FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-11023
E'town CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2596330
(State of incorporation) (I.R.S. Employer Identification No.)
600 South Avenue
Westfield, New Jersey 07090
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 654-1234
Title of each class Name of each exchange on which registered
Common Stock, without par value New York Stock Exchange
Commission file number 0-628
ELIZABETHTOWN WATER COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-1683171
(State of incorporation) (I.R.S. Employer Identification No.)
600 South Avenue
Westfield, New Jersey 07090
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 654-1234
Title of each class Name of each exchange on which registered
None None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No_____
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date
Outstanding at
Class of Common Stock: June 30, 1999
E'town Corporation (without par value) 8,574,297
Elizabethtown Water Company (without par value)* 1,974,902
* All shares are owned by E'town Corporation
===============================================================================
<PAGE>
The purpose of this amended filing is to correct errors discovered in
Form 10-Q filed for the quarterly period ended June 30, 1999. The second
quarter Form 10-Q is being refiled in its entirety. The amended items are as
follows:
Item 1). Page 2, Consolidated Balance Sheets - Total Current Assets:
The amount for the line item entitled "Infrastructure loan funds
receivable (Note 4)" is incorrectly displayed as "45,657". The correct
amount is "5,657". The total current assets amount of "59,584" is
correct.
Item 2). Pages 22 and 23, Results of Operations:
The six month-to-date percentage changes of various income statement
line items were displayed incorrectly. The amendments are as follows:
Line Item Original % Amended %
Operation Expenses 18.0% 37.8%
Maintenance Expenses 10.4% 21.2%
Depreciation and
Amortization Expenses 8.3% 16.6%
Revenue Taxes 2.1% 4.5%
Real Estate, Payroll and
Other Taxes Expenses 7.9% 15.2%
Federal Income Taxes 1.4% 3.2%
Other Income (Expense) 259.9% 566.6%
Total Interest Charges 4.4% 8.8%
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
INDEX
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
E'TOWN CORPORATION AND SUBSIDIARIES
- Statements of Consolidated Income 1
- Consolidated Balance Sheets 2-3
- Statements of Consolidated Capitalization 4
- Statements of Consolidated Shareholders' Equity 5
- Statements of Consolidated Cash Flows 6
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
- Statements of Consolidated Income 7
- Consolidated Balance Sheets 8-9
- Statements of Consolidated Capitalization 10
- Statements of Consolidated Shareholder's Equity 11
- Statements of Consolidated Cash Flows 12
E'TOWN CORPORATION AND SUBSIDIARIES AND
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
- Notes to Consolidated Financial Statements 13
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 20
PART II - OTHER INFORMATION 27
Items 1 - 5
Item 6 (a) - Exhibits 27
(b) - Reports on Form 8-K 27
SIGNATURES 28
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands Except Per Share Amounts)
(Unaudited) Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------
Operating Revenues $41,611 $33,609 $77,087 $64,876
Operating Expenses:
Operation 17,142 11,865 31,717 23,021
Maintenance 2,310 1,665 3,919 3,234
Depreciation and amortization 3,711 3,175 7,385 6,333
Revenue taxes 4,542 4,082 8,282 7,928
Real estate, payroll and other taxes 872 770 1,862 1,616
Federal income taxes 2,855 2,676 5,068 4,913
- -----------------------------------------------------------------------------
Total operating expenses 31,432 24,233 58,233 47,045
- -----------------------------------------------------------------------------
Operating Income 10,179 9,376 18,854 17,831
- -----------------------------------------------------------------------------
Other Income (Expense):
Allowance for equity funds used during
construction 141 164 216 279
Federal income taxes (309) (166) (1,552) (236)
Gain on sale of land 3,197
Other - net 751 309 1,032 391
- -----------------------------------------------------------------------------
Total other income (expense) 583 307 2,893 434
- -----------------------------------------------------------------------------
Total Operating and Other Income 10,762 9,683 21,747 18,265
- -----------------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 4,239 4,048 8,373 8,033
Other interest expense - net 565 286 856 500
Capitalized interest (112) (125) (165) (216)
Amortization of debt discount and expense-net 110 109 220 217
- -----------------------------------------------------------------------------
Total interest charges 4,802 4,318 9,284 8,534
- -----------------------------------------------------------------------------
Income Before Preferred Stock Dividends
of Subsidiary 5,960 5,365 12,463 9,731
Preferred Stock Dividends 203 203 406 406
- -----------------------------------------------------------------------------
Net Income $ 5,757 $ 5,162 $12,057 $ 9,325
=============================================================================
Earnings Per Share of Common Stock (Note 6):
- -----------------------------------------------------------------------------
Basic $ 0.67 $ 0.63 $ 1.41 $ 1.15
Diluted $ 0.66 $ 0.62 $ 1.39 $ 1.15
- -----------------------------------------------------------------------------
Average Number of Shares Outstanding for
the Calculation of Earnings Per Share:
- -----------------------------------------------------------------------------
Basic 8,562 8,161 8,537 8,109
Diluted 8,843 8,464 8,820 8,415
- -----------------------------------------------------------------------------
Dividends Paid Per Common Share $ 0.51 $ 0.51 $ 1.02 $ 1.02
=============================================================================
See Notes to Consolidated Financial Statements.
