Exhibit 13
E'TOWN CORPORATION
Portion of the 1993 Annual Report to Shareholder's which is
incorporated by reference into this filing on Form 10-K for
the year ended December 31, 1993.
INDEX
Page
----
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 1
Consolidated Financial Statements 9
Notes to Consolidated Financial Statements 15
Independent Auditors' Report 42
Other Financial and Statistical Data 43
Stock Price and Dividend Data 44
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) and E'town Properties, Inc. (Properties).
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 following analysis sets forth significant events affecting
the financial condition of E'town and Elizabethtown at December 31, 1993,
and the results of operations for the years ended December 31, 1993,
1992 and 1991.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures Program
Consolidated capital expenditures, primarily for water utility
plant, were $32.7 million during 1993. Capital expenditures for the
three-year period ending December 31, 1996, are estimated to be
$196.9 million, of which $196.5 million is for Elizabethtown's utility
plant and $.4 million is for real estate-related expenditures.
Elizabethtown's construction program includes additional mains and
storage facilities necessary to serve customers who were added during
the last several years. In addition, Elizabethtown anticipates
upgrading its existing surface water treatment plant by rehabilitating
certain components and adding facilities designed to maximize its
capacity. These projects are designed to ensure the plant's compliance
with proposed water quality and other environmental regulations.
Elizabethtown's estimated capital expenditures through 1996 include
$100.0 million, excluding an Allowance for Funds Used During
Construction (AFUDC), for construction of a new water treatment plant,
the Canal Road Water Treatment Plant (Plant), near its existing plant.
The Plant is scheduled to be completed in 1996. The Plant, which will
have a rated production capacity of 40 million gallons per day, is
necessary to meet existing and anticipated customer demands and to
replace groundwater supplies withdrawn from service as a result of more
restrictive water quality regulations and groundwater contamination.
In August 1993, the Board of Regulatory Commissioners (BRC)
approved a stipulation (1993 Plant Stipulation) signed by the parties to
the Company's petition relating to the Plant. The 1993 Plant
Stipulation states that the Plant is necessary and that the Company's
estimate regarding the Plant's cost, at that time of $87 million, and
construction period were reasonable. The 1993 Plant Stipulation
authorizes the Company to levy a rate surcharge if the Company's pre-tax
interest coverage ratio for any 12 month historical period drops below
2.0 times. The surcharge would equal 20% of the Company's gross
-1-
interest expense for the prior 12 months, adjusted for revenue taxes.
The surcharge would go into effect at the same time as the Company's
next base rate increase after the coverage ratio falls below 2.0 times,
but in no event prior to January 1, 1995. Also, the surcharge would
remain in effect for 12 months and could be extended by the BRC for up
to six additional months. The 1993 Plant Stipulation also provides that
the rate of return on common stockholder's equity used to calculate the
rate for the equity component of the AFUDC for the Plant will be 1.5%
less than the rate of return on common stockholder's equity established
in the Company's most recent base rate case. The authorized rate of
return on common stockholder's equity is currently 11.5%.
Elizabethtown has solicited bids from general contractors for the
construction of the Plant. The estimated cost of the Plant, as of
March 23, 1994, is approximately $100 million, excluding AFUDC. The
Company has notified all parties to the 1993 Plant Stipulation that the
estimated cost of the Plant has increased. The Company expects to
execute a contract and commence construction in the spring of 1994.
Also included in the Company's capital program is $12.2 million for
new wells, treatment facilities and transmission lines to augment Mount
Holly's water supplies. Such projects are necessary for Mount Holly to
comply with recent state legislation requiring Mount Holly and other
water purveyors located in a particular area in southern New Jersey to
obtain additional sources of water to replace portions of their existing
supplies.
CAPITAL RESOURCES
During 1993, Elizabethtown, including Mount Holly, financed 28.2%
of its capital expenditures from internally generated funds (after
payment of common stock dividends). The balance was funded from
(i) capital contributions from E'town from the sale of common stock,
(ii) the remaining proceeds of various New Jersey Economic Development
Authority (NJEDA) tax-exempt bond issues from prior years and
(iii) short-term bank debt on an interim basis.
For the three-year period ending December 31, 1996, Elizabethtown,
including Mount Holly, estimates that 15% of its capital expenditures
will be financed with internally generated funds (after the payment of
common stock dividends). The balance will be financed with a
combination of proceeds from the sale of E'town common stock, long-term
debentures, proceeds of tax-exempt NJEDA bonds and short-term borrowings
under a revolving credit agreement (see below), on an interim basis.
The NJEDA has granted preliminary approval for the financing of almost
all of Elizabethtown's major projects over the next three years,
including the Plant. Elizabethtown expects to pursue tax-exempt
financing to the extent that final allocations are granted by the NJEDA.
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On May 17, 1993, E'town issued 575,000 shares of common stock for
net proceeds of $16.6 million. The net proceeds were used to
fund equity contributions to Elizabethtown of $11.0 million in May 1993
and $2.8 million in September 1993. Elizabethtown used a portion of
such contributions to repay $7.0 million of short-term bank debt
incurred for construction expenditures and invested the balance on a
short-term basis until needed for construction expenditures. E'town
used $1.0 million of the proceeds to repay short-term bank debt
previously incurred for working capital. The balance of the proceeds
has been invested on a short-term basis and is expected to be used to
fund working capital requirements of the Corporation.
During 1993, E'town raised $6.0 million from the sale of common
stock issued under its Dividend Reinvestment and Stock Purchase Plan
(DRP). Such proceeds were used to fund equity contributions to
Elizabethtown primarily for Elizabethtown's capital expenditures.
On August 24, 1993, E'town, Properties and Elizabethtown sold
three parcels of land totalling 260 acres to the Somerset County Park
Commission for $3.4 million. The cash generated by the sale has been
invested on a short-term basis and will be used to fund a $2.2 million
equity contribution to Elizabethtown when required by the Company for
construction expenditures. The remainder of the proceeds will be used
to fund working capital requirements of the Corporation.
On November 9, 1993, Elizabethtown issued $50 million of 7 1/4%
Debentures due November 1, 2028. The proceeds of the issue were used to
redeem $30 million of the Company's 8 5/8% Debentures due 2007 and
$20 million of the Company's 10 1/8% Debentures due 2018. The aggregate
redemption premiums of $2.7 million were paid from general Company
funds.
During 1994, E'town Corporation expects to issue approximately
500,000 shares of common stock, through a public offering prior to
June 30, 1994, to finance additional equity contributions to
Elizabethtown. Proceeds from all stock issued under E'town's DRP will
continue to fund additional equity contributions to Elizabethtown.
Elizabethtown is negotiating a committed revolving credit
agreement, which is expected to be in place by April 1994, with an agent
bank and up to five additional participating banks to replace its
existing uncommitted lines of credit. The agreement will provide up to
$60 million in revolving short-term notes to provide sufficient
short-term financing for the Company to fund, together with other
monies, its $196.5 million capital program. The agreement will allow
the Company to borrow, repay and reborrow up to $60 million for the
first three years, after which time the Company may convert any
outstanding balances to a five-year fully amortizing term loan. The
agreement will further provide that among other covenants, the Company
must maintain a ratio of common and preferred equity to total
capitalization of not less than 35% and a pre-tax interest coverage
ratio of at least 1.5 to 1.
-3-
December 31, 1992 and 1991
In April 1992, E'town issued 500,000 shares of common stock for net
proceeds of $12.7 million. Proceeds of the issue funded an $11.0
million capital contribution to Elizabethtown, and the balance was used
to repay E'town's short-term bank debt previously incurred to fund
working capital. Also, E'town funded additional equity contributions of
$4.2 million to Elizabethtown from E'town's DRP. During 1992,
Elizabethtown issued $15 million of 8% Debentures to repay short-term
bank debt, of which, $9 million was incurred to repay Elizabethtown's
4 7/8% Debentures due February 1, 1992, and the remainder was incurred
to finance construction expenditures.
