SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
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
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
Title of each class Name of each exchange on which registered
None 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 Securities 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 the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date
Outstanding at
Class of Common Stock: March 31, 1999
E'town Corporation (without par value) 8,534,380
Elizabethtown Water Company (without par value)* 1,974,902
* All shares are owned by E'town Corporation
===============================================================================
E'TOWN CORPORATION AND SUBSIDIARIES
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
INDEX
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
E'TOWN CORPORATION AND SUBSIDIARIES
- Statements of Consolidated Income 1
- Consolidated Balance Sheets 2-3
- Statements of Consolidated Capitalization 4
- Statements of Consolidated Shareholders' Equity 5
- Statements of Consolidated Cash Flows 6
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
- Statements of Consolidated Income 7
- Consolidated Balance Sheets 8-9
- Statements of Consolidated Capitalization 10
- Statements of Consolidated Shareholder's Equity 11
- Statements of Consolidated Cash Flows 12
E'TOWN CORPORATION AND SUBSIDIARIES AND
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
- Notes to Consolidated Financial Statements 13
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 18
PART II - OTHER INFORMATION 25
Items 1 - 5
Item 6 (a) - Exhibits 25
(b) - Reports on Form 8-K 25
SIGNATURES 26
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands Except Per Share Amounts)
(Unaudited) Three Months Ended
March 31,
1999 1998
- -----------------------------------------------------------------------------
Operating Revenues $ 35,476 $ 31,267
- -----------------------------------------------------------------------------
Operating Expenses:
Operation 14,575 11,156
Maintenance 1,609 1,569
Depreciation and amortization 3,674 3,158
Revenue taxes 3,740 3,846
Real estate, payroll and other taxes 990 846
Federal income taxes 2,213 2,237
- -----------------------------------------------------------------------------
Total operating expenses 26,801 22,812
- -----------------------------------------------------------------------------
Operating Income 8,675 8,455
- -----------------------------------------------------------------------------
Other Income (Expense):
Allowance for equity funds used during
construction 75 115
Federal income taxes (1,243) (70)
Gain on sale of land 3,197
Other - net 281 82
- -----------------------------------------------------------------------------
Total other income (expense) 2,310 127
- -----------------------------------------------------------------------------
Total Operating and Other Income 10,985 8,582
- -----------------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 4,134 3,985
Other interest expense - net 291 214
Capitalized interest (53) (91)
Amortization of debt discount and expense-net 110 108
- -----------------------------------------------------------------------------
Total interest charges 4,482 4,216
- -----------------------------------------------------------------------------
Income Before Preferred Stock Dividends
of Subsidiary 6,503 4,366
Preferred Stock Dividends 203 203
- -----------------------------------------------------------------------------
Net Income $ 6,300 $ 4,163
=============================================================================
Earnings Per Share of Common Stock (Note 6):
- -----------------------------------------------------------------------------
Basic $ 0.74 $ 0.52
Diluted $ 0.73 $ 0.51
- -----------------------------------------------------------------------------
Average Number of Shares Outstanding for
the Calculation of Earnings Per Share:
- -----------------------------------------------------------------------------
Basic 8,512 8,057
Diluted 8,797 8,366
- -----------------------------------------------------------------------------
Dividends Paid Per Common Share $ 0.51 $ 0.51
=============================================================================
See Notes to Consolidated Financial Statements.
-1-
E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands) March 31,
1999 December 31,
Assets (Unaudited) 1998
- -----------------------------------------------------------------------------
Utility Plant-At Original Cost:
Utility plant in service $ 718,117 $ 717,985
Construction work in progress 24,992 16,580
- -----------------------------------------------------------------------------
Total utility plant 743,109 734,565
Less accumulated depreciation 128,448 125,262
- -----------------------------------------------------------------------------
Utility plant-net 614,661 609,303
- -----------------------------------------------------------------------------
Non-utility Property and Other
Investments - Net (Note 7) 83,813 84,945
- -----------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 7,017 5,909
Customer and other accounts receivable
(less reserve: 1999, $1,080, 1998, $1,065) 31,059 24,720
Unbilled revenues 12,224 12,198
Infrastructure loan funds receivable (Note 4) 5,657 5,895
Materials and supplies-at average cost 2,432 2,538
Prepaid insurance, taxes, other 1,466 2,515
- -----------------------------------------------------------------------------
Total current assets 59,855 53,775
- -----------------------------------------------------------------------------
Deferred Charges:
Waste residual management 1,318 1,371
Unamortized debt and preferred stock expenses 9,924 10,050
Taxes recoverable through future rates 14,226 14,226
Postretirement benefit expense 3,425 3,490
Other unamortized expenses 2,002 1,582
- -----------------------------------------------------------------------------
Total deferred charges 30,895 30,719
- -----------------------------------------------------------------------------
Total $ 789,224 $ 778,742
=============================================================================
See Notes to Consolidated Financial Statements.
-2-
E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands) March 31,
1999 December 31,
Capitalization and Liabilities (Unaudited) 1998
- -----------------------------------------------------------------------------
Capitalization (Notes 3 and 4):
Common shareholders' equity $ 219,828 $ 215,472
Mandatory Redeemable Cumulative Preferred Stock 12,000 12,000
Redeemable preferred stock 227 227
Long-term debt - net 286,675 286,908
- -----------------------------------------------------------------------------
Total capitalization 518,730 514,607
- -----------------------------------------------------------------------------
Current Liabilities:
Notes payable - banks 41,984 44,022
Long-term debt - current portion 30 30
Accounts payable and other liabilities 18,306 19,469
Contract obligations payable 12,000 12,000
Customers' deposits 246 248
Municipal and state taxes accrued 20,830 16,789
Federal income taxes accrued 1,768
Interest accrued 5,365 3,675
Preferred stock dividends accrued 59 59
- -----------------------------------------------------------------------------
Total current liabilities 100,588 96,292
- -----------------------------------------------------------------------------
Deferred Credits:
Customers' advances for construction 42,113 41,102
Federal income taxes 67,297 66,487
State income taxes 207 207
Unamortized investment tax credits 7,872 7,839
Accumulated postretirement benefits 4,030 4,090
- -----------------------------------------------------------------------------
Total deferred credits 121,519 119,725
- -----------------------------------------------------------------------------
Contributions in Aid of Construction 48,387 48,118
- -----------------------------------------------------------------------------
Commitments and Contingent Liabilities
- -----------------------------------------------------------------------------
Total $ 789,224 $ 778,742
=============================================================================
See Notes to Consolidated Financial Statements.
