FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11023
E'TOWN CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2596330
(State of incorporation) (I.R.S. Employer Identification No.)
600 South Avenue
Westfield, New Jersey 07090
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 654-1234
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, without par value New York Stock Exchange
Commission file number 0-628
ELIZABETHTOWN WATER COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-1683171
(State of incorporation) (I.R.S. Employer Identification No.)
600 South Avenue
Westfield, New Jersey 07090
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 654-1234
Securities reSecurities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Secrities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. __X__
On December 31, 1996, the aggregate market value of E'town Corporation's voting
stock held by non-affiliates was $246,101,797.
On December 31, 1996, there were 7,781,875 shares of Common Stock outstanding,
exclusive of treasury shares or shares held by subsidiaries of E'town
Corporation.
Note: All of the Common Stock of Elizabethtown Water Company is owned by E'town
Corporation.
Parts II and IV incorporate information by reference from the Annual Report to
Shareholders of E'town Corporation for the Year Ended December 31, 1996.
Part III incorporates information by reference from the definitive Proxy
Statement in connection with E'town Corporation's Annual Meeting of Shareholders
to be held on May 15, 1997.
E'TOWN CORPORATION AND SUBSIDIARIES
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
PART I PAGE
Item 1. Business 1
Organization 1
Service Area and Customers 1
Water Supply 2
Water Treatment Facilities and Water
Quality Regulations 2
Transmission and Distribution 4
Energy Supply 4
Environmental Matters 4
Franchises 5
Employee Relations 5
Rate Matters 5
Real Estate Matters 6
Other Developments 6
Executive Officers of the Corporation and Elizabethtown 7
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for the Corporation's Common Stock
and Related Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of
Consolidated Financial Condition and
Results of Operations 10
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial
Owners and Management 14
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 14
SIGNATURES 16
APPENDIX I
Elizabethtown Water Company and Subsidiary Consolidated
Financial Statements for the Years Ended December 31, 1996,
1995 and 1994 and Independent Auditors' Report
E'TOWN CORPORATION
ELIZABETHTOWN WATER COMPANY
Annual Report on Form 10-K
For the year ended December 31, 1996
PART I
ITEM 1. Business
ORGANIZATION
E'town Corporation (E'town or Corporation) was incorporated
under the laws of the State of New Jersey in 1985 to serve as a
holding company for Elizabethtown Water Company (Elizabethtown
or Company) and its wholly owned subsidiary, The Mount Holly
Water Company (Mount Holly). Elizabethtown and Mount Holly are
regulated water utilities which, as a consolidated entity, are
referred to herein as Elizabethtown Water Company (Elizabethtown
Water Company). E'town Properties, Inc. (Properties) was
incorporated in 1987 as a wholly owned and non-regulated
subsidiary of E'town to acquire, develop and sell real estate
holdings. E'town also owns a 65% interest in Applied Watershed
Management, LLC (AWM). AWM is a joint venture formed in 1995 to
pursue opportunities in water and wastewater facilities for
corporate and municipal clients.
Elizabethtown and Mount Holly are engaged in the
distribution of water for domestic, commercial, industrial and
fire protection purposes and for resale by other water companies
and public bodies.
Elizabethtown is a New Jersey corporation, one of whose
predecessors was first incorporated in 1854. The present
corporation was formed in 1961 as a result of a consolidation of
Elizabethtown Water Company Consolidated and Plainfield-Union
Water Company. Elizabethtown owns all of the common stock of
Mount Holly which contributed 3% of the Company's consolidated
operating revenues for 1996.
SERVICE AREA AND CUSTOMERS
At December 31, 1996 Elizabethtown and Mount Holly
furnished water service on a retail basis to general customers
and to industrial customers served through 197,791 meters in 54
municipalities in the counties of Union, Middlesex, Somerset,
Mercer, Hunterdon, Ocean, Morris and Burlington in the central
part of New Jersey.
Elizabethtown also provides, on a wholesale basis, a portion
of the water requirements of eight additional municipalities
with their own retail water systems and of three other
investor-owned water companies. Water for fire protection
service is provided to 53 municipalities and also to commercial
and industrial establishments.
The Company's operating revenues by major classification of
customer for the twelve months ending December 31, 1996 are as
follows:
General customers 62.3%
Sales to other systems 17.2%
Larger industrial customers 7.1%
Fire protection service/miscellaneous 13.4%
The water systems are substantially all metered except
for fire service.
Additional operating statistics appear on page 9.
-1-
WATER SUPPLY
The water supply systems of Elizabethtown and Mount Holly
are physically separate. During 1996, Elizabethtown's pumpage
averaged 127.6 million gallons per day (MGD) and Mount Holly's
pumpage averaged 3.4 MGD. Elizabethtown and Mount Holly believe
they have sufficient water supply sources to meet the current
needs of their customers. Mount Holly plans to construct
additional facilities, as discussed below, to augment its water
supplies.
In 1996, surface water sources supplied approximately 89% of
Elizabethtown's supply with wells supplying the remaining 11%.
All of Mount Holly's water is produced from wells.
Substantially all of Elizabethtown's surface water is
purchased under a long-term contract with the New Jersey Water
Supply Authority (NJWSA) which requires Elizabethtown to
purchase (i) 32 MGD from the state-owned Delaware and Raritan
Canal which transports water from the Delaware River Basin plus
(ii) 70 MGD from the Raritan River Basin which includes the
state-owned Spruce Run-Round Valley Reservoir System. The safe
yield of the Raritan River Basin and the Delaware and Raritan
Canal is 225 MGD of which 151 MGD is presently allocated to
Elizabethtown and others. The NJWSA has available, and
Elizabethtown purchases, water above the Company's minimum
purchase obligation on an as-needed basis.
To ensure an adequate supply of quality water from an
aquifer serving parts of southern New Jersey, state legislation
requires Mount Holly, as well as other suppliers obtaining water
from designated portions of this aquifer, to reduce pumpage from
its wells. Mount Holly has a plan to develop a new water
supply, treatment and transmission system necessary to obtain
water outside the designated portion of the aquifer and to treat
the water and pump it into the Mount Holly system. This is
referred to as the Mansfield Project. The project is currently
estimated to cost $16.5 million excluding an Allowance for Funds
Used During Construction (AFUDC). Construction is expected to
begin after issuance of the final water allocation permit. The
land for the supply and treatment facilities has been purchased
and wells have been drilled and can produce the required supply.
Mount Holly has a rate filing pending relating to the Mansfield
Project.
On October 5, 1995, the New Jersey Department of
Environmental Protection (NJDEP) granted Mount Holly a water
allocation permit for four wells that are to be the water supply
for the Mansfield Project. On October 20, 1995, another water
purveyor requested of the NJDEP, and was subsequently granted,
an adjudicatory hearing on the permit. For further discussion of
this matter see "Rate Matters-Mount Holly" below.
WATER TREATMENT FACILITIES AND WATER QUALITY REGULATIONS
Elizabethtown owns and operates two treatment plants at the
confluence of the Raritan and Millstone Rivers adjacent to the
Delaware and Raritan Canal to treat surface water purchased from
the NJWSA. The plants can withdraw water from any of the above
sources, which is an advantage in the event that one source
becomes contaminated. The Raritan-Millstone Plant (RM Plant)
was placed in service in 1931 and has continually been upgraded
since that time. The RM Plant has a production capacity of 155
MGD. The Canal Road Water Treatment Plant (Plant) was placed in
service in October 1996 to increase Elizabethtown's sustainable
production capacity and provide the ability to continue to meet
water quality regulations. The Plant has an initial rated
production capacity of 40 MGD and an installed cost of
approximately $102 million, excluding an Allowance For Funds
Used During Construction (AFUDC). Elizabethtown also operates
smaller treatment facilities to treat groundwater produced by
certain wells. Mount Holly operates similar groundwater
treatment facilities.
Both the United States Environmental Protection Agency
(USEPA) and the NJDEP regulate the operation of Elizabethtown's
and Mount Holly's water treatment and distribution systems and
-2-
the quality of the water Elizabethtown and Mount Holly deliver
to their customers. Currently, Elizabethtown and Mount Holly
believe they are in compliance, in all material respects, with
all present federal and state water quality standards, including
all regulations promulgated to date by the USEPA pursuant to the
Federal Safe Drinking Water Act, as amended (SDWA), and by the
NJDEP pursuant to similar state legislation. Elizabethtown has
included certain capital projects in its three-year capital
expenditure plans which it anticipates will be necessary to
comply with regulations that have been proposed by the USEPA and
NJDEP. Recovery of the financing and operating costs of such
improvements, plus those costs for any additional projects which
cannot be foreseen at this time, will be requested in rates.
Elizabethtown has responded in recent years to water quality
regulations promulgated by NJDEP and the USEPA by replacing
groundwater supplies with increased supplies of surface water.
The Company expects this trend to continue because it is
preferable from the standpoint of operational efficiency and
cost to modify treatment processes and facilities at one or two
large plants than to constantly upgrade treatment facilities at
multiple well sites.
Water Quality Regulations
As required by the SDWA, the USEPA has established maximum
contaminant levels (MCLs) for various substances found in
drinking water. As authorized by similar state legislation, the
NJDEP has set MCLs for certain substances which are more
restrictive than the MCLs set by the USEPA. In certain cases,
the USEPA and NJDEP have also mandated that certain treatment
procedures be followed in addition to satisfying MCLs
established for specific contaminants. The NJDEP is also the
USEPA's agent for enforcing the SDWA in New Jersey and, in that
capacity, monitors the activities of Elizabethtown and Mount
Holly and reviews the results of water quality tests performed
by Elizabethtown and Mount Holly for adherence to applicable
regulations.
Regulations generally applicable to water utilities,
including Elizabethtown and Mount Holly, include the Lead and
Copper Rule (LCR), the MCLs established for various volatile
organic compounds (VOCs), the MCLs proposed for radionuclides
and the Surface Water Treatment Rule (SWTR).
Lead and Copper Rule
The LCR requires Elizabethtown and Mount Holly to test the
quantity of lead and copper in drinking water at the customer's
tap and, if certain contaminant levels (action levels) are
exceeded, to notify customers and initiate a public information
campaign advising customers how to minimize exposure to lead and
copper. The LCR also requires Elizabethtown to add corrosion
inhibitors to water to minimize leaching of lead from piping,
faucets and soldered joints into water consumed at the tap.
Results from two separate tests completed during 1992 within
Elizabethtown and Mount Holly's systems did not indicate lead
and copper concentrations above the action levels. Accordingly,
public notification and a public information campaign have not
been required. Corrosion inhibitor facilities for Elizabethtown
were completed in 1996.