-1-
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands) June 30,
1999 December 31,
Assets (Unaudited) 1998
- -----------------------------------------------------------------------------
Utility Plant-At Original Cost:
Utility plant in service $ 722,740 $ 717,985
Construction work in progress 35,632 16,580
- -----------------------------------------------------------------------------
Total utility plant 758,372 734,565
Less accumulated depreciation 131,899 125,262
- -----------------------------------------------------------------------------
Utility plant-net 626,473 609,303
- -----------------------------------------------------------------------------
Non-utility Property and Other
Investments - Net (Note 7) 83,350 84,945
- -----------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 5,491 5,909
Customer and other accounts receivable
(less reserve: 1999, $1,044, 1998, $1,065) 30,108 24,720
Unbilled revenues 14,917 12,198
Infrastructure loan funds
receivable (Note 4) 5,657 5,895
Materials and supplies-at average cost 2,284 2,538
Prepaid insurance, taxes, other 1,127 2,515
- -----------------------------------------------------------------------------
Total current assets 59,584 53,775
- -----------------------------------------------------------------------------
Deferred Charges:
Waste residual management 1,416 1,371
Unamortized debt and preferred
stock expense 9,825 10,050
Taxes recoverable through future rates 14,226 14,226
Postretirement benefit expense 3,360 3,490
Other unamortized expenses 2,816 1,582
- -----------------------------------------------------------------------------
Total deferred charges 31,643 30,719
- -----------------------------------------------------------------------------
Total $ 801,050 $ 778,742
=============================================================================
See Notes to Consolidated Financial Statements.
-2-
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands) June 30,
1999 December 31,
Capitalization and Liabilities (Unaudited) 1998
- -----------------------------------------------------------------------------
Capitalization (Notes 3 and 4):
Common shareholders' equity $ 222,943 $ 215,472
Mandatory Redeemable Cumulative
Preferred Stock 12,000 12,000
Redeemable preferred stock 227 227
Long-term debt - net 267,710 286,908
- -----------------------------------------------------------------------------
Total capitalization 502,880 514,607
- -----------------------------------------------------------------------------
Current Liabilities:
Notes payable - banks 65,203 44,022
Long-term debt - current portion 30 30
Accounts payable and other liabilities 18,465 19,469
Contract obligations payable 19,000 12,000
Customers' deposits 237 248
Municipal and state taxes accrued 17,545 16,789
Federal income taxes accrued 771
Interest accrued 3,766 3,675
Preferred stock dividends accrued 59 59
- -----------------------------------------------------------------------------
Total current liabilities 125,076 96,292
- -----------------------------------------------------------------------------
Deferred Credits:
Customers' advances for construction 41,110 41,102
Federal income taxes 68,046 66,487
State income taxes 207 207
Unamortized investment tax credits 7,739 7,839
Accumulated postretirement benefits 3,993 4,090
- -----------------------------------------------------------------------------
Total deferred credits 121,095 119,725
- -----------------------------------------------------------------------------
Contributions in Aid of Construction 51,999 48,118
- -----------------------------------------------------------------------------
Commitments and Contingent Liabilities
- -----------------------------------------------------------------------------
Total $ 801,050 $ 778,742
=============================================================================
See Notes to Consolidated Financial Statements.