-3-
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(In Thousands Except Share Amounts) March 31,
1999 December 31,
(Unaudited) 1998
- -----------------------------------------------------------------------------
Common Shareholders' Equity:
E'town Corporation:
Common stock without par value, authorized,
15,000,000 shares, issued 1999, 8,566,934
shares; 1998, 8,504,344 shares $ 171,719 $ 169,324
Paid-in capital 1,315 1,315
Capital stock expense (5,160) (5,160)
Retained earnings 52,922 50,961
Less cost of treasury stock; 1999 and
1998, 32,554 shares (968) (968)
- -----------------------------------------------------------------------------
Total common shareholders' equity 219,828 215,472
- -----------------------------------------------------------------------------
Preferred Shareholders' Equity
Elizabethtown Water Company:
Mandatory Redeemable Cumulative Preferred Stock:
$100 par value, authorized, 200,000 shares;
$5.90 series, issued and outstanding,
120,000 shares 12,000 12,000
Cumulative Preferred Stock:
$25 par value, authorized, 500,000 shares;
none issued
Applied Wastewater Management, Inc:
Redeemable Preferred Stock:
No par value, non-cumulative, issued and
outstanding, 227 shares 227 227
- -----------------------------------------------------------------------------
Total preferred shareholders' equity 12,227 12,227
- -----------------------------------------------------------------------------
Long-Term Debt (Note 4):
E'town Corporation:
6 3/4% Convertible Subordinated Debentures,
due 2012 10,257 10,499
6.79% Senior Notes, due 2007 12,000 12,000
Liberty Water Company:
Contract Obligations Payable 19,000 19,000
Applied Wastewater/Applied Water Management:
Notes Payable 267 261
Elizabethtown Water Company:
7.20% Debentures, due 2019 10,000 10,000
7 1/2% Debentures, due 2020 15,000 15,000
6.60% Debentures, due 2021 10,500 10,500
6.70% Debentures, due 2021 15,000 15,000
8 3/4% Debentures, due 2021 27,500 27,500
8% Debentures, due 2022 15,000 15,000
5.60% Debentures, due 2025 40,000 40,000
7 1/4% Debentures, due 2028 50,000 50,000
Variable Rate Debentures, due 2027 50,000 50,000
The Mount Holly Water Company:
New Jersey Environmental Infrastructure
Trust Notes 7,295 7,295
New Jersey Department of Environmental
Protection Notes 5,895 5,895
Notes Payable (due serially through 2000) 23 30
- -----------------------------------------------------------------------------
Total long-term debt 287,737 287,980
Unamortized (discount) premium-net (1,062) (1,072)
- -----------------------------------------------------------------------------
Total long-term debt-net 286,675 286,908
- -----------------------------------------------------------------------------
Total Capitalization $ 518,730 $ 514,607
=============================================================================
See Notes to Consolidated Financial Statements.
-4-
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Thousands Except Share Amounts) Three Months Ended
March 31, Year Ended
1999 December 31,
(Unaudited) 1998
- -----------------------------------------------------------------------------
Common Stock:
Balance at Beginning of Period $ 169,324 $ 153,162
Common stock issued under Dividend Reinvestment
and Stock Purchase Plan (1999, 53,340 shares;
1998, 213,568 shares) 2,067 7,861
Redemption of Convertible Debentures (1999,
6,050 shares; 1998, 18,100 shares) 242 724
Issuance of restricted stock under compensation
programs (1998, 9,590 shares) 332
Issuance of restricted stock for acquisitions
(1998, 186,310 shares) 6,653
Exercise of stock options (1999, 3,200 shares;
1998, 22,386 shares) 592
- -----------------------------------------------------------------------------
Balance at End of Period 171,719 169,324
- -----------------------------------------------------------------------------
Paid-in Capital: 1,315 1,315
- -----------------------------------------------------------------------------
Capital Stock Expense: (5,160) (5,160)
- -----------------------------------------------------------------------------
Retained Earnings:
Balance at Beginning of Period 50,961 45,560
Net Income 6,300 22,330
Dividends on common stock (1999, $.51; 1998, $2.04) (4,339) (16,929)
- -----------------------------------------------------------------------------
Balance at End of Period 52,922 50,961
- -----------------------------------------------------------------------------
Treasury Stock:
Balance at Beginning of Period (968) (954)
Cost of shares redeemed to exercise stock
options (1998, 346 shares) (14)
- -----------------------------------------------------------------------------
Balance at End of Period (968) (968)
- -----------------------------------------------------------------------------
Total Common Shareholders' Equity $ 219,828 $ 215,472
=============================================================================
See Notes to Consolidated Financial Statements.
-5-
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands)
(Unaudited) Three Months Ended
March 31,
1999 1998
- -----------------------------------------------------------------------------
Cash Flows Provided by Operating Activities:
Net Income $ 6,300 $ 4,163
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,674 3,158
Increase in deferred charges (367) (739)
Deferred income taxes and investment tax
credits-net 844 803
Capitalized interest and AFUDC (128) (206)
Other operating activities-net 314 351
Change in current assets and current liabilities
excluding cash, short-term investments and
current portion of debt:
Customer and other accounts receivable (6,101) (820)
Unbilled revenues (26) 491
Accounts payable and other liabilities (1,165) 1,916
Accrued/prepaid interest and taxes 8,517 7,861
Other 106 (350)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 11,968 16,628
- -----------------------------------------------------------------------------
Cash Flows Used by Financing Activities:
Proceeds from issuance of common stock 2,395 2,021
Funds held in Trust by others 258
Debt and preferred stock issuance and
amortization costs 126 124
Issuance of other of long-term debt 6,000
Repayment of long-term debt (243) (72)
Contributions and advances for construction-net 1,280 (926)
Net decreases in notes payable - banks (2,038) (12,000)
Dividends paid on common stock (4,339) (4,107)
- -----------------------------------------------------------------------------
Net cash flows used by financing activities (2,561) (8,960)
- -----------------------------------------------------------------------------
Cash Flows Used for Investing Activities:
Utility plant and other capital expenditures
(excluding allowance for funds used during
construction) (9,541) (7,314)
Capital expenditures on privatization contracts (286)
Proceeds from sale of land 1,528
Development costs of land (excluding
capitalized interest) (14)
- -----------------------------------------------------------------------------
Net cash flows used for investing activities (8,299) (7,328)
- -----------------------------------------------------------------------------
Net Increase in Cash
and Cash Equivalents 1,108 340
Cash and Cash Equivalents at
Beginning of Period 5,909 6,233
- -----------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 7,017 $ 6,573
=============================================================================
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 3,896 $ 2,244
Income taxes $ 1,600 $ -0-
Preferred stock dividends $ 177 $ 177
- -----------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-6-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
1999 1998
- -----------------------------------------------------------------------------
Operating Revenues $ 31,066 $ 30,507
- -----------------------------------------------------------------------------
Operating Expenses:
Operation 11,591 10,409
Maintenance 1,456 1,455
Depreciation 3,197 3,158
Revenue taxes 3,733 3,846
Real estate, payroll and other taxes 883 824
Federal income taxes 2,189 2,413
- -----------------------------------------------------------------------------
Total operating expenses 23,049 22,105
- -----------------------------------------------------------------------------
Operating Income 8,017 8,402
- -----------------------------------------------------------------------------
Other Income (Expense):
Allowance for equity funds used during
construction 75 115
Federal income taxes (72) (43)
Other - net 128 7
- -----------------------------------------------------------------------------
Total other income (expense) 131 79
- -----------------------------------------------------------------------------
Total Operating and Other Income 8,148 8,481
- -----------------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 3,757 3,624
Other interest expense - net 63 206
Allowance for funds used during construction (53) (91)
Amortization of debt discount and expense-net 98 97
- -----------------------------------------------------------------------------
Total interest charges 3,865 3,836
- -----------------------------------------------------------------------------
Net Income 4,283 4,645
Preferred Stock Dividends 203 203
- -----------------------------------------------------------------------------
Earnings Applicable To Common Stock $ 4,080 $ 4,442
=============================================================================
See Notes to Consolidated Financial Statements.