Volatile Organic Compounds
VOCs include various substances (primarily synthetic
organic solvents) which have percolated into groundwater
aquifers from surface sources. Elizabethtown has found VOCs in
excess of the applicable MCLs in certain of its wells and has
either suspended the use of such wells or constructed aeration
towers which remove such contaminants from the water by venting
them into the atmosphere. Because underground water flows are
difficult to map, it is difficult to predict when and where
contamination will occur in the future. To the extent that
contamination in excess of applicable MCLs occurs at wells
lacking aeration towers, Elizabethtown will consider building
such facilities if feasible and cost effective, or closing such
wells, thereby increasing its reliance on surface water. To
date, Mount Holly has not been affected by VOC contamination.
Radionuclides
Radionuclides are naturally occurring radioactive substances
(primarily radon) found in groundwater. Like VOCs, radon can be
removed from groundwater using aeration towers. If the MCLs
proposed for all radionuclides are finally adopted,
Elizabethtown believes that it will abandon wells with aggregate
-3-
production capacity of approximately 5 MGD, thereby further
increasing Elizabethtown's reliance on surface water.
Elizabethtown currently owns and operates wells with an
aggregate safe daily yield of 18 MGD.
Surface Water Treatment Rule
The operation of Elizabethtown's Raritan-Millstone treatment
plant is subject to the SWTR. Elizabethtown has assessed the
plant's sustainable production capacity, assuming operation
consistent with the requirements of the SWTR, and determined
that improvements to the existing plant are necessary.
Specifically, Elizabethtown has installed additional pumps to
increase capacity and reliability at peak times and has
constructed a new building to house offices and lab facilities.
Also, Elizabethtown has replaced existing chlorine gas
disinfection facilities with liquid sodium hypochlorite to
improve community and employee safety and has installed
corrosion inhibitor facilities in conformance with the LCR.
The Canal Road Water Treatment Plant has been designed and
installed for compliance with the SWTR.
TRANSMISSION AND DISTRIBUTION
As of December 31, 1996, Elizabethtown Water Company's
transmission and distribution system included 2,899 miles of
transmission and distribution mains. Mains range in size up to
60 inches, substantially all of which are either ductile iron,
cast iron or prestressed concrete pipe. Elizabethtown conducts
an ongoing program (which is projected to cost $2.0 million for
1997) to clean and line its older cast iron mains. Such costs
are capitalized and have been included in rate base in
stipulations settling recent rate cases.
On an ongoing basis, Elizabethtown assesses the capacity of
its system to maintain adequate pressures and initiates plans to
construct pumping, transmission and storage facilities as needed.
ENERGY SUPPLY
Elizabethtown pumps most of its water with electric power
purchased from two major electric utilities. The Company has
replaced certain electric pumps with natural gas-fired pumps in
1996 to reduce energy costs. In 1997, the Company expects to
replace two large diesel-powered pumps with similar natural
gas-fired pumps to further reduce energy costs. Elizabethtown
also has other diesel powered pumping and generating facilities
at its major treatment plants and at certain transfer stations
to provide basic service during possible electrical shortages.
Elizabethtown has not, to date, experienced any shortage of
electric energy, natural gas or diesel fuel to operate its pumps
and has cooperated with its electric suppliers during their peak
periods by operating non-electrical pumping facilities upon
request.
ENVIRONMENTAL MATTERS
Elizabethtown and Mount Holly are also subject to
regulation by the NJDEP with respect to water supply plans and
specifications for the construction, improvement, alteration and
operation of public water supply systems and with respect to the
quality of any residuals from treatment plants.
As a normal by-product of treating surface water,
Elizabethtown's existing surface water treatment plants generate
silt removed from untreated river water plus residue from
chemicals used in the treatment process. Historically,
Elizabethtown had disposed of this material in landfills. As a
result of revised regulations governing landfills, Elizabethtown
has been reusing this material on site for flood protection and
is presently removing some material off-site for beneficial
reuse.
Under New Jersey law, environmental matters are addressed
by the NJDEP before diversion allowances or other water supply
projects are authorized. To date, Elizabethtown has been able
to construct all plant facilities and obtain all diversion
authorizations necessary to maintain customer service. Mount
Holly has also been able to construct all facilities and obtain
all diversion authorizations with the exception of the pending
objection to the diversion permit for the Mansfield Project as
discussed below.
-4-
FRANCHISES
The property and franchises of Elizabethtown and Mount Holly
are subject to rights of eminent domain of the State of New
Jersey. These rights have been delegated by statutes now in
effect to municipalities or groups of municipalities and have
been or may be delegated to various public agencies. No such
rights of eminent domain have been exercised since 1931.
EMPLOYEE RELATIONS
As of December 31, 1996, the Corporation had a total of 400
full-time employees, of which 213 were covered by union
contracts. The contracts between the Company and the Utility
Workers Union of America (A.F.L.-C.I.O.) were renegotiated on
February 1, 1996 and will expire on January 31, 1999. The
contract provided for wage increases of 4% on February 1, 1996,
1997 and 1998, respectively.
The Company considers relations with both union and
non-union employees to be satisfactory.
RATE MATTERS
Elizabethtown and Mount Holly are subject to regulation by
the New Jersey Board of Public Utilities (BPU) with respect to
the issuance and sale of securities, rates and service,
classification of accounts, mergers, and other matters.
Elizabethtown and Mount Holly periodically seek rate relief to
cover the cost of increased operating expenses, increases in
financing expenses due to additional investments in utility
plant, and other costs of doing business.
Elizabethtown
On October 25, 1996, a rate increase under a stipulation
(1996 Stipulation) went into effect for
Elizabethtown. The 1996 Stipulation was designed to result in an
increase in annual operating revenues of $21.8 million. The rate
increase reflects a full allowance for the estimated capital and
operating costs for the Plant and an authorized rate of return
on common equity of 11.25%. Recovery of depreciation expense on
Contributions in Aid of Construction and Customers' Advances
for Construction is not reflected in the rate increase.
Furthermore, under the terms of the 1996 Stipulation, the
Company will not be required to record such depreciation expense
of approximately $.7 million annually, for the period that this
rate increase is in effect. The 1996 Stipulation
also allows the Company to continue to defer the transition
obligation and interest associated with postretirement
benefits.
Mount Holly
In June 1995, Mount Holly petitioned the BPU for an
increase in rates, to take place in two phases. The first phase
was necessary to recover costs that were not reflected in rates
last increased in 1986. The second phase would recover the cost
of a new water supply, treatment and transmission system
necessary to obtain water outside a designated portion of an
aquifer currently used by Mount Holly, and to treat and pump the
water into the Mount Holly distribution system. Management
believes this project is the most cost-effective alternative
available to Mount Holly to comply with recent state legislation
that restricts the amount of water that can be withdrawn from an
aquifer in certain areas of southern New Jersey. The project,
referred to as the Mansfield project, is currently estimated to
cost $16.5 million, excluding AFUDC. Mount Holly has expended
$2.9 million on the Mansfield Project as of December 31, 1996,
excluding AFUDC. The land for the supply and treatment
facilities has been purchased and test wells have been drilled
and can produce the required supply. On October 5, 1995, the
NJDEP granted Mount Holly a water allocation permit for four
wells that are to be the water supply for this project. On
October 20, 1995, another water purveyor requested of the NJDEP,
and was subsequently granted, an adjudicatory hearing in
opposition to the permit. Hearings on the matter before an
administrative law judge are pending. A decision is expected
later in 1997. The Company and Mount Holly believe that the
permit in question will be upheld, but cannot predict with
certainty the outcome of the matter. In the event that the
objector is successful and the permit is rescinded, Mount Holly
would meet its regulatory obligation to provide an alternate
source of water by purchasing water from that purveyor.
-5-
On January 24, 1996, the BPU approved a stipulation (Mount
Holly Stipulation) for an increase in rates of $.6 million
effective as of that date. The Mount Holly Stipulation has,
effectively, concluded the first phase of the rate proceeding.
Mount Holly is continuing with the adjudicatory process with
respect to the second phase of the petition. While management
believes that the water supply, treatment and transmission
project planned for Mount Holly is the most cost-effective
response to the state legislation affecting the area, management
cannot predict the ultimate outcome of the rate proceeding at
this time.
REAL ESTATE MATTERS
Properties and E'town currently own several parcels of land
aggregating approximately 740 acres located in central New
Jersey having a carrying cost of approximately $13 million. A
portion of this acreage was purchased from a third party and the
balance was land formerly owned by Elizabethtown and no longer
needed for utility purposes. These holdings are owned in fee.
The Corporation has no plans to acquire additional real
estate. Over the next several years, E'town and Properties will
seek to sell their existing properties and expect to invest the
sale proceeds into water and wastewater utility investments.
Properties has executed a contract to sell one parcel for
a price of $.4 million. The contract is expected to close in
1997 and produce a minimal gain. Properties executed a contract
to sell another parcel to a developer. The parties expected that
the contract would close prior to December 31, 1996 but the
developer was unable to obtain the required municipal approvals.
The contract has been extended and Properties and the developer
have commenced litigation against the municipality. It is not
known whether or when a sale will be consummated.
The carrying cost 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. Such costs are capitalized
until the property is offered for sale, after which time such
costs are expensed. Based on independent appraisals received at
various times prior to 1996, the estimated net realizable value
of each property exceeds its respective carrying value as of
December 31, 1996.
OTHER DEVELOPMENTS
Following a competitive selection process, Edison Township
chose to negotiate with E'town for a 20-year contract to operate
the Township's water supply system. This system serves about
11,000 residential, commercial and industrial customers. The
partners have completed negotiations. The transaction still
requires municipal and state agency approvals. E'town expects to
realize a return on its investment in the project comparable to
that realized by E'town's regulated utility operations. The
earnings effect is expected to be small during the first few
years and is expected to increase after year five.
On January 1, 1997, AWM commenced a three-year contract to
operate the wastewater collection and treatment facilities owned
by Environmental Disposal Corporation (EDC), which serves
portions of Bedminster, Far Hills, and Peapack-Gladstone. AWM is
also providing the billing and customer inquiry services. AWM
has also negotiated letters of understanding with two developers
whereby AWM will construct wastewater collection and treatment
facilities to serve developments in Morris and Bergen counties.
Each developer will pay the associated construction costs.
Subsequently, AWM will repurchase the facilities, for a nominal
amount, and operate the systems as regulated utilities.
-6-
Executive Officers of the Corporation and Elizabethtown
Name Age Positions Held
Robert W. Kean, Jr. 74 Chairman and Chief Executive Officer
of the Corporation since 1985 and
Elizabethtown since 1973.
Henry S. Patterson, II 74 President of the Corporation since
March 1985 and Properties since
July 1987.
Thomas J. Cawley 66 Vice Chairman of Elizabethtown since
January 1996 and President of
Elizabethtown and its subsidiary,
Mount Holly since August 1992.
Executive Vice President of
Elizabethtown since January 1987 and
Vice President of Mount Holly since
1973 (retired from Elizabethtown
December 31, 1996, remains
President of Mount Holly).