On February 14, 1991, E'town issued 523,700 shares of common stock
for net proceeds of $11.6 million. Proceeds of the issue funded an
$8 million capital contribution to Elizabethtown, and the balance was
used to repay E'town's short-term bank debt previously incurred to fund
working capital. Also, E'town funded additional equity contributions of
$1.8 million to Elizabethtown from E'town's DRP. During 1991,
Elizabethtown issued $27.5 million of 8 3/4% Debentures to retire $25
million of 11 1/8% Debentures and, through the NJEDA, issued a total of
$25.5 million of tax-exempt debentures with interest rates of 6.6% and
6.7% to refinance $10.5 million of tax-exempt 8.20% Debentures and
$15 million of 6.20% NJEDA Notes.
RESULTS OF OPERATIONS
Net Income for 1993 was $13.8 million or $2.59 per share on a primary
basis as compared to $10.2 million or $2.21 per share for 1992. The
increase in net income resulted from higher levels of outdoor water use
due to abnormally hot and dry summer weather and the gain from the land
sale referred to above. Also, rate increases received in March of 1993
and 1992, enabled the Company to cover higher levels of operating and
financial expenses in 1993 without adversely affecting net income.
Summer water use in excess of what management believes to be normal
contributed approximately $1.8 million or $.34 per share. The land sale
produced an after-tax gain of $1.1 million or $.21 per share. The
average number of shares outstanding in 1993 increased 15.3% over 1992.
Assuming a return to normal weather patterns in 1994, the Company
expects that earnings for 1994 will be less than earnings realized in
1993.
Net Income for 1992 was $10.2 million or $2.21 per share on a
primary basis, as compared to $9.5 million or $2.32 per share for 1991.
Net income increased primarily because the Company realized $3.3 million
from the rate increase granted in March 1992, which was partially offset
by increased expenses. Earnings per share fell because the average
number of shares outstanding increased by 13.4%.
-4-
Operating Revenues increased $10.8 million or 12.1% in 1993. Of this
increase, $4.8 million relates to the combined effect of the rate
increases of $5.0 million and $4.0 million effective March 1993 and
1992, respectively. Also, sales to retail customers increased $3.8
million and sales to other water systems increased $1.2 million due to
hot, dry summer weather.
Operating Revenues increased $ $3.1 million or 3.6% in 1992 primarily
because of the rate increase effective March 1992. Retail water
consumption dropped by $1.5 million in 1992 due to relatively wet summer
weather. However, lower consumption by retail customers was partially
offset by an increase in sales to other water systems of $.4 million.
Operation Expenses increased by $3.5 million or 9.9% in 1993 primarily
due to increases in the quantity of power and raw water purchased to
meet higher than normal summer loads. Also, the unit costs of power and
purchased water increased, as did labor costs and the cost of medical
and other benefits.
Operation Expenses increased $1.5 million or 4.4% in 1992.
Increases in labor, the price of purchased water and worker's
compensation premiums were partially offset by a reduction in
hospitalization premiums.
Maintenance Expenses increased less than $.1 million or .2% in 1993 and
$.3 million or 5.7% in 1992 due to fluctuations in routine maintenance
at various operating facilities.
Depreciation Expense increased $.6 million or 9.5% in 1993 and $.4 million
or 6.3% in 1992 due to additional depreciable plant being placed in
service during those periods.
Revenue Taxes increased $1.4 million or 12.8% in 1993 and $.4 million or
3.4% in 1992 due to additional taxes on the higher revenues explained
above.
Real Estate, Payroll and Other Taxes increased $.2 million or 9.6% in
1993 due to increased payroll taxes resulting from labor cost increases
and state income taxes resulting from the adoption of SFAS 109. Real
Estate, Payroll and Other Taxes increased by $.1 million in 1992.
Federal Income Taxes increased $1.7 million or 31.4% in 1993 and
$.3 million or 5.0% in 1992 due to the changes in the components of
taxable income discussed herein. The increase in 1993 also includes
$.2 million due to the change in the federal statutory tax rate from 34%
to 35%.
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Other Income increased in total by $1.2 million in 1993. Other Income
increased due to a gain on the sale of land in August 1993 of $1.7
million or $1.1 million, net of federal income taxes, discussed
previously. A decrease in the equity component of AFUDC of $.2 million
resulted from the timing of construction expenditures. Other Income
decreased because Properties adjusted the carrying values of certain
investments downward to their estimated net realizable values (see
"Economic Outlook - Properties"). This decrease is comprised of a
downward adjustment of $.1 million to the carrying value of the
Bordentown property and a similar adjustment of $.2 million to the
Mansfield property. These adjustments were compared to a downward
adjustment of $.2 million in 1992 to the investment in Solar Electric
Generating System V (SEGS). Other increases of $.5 million resulted
from various miscellaneous items. Federal income taxes, as a result of
all of the above, increased $.7 million.
In 1992 Other Income increased in total by $.2 million. Other
Income in 1992 includes an equity component of AFUDC of $.6 million,
which is offset by the $.2 million adjustment to SEGS discussed
previously. Other income also decreased by $.1 million due to various
other miscellaneous items. Federal income taxes, as a result of all of
the above, increased $.1 million.
Total Interest Charges increased $.9 million or 8.4% in 1993, due
primarily to an increase in interest for long-term debt issued in
September 1992 and a reduction in earnings from NJEDA trust funds due to
reduced trust fund balances. These items were partially offset by lower
interest on short-term debt due to reduced borrowings.
Total Interest Charges decreased $.4 million or 3.9% in 1992 due to
the net effect of (i) new long-term debt issued in September 1992,
(ii) lower interest costs as a result of long-term debt refinancing and
(iii) lower levels of short-term debt balances and their related rates.
ECONOMIC OUTLOOK
Consolidated earnings for E'town for the next several years will
be determined primarily by Elizabethtown's ability to generate adequate
earnings and, to a lesser degree, the ability of Properties and E'town
to generate adequate returns on their real estate investments.
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Elizabethtown and Subsidiary
Elizabethtown believes that it has sufficient surface and well
water supplies to meet its customers' needs and that it is, and will
remain, in compliance with all water quality standards. Nonetheless,
governmental water quality and service regulations will require
Elizabethtown and Mount Holly to make significant investments in water
treatment, transmission and storage facilities including, most
significantly, the Plant. This capital program will require regular
external financing and rate relief for the next several years.
Because Elizabethtown expects its rate base to grow more quickly
than pumpage over the next several years, Elizabethtown anticipates
filing for a rate increase in 1994, and regularly thereafter, so that it
may have the opportunity to realize satisfactory returns on equity.
Adequate equity returns will enable Elizabethtown to continue to attract
external capital to finance improvements necessary to maintain safe and
adequate service. Future earnings of the Company will be primarily
affected by weather and customer usage, the magnitude and timing of
capital expenditures, the rate of growth of revenues and expenses, and
the adequacy and timeliness of regulatory relief.
Properties
Included in non-utility property and other investments at
December 31, 1993 and 1992 is $11.9 million and $13.3 million,
respectively, of investments in various parcels of undeveloped land in
New Jersey. The carrying value of each parcel includes the original
cost plus any real estate taxes, interest and, where applicable, direct
costs capitalized while rezoning or governmental approvals are or were
being sought. Based upon independent appraisals received at various
times prior to, and during 1993, the estimated net realizable value of
each property exceeds its respective carrying value as of December 31,
1993, after the adjustments to the Mansfield and Bordentown properties
discussed below.
After sewer capacity became available for its parcel in Bordentown, New
Jersey (which was purchased together with lands across the town line in
Mansfield), Properties determined that the Bordentown parcel was ready
for its intended use and has listed the parcel with a broker for sale.
Effective in 1993, the carrying charges on the Bordentown parcel were,
and will continue to be, expensed since this property is ready for its
intended use. Such carrying charges were approximately $.2 million in
1993.
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Properties continues to seek permits and more favorable zoning
treatment for its Mansfield property and, therefore, continues to
capitalize various carrying charges. During the second quarter of 1993,
the carrying value of the Mansfield property held by Properties exceeded
its estimated net realizable value and, as a result, carrying charges
incurred after that date were, and continue to be, adjusted monthly.