-7-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands) March 31,
1999 December 31,
Assets (Unaudited) 1998
- -----------------------------------------------------------------------------
Utility Plant-At Original Cost:
Utility plant in service $ 714,433 $ 714,301
Construction work in progress 23,857 15,694
- -----------------------------------------------------------------------------
Total utility plant 738,290 729,995
Less accumulated depreciation and amortization 128,255 125,096
- -----------------------------------------------------------------------------
Utility plant-net 610,035 604,899
- -----------------------------------------------------------------------------
Non-utility Property (Note 7) 7,057 7,315
- -----------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 4,205 3,598
Customer and other accounts receivable
(less reserve: 1999, $653, 1998, $670) 18,469 16,952
Unbilled revenues 9,950 10,091
Infrastructure loan funds receivable (Note 4) 5,657 5,895
Materials and supplies-at average cost 2,432 2,538
Prepaid insurance, taxes, other 1,392 2,433
- -----------------------------------------------------------------------------
Total current assets 42,105 41,507
- -----------------------------------------------------------------------------
Deferred Charges:
Waste residual management 1,318 1,371
Unamortized debt and preferred stock expenses 9,254 9,368
Taxes recoverable through future rates 14,226 14,226
Postretirement benefit expense 3,425 3,490
Other unamortized expenses 1,689 1,152
- -----------------------------------------------------------------------------
Total deferred charges 29,912 29,607
- -----------------------------------------------------------------------------
Total $ 689,109 $ 683,328
=============================================================================
See Notes to Consolidated Financial Statements.
-8-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands) March 31,
1999 December 31,
Capitalization and Liabilities (Unaudited) 1998
- -----------------------------------------------------------------------------
Capitalization (Note 3):
Common shareholder's equity $ 210,381 $ 208,573
Mandatory redeemable cumulative preferred stock 12,000 12,000
Long-term debt - net 245,151 245,148
- -----------------------------------------------------------------------------
Total capitalization 467,532 465,721
- -----------------------------------------------------------------------------
Current Liabilities:
Notes payable - banks 20,000 22,000
Long-term debt - current portion 30 30
Accounts payable and other liabilities 10,094 12,457
Customers' deposits 246 248
Federal income taxes accrued 451
Municipal and state taxes accrued 20,851 16,776
Interest accrued 4,960 3,228
Preferred stock dividends accrued 59 59
- -----------------------------------------------------------------------------
Total current liabilities 56,691 54,798
- -----------------------------------------------------------------------------
Deferred Credits:
Customers' advances for construction 41,915 40,874
Federal income taxes 65,495 64,696
Unamortized investment tax credits 7,872 7,839
Accumulated postretirement benefits 3,882 3,947
- -----------------------------------------------------------------------------
Total deferred credits 119,164 117,356
- -----------------------------------------------------------------------------
Contributions in Aid of Construction 45,722 45,453
- -----------------------------------------------------------------------------
Commitments and Contingent Liabilities
- -----------------------------------------------------------------------------
Total $ 689,109 $ 683,328
=============================================================================
See Notes to Consolidated Financial Statements.
-9-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(In Thousands) March 31,
1999 December 31,
(Unaudited) 1998
- -----------------------------------------------------------------------------
Common Shareholder's Equity (Note 3):
Common stock without par value, authorized,
15,000,000 shares, issued 1999 and 1998,
1,974,902 shares $ 15,741 $ 15,741
Paid-in capital 134,820 132,753
Capital stock expense (485) (485)
Retained earnings 60,305 60,564
- -----------------------------------------------------------------------------
Total common shareholder's equity 210,381 208,573
- -----------------------------------------------------------------------------
Preferred Shareholders' Equity:
Mandatory Redeemable Cumulative Preferred Stock
$100 par value, authorized, 200,000 shares;
$5.90 series, issued and outstanding,
120,000 shares 12,000 12,000
Cumulative Preferred Stock:
$25 par value, authorized, 500,000 shares;
none issued
- -----------------------------------------------------------------------------
Long-Term Debt:
Elizabethtown Water Company:
7.20% Debentures, due 2019 10,000 10,000
7 1/2% Debentures, due 2020 15,000 15,000
6.60% Debentures, due 2021 10,500 10,500
6.70% Debentures, due 2021 15,000 15,000
8 3/4% Debentures, due 2021 27,500 27,500
8% Debentures, due 2022 15,000 15,000
5.60% Debentures, due 2025 40,000 40,000
7 1/4% Debentures, due 2028 50,000 50,000
Variable Rate Debentures, due 2027 50,000 50,000
The Mount Holly Water Company:
New Jersey Department of Environmental
Protection Notes 5,895 5,895
New Jersey Environmental Infrastructure
Trust Notes 7,295 7,295
Notes Payable (due serially through 2000) 23 30
- -----------------------------------------------------------------------------
Total long-term debt 246,213 246,220
Unamortized discount-net (1,062) (1,072)
- -----------------------------------------------------------------------------
Total long-term debt-net 245,151 245,148
- -----------------------------------------------------------------------------
Total Capitalization $ 467,532 $ 465,721
=============================================================================
See Notes to Consolidated Financial Statements.
-10-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Thousands)
Three Months Ended
March 31, Year Ended
1999 December 31,
(Unaudited) 1998
- -----------------------------------------------------------------------------
Common Stock: $ 15,741 $ 15,741
- -----------------------------------------------------------------------------
Paid-in Capital:
Balance at Beginning of Period 132,753 124,560
Capital contributed by parent company 2,067 8,193
- -----------------------------------------------------------------------------
Balance at End of Period 134,820 132,753
- -----------------------------------------------------------------------------
Capital Stock Expense (485) (485)
- -----------------------------------------------------------------------------
Retained Earnings:
Balance at Beginning of Period 60,564 53,538
Net income 4,283 24,768
Dividends on common stock (4,339) (16,929)
Dividends on preferred stock (203) (813)
- -----------------------------------------------------------------------------
Balance at End of Period 60,305 60,564
- -----------------------------------------------------------------------------
Total Common Shareholder's Equity $ 210,381 $ 208,573
=============================================================================
See Notes to Consolidated Financial Statements.
