. - -7-
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. Pending Merger On November 21, 1999, E'town entered into an agreement (Merger Agreement) with Thames Water Plc (Thames Water) under which Thames Water has agreed, subject to certain conditions, to acquire E'town for $68 per share in cash or approximately $607 million. Thames Water will also assume the debt of E'town. The acquisition will take the form of a merger (Merger) of E'town with a newly formed subsidiary of Thames Water and E'town will be the surviving company.
A special meeting of E'town shareholders is expected to be held during the second quarter of 2000 to seek shareholder approval of the transaction. The acquisition is also subject to approval by the New Jersey Board of Public Utilities (BPU), the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino antitrust Improvement Act of 1976. Certain clearances must also be obtained from the New Jersey environmental regulators. The transaction is expected to close prior to the end of 2000.
3. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include Elizabethtown and its subsidiary, 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 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 various classes of assets based on the estimated useful lives of the assets. The balances of significant classes of assets and their respective depreciable lives at December 31, 1999 and 1998 are as follows:
Annual Depreciation (Thousands of Dollars) 1999 1998 Rate - ------------------------------------------------------------------------------- Asset Class : Transmission and Distribution Mains $ 337,408 $ 318,363 0.99 % Water Treatment Equipment 111,961 106,787 2.35 Services 67,154 62,213 2.77 Structures and Improvements 88,147 75,736 2.08 - 2.74 Pumping Equipment 42,704 41,082 2.59 - 3.38 Meters 27,589 23,415 2.77 Water Storage Tanks 23,658 21,232 1.37 Other 71,630 65,473 0 - 15.73 - ------------------------------------------------------------------------------- Total utility plant in service $ 770,251 $ 714,301 =============================================================================== - -8-
The provision for depreciation, as a percentage of average depreciable property, on a composite basis, was 1.82% for 1999, 1.81% for 1998 and 1.85% for 1997.
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 lives. 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 $.66 million, $1.05 million and $.38 million for 1999, 1998 and 1997, respectively.
Revenues Water 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, under a contract, for main extensions to new real estate developments. CAC is refundable to developers based upon amounts for each type and quantity of unit constructed by the developer when the units are metered. Such contracts have a ten-year life. CIAC represents CAC that, under the terms of individual main extension agreements, are no longer subject to refund.
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 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activity". In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activity - Deferral of the Effective Date of SFAS No. 133" to defer the effective date of SFAS No. 133 for one year. Consequently, SFAS No. 133 will now be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not believe this Statement will have an impact on its financial condition and results of operations.
Reclassification Certain prior year amounts have been reclassified to conform to the current year's presentation.
Use of Estimates 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. - -9-
4. 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:
(Thousands of Dollars) 1999 1998 1997 - ------------------------------------------------------------------------------- Tax expense at statutory rate $ 11,543 $ 13,255 $ 11,262 Items for which deferred taxes are not provided: Difference between book and tax depreciation 147 63 58 Other 89 (14) 157 Investment tax credits (203) (203) (203) - ------------------------------------------------------------------------------- Provision for federal income taxes $ 11,576 $ 13,101 $ 11,274 ===============================================================================
The provision for federal income taxes is comprised of the following: Current $ 5,727 $ 8,902 $ 7,212 Tax on main extension refunds 416 525 1,369 Deferred: Tax depreciation 3,166 3,131 2,716 Capitalized interest 56 91 19 Main cleaning and lining 758 796 612 Flood expenditures 1,750 Other (94) 40 (451) Investment tax credits - net (203) (203) (203) Refund from IRS (181) - ------------------------------------------------------------------------------- Total provision $ 11,576 $ 13,101 $ 11,274 ===============================================================================
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, 1999, Elizabethtown and Mount Holly had deferred tax liabilities of $67.0 million and $2.6 million. There were also, at December 31, 1999, offsetting regulatory assets of $12.7 million and $.8 million for Elizabethtown and Mount Holly, respectively, 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, 1999 and 1998 is as follows:
(Thousands of Dollars) 1999 1998 - ------------------------------------------------------------------------------- Water utility plant - net $ (51,508) $ (47,538) Taxes recoverable through future rates (13,466) (14,226) Prepaid pension expense (123) (29) Capitalized interest (2,739) (2,683) Waste residuals (539) (480) Flood expenditures (1,750) Other assets 720 541 Other liabilities (165) (281) - ------------------------------------------------------------------------------- Net deferred income tax liabilities $ (69,570) $ (64,696) =============================================================================== - -10-
5. 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 $8.70 million, $7.86 million and $6.98 million for the years ended December 31, 1999, 1998 and 1997, 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, 1999, $7.52 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 2.59%. The proceeds of the loans will finance a portion of the Mansfield Project (see Note 9).