Andrew M. Chapman 41 Chief Financial Officer of the
Corporation since August 1989 and
Treasurer of the Corporation since
November 1990. President of
Elizabethtown since January 1996 and
Executive Vice President of
Elizabethtown from May 1994 to
December 1995. He served as Senior
Vice President of Elizabethtown from
April 1993 to May 1994, Chief
Financial Officer of Elizabethtown
from November 1990 to December 1995
and Treasurer of Elizabethtown from
August 1989 to May 1994.
Anne Evans Estabrook 52 Vice President of the Corporation
since September 1987. Owner of the
Elberon Development Co., (a real
estate holding company) and
President of David 0. Evans, Inc.
(a construction company).
Walter M. Braswell 47 Secretary of the Corporation,
Properties and Elizabethtown since
December 1990 and Vice President
and General Counsel of Elizabethtown
since August 1988.
Norbert Wagner 61 Senior Vice President-Operations of
Elizabethtown since May 1992. Vice
President-Operations since
March 1987.
Edward F. Cash 61 Vice President - Customer Services
of Elizabethtown since 1977.
Effective May 15, 1997, Messrs. Kean and Patterson will
retire from the positions described above and become Chairman
Emeritus and Director Emeritus, respectively, of the Corporation
and Elizabethtown. On that date Mrs. Estabrook will become
Chairman of the Corporation and Elizabethtown and Mr. Chapman
will become President of the Corporation while retaining his
responsibilities as President of Elizabethtown.
-7-
ITEM 2. Properties
All principal plants and other materially important units of
property of Elizabethtown and Mount Holly are owned in fee. The
Company considers that the properties of Elizabethtown and Mount
Holly are in good operating condition.
ITEM 3. Legal Proceedings
In the opinion of management, litigation in which the
Corporation or its subsidiaries is involved is in the ordinary
course of business and will not have a material adverse effect
on the consolidated financial condition of the Corporation.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
PART II
ITEM 5. Market for the Corporation's Common Stock and Related
Stockholder Matters
This information is included in Exhibit 13, filed herewith, and
is incorporated herein by reference. All of the common stock of
Elizabethtown Water Company is owned by E'town.
-8-
Item 6. Selected Financial Data
E'town Corporation
This information is included in Exhibit 13, filed herewith, and is incorporated herein by reference.
Elizabethtown Water Company
1996 1995 1994 1993 1992
Utility Plant (Thousands)
Utility Plant - net $ 560,024 $ 507,858 $ 437,456 $ 373,293 $ 347,253
Construction Expenditures
(excluding AFUDC) 55,125 73,789 69,981 32,517 33,293
Total Assets 640,779 580,808 502,848 437,405 386,880
Capitalization (Thousands)
Shareholder's Equity 182,293 176,685 151,624 125,765 103,024
Preferred Stock 12,000 12,000 12,000 12,000 12,000
Debt (1) 250,963 208,952 164,951 141,952 147,841
Total Capitalization $ 445,256 $ 397,637 $ 328,575 $ 279,717 $ 262,865
Capitalization Ratios
Common Stock 41% 44% 46% 45% 39%
Preferred Stock 3% 3% 4% 4% 5%
Debt (1) 56% 53% 50% 51% 56%
Earnings Applicable to
Common Stock (Thousands) $ 15,942 $ 16,512 $ 13,369 $ 13,783 $ 11,099
Operating Statistics
Revenues (Thousands)
General Customers $ 68,797 $ 67,455 $ 62,923 $ 63,100 $ 55,570
Other Water Systems 18,929 18,720 18,082 17,187 15,080
Industrial Wholesale 7,869 7,947 7,458 6,652 6,044
Fire Service/Miscellaneous 14,763 14,276 13,570 13,057 12,473
Total Revenues $ 110,358 $ 108,398 $ 102,033 $ 99,996 $ 89,167
Water Sales - Millions of Gallons (mg)
General Customers 22,890 23,999 23,551 23,883 22,062
Other Water Systems 15,049 15,569 15,691 15,109 14,118
Industrial Wholesale 3,567 3,673 3,568 3,213 3,145
System Use and Unaccounted For 6,444 6,402 6,570 5,453 5,843
Total Water Sales 47,950 49,643 49,380 47,658 45,168
System Delivery by Source - mg
Surface 41,485 42,646 42,534 40,742 38,558
Wells 6,328 6,764 6,690 6,776 6,480
Purchased 137 233 156 140 130
Total System Delivery 47,950 49,643 49,380 47,658 45,168
Millions of Gallons Pumped:
Average Day 131 136 135 131 123
Maximum Day 170 183 182 191 159
General Information
Meters in Service 197,791 195,375 191,622 188,677 185,028
Miles of Main 2,899 2,869 2,828 2,800 2,738
Fire Hydrants Served 16,012 15,650 15,291 14,909 14,400
<FN>
(1) Includes long-term debt, notes payable and long-term debt-current portion.
-9-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
E'town Corporation
This information is included in Exhibit 13, filed herewith, and
is incorporated herein by reference.
Elizabethtown Water Company and Subsidiary
The water utility operations of Elizabethtown Water Company
(Elizabethtown or Company) and its subsidiary The Mount Holly
Water Company (Mount Holly), presently constitute the major
portion of E'town Corporation's (E'town or Corporation) assets
and earnings. Mount Holly contributed 3% of the Company's
consolidated operating revenues for 1996. The following
analysis sets forth significant events affecting the financial
condition of Elizabethtown at December 31, 1996, and the results
of operations for the years ended December 31, 1996 and 1995 for
Elizabethtown Water Company.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures Program
Capital expenditures were $55.1 million during 1996. Of this
total, $18.6 million, excluding an Allowance For Funds Used
During Construction (AFUDC), was expended on the Canal Road
Water Treatment Plant (Plant). Capital expenditures for the
three-year period ending December 31, 1999 are estimated to be
$125.3 million ($105.8 million for Elizabethtown and $19.5
million for Mount Holly).
The utilities' projected capital expenditures are returning
to the levels experienced in the early 1990s as Elizabethtown
has completed and placed the Plant into service as discussed
below. Mount Holly expects to incur significant capital
expenditures in 1997 and 1998 to construct new water supply,
treatment and transmission facilities as discussed below.
Elizabethtown
The Plant was completed and placed into service on October
24, 1996. The Plant, which has an initial rated production
capacity of 40 million gallons per day (mgd), will meet existing
and anticipated customer demands and replace groundwater
supplies withdrawn from service as a result of more restrictive
water quality regulations and groundwater contamination.
Elizabethtown's three-year capital program includes $69.3
million for projects of a routine nature. This program also
includes $56.0 million of major projects such as new
transmission mains, improvements to pumping facilities,
construction of a new operations center in the western portion
of our service territory and other miscellaneous projects.
Mount Holly
To ensure an adequate supply of quality water from an
aquifer serving parts of southern New Jersey, state legislation
requires Mount Holly, as well as other suppliers obtaining water
from designated portions of this aquifer, to reduce pumpage from
its wells. Mount Holly has received approval from the New
Jersey Department of Environmental Protection (NJDEP) for its
plan to develop a new water supply, treatment and transmission
system necessary to obtain water outside the designated portion
of the aquifer, and to treat the water and pump it into the
Mount Holly system. This is referred to as the Mansfield
Project. The project is currently estimated to cost $16.5
million, excluding AFUDC, of which $13.6 million is anticipated
to be spent over the next three years. Mount Holly has expended
$2.9 million on the Mansfield Project as of December 31, 1996,
excluding AFUDC. The land for the supply and treatment
facilities has been purchased and wells have been drilled and
can produce the required supply.
On October 5, 1995, the NJDEP granted Mount Holly a water
allocation permit for four wells that are to be the water supply
for the Mansfield Project. On October 20, 1995, another water
purveyor requested of the NJDEP, and was subsequently granted,
an adjudicatory hearing in opposition to the permit. Hearings
on the matter before an administrative law judge are pending. A
decision is expected later in 1997. The Company and Mount Holly
believe that the permit in question will be upheld, but cannot
predict with certainty the outcome of the matter. In the event
that the objector is successful and the permit is rescinded,
Mount Holly would meet its regulatory obligation to provide an
alternate source of water by purchasing water from that
-10-
purveyor. Management believes the Mansfield Project is the most
cost-effective alternative available to Mount Holly to comply
with recent state legislation that restricts the amount of water
that can be withdrawn from the aquifer.
In June 1995, Mount Holly petitioned the New Jersey Board of
Public Utilities (BPU) for an increase in rates, to take place
in two phases. The first phase was necessary to recover costs
that were not reflected in rates last increased in 1986. The
second phase would recover the cost of the Mansfield project.
On January 24, 1996, the BPU approved a stipulation (Mount
Holly Stipulation) for an increase in rates of $.6 million,
effective as of that date. The Mount Holly Stipulation has,
effectively, concluded the first phase of the rate proceeding.
Mount Holly is continuing with the adjudicatory process with
respect to the second phase of the petition.
Capital Resources
During 1996, Elizabethtown, including Mount Holly, financed
40.2% of its capital expenditures from internally generated
funds (after payment of common stock dividends). The balance was
financed with a combination of short-term borrowings under a
revolving credit agreement discussed below, proceeds from
capital contributions from E'town (funded by issuances of
Common Stock under the Corporation's Dividend Reinvestment and
Stock Purchase Plan) and other short-term bank borrowings.
For the three-year period ending December 31, 1999,
Elizabethtown, including Mount Holly, estimates that 57% of its
capital expenditures are expected to be financed with internally
generated funds (after payment of common stock dividends). The
balance will be financed with a combination of proceeds from the
sale of E'town common stock, long-term debentures, proceeds of
tax-exempt New Jersey Economic Development Authority (NJEDA)
bonds and short-term borrowings. The NJEDA has granted
preliminary approval for the financing of almost all of
Elizabethtown's major projects during the next three years and
the Mansfield Project. Elizabethtown expects to pursue
tax-exempt financing to the extent that final allocations are
granted by the NJEDA. The Company's senior debt is currently
rated A3 and A by Moody's Investors Service and Standard &
Poor's Ratings Group, respectively. Standard & Poor's has
recently reaffirmed the Company's A rating and has upgraded its
rating outlook from "negative" to "stable."
In the second quarter of 1997, Elizabethtown expects to
issue $50.0 million of tax-exempt Variable Rate Demand Notes
through the NJEDA. The proceeds of the issue are expected to be
used to repay amounts outstanding under the revolving credit
agreement discussed below.
Elizabethtown continues to obtain a portion of the funds
required for its capital program through borrowings under a
revolving credit agreement (Agreement) with an agent bank and
five additional banks. The Agreement was executed in 1994 to
provide up to $60.0 million in revolving short-term financing to
partially fund Elizabethtown's capital program, the predominant
portion of which was the Plant.