-11-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands)
(Unaudited) Three Months Ended
March 31,
1999 1998
- -----------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 4,283 $ 4,645
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,197 3,158
Increase in deferred charges (484) (587)
Deferred income taxes and investment tax
credits-net 832 783
Allowance for funds used during construction (128) (206)
Other operating activities-net (16) 120
Change in current assets and current liabilities
excluding cash, short-term investments and
current portion of debt:
Customer and other accounts receivable (1,279) (942)
Unbilled revenues 141 545
Accounts payable and other liabilities (2,365) 2,284
Accrued/prepaid interest and taxes 7,299 8,064
Other 106 (350)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 11,586 17,514
- -----------------------------------------------------------------------------
Cash Flows Used by Financing Activities:
Capital contributed by parent company 2,067 1,498
Funds held in Trust by others 258
Debt and preferred stock issuance and
amortization costs 114 113
Repayment of long-term debt (7) (4)
Contributions and advances for construction-net 1,310 (926)
Net decrease in notes payable - banks (2,000) (7,000)
Dividends paid on common stock and preferred stock (4,516) (4,284)
- -----------------------------------------------------------------------------
Net cash used by financing activities (2,774) (10,603)
- -----------------------------------------------------------------------------
Cash Flows Used for Investing Activities:
Utility plant expenditures (excluding allowance
for funds used during construction) (8,205) (7,073)
- -----------------------------------------------------------------------------
Cash used for investing activities (8,205) (7,073)
- -----------------------------------------------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 607 (162)
Cash and Cash Equivalents at
Beginning of Period 3,598 4,226
- -----------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 4,205 $ 4,064
=============================================================================
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 2,795 $ 2,049
Income taxes $ 1,600 $ -0-
Preferred stock dividends $ 177 $ 177
- -----------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-12-
E'TOWN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
E'town Corporation (E'town or Corporation), is the parent company of
Elizabethtown Water Company (Elizabethtown or Company), Edison Water
Company (Edison), E'town Properties, Inc. (Properties), Liberty Water
Company (Liberty), Applied Water Management, Inc. (AWM) and Applied
Wastewater Management, Inc. (AWWM). The Mount Holly Water Company (Mount
Holly) is a wholly-owned subsidiary of Elizabethtown. The assets and
operating results of Elizabethtown constitute the predominant portions of
E'town's assets and operating results. The regulated utilities,
Elizabethtown, Mount Holly and AWWM, comprise the Regulated Utilities
segment, Liberty and Edison comprise the Contract Operations segment, AWM
is the Engineering/Operations/Construction segment and E'town and
Properties comprise the Financing and Investment segment.
2. INTERIM FINANCIAL STATEMENTS
The financial statements reflect all adjustments which, in the opinion of
management, are necessary for a fair presentation. The Notes to
Consolidated Financial Statements accompanying the 1998 Annual Report to
Shareholders and the 1998 Form 10-K should be read in conjunction with
this report.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that 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.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments
of an Enterprise and Related Information". The pronouncement requires
disclosure of selected information about operating segments in interim
financial reports. The Corporation adopted this pronouncement in 1998. See
Note 9 for this disclosure.
In 1998 the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP is
effective for fiscal years beginning after December 15, 1998 and
establishes criteria for capitalizing certain internal use software costs.
The Corporation adopted this pronouncement in the first quarter of 1999.
Adoption of the SOP did not have an effect on the Corporatio's financial
statements.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity". Absent any possible changes, this
Statement must be adopted by January 1, 2000. The Corporation does not
believe this Statement will have any impact on its financial condition and
results of operations.
3. CAPITALIZATION
E'town routinely makes equity contributions to Elizabethtown which
represent a portion of the proceeds of common stock issued under E'town's
Dividend Reinvestment and Stock Purchase Plan (DRP). E'town contributed
$2.1 million from the DRP proceeds to Elizabethtown for the three months
ended March 31, 1999.
-13-
4. LONG-TERM DEBT
In October 1998, E'town filed a registration statement with the Securities
and Exchange Commission (SEC) to issue up to $75 million of unsecured
medium-term notes. The SEC is currently reviewing the filing, E'town
plans to issue approximately $25 million of these notes later in 1999 to
repay short-term debt incurred to finance the acquisition of the contract
to operate the water system of the City of Elizabeth and capital costs for
the non-regulated subsidiaries.
In November 1998 Mount Holly closed on loan agreements that will make
available up to $13.19 million in proceeds from the issuance of unsecured
notes through the New Jersey Environmental Infrastructure Trust Financing
Program. This program provides financing through two loans. The first
loan, in the amount of $7.30 million, is through the New Jersey
Environmental Infrastructure Trust (Trust), which issued tax-exempt bonds
with average interest rates of 4.7%. The second loan, in the amount of
$5.89 million, is from the State of New Jersey, acting through the New
Jersey Department of Environmental Protection. The state is participating
in the Safe Drinking Water State Revolving Fund, authorized by the Safe
Drinking Water Act amendments of 1996, whereby the federal government is
funding the state loan at no interest cost. The effective interest rate
for the combined notes is approximately 2.60%. The proceeds of the loans
will finance the construction of the Mansfield Project (see Note 8).
E'town has outstanding $12 million of 6.79% Senior Notes due December 15,
2007. The Note Agreement requires the maintenance of a consolidated fixed
charges coverage ratio of at least 1.5 to 1 and a debt to total
capitalization ratio not to exceed .65 to 1. As of March 31, 1999, the
fixed charges coverage ratio was 2.9 to 1 and the debt to total
capitalization ratio was .61 to 1, calculated in accordance with the Note
Agreement.
5. LINES OF CREDIT
E'town has $98 million of uncommitted lines of credit with several banks,
of which up to $43 million is available to E'town for use by the
Corporation or its unregulated subsidiaries and $88 million is available
to Elizabethtown as of March 31, 1999. These lines, together with internal
funds and proceeds of future issuances of debt and preferred stock by
Elizabethtown, and sales of common stock and issuances of short- and
long-term debt by E'town, are expected to be sufficient to finance the
Corporation's capital needs.
