Exhibit 13
Exhibit 13 represents the portion of the 1999 Annual Report to Shareholders
which is incorporated by reference in this filing on Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
E'town Corporation (E'town or Corporation), a New Jersey holding company, is the
parent company of Elizabethtown Water Company (Elizabethtown or Company), Edison
Water Company (Edison), E'town Properties, Inc. (Properties), Liberty Water
Company (Liberty), Applied Water Management, Inc. (AWM) and Applied Wastewater
Management, Inc. (AWWM). The Mount Holly Water Company (Mount Holly) is a
wholly-owned subsidiary of Elizabethtown. The assets and operating results of
Elizabethtown constitute the predominant portions of E'town's assets and
operating results. Mount Holly , Liberty, AWM and Edison contributed 3.2%, 5.4%,
7.4% and 1.6%, respectively, of the Corporation's consolidated operating
revenues for 1999. Elizabethtown, Mount Holly and AWWM comprise the Regulated
Utilities segment, Liberty and Edison comprise the Contract Operations segment,
AWM is the Engineering/Operations and Construction segment and E'town and
Properties comprise the Financing and Investment segment (see Note 16 to
E'town's Notes to Consolidated Financial Statements). The following analysis
sets forth significant events affecting the financial condition of the various
segments at December 31, 1999, and the results of operations for the years ended
December 31, 1999 and 1998.
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 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.
- -1-
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures Program
Net capital expenditures were $62.3 million in 1999. Included in this total
are $57.4 million for additions and improvements to water utility plant and
wastewater facilities, $1.8 million for the purchase of a regulated water and
wastewater operation by Mount Holly and AWWM and $3.1 million for capital
additions under privatization contracts. For the three years ending December 31,
2002, capital and investment requirements for E'town are estimated to be $171.4
million, consisting of (i) expenditures for the Regulated Utilities Segment
($135.1 million for Elizabethtown, $4.7 million for Mount Holly and $5.2 million
for AWWM), (ii) investments in the Contract Operations segment for concession
payments by Liberty and capital improvements for Liberty and Edison of $24.4
million and (iii) investments in the Engineering/Operations and Construction
segment of $2.0 million. See "Economic Outlook" for a discussion of Contract
Operations. These estimates do not include any amounts for possible additional
acquisitions or privatization activities in the three-year period.
REGULATED UTILITIES SEGMENT
Elizabethtown
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 accommodate 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.
- -2-
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%.
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.
AWWM
In June 1998 the Corporation purchased AWWM, which is a regulated wastewater
utility. AWWM owns and operates water and wastewater facilities. In some
instances, AWWM purchases the wastewater facilities from developers that were
constructed by AWM. These purchases add to E'town's regulated utility customer
base. AWWM expects to incur capital expenditures of $5.1 million in the next
three years for purchases of wastewater plants from developers.
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.
CONTRACT OPERATIONS SEGMENT
LIBERTY
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
during 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, during the life of the contract. Of these total commitments,
approximately $2.5 million is expected to be expended in the next three years.
During 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.
- -3-
EDISION
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
AWM
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.
Capital Resources
During 1999 E'town financed 37.0% of its capital expenditures, including capital
expenditures for the Regulated Utilities segment and investments in the Contract
Operations and Engineering/ Operations and Construction segments, 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, proceeds from capital contributions from E'town (funded by issuances of
Common Stock under the Corporation's Dividend Reinvestment and Stock Purchase
Plan) and proceeds from the sale of real estate.
- -4-
For the three-year period ending December 31, 2002, E'town estimates that 52% of
its currently projected capital expenditures and concession fee obligations for
all segments 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, medium-term notes,
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 February 2000 E'town issued $30 million of 7.69% Senior Notes due 2010 in a
private placement. The proceeds were used to repay short-term debt incurred to
finance the acquisition of the contract to operate the water system of the city
of Elizabeth and capital costs for the non-regulated subsidiaries.
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 DEP. 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.
During 1999 Moody's Investors Services raised E'town's senior debt rating to A3
while keeping the rating of Elizabethtown's senior debt at A2. Subsequent to the
signing of the Merger Agreement, Standard & Poor's upgraded the ratings on
E'town's senior debt from A- to A and on Elizabethtown's senior debt from A to
A+. The rating upgrades reflect E'town's pending Merger with Thames Water.
- -5-
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
INTEREST RATE RISK
The Corporation is subject to the risk of fluctuating interest rates in the
normal course of business. The Corporation 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 annual interest rates
would result in a $1.4 million change in interest costs related to short-term
and variable rate debt.
RESULTS OF OPERATIONS
Net Income for 1999 was $20.5 million or $2.39 per share on a basic basis as
compared to $22.3 million or $2.70 per basic share for the same period in 1998.
The 1999 decrease of $1.8 million in net income or $.31 in net income per
basic share is comprised of (i) a decrease of $1.0 million or $.12 per share for
costs incurred for the pending Merger, (ii) a decrease of $.7 million or $.08
per share for lost revenues net of expenses from reduced consumption as a result
of New Jersey state-imposed water restrictions in August for drought conditions,
(iii) a decrease of $.4 million or $.05 per share from flooding in September of
Elizabethtown's Raritan-Millstone Plant caused by Tropical Storm Floyd (Floyd)
(see Other Matters), (iv) a decrease of $2.5 million or $.29 per share from
additional operating expenses, primarily labor and benefits, (v) a decrease of
$1.6 million or $.19 per share from higher interest costs and depreciation and
(vi) a decrease of $.4 million or $.05 per share from operations of the
Engineering/Operations and Construction segment. These decreases were partially
mitigated by the favorable impact of increases of (i) $1.8 million or $.21 per
share for higher water consumption related to an extended dry period in the
spring and early summer of 1999, (ii) an increase of $ 2.0 million or $.23 per
share for the after-tax gain on the sale of a real estate parcel in Green Brook,
New Jersey and (iii) an increase of $1.0 million or $.12 per share reflecting
the earnings of the Contract Operations segment, which includes operations of
Liberty for a full year in 1999. The decrease in earnings per basic share also
included a decrease of $.09 for the effect of additional shares issued under the
Dividend Reinvestment and Stock Purchase Plan.
Net income for 1998 was $22.3 million or $2.70 per share on a basic basis
as compared to $19.3 million or $2.44 per basic share for 1997.
The 1998 increase of $3.1 million or $.26 per basic share is principally
comprised of (i) an increase of $.6 million or $.07 per share due to an
extended dry period in the summer of 1998 resulting in higher water
consumption than in 1997 (ii) an increase of $ 1.1 million or $.13 per
share 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 and (iii) an increase of
$.5 million or $.06 per share from the earnings of the Contract Operations
and Engineering/Operations and Construction segments, which were new
operations in 1998 and (iv) an increase of $.5 million or $.06 per share
due to capitalized construction interest. The increase in basic earnings
per share was partially offset by an increase in the number of outstanding
shares.
- -6-
Operating Revenues increased $16.7 million or 11.5% in 1999 as compared
with the comparable 1998 amount. Revenues from the Regulated Utilities
segment increased $4.2 million principally due to higher water consumption
related to an extended dry period in the spring and early summer of 1999.
These favorable factors were 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 primarily accounted for the
remaining $2.3 million increase in the Regulated Utilities segment. The
revenues of the Contract Operations segment increased $6.7 million and the
revenues of the Engineering/Operations and Construction segment increased
$6.1 million from 1998 reflecting a full year of operations in 1999 for
Liberty and AWM, respectively.
Operating Revenues increased $11.7 million or 8.7% in 1998 as compared with
the comparable 1997 amount. The increase from the Regulated Utilities
segment 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 and the PWAC rate increase for Mount Holly primarily
accounted for the remainder of an increase in the Regulated Utilities
segment of $1.8 million. The revenue increase includes $3.3 million from
the Contract Operations segment, comprised of Edison and Liberty. The
Engineering/Operations and Construction segment contributed $5.2 million to
operating revenues.