The Agreement further provides that, among other covenants,
Elizabethtown must maintain a percentage 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. As of
December 31, 1996, the percentage of Elizabethtown's common and
preferred equity to total capitalization, as calculated in
accordance with Agreement, was 44%. For 1996, Elizabethtown's
pre-tax interest coverage ratio, calculated in accordance with
the Agreement, was 2.7 to 1. At December 31, 1996, Elizabethtown
had outstanding borrowings of $60.0 million under the Agreement
and $9.0 million of borrowings under uncommitted lines of
credit. The combined borrowings were at interest rates from
5.50% to 5.88% at a weighted average rate of 5.72%. The
Agreement expires in July 1997 and provides that the Company may
convert any outstanding balances to a five-year, fully
amortizing term loan. However, upon expiration of the Agreement,
the Company expects to meet its short-term financing needs with
uncommitted lines of credit.
RESULTS OF OPERATIONS
Earnings Applicable to Common Stock for 1996 were $15.9
million as compared to $16.5 million for 1995. The primary
factor contributing to the decrease in earnings was a reduction
in revenues due to reduced outdoor water consumption in 1996
compared to 1995.
Earnings Applicable to Common Stock for 1995 were $16.5
million as compared to $13.4 million for 1994. The combined
effect of a $5.3 million rate increase in February 1995,
increases in capitalized AFUDC in 1995 and a non-recurring
charge in 1994 all contributed to the increase in earnings
between 1994 and 1995.
-11-
Operating Revenues increased $2.0 million or 1.8% in 1996
over the comparable 1995 amount. The increase in total revenues
was comprised of rate increases for Elizabethtown and Mount
Holly, as discussed above for Mount Holly and at Economic
Outlook for Elizabethtown, which were offset by a decrease in
water consumption due to unusually cool, wet summer weather in
1996. The reduction in water consumption accounted for a
decrease in revenues of $2.4 million. Operating revenues
increased by $3.9 million and $.5 million for the effects of the
increases in rates of Elizabethtown and Mount Holly,
respectively.
Operating Revenues increased $6.4 million, or 6.2%, in 1995.
Of this increase, $4.6 million relates to a rate increase,
effective February 1995. Increased consumption by retail
customers and an increase in the number of customers increased
revenues by $1.4 million. Revenues from industrial customers
resulting from consumption increased $.2 million, while revenues
from other water systems resulting from consumption decreased
$.2 million. Revenues from fire service customers increased $.4
million.
Operation Expenses increased $.6 million or 1.3% in 1996 over
the comparable 1995 amount. Operation expenses decreased by $.4
million for certain variable expenses associated with the
reduction in water consumption discussed above. The successful
implementation of an energy conservation program in the second
quarter of 1996 at our Raritan-Millstone Treatment Plant reduced
energy costs by $.8 million. The success of various safety
programs resulted in a decrease in workers compensation premiums
of $.3 million. These decreases were offset by increased labor
costs of
$1.6 million.
Operation Expenses increased $2.4 million, or 5.9%, in 1995.
The increase is due, primarily, to increased costs for labor,
benefits and the cost of purchased water calculated in
accordance with a Purchased Water Adjustment Clause (PWAC).
Benefit costs increased due to increases in the actuarially
calculated pension expense and the cost of postemployment
benefits, a portion of which was expensed in 1995 as it is
recognized in rates pursuant to the 1995 Stipulation effective
February 1995.
Maintenance Expenses increased less than $.1 million or .9%
in 1996 over the comparable 1995 amount. The Company is
realizing the benefits of various preventive maintenance
programs and operating efficiencies instituted in the current
and prior years.
Maintenance Expenses decreased $.8 million, or 12.4%, in
1995. The decrease is due, primarily, to the absence in 1995 of
the unusually harsh winter weather that occurred in 1994. Also,
the results of preventive maintenance programs have contributed
to an overall decrease in maintenance expenses.
Depreciation Expense increased $1.1 million or 12.3% in 1996
as compared to 1995. The increase is due, primarily, to a higher
level of depreciable plant in service and includes $.5 million
of depreciation expense for the Plant for a portion of the year.
Depreciation Expense increased $.9 million, or 12.1%, in
1995 due, primarily, to additional depreciable plant being
placed in service during that period. Also, an increase in
authorized depreciation rates as a result of the 1995
Stipulation, effective February 1995, accounted for $.4 million
of the increase.
Revenue Taxes increased $.2 million, or 1.7% in 1996 and $.8
million, or 6.6% in 1995 due to additional taxes on the higher
revenues discussed above.
Real Estate, Payroll and Other Taxes increased $.1 million
or 3.5% in 1996 and $.1 million, or 2.0%, in 1995 due to
increased payroll taxes resulting from labor cost increases.
Federal Income Taxes as a component of operating expenses
decreased $.6 million or 8.0% from the comparable 1995 amount
due to the changes in the components of taxable income discussed
herein.
Federal Income Taxes increased $.8 million, or 11.5%, in
1995 due to changes in the components of taxable income
discussed herein. In addition, in 1995 Elizabethtown received
tax refunds related to the years 1984 and 1985 of $.1 million.
Other Income (Expense) increased $.6 million or 26.1% as
compared to the 1995 amount. An increase in the equity
component of AFUDC of $.7 million, primarily from the
construction of the Plant accounted for the overall increase.
Other Income (Expense) increased $1.7 million in 1995 due,
primarily, to an increase in the equity component of AFUDC of
$1.8 million and a non-recurring litigation settlement in 1994.
The increases were offset by federal income taxes associated
with the various components.
Total Interest Charges increased $1.7 million or 15.2% in
1996 over the comparable 1995 amount. The increase is due,
primarily, to increased interest on long-term debt due to the
issuance of $40.0 million of NJEDA tax-exempt debentures in
December 1995 to refinance balances previously incurred under
-12-
the revolving credit agreement. A higher level of short-term
borrowings under the revolving credit agreement incurred to
finance Elizabethtown's capital program on an interim basis has
also contributed to the overall increase. This increase was
offset by an increase in the debt component of AFUDC resulting
from Elizabethtown's higher construction work in progress
balances in 1996, primarily due to the Plant.
Total Interest Charges increased $.7 million, or 6.8%, in
1995 due, primarily, to an increase in interest expense of $2.1
million on increased borrowings under Elizabethtown's revolving
credit agreement to finance the Company's ongoing capital
program, the largest component of which was the Plant. This
amount was offset by an increase in the debt component of AFUDC
of $1.6 million, also primarily related to the construction of
the Plant. In addition, in 1995 Elizabethtown received
interest on tax refunds related to 1984 and 1985 of $.1 million.
ECONOMIC OUTLOOK
Forward Looking Information
Certain information included in this report contains, and
other materials filed or to be filed by the Corporation with the
Securities and Exchange Commission (as well as information
included in oral and written statements made or to be made by
the Company) contain or will contain forward looking statements
within the meaning of the Securities Acts of 1933 and 1934, as
amended. Any forward looking information is or will be based on
information available at that time and is or will be subject to
risks and uncertainties that could cause actual results to
differ materially from those expressed in the statements.
Consolidated earnings for Elizabethtown Water Company for
the next several years will be determined by (i) Elizabethtown's
ability to increase sales and to further control operating
expenses through improved productivity, (ii) Mount Holly's, and
later Elizabethtown's, ability to obtain adequate and timely
rate relief in connection with future utility plant additions.
Elizabethtown expects earnings to increase approximately 15% in
1997 as the Company realizes the full impact of its $21.8
million rate increase effective in October 1996 in addition to
realizing the benefits of ongoing cost control efforts. This
expectation assumes a return to normal weather conditions in
1997.
On October 25, 1996, a rate increase under a stipulation
(1996 Stipulation) went into effect for Elizabethtown. The 1996
Stipulation was designed to result in an increase in annual
operating revenues of $21.8 million. The rate increase reflects
a full allowance for the estimated capital and operating costs
for the Plant and an authorized rate of return on common equity
of 11.25%. Recovery of depreciation expense on Contributions in
Aid of Construction and Customers' Advances for Construction is
not reflected in the rate increase. Furthermore, under the terms
of the 1996 Stipulation, the Company will not be required to
record such depreciation expense of approximately $.7 million
annually, for the period that this rate increase is in effect.
The 1996 Stipulation also allows the Company to continue to
defer the transition obligation and interest associated with
postretirement benefits.
Elizabethtown, excluding Mount Holly, earned a rate of
return on common equity of 9.0% in 1996. Elizabethtown's
authorized rate of return on common equity is currently 11.25%.
In 1997, Elizabethtown expects to substantially close this gap
between its earned return on common equity in 1996 and its
authorized return. This assumes a return to normal summer
weather conditions and outdoor water use. Realizing rates of
return in 1998 comparable to authorized levels will require
continued customer additions and the success of ongoing cost
control efforts, as well as rate relief later in that year.
Mount Holly earned a rate of return on common equity of 3.5%
in 1996, compared to an authorized rate of return of 11.25%
established in its most recent rate proceeding. Mount Holly
contributed $.02 to E'town's consolidated earnings per share in
1996. Management expects Mount Holly to increase its
contribution to E'town's earnings per share by obtaining
additional rate relief so that Mount Holly can realize rates of
return comparable to authorized levels upon the completion of
Mount Holly's Mansfield project, and recovery of the costs of
that and other projects in rates.
New Accounting Pronouncement
See Note 2 of the Notes to Consolidated Financial Statements
for a discussion of a new accounting standard that was effective
in 1996.
-13-
Item 8. Financial Statements and Supplementary Data
The information for E'town is included in Exhibit 13, filed
herewith, and is incorporated herein by reference.
The information for Elizabethtown Water Company is on pages 2
through 16 of Appendix I included herein.
Item 9. Changes in and Disagreements with Accountants on
Acccounting and Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to directors of E'town and
Elizabethtown is included in E'town's Proxy Statement for the
1997 Annual Meeting of Stockholders, and is incorporated herein
by reference.
Information regarding the executive officers of both E'town and
Elizabethtown is included under Item I in Part I of this Form
10-K.
Item 11. Executive Compensation
This information for E'town and Elizabethtown is included in
E'town's Proxy Statement for the 1997 Annual Meeting of
Stockholders, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
This information is included in E'town's Proxy Statement for the
1997 Annual Meeting of Stockholders, and is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions
This information for E'town and Elizabethtown is included in
E'town's Proxy Statement for the 1997 Annual Meeting of
Stockholders, and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) The following documents are filed as part of this
report:
1. Financial Statements:
Elizabethtown Water Company
Statements of Consolidated Income for the years ended December
31, 1996, 1995 and 1994.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Statements of Consolidated Capitalization as of December 31,
1996 and 1995.
-14-
Statement of Consolidated Shareholder's Equity for the years
ended December 31, 1996, 1995 and 1994.