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, 1999, were 5.20% for Series A and 5.10% for Series B.
6. Lines of Credit Elizabethtown has $90 million in lines of credit with several banks as of December 31, 1999. Of this amount, $10 million represents a committed line of credit. 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 Elizabethtown's capital needs.
Information relating to bank borrowings for 1999, 1998 and 1997 is as follows:
(Thousands of Dollars) 1999 1998 1997 - ------------------------------------------------------------------------------- Maximum amount outstanding $ 51,500 $ 22,000 $ 69,500
Average monthly amount outstanding $ 29,955 $ 14,983 $ 40,886
Average interest rate at year end 6.9% 5.9% 6.0%
Weighted average interest rate based on average daily balances 5.9% 5.8% 5.8%
- -------------------------------------------------------------------------------
There were no compensating balances as of December 31, 1999, 1998 and 1997. - -11-
7. Financial Instruments The carrying amounts and the estimated fair values, as of December 31, 1999 and 1998, of financial instruments issued or held by the Company are as follows:
(Thousands of dollars) 1999 1998 - ------------------------------------------------------------------------------- Cumulative preferred stock: Carrying amount $ 12,000 $ 12,000 Estimated fair value 11,850 13,020
Long - term debt Carrying amount $ 244,842 $ 245,148 Estimated fair value 236,431 255,087 - -------------------------------------------------------------------------------
Estimated fair values are based upon quoted market prices for these or similar securities.
8. Regulatory Assets and Liabilities Certain costs incurred by Elizabethtown and Mount Holly have been deferred as regulatory assets and are being amortized over various periods, as set forth below:
(Thousands of dollars) 1999 1998 - ------------------------------------------------------------------------------- Waste residual management $ 1,538 $ 1,371 Unamortized debt and preferred stock expense 8,900 9,368 Taxes recoverable through future rates (Note 4) 13,466 14,226 Postretirement benefit expense (Notes 9 and 12) 3,145 3,490 Safety management expense 158 245 Business process redesign 136 210 Rate case expenses 23 7 PWAC underrecovery 480 305 - ------------------------------------------------------------------------------- Total $ 27,846 $ 29,222 ===============================================================================
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 3- and 5-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. Rate case expenses are being substantially recovered in rates during two-year periods.
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 summers of 1999 and 1998, Elizabethtown has under-recovered its purchased water costs and therefore, has deferred $.44 million as of December 31, 1999. As of December 31, 1999, Mount Holly has deferred $.04 million of PWAC costs (see Note 9).
There were no regulatory liabilities at December 31, 1999 or 1998. - -12-
9. 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 were $.39 million for Elizabethtown and $.02 million for Mount Holly.
In accordance with the terms of the pending Merger Agreement, Elizabethtown will postpone filing for rate relief until at least August 2000.
Mount Holly In 1998 Mount Holly commenced a construction project, called the Mansfield Project, to comply with New Jersey legislative restrictions to obtain alternative water supplies, thereby reducing its water pumpage from an aquifer, which had been subject to over-pumping by Mount Holly and various local purveyors in a portion of southern New Jersey. A portion of this project was placed into service in the third quarter of 1998 and the remaining portion of the project was placed into service in late December 1999.
To settle an appeal initiated by another water purveyor in 1995 concerning the diversion rights for the Mansfield Project, Mount Holly signed a Stipulation in 1997 with the purveyor, the New Jersey Department of Environmental Protection (DEP) and other parties, requiring Mount Holly to purchase one million gallons per day from the other purveyor during the two-year period that the Mansfield Project was being constructed. Purchases began during March of 1998, after completion of an interconnection and ended in January 2000 shortly after the Mansfield Project went into service.
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 the other purveyor under the aforementioned agreement. In May 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%.
Effective January 1, 2000, Mount Holly received an increase in annual rates of $1.88 million. This increase included costs for Mount Holly's Mansfield Project that was placed in service at the end of December 1999. The rate decision also reflected the elimination of the PWAC. After the elimination of the PWAC the net rate increase was $.51 million. This increase also reflects additional construction and financing costs, as well as increases in operating costs since base rates were last established in January 1996.