Operation Expenses increased $17.0 million or 31.6% in 1999 as compared with
1998. The increases in the Regulated Utilities segment consist 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 and (iv)
an increase of $.9 million from various other operating expenses. The Financing
and Investment segment expensed $1.6 million of one-time costs related to the
pending Merger with Thames Water. Operation expenses of the Contract Operations
segment increased $3.4 million and operation expenses of the
Engineering/Operations and Construction segment increased $7.1 million,
reflecting a full year of operations in 1999 for Liberty and AWM, respectively.
- -7-
Operation Expenses increased $5.9 million or 12.2% in 1998 over the
comparable 1997 amount. The operation expenses (net of intercompany expenses) of
the Contract Operations and Engineering/Operations and Construction segments,
which were newly established businesses in 1998, accounted for $7.1 million of
the increase. The Regulated Utilities segment experienced decreases 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 increased cost of labor, purchased
water to Mount Holly and variable costs for the higher water sales.
Maintenance Expenses increased $.2 million or 3.5% in 1999 as compared to
1998. The increase occurred primarily in the Regulated Utilities segment for
waste residual costs.
Maintenance Expenses decreased $.1 million or 1.0% in 1998 as compared with
the comparable 1997 amount due to improved procurement procedures and preventive
maintenance programs.
Depreciation and Amortization Expense increased $2.1 million or 15.5% in
1999 compared to 1998. Of the increase, $1.0 million represents depreciation on
additional utility plant in the Regulated Utilities segment. The remainder of
the increase represents amortization of the concession fees for Liberty
reflecting a full year of operations in 1999 and depreciation on additional
wastewater plants acquired by AWM in 1999.
Depreciation and Amortization Expense increased $1.3 million or 10.4% in
1998 compared to 1997 of which $.9 million represents amortization of initial
concession fees and capital expenditures for the Contract Operations segment.
The balance represents depreciation on utility plant additions for the Regulated
Utility segment.
Revenue Taxes increased $.6 million or 3.3% and $.2 million or 1.2% for the
Regulated Utiliies Segment in 1999 and 1998, respectively, as a result of
increases in taxable operating revenues discussed above.
Real Estate, Payroll and Other Taxes increased $1.0 million or 34.5% in
1999 primarily due to increased payroll taxes as a result of higher labor costs
in the Regulated Utilities segment and inclusion of payroll and real estate
taxes for AWM for a full year in the Engineering/Operations and Construction
segment.
Real estate, Payroll and Other Taxes decreased $.1 million or 4.0% 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.
- -8-
Federal Income Taxes as a component of operating expenses decreased $1.9
million or 16.0% in 1999 as compared to 1998 and increased $1.2 million or 11.4%
in 1998 over 1997 due to changes in taxable operating income for each segment.
Other Income (Expense) increased $2.1 million or 209.0% compared to the
1998 amount due to a gain on the sale of real estate of $3.2 million ($2.1
million net of taxes) in the Financing and Investment segment.
Other Income (Expense) increased $.2 million or 32.4% in 1998 as compared
to 1997 due to a $.4 million increase in Allowance for Funds Used During
Construction (AFUDC), primarily related to Elizabethtown's western operations
center. Federal income taxes increased $.1 million for the taxes on the AFUDC.
Total Interest Charges increased $1.6 million or 8.9% in 1999 of which $.9
million is for the Regulated Utilities segment. The $.9 million 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 the
construction program. In the Contract Operations Segment, interest expenses
increased $.5 million, reflecting a full year of Liberty's operations and
additional short-term borrowing by Liberty in order to finance a scheduled
concession payment of $12.0 million in June, 1999 to the city of Elizabeth. The
remainder of the increase resulted from short-term borrowings in the Financing
and Investment segment to finance capital contributions to the Contract
Operations segment.
Total interest charges increased $.5 million or 2.8% in 1998 as compared with
the comparable 1997 amount due to increased borrowing for utility plant
expenditures for the Regulated Utilities segment and for the concession fee for
Liberty. 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. This decrease in interest charges
was offset by the absence in 1998 of capitalized interest on real estate
investments for Properties of $.3 million.
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 and reduced net income in 1999 by approximately $.68
million. The restrictions were lifted in October 1999.
- -9-
In September 1999 Elizabethtown withdrew its primary water treatment plant,
the Raritan-Millstone Water Treatment Plant, from service as a result of
flooding from 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
are being 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 has been deferred. 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 regarding future earnings,
capital expenditures and anticipated actions of regulators, among other things.
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, changes in historical patterns of water
consumption and demand, including changes through increased use of
water-conserving devices, conditions in capital and real estate markets,
increases in operating expenses due to factors beyond the Corporation's control,
the closing of the pending Merger with Thames Water Plc, changes in
environmental regulation and associated costs of compliance and additional
investments or acquisitions which may be made by the Corporation.
E'town Corporation and Subsidiaries
Earnings are expected to be lower in 2000 than in 1999 for the following
reasons: (i) an assumed return to historical average water consumption patterns
as a result of a return to normal weather conditions (ii) additional expenses in
2000 in connection with the Merger and (iii) Elizabethtown will not file for
needed rate relief until early in 2001 as a condition of the Merger Agreement.
During the next several years, management will seek to increase earnings by
(i) maximizing earned returns on the Regulated Utilities segment through
expansion efforts to increase sales, cost control measures and obtaining timely
and adequate rate relief and (ii) investing in water and wastewater assets
including municipal privatization contracts, as well as designing, constructing,
operating and purchasing wastewater assets through AWM and AWWM, discussed
below. The Corporation intends to continue to sell Properties' real estate
holdings during the next several years to fund a portion of the investment
planned for the regulated and non-regulated businesses. The balance of such
funding will be generated from internal and external sources.
- -10-
Regulated Utilities Segment
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
lower in 2000 than in 1999 due to an assumed return to normal weather
conditions and postponement of the rate filing.
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 because 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 E'town's earnings per share in 2000 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.
AWWM expects to become profitable in the next several years after it expands
its customer base.
Contract Operations Segment
Liberty
Liberty is expected to realize a return on its capital in an amount similar to
that currently earned by E'town's regulated operations.
Edison
Contributions to earnings will be small through 2002 and then will increase as
rate increases specified in the contract take effect. Beyond 2002 Edison is
expected to realize a return on its capital in an amount similar to that
currently earned by E'town's regulated operations.
E'town continues to pursue opportunities to operate municipal water and
wastewater systems under long-term contracts, primarily in New Jersey. E'town
will focus on opportunities where it may have an advantage due to location or
experience in operation.
Engineering/Operations and Construction
AWM
AWM continues to develop its business model to provide a complete
complement of wastewater services to design, build and operate stand-alone
wastewater treatment facilities with a focus on the Northeast region of the
United States. Acquisition of new business is largely dependent on demographic
and economic factors as well as the competitive nature of proposing on such
work. These efforts are expected to contribute marginally to earnings in 2000 as
the business model continues to be implemented.
- -11-
Financing and Investment Segment
E'town and Properties
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 in
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.
New Accounting Pronouncements
See Note 3 of E'town's Notes to Consolidated Financial Statements for a
discussion of new accounting standards.
Year 2000 State of Readiness
The Corporation 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 Corporation could have an impact on the Corporation'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 were two areas of
significant importance and received documentation from the vendors who provide
these services that indicated 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 Corporation 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 Corporation
to incur costs of approximately $.4 million to bring them into compliance.
At the turn of the century, and to-date, the Corporation has 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.