-3-
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(In Thousands Except Share Amounts) June 30,
1999 December 31,
(Unaudited) 1998
- -----------------------------------------------------------------------------
Common Shareholders' Equity:
E'town Corporation:
Common stock without par value, authorized,
15,000,000 shares, issued 1999, 8,606,851
shares; 1998, 8,504,344 shares $173,433 $169,324
Paid-in capital 1,315 1,315
Capital stock expense (5,160) (5,160)
Retained earnings 54,323 50,961
Less cost of treasury stock; 1999 and
1998, 32,554 shares (968) (968)
- -----------------------------------------------------------------------------
Total common shareholders' equity 222,943 215,472
- -----------------------------------------------------------------------------
Preferred Shareholders' Equity
Elizabethtown Water Company:
Mandatory Redeemable Cumulative Preferred Stock:
$100 par value, authorized, 200,000 shares;
$5.90 series, issued and outstanding,
120,000 shares 12,000 12,000
Cumulative Preferred Stock:
$25 par value, authorized, 500,000
shares; none issued
Applied Wastewater Management, Inc:
Redeemable Preferred Stock:
No par value, non-cumulative, issued
and outstanding, 227 shares 227 227
- -----------------------------------------------------------------------------
Total preferred shareholders' equity 12,227 12,227
- -----------------------------------------------------------------------------
Long-Term Debt (Note 4):
E'town Corporation:
6 3/4% Convertible Subordinated
Debentures, due 20129, 9,843 10,499
6.79% Senior Notes, due 2007 12,000 12,000
Liberty Water Company:
Contract Obligations Payable 19,000
Applied Wastewater/Applied Water Management:
Notes Payable 548 261
Elizabethtown Water Company:
7.20% Debentures, due 2019 10,000 10,000
7 1/2% Debentures, due 2020 15,000 15,000
6.60% Debentures, due 2021 10,500 10,500
6.70% Debentures, due 2021 15,000 15,000
8 3/4% Debentures, due 2021 27,500 27,500
8% Debentures, due 2022 15,000 15,000
5.60% Debentures, due 2025 40,000 40,000
7 1/4% Debentures, due 2028 50,000 50,000
Variable Rate Debentures, due 2027 50,000 50,000
The Mount Holly Water Company:
New Jersey Environmental Infrastructure
Trust Notes 7,295 7,295
New Jersey Department of Environmental
Protection Notes 5,895 5,895
Other Notes Payable 181 30
- -----------------------------------------------------------------------------
Total long-term debt 268,762 287,980
Unamortized (discount) premium-net (1,052) (1,072)
- -----------------------------------------------------------------------------
Total long-term debt-net 267,710 286,908
- -----------------------------------------------------------------------------
Total Capitalization $ 502,880 $514,607
=============================================================================
See Notes to Consolidated Financial Statements.
-4-
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Thousands Except Share Amounts)
Six Months Ended
June 30, Year Ended
1999 December 31,
(Unaudited) 1998
- -----------------------------------------------------------------------------
Common Stock:
Balance at Beginning of Period $ 169,324 $ 153,162
Common stock issued under Dividend
Reinvestment and Stock Purchase Plan
(1999, 105,432 shares; 1998, 213,568 shares) 4,167 7,861
Redemption of Convertible Debentures (1999,
15,775 shares; 1998, 18,100 shares) 631 724
Issuance of restricted stock under compensation
programs (1999, 2,856 shares; 1998,
9,590 shares) 120 332
Restricted stock issued/(redeemed) in connection
with acquisitions (1999, ($25,956) shares;
1998, 186,310 shares) Note 7 (920) 6,653
Exercise of stock options (1999, 4,200 shares;
1998, 22,315 shares) 111 592
- -----------------------------------------------------------------------------
Balance at End of Period 173,433 169,324
- -----------------------------------------------------------------------------
Paid-in Capital: 1,315 1,315
- -----------------------------------------------------------------------------
Capital Stock Expense: (5,160) (5,160)
- -----------------------------------------------------------------------------
Retained Earnings:
Balance at Beginning of Period 50,961 45,560
Net Income 12,057 22,330
Dividends on common stock (1999, $1.02;
1998, $2.04) (8,695) (16,929)
- -----------------------------------------------------------------------------
Balance at End of Period 54,323 50,961
- -----------------------------------------------------------------------------
Treasury Stock:
Balance at Beginning of Period (968) (954)
Cost of shares redeemed to exercise stock
options (1998, 346 shares) (14)
- -----------------------------------------------------------------------------
Balance at End of Period (968) (968)
- -----------------------------------------------------------------------------
Total Common Shareholders' Equity $ 222,943 $ 215,472
=============================================================================
See Notes to Consolidated Financial Statements.