Statements of Consolidated Cash Flows for the years ended
December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
E'town Corporation
A portion of the 1996 Annual Report to Shareholders which
includes Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations, Consolidated
Financial Statements, Notes to Consolidated Financial
Statements, Independent Auditors' Report and Other Financial and
Statistical Data is filed herewith as Exhibit 13 and is herein
incorporated by reference.
Elizabethtown Water Company
Elizabethtown Water Company's consolidated financial statements
and notes thereto are included herein on pages 2 through 16 of
Appendix I.
E'town and Elizabethtown Water Company
The Independent Auditors' Reports for E'town (as to certain
financial statement schedules) and Elizabethtown Water Company
appear on page 18 herein and page 1 of Appendix I, respectively.
2. Financial Statement Schedules:
All financial schedules required to be filed contain the same
data and amounts for both E'town and Elizabethtown Water
Company, except for Supplemental Schedule of Property, Plant and
Equipment, which includes property, plant and equipment for each
company.
Schedule II - Valuation and Qualifying Accounts for the Years
Ended December 31, 1996, 1995 and 1994.
Supplemental Schedule of Property, Plant and Equipment at
December 31, 1996 and 1995.
Other schedules are omitted because of the absence of the
conditions under which they are required or because the required
information is included in the financial statements or the notes
accompanying each company's financial statements.
3. Exhibits
(a) Exhibits for E'town and Elizabethtown Water Company are
listed in the Exhibit Index.
(b) Reports on Form 8-K: None
-15-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
March 20, 1997
E'TOWN CORPORATION
By: /s/ Robert W. Kean, Jr.
Chairman, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on
March 20, 1997.
Chairman, Chief Executive Officer
and Director /s/ Robert W. Kean, Jr.
President and Director /s/ Henry S. Patterson, II
Vice President and Director /s/ Anne Evans Estabrook
Chief Financial Officer, Treasurer
and Director /s/ Andrew M. Chapman
(Principal Financial & Accounting Officer)
Director /s/ Brendan T. Byrne
Director /s/ Thomas J. Cawley
Director /s/ Anthony S. Cicatiello
Director /s/ John Kean
Director /s/ Robert W. Kean III
Director /s/ Barry T. Parker
Director /s/ Hugo M. Pfaltz, Jr.
Director /s/ Chester A. Ring III
-16-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ELIZABETHTOWN WATER COMPANY
March 20, 1997
By: /s/ Robert W. Kean, Jr.
Chairman, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on
March 20, 1997.
Chairman, Chief Executive Officer
and Director /s/ Robert W. Kean, Jr.
Vice Chairman and Director /s/ Thomas J. Cawley
President and Director /s/ Andrew M. Chapman
Vice President - Finance & Treasurer /s/ Gail P. Brady
(Principal Financial Officer)
Controller /s/ Dennis W. Doll
(Principal Accounting Officer)
Director /s/ Brendan T. Byrne
Director /s/ Anthony S. Cicatiello
Director /s/ Anne Evans Estabrook
Director /s/ John Kean
Director /s/ Robert W. Kean III
Director /s/ Barry T. Parker
Director /s/ Henry S. Patterson, II
Director /s/ Hugo M. Pfaltz, Jr.
Director /s/ Chester A. Ring III
-17-
INDEPENDENT AUDITORS' REPORT
E'TOWN CORPORATION:
We have audited the consolidated financial statements of E'town
Corporation and its subsidiaries as of December 31, 1996 and
1995, and for each of the three years in the period ended
December 31, 1996, and have issued our report thereon dated
February 19, 1997; such consolidated financial statements and
report are included in your 1996 Annual Report to Shareholders
and are incorporated herein by reference. Our audits also
included the financial statement schedules of E'town Corporation
and its subsidiaries, listed in Item 14. These financial
statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement
schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Parsippany, NJ
February 19, 1997
-18-
E'TOWN CORPORATION Schedule II
ELIZABETHTOWN WATER COMPANY
VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Balance at
Beginning ofCosts and Deductions End of
Description: Period Expenses (A) Period
Reserve for
Uncollectible Accounts:
Year Ended 12/31/9$532,000 $600,242 $566,242 $566,000
Year Ended 12/31/9$463,000 $600,648 $531,648 $532,000
Year Ended 12/31/9$434,000 $552,459 $523,459 $463,000
(A) Write-off of uncollectible accounts, net of recoveries.
E'TOWN CORPORATION
ELIZABETHTOWN WATER COMPANY
PROPERTY, PLANT AND EQUIPMENT
AT DECEMBER 31, 1996 AND 1995
ELIZABETHTOWN WATER COMPANY: 1996 1995
UTILITY PLANT IN SERVICE:
Intangible Plant $250,766 $250,766
Source of Supply Plant 20,502,583 10,073,447
Pumping Plant 54,666,431 44,838,866
Water Treatment Plant 156,149,004 53,070,107
Transmission & Distribution Plant 404,946,395 378,216,166
General Plant 17,444,418 15,373,329
Leasehold Improvements 120,548 117,186
Acquisition Adjustments 632,388 632,388
------------ ------------
Utility Plant In Service 654,712,533 502,572,255
Construction Work In Progress 7,994,186 100,212,636
------------ ------------
Total Utility Plant 662,706,719 602,784,891
NON-UTILITY PROPERTY - NET 80,976 83,178
------------ ------------
TOTAL $662,787,695 $602,868,069
============ ============
E'TOWN CORPORATION:
UTILITY PLANT (from above) 662,706,719 602,784,891
NON-UTILITY PROPERTY - NET 12,769,953 12,151,496
------------ ------------
TOTAL $675,476,672 $614,936,387
============ ============
EXHIBIT INDEX
Certain of the following exhibits, designated with an
asterisk(*), are filed herewith. The exhibits not so designated
have heretofore been filed with the Commission and are
incorporated herein by reference to the documents indicated in
brackets following the description of such exhibits.
E'town Corporation
Exhibit
No. Description
3(a) - Certificate of Incorporation of E'town Corp.
[Registration Statement No. 33-42509, Exhibit 4(a)]
*3(b) - By-Laws of E'town Corp.
3(c) - Certificate of Incorporation of E'town Properties, Inc.
[Registration Statement No. 33-32143, Exhibit 4(j)]
3(d) - By-Laws of E'town Properties, Inc. [Registration
Statement No. 33-32143, Exhibit 4(n)]
4(a) - Rights Agreement dated as of February 4, 1991 between
E'town and the Rights Agent [Registration Statement No.
33-38566, Exhibit 4(n)]
4(b) - Indenture dated as of January 1, 1987 from E'town
Corporation to Boatmen's Trust, Trustee, relating to the 6 3/4%
Convertible Subordinated Debentures due 2012 [Registration
Statement No. 33-32143, Exhibit 4(a)]
10(a) - Incentive Stock Option Plan
[Registration Statement No. 2-99602, Exhibit 28(a)]
10(b) - Savings and Investment Plan - 401(k) [Form 10-K for the
year 1994, Exhibit 10(b)]
10(c) - Management Incentive Plan [Registration Statement No.
33-38566, Exhibit 10(i)]
10(d) - E'town's 1987 Stock Option Plan [Registration Statement
No. 33-42509, Exhibit 281
10(e) - E'town's 1990 Performance Stock Program [Registration
Statement No. 33-46532, Exhibit 10(k)]
10(f) - E'town's Dividend Reinvestment and Stock Purchase Plan
[Registration No. 333-16713, Exhibit 4(e)]
10(g) - Change of Control Agreement [Form 10-Q for the quarter
ended March 31, 1995, Exhibit 10]
*11 - Statement Regarding Computation of Per Share Earnings
*13 - Portion of the 1996 Annual Report to Shareholders which
includes Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations, Consolidated
Financial Statements, Notes to Consolidated Financial Statements,
Independent Auditors' Report and Other Financial and Statistical Data
and is herein incorporated by reference.
*21- Subsidiaries of the Corporation
*27- E'town Corporation - Financial Data Schedule
Elizabethtown Water Company
3(a) - Form of Restated Certificate of Incorporation of
Elizabethtown Water Company [Form 10-K for the year ended
December 31, 1994, Exhibit 3(a)]
*3(b) - By-Laws of Elizabethtown Water Company
4(a) - Indenture dated as of November 1, 1994 from
Elizabethtown Water Company to The Bank of New York, Trustee,
relating to the 7 1/4% Debentures due 2028. [Form 10-K for year
ended December 31, 1994, Exhibit 4(a)]
4(b) - Indenture dated as of September 1, 1992 from
Elizabethtown Water Company to The Bank of New York, Trustee,
relating to the 8% Debentures due 2022 [Form 10-K for year ended
December 31, 1993, Exhibit 4(a)]
4(c) - Indenture dated as of October 1, 1991 from Elizabethtown
Water Company to The Bank of New York, Trustee, relating to the
8 3/4% Debentures due 2021 [Registration Statement No. 33-46532,
Exhibit 4(f)]
4(d) - Indenture dated as of August 1, 1991 from Elizabethtown
Water Company to The Bank of New York, Trustee, relating to the
6.60% Debentures due 2021 [Registration Statement No. 33-46532,
Exhibit 4(g)]
4(e) - Indenture dated as of August 1, 1991 from Elizabethtown
Water Company to The Bank of New York, Trustee, relating to the
6.70% Debentures due 2021 [Registration Statement No.
33-46532, Exhibit 4(h)]
4(f) - Indenture dated as of October 1, 1990 from
Elizabethtown Water Company to Citibank, N.A., Trustee, relating
to the 7 1/2% Debentures due 2020 [Registration Statement No.
33-38566, Exhibit 4(e)]
4(g) - Indenture dated as of December 1, 1989 from Elizabethtown Water
Company to Citibank, N.A., Trustee, relating to the 7.20%
Debentures due 2019 [Registration Statement No. 33-38566,
Exhibit 4(f)]
4(h) - Indenture dated as of December 1, 1995 from Elizabethtown Water
Company to The Bank of New York, Trustee, relating to the 5.60%
Debentures due 2025
10(a)- Contract for service to Middlesex Water Company. [Registration
Statement No. 33-38566, Exhibit 10(a)]
10(b)- Contract for service to Edison Township. [Registration Statement
No. 2-58262, Exhibit 13(c)]
10(c)- Contract for service to New Jersey-American Water Company.
[Form 10-K for the year ended December 31, 1993, Exhibit 10(c)]
10(d)- Contract for service to City of Elizabeth. [Form 10-K for the
year ended December 31, 1992, Exhibit 10(d)]
10(e)- Contract for service to Franklin Township. [Registration Statement
No. 33-46532, Exhibit 10(e)]
10(f)- Contract with the New Jersey Water Supply Authority for the purchase
of water from the Raritan Basin. [Registration Statement No.