-14-
6. EARNINGS PER SHARE
Basic earnings per share are computed on the basis of the weighted average
number of shares outstanding. Diluted earnings per share assumes both the
conversion of the 6 3/4% Convertible Subordinated Debentures and common
stock equivalents, assuming all stock options are exercised. The
calculations of basic and diluted earnings per share for the three months
ended March 31, 1999 and 1998 follow:
(Thousands of Dollars Except Per Share Amounts)
1999 1998
------ ------
Basic:
Net income $ 6,300 $ 4,163
Average common shares outstanding 8,512 8,057
------- -------
Basic earnings per share $ .74 $ .52
======= =======
Diluted:
Net income $ 6,300 $ 4,163
After tax interest expense applicable
to 6 3/4% Convertible Subordinated
Debentures 112 112
------- -------
Adjusted net income $ 6,412 $ 4,286
------- -------
Average common shares outstanding 8,512 8,057
Additional shares from assumed
exercise of stock options 25 25
Additional shares from assumed
conversion of 6 3/4% Convertible
Subordinated Debentures 260 284
------- -------
Average common shares outstanding
as adjusted 8,797 8,366
------- -------
Diluted earnings per share $ .73 $ .51
======= =======
7. NON-UTILITY PROPERTY AND OTHER INVESTMENTS
The detail of amounts included in Non-Utility Property and Other
Investments at March 31, 1999 and December 31, 1998 is as follows :
(Thousands of Dollars)
1999 1998
------ ------
Concession fees on privatization
contracts - net of amortization $ 55,115 $ 55,505
Capital assets for privatization
contracts - net of amortization 3,617 3,341
Investments in real estate 9,301 11,341
Funds held in trust by others 6,976 7,234
Goodwill on AWM and AWWM
acquisitions - net of amortization 5,363 5,401
Investment in SEGS 1,214 1,214
Other capital assets 2,036 637
Other 191 272
-------- --------
Total $ 83,813 $ 84,945
======== ========
Effective July 1998 E'town, through Liberty entered into a contract with
the city of Elizabeth (Elizabeth), New Jersey to operate its water system
under a 40-year contract serving 17,900 customers. Under the contract,
Liberty made a payment to Elizabeth of $19.7 million in 1998 and is
contractually obligated to make payments to Elizabeth of $12 million in
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June 1999 and $19 million in June 2000, which have been included in
Concession Fees on Privatization contracts, net of amortization. These
Concession Fees are being amortized on a straight-line basis over the life
of the contract. Also under the terms of the contract, Liberty will
deposit $57.8 million from revenues earned over the 40-year contract, of
which $52.3 million is due after 2012, into a fund administered by
Elizabeth to be used by Elizabeth to pay for capital improvements to the
water system. In addition, Liberty is responsible for $7.45 million of
construction expenditures, primarily for meter replacements, over the life
of the contract. These construction expenditures, as they are incurred,
are being amortized on a straight-line basis over the remaining life of
the contract. Of these total commitments, approximately $4.01 million is
expected to be expended in the next three years. E'town will receive all
the revenues from operating the system in accordance with rate increases
set forth in the contract. E'town is also responsible for all operating
expenses as well as the capital expenditures discussed above. Performance
by Liberty of the contract provisions is guaranteed by E'town.
E'town also performs the commercial billing operations for the wastewater
system of Elizabeth. E'town does not operate the wastewater system. E'town
does the wastewater billing for Elizabeth and remits all cash collected to
Elizabeth. Recorded on the financial statements as Customer and Other
Accounts Receivable at March 31, 1999 are the receivables from the
customers of Elizabeth for wastewater services in the amount of $2.63
million. An equal amount of liability to Elizabeth is included in Accounts
Payable and Other Liabilities which has been established to reflect
E'town's obligation to remit these funds to Elizabeth as collected.
In 1997 E'town formed a wholly-owned subsidiary, Edison Water Company
(Edison), for the purpose of managing the assets and operations of the
Edison Township water system under a 20-year contract. Edison serves
approximately 11,600 residential, commercial and industrial customers.
Edison bills and receives all water revenues generated as a result of
operating the water system of the township of Edison, New Jersey and pays
all the expenses under the contract. Edison expects to make expenditures
of approximately $25 million during the 20-year life of the contract of
which $10.16 million has been spent to date. Construction expenditures, as
they are incurred, are being amortized on a straight-line basis over the
remaining life of the contract. Performance by Edison of the contract
provisions is guaranteed by E'town.
Also included in Non-Utility Property and Other Investments at March 31,
1999 is $9.3 million of investments in several parcels of undeveloped
land in New Jersey. A parcel was sold in 1997 for $.4 million, resulting
in a gain of less than $.1 million. Two other parcels were sold in 1998
for $1.7 million resulting in a gain of less than $.1 million. Cash
proceeds of $1.2 million were received in 1998 and the balance was
financed with a one-year mortgage at an interest rate of 8%, with full
payment due in 1999. On February 17, 1999, Properties sold a parcel of
land which has been under contract since 1995 in Green Brook, New Jersey
for $5.83 million, at a gain of $2.08 million net of taxes. Cash proceeds
of $1.5 million were received in February 1999 and the remaining $4.33
million was financed with a 7.75% mortgage, to be paid over two years.
This amount is included in Customer and Other Accounts Rceivable in
E'town's Consolidated Balance Sheets. The long-term portion of $1.9
million is included in this balance and is due February 2001. The gain has
been reflected in the accompanying financial statements. The sale proceeds
will be invested into water and wastewater investments that produce a
current return. Properties has entered into contracts for sale for all but
one of its remaining parcels. The eventual sale of these parcels is
contingent upon the purchaser obtaining various approvals for development.
This process could take several years. Based upon independent appraisals
received at various times prior to 1997 and the expected sales prices for
properties under contract to be sold, the estimated net realizable value
of each property exceeds its respective carrying value as of March 31,
1999.
In 1998 E'town exercised an option to purchase the operations of Applied
Wastewater General Partnership (AWG) to provide a full complement of water
and wastewater services and consequently closed on the transaction in June
1998. The purchase price, in a non-cash transaction, was $6.6 million
(185,005 restricted common shares) for the three companies that now
comprise AWM and $.04 million (1,305 restricted common shares) for AWWM, a
regulated wastewater utility, in a stock-for-stock transaction accounted
-16-
for as a purchase. Of the shares issued, 20% are being held in escrow. The
goodwill amounted to $5.46 million, which is being amortized over a
40-year period. The purchase price is subject to a potential downward
post-closing adjustment based upon a multiple of earnings for the twelve
months ended March 31, 1998. As required by the purchase contract, E'town
has undertaken an audit of AWG for such period. Therefore, the amount of
any post-closing adjustment is not yet determinable.
Included in Non-Utility Property and Other Investments at March 31, 1999
is an investment of $1.21 million ($.43 million net of related deferred
taxes) in a limited partnership that owns Solar Electric Generating System
V (SEGS), located in California. The Corporation owns a 3.19% interest in
SEGS. The transaction is being accounted for on the equity method. The
Corporation will continue to monitor the relationship between the carrying
and net realizable values of its investment in SEGS, based upon
information provided by SEGS management as well as through cash flow
analyses.
8. REGULATORY MATTERS
Rates
ELIZABETHTOWN
Elizabethtown expects to file for rate relief later in 1999 to recover
additional construction and financing costs incurred since base rates were
last established in October 1996.
MOUNT HOLLY
On January 29, 1999, Mount Holly filed a petition with the BPU for a $2.09
million or 40.55% rate increase, which reflects additional construction
and financing costs, as well as increases in operating costs since base
rates were last established in January 1996. This rate case also includes
$8.96 million in costs with a corresponding rate increase of $1.30
million, for the portion of Mount Holly's Mansfield Project that was
placed in service in the third quarter of 1998. A decision is expected
during the fall of 1999. Mount Holly expects to file an additional rate
case later in 1999 for the remaining cost of the Mansfield Project, to
coincide with the completion of the project and the expiration of an
agreement to purchase 1.0 million gallons per day from another regional
purveyor under a Purchased Water Adjustment Clause (PWAC) now in effect.
9. SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires that companies disclose segment data based upon how
management makes decisions, allocates resources and measures performance.