- -12-
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands Except Per Share Amounts)
Year Ended December 31,
1999 1998 1997
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Operating Revenues $ 162,195 $ 145,480 $ 133,826
- -------------------------------------------------------------------------------
Operating Expenses:
Operation 70,845 53,844 47,982
Maintenance 6,766 6,539 6,606
Depreciation and amortization 15,796 13,679 12,396
Revenue taxes 17,296 16,743 16,550
Real estate, payroll and other taxes 4,070 3,027 3,152
Federal income taxes (Note 4) 9,814 11,685 10,487
- -------------------------------------------------------------------------------
Total operating expenses 124,587 105,517 97,173
- -------------------------------------------------------------------------------
Operating Income 37,608 39,963 36,653
- -------------------------------------------------------------------------------
Other Income (Expense):
Allowance for equity funds used during
construction (Note 3) 363 607 215
Gain on sale of land (Note 8) 3,197 135 34
Other - net 1,222 805 919
Federal income taxes (Note 4) (1,674) (541) (408)
- -------------------------------------------------------------------------------
Total other income (expense) 3,108 1,006 760
- -------------------------------------------------------------------------------
Total Operating and Other Income 40,716 40,969 37,413
- -------------------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 16,109 16,217 14,807
Other interest expense - net 3,256 1,641 2,560
Capitalized interest (Note 3) (395) (470) (438)
Amortization of debt discount and expense-net 446 438 411
- -------------------------------------------------------------------------------
Total interest charges 19,416 17,826 17,340
- -------------------------------------------------------------------------------
Income Before Preferred Stock Dividends
of Subsidiary 21,300 23,143 20,073
Preferred Stock Dividends 813 813 813
- -------------------------------------------------------------------------------
Net Income $ 20,487 $ 22,330 $ 19,260
===============================================================================
Earnings Per Share of Common Stock (Note 3):
- -------------------------------------------------------------------------------
Basic $ 2.39 $ 2.70 $ 2.44
Diluted $ 2.36 $ 2.66 $ 2.41
- -------------------------------------------------------------------------------
Average Number of Shares Outstanding for
the Calculation of Earnings Per Share:
- -------------------------------------------------------------------------------
Basic 8,572 8,263 7,891
Diluted 8,871 8,567 8,215
- -------------------------------------------------------------------------------
Dividends Paid Per Common Share $ 2.04 $ 2.04 $ 2.04
===============================================================================
See Notes to Consolidated Financial Statements.
- -13-
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands)
Year Ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------
Cash Flows Provided by Operating Activities:
Net Income $ 20,487 $ 22,330 $ 19,260
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 15,796 13,679 12,396
Gain on sale of land (3,197) (135) (34)
Increase in deferred charges (4,749) (736) 699
Deferred income taxes and investment tax
credits-net 4,641 3,592 2,778
Capitalized interest and AFUDC (758) (1,077) (653)
Other operating activities-net 4,114 (1,061) 416
Change in current assets and current liabilities
excluding cash, short-term investments and
current portion of debt:
Customer accounts, notes and
other receivables (9,571) (7,181) (1,352)
Unbilled revenues (774) (1,786) (1,056)
Accounts payable and other liabilities 11,861 7,876 (4,656)
Accrued/prepaid interest and taxes (4,375) 1,440 3,088
Other (1,017) 138 5
- -------------------------------------------------------------------------------
Net cash provided by operating activities 32,458 37,079 30,891
- -------------------------------------------------------------------------------
Cash Flows Provided by Financing Activities:
Proceeds from issuance of common stock 9,779 8,453 7,378
Funds held in Trust by others (30) (7,234)
Proceeds from issuance of debentures 54,000
Debt and preferred stock issuance and
amortization costs 643 213 (755)
Issuance of other long-term debt 15,295
Repayment of current portion of long-term debt (30)
Repayment of long-term debt (99) (1,381) (224)
Contributions and advances for construction 6,460 11,590 7,275
Refunds of customer advances for construction (3,076) (2,364) (2,516)
Net increase (decrease) in notes payable-banks 45,478 21,022 (46,000)
Dividends paid on common stock (17,526) (16,929) (16,134)
- -------------------------------------------------------------------------------
Net cash flows provided by financing
activities 41,599 28,665 3,024
- -------------------------------------------------------------------------------
Cash Flows Used for Investing Activities:
Utility plant (excluding allowance for funds
used during construction) (60,834) (43,582) (24,612)
Purchase of companies (1,800)
Investment in privatization contracts (12,000) (19,856) (5,810)
Capital expenditures on nonregulated property (3,065) (3,799) (928)
Proceeds from sale of land 2,069 1,200 440
- -------------------------------------------------------------------------------
Net cash flows used for investing activities (75,630) (66,037) (30,910)
- -------------------------------------------------------------------------------
Net (Decrease) Increase in Cash
and Cash Equivalents (1,573) (293) 3,005
Cash and Cash Equivalents at
Beginning of Period 5,940 6,233 3,228
- -------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 4,367 $ 5,940 $ 6,233
===============================================================================
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 19,726 $ 16,532 $ 16,719
Income taxes $ 9,700 $ 7,723 $ 6,023
Preferred stock dividends $ 708 $ 708 $ 708
Noncash issuance of common stock $ 1,021 $ 7,709 $ 123
See Notes to Consolidated Financial Statements.
- -14-
E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
Assets 1999 1998
- -------------------------------------------------------------------------------
Utility Plant-At Original Cost:
Utility plant in service $ 779,485 $ 717,985
Construction work in progress 17,441 16,580
- -------------------------------------------------------------------------------
Total utility plant 796,926 734,565
Less accumulated depreciation and amortization 137,587 125,262
- -------------------------------------------------------------------------------
Utility plant-net 659,339 609,303
- -------------------------------------------------------------------------------
Non-utility Property and Other
Investments - Net (Note 8) 85,163 84,945
- -------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 4,367 5,940
Customer and other accounts receivable
(less reserve: 1999, $1,316, 1998, $1,065) 30,129 23,200
Mortgage and other notes receivable (Note 8) 4,600 1,520
Unbilled revenues 12,972 12,198
Infrastructure loan funds receivable (Note 5) 5,657 5,895
Materials and supplies-at average cost 4,069 2,538
Prepaid federal income taxes 4,617 808
Prepaid insurance, taxes, other 3,663 1,676
- -------------------------------------------------------------------------------
Total current assets 70,074 53,775
- -------------------------------------------------------------------------------
Deferred Charges:
Waste residual management (Note 10) 1,538 1,371
Unamortized debt and preferred stock expenses (Note 10) 9,419 10,050
Taxes recoverable through future rates (Notes 4 and 10) 13,466 14,226
Postretirement benefit expense (Notes 10 and 14) 3,145 3,490
Flood expenditures (Note 12) 5,000
Other unamortized expenses (Note 10) 1,164 1,582
- -------------------------------------------------------------------------------
Total deferred charges 33,732 30,719
- -------------------------------------------------------------------------------
Total $ 848,308 $ 778,742
===============================================================================
See Notes to Consolidated Financial Statements.
- -15-
E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
Capitalization and Liabilities 1999 1998
- -------------------------------------------------------------------------------
Capitalization (Notes 2, 5 and 6):
Common shareholders' equity $ 229,233 $ 215,472
Mandatory redeemable cumulative preferred stock 12,000 12,000
Redeemable preferred stock 227 227
Long-term debt - net 266,015 286,908
- -------------------------------------------------------------------------------
Total capitalization 507,475 514,607
- -------------------------------------------------------------------------------
Current Liabilities:
Notes payable - banks (Note 7) 89,500 44,022
Long-term debt - current portion (Note 5) 494 30
Accounts payable and other liabilities 31,434 19,469
Contract obligations payable (Note 5) 19,000 12,000
Customers' deposits 263 248
Municipal and state taxes accrued 17,682 16,789
Interest accrued 4,219 3,675
Preferred stock dividends accrued 59 59
- -------------------------------------------------------------------------------
Total current liabilities 162,651 96,292
- -------------------------------------------------------------------------------
Deferred Credits:
Customers' advances for construction 41,321 41,102
Federal income taxes (Note 4) 71,236 66,487
State income taxes 302 207
Unamortized investment tax credits 7,636 7,839
Accumulated postretirement benefits (Note 14) 3,571 4,090
- -------------------------------------------------------------------------------
Total deferred credits 124,066 119,725
- -------------------------------------------------------------------------------
Contributions in Aid of Construction 54,116 48,118
- -------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note 13)
- -------------------------------------------------------------------------------
Total $ 848,308 $ 778,742
===============================================================================
See Notes to Consolidated Financial Statements.