In June 1999 Mount Holly purchased Homestead Water Utility, Inc. for a cash price of $.9 million. The entity provides water services to approximately 800 customers of the Homestead community in southern New Jersey. The transaction was accounted for as a purchase. Had the acquisition been consummated as of January 1, 1997, the pro-forma effect on revenues and net income for the years ended December 31, 1999, 1998 and 1997 would be immaterial.
10. Other Events In August 1999 the Governor of the State of New Jersey declared a "Water Emergency" for the entire state and issued mandatory restrictions on outdoor, nonessential water use. Due to unusually low levels of rainfall during June and July the Governor deemed these measures necessary to preserve the integrity of several of the state's reservoir and well supplies. Customers of Elizabethtown and Mount Holly were subject to these restrictions. The water systems at all times had, and continue to have, adequate supplies of water to meet the needs of their customers. These restrictions affected the amount of water consumed by a substantial number of Elizabethtown's customers and reduced net income by approximately $.68 million. The restrictions were lifted in October 1999. - -13-
In September 1999, Elizabethtown withdrew its primary water treatment plant, the Raritan-Millstone Water Treatment Plant (Plant), from service as a result of flooding from Tropical Storm Floyd (Floyd). For several days, Elizabethtown had difficulty maintaining adequate water pressure in portions of its distribution system because overall system production levels were substantially less than normal. Customers in portions of a few municipalities were without water service for a period of up to three days. Costs incurred to repair and replace equipment damaged by the flood and to respond to inquiries by customers, regulatory bodies and the media have been deferred and are expected to be recoverable through insurance. The Company has incurred $7.0 million of flood-related expenditures and has received an advanced reimbursement of $2.0 million from its insurance carrier. The remaining $5.0 million of flood-related expenditures is reported on the Consolidated Balance Sheets as a deferred charge at December 31, 1999. The loss of revenues due to below normal water consumption is not recoverable through insurance (see Note 11 for legal matters related to Floyd). The loss of revenues decreased net income by $.39 million.
11. Commitments and Contingent Liabilities Elizabethtown is obligated, under a contract that expires in 2013, to purchase from the New Jersey Water Supply Authority (NJWSA) a minimum of 37 billion gallons of water annually. Effective July 1, 1999, the annual cost of water under contract is $7.63 million. The Company purchases additional water from the NJWSA on an as-needed basis. The total cost of water purchased from the NJWSA was $9.03 million for 1999.
Mount Holly was obligated, under a contract, to purchase water from another purveyor, at a rate of 1 million gallons per day until such time as the Mansfield Project was completely in service. In mid-January 2000, Mount Holly ceased purchasing water from the other purveyor. The annual cost of the purchased water was $1.16 million.
Capital expenditures of Elizabethtown and Mount Holly are estimated to be $135.14 million and $4.69 million, respectively, through 2002.
Expected future minimum rental payments required under noncancelable leases with terms in excess of one year at December 31 of each of the years 2000 through 2004 are: 2000, $.77 million; 2001, $.81 million; 2002 $.82 million; 2003, $.62 million and 2004, none. Rent expense totaled $.77 million, $.73 million and $.72 million in 1999, 1998 and 1997, 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 2000 through 2004 are: $1.64 million per year. The lease expense was $1.37 million and $.26 million for 1999 and 1998, respectively. There were no lease expenses for 1997 as vehicles were not leased during that year.
Environmental, Legal and Other Matters On September 23, 1999, two parties filed separate class action lawsuits for compensatory damages and related fees on behalf of themselves and similarly situated residential and commercial customers against Elizabethtown Water Company and certain other subsidiaries of E'town. The lawsuit alleges negligence regarding the quantity and quality of water services during the period in September 1999 when Elizabethtown's main water treatment plant was flooded from Tropical Storm Floyd and was withdrawn from service for approximately 3 days. Elizabethtown has notified its insurance carrier of the lawsuit and has filed a motion for summary judgment to dismiss the lawsuit as a class action proceeding prior to answering the allegations. In March 2000, the New Jersey Superior Court (NJSC) ruled that in the event the lawsuit is not dismissed, the case be referred to the New Jersey Board of Public Utilities (BPU) for purposes of investigating the matter and reporting its findings to the NJSC. The NJSC, in view of the BPU's findings, will then determine what, if any, damages were suffered by the plaintiffs and what liability, if any, rests with Elizabethtown. The Company maintains that such allegations are without merit and believes that the plaintiffs'chances of prevailing are not significant.