33-32143, Exhibit 10(e)]
10(g)- Supplemental Executive Retirement Plan of Elizabethtown Water Company
[Form 10-K for the year ended December 31, 1992, Exhibit 10(g)]
10(h)- Medical Reimbursement Plan of Elizabethtown Water Company [Form
10-K for the year ended December 31, 1992, Exhibit 10(h)]
10(i)- Supplemental Executive Retirement Plan of Elizabethtown Water
Company [Form 10-Q for the year ended September 30, 1995,
Exhibit 10]
*12(a)-Computation of Ratio of Earnings to Fixed Charges
*12(b)-Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividends
*21 - Subsidiaries of the Company
*23 - Consent of Deloitte & Touche LLP, Independent Auditors
*27 - Elizabethtown Water Company - Financial Data Schedule.
APPENDIX I
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDER AND BOARD OF DIRECTORS OF ELIZABETHTOWN WATER
COMPANY:
We have audited the accompanying consolidated balance sheets and
statements of consolidated capitalization of Elizabethtown Water
Company and its subsidiary as of December 31, 1996 and 1995, and
the related statements of consolidated income, shareholder's
equity, and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the financial
statement schedules listed in the Index at Item 14. These
financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Elizabethtown Water Company and its subsidiary at December 31,
1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present
fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Parsippany, NJ
February 19, 1997
-1-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
STATEMENTS OF CONSOLIDATED INCOME
Year Ended December 31,
1996 1995 1994
Operating Revenues $ 110,358,349 $ 108,398,105 $ 102,032,505
------------- ------------- -------------
Operating Expenses:
Operation 43,713,177 43,132,400 40,722,980
Maintenance 5,859,167 5,805,511 6,623,772
Depreciation 9,893,391 8,808,169 7,860,180
Revenue taxes 13,819,646 13,591,212 12,748,161
Real estate, payroll and other taxes 2,869,066 2,771,716 2,717,067
Federal income taxes (Note 3) 7,360,461 8,002,292 7,176,396
------------- ------------- -------------
Total operating expenses 83,514,908 82,111,300 77,848,556
------------- ------------- -------------
Operating Income 26,843,441 26,286,805 24,183,949
------------- ------------- -------------
Other Income (Expense):
Allowance for equity funds used during construction (Note 2) 3,725,234 2,976,290 1,178,133
Litigation settlement (932,203)
Federal income taxes (Note 3) (1,462,076) (1,159,218) (237,599)
Other - net 452,127 335,763 432,922
------------- ------------- -------------
Total other income (expense) 2,715,285 2,152,835 441,253
------------- ------------- -------------
Total Operating and Other Income 29,558,726 28,439,640 24,625,202
------------- ------------- -------------
Interest Charges:
Interest on long-term debt 13,011,069 10,892,129 10,774,008
Other interest expense - net 2,640,117 2,343,903 175,507
Capitalized interest (Note 2) (3,208,636) (2,445,093) (867,101)
Amortization of debt discount and expense-net 361,012 323,557 319,646
------------- ------------- -------------
Total interest charges 12,803,562 11,114,496 10,402,060
------------- ------------- -------------
Income Before Preferred Stock Dividends of Subsidiary 16,755,164 17,325,144 14,223,142
Preferred Stock Dividends 813,000 813,000 854,047
------------- ------------- -------------
Earnings Applicable to Common Stock $ 15,942,164 $ 16,512,144 $ 13,369,095
============= ============= =============
<FN>
See Notes to Consolidated Financial Statements.
-2-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
Assets
Utility Plant-At Original Cost:
Utility plant in service $ 654,712,533 $ 502,572,255
Construction work in progress 7,994,186 100,212,636
------------- -------------
Total utility plant 662,706,719 602,784,891
Less accumulated depreciation and amortization 102,682,572 94,926,413
------------- -------------
Utility plant-net 560,024,147 507,858,478
------------- -------------
Non-utility Property 80,976 83,178
------------- -------------
Current Assets:
Cash and cash equivalents 3,121,958 3,796,757
Customer and other accounts receivable
(less reserve: 1996, $566,000; 1995, $532,000) 16,725,298 16,943,725
Unbilled revenues 9,356,122 7,443,656
Materials and supplies-at average cost 2,044,748 1,912,015
Prepaid insurance, taxes, other 3,741,645 1,874,338
------------- -------------
Total current assets 34,989,771 31,970,491
------------- -------------
Deferred Charges (Note 7):
Prepaid pension expense (Note 10) 99,210 580,534
Waste residual management 1,064,454 970,182
Unamortized debt and preferred stock expenses 8,988,426 9,384,609
Taxes recoverable through future rates (Note 3) 30,434,909 26,427,627
Postretirement benefit expense (Note 10) 3,465,272 2,900,569
Other unamortized expenses 1,631,837 632,191
------------- -------------
Total deferred charges 45,684,108 40,895,712
------------- -------------
Total $ 640,779,002 $ 580,807,859
============= =============
<FN>
See Notes to Consolidated Financial Statements.
-3-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
Capitalization and Liabilities
Capitalization (Notes 4 and 5):
Common shareholder's equity $ 182,292,832 $ 176,684,773
Cumulative preferred stock 12,000,000 12,000,000
Long-term debt - net 181,933,425 181,922,528
------------- -------------
Total capitalization 376,226,257 370,607,301
------------- -------------
Current Liabilities:
Notes payable - banks (Note 5) 69,000,000 27,000,000
Long-term debt - current portion (Note 4) 30,000 30,000
Accounts payable and other liabilities 17,093,249 16,723,904
Customers' deposits 300,561 305,349
Municipal and state taxes accrued 13,886,634 13,661,620
Federal income taxes accrued 533,286
Interest accrued 3,157,869 2,937,637
Preferred stock dividends accrued 59,000 59,000
------------- -------------
Total current liabilities 103,527,313 61,250,796
------------- -------------
Deferred Credits:
Customers' advances for construction 43,636,080 45,460,749
Federal income taxes (Note 3) 73,950,218 64,886,448
Unamortized investment tax credits 8,244,937 8,448,811
Accumulated postretirement benefits (Note 10) 3,595,542 2,900,569
------------- -------------
Total deferred credits 129,426,777 121,696,577
------------- -------------
Contributions in Aid of Construction 31,598,655 27,253,185
------------- -------------
Commitments and Contingent Liabilities (Note 9)
Total $ 640,779,002 $ 580,807,859
============= =============
<FN>
See Notes to Consolidated Financial Statements.
-4-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
STATEMENTS OF CONSOLIDATED CAPITALIZATION
December 31,
1996 1995
Common Shareholder's Equity (Notes 4 and 5):
Common stock without par value, authorized,
10,000,000 shares,issued 1996 and 1995,
1,974,902 shares $ 15,740,602 $ 15,740,602
Paid-in capital 117,457,348 112,157,348
Capital stock expense (484,702) (484,702)
Retained earnings 49,579,584 49,271,525
------------- -------------
Total common shareholders' equity 182,292,832 176,684,773
------------- -------------
Cumulative Preferred Stock (Note 4):
$100 par value, authorized, 200,000 shares; $5.90 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 ------------- -------------
Elizabethtown Water Company:
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
5.60% Debentures, due 2025 40,000,000 40,000,000
7 1/4% Debentures, due 2028 50,000,000 50,000,000
The Mount Holly Water Company:
Notes Payable (due serially through 2000) 87,500 117,500
------------- -------------
Total long-term debt 183,087,500 183,117,500
Unamortized discount-net (1,154,075) (1,194,972)
------------- -------------
Total long-term debt-net 181,933,425 181,922,528
------------- -------------
Total Capitalization $ 376,226,257 $ 370,607,301
============= =============
<FN>
See Notes to Consolidated Financial Statements.
-5-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY
Year Ended December 31,
1996 1995 1994
Common Stock: $ 15,740,602 $ 15,740,602 $ 15,740,602
------------- ------------- -------------
Paid-in Capital:
Balance at Beginning of Year 112,157,348 88,868,632 63,522,594
Capital contributed by parent company 5,300,000 23,288,716 25,346,038
------------- ------------- -------------
Balance at End of Year 117,457,348 112,157,348 88,868,632
------------- ------------- -------------
Capital Stock Expense: (484,702) (484,702) (484,702)
------------- ------------- -------------
Retained Earnings:
Balance at Beginning of Year 49,271,525 47,499,723 46,986,485
Income before preferred stock dividends 16,755,164 17,325,144 14,223,142
Dividends on common stock (15,634,105) (14,740,342) (12,855,857)
Dividends on preferred stock (813,000) (813,000) (854,047)
------------- ------------- -------------
Balance at End of Period 49,579,584 49,271,525 47,499,723
------------- ------------- -------------
Total Common Shareholder's Equity $ 182,292,832 $ 176,684,773 $ 151,624,255
============= ============= =============
<FN>
See Notes to Consolidated Financial Statements.
-6-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31,
1996 1995 1994
Cash Flows from Operating Activities:
Income before preferred stock dividends $ 16,755,164 $ 17,325,144 $ 14,223,142
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 9,893,391 8,808,169 7,860,180
(Increase) decrease in deferred charges (612,594) 327,562 (169,459)
Deferred income taxes and investment tax credits-net 4,852,614 4,486,908 4,256,534
Capitalized interest and AFUDC (6,933,870) (5,421,383) (2,045,234)
Other operating activities-net 68,369 (61,590) (130,902)
Change in current assets and current liabilities
excluding cash, short-term investments and current
portion of debt:
Customer and other accounts receivable 218,427 (4,592,923) (462,817)
Unbilled revenues (1,912,466) (282,173) 86,839
Accounts payable and other liabilities 364,557 (1,415,164) 8,517,848
Accrued/prepaid interest and taxes (1,955,347) 2,353,248 (1,464,787)
Other (132,732) (187,046) (101,266)
------------- ------------- -------------
Net cash provided by operating activities 20,605,513 21,340,752 30,570,078
------------- ------------- -------------
Cash Flows Provided by Financing Activities:
Decrease in funds held by Trustee for
construction expenditures 382,306
Proceed from issuance of debentures 40,000,000
Proceed from issuance of preferred stock 12,000,000
Redemption of preferred stock (12,000,000)
Capital contributed by parent company 5,300,000 23,288,716 25,346,038
Debt and preferred stock issuance/amortization costs 396,183 (482,338) (876,594)
Repayment of long-term debt (30,000) (38,800) (42,000)
Contributions and advances for construction-net 2,520,801 3,440,942 3,453,604
Net increase in notes payable - banks 42,000,000 4,000,000 23,000,000
Dividends paid on common stock (16,342,106) (15,448,342) (13,631,154)
------------- ------------- -------------
Net cash provided by financing activities 33,844,878 54,760,178 37,632,200
------------- ------------- -------------
Cash Flows Used for Investing Activities:
Utility plant expenditures (excluding allowance
for funds used during construction) (55,125,190) (73,789,288) (69,980,619)
------------- ------------- -------------
Cash used for investing activities (55,125,190) (73,789,288) (69,980,619)
------------- ------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents (674,799) 2,311,642 (1,778,341)
Cash and Cash Equivalents at Beginning of Year 3,796,757 1,485,115 3,263,456
------------- ------------- -------------
Cash and Cash Equivalents at End of Year $ 3,121,958 $ 3,796,757 $ 1,485,115
============= ============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 8,481,253 $ 7,833,355 $ 9,952,838
Income taxes $ 5,723,350 $ 4,158,093 $ 6,771,254
Preferred stock dividends $ 708,000 $ 708,000 $ 805,475
<FN>
See Notes to Consolidated Financial Statements.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Elizabethtown Water Company (Elizabethtown or Company) and
its wholly owned subsidiary, The Mount Holly Water Company
(Mount Holly) is a wholly owned subsidiary of E'town
Corporation (E'town or Corporation). E'town, a New Jersey
holding company, is the parent company of Elizabethtown Water
Company, E'town Properties and owner of a 65% interest in
Applied Watershed Management.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include Elizabethtown
and its subsidiary, Mount Holly. Significant intercompany
accounts and transactions have been eliminated. Elizabethtown
and Mount Holly are regulated water utilities and follow the
Uniform System of Accounts, as adopted by the New Jersey Board
of Public Utilities (BPU).