-5-
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands) Six Months Ended
(Unaudited) June 30,
1999 1998
- -----------------------------------------------------------------------------
Cash Flows Provided by Operating Activities:
Net Income $ 12,057 $ 9,325
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,385 6,333
Increase in deferred charges (1,279) (1,932)
Deferred income taxes and investment tax
credits-net 1,458 1,542
Capitalized interest and AFUDC (381) (495)
Other operating activities-net 2,105 575
Change in current assets and current liabilities
excluding cash, short-term investments and
current portion of debt:
Customer and other accounts receivable (4,951) (356)
Unbilled revenues (2,719) (1,457)
Accounts payable and other liabilities (1,131) 867
Accrued/prepaid interest and taxes 2,958 3,110
Other 254 (490)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 15,756 17,022
- -----------------------------------------------------------------------------
Cash Flows Used by Financing Activities:
Proceeds from issuance of common stock 4,909 4,617
Funds held in Trust by others 114
Debt and preferred stock issuance and
amortization costs 237 248
Issuance of other of long-term debt 8,000
Repayment of long-term debt (12,671) (107)
Contributions and advances for construction-net 1,056 3,012
Net increases in notes payable - banks 21,181 11,000
Dividends paid on common stock (8,695) (8,345)
- -----------------------------------------------------------------------------
Net cash flows provided by financing activities 6,131 18,425
- -----------------------------------------------------------------------------
Cash Flows Used for Investing Activities:
Utility plant and other capital expenditures
(excluding allowance for funds used during
construction) (21,914) (17,225)
Purchase of companies (1,800)
Capital expenditures on privatization contracts (660) (19,729)
Proceeds from sale of land 2,069
- -----------------------------------------------------------------------------
Net cash flows used for investing activities (22,305) (36,954)
- -----------------------------------------------------------------------------
Net Decrease in Cash
and Cash Equivalents (418) (1,507)
Cash and Cash Equivalents at
Beginning of Period 5,909 6,233
- -----------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 5,491 $ 4,726
=============================================================================
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 10,133 $ 8,101
Income taxes $ 3,400 $ 1,800
Preferred stock dividends $ 354 $ 354
See Notes to Consolidated Financial Statements.
-6-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------
Operating Revenues $ 35,509 $32,739 $66,575 $63,246
- -----------------------------------------------------------------------------
Operating Expenses:
Operation 12,541 11,120 24,132 21,529
Maintenance 1,447 1,404 2,903 2,859
Depreciation 3,197 3,158 6,394 6,316
Revenue taxes 4,532 4,082 8,265 7,928
Real estate, payroll and other taxes 746 749 1,629 1,573
Federal income taxes 3,079 2,892 5,268 5,305
- -----------------------------------------------------------------------------
Total operating expenses 25,542 23,405 48,591 45,510
- -----------------------------------------------------------------------------
Operating Income 9,967 9,334 17,984 17,736
- -----------------------------------------------------------------------------
Other Income (Expense):
Allowance for equity funds used during
construction 141 164 216 279
Federal income taxes (290) (125) (362) (168)
Other - net 688 192 816 199
- -----------------------------------------------------------------------------
Total other income (expense) 539 231 670 310
- -----------------------------------------------------------------------------
Total Operating and Other Income 10,506 9,565 18,654 18,046
- -----------------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 3,862 3,713 7,619 7,337
Other interest expense - net 315 192 378 398
Allowance for funds used during construction (112) (125) (165) (216)
Amortization of debt discount and expense-net 98 98 196 195
- -----------------------------------------------------------------------------
Total interest charges 4,163 3,878 8,028 7,714
- -----------------------------------------------------------------------------
Net Income 6,343 5,687 10,626 10,332
Preferred Stock Dividends 203 203 406 406
- -----------------------------------------------------------------------------
Earnings Applicable To Common Stock $ 6,140 $ 5,484 $ 10,220 $ 9,926
=============================================================================
See Notes to Consolidated Financial Statements.