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, other than the items discussed above, regarding environmental or other issues in which an outcome adverse to the Company could have a material impact on the financial statements. - -14-
12. Pension Plan and Other Postretirement Benefits Pension Plan Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan), which covers most employees of Elizabethtown and Mount Holly. The Plan provides for annual benefits at retirement equal to 1.6% of the average compensation for the highest four consecutive years, multiplied by the number of years of credited service.
Supplemental Pension Plan The Company also has a supplemental retirement plan for certain management employees that is not funded. Eligibility for the designated employees is based upon their completion of twenty years of service. Payments are based upon 60% of the average compensation of an eligible management employee's last three years of service, net of the amount earned under the Plan. Benefits are payable for a period of 15 years and payments are made directly by the Company. In 1999, the supplemental compensation plan was amended to change the definition of compensation to include incentive compensation and other taxable benefits. The unfunded benefit obligation at December 31, 1999 and 1998 was $2.1 million and $1.5 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, 1999, and for 1999 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 allow 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, 1999, the unamortized amounts that remain deferred are $3.02 million and $.13 million for Elizabethtown and Mount Holly, respectively.
Other Postretirement Pension Plans Benefits (Thousands of Dollars) 1999 1998 1999 1998 - ------------------------------------------------------------------------------- Funded Status Change in benefit obligation during year: Benefit obligation at beginning of year $ 45,538 $ 40,172 $ 7,877 $ 6,556 Service cost 1,653 1,391 238 387 Interest cost 3,083 2,836 426 482 Benefit payments (2,255) (2,092) (238) (247) Actuarial (gain) or loss (5,539) 3,231 (2,345) 699 Plan amendments 650 - ------------------------------------------------------------------------------- Benefit obligation at end of year 43,130 45,538 5,958 7,877 - ------------------------------------------------------------------------------- Change in plan assets during year: Fair value of plan assets at beginning of year 51,844 46,537 2,171 1,331 Employer contributions 161 174 879 978 Benefit payments (2,255) (2,092) (238) (247) Actual return on plan assets 9,751 7,225 286 109 - ------------------------------------------------------------------------------- Fair value of plan assets at end of year 59,501 51,844 3,098 2,171 - ------------------------------------------------------------------------------- Reconciliation of funded status at end of year: Funded status 16,371 6,306 (2,860) (5,706) Unrecognized net transition (asset) or obligation (1,091) (1,358) 4,699 5,061 Unrecognized prior service cost 2,708 2,391 Unrecognized net (gain) or loss (18,227) (7,577) (4,999) (3,064) - ------------------------------------------------------------------------------- Accumulated postretirement benefits* $ (239) $ (238) $ (3,160) $ (3,709) - ------------------------------------------------------------------------------- * Recognized in the Consolidated Balance Sheets
- -15-
13. Related Party Transactions Utility Billing Services, Inc., a subsidiary of NUI Corporation, of which a Director of Elizabethtown 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 $.86 million, $.72 million, and $.67 million, for 1999, 1998 and 1997, respectively. The current contract expires December 31, 2000.
A Director of Elizabethtown is also a Director of Summit Bank. Elizabethtown paid Summit Bank to serve as a bond trustee for Elizabethtown for fees of less than $.10 million in 1999, 1998 and 1997.
14. Quarterly Financial Data (Unaudited) A summary of financial data for each quarter of 1999 and 1998 follows:
Earnings Applicable Operating Operating Net to Common Ouarter Revenues Income Income Stock - ------------------------------------------------------------------------------- (Thousands of Dollars) 1st $ 31,066 $ 8,017 $ 4,283 $ 4,080 2nd 35,509 9,967 6,343 6,140 3rd 39,204 11,772 7,880 7,677 4th 32,527 7,298 2,899 2,695 - ------------------------------------------------------------------------------- Total $ 138,306 $ 37,054 $ 21,405 $ 20,592 ===============================================================================
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 ===============================================================================
Water utility revenues are subject to seasonal fluctuation due to normal increased water consumption during the third quarter of each year.
Net income in the fourth quarter of 1999 was impacted by certain significant operation costs, including labor and power costs indirectly attributable to a major flood at Elizabethtown's primary water treatment plant. - -16-