- -16-
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(In Thousands Except Share Amounts)
December 31,
1999 1998
- -------------------------------------------------------------------------------
Common Shareholders' Equity:
E'town Corporation:
Common stock without par value, authorized,
15,000,000 shares, issued 1999, 8,760,682
shares; 1998, 8,504,344 shares $ 180,124 $ 169,324
Paid-in capital 1,315 1,315
Capital stock expense (5,160) (5,160)
Retained earnings 53,922 50,961
Less cost of treasury stock; 1999 and 1998, 32,554 shares (968) (968)
- -------------------------------------------------------------------------------
Total common shareholders' equity 229,233 215,472
- -------------------------------------------------------------------------------
Preferred Shareholders' Equity (Note 5)
Elizabethtown Water Company:
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
Applied Wastewater Management, Inc:
Redeemable Preferred Stock:
No par value, non-cumulative, issued and
outstanding, 227 shares 227 227
- -------------------------------------------------------------------------------
Total preferred shareholders' equity 12,227 12,227
- -------------------------------------------------------------------------------
Long-Term Debt (Notes 5, 8 and 9):
E'town Corporation:
6 3/4% Convertible Subordinated Debentures, due 2012 8,705 10,499
6.79% Senior Notes, due 2007 12,000 12,000
Liberty Water Company:
Contract Obligations Payable 19,000
Applied Wastewater/Applied Water Management:
6% Note Payable (due serially through 2027) 204 261
9.65% Mortgage Note Payable (due 2001) 264
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 267,046 287,980
Unamortized (discount) premium-net (1,031) (1,072)
- -------------------------------------------------------------------------------
Total long-term debt-net 266,015 286,908
- -------------------------------------------------------------------------------
Total Capitalization $ 507,475 $ 514,607
===============================================================================
See Notes to Consolidated Financial Statements.
- -17-
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Thousands Except Share Amounts)
Year Ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------
Common Stock:
Balance at Beginning of Year $ 169,324 $ 153,162 $ 145,661
Common stock issued under Dividend Reinvestment
and Stock Purchase Plan (1999, 197,547 shares;
1998, 213,568 shares; 1997, 227,992 shares) 8,702 7,861 6,980
Redemption of Convertible Debentures (1999,
44,225 shares; 1998, 18,100 shares) 1,769 724
Issuance of restricted and unrestricted stock
under compensation programs (1999, 2,822
shares; 1998, 9,590 shares; 1997, 4,033 shares) 119 332 123
(Cancellation) issuance of restricted stock for
acquisitions (1999,(25,756) shares; 1998,
186,310 shares)(Note 8) (867) 6,653
Exercise of stock options (1999, 37,500 shares;
1998, 22,315 shares; 1997, 14,685 shares) 1,077 592 398
- -------------------------------------------------------------------------------
Balance at End of Year 180,124 169,324 153,162
- -------------------------------------------------------------------------------
Paid-in Capital 1,315 1,315 1,315
- -------------------------------------------------------------------------------
Capital Stock Expense (5,160) (5,160) (5,160)
- -------------------------------------------------------------------------------
Retained Earnings:
Balance at Beginning of Year 50,961 45,560 42,434
Net Income 20,487 22,330 19,260
Dividends on common stock (1999, 1998 and
1997, $2.04) (17,526) (16,929) (16,134)
- -------------------------------------------------------------------------------
Balance at End of Year 53,922 50,961 45,560
- -------------------------------------------------------------------------------
Treasury Stock:
Balance at Beginning of Year (968) (954) (737)
Cost of shares redeemed to exercise stock
options (1998, 346 shares; 1997, 6,332 shares) (14) (217)
- -------------------------------------------------------------------------------
Balance at End of Year (968) (968) (954)
- -------------------------------------------------------------------------------
Total Common Shareholders' Equity $ 229,233 $ 215,472 $ 193,923
===============================================================================
See Notes to Consolidated Financial Statements.
- -18-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
E'town Corporation (E'town or Corporation), a New Jersey holding company, is
the parent company of Elizabethtown Water Company (Elizabethtown or Company),
E'town Properties, Inc. (Properties), Edison Water Company (Edison), Liberty
Water Company (Liberty), Applied Water Management, Inc. (AWM) and Applied
Wastewater Management, Inc. (AWWM). The Mount Holly Water Company (Mount
Holly) is a wholly owned subsidiary of Elizabethtown. The assets and
operating results of Elizabethtown constitute the predominant portions of
E'town's assets and operating results. The regulated utilities,
Elizabethtown, Mount Holly and AWWM, comprise the Regulated Utilities
segment, Liberty and Edison comprise the Contract Operations segment, AWM is
the Engineering/Operations and Construction segment and E'town and Properties
comprise the Financing and Investment segment.
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 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 E'town and its subsidiaries.
Significant intercompany accounts and transactions have been eliminated.
Elizabethtown and Mount Holly are regulated water utilities. AWWM is a
regulated wastewater utility. All three companies follow the Uniform System
of Accounts, as adopted by the BPU.
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.
- -19-
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 80,864 69,157 0% - 15.73%
- -----------------------------------------------------------------------------
Total utility plant in service $ 779,485 $ 717,985
=============================================================================
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, Mount Holly and AWWM 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 $.76 million, $1.08 million and $.38 million for 1999,
1998 and 1997, respectively.
Non-utility Property
Ongoing costs associated with real estate parcels are being expensed as
incurred. Properties had capitalized direct costs, real estate taxes and
interest costs associated with certain real estate parcels as they were being
developed. All the parcels were available for sale as of November 1997 and
therefore, no interest was capitalized in 1999 or 1998.
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.
- -20-
The construction division of AWM engages in fixed-price and modified
fixed-price contracts for the construction of wastewater facilities. These
revenues are recognized on the percentage-of-completion method, measured by
the cost-to-cost method. Contract costs, under the percentage-of-completion
method, include all direct material and labor costs and those indirect costs
related to contract performance such as tools and vehicle costs.
Federal Income Taxes
E'town files a consolidated federal tax return. Deferred income taxes are
provided for temporary differences between the bases of assets and
liabilities for tax and financial statement purposes for the non-regulated
companies. Deferred income taxes are also provided for each regulated water
utility to the extent permitted by the BPU. The regulated water utilities
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.
Earnings Per Share of Common Stock
Basic earnings per share are computed on the basis of the weighted average
number of shares outstanding. Diluted earnings per share assumes both the
conversion of the 6 3/4% Convertible Subordinated Debentures and assumes the
exercise of all stock options (see Note 6). The calculations of basic and
diluted earnings per share for the three years ended December 31, 1999 follow:
(THOUSANDS OF DOLLARS) 1999 1998 1997
===============================================================================
Basic:
Net Income $ 20,487 $ 22,330 $ 19,260
Average common shares outstanding 8,572 8,263 7,891
- -------------------------------------------------------------------------------
Basic earnings per share $ 2.39 $ 2.70 $ 2.44
===============================================================================
Diluted:
Net income $ 20,487 $ 22,330 $ 19,260
After tax interest expense
applicable to 6 3/4% Convertible
Subordinated Debentures 429 488 500
- -------------------------------------------------------------------------------
Adjusted net income $ 20,916 $ 22,818 $ 19,760
- -------------------------------------------------------------------------------
Average common shares outstanding 8,572 8,263 7,891
Additional shares from assumed
exercise of stock options 81 42 40
Additional shares from assumed
conversion of 6 3/4% Convertible
Subordinated Debentures 218 262 284
- -------------------------------------------------------------------------------
Average common shares outstanding as adjusted 8,871 8,567 8,215
- -------------------------------------------------------------------------------
Diluted earnings per share $ 2.36 $ 2.66 $ 2.41
===============================================================================
- -21-
Cash Equivalents
The Corporation 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
Corporation 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.