-7-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands) June 30,
1999 December 31,
Assets (Unaudited) 1998
- -----------------------------------------------------------------------------
Utility Plant-At Original Cost:
Utility plant in service $ 716,327 $ 714,301
Construction work in progress 34,219 15,694
- -----------------------------------------------------------------------------
Total utility plant 750,546 729,995
Less accumulated depreciation and amortization 131,427 125,096
- -----------------------------------------------------------------------------
Utility plant-net 619,119 604,899
- -----------------------------------------------------------------------------
Non-utility Property (Note 7) 7,202 7,315
- -----------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 1,446 3,598
Customer and other accounts receivable
(less reserve: 1999, $686, 1998, $670) 19,195 16,952
Unbilled revenues 12,666 10,091
Infrastructure loan funds receivable (Note 4) 5,657 5,895
Materials and supplies-at average cost 2,284 2,538
Prepaid insurance, taxes, other 1,410 2,433
- -----------------------------------------------------------------------------
Total current assets 42,658 41,507
- -----------------------------------------------------------------------------
Deferred Charges:
Waste residual management 1,416 1,371
Unamortized debt and preferred stock expense 9,145 9,368
Taxes recoverable through future rates 14,226 14,226
Postretirement benefit expense 3,360 3,490
Other unamortized expenses 2,534 1,152
- -----------------------------------------------------------------------------
Total deferred charges 30,681 29,607
- -----------------------------------------------------------------------------
Total $ 699,660 $ 683,328
=============================================================================
See Notes to Consolidated Financial Statements.
-8-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands) June 30,
1999 December 31,
Capitalization and Liabilities (Unaudited) 1998
- -----------------------------------------------------------------------------
Capitalization (Note 3):
Common shareholder's equity $ 214,254 $ 208,573
Mandatory redeemable cumulative preferred stock 12,000 12,000
Long-term debt - net 245,319 245,148
- -----------------------------------------------------------------------------
Total capitalization 471,573 465,721
- -----------------------------------------------------------------------------
Current Liabilities:
Notes payable - banks 30,000 22,000
Long-term debt - current portion 30 30
Accounts payable and other liabilities 10,449 12,457
Customers' deposits 237 248
Municipal and state taxes accrued 17,639 16,776
Interest accrued 3,275 3,228
Preferred stock dividends accrued 59 59
- -----------------------------------------------------------------------------
Total current liabilities 61,689 54,798
- -----------------------------------------------------------------------------
Deferred Credits:
Customers' advances for construction 41,004 40,874
Federal income taxes 66,234 64,696
Unamortized investment tax credits 7,739 7,839
Accumulated postretirement benefits 3,841 3,947
- -----------------------------------------------------------------------------
Total deferred credits 118,818 117,356
- -----------------------------------------------------------------------------
Contributions in Aid of Construction 47,580 45,453
- -----------------------------------------------------------------------------
Commitments and Contingent Liabilities
- -----------------------------------------------------------------------------
Total $ 699,660 $ 683,328
=============================================================================
See Notes to Consolidated Financial Statements.
-9-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(In Thousands) June 30,
1999 December 31,
(Unaudited) 1998
- -----------------------------------------------------------------------------
Common Shareholder's Equity (Note 3):
Common stock without par value, authorized,
15,000,000 shares, issued 1999 and 1998,
1,974,902 shares $ 15,741 $ 15,741
Paid-in capital 136,909 132,753
Capital stock expense (485) (485)
Retained earnings 62,089 60,564
- -----------------------------------------------------------------------------
Total common shareholder's equity 214,254 208,573
- -----------------------------------------------------------------------------
Preferred Shareholders' Equity:
Mandatory Redeemable Cumulative Preferred Stock
$100 par value, authorized, 200,000 shares;
$5.90 series, issued and outstanding,
120,000 shares 12,000 12,000
Cumulative Preferred Stock:
$25 par value, authorized, 500,000 shares;
none issued
- -----------------------------------------------------------------------------
Long-Term Debt:
Elizabethtown Water Company:
7.20% Debentures, due 2019 10,000 10,000
7 1/2% Debentures, due 2020 15,000 15,000
6.60% Debentures, due 2021 10,500 10,500
6.70% Debentures, due 2021 15,000 15,000
8 3/4% Debentures, due 2021 27,500 27,500
8% Debentures, due 2022 15,000 15,000
5.60% Debentures, due 2025 40,000 40,000
7 1/4% Debentures, due 2028 50,000 50,000
Variable Rate Debentures, due 2027 50,000 50,000
The Mount Holly Water Company:
New Jersey Department of Environmental
Protection Notes 5,895 5,895
New Jersey Environmental Infrastructure
Trust Notes 7,295 7,295
Notes Payable (due serially through 2000) 181 30
- -----------------------------------------------------------------------------
Total long-term debt 246,371 246,220
Unamortized discount-net (1,052) (1,072)
- -----------------------------------------------------------------------------
Total long-term debt-net 245,319 245,148
- -----------------------------------------------------------------------------
Total Capitalization $ 471,573 $ 465,721
=============================================================================
See Notes to Consolidated Financial Statements.
