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.
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
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
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.
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.
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.
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.
ITEM 2.
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.
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.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
PART II
ITEM 5.
ITEM 5. Market for the Corporation's Common Stock and Related Stockholder Matters
This information is included in Exhibit 13, filed herewith, and is incorporated herein by reference. All of the common stock of Elizabethtown Water Company is owned by E'town.
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
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.
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
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.
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.
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
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
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
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
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
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
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%.
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
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.
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
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.
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.
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
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) 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 ========= ========= ========= ========= 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.
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
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.
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
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.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information for E'town is included in Exhibit 13, filed herewith, and is incorporated herein by reference.
The information for Elizabethtown Water Company is on pages 2 through 16 of Appendix I included herein.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Acccounting and Financial Disclosure
None
PART III
Item 10.
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.
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.
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.
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.
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.
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
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
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
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
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
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
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%.
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
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.
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
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.
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.
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
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) 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 ========= ========= ========= ========= 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.