This is due to the fact that the Mansfield property is not yet ready for
its intended use and, therefore, various carrying charges continue to be
capitalized while, based upon recent appraisals, the market value of the
property has remained constant. An allowance of $.2 million for the
year ended December 31, 1993, to adjust the carrying value of the
Mansfield property, has been reflected in the Statements of Consolidated
Income and Consolidated Balance Sheets. As Properties expects to
continue capitalizing carrying charges on the Mansfield property until
it is ready for its intended use, further adjustments for these
capitalized carrying charges, reflecting management's estimate of the
net realizable value of the property, should be expected. Such carrying
costs were approximately $.3 million in 1993.
The Corporation will continue to monitor the relationship between
the carrying and net realizable values of its properties through updated
appraisals on a regular basis.
-8-
E'town Corporation and Subsidiaries
Statements of Consolidated Income Year Ended December 31,
--------------------------------------
1993 1992 1991
------------ ------------ ------------
Operating Revenues $99,996,120 $89,167,337 $86,086,103
----------- ----------- -----------
Operating Expenses:
Operation 39,280,920 35,744,262 34,246,828
Maintenance 5,716,157 5,704,843 5,399,139
Depreciation 7,285,309 6,654,986 6,258,302
Revenue taxes 12,501,804 11,086,349 10,717,838
Real estate, payroll and other taxes 2,706,447 2,469,066 2,322,425
Federal income taxes (Note 3) 7,170,406 5,455,022 5,193,665
----------- ----------- -----------
Total operating expenses 74,661,043 67,114,528 64,138,197
----------- ---------- ----------
Operating Income 25,335,077 22,052,809 21,947,906
----------- ---------- ----------
Other Income:
Gain on sale of land (Note 7) 1,685,521
Allowance for equity funds used
during construction (Note 2) 445,339 599,443
Write-down of non-utility property
and other investments (Note 7) (269,315) (180,000)
Federal income taxes (Note 3) (790,320) (117,623) (15,404)
Other--net 396,515 (73,493) 45,305
----------- ----------- -----------
Total other income 1,467,740 228,327 29,901
----------- ----------- -----------
Total Operating and Other Income 26,802,817 22,281,136 21,977,807
----------- ----------- -----------
Interest Charges:
Interest on long-term debt 12,374,224 11,389,341 11,488,492
Other interest expense--net 95,848 564,064 610,131
Capitalized interest (Note 2) (805,882) (1,197,328) (977,482)
Amortization of debt discount--net 258,799 244,047 321,596
----------- ----------- -----------
Total interest charges 11,922,989 11,000,124 11,442,737
----------- ----------- -----------
Income Before Preferred Stock
Dividends of Subsidiary 14,879,828 11,281,012 10,535,070
Preferred Stock Dividends 1,050,000 1,050,000 1,050,000
----------- ----------- -----------
Net Income $13,829,828 $10,231,012 $ 9,485,070
=========== =========== ===========
Earnings Per Share of Common Stock (Note 2):
Primary $ 2.59 $ 2.21 $ 2.32
=========== =========== ===========
Fully Diluted $ 2.54 $ 2.18 $ 2.28
Average Number of Shares Outstanding for =========== =========== ===========
the Calculation of Earnings Per Share:
Primary 5,337,939 4,627,814 4,080,118
=========== =========== ===========
Fully Diluted 5,651,808 4,950,768 4,413,178
=========== =========== ===========
Dividends Paid Per Common Share $ 2.01 $ 2.00 $ 2.00
=========== =========== ===========
See Notes to Consolidated Financial Statements.
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E'town Corporation and Subsidiaries
Consolidated Balance Sheets
December 31,
---------------------------
Assets 1993 1992
------------ ------------
Utility Plant--At Original Cost:
Utility plant in service $438,178,824 $411,317,989
Construction work in progress 17,242,088 11,809,783
------------ ------------
Total utility plant 455,420,912 423,127,772
Less accumulated depreciation and amortization 82,128,023 75,874,538
------------ ------------
Utility plant--net 373,292,889 347,253,234
------------ ------------
Non-utility Property and Other Investments (Note 7) 13,545,589 15,005,380
------------ ------------
Funds Held by Trustee for Construction
Expenditures (Note 2) 382,306 8,902,183
------------ ------------
Current Assets:
Cash and cash equivalents 7,376,472 2,408,429
Short-term investments 30,622 30,622
Customer and other accounts receivable
(less reserve: 1993, $434,000; 1992, $377,000) 12,031,414 11,032,897
Unbilled revenues 7,248,322 6,559,721
Materials and supplies--at average cost 1,623,702 1,616,832
Prepaid insurance, taxes, other 1,603,955 1,606,276
------------ ------------
Total current assets 29,914,487 23,254,777
------------ ------------
Deferred Charges (Note 9):
Prepaid pension expense (Note 12) 962,595 778,176
Abandonments 152,097 228,146
Waste residual management 587,589 561,551
Emergency water projects 113,412 230,013
Unamortized debt expenses 8,648,030 5,542,874
Taxes recoverable through future rates (Note 3) 26,643,663
Postretirement benefit expense (Note 12) 1,004,556
Other unamortized expenses 484,767 773,765
------------ ------------
Total deferred charges 38,596,709 8,114,525
------------ ------------
Total $455,731,980 $402,530,099
============ ============
See Notes to Consolidated Financial Statements.
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December 31,
---------------------------
Capitalization and Liabilities 1993 1992
------------ ------------
Capitalization (Notes 4 and 5):
Common shareholders' equity $128,374,207 $102,749,893
Cumulative preferred stock--redeemable 12,000,000 12,000,000
Long-term debt--net 154,406,533 154,999,463
------------ ------------
Total capitalization 294,780,740 269,749,356
------------ ------------
Current Liabilities:
Notes payable--banks (Note 6) 6,500,000
Long-term debt--current portion (Note 4) 42,000 42,000
Accounts payable and other liabilities 9,645,055 8,985,477
Customers' deposits 276,497 273,238
Municipal and state taxes accrued 12,569,445 11,087,926
Federal income taxes accrued 947,274 649,156
Interest accrued 3,052,160 3,550,163
Preferred stock dividends accrued 89,178 89,178
------------ ------------
Total current liabilities 26,621,609 31,177,138
------------ ------------
Deferred Credits:
Customer advances for construction 45,149,522 45,292,966
Federal income taxes (Note 3) 58,363,510 28,403,699
State income taxes (Note 3) 151,538
Unamortized investment tax credits 8,852,487 9,046,119
Emergency water projects (Note 9) 127,704 244,304
Accumulated postretirement benefits 1,015,004
------------ ------------
Total deferred credits 113,659,765 82,987,088
------------ ------------
Contributions in Aid of Construction 20,669,866 18,616,517
------------ ------------
Commitments and Contingent Liabilities (Note 11)
------------ ------------
Total $455,731,980 $402,530,099
============ ============
See Notes to Consolidated Financial Statements.
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E'town Corporation and Subsidiaries
Statements of Consolidated Capitalization
December 31,
----------------------------
1993 1992
------------ ------------
E'town Corporation:
Common Shareholders' Equity (Notes 4 and 5):
Common stock without par value, authorized,
15,000,000 shares; issued 1993, 5,661,504
shares; 1992, 4,881,576 shares $ 87,842,657 $ 64,261,763
Paid-in capital 1,315,025 1,315,025
Capital stock expense (3,357,165) (2,479,987)
Retained earnings 43,207,666 40,228,199
Less cost of treasury stock; 1993, 22,032
shares; 1992, 20,356 shares (633,976) (575,107)
------------ ------------
Total common shareholders' equity 128,374,207 102,749,893
------------ ------------
Elizabethtown Water Company:
Cumulative Preferred Stock - Redeemable (Note 4):
$100 par value, authorized, 200,000
shares; $8.75 series, issued and
outstanding, 120,000 shares 12,000,000 12,000,000
------------ ------------
Cumulative Preferred Stock:
$25 par value, authorized, 500,000 shares;
none issued
Long-Term Debt (Note 4):
E'town Corporation:
6 3/4% Convertible Subordinated Debentures,
due 2012 12,497,000 12,700,000
Elizabethtown Water Company:
8 5/8% Debentures, due 2007 30,000,000
10 1/8% Debentures, due 2018 20,000,000
7.20% Debentures, due 2019 10,000,000 10,000,000
7 1/2% Debentures, due 2020 15,000,000 15,000,000
6.60% Debentures, due 2021 10,500,000 10,500,000
6.70% Debentures, due 2021 15,000,000 15,000,000
8 3/4% Debentures, due 2021 27,500,000 27,500,000
8% Debentures, due 2022 15,000,000 15,000,000
7 1/4% Debentures, due 2028 50,000,000
The Mount Holly Water Company:
Notes Payable (due serially through 2000) 186,300 228,300
------------ ------------
Total long-term debt 155,683,300 155,928,300
Unamortized discount--net (1,276,767) (928,837)
------------ ------------
Total long-term debt--net 154,406,533 154,999,463
------------ ------------
Total capitalization $294,780,740 $269,749,356
============ ============
See Notes to Consolidated Financial Statements.