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 amounts
reported in the Statements of Consolidated Income follow:
(THOUSANDS OF DOLLARS) 1999 1998 1997
========================================================================
Tax expense at statutory rate $ 11,476 $ 12,378 $ 10,843
Items for which deferred taxes are
not provided:
Difference between book
and tax depreciation 147 63 58
Other 68 (12) 197
Investment tax credits (203) (203) (203)
- ------------------------------------------------------------------------
Provision for federal income taxes $ 11,488 $ 12,226 $ 10,895
========================================================================
The provision for federal income
taxes is comprised of the following:
Current $ 5,766 $ 8,301 $ 6,759
Tax on main extension refunds 416 525 1,369
Deferred:
Tax depreciation 3,099 3,086 2,670
Capitalized interest (27) 91 114
Main cleaning and lining 759 796 612
Flood expenditures 1,750
Other (72) (189) (426)
Investment tax credits - net (203) (203) (203)
Refund from IRS (181)
- ------------------------------------------------------------------------
Total provision $ 11,488 $ 12,226 $ 10,895
========================================================================
- -22-
The Regulated Utilities Segment provides 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 the regulated utility customers will be
recovered from these customers in the future. Accordingly, offsetting
regulatory assets have been established. At December 31, 1999, the regulated
utilities had deferred tax liabilities of $13.47 million. There were also, at
December 31, 1999, offsetting regulatory assets for the same amounts
representing the future revenue expected to be recovered through rates based
upon established regulatory practices which permit recovery of current taxes
payable. These amounts were determined using the enacted federal income tax
rate of 35% and were calculated in accordance with SFAS No. 109.
The tax effect of significant temporary differences representing deferred
income tax assets and liabilities as of December 31, 1999 and 1998 is as
follows:
(THOUSANDS OF DOLLARS) 1999 1998
====================================================================
Water utility plant - net $ (51,534) $ (47,538)
Non - utility property 286 251
Other investments (742) (787)
Taxes recoverable through future rates (13,466) (14,226)
Capitalized interest (3,847) (3,983)
Waste residuals (539) (480)
Flood expenditures (1,750)
Other assets 746 562
Other liabilities (390) (286)
- --------------------------------------------------------------------
Net deferred income tax liabilities $ (71,236) $ (66,487)
====================================================================
5. Capitalization
E'town routinely makes equity contributions to Elizabethtown which represent
a portion of 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.
The Corporation maintains a Shareholders' Rights Plan (Rights Plan).
Generally, under the Rights Plan, if a person or group acquires 10% or more
of the Corporation's common stock or announces a tender offer for the
Corporation's common stock, non-acquiring shareholders may, under certain
circumstances, exercise rights (Rights) to allow them to significantly
increase their percentage of ownership of the Corporation's common stock.
Such Rights may be redeemed by the Board of Directors. Pursuant to the terms
of the Merger Agreement with Thames Water, the Corporation has amended its
Rights Plan so that the Corporation may proceed to consummate the Merger
without triggering the provisions of the Rights Plan and the Rights would
expire immediately prior to the effective time of the Merger (see Note 2).
- -23-
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.
AWWM's no par value, non-cumulative preferred stock has no cumulative
dividend rights and is redeemable at the option of the Corporation. There
are no liquidation preferences specified with respect to this class of
preferred stock.
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. Therefore, $46.40 million of E'town's consolidated retained
earnings were unrestricted.
In February 2000 E'town issued $30 million of 7.69% Senior Notes due 2010 in a
private placement. The proceeds were used to repay short-term debt incurred to
finance the acquisition of the contract to operate the water system of the
city of Elizabeth and capital costs for the non-regulated subsidiaries.
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%. 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 (DEP). 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 2.59%. The proceeds of the loans will be used to repay
short-term debt incurred to finance the Mansfield Project (see Note 11). The
Company expects to request these funds from the Trust in the second quarter
of 2000.
E'town has outstanding $12 million of 6.79% Senior Notes due December 15,
2007. E'town issued $4 million of these notes in December 1997, $6 million in
January 1998 and $2 million in May 1998. The proceeds were used to finance
capital additions for Edison as well as to meet working capital needs.
The Note Agreements for E'town's 7.69% and 6.79% Senior Notes require the
maintenance of a consolidated fixed charges coverage ratio of at least 1.5 to
1 and a debt to total capitalization ratio not to exceed .65 to 1. As of
December 31, 1999, the fixed charges coverage ratio was 2.5 to 1 and the
debt to total capitalization ratio was .62 to 1, calculated in accordance with
the Note Agreements.
- -24-
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.
E'town's 6 3/4% Convertible Subordinated Debentures are convertible to E'town
common stock at $40 per share. At December 31, 1999, 217,625 shares of common
stock were reserved for issuance upon exercise of the conversion rights.
Liberty, under its contract with the city of Elizabeth, made an installment
payment of $12 million in June 1999 and is obligated to make a payment of $19
million in June 2000, which has been recorded as contract obligations payable
in the financial statements (see Note 8).
The aggregate maturities of long-term debt (including the portion classified
as current and contract obligations payable) for each of the five years
succeeding December 31, 1999 are: 2000, $19.49 million; 2001, $1.00 million;
2002, $.59 million; 2003, $.60 million and 2004, $.61 million.
6. Performance Stock Plan and Stock Option Plan
The Corporation has a Performance Stock Plan whereby restricted stock is
awarded to key employees and is amortized over three years as compensation
expense. The Corporation has recognized compensation expense of less than $.1
million for each of the three years ended December 31, 1999. No restricted
stock was issued to employees in 1999. The individual share prices of
restricted shares issued for 1998 and 1997 were $34.56, and $30.50,
respectively.
E'town has a Stock Option Plan, a qualified incentive plan under which
options to purchase shares of E'town's common stock have been granted to
certain officers and other key employees at prices not less than the fair
market value at the date of grant. The Stock Option Plan provides that any
options may be exercised after one year from date of grant up to an
expiration date, not to exceed 10 years from grant date.
A summary of the details of stock option grants and outstanding balances is
presented below:
Year Options Option Options Outstanding
Granted Granted Price 12/31/99 12/31/98 12/31/97
- ------------------------------------------------------------------------------
1989 7,500 $24.67 2,200 7,500
1990 7,500 26.67 7,500 7,500 7,500
1995 77,000 27.12 34,000 44,300 60,315
1996 4,000 26.87 2,000 2,000 4,000
1997 25,000 29.75 25,000 25,000
1998 4,000 41.00 4,000 4,000
1999 40,000 44.00 40,000
- ------------------------------------------------------------------------------
Total 87,500 85,000 104,315
==============================================================================
- -25-
Weighted
Number Average
of Options Option Price
- ----------------------------------------------------------------
Options outstanding at 12/31/96 96,000 $26.88
- ----------------------------------------------------------------
Granted * 25,000 29.75
Exercised (14,685) (27.12)
Forfeited (2,000) (27.12)
- ----------------------------------------------------------------
Options outstanding at 12/31/97 104,315 27.53
- ----------------------------------------------------------------
Granted * 4,000 41.00
Exercised (22,315) (26.52)
Forfeited (1,000) (27.12)
- ----------------------------------------------------------------
Options outstanding at 12/31/98 85,000 28.44
- ----------------------------------------------------------------
Granted * 40,000 44.00
Exercised (37,500) (28.73)
Forfeited 0 0
- ----------------------------------------------------------------
Options outstanding at 12/31/99 87,500 $35.43
================================================================
* Options are exercisable after one year from date of grant.
In connection with the adoption of SFAS No. 123 "Accounting for Stock-Based
Compensation," which was effective in 1996, the Corporation elected to
continue to account for its Stock Option Plan using the method prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and provide proforma disclosure of the effect of adopting
SFAS No. 123. The effect of accounting for stock-based compensation under
SFAS No. 123 would be to reduce earnings by $.07 million, $.03 million and
$.06 million for 1999, 1998 and 1997, respectively, and $.008, $.004 and
$.008 per share for 1999, 1998 and 1997, respectively. The fair values of
the options granted for 1999, 1998 and 1997 were $2.58, $5.14 and $3.38,
respectively. This calculation was based upon the Black-Scholes option
pricing model for 1999, 1998 and 1997, respectively as follows: expected
volatility 13%, 30% and 30%; dividend yield 4.6%, 4.3% and 6.5%; risk-free
interest rate 6.2%, 7% and 7%.