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period.
Utility Plant and Depreciation
Income is charged with the cost of labor, materials and
other expenses incurred in making repairs and minor replacements
and in maintaining the properties. Utility plant accounts are
charged with the cost of improvements and major replacements of
property. When depreciable property is retired or otherwise
disposed of, the cost thereof, plus the cost of removal net of
salvage, is charged to accumulated depreciation. Depreciation is
generally computed on a straight-line basis at functional rates
for various classes of assets. The provision for depreciation,
as a percentage of average depreciable property, was 1.73% for
1996, 1.83% for 1995 and 1.75 % for 1994.
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, 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 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. AFUDC totaled $6,933,870, $5,421,383 and
$2,045,234 for 1996, 1995 and 1994, respectively (see Note 8).
Revenues
Revenues are recorded based on the amounts of water
delivered to customers through the end of each accounting
period. This includes an accrual for unbilled revenues for water
delivered from the time meters were last read to the end of the
respective accounting periods.
Federal Income Taxes
Elizabethtown files a consolidated federal tax return with
E'town. Deferred income taxes are provided for temporary
differences in the recognition of revenues and expenses for tax
and financial statement purposes to the extent permitted by the
BPU. Elizabethtown and Mount Holly account for prior years'
investment tax credits by the deferral method, which amortizes
the credits over the lives of the respective assets.
Customer Advances for Construction and Contributions in Aid of
Construction
Customer Advances for Construction (CAC) and Contributions
in Aid of Construction (CIAC) represent capital provided by
developers for main extensions to new real estate developments.
Some portion of CAC is refunded based upon the revenues that the
new developments generate. CIAC are customer advances for
-8-
construction that, under the terms of individual main extension
agreements, are no longer subject to refund. As of October 25,
1996, Elizabethtown is no longer recording depreciation on CAC
and CIAC property, in accordance with a rate decision effective
as of that date (See Note 10).
Cash Equivalents
Elizabethtown Water Company considers all highly liquid debt
instruments purchased with maturities of three months or less to
be cash equivalents.
New Accounting Pronouncement
The Company has adopted SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which was effective in 1996. The statement
requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The
resultant impairment, if any, would be measured based on the
fair value of the asset. The Company does not have any impaired
assets.
Reclassification
Certain prior year amounts have been reclassified to conform
to the current year's presentation.
3. Federal Income Taxes
The computation of federal income taxes and the
reconciliation of the tax provision computed at the federal
statutory rate (35%) with the amount reported in the Statements
of Consolidated Income follow:
1996 1995 1994
(Thousands of Dollars)
Tax expense at statutory rate $ 8,952 $ 9,270 $ 7,573
Items for which deferred taxes
are not provided:
Difference between book and
tax depreciation 132 133 92
Investment tax credits (205) (204) (209)
Other (56) (37) (42)
-------- ------- -------
Provision for federal
income taxes $ 8,823 $ 9,162 $ 7,414
========= ======== ========
The provision for federal income
taxes is composed of the following:
Current $ 3,764 $ 6,409 $ 5,087
Tax on main extensions 207 (1,734) (1,931)
Deferred:
Tax depreciation 3,379 3,492 3,366
Capitalized interest 1,264 800 384
Main cleaning and lining 587 405 396
Other (174) (8) 314
Investment tax credits - net (204) (202) (202)
------- ------- -------
Total provision $8,823 $ 9,162 $ 7,414
======= ======= =======
In accordance with SFAS 109, deferred tax balances have been
reflected at E'town's current consolidated federal income tax
rate, which is 35%.
-9-
The tax effect of significant temporary differences
representing deferred income tax assets and liabilities as of
December 31, 1996 and 1995 is as follows:
1996 1995
(Thousands of Dollars)
Water utility plant - net $(63,474) $(56,956)
Taxes recoverable through future rates (9,871) (9,250)
Investment Tax Credit 2,627 2,957
Prepaid pension expense (35) (203)
Capitalized interest (2,573) (1,308)
Waste residuals (373) (340)
Other assets 285 994
Other liabilities (536) (780)
-------- --------
Net deferred income tax liabilities $(73,950) $(64,886)
======== ========
4. Capitalization
In June 1995, E'town issued 660,000 shares of common stock
for net proceeds of $16,863,860. The gross proceeds of
$17,737,500 were used to fund equity contributions to
Elizabethtown totaling $16,900,000. These equity contributions
were used to repay short-term debt that had been issued under
Elizabethtown's revolving credit agreement (see below) to
partially fund the Company's capital program.
E'town routinely makes equity contributions to Elizabethtown
from the proceeds of common stock issued under E'town's Dividend
Reinvestment and Stock Purchase Plan (DRP). E'town contributed
$5,300,000 and $6,388,716 in 1996 and 1995, respectively, to
Elizabethtown from the proceeds of DRP issuances.
Cumulative Preferred Stock
Elizabethtown's $5.90 Cumulative Preferred Stock is not
redeemable at the option of the Company. Elizabethtown is
required to redeem the entire issue at $100 per share on March
1, 2004.
Long-term Debt
Elizabethtown's long-term debt indentures restrict the
amount of retained earnings available to Elizabethtown to pay
cash dividends (which is the primary source of funds available
to the Corporation for payment of dividends on its common stock)
or acquire Elizabethtown's common stock, all of which is held by
E'town. At December 31, 1996, $7,689,840 of Elizabethtown's
retained earnings were restricted under the most restrictive
indenture provision. Therefore, $34,744,065 of E'town's
consolidated retained earnings were unrestricted.
In the second quarter of 1997, Elizabethtown expects to
issue $50,000,000 of tax-exempt Variable Rate Demand Notes,
through the New Jersey Economic Development Authority (NJEDA).
The proceeds of the issue are expected to be used to repay
amounts outstanding under a revolving credit agreement (see Note
5).
In December 1995, Elizabethtown issued $40,000,000 of 5.60%
tax-exempt debentures through the NJEDA. The proceeds of the
issue were used to repay amounts outstanding under the revolving
credit agreement.
5. Lines of Credit
Elizabethtown has a committed revolving credit agreement
(Agreement) with an agent bank and five additional banks. The
Agreement was executed in 1994 to provide up to $60,000,000 in
revolving short-term financing to partially finance
Elizabethtown's capital program, the predominant portion of
which was the Canal Road Water Treatment Plant (Plant) (see Note
8). The Agreement expires in July 1997 at which time the Company
may convert any outstanding balances to a five-year, fully
amortizing term loan. After July 1997, the Company expects to
meet its short-term financing needs with uncommitted lines of
-10-
credit. These lines, together with internal funds and proceeds
of future issuances of debt and preferred stock by Elizabethtown
and capital contributions by E'town, are expected to be
sufficient to finance Elizabethtown's and Mount Holly's capital
needs, which are estimated to be $125,327,000 through 1999. At
December 31, 1996, Elizabethtown had outstanding borrowings of
$60,000,000 under the Agreement and $9,000,000 of borrowings
under uncommitted lines of credit. The combined borrowings were
at interest rates of 5.50% to 5.88%, at a weighted average rate
of 5.72%. Of the $60,000,000 outstanding under the Agreement at
December 31, 1996, $50,000,000 is expected to be repaid with
the proceeds of the Variable Rate Demand Notes to be issued in
the second quarter of 1997 as discussed in Note 4.
The Agreement further provides that, among other covenants,
Elizabethtown must maintain a percentage 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. As of
December 31, 1996, the percentage of Elizabethtown's common and
preferred equity to total capitalization, calculated in
accordance with the Agreement, was 44%. For the 12 months ended
December 31, 1996, Elizabethtown's pre-tax interest coverage
ratio, calculated in accordance with the Agreement, was 2.72 to
1.
Information relating to bank borrowings for 1996, 1995 and
1994 is as follows:
1996 1995 1994
(Thousands of Dollars)
Maximum amount outstanding $ 69,000 $ 60,000 $ 23,000
Average monthly amount
outstanding $ 45,240 $ 39,636 $ 2,958
Average interest rate at year end 5.7% 5.9% 6.1%
Compensating balances at year end$ 0 $ 0 $ 0
Weighted average interest rate
based on average daily balances 5.8% 6.2% 5.7%
6. Financial Instruments
The carrying amounts and the estimated fair values, as of
December 31, 1996 and 1995, of financial instruments issued or
held by the Company are as follows:
1996 1995
(Thousands of Dollars)
Cumulative preferred stock:
Carrying amount $ 12,000 $ 12,000
Estimated fair value 12,000 11,940
Long-term debt:
Carrying amount $181,933 $181,923
Estimated fair value 185,375 189,664
Estimated fair values are based upon quoted market prices
for these or similar securities.
-11-
7. Regulatory Assets and Liabilities
Certain costs incurred by Elizabethtown and Mount Holly,
which have been deferred, have been recognized as regulatory
assets and are being amortized over various periods as set forth
below:
1996 1995
(Thousands of Dollars)
Waste residual management $ 1,064 $ 970
Unamortized debt and preferred
stock expense 8,988 9,385
Taxes recoverable through future
rates (Note 3) 30,435 26,428
Postretirement benefit
expense (Note 10) 3,465 2,901
Safety management expense 418 302
Business process redesign 362 235
Rate case expenses 201 110
--------- ---------
Total $ 44,933 $ 40,331
========= =========
Waste Residual Management
The costs of disposing of the waste generated by
Elizabethtown's and Mount Holly's water treatment plants are
being amortized and recovered in rates over three and five-year
periods, respectively, for ratemaking and financial statement
purposes. No return is being earned on the deferred balances
related to these programs.