-10-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Thousands)
Six Months Ended
June 30, Year Ended
1999 December 31,
(Unaudited) 1998
- -----------------------------------------------------------------------------
Common Stock: $ 15,741 $ 15,741
- -----------------------------------------------------------------------------
Paid-in Capital:
Balance at Beginning of Period 132,753 124,560
Capital contributed by parent company 4,156 8,193
- -----------------------------------------------------------------------------
Balance at End of Period 136,909 132,753
- -----------------------------------------------------------------------------
Capital Stock Expense (485) (485)
- -----------------------------------------------------------------------------
Retained Earnings:
Balance at Beginning of Period 60,564 53,538
Net income 10,626 24,768
Dividends on common stock (8,695) (16,929)
Dividends on preferred stock (406) (813)
- -----------------------------------------------------------------------------
Balance at End of Period 62,089 60,564
- -----------------------------------------------------------------------------
Total Common Shareholder's Equity $214,254 $208,573
=============================================================================
See Notes to Consolidated Financial Statements.
-11-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands)
(Unaudited) Six Months Ended
June 30,
1999 1998
- -----------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 10,626 $ 10,332
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,394 6,316
Increase in deferred charges (1,427) (1,456)
Deferred income taxes and investment tax
credits-net 1,438 1,515
Allowance for funds used during construction (381) (495)
Other operating activities-net 998 236
Change in current assets and current liabilities
excluding cash, short-term investments and
current portion of debt:
Customer and other accounts receivable (1,940) 1,676
Unbilled revenues (2,575) (1,152)
Accounts payable and other liabilities (2,040) 5
Accrued/prepaid interest and taxes 1,916 3,385
Other 254 (490)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 13,263 19,872
- -----------------------------------------------------------------------------
Cash Flows Used by Financing Activities:
Capital contributed by parent company 4,156 4,209
Funds held in Trust by others 114
Debt and preferred stock issuance and
amortization costs 229 225
Repayment of long-term debt (15) (9)
Contributions and advances for construction-net 1,178 3,012
Net increase (decrease) in notes payable - banks 8,000 (3,000)
Dividends paid on common stock and preferred stock (9,049) (8,699)
- -----------------------------------------------------------------------------
Net cash provided (used) by financing activities 4,613 (4,262)
- -----------------------------------------------------------------------------
Cash Flows Used for Investing Activities:
Utility plant expenditures (excluding allowance
for funds used during construction) (19,168) (16,498)
Purchase of company (860)
- -----------------------------------------------------------------------------
Cash used for investing activities (20,028) (16,498)
- -----------------------------------------------------------------------------
Net Decrease in Cash and
Cash Equivalents (2,152) (888)
Cash and Cash Equivalents at
Beginning of Period 3,598 4,226
- -----------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 1,446 $ 3,338
=============================================================================
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 8,379 $ 7,380
Income taxes $ 3,400 $ 1,800
Preferred stock dividends $ 354 $ 354
See Notes to Consolidated Financial Statements.
-12-
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
E'town Corporation (E'town or Corporation), is the parent company of
Elizabethtown Water Company (Elizabethtown or Company), Edison Water
Company (Edison), E'town Properties, Inc. (Properties), Liberty Water
Company (Liberty), Applied Water Management, Inc. (AWM) and Applied
Wastewater Management, Inc. (AWWM). The Mount Holly Water Company (Mount
Holly) is a wholly-owned subsidiary of Elizabethtown. The assets and
operating results of Elizabethtown constitute the predominant portions of
E'town's assets and operating results. The regulated utilities,
Elizabethtown, Mount Holly and AWWM, comprise the Regulated Utilities
segment, Liberty and Edison comprise the Contract Operations segment, AWM
is the Engineering/Operations and Construction segment and E'town and
Properties comprise the Financing and Investment segment.