The Corporation has a Directors' Stock Plan established in 1998 whereby
directors are compensated for their annual retainer in E'town Corporation common
stock. The Corporation issued 2,856 and 3,464 shares in 1999 and 1998,
respectively, of which the related effect on compensation expense was recorded
as an operation expense. The director may elect to receive the common stock as
either restricted or unrestricted stock.
7. Lines of Credit
E'town has $115 million in lines of credit with several banks, of which up to
$55 million is available to E'town for use by the Corporation or its
unregulated subsidiaries and of which $90 million is available to
Elizabethtown as of December 31, 1999. Of the lines available to
Elizabethtown, $10 million represents a committed line of credit.
- -26-
Information relating to bank borrowings for 1999, 1998 and 1997 is as follows:
(THOUSANDS OF DOLLARS) 1999 1998 1997
=====================================================================
Maximum amount outstanding $ 89,500 $ 44,000 $ 69,500
Average monthly amount
outstanding $ 60,182 $ 26,238 $ 43,525
Average interest rate at year end 6.8 % 5.9 % 6.2
Weighted average interest rate
based on average daily balances 5.8 % 6.0 % 5.8
=====================================================================
There were no compensating balances as of December 31, 1999, 1998 and 1997.
8. Non-Utility Property and Other Investments
The detail of amounts included in Non-Utility Property and Other Investments
at December 31, 1999 is as follows:
(THOUSANDS OF DOLLARS) 1999 1998
====================================================================
Funds held in trust by others $ 7,264 $ 7,234
Concession fees on privatization
contracts - net of amortization 53,946 55,505
Capital assets for privatization
contracts - net of amortization 6,165 3,341
Investments in real estate 9,049 11,341
Goodwill - net of amortization 5,036 5,401
Investment in SEGS 1,089 1,214
Other capital assets 2,429 637
Other 185 272
- --------------------------------------------------------------------
Total $ 85,163 $ 84,945
====================================================================
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. These
amounts have been included in the table above in concession fees on
privatization contracts, net of amortization. These concession fees are being
amortized on a straight-line basis over the life of the contract. Also
under the terms of the contract, Liberty will deposit $57.8 million from
customer collections during 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. As these funds will be controlled by Elizabeth, they will be
accounted for as a pass-through from customers to Elizabeth and will not be
included in revenues or expenses. Liberty is responsible for $7.45 million of
construction expenditures, primarily for meter replacements, during the life of
the contract. Of these total commitments, approximately $2.45 million is
expected to be expended in the next three years. During 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.
- -27-
E'town also performs the commercial billing operations for the wastewater
system of Elizabeth. E'town does not operate the wastewater system. E'town
does the wastewater billing for Elizabeth and remits all cash collected to
Elizabeth. Included in the Consolidated Balance Sheets of E'town as Customer
and Other Accounts Receivable at December 31, 1999 and 1998 are the
receivables from the customers of Elizabeth for wastewater services in the
amount of $5.05 million and $3.37 million, respectively. An equal amount of
liability to Elizabeth is included in Accounts Payable and Other Liabilities
which has been established to reflect E'town's obligation to remit these
funds to Elizabeth as collected.
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 of the township
of Edison, New Jersey and pays all the expenses under the contract. Edison
expects to make expenditures of approximately $25 million during the 20-year
life of the contract of which $12.48 million has been spent as of December
31, 1999. Construction expenditures, as they are incurred, are being
amortized on a straight-line basis over the remaining life of the contract.
Expenditures include capital improvements to the water system as well as
contract payments to the township of Edison. Of the total, approximately
$2.94 million is expected to be expended in the next three years of the
contract. An initial payment of $5.7 million was made upon the closing in
June 1997 and has been included in the table above in concession fees on
privatization contracts, net of amortization. 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.
Also included in Non-Utility Property and Other Investments at December 31, 1999
and 1998 are $9.05 million and $11.34 million, respectively, of investments in
various parcels of undeveloped land in New Jersey.
One of the real estate parcels was sold in 1997 for $.4 million, resulting
in a gain of less than $.1 million. Two other parcels were sold in 1998 for
$1.7 million resulting in a gain of less than $.1 million. Cash proceeds of
$1.2 million were received in 1998 for these two parcels and the balance
was financed with a one-year mortgage at an interest rate of 8%, which was
paid in 1999. In February 1999 Properties sold a parcel of land, which has
been under contract since 1995 in Green Brook, New Jersey for $5.83
million, at a gain of $2.00 million net of taxes. Cash proceeds of $1.99
million were received in 1999. The remaining $4.33 million, at time of
closing, was financed with a 7.75% mortgage, to be paid over 2 years. The
mortgage balance, including accrued interest, of $3.84 million is included
in Mortgage and Other Notes Receivable in E'town's Consolidated Balance
Sheets. Properties sold a small parcel in Clinton, New Jersey in 1999 for
$.6 million at a gain of less than $.1 million net of taxes. The sale
proceeds are being invested into water and wastewater projects. Properties
has entered into contracts for sale for all of its remaining parcels. The
eventual sale of these parcels is contingent upon the purchaser obtaining
various approvals for development. This process could take up to several
years. As of December 31, 1999, all the remaining properties are under
contract to be sold. Based upon the expected sales prices for these
properties under the contracts, the estimated net realizable value of each
property exceeds its respective carrying value as of December 31, 1999.
- -28-
E'town purchased the operations of Applied Wastewater General Partnership
(AWG) in June 1998 to provide a full complement of water and wastewater
services. The original purchase price, in a non-cash transaction, was $6.61
million (185,005 restricted common shares issued) for the three companies
that now comprise AWM and $.04 million (1,305 restricted common shares
issued) for AWWM, a regulated wastewater utility, in a stock-for-stock
transaction accounted for as a purchase. The purchase price was subject to a
potential downward post-closing adjustment based upon a multiple of earnings
for the twelve months ended March 31, 1998. As required by the purchase
contract, E'town had undertaken an audit of AWG for such period. This process
resulted in a downward post-closing adjustment of $.9 million (25,756 shares),
which has been reflected in E'town's 1999 Consolidated Balance Sheet. The
adjusted goodwill amounts to $4.76 million as of December 31, 1999 and is
being amortized over a 40-year period. Had the acquisition been consummated
as of January 1, 1997, the proforma effect on revenues, net income and
earnings per share for the years ended December 31, 1999, 1998 and 1997 would
be immaterial.
Included in Non-Utility Property and Other Investments at December 31, 1999
and 1998 is an investment of $1.09 million and $1.21 million, respectively,
($.35 million and $.43 million net of related deferred taxes) in a limited
partnership that owns Solar Electric Generating System V (SEGS), located in
California. The Corporation owns a 3.19% interest in SEGS. The investment is
being accounted for on the equity method. The Corporation continues to
monitor the relationship between the carrying and net realizable values of
its investment in SEGS, based upon information provided by SEGS management as
well as through cash flow analyses.
During 1999 AWM made certain investments in non-regulated wastewater assets
for $1.7 million. Of this amount $1.2 million was recorded as other capital
assets and $.5 million was recorded as goodwill. The goodwill is being
amortized over 10 years.
9. Financial Instruments
The carrying amounts and the estimated fair values, as of December 31, 1999
and 1998, of financial instruments issued by the Corporation are as follows:
(THOUSANDS OF DOLLARS) 1999 1998
=============================================================
Cumulative preferred stock:
Carrying amount $ 12,227 $ 12,227
Estimated fair value 12,077 13,247
Long - term debt:
Carrying amount $ 266,015 $ 286,908
Estimated fair value 261,686 299,630
=============================================================
Estimated fair values for preferred and debt instruments are based upon
quoted market prices for these or similar securities.