-12-
E'town Corporation and Subsidiaries
Statements of Consolidated Cash Flows Year Ended December 31,
---------------------------------------
1993 1992 1991
Cash Flows from Operating Activities: ------------ ----------- -----------
Net Income $13,829,828 $10,231,012 $ 9,485,070
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 7,285,309 6,654,986 6,258,302
Write-down of non-utility property
and other investments 269,315 180,000
Gain on sale of land (1,685,521)
Amortization of deferred charges 1,399,410 1,981,701 3,654,031
Increase in deferred charges (4,233,375) (1,847,202) (7,502,304)
Deferred income taxes and investment
tax credits--net 3,274,054 3,385,483 4,040,331
Capitalized interest and AFUDC 1,251,221) (1,796,771) (977,482)
Other operating activities--net (390,231) (2,669) (499,536)
Change in current assets and liabilities
excluding cash, short-term investments
and current portion of debt:
Customer and other accounts receivable (998,517) 807,763 (880,062)
Unbilled revenues (688,601) (164,241) (450,793)
Accounts payable and other liabilities 662,837 (964,663) 1,780,657
Accrued/prepaid interest and taxes 1,283,955 407,304 1,961,431
Other (6,870) 3,473 (34,699)
------------ ------------ ------------
Net cash provided by operating activities 18,750,372 18,876,176 16,834,946
Cash Provided by Financing Activities: ------------ ------------ ------------
Decrease in funds held by Trustee for
construction expenditures 8,519,877 12,390,518 6,650,299
Proceeds from issuance of debentures 50,000,000 15,000,000 53,000,000
Proceeds from issuance of common stock 22,644,847 17,258,786 13,499,761
Repayment of short-term notes (15,000,000)
Repayment of long-term debt (50,245,000) (9,503,000) (36,007,500)
Contributions and advances for
construction--net 1,909,905 3,066,832 5,270,774
Net decrease in notes payable--banks (6,500,000) (13,500,000) (8,000,000)
Dividends paid on common stock (10,850,361) (9,284,160) (8,282,142)
------------ ------------ ------------
Net cash provided by
financing activities 15,479,268 15,428,976 11,131,192
Cash Used for Investing Activities: ------------ ------------ -----------
Utility plant expenditures (excluding
AFUDC) (32,516,755) (33,292,602) (27,732,407)
Development costs of land (excluding
capitalized interest) (194,842) (286,885) (169,438)
Proceeds from sale of land 3,450,000
------------ ------------ ------------
Cash used for investing activities (29,261,597) (33,579,487) (27,901,845)
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 4,968,043 725,665 64,293
Cash and Cash Equivalents at
Beginning of Year 2,408,429 1,682,764 1,618,471
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 7,376,472 $ 2,408,429 $ 1,682,764
============ ============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 12,296,508 $ 11,332,836 $ 12,496,837
Income taxes 5,881,008 3,875,774 3,898,793
Preferred stock dividends of subsidiary $ 1,050,000 $ 1,050,000 $ 1,050,000
See Notes to Consolidated Financial Statements.
-13-
E'town Corporation and Subsidiaries
Statements of Consolidated Shareholders' Equity
Year Ended December 31,
---------------------------------------
1993 1992 1991
------------ ----------- ----------
Common Stock:
Balance at Beginning of Year $ 64,261,763 $ 45,952,195 $ 31,761,854
Public sale of common stock (1993,
575,000 shares; 1992, 500,000
shares; 1991, 523,700 shares) 17,465,625 13,437,500 12,294,631
Common stock issued under Dividend
Reinvestment and Stock Purchase
Plan (1993, 200,878 shares; 1992,
161,802 shares; 1991, 72,552 shares) 6,009,298 4,197,938 1,766,832
Exercise of stock options (1993,
4,050 shares; 1992, 21,900 shares;
1991, 5,250 shares) 105,971 540,356 123,878
Issuance of restricted stock
(1992, 5,072 shares) 133,774
Conversion of E'town Corporation
6 3/4% Convertible Subordinated
Debentures to common stock
(1991, 125 shares) 5,000
------------ ------------ ------------
Balance at End of Year 87,842,657 64,261,763 45,952,195
------------ ------------ ------------
Paid-in Capital: 1,315,025 1,315,025 1,315,025
------------ ------------ ------------
Capital Stock Expense:
Balance at Beginning of Year (2,479,987) (1,698,001) (1,007,421)
Expenses incurred for the issuance
and sale of common stock (877,178) (781,986) (690,580)
------------ ------------ ------------
Balance at End of Year (3,357,165) (2,479,987) (1,698,001)
------------ ------------ ------------
Retained Earnings:
Balance at Beginning of Year 40,228,199 39,281,347 38,078,419
Net income 13,829,828 10,231,012 9,485,070
Dividends on Common Stock (1993,
$2.01, 1992 and 1991, $2.00) (10,850,361) (9,284,160) (8,282,142)
------------ ------------ ------------
Balance at End of Year 43,207,666 40,228,199 39,281,347
------------ ------------ ------------
Treasury Stock:
Balance at Beginning of Year (575,107) (306,311) (306,311)
Cost of shares redeemed to exercise
stock options (1993, 1,676 shares;
1992, 9,850 shares) (58,869) (268,796)
------------ ------------ ------------
Balance, End of Year (633,976) (575,107) (306,311)
------------ ------------ ------------
Total Common Shareholders' Equity $128,374,207 $102,749,893 $ 84,544,255
============ ============ ============
See Notes to Consolidated Financial Statements.
-14-
E'TOWN CORPORATION AND SUBSIDIARIES
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) and E'town Properties, Inc. (Properties).
The Mount Holly Water Company (Mount Holly) is a wholly owned
subsidiary of Elizabethtown.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
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 and follow the Uniform System of Accounts, as adopted by the
New Jersey Board of Regulatory Commissioners (BRC).
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.
-15-
Depreciation generally is computed on a straight-line basis at
functional rates for various classes of assets. The provision for
depreciation, as a percentage of average depreciable property,
was 1.74% percent for 1993 and 1.72% for 1992 and 1991.
Allowance for Funds Used During Construction
Elizabethtown capitalizes, 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 is
added to the construction cost of the project and included in rate
base and then recovered in rates during the project's useful life.
AFUDC is comprised of a debt component (credited to Interest Charges),
and an equity component (credited to Other Income) in the Statements
of Consolidated Income. (See Note 10). The equity component considers
the increased reliance on equity contributions to Elizabethtown from
E'town's stock sales. Such equity contributions have become an
integral part of the financing of Elizabethtown's construction
program. AFUDC totaled $837,234, $1,215,916 and $391,936 for 1993,
1992 and 1991, respectively.
Non-utility Property
Properties capitalizes direct costs, real estate taxes and interest
costs associated with real estate properties that are being developed.
These costs are expensed on properties ready for their intended use.
The amount of interest capitalized for 1993, 1992 and 1991 totaled
$413,987, $580,855 and $585,546, respectively. (See Note 7).
-16-
Revenues
Revenues are recorded based on the amounts of water delivered to
customers through the end of each accounting period. This includes an
accrual for unbilled revenues for water delivered from the time meters
were last read to the end of the respective accounting periods.
Federal Income Taxes
E'town files a consolidated federal tax return. Deferred income taxes
are provided for timing differences in the recognition of revenues and
expenses for tax and financial statement purposes for E'town and
Properties. Deferred income taxes are also provided for each
regulated water utility to the extent permitted by the BRC.
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. The non-regulated companies utilize
the flow-through method to account for investment tax credits. This
method treats the credits as a reduction of federal income taxes in
the year the credits arise.