The first quarter 1999 segment data is presented as follows:
Engineering/ Financing
Regulated Contract Operations/ and
Utilities Operations Construction Investment Eliminations Total
----------------------------------------------------------------------------
(Thousands of Dollars)
----------------------------------------------------------------------------
Operating
revenues $ 31,117 $4,774 $1,514 $ (1,929) $ 35,476
Operating
expenses 23,128 3,990 1,438 $ 174 (1,929) 26,801
Interest 3,866 290 326 4,482
expense
Net income 4,060 521 75 8,327 (6,683) 6,300
Total assets $693,898 $70,078 $5,453 $47,914 $(28,119) $789,224
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
E'town Corporation (E'town or Corporation), a New Jersey holding
company, is the parent company of Elizabethtown Water Company
(Elizabethtown or Company), Edison Water Company (Edison), E'town
Properties, Inc. (Properties), Liberty Water Company (Liberty), Applied
Water Management, Inc. (AWM) and Applied Wastewater Management, Inc.
(AWWM). The Mount Holly Water Company (Mount Holly) is a wholly-owned
subsidiary of Elizabethtown. The assets and operating results of
Elizabethtown constitute the predominant portions of E'town's assets and
operating results. Mount Holly contributed about 3% and Liberty, AWM and
Edison each contributed 4% of the Corporation's consolidated operating
revenues for 1998. The regulated utilities, Elizabethtown, Mount Holly
and AWWM, comprise the Regulated Utilities segment, Liberty and Edison
comprise the Contract Operations segment, AWM is the
Engineering/Operations/Construction segment and E'town and Properties
comprise the Financing and Investment segment (See Notes 2 and 9 to
E'town's Notes to Consolidated Financial Statements). The following
analysis sets forth significant events affecting the financial condition
of the various segments at March 31, 1999, and the results of operations
for the three months ended March 31, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures Program
In the first quarter of 1999 capital expenditures were $9.8 million, of
which $1.2 million was for the purchase of several small wastewater
plants by AWM, $.3 million was for capital additions for contract
operations and $8.2 million was for water utility plant. For the three
years ending December 31, 2001, capital and investment requirements for
E'town are estimated to be $181.4 million, consisting of (I)
expenditures for the Regulated Utilities Segment ($107.5 million for
Elizabethtown, $17.0 million for Mount Holly and $16.4 million for
AWWM), (ii) investments in the Contract Operations segment for
concession payments for Liberty, and capital improvements for Liberty
and Edison of $39.0 million, and (iii) investments in the
Engineering/Operations/Construction segment of $1.5 million. These
estimates do not include any amounts for possible additional
acquisitions or privatization activities in the three-year period.
REGULATED UTILITIES SEGMENT
Elizabethtown
While Elizabethtown's projected capital outlays have dropped from recent
years now that the Canal Road Water Treatment Plant (Plant) is
completed, Elizabethtown's facilities will continue to be upgraded and
expanded to handle customer growth. Elizabethtown's three-year capital
program includes $50.6 million for routine projects (services, hydrants
and main extensions not funded by developers) and $56.9 million for
transmission system upgrades, a new operations center and other
projects. Elizabethtown expects to file for rate relief in the later
part of 1999 and periodically thereafter to ensure that such costs are
adequately reflected in rates (see Economic Outlook).
Mount Holly
During the next three years, Mount Holly expects to spend $17.0 million,
primarily for an additional supply source to comply with state
regulations designed to prevent further depletion of a local aquifer.
Mount Holly currently obtains all of its water from wells drilled into
an aquifer, which has been subject to over- pumping by various users in
a portion of southern New Jersey. The state adopted legislation
requiring all local purveyors, including Mount Holly, to obtain
alternate supplies and reduce their withdrawals from the affected parts
-18-
of the aquifer. Mount Holly is constructing a Project, called the
Mansfield Project, to obtain water from outside the affected part of the
aquifer for delivery into the Mount Holly system. A portion of this
project was placed into service in the fall of 1998.
On January 29, 1999, Mount Holly filed a petition with the BPU for a
$2.09 million or 40.55% rate increase, which reflects additional
construction and financing costs, as well as increases in operating
costs since base rates were last established in January 1996. This rate
case also includes $8.96 million in costs with a corresponding rate
increase of $1.30 million, for the portion of Mount Holly's Mansfield
Project that has been placed in service. A decision is expected during
the fall of 1999. Mount Holly expects to file an additional rate case
later in 1999 for the remaining cost of the Mansfield Project, to
coincide with the completion of the project and the expiration of an
agreement to purchase 1.0 million gallons per day from another regional
purveyor under a Purchased Water Adjustment Clause (PWAC) now in effect.
AWWM
AWWM expects to incur capital expenditures of $16.4 million in the next
three years, the predominant portion of which is expected to be spent in
1999 and 2000. These expenditures are
primarily for the purchase of wastewater plants from developers upon
completion of their construction by AWM.
CONTRACT OPERATIONS SEGMENT
LIBERTY
Under the contract to operate the water system of the City of Elizabeth,
New Jersey, Liberty
made a payment to Elizabeth of $19.7 million in 1998 and is
contractually obligated to make payments to Elizabeth of $12 million in
June 1999 and $19 million in June 2000. Also, under the terms of the
contract, Liberty will deposit $57.8 million from revenues earned during
the 40-year contract, of which $52.4 million is due after 2012, into a
fund administered by Elizabeth to be used by Elizabeth to pay for
capital improvements to the water system. In addition, Liberty is
responsible for $7.8 million of construction expenditures, primarily for
meter replacements,
over the life of the contract. Of the total construction expenditures,
approximately $4.0 million is expected to be expended in the next three
years.
EDISION
Under the contract to operate the water system of the Township of
Edison, New Jersey, Edison Water expects to spend $3.6 million during
the next three years to upgrade the system.
ENGINEERING/OPERATIONS/CONSTRUCTION SEGMENT
AWM
AWM expects to incur capital expenditures of $1.5 million during the
next three years. These expenditures consist primarily of vehicles and
equipment used in the construction and waste hauling operations.
Capital Resources
During 1998 E'town financed 35.5% of its capital expenditures, including
concession fees for the Regulated Utilities segment and investments in
the Contract Operations and Engineering/Operations/Construction
segments, from internally generated funds (after payment of common stock
dividends). The balance was financed with a combination of short-term
borrowings under lines of credit, proceeds from capital contributions
from E'town (funded by issuances of Common Stock under the Corporation's
Dividend Reinvestment and Stock Purchase
Plan) and long-term debt.
-19-
For the three-year period ending December 31, 2001, E'town estimates
that 52.2% of its currently projected capital expenditures and
concession fees for all segments are expected to be financed with
internally generated funds (after payment of common stock dividends).
The balance will be financed with a combination of proceeds from the
sale of E'town common stock, medium-term notes, proceeds of tax-exempt
New Jersey Economic Development Authority (NJEDA) bonds, and short-term
borrowings. Mount Holly's Mansfield Project will be financed by
requisitions from the New Jersey Environmental Infrastructure Trust
Financing Program. The NJEDA has granted preliminary approval for the
financing of almost all of Elizabethtown's major projects during the next
three years. Elizabethtown expects to pursue additional tax-exempt
financing to the extent that final allocations are granted by the NJEDA.