- -29-
10. 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 11 and 14) 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 11).
There were no regulatory liabilities at December 31, 1999 or 1998.
- -30-
11. 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 the Merger has been consummated.
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 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. and AWWM
purchased Homestead Treatment Utility, Inc. for a combined cash price of
$1.8 million. The entities provide water and wastewater services to
approximately 800 customers of the Homestead community in southern New Jersey.
The transactions were accounted for as purchases. Had the acquisitions been
consummated as of January 1, 1997, the proforma effect on revenues, net
income and earnings per share for the years ended December 31, 1999, 1998 and
1997 would be immaterial.
- -31-
12. 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, 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 and reduced net income in
1999 by approximately $.68 million. The restrictions were lifted in October
1999.
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 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 (see Note 13 for legal matters related to Floyd). The loss
of revenues decreased net income in 1999 by approximately $.39 million.
13. 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 in 1999.
In connection with E'town's agreement to operate the water systems of the
township of Edison and the city of Elizabeth, E'town has certain contractual
commitments which are set forth in Note 8.
Capital expenditures of E'town and its subsidiaries are estimated to be
$152.36 million, exclusive of concession fees, through 2002, of which $144.99
million is for utility expenditures by Elizabethtown, Mount Holly and AWWM
and $7.37 million is for non-utility expenditures.
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, $1.04 million; 2001, $1.06 million; 2002 $.92
million; 2003, $.62 million and 2004, none. Rent expense totaled $.99
million, $.83 million and $.72 million in 1999, 1998 and 1997, respectively.
Elizabethtown and AWM lease 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: $1.66
million, $1.65 million, $1.64 million, $1.64 million and $1.64 million. The
lease expense was $1.39 million and $.29 million for 1999 and 1998,
respectively. There was no lease expense for 1997.
- -32-
In connection with the pending Merger the Corporation retained a financial
advisor. The total estimated fee for the financial advisor is $ 4.50 million
of which $ 1.09 million was expensed in 1999 in connection with the Merger
announcement, $ .66 million is due upon shareholder approval and the
remainder is due when the transaction is consummated.
Upon the consummation of the pending Merger, the Corporation will become
obligated to make a payment of $.4 million to an officer of the Corporation
as consideration for efforts to bring the transaction to completion.
Also in connection with the pending Merger, subsequent to the consummation of
the transaction, the Corporation may become obligated to make payments to
officers of Elizabethtown and Properties under change in control agreements
presently in effect between the Corporation and the officers. The extent of
personnel decisions that could potentially trigger the provisions of these
agreements are not presently known and therefore, the amounts of any
potential obligations are not presently determinable.
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, 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 Plant
was flooded from 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.
There are environmental matters that are inherent in the production,
transmission and distribution of water as well as in the treatment of
wastewater. The Corporation is sensitive to these issues and mitigates the
environmental impact of these activities to the extent required by the laws
and regulations under which these activities are governed and makes efforts
to exceed the regulatory requirements where practical.
The Corporation, in the ordinary course of business, periodically becomes
involved in litigation. There is currently no litigation in progress, 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.
- -33-
14. Pension Plan and Other Postretirement Benefits
Pension Plan
Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan), which
covers most employees of Elizabethtown, Mount Holly and Properties. 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 Corporation 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 Corporation. 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 $2.13 million and $1.51 million,
respectively.
Other Postretirement Benefits
The Corporation 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 Corporation's bargaining unit, all union
and non-union employees retiring after January 1, 1997, pay 25% of future
increases in the premiums the Corporation 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.
The accompanying tables set forth the funded status of the Company's Plan and
other postretirement benefit plans as of December 31 1999 and 1998 and
reconciliations of the components of net periodic pension and postretirement
benefit costs for the years 1999, 1998 and 1997:
- -34-
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 $45,880 $40,447 $ 7,938 $ 6,604
Service cost 1,672 1,407 241 390
Interest cost 3,109 2,855 430 486
Benefit payments (2,256) (2,092) (238) (247)
Actuarial (gain) or loss (5,615) 3,263 (2,359) 705
Plan amendments 691
- -------------------------------------------------------------------------------
Benefit obligation at end of year 43,481 45,880 6,012 7,938
===============================================================================
Change in plan assets during year:
Fair value of plan assets at
beginning of year 52,153 46,803 2,171 1,331
Employer contributions 161 174 879 978
Benefit payments (2,256) (2,092) (238) (247)
Actual return on plan assets 9,811 7,268 286 109
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year 59,869 52,153 3,098 2,171
===============================================================================
Reconciliation of funded status at end of year:
Funded status 16,389 6,273 (2,914) (5,767)
Unrecognized net transition (asset)
or obligation (1,097) (1,365) 4,716 5,079
Unrecognized prior service cost 2,771 2,415
Unrecognized net (gain) or loss (18,422) (7,662) (5,014) (3,063)
- -------------------------------------------------------------------------------
Accumulated postretirement benefits* $ (359) $ (339)$(3,212) $(3,751)
===============================================================================
* Recognized in the Consolidated Balance Sheets
Pension Plans Other Postretirement Benefits
(THOUSANDS OF DOLLARS) 1999 1998 1997 1999 1998 1997
==================================================================================================================================
Net periodic benefit cost recognized for year:
Service cost $ 1,672 $ 1,407 $ 1,322 $ 241 $ 390 $ 389
Interest cost 3,109 2,855 2,734 430 486 449
Expected return on plan assets (4,592) (4,125) (3,542) (186) (109) (57)
Net amortization and deferral (7) (153) 66 165 158 140
Deferral/amortization for regulated companies 249 247 (273)
- ----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost 182 (16) 580 899 1,172 648
==================================================================================================================================
Weighted - average assumptions for year:
Discount rate 6.75 % 7.25 % 7.50 % 6.75 % 7.25 % 7.50%
Rate of compensation increases 3.50 % 4.00 % 4.00 %
Expected long - term rate of return on plan assets 9.00 % 9.00 % 9.00 % 9.00 % 9.00 % 9.00%
Weighted - average assumptions at end of year:
Discount rate 7.75 % 6.75 % 7.25 % 7.75 % 6.75 % 7.25%
Rate of compensation increases 3.50 % 4.00 % 4.00 %
==================================================================================================================================
- -35-
A single percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit
obligation as of December 31, 1999, and the net postretirement service and
interest cost by approximately $.81 million and $.11 million, respectively.
15. Related Party Transactions
Utility Billing Services, Inc., a subsidiary of NUI Corporation, of which a
Director of E'town is Chairman of the Board and a Director, provides data
processing and related services to Elizabethtown and other subsidiaries of the
Corporation. The charges for all services totaled $1.04 million, $.93 million,
and $.72 million, for 1999, 1998 and 1997, respectively. The current contract
expires December 31, 2000.
The Corporation has a line of credit effective October 1999 in the amount of
$10 million with Summit Bank. A Director of E'town and of Elizabethtown is
also a Director of Summit Bank. At December 31, 1999, E'town had loans
outstanding with Summit Bank in the amount of $7.0 million. Total interest
charges paid to Summit Bank by E'town were $.30 million, $.07 million and
$.35 million for 1999, 1998 and 1997, respectively. Summit Bank also serves
as a bond trustee for Elizabethtown for which Elizabethtown has paid fees of
less than $.10 million in 1999, 1998 and 1997.
AWM leases office space from a Director of E'town. Total rent payments were
$.24 million for 1999 and $.10 million for the portion of 1998 that the
Corporation owned AWM.
16. Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires that companies disclose segment data based upon how
management makes decisions, allocates resources and measures performance. The
1999, 1998 and 1997 segment data is presented as follows:
Engineering/ Financing
(THOUSANDS OF DOLLARS) Regulated Contract Operations/ and
Utilities Operations Construction Investment Eliminations Total
==============================================================================================================================
1999
Revenues $ 138,791 $ 19,363 $ 12,439 $ (8,398) $ 162,195
Operating Expenses 102,017 16,640 12,564 $ 1,679 (8,313) 124,587
Depreciation and Amortization Expense 13,534 1,807 335 120 15,796
Interest Expense 16,574 1,312 63 1,467 19,416
Net Income (Loss) 20,263 1,489 (189) (1,076) 20,487
Total Assets 750,690 72,921 7,506 51,574 (34,383) 848,308
Total Debt (1) 299,398 44,624 2,067 59,660 (30,740) 375,009
==============================================================================================================================
1998
Revenues $ 134,943 $ 12,126 $ 5,735 $ $ (7,324) $ 145,480
Operating Expenses 95,432 10,968 5,699 635 (7,217) 105,517
Depreciation and Amortization Expense 12,500 1,035 81 63 13,679
Interest Expense 15,619 843 (6) 1,370 17,826
Net Income (Loss) 23,871 420 43 (2,192) 188 22,330
Total Assets 688,046 68,539 3,744 44,964 (26,551) 778,742
Total Debt (1) 268,056 31,000 179 44,499 (774) 342,960
==============================================================================================================================
(1) Includes long-term debt, notes payable, long-term debt - current portion and contract obligations payable.
- -36-
The Regulated Utilities segment provides water and wastewater services
through Elizabethtown, Mount Holly and AWWM. This segment is regulated by the
BPU.
The Contract Operations segment is comprised of Liberty and Edison and
provides water services under contract to municipalities.
The Engineering/Operations/Construction segment is comprised of AWM and
provides engineering, operating and construction services, primarily in the
wastewater field.
The Financing and Investment segment is comprised of Properties and E'town.
E'town provides the equity financing for all the other segments and debt
financing for all segments other than the Regulated Utilities segment.
Properties owns real estate parcels.
Eliminations are comprised of the accounting entries necessary to eliminate
intercompany sales, expenses and investments.
17. Quarterly Financial Data (Unaudited)
A summary of financial data for each quarter of 1999 and 1998 follows:
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Basic Diluted
Operating Operating Net Earnings Earnings
Quarter Revenues Income Income Per Share Per Share
==========================================================================
1999
1st $ 35,476 $ 8,675 $ 6,300 $ 0.74 $ 0.73
2nd 41,611 10,179 5,757 0.67 0.66
3rd 45,593 12,809 7,953 0.92 0.91
4th 39,515 5,945 477 0.06 0.06
- --------------------------------------------------------------------------
Total $162,195 $ 37,608 $ 20,487 $ 2.39 $ 2.36
==========================================================================
1998
1st $ 31,267 $ 8,455 $ 4,163 $ 0.52 $ 0.51
2nd 33,609 9,376 5,162 0.63 0.62
3rd 43,907 12,917 8,555 1.02 1.00
4th 36,697 9,215 4,450 0.53 0.53
- --------------------------------------------------------------------------
Total $145,480 $ 39,963 $ 22,330 $2.70 $ 2.66
==========================================================================
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 costs associated with the pending Merger
and labor and power costs indirectly attributable to a major flood at
Elizabethtown's primary water treatment plant.
- -37-
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of E'town Corporation:
We have audited the accompanying consolidated balance sheets and statements
of consolidated capitalization of E'town Corporation and its subsidiaries as
of December 31, 1999 and 1998, and the related statements of consolidated
income, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 amounts and disclosures in 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 E'town Corporation and its
subsidiaries at December 31, 199 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.
/s/ Deloitte & Touche
March 9, 2000
Parsippany, New Jersey
Other Financial and Statistical Data
1999 1998 1997 1996 1995
=================================================================================================================
UTILITY PLANT (THOUSANDS)
Utility Plant - net $ 659,339 $ 609,303 $ 572,785 $ 560,024 $ 507,858
Construction Expenditures (excluding AFUDC) 60,834 43,582 24,612 55,125 73,789
TOTAL ASSETS (THOUSANDS) 848,308 778,742 670,904 655,207 59,156
CAPITALIZATION (THOUSANDS)
Shareholders' Equity 229,233 215,472 193,923 183,512 177,081
Preferred Stock 12,227 12,227 12,000 12,000 12,000
Debt (1) $ 375,009 $ 342,960 $ 270,328 $ 262,511 $ 220,703
Total Capitalization $ 616,469 $ 570,659 $ 476,251 $ 458,023 $ 409,784
CAPITALIZATION RATIOS
Common Stock 37% 38% 41% 40% 43%
Preferred Stock 2% 2% 2% 3% 3%
Debt (1) 61% 60% 57% 57% 54%
EARNINGS TO FIXED CHARGES RATIO 2.59 2.86 2.67 2.18 2.47
COMMON STOCK DATA
Earnings Per Share:
Basic $ 2.39 $ 2.70 $ 2.44 $ 1.96 $ 2.16
Diluted 2.36 2.66 2.41 1.96 2.14
Dividends Per Share 2.04 2.04 2.04 2.04 2.04
Book Value Per Share $ 26.26 $ 25.43 $ 24.17 $ 23.58 $ 23.54
Average Shares Outstanding: (Thousands)
Basic 8,572 8,263 7,891 7,668 7,093
Diluted 8,871 8,567 8,215 7,966 7,394
REVENUES (THOUSANDS)
General Customers $ 92,595 $ 87,794 $ 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 17,068 16,820 16,754 14,814 14,276
Contract Operations 19,363 12,126 3,330
Engineering Operations & Construction 12,439 5,735
Elimination of Intercompany Sales (8,398) (7,324) (1,804)
Total Revenues $ 162,195 $ 145,480 $ 133,826 $ 110,409 $ 108,398
NET INCOME $ 20,487 $ 22,330 $ 19,260 $ 15,073 $ 15,296
WATER SALES - MILLIONS OF GALLONS (MG)
General Customers 25,852 24,614 24,333 22,890 23,999
Other Water Systems 13,806 14,396 14,504 15,049 15,569
Industrial Wholesale 3,270 3,482 3,533 3,567 3,673
Contract Operations 8,051 5,091 1,307
System Use and Unaccounted For 7,718 6,934 6,948 6,444 6,402
Elimination of Intercompany Sales (5,165) (3,899) (1,163)
Total Water Sales 53,532 50,618 49,462 47,950 49,643
SYSTEM DELIVERY BY SOURCE (MG)
Surface 44,520 48,067 42,585 41,485 42,646
Wells 5,740 1,072 6,689 6,328 6,764
Purchased 8,437 5,378 1,351 137 233
Elimination of Intercompany Sales (5,165) (3,899) (1,163)
Total System Delivery 53,532 50,618 49,462 47,950 49,643
MILLIONS OF GALLONS PUMPED
Average Day 147 139 135 131 136
Maximum Day 241 217 205 170 183
CUSTOMERS
Regulated Utilities 205,022 200,536 197,663 195,482 192,617
Contract Operations 29,051 29,471 11,207
Engineering/Operations/Construction 4,605 4,437 4,057
Total Customers 238,678 234,444 212,927 195,482 192,617
GENERAL INFORMATION
Miles of Main 3,014 2,955 2,926 2,899 2,869
Fire Hydrants Served 17,668 16,426 16,228 16,012 15,650
=================================================================================================================
(1) Includes long-term debt, notes payable, long-term debt - current portion and contract obligations payable.
As of March 29, 2000 there were 5,182 holders of record of E'town's Common Stock.
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.
STOCK PRICE AND DIVIDEND DATA:
E'TOWN'S COMMON STOCK IS TRADED ON THE NEW YORK
STOCK EXCHANGE UNDER THE SYMBOL ETW.
1999 1st 2nd 3rd 4th
================================================================
Quarter
Closing Price:
Low: $ 37.44 $ 39.44 $ 45.56 $ 43.56
High: $ 46.81 $ 46.88 $ 53.13 $ 62.88
Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51
================================================================
1998 1st 2nd 3rd 4th
================================================================
Quarter
Closing Price:
Low: $ 34.38 $ 33.88 $ 36.44 $ 40.75
High: $ 39.69 $ 38.06 $ 43.75 $ 47.38
Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51
================================================================