Effective January 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) 109, "Accounting for Income
Taxes." (See Note 3).
-17-
Customer Advances for Construction and Contributions in Aid of
Construction
Customer Advances for Construction and Contributions in Aid of
Construction represent capital provided by developers for main
extensions to new real estate developments. Some portion of Customer
Advances for Construction is refunded based upon the revenues that the
new developments generate. Contributions in Aid of Construction are
Customer Advances for Construction that are no longer subject to
refund.
Short-term Investments
Short-term investments are stated at cost, which approximates market
value.
Earnings Per Share of Common Stock
Primary earnings per share are computed on the basis of the weighted
average number of shares outstanding, plus common stock equivalents,
assuming all stock options are exercised. Fully diluted earnings per
share assumes both the conversion of the 6 3/4% Convertible
Subordinated Debentures and the common stock equivalents referred to
above.
-18-
Postretirement Benefits
Effective January 1, 1993, the Corporation adopted SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions." (See Note 12).
Funds Held by Trustee for Construction Expenditures
Proceeds from New Jersey Economic Development Authority financings are
held in trust until such time as qualified project expenditures are
incurred. Income received from the investment of the trust fund
assets is recorded as an offset to the related interest expense.
Cash Equivalents
The Corporation considers all highly liquid debt instruments purchased
with maturities of three months or less to be cash equivalents for
purposes of the Statements of Consolidated Cash Flows.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation.
-19-
3. FEDERAL INCOME TAXES
The computation of federal income taxes and the reconciliation of the
tax provision computed at the federal statutory rate (35% in 1993, 34%
in 1992 and 1991) with the amount reported in the Statements of
Consolidated Income follow:
1993 1992 1991
----------------------
(Thousands of Dollars)
Tax expense at statutory rate ........ $7,994 $5,730 $5,353
Items for which deferred taxes
are not provided:
Capitalized interest ............... (2) (3) 16
Difference between book and tax
depreciation ...................... 81 66 50
Investment tax credits................ (208) (210) (210)
Other ................................ 96 (10)
------ ------ ------
Provision for federal income taxes..... $7,961 $5,573 $5,209
====== ====== ======
The provision for federal income taxes
is composed of the following:
Current ............................... $6,180 $4,170 $4,261
Tax collected on main extensions ...... (1,341) (1,982) (3,127)
Deferred:
Tax depreciation .................... 3,183 3,052 3,003
Alternative minimum tax.............. 82 600
Capitalized interest................. 217 315 134
Other ............................... (84) 38 542
Investment tax credits-net............. (194) (202) (204)
------ ------ ------
Total provision ....................... $7,961 $5,573 $5,209
====== ====== ======
Effective January 1, 1993, the Corporation adopted SFAS 109,
"Accounting for Income Taxes." SFAS 109 establishes new accounting
rules that change the manner in which income tax expense is determined
for accounting purposes. SFAS 109 utilizes a liability method under
which deferred taxes are provided at the enacted statutory rate for all
temporary differences between financial statement earnings amounts and
the tax basis of existing assets or liabilities.
-20-
In connection with the adoption of SFAS 109, the Corporation recorded
additional deferred taxes for water utility temporary differences not
previously recognized. The increased deferred tax liability was
offset by a corresponding asset representing the future revenue
expected to be recovered through rates based on established regulatory
practice permitting such recovery. The increased deferred tax
liability totaled $25,352,412 at January 1, 1993 and $26,643,663 at
December 31, 1993.
In addition, the adoption of SFAS 109 resulted in a credit to Federal
Income Tax Expense of $63,271 and a charge to Real Estate, Payroll and
Other Tax Expense of $141,068 to record the changes in deferred income
taxes payable by the non-regulated companies.
In accordance with SFAS 109, deferred tax balances of the Corporation
have been reflected at the Corporation's current federal income tax
rate, which is 35%. The increase in the statutory tax rate,
retroactive to January 1, 1993, from 34% to 35%, is the result of the
Omnibus Budget Reconciliation Act of 1993, which was passed by
Congress on August 2, 1993. The increase in the statutory tax rate
resulted in the recognition of additional federal income tax expense
of $176,048 and an additional deferred federal income tax liability of
$94,402.
-21-
The net deferred income tax liability as of December 31, 1993 is
comprised of the following:
1993
----------------------
(Thousands of Dollars)
Deferred tax assets $ 3,804
Deferred tax liabilities (62,168)
--------
Net deferred income tax liabilities $(58,364)
========
The tax effect of significant temporary differences representing
deferred income tax assets and liabilities as of December 31, 1993
is as follows:
1993
----------------------
(Thousands of Dollars)
Water utility plant--net $(49,582)
Non-utility property (1,378)
Other investments (1,046)
Taxes recoverable (9,326)
Investment tax credit 3,098
Pension expenditures (335)
Other--net 205
--------
Net deferred income tax liabilities $(58,364)
========
4. CAPITALIZATION
On May 17, 1993, E'town issued 575,000 shares of common stock for net
proceeds of $16,591,927. The net proceeds were used to fund equity
contributions to Elizabethtown of $11,000,000 in May 1993 and
$2,800,000 in September 1993. Elizabethtown used a portion of such
contributions to repay $7,000,000 of short-term bank debt incurred for
construction expenditures and invested the balance on a short-term
basis until needed for construction expenditures. E'town used
$1,000,000 of the proceeds to repay short-term bank debt previously
incurred for working capital. The balance of the proceeds have been
invested on a short-term basis and are expected to be used to fund
working capital requirements of the Corporation.
-22-
During 1993, E'town issued 200,878 shares for $6,009,297 under the
Company's Dividend Reinvestment and Stock Purchase Plan (DRP). The
proceeds of the DRP were used to fund equity contributions to
Elizabethtown primarily for capital expenditures.
In January 1991, the Board of Directors of E'town adopted 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 purchase additional shares of common stock
on terms which allow them to significantly increase their percentage
ownership of the Corporation's common stock. Such Rights may be
redeemed by the Board of Directors.
Cumulative Preferred Stock - Redeemable
Elizabethtown's $8.75 Cumulative Preferred Stock has optional
redemption privileges beginning in 1994 at $108.75 per share, which
diminish annually until 2009, when redemption is at par ($100).
Beginning in December 1994, sinking fund payments of $600,000 are
required annually through 2018.
Elizabethtown proposes to issue 120,000 shares of $100 par value
Cumulative Preferred Stock in March 1994. The proceeds of the issue
will be used to redeem $12,000,000 of the Company's $8.75 Cumulative
Preferred Stock. The redemption premium of $1,050,000 will be paid
from general Company funds.
-23-
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, 1993,
$12,831,414 of Elizabethtown's retained earnings were restricted under
the most restrictive indenture provision. Therefore, $30,376,252 of
E'town's consolidated retained earnings were unrestricted.
On November 9, 1993, Elizabethtown issued $50,000,000 of 7 1/4%
Debentures due November 1, 2028. The proceeds of the issue were used
to redeem $30,000,000 of the Company's 8 5/8% Debentures due 2007 and
$20,000,000 of the Company's 10 1/8% Debentures due 2018. The
aggregate redemption premiums of $2,681,000 were paid from general
Company funds.
On September 16, 1992, Elizabethtown issued $15,000,000 of 8%
Debentures due September 1, 2022. The proceeds of this issue were
used to repay short-term bank debt, of which $9,000,000 was incurred
to repay Elizabethtown's 4 7/8% Debentures on their February 1, 1992
maturity date and the remainder was incurred to finance construction
expenditures.
E'town's 6 3/4% Convertible Subordinated Debentures are convertible to
E'town common stock at $40 per share. At December 31, 1993, 312,425
shares of common stock were reserved for issuance upon exercise of the
conversion rights.
-24-
5. STOCK OPTION PLAN
E'town has a qualified non-compensatory incentive stock option 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 plan provides
that any options granted may be exercised at any time up to an
expiration date, not to exceed 10 years from the date of each grant.