In October 1998, E'town filed a registration statement with the
Securities and Exchange Commission (SEC) to issue up to $75 million of
unsecured medium-term notes. The SEC is currently reviewing the filing,
E'town plans to issue approximately $25 million of these notes later in
1999 to repay short-term debt incurred to finance the acquisition of the
contract to operate the water system of the City of Elizabeth and
capital costs for the non-regulated subsidiaries.
In November 1998 Mount Holly closed on two loans that will provide up to
$13.2 million in 2.60% financing for the Mansfield Project through the
New Jersey Environmental Infrastructure Trust Financing Program. The
first loan, in the amount of $7.3 million, is through the New Jersey
Environmental Infrastructure Trust (Trust), which issued tax-exempt
bonds with average interest rates of 4.7%. The second loan, in the
amount of $5.9 million, is from the state of New Jersey, acting through
the New Jersey Department of Environmental Protection, funded by federal
monies at no interest cost. The effective interest rate for the combined
notes is approximately 2.60%.
E'town's senior debt is currently rated A3 and A- and Elizabethtown's
senior debt is currently rated A3 and A by Moody's Investors Service and
Standard & Poor's Ratings Group, respectively.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
INTEREST RATE RISK
The Corporation is subject to the risk of fluctuating interest rates in
the normal course of business. The Corporation manages interest rates
through the use of fixed and, to a lesser extent, variable rate debt. A
hypothetical single percentage point change in interest rates for the
three months ended March 31, 1999 would result in a $.1 million change
in interest costs and earnings before tax related to short-term and
variable rate debt.
RESULTS OF OPERATIONS
Net Income for the three months ended March 31, 1999 was $6.3 million or
$.74 per share on a basic basis as compared to $4.2 million or $.52 per
share for the same period in 1998. Net income increased by $2.1 million
or $.24 per share due to an after-tax gain on the sale of a real estate
parcel. Net income, as a result of continuing operations, remained
relatively constant between the first quarter of 1999 and the first
quarter of 1998. Revenues and expenses increased in 1999 due to the
operations of Liberty and AWM which were formed in the second quarter of
1998.
Operating Revenues increased $4.2 million or 13.5% for the three months
ended March 31, 1999 compared to the same period in 1998. The increase
resulted primarily from revenues of Liberty and AWM which began
operations in July and June 1998, respectively. These new operations
contributed $2.2 million (for Liberty) and $1.6 million (for AWM), net
of $1.2 million of intercompany sales/expenses, for the quarter.
-20-
Operation Expenses increased $3.4 million or 30.6% for the three months
ended March 31, 1999 compared to the same period in 1998. The increase
was primarily due to the inclusion of the operation expenses of Liberty
and AWM in E'town's consolidated financial results. This contributed $.9
million (for Liberty) and $1.2 million (for AWM), net of $1.2 million of
intercompany sales, for the quarter. Elizabethtown's operation expenses
increased $.9 million for the quarter primarily due to additional labor
costs for additional employees and increased overtime. Mount Holly's
operation costs increased $.3 million primarily due to the cost, which
is reflected in utility rates under the PWAC, of purchasing water from
another purveyor as discussed above. All other E'town operation expenses
combined changed only moderately.
Maintenance Expenses increased less than $.1 million or 2.5% for the
three months ended March 31, 1999 over the comparable period in 1998.
These increases are due to the operations of Liberty and Edison Water
Companies. Maintenance costs remained relatively constant due to ongoing
preventive maintenance programs and cost control efforts.
Depreciation and Amortization Expense increased $.5 million or 16.3%
primarily due to the amortization of concession fees associated with the
contract to operate the water system of the city of Elizabeth, New
Jersey. Depreciation expense also increased due to a higher level of
depreciable plant in service.
Revenue Taxes decreased $.1 million or 2.8% for the three months ended
March 31, 1999 compared to the same period in 1998 primarily due to a
higher proportion of increased sales to exempt customers in the Service
to Other Systems revenue class than in other revenue classes.
Real Estate, Payroll and Other Taxes Expenses increased $.1 million or
17.0% for the three months ended March 31, 1999 compared to the same
period in 1998 primarily due to increased payroll taxes as a result of
higher wage levels and additional employees.
Federal Income Taxes as a component of operating expenses decreased less
than $.1 million or 1.1% for the three months ended March 31, 1999
compared to the same period in 1998 due to a small decline in taxable
income from operations.
Other Income (Expense) increased $2.2 million for the three months ended
March 31, 1999 compared to the same period in 1998 due to a sale of a
parcel of land in Green Brook, New Jersey at a gain of $3.2 million
($2.08 million after taxes). This increase was offset by an increase in
associated income taxes.
Total Interest Charges increased $.3 million or 6.3% % for the three
months ended March 31, 1999 compared to the same period in 1998 due
primarily to an increase in long-term interest expense as a result of
the issuance of long-term notes through the New Jersey Environmental
Infrastructure Trust Financing Program to finance the construction of
the Mansfield Project.
ECONOMIC OUTLOOK
Forward Looking Information
Information in this report includes certain forward looking statements
within the meaning of the Federal securities laws. Any forward looking
statements are based upon information currently available and are
subject to future events, risks and uncertainties that could cause
actual results to differ materially from those expressed in the
statements. Such events, risks and uncertainties include, without
limitation, actions of regulators, the effects of weather on water
consumption, changes in historical patterns of water consumption and
demand, including changes through increased use of water-conserving
devices, conditions in capital and real estate markets, increases in
operating expenses due to factors beyond the Corporation's control,
changes in environmental regulation and associated costs of compliance
and additional investments or acquisitions which may be made by the
Corporation.
-21-
E'town Corporation and Subsidiaries
During the next several years, management will seek to increase earnings
per share by (I) maximizing earned returns on the Regulated Utilities
segment through expansion efforts to increase sales and cost control
measures and (ii) investing in water and wastewater assets (including
municipal privatization contracts, as well as designing, constructing,
operating and purchasing wastewater assets through AWM and AWWM,
discussed below) which produce a current return. The Corporation intends
to continue to sell Properties' real estate holdings during the next
several years to fund a portion of the investment planned for the
regulated and non-regulated businesses. The balance of such funding will
be generated from internal and external sources.
Earnings per share will vary going forward due to the effect of weather
on costs and pumpage, timing and adequacy of rate relief, time elapsed
since the last rate increase, the nonrecurring effect of real estate
sales and other factors. For 1999 E'town expects consolidated earnings
per share to be similar to 1998, based on somewhat reduced returns from
the regulated operations, assuming a return to normal weather patterns
after the unusually dry summers in 1998 and 1997, to be offset by the
gain on the sale of a parcel of land located in Green Brook, New Jersey
in February 1999 of $2.08 million or $.24 per share. In particular,
Elizabethtown's returns should be somewhat lower in 1999 given that this
year will be the third year since the last rate adjustment.
Regulated Utilities Segment
Elizabethtown, Mount Holly and AWWM
Elizabethtown expects to petition the BPU for an increase in rates in
1999 to reflect the increases in construction, financing and operating
costs since base rates were last established in October 1996.