2. INTERIM FINANCIAL STATEMENTS
The financial statements reflect all adjustments which, in the opinion of
management, are necessary for a fair presentation. The Notes to
Consolidated Financial Statements accompanying the 1998 Annual Report to
Shareholders and the 1998 Form 10-K should be read in conjunction with
this report.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activity". In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activity - Deferral of the Effective Date of SFAS No. 133" to defer the
effective date of SFAS No. 133 for one year. Consequently, SFAS No. 133
will now be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Corporation does not believe this
Statement will have any impact on its financial condition and results of
operations.
Acquisitions
In June 1999, Mount Holly purchased Homestead Water Utility, Inc. and AWWM
purchased Homestead Treatment Utility, Inc. for a combined purchase price
of $1.8 million. The entities provide water and wastewater services to
approximately 800 customers of the Homestead community in southern New
Jersey. A calculation of the net assets acquired in the transaction is as
follows:
(Thousands of Dollars)
---------------------------------------------
Utility plant in service $ 4,189
Utility plant acquisition adjustments 671
Working capital 578
Other assets 23
Accumulated depreciation (346)
Long-term debt (453)
Other deferred credits (29)
Contributions in aid of construction (2,833)
=============================================
Net assets acquired $ 1,800
=============================================
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3. CAPITALIZATION
E'town routinely makes equity contributions to Elizabethtown which
represent a portion of the proceeds of common stock issued under E'town's
Dividend Reinvestment and Stock Purchase Plan (DRP). E'town contributed
$4.2 million from the DRP proceeds to Elizabethtown for the six months
ended June 30, 1999.
4. LONG-TERM DEBT
In October 1998, E'town filed a registration statement with the Securities
and Exchange Commission (SEC) to issue up to $75 million of unsecured
medium-term notes. The SEC is currently reviewing the filing, E'town
plans to issue approximately $30 million of these notes later in 1999 to
repay short-term debt incurred to finance the acquisition of the contract
to operate the water system of the City of Elizabeth and capital costs for
the non-regulated subsidiaries.
In November 1998 Mount Holly closed on loan agreements that will make
available up to $13.19 million in proceeds from the issuance of unsecured
notes through the New Jersey Environmental Infrastructure Trust Financing
Program. This program provides financing through two loans. The first
loan, in the amount of $7.30 million, is through the New Jersey
Environmental Infrastructure Trust (Trust), which issued tax-exempt bonds
with average interest rates of 4.7%. The second loan, in the amount of
$5.89 million, is from the State of New Jersey, acting through the New
Jersey Department of Environmental Protection. The state is participating
in the Safe Drinking Water State Revolving Fund, authorized by the Safe
Drinking Water Act amendments of 1996, whereby the federal government is
funding the state loan at no interest cost. The effective interest rate
for the combined notes is approximately 2.59%. The proceeds of the loans
will finance the construction of the Mansfield Project (see Note 8).
E'town has outstanding $12 million of 6.79% Senior Notes due December 15,
2007. The Note Agreement requires the maintenance of a consolidated fixed
charges coverage ratio of at least 1.5 to 1 and a debt to total
capitalization ratio not to exceed .65 to 1. As of June 30, 1999, the
fixed charges coverage ratio was 2.87 to 1 and the debt to total
capitalization ratio was .61 to 1, calculated in accordance with the Note
Agreement.
5. LINES OF CREDIT
E'town has $110 million of uncommitted lines of credit with several banks,
of which up to $50 million is available to E'town for use by the
Corporation or its unregulated subsidiaries and $90 million is available
to Elizabethtown as of June 30, 1999. These lines, together with internal
funds and proceeds of future issuances of debt and preferred stock by
Elizabethtown, and sales of common stock and issuances of short- and
long-term debt by E'town, are expected to be sufficient to finance the
Corporation's capital needs.