A summary of the details of stock option grants and outstanding
balances is presented below:
Year Shares Option Shares Outstanding
Granted Granted Price Exercised or Expired 12/31/92 12/31/93
------- ------- ------ -------------------- ---------- ----------
1983 10,500 $18.42 6,000 (1986)
600 (1988)
1,500 (1991)
2,400 (1992) -0- -0-
1985 26,369 26.17 2,250 (1991) (A)
3,300 (1992) 20,819
4,050 (1993) 16,769
1987 36,000 25.67 4,050 (1989)
3,750 (1990)
3,750 (1991)
4,500 (1991) (A)
11,700 (1992) 8,250 8,250
1989 7,500 24.67 7,500 7,500
1990 7,500 26.67 7,500 7,500
------ ------ ------ ------
Total 87,869 47,850 44,069 40,019
====== ====== ====== ======
(A) Expired Options
6. LINES OF CREDIT
E'town has existing uncommitted lines of credit with several banks
aggregating $41,000,000 for which compensating balances are
maintained. Information relating to bank borrowings and compensating
balances is as follows:
-25-
1993 1992 1991
-------------------------------
(Thousands of Dollars)
Maximum amount outstanding.......... $8,000 $29,750 $26,500
Average monthly amount outstanding.. 2,514 $16,544 $16,882
Average interest rate at year end... (A) 4.1% 5.6%
Compensating balances at year end... $ 195 $ 205 $ 230
Weighted average interest rate based
on average daily balances.......... 3.8% 4.6% 6.5%
(A) No outstanding bank borrowings at year end.
Elizabethtown is negotiating a committed revolving credit agreement,
which is expected to be in place by April 1994, with an agent bank and
up to five additional participating banks to replace its existing
uncommitted lines of credit discussed above. The agreement will provide
up to $60,000,000 in revolving short-term notes to provide sufficient
short-term financing for the Company to fund, together with other
monies, its capital program, which is estimated to be $196,451,000
through 1996. The agreement will allow the Company to borrow, repay and
reborrow up to $60,000,000 for the first three years, after which
time the Company may convert any outstanding balances to a five-year,
fully amortizing term loan. The agreement will further provide that
among other covenants, the Company must maintain a ratio of common
and preferred equity to total capitalization of not less than 35%
and a pre-tax interest coverage ratio of at least 1.5 to 1.
-26-
7. NON-UTILITY PROPERTY AND OTHER INVESTMENTS
On August 24, 1993, E'town, Properties and Elizabethtown sold three
parcels of land totalling 260 acres to the Somerset County Park
Commission for $3,450,000. The sale produced an after-tax gain of
approximately $1,100,000 or $.21 per share. The cash generated by the
sale has been invested on a short-term basis and will be used to fund
a $2,200,000 equity contribution to Elizabethtown when required by the
Company for construction expenditures. The remainder of the proceeds
will be used to fund working capital requirements of the Corporation.
Included in Non-utility Property and Other Investments at December 31,
1993 and 1992, is an investment of $1.6 million, or $.5 million, net
of related deferred taxes, in a limited partnership that owns Solar
Electric Generating System V (SEGS), located in California. In 1992,
E'town reduced the carrying value of the investment by $180,000 in
order to present the investment at management's estimate of its
approximate net realizable value. No such reduction in carrying value
was made in 1993 as management believes that the net realizable value
of the investment in SEGS at December 31, 1993 exceeds its carrying
value.
-27-
Also included in Non-utility Property and Other Investments at
December 31, 1993 and 1992 is $11.9 million and $13.3 million,
respectively, of investments in various parcels of undeveloped land in
New Jersey. The carrying value of each parcel includes the original
cost plus any real estate taxes, interest and, where applicable,
direct costs capitalized while rezoning or governmental approvals are,
or were, being sought.
Based upon independent appraisals received at various times prior to
and during, 1993, the estimated net realizable value of each property
exceeds its respective carrying value as of December 31, 1993, after
the adjustments to the Mansfield and Bordentown properties discussed
below.
After sewer capacity became available for its parcel in Bordentown,
New Jersey (which was purchased together with lands across the town
line in Mansfield), Properties determined that the Bordentown parcel
was ready for its intended use and has listed the parcel with a broker
for sale. Accordingly, the original acquisition has been divided, for
investment purposes, into a Bordentown parcel and a Mansfield parcel.
As a result of allocating the recorded costs between the two parcels,
the carrying value of the Bordentown portion exceeded its estimated
-28-
net realizable value by $85,526 in the first quarter of 1993. An
allowance for this amount has been reflected in the Statements of
Consolidated Income and Consolidated Balance Sheets as a reduction of
Other Income and Non-utility Property and Other Investments,
respectively. Effective in 1993, the carrying charges on the
Bordentown parcel were, and will continue to be, expensed since this
property is ready for its intended use. Such carrying charges were
approximately $.2 million in 1993.
Properties continues to seek permits and more favorable zoning
treatment for its Mansfield property and, therefore, continues to
capitalize various carrying charges. During the second quarter of
1993 the carrying value of the Mansfield property held by Properties
exceeded its estimated net realizable value. This is due to the fact
that the Mansfield property is not yet ready for its intended use and
therefore, various carrying charges continue to be capitalized while,
based upon recent appraisals, the market value of the property has
remained constant. An allowance of $183,789 for the year ended
December 31, 1993, to adjust the carrying value of the Mansfield
property, has been reflected in the Statements of Consolidated Income
and Consolidated Balance Sheets. As Properties expects to continue
capitalizing carrying charges on the Mansfield property until it is
ready for its intended use, further adjustments for these capitalized
carrying charges, reflecting management's estimate of the net
realizable value of the property, should be expected. Such carrying
charges were approximately $.3 million in 1993.
-29-
The Corporation will continue to monitor the relationship between the
carrying and net realizable values of its properties through updated
appraisals and its investment in SEGS through cash flow analyses.
8. FINANCIAL INSTRUMENTS
The carrying amounts and the estimated fair values, as of
December 31, 1993 and 1992 of financial instruments issued by the
Corporation, are as follows:
1993 1992
---------------------------
(Thousands of Dollars)
Cash (1):
Carrying amount $ 7,376 $ 2,408
Estimated fair value 7,376 2,408
Short-term investments (2):
Carrying amount $ 31 $ 31
Estimated fair value 41 37
Cumulative preferred stock (2):
Carrying amount $ 12,000 $ 12,000
Estimated fair value 13,020 12,960
Long-term debt (2):
Carrying amount $154,407 $154,999
Estimated fair value 167,094 160,190
(1) Fair value approximates the carrying amount.
(2) Estimated fair values are based upon quoted market prices for
these or similar securities.
-30-
9. DEFERRED CHARGES AND CREDITS
Abandonments
The abandonment cost of a small filter plant has been deferred and
is being amortized for ratemaking purposes over a 10-year period ending
in 1995.
Waste Residual Management
The costs of the waste residual management programs are being amortized
over three-year periods for ratemaking purposes.
No return is being earned on either of the above unamortized deferred
charge balances.
Emergency Water Projects
The 1984 assessment for Elizabethtown's proportionate share of the
cost of emergency water projects is being recovered through rates and
amortized over a 10-year period.
Unamortized Debt Expenses
Costs incurred in connection with the issuance or redemption of
long-term debt have been deferred and are being amortized over the lives
of the respective issues.
-31-
10. REGULATORY MATTERS
Rates
In August 1993, the BRC approved a stipulation (1993 Plant
Stipulation) signed by the parties to the Company's petition relating
to the Canal Road Water Treatment Plant (Plant). The 1993 Plant
Stipulation states that the Plant is necessary and that the Company's
estimates regarding the Plant's cost, at that time of $87,000,000, and
construction period are reasonable. The 1993 Plant Stipulation
authorizes the Company to levy a rate surcharge if the Company's
pre-tax interest coverage ratio for any 12-month historical period
drops below 2.0 times. The surcharge would equal 20% of the Company's
gross interest expense for the prior 12 months, adjusted for revenue
taxes. The surcharge would go into effect at the same time as the
Company's next base rate increase after the coverage ratio falls below
2.0 times, but in no event prior to January 1, 1995. Also, the
surcharge would remain in effect for 12 months and could be extended
by the BRC for up to six additional months. The 1993 Plant
Stipulation also provides that the rate of return on common
stockholder's equity used to calculate the rate for the equity
component of the AFUDC for the Plant will be 1.5% less than the rate
of return on common stockholder's equity established in the Company's
most recent base rate case. The authorized rate of return on common
stockholder's equity is currently 11.5%.