Unamortized Debt and Preferred Stock Expenses
Costs incurred in connection with the issuance or redemption
of long-term debt have been deferred and are being amortized and
recovered in rates over the lives of the respective issues for
ratemaking and financial statement purposes. Costs incurred in
connection with the issuance and redemption of preferred stock
have been deferred and are being amortized and recovered in
rates over a 10-year period for ratemaking and financial
statement purposes.
Other
Safety management expenses and business process redesign
expenses were 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 over two-year periods.
There were no regulatory liabilities at December 31, 1996 or
1995.
8. Regulatory Matters
Rates
Elizabethtown
On October 25, 1996, Elizabethtown received a rate increase
under a stipulation (1996 Stipulation) resulting in an increase
in annual revenues of $21,800,000. The rate increase reflects a
full allowance for the estimated capital cost of the Plant of
$100,000,000 in addition to estimated AFUDC of $12,598,151. The
increase also reflects a full allowance for the estimated
operating costs of the Plant. The Plant went into service on
October 24, 1996. The total cost of the Plant is estimated to be
$101,554,469 in addition to AFUDC of $13,499,744. The 1996
Stipulation provides that actual costs in excess of the original
estimated cost of $100,000,000 will be considered in future rate
cases. The rate increase also reflects an authorized rate of
return on common equity of 11.25%. Recovery of depreciation
expense on CIAC and CAC is not reflected in the rate increase
and the Company is no longer required to record, for financial
statement purposes, such depreciation expense of approximately
$700,000 annually, for the period that this rate increase is in
effect. The 1996 Stipulation also allows the Company to continue
to defer the transition obligation and interest associated with
postretirement benefits as well as to continue to recover in
rates the current service cost portion of the obligation for
postretirement benefits. In addition, the 1996 Stipulation
-12-
reflects $246,292 for the effect of the Purchased Water
Adjustment Clause, for which a separate petition was filed in
February 1996 and subsequently withdrawn due to the inclusion of
this item in the 1996 Stipulation.
In February 1995, Elizabethtown received a rate increase
that yielded $5,300,000 in annual revenues as a result of a
stipulation (1995 Stipulation). This Stipulation provided for an
authorized rate of return on common equity of 11.5%. The
increase also provided for recovery of the cost to finance
$62,000,000 of construction projects since rates had last been
established in March 1993 as well as increased costs for power,
labor and benefits, primarily medical.
Mount Holly
In June 1995, Mount Holly petitioned the BPU for an increase
in rates, to take place in two phases. The first phase was
necessary to recover costs that were not reflected in rates last
increased in 1986. The second phase would recover the cost of a
new water supply, treatment and transmission system necessary to
obtain water outside a designated portion of an aquifer
currently used by Mount Holly, and to treat and pump the water
into the Mount Holly distribution system. Management believes
this project is the most cost-effective alternative available to
Mount Holly to comply with recent state legislation that
restricts the amount of water that can be withdrawn from an
aquifer in certain areas of southern New Jersey. The project,
referred to as the Mansfield project, is currently estimated to
cost $16,500,000, excluding AFUDC. Mount Holly has expended
$2,855,587 on the Mansfield Project as of December 31, 1996,
excluding AFUDC. The land for the supply and treatment
facilities has been purchased and test wells have been drilled
and can produce the required supply. On October 5, 1995, the New
Jersey Department of Environmental Protection (NJDEP) granted
Mount Holly a water allocation diversion permit for four wells
that are to be the water supply for this project. On October 20,
1995, another water purveyor requested of the NJDEP, and was
subsequently granted, an adjudicatory hearing in opposition to
the permit. Hearings on the matter before an administrative law
judge are pending. A decision is expected later in 1997. The
Company and Mount Holly believe that the permit in question will
be upheld, but cannot predict with certainty the outcome of the
matter. In the event that the objector is successful and the
permit is rescinded, Mount Holly would meet its regulatory
obligation to provide an alternate source of water by purchasing
water from that purveyor.
On January 24, 1996, the BPU approved a stipulation (Mount
Holly Stipulation) for an increase in rates of $550,000,
effective as of that date. The Mount Holly Stipulation has,
effectively, concluded the first phase of the rate proceeding.
9. Commitments
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, 1997, the annual cost of water under contract
will be $7,861,486. The Company purchases additional water from
the NJWSA on an as-needed basis. The total cost of water
purchased from the NJWSA was $8,695,370, $9,344,792 and
$8,987,472 for 1996, 1995 and 1994, respectively.
The Elizabethtown has committments under long-term leases
of $817,264 for 1997 and $12,330 for 1998. Substantially all of
these committments expire in November 1997. Rent expense totaled
$836,400, $820,481 and $829,562 for 1996, 1995 and 1994,
respectively.
Capital expenditures through 1999 are estimated to be
$125,327,000 for Elizabethtown's and Mount Holly's utility
plant.
10. Pension Plan and Other Postretirement Benefits
Pension Plan
Elizabethtown has a trusteed, noncontributory Retirement
Plan (Plan), which covers most employees. Under the Company's
funding policy, the Company makes contributions that meet the
minimum funding requirements of the Employee Retirement Income
Security Act of 1974.
-13-
The components of the net pension costs for the
Retirement Plan are as follows:
1996 1995 1994
(Thousands of Dollars)
Service cost - benefits earned
during the year $ 1,322 $ 915 $ 1,052
Interest cost on projected
benefit obligation 2,480 2,156 1,946
Return on Plan assets (4,542) (7,587) 939
Net amortization and deferral 1,221 4,862 (3,860)
------- -------- ------
Net pension costs $ 481 $ 346 $ 77
======= ======== ======
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:
1996 1995
(Thousands of Dollars)
Market value of Plan assets $40,016 $ 36,957
------- --------
Actuarial present value of Plan benefits:
Vested benefits 28,492 25,986
Non-vested benefits 97 101
------- -------
Accumulated benefit obligation 28,589 26,087
Projected increases in compensation levels 7,183 7,877
------- -------
Projected benefit obligation 35,772 33,964
------- -------
Excess of Plan assets over projected benefit
obligation 4,244 2,993
Unrecognized net gain (3,978) (620)
Unrecognized prior service cost 1,724 363
Unrecognized transition asset (1,891) (2,156)
------- --------
Prepaid pension expense $ 99 $ 580
======= =======
The Company has a supplemental retirement plan for certain
management employees that is not funded. Benefit payments under
this plan are made directly by the Company. At December 31,
1996, the projected benefit obligation of this supplemental plan
was $1,400,326 and the net periodic benefit cost for 1996 was
$251,279. The assumed rates used in determining the actuarial
present value of the projected benefit obligations were as
follows:
1996 1995 1994
Discount rate 7.50% 7.00% 8.00%
Compensation increase 5.50% 5.50% 5.50%
Rate of return on Plan assets 9.00% 9.00% 8.50%
Other Postretirement Benefits
The Company provides certain health care and life insurance
benefits for substantially all of its retired employees. As a
result of a contract negotiated in February 1996 with the
Company's bargaining unit, all union and non-union employees
retiring after January 1, 1997 will pay 25% of future increases
in the premiums the Company pays for postretirement medical
benefits.
Under SFAS 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.
-14-
Based upon an independent actuarial study, the transition
obligation, calculated under SFAS 106, was $7,214,736 as of
January 1, 1993, the date of adoption of SFAS 106. The
transition obligation is being amortized over 20 years.
The following table details the postretirement benefit
obligation at December 31:
1996 1995
(Thousands of Dollars)
Retirees $ 2,015 $ 2,404
Fully eligible plan participants 4,034 6,263
-------- ---------
Accumulated postretirement
benefit obligation 6,049 8,667
Plan assets at fair value (764) (320)
Unrecognized net gain 3,952 685
Unrecognized transition obligation (5,772) (6,131)
-------- --------
Accrued postretirement benefit obligation $ 3,465 $ 2,901
======== ========
The assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation as of December
31, 1996 and for 1996 was 9%. This rate decreases linearly each
successive year until it reaches 3.8% in 2006, after which the
rate remains constant. The assumed rates used in determining the
actuarial present value of the projected benefit obligations
were as follows:
1996 1995 1994
Discount rate 7.50% 7.00% 8.00%
A single percentage point increase in the assumed health
care cost trend rate for each year would increase the
accumulated postretirement benefit obligation as of December 31,
1996, and the net postretirement service and interest cost by
approximately $1,370,000 and $186,000, respectively.
Based upon the independent actuarial study referred to
above, the annual postretirement cost calculated under SFAS 106
is as follows:
1996 1995 1994
(Thousands of Dollars)
Service cost - benefits earned
during the year $ 416 $ 474 $ 369
Interest cost on accumulated
postretirement benefit obligation 425 579 592
Return on Plan assets (72)
Amortization of transition
obligation 417 360 361
------- ------- -------
Total 1,186 1,413 1,322
Deferred amount for regulated
companies pending recovery (565) (824) (1,072)
------- ------- -------
Net postretirement benefit expense $ 621 $ 589 $ 250
======= ======= =======
The rate increases allowed by the 1996 Stipulation and the
Mount Holly Stipulation include as a recoverable expense the
pay-as-you-go portion of postretirement benefits as well as the
current service cost to the extent such current service cost is
funded. Elizabethtown funded $347,151 in 1996 and $318,222 in
1995. Mount Holly funded $25,045 for 1996. These Stipulations
allow Elizabethtown and Mount Holly to defer the amount accrued
in excess of the portions being recovered in rates for
consideration in future rate filings. As of December 31, 1996,
the amount that has been deferred is $3,465,272. On January 8,
1997, the BPU issued a generic Order for regulated New Jersey
-15-
utilities approving a stipulation related to the implementation
of SFAS 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions". The stipulation developed general
guidelines for mechanisms which would be available for recovery
of costs consistent with SFAS 106. Elizabethtown and Mount Holly
will file for a rate increase in 1997, solely related to the
recovery of SFAS 106 costs, to be effective by January 1, 1998.
11. Quarterly Financial Data (Unaudited)
A summary of financial data for each quarter of 1996 and
1995 follows:
Earnings
Income Before Applicable
Operating Operating Preferred Stock to Common
Quarter Revenues Income Dividends Stock
(Thousands of Dollars)
1996
1st $ 25,760 $ 5,651 $ 3,594 $ 3,391
2nd 27,263 6,484 4,365 4,163
3rd 28,173 7,146 4,911 4,708
4th 29,162 7,562 3,885 3,680
--------- --------- --------- ---------
Total $ 110,358 $ 26,843 $ 16,755 $ 15,942
========= ========= ========= =========
1995
1st $ 25,174 $ 5,906 $ 3,653 $ 3,449
2nd 27,101 6,542 4,377 4,174
3rd 30,451 8,085 5,720 5,517
4th 25,672 5,754 3,575 3,372
--------- --------- --------- ---------
Total $ 108,398 $ 26,287 $ 17,325 $ 16,512
========= ========= ========= =========
Water utility revenues are subject to seasonal fluctuation
due to normal increased water consumption during the third
quarter of each year.
-16-