Mount Holly earned a rate of return on common equity of 4.7% in 1998,
compared to an authorized rate of return of 11.25%, established in its
most recent rate proceeding. Mount Holly contributed $.04 to E'town's
consolidated earnings per share in 1998. Management expects Mount Holly
to increase its contribution to E'town's earnings per share later in
1999 and into 2000 upon receipt of additional rate relief from the rate
increase filed in January 1999, so that Mount Holly can realize rates of
return comparable to authorized levels. Mount Holly earned significantly
below its authorized return in 1998 and 1997 as the Company was
precluded from filing for needed rate relief due to recently settled
litigation with another purveyor.
AWWM expects to realize rates of return comparable to those earned by
Elizabethtown on its anticipated investments of $16.4 million in new
wastewater facilities during the next several years.
Contract Operations Segment
Liberty
Effective July 1, 1998, E'town, through its Liberty Water Company
subsidiary, commenced operation of the 17,900 customer water supply
system of the city of Elizabeth under a 40-year contract. Liberty is
expected to realize a return on its capital in an amount similar to that
currently earned by E'town's regulated operations.
-22-
Edison
Effective July 1, 1997, E'town, through its Edison Water Company
subsidiary, commenced operation of Edison Township's 11,600-customer
water system under a 20-year contract. Edison is expected to realize a
return on its capital in an amount similar to that currently earned by
E'town's regulated operations. Contributions to earnings will be small
through 2002 and then will increase as rate increases specified in the
contract take effect.
E'town continues to pursue opportunities to operate municipal water and
wastewater systems under long-term contracts, primarily in New Jersey.
E'town will focus on opportunities where it may have an advantage due to
location or experience in operation.
Engineering/Operations/Construction
AWM
AWM provides "one-stop shopping" for water and wastewater services to
residential and commercial developers. These services include the
design, construction and operation of water and wastewater facilities
and, in some instances, purchase of such utilities at project build-out
by AWWM, thereby adding to E'town's regulated utility customer base.
E'town expects the
acquisition to increase its contribution to E'town's earnings per share
in 1999.
Financing and Investment Segment
E'town and Properties
E'town is in the process of selling its various parcels of undeveloped
land carried as investments of $9.3 million at March 31, 1999. One of
the real estate parcels was sold in 1997 for $.4 million, resulting in a
gain of less than $.1 million. Two other parcels were sold in 1998 for
$1.7 million resulting in a gain of less than $.1 million. In February
1999 Properties sold a parcel of land, which had been under contract
since 1995 in Green Brook, New Jersey for $5.83 million, at a gain of
$2.08 million, net of income taxes, or $.24 per share. Cash proceeds
from this sale, of $1.5 million, were received in February 1999 and the
remaining $4.33 million will be paid over the next two years. Properties
has entered into contracts for the sale of all of its remaining parcels
at prices that exceed the carrying cost of such properties. The eventual
sale of these parcels is contingent upon the purchaser obtaining various
approvals for development and could take several years. E'town expects
to invest the sale proceeds from the remaining parcels into water and
wastewater utility investments that produce a current return. The
Corporation has no plans to make additional investments other than in
water and wastewater projects.
New Accounting Pronouncements
See Note 2 of E'town's Notes to Consolidated Financial Statements for a
discussion of new accounting standards.
Year 2000
State of Readiness
The Corporation has assessed its significant business systems, as well
as non-critical, peripheral support systems for compliance with the Year
2000 computer challenge. The assessment concluded that all significant
business systems (i.e. Customer billing and service, financial, water
treatment operating and control, water quality laboratory information
and telemetric data acquisition systems) are Year 2000 compliant. The
assessment also included inquiries as to the state of readiness of
significant vendors whose services to the Corporation could have an
impact on the Corporation's ability to deliver service to its customers.
Management concluded that the delivery of electric power as well as
chemicals used in the water treatment process are two areas of
significant importance and received documentation from the vendors who
provide these services that indicates their ability to provide service.
Therefore, the Corporation expects no disruption in the services it
provides to its customers and expects to process transactions in its
financial, customer billing and customer services systems. The
assessment did identify certain peripheral support systems that need to
be addressed. A plan to address these issues has been developed and is
being implemented.
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The Costs To Address The Corporation's Year 2000 Issues
The significant business systems of the Corporation defined above are
Year 2000 compliant and have been operational for up to several years.
Therefore, no further costs are expected to be incurred in connection
with bringing these systems into compliance. The peripheral support
systems that are being addressed will require the Corporation to incur
costs to bring them into compliance. The present estimates place the
total of these costs at less than $.2 million.
Risks Associated With The Corporation's Year 2000 Issues
Management believes that all identifiable issues with respect to Year
2000 compliance have been addressed, or will be addressed, in sufficient
time and in sufficient detail to preclude any disruption in service or
adverse effect on the Corporation's financial profile. Management,
therefore, believes that risks associated with this issue are minimal
with respect to those areas, which are internal to the Corporation and
over which management exercises control. Those areas that are external
to the Corporation i.e., issues associated with our vendors, have been
mitigated to the extent possible through inquiry of our vendors, tests
of their claims of Year 2000 compliance and development of contingency
plans as considered appropriate.
Contingency Plan
There are operational contingency plans in place on an ongoing basis to
address issues, such as natural disasters, that could result in a
disruption of service. These procedures would be activated in the event
that certain physical facilities were not operable as a result of
failures by our vendors associated with Year 2000 issues. In addition,
Elizabethtown Water Company has alternative electric, natural gas and
diesel generation capacity that could sustain a significant level of
pumping capacity for an indefinite period of time.
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PART II - OTHER INFORMATION
Items 1 - 5:
Nothing to Report.
Item 6(a) - Exhibits
Exhibits to Part I:
Exhibit 10(o) - E'town Corporation & Subsidiaries - Form of Amended
and Restated Change in Control Agreement for certain
officers of E'town and Affiliated Companies
Exhibit 10(p) - E'town Corporation & Subsidiaries - Amendments to
Change in Control Agreement for Andrew M. Chapman
Exhibit 10(q) - E'town Corporation & Subsidiaries - Amendments to
Change in Control Agreement for Anne E. Estabrook
Exhibit 12 - E'town Corporation and Subsidiaries - Computation of
Ratio of Earnings to Fixed Charges
Exhibit 12(a) - Elizabethtown Water Company - Computation of Ratio of
Earnings to Fixed Charges
Exhibit 12(b) - Elizabethtown Water Company - Computation of Ratio of
Earnings to Fixed Charges and Preferred Dividends
Exhibit 27 - E'town Corporation and Subsidiaries and Elizabethtown
Water Company and Subsidiary - Financial Data Schedules
Item 6(b) - Reports on Form 8-K
None
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E'TOWN CORPORATION
ELIZABETHTOWN WATER COMPANY
SIGNATURES
Pursuant to the requirements 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.
Date: May 13, 1999
E'TOWN CORPORATION
ELIZABETHTOWN WATER COMPANY
/s/ Gail P. Brady
________________________________
Gail P. Brady
Treasurer
/s/ Dennis W. Doll
________________________________
Dennis W. Doll
Controller
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