On January 4, 1994, Elizabethtown filed with the BRC for a Purchased
Water Adjustment Clause, a procedure established by BRC Rules, which
would allow Elizabethtown to recover in rates $529,291 for the
increase in the cost of purchased water from the New Jersey Water
-32-
Supply Authority (NJWSA) without a complete rate case. The NJWSA has
given notice that effective July 1, 1994, it will increase charges for
water from $220.47 to $232.65 per million gallons. The Company
expects the BRC to render a decision prior to July 1994.
On March 18, 1993, the BRC approved a stipulation (1993 Stipulation)
for a rate increase of $5,000,000, effective as of that date. The
1993 Stipulation contains a provision allowing for the deferral of
expenses, calculated under SFAS 106, for postretirement benefits
accrued that are in excess of the cash benefits paid. Recovery of
such deferrals will be considered in future rate cases. (See
Note 12).
On March 18, 1992, the BRC approved a stipulation for a rate increase
of $4,050,000, effective as of that date.
Main Extension Refunds
In a case captioned Van Holten, et al v. Elizabethtown Water Company,
(Van Holten) several developers petitioned the BRC in 1984 and 1985
seeking an Order which would require Elizabethtown to refund to the
developers all of their on-site and off-site customer advances for
construction. For on-site mains, Elizabethtown received a final BRC
decision in September 1987, requiring refunds in accordance with the
BRC's suggested refund formula, which was less than the amounts
requested by the developers. For the off-site mains, the developers
were denied any refund. The developers appealed the BRC decision to
the Appellate Division of the New Jersey Superior Court (Appellate
Division), which in October 1988 upheld the decision of the BRC.
-33-
Since 1986, additional petitions dealing with this issue have been
filed by other developers. In these additional proceedings, all
parties have agreed to abide by the final decision of the New Jersey
Supreme Court in the Van Holten case. For all customer advances,
Elizabethtown has and will continue to make the refunds in accordance
with the BRC's suggested refund formula.
In response to an appeal of the 1988 Appellate Division decision, in
August 1990, the New Jersey Supreme Court (Court) rendered a decision
upholding the BRC's authority to implement what the BRC had
established as an appropriate refund formula in the Van Holten case.
The BRC's suggested formula provides for a refund of 2 1/2 times the
annual revenues for each metered connection. Although the Court ruled
that the BRC has the jurisdiction to determine what is an appropriate
refund formula, it remanded the case to the BRC to further develop the
record on why the BRC deemed the 2 1/2 times formula to be appropriate
in the Van Holten case.
In June 1991, the BRC issued an Order on Remand reaffirming the 2 1/2
times annual revenue formula. Addressing the reasonableness of this
formula, the BRC indicated in its decision that the 2 1/2 times
formula fairly allocates the costs of the main extensions among the
developers, Elizabethtown and the rate payers. Again, developers
appealed the Order on Remand to the Appellate Division, and in
December 1992, the Appellate Division remanded the matter to the BRC
for more complete findings and statements of reasons in support of its
decision.
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By Order on Remand dated January 19, 1994, the BRC again deemed the
2 1/2 times formula to be appropriate in the Van Holten case. In
addition to the previous rationale it gave for employing this formula
in this case, the BRC indicated that on a per-customer basis, the
initial cost of the extension was, in most instances, far higher than
Elizabethtown's average cost of plant invested for existing customers
at the time petitions were filed in 1984. Therefore, a full refund
would clearly result in a significant subsidization of the developers
by Elizabethtown's existing customers. The BRC concluded that such a
subsidization would be unjust and unreasonable.
On February 23, 1994, the developers appealed the January 19, 1994 BRC
Order on Remand to the Appellate Division.
The maximum potential refund for the Van Holten case, and all
subsequently filed cases, is approximately $3,000,000, which would be
capitalized and, therefore, would not have a material adverse effect
on earnings. Management believes the final outcome of this matter
will be favorable and no additional refunds will be necessary.
11. COMMITMENTS
Elizabethtown is obligated, under a contract that expires in 2013, to
purchase from the NJWSA a minimum of 37 billion gallons of water
annually. The Company purchases additional water from the NJWSA on an
as-needed basis. Effective July 1, 1994, the annual cost under the
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contract will be $8,661,559. The total cost of water purchased from
the NJWSA, including additional water purchased on an as-needed basis,
was $8,819,212, $7,827,058 and $7,527,662 for 1993, 1992 and 1991,
respectively.
The following is a schedule by years of future minimum rental payments
required under noncancelable operating leases with terms in excess of
one year at December 31, 1993:
1993
----------------------
(Thousands of Dollars)
1994 $ 832
1995 785
1996 780
1997 720
1998 -0-
------
Total $3,117
======
Rent expense totaled $789,636, $719,624 and $740,801 for 1993, 1992
and 1991, respectively.
Capital expenditures through 1996 are estimated to be $196,850,000 of
which $196,451,000 is for Elizabethtown's and Mount Holly's utility plant
and $399,000 is for real estate-related expenditures.
Elizabethtown has solicited bids from general contractors for the
construction of the Plant. The estimated cost of the Plant, as of
March 23, 1994, is approximately $100 million, excluding AFUDC. The
Company has notified all parties to the 1993 Plant Stipulation that the
estimated cost of the Plant has increased. The Company expects to
execute a contract and commence construction in the spring of 1994.
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The Company has recorded $6,825,354 as construction costs on the Plant as
of December 31, 1993.
12. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan),
which covers most employees. Under the Company's funding policy, the
Corporation makes contributions that meet the minimum funding require-
ments of the Employee Retirement Income Security Act of 1974. The
components of the net pension credits are as follows:
1993 1992 1991
-----------------------
(Thousands of Dollars)
Service cost-benefits earned during the year . $ 913 $ 857 $ 793
Interest cost on projected benefit obligation 1,986 1,846 1,724
Return on Plan assets ........................ (1,417) (975) (5,705)
Net amortization and deferral ................ (1,666) (2,246) 3,066
------ ------ ------
Net pension credit .................... $ (184) $ (518) $ (122)
====== ====== ======
Plan assets are invested in publicly traded debt and equity securities.
The reconciliations of the funded status of the Plan to the amounts
recognized in the Consolidated Balance Sheets are presented below:
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1993 1992
----------------------
(Thousands of Dollars)
Market value of Plan assets ..................... $33,208 $32,879
------- -------
Actuarial present value of Plan benefits:
Vested benefits ............................... 20,793 16,972
Non-vested benefits ........................... 226 104
------- -------
Accumulated benefit obligation ................ 21,019 17,076
Projected increases in compensation levels .... 6,641 6,901
------- -------
Projected benefit obligation .................... 27,660 23,977
------- -------
Excess of Plan assets over projected benefit
obligation ..................................... 5,548 8,902
Unrecognized net gain ........................... (2,425) (5,784)
Unrecognized prior service cost ................. 541 630
Unrecognized transition asset ................... (2,701) (2,970)
------- -------
Prepaid pension expense.......................... $ 963 $ 778
======= =======
The assumed rates used in determining the actuarial present value of the
projected benefit obligations were as follows:
1993 1992
----------------
Discount rate ................................... 7.00% 8.50%
Compensation increase ........................... 5.50% 7.50%
Rate of return on Plan assets ................... 8.50% 8.50%
The Corporation provides certain health care and life insurance benefits for
substantially all of its retired employees. Effective January 1, 1993, the
Corporation adopted SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." Under SFAS 106, the costs of such 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
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beneficiaries and covered dependents rather than expensing these benefits on a
pay-as-you-go basis for retired employees. Based upon an independent actuarial
study, the transition obligation, which the Corporation has not funded, was
$7,255,745 as of January 1, 1993. The transition obligation is being amortized
over 20 years. The following table details the unfunded postretirement benefit
obligation at December 31, 1993:
1993
----------------------
(Thousands of Dollars)
Retirees $3,133
Fully eligible plan participants 5,458
Accumulated postretirement benefit ------
obligation 8,591
Unrecognized net gain (683)
Unrecognized transition obligation (6,893)
------
Accumulated postretirement benefits $1,015
======
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1993, and for 1993,
was 12%. This rate decreases linearly each successive year until it
reaches 5% in 2003, after which the rate remains constant. The assumed
discount rate used in determining the accumulated postretirement benefit
obligation at December 31, 1993, and for 1993, was 7.0% and 8.5%, res-
pectively. A one-percentage-point increase in the assumed health care
cost trend rate for each year would increase the accumulated post-
retirement benefit obligation as of January 1, 1993, and net postre-
tirement service cost and interest cost by approximately $924,000 and
$140,000, respectively.
Based upon an independent actuarial study, the annual postretirement cost
calculated under SFAS 106 for 1993 is as follows:
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1993
----------------------
(Thousands of Dollars)
Service cost - benefits earned
during the year $ 254
Interest cost on accumulated
postretirement benefit obligation 605
Amortization of transition obligation 363
------
Total 1,222
Deferred amount for regulated
companies pending recovery (1,005)
------
Net postretirement benefit expense $ 217
======
The Corporation recognized as an expense (on a pay-as-you-go basis) $252,000
for both 1992 and 1991 for postretirement health care and life insurance
benefits.
The rate increase for the 1993 Stipulation includes as an allowable expense,
only the pay-as-you-go portion of postretirement benefits. The 1993 Stipula-
tion allows Elizabethtown to defer the amount accrued in excess of the pay-as-
you-go portion, for consideration in future rate cases. In addition, in a
separate proceeding, Mount Holly had petitioned the BRC for permission to defer
the amount accrued in excess of the pay-as-you-go portion of its expenses calc-
ulated under SFAS 106, and consequently, has been granted such authority.
Generally accepted accounting principles permit this regulatory treatment,
provided deferrals are not accumulated for a period of more than five years.
As of December 31, 1993, the amount that has been deferred is $1,004,556.
Recovery of deferred postretirement costs will be requested in Elizabethtown
and Mount Holly's next base rate case. Management believes that Elizabethtown
and Mount Holly will recover the deferred postretirement costs in future rates.
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13. QUARTERLY FINANCIAL DATA (Unaudited)
A summary of financial data for each quarter of 1993 and 1992 follows:
Primary Fully Diluted
Operating Operating Net Earnings Per Earnings Per
Quarter Revenues Income Income Share Share
--------------------------------------------------------------------------
(Thousands of Dollars Except Per Share Amounts)
1993
1st $22,136 $ 5,357 $ 2,080 $ .42 $ .42
2nd 24,865 6,618 3,437 .66 .64
3rd 28,947 8,067 6,054 1.09 1.05
4th 24,048 5,293 2,259 .42 .43
------- ------- ------- ----- -----
Total $99,996 $25,335 $13,830 $2.59 $2.54
======= ======= ======= ===== =====
1992
1st $20,803 $ 4,880 $ 1,967 $ .47 $ .47
2nd 22,423 5,519 2,570 .55 .54
3rd 23,812 6,091 3,236 .67 .66
4th 22,129 5,563 2,458 .52 .51
------- ------- ------- ----- -----
Total $89,167 $22,053 $10,231 $2.21 $2.18
======= ======= ======= ===== =====
Water utility revenues are subject to a seasonal fluctuation due to
normal increased consumption during the third quarter of each year.
The gain on the sale of land to the Somerset County Park Commission
(see Note 7) was recorded in the third quarter of 1993.
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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, 1993 and 1992, and the related
statements of consolidated income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1993.
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 the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of E'town Corporation
and its subsidiaries at December 31, 1993 and 1992, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1993 in conformity with generally accepted
accounting principles.
As discussed in Notes 3 and 12 to the consolidated financial statements,
in 1993 the Company changed its method of accounting for postretirement
benefit costs and income taxes to conform with Statements of Financial
Accounting Standards Numbers 106 and 109, respectively.
/s/ Deloitte & Touche
Parsippany, New Jersey
February 15, 1994, except for the subsequent
events discussed in Notes 10 and 11, as to
which the dates are February 23, 1994 and
March 23, 1994, respectively
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Other Financial and Statistical Data
1993 1992 1991 1990 1989
-----------------------------------------------------------
Utility Plant (Thousands)
Utility Plant--net .......... $ 373,293 $ 347,253 $ 319,421 $ 297,577 $ 275,588
Construction Expenditures
(excluding AFUDC)........... 32,517 33,293 27,732 27,301 38,589
Capitalization (Thousands)
Shareholders' Equity ........ 128,374 102,750 84,544 69,842 68,690
Redeemable Preferred Stock .. 12,000 12,000 12,000 12,000 12,000
Debt (l) .................... 154,448 161,541 169,648 176,078 147,851
Total Capitalization ........ $ 294,822 $ 276,291 $ 266,192 $ 257,920 $ 228,541
Capitalization Ratios
Common Stock ................ 44% 37% 32% 27% 30%
Preferred Stock ............. 4% 4% 4% 5% 5%
Debt (1) .................... 52% 59% 64% 68% 65%
Common Stock Data
Earnings Per Share:
Primary..................... $ 2.59 $ 2.21 $ 2.32 $ 1.73 $ 1.63
Fully Diluted............... 2.54 2.18 2.28 1.73 1.63
Dividends Per Share.......... 2.01 2.00 2.00 1.98 1.95
Book Value Per Share......... $ 22.76 $ 21.14 $ 20.21 $ 19.50 $ 19.67
Average Shares Outstanding:
Primary..................... 5,337,939 4,627,814 4,080,118 3,547,328 3,170,912
Fully Diluted............... 5,651,808 4,950,768 4,413,178 3,547,328 3,170,912
Number of Common Shareholders 5,240 4,832 3,965 3,491 3,480
Operating Statistics
Revenues (Thousands)
General Customers .......... $ 63,100 $ 55,570 $ 54,071 $ 48,267 $ 45,088
Other Water Systems ........ 17,187 15,080 14,082 12,947 11,060
Industrial Wholesale ....... 6,652 6,044 5,846 5,515 5,183
Fire Service/Miscellaneous.. 13,057 12,473 12,087 11,386 9,906
Total Revenues ............. $ 99,996 $ 89,167 $ 86,086 $ 78,115 $ 71,237
Net Income .................. $ 13,830 $ 10,231 $ 9,485 $ 6,139 $ 5,163
Water Sales - Millions of
Gallons (mg)
General Customers .......... 23,883 22,062 22,659 21,686 21,119
Other Water Systems ........ 15,109 14,118 13,811 14,379 14,450
Industrial Wholesale ....... 3,213 3,145 3,155 3,313 3,757
System Use and Unaccounted For 5,453 5,843 6,368 5,854 6,297
Total Water Sales .......... 47,658 45,168 45,993 45,232 45,623
System Delivery by Source - mg
Surface .................... 40,742 38,558 39,222 40,343 38,937
Wells ...................... 6,776 6,480 6,658 4,805 6,587
Purchased .................. 140 130 113 84 99
Total System Delivery ...... 47,658 45,168 45,993 45,232 45,623
Millions of Gallons Pumped:
Average Day ................ 131 123 126 124 125
Maximum Day ................ 191 159 169 155 148
General Information
Meters in Service ........... 188,677 185,028 182,019 179,700 176,393
Miles of Main ............... 2,800 2,738 2,694 2,647 2,617
Fire Hydrants Served ........ 14,909 14,400 13,987 13,555 13,289
Total Employees ............. 385 379 374 376 360
<FN>
_________________________________________________________________________________________________
(1)Includes long-term debt, notes payable and long-term debt-current portion.
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STOCK PRICE AND DIVIDEND DATA - E'town's Common Stock is traded on the New York
Stock Exchange under the symbol ETW.
1993
Quarter 1st 2nd 3rd 4th
Closing Price
Low: $27.63 $29.50 $29.88 $30.25
High: $30.88 $31.13 $35.75 $34.75
Dividend Paid $.50 $.50 $.50 $.51
1992
Quarter 1st 2nd 3rd 4th
Closing Price
Low: $27.75 $25.63 $26.13 $26.88
High: $29.25 $27.63 $29.13 $29.00
Dividend Paid $.50 $.50 $.50 $.50
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