6. EARNINGS PER SHARE
Basic earnings per share are computed on the basis of the weighted average
number of shares outstanding. Diluted earnings per share assumes both the
conversion of the 6 3/4% Convertible Subordinated Debentures and common
stock equivalents, assuming all stock options are exercised. The
calculations of basic and diluted earnings per share for the three and six
months ended June 30, 1999 and 1998 follow:
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Three Months Ended Six Months Ended
June 30, June 30,
Thousands of Dollars Except Per Share Amounts 1999 1998 1999 1998
--------------------------------------------- ---- ---- ---- ----
Basic:
Net Income $5,757 $ 5,162 $ 12,057 $ 9,325
Average common shares outstanding 8,562 8,161 8,537 8,109
--------------------------------
Basic earnings per share $ .67 $ .63 $ 1.41 $ 1.15
================================
Diluted:
Net income $5,757 $ 5,162 $ 12,057 $ 9,325
After tax interest expense applicable to
6 3/4% Convertible Subordinated Debentures 111 123 222 374
--------------------------------
Adjusted net income $5,868 $ 5,285 $ 12,279 $ 9,699
================================
Average common shares outstanding 8,562 8,161 8,537 8,109
Additional shares from assumed exercise of
stock options 28 21 28 23
Additional shares from assumed conversion of
6 3/4% Convertible Subordinated Debentures 253 282 255 283
Average common shares outstanding as adjusted 8,843 8,464 8,820 8,415
================================
Diluted earnings per share $ .66 $ .62 $ 1.39 $ 1.15
================================
7. NON-UTILITY PROPERTY AND OTHER INVESTMENTS
The detail of amounts included in Non-Utility Property and Other
Investments at June 30, 1999 and December 31, 1998 is as follows :
Thousands of Dollars Except Per Share Amounts 1999 1998
- --------------------------------------------- ---- ----
Concession fees on privatization contracts - net
of amortization $ 54,725 $ 55,505
Capital assets from privatization contracts - net
of amortization 3,982 3,341
Investments in real estate 9,296 11,341
Funds held in trust by others 7,120 7,234
Goodwill on AWM and AWWM acquisitions - net
of amortization 4,628 5,401
Investment in SEGS 1,214 1,214
Other capital assets 2,195 637
Other 190 272
======================================================================
Total $ 83,350 $ 84,945
======================================================================
Effective July 1998 E'town, through Liberty, entered into a contract with
the city of Elizabeth (Elizabeth), New Jersey to operate its water system
under a 40-year contract serving 17,900 customers. Under the contract,
Liberty made payments to Elizabeth of $19.7 million in 1998 and $12
million in June 1999 and is obligated to make a payment of $19 million in
June 2000. These amounts have been included in Concession Fees on
Privatization contracts, net of amortization in the table above. These
concession fees are being amortized on a straight-line basis over the life
of the contract. Also under the terms of the contract, Liberty will
deposit $57.8 million from revenues earned over the 40-year contract, of
which $52.3 million is due after 2012, into a fund administered by
Elizabeth to be used by Elizabeth to pay for capital improvements to the
water system. In addition, Liberty is responsible for $7.45 million of
construction expenditures, primarily for meter replacements, over the life
of the contract. These construction expenditures, as they are incurred,
are being amortized on a straight-line basis over the remaining life of
the contract. Of these total commitments, approximately $4.01 million is
expected to be expended in the next three years. E'town will receive all
the revenues from operating the system in accordance with rate increases
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set forth in the contract. E'town is also responsible for all operating
expenses as well as the capital expenditures discussed above. Performance
by Liberty of the contract provisions is guaranteed by E'town.
E'town also performs the commercial billing operations for the wastewater
system of Elizabeth. E'town does not operate the wastewater system. E'town
does the wastewater billing for Elizabeth and remits all cash collected to
Elizabeth. Included in the Consolidated Balance Sheets of E'town as
Customer and Other Accounts Receivable at June 30, 1999 are the
receivables from the customers of Elizabeth for wastewater services in the
amount of $2.7 million. An offsetting liability to Elizabeth is included
in Accounts Payable and Other Liabilities which has been established to
reflect E'town's obligation to remit these funds to Elizabeth as collected.
In 1997 E'town formed a wholly-owned subsidiary, Edison Water Company
(Edison), for the purpose of managing the assets and operations of the
Edison Township water system under a 20-year contract. Edison serves
approximately 11,600 residential, commercial and industrial customers.
Edison bills and receives all water revenues generated as a result of
operating the water system of the township of Edison, New Jersey and pays
all the expenses under the contract. Edison expects to make expenditures
of approximately $25 million during the 20-year life of the contract of
which $10.16 million has been spent to date. Construction expenditures, as
they are incurred, are being amortized on a straight-line basis over the
remaining life of the contract. Performance by Edison of the contract
provisions is guaranteed by E'town.
Also included in Non-Utility Property and Other Investments at June 30,
1999 is $9.3 million of investments in several parcels of undeveloped land
in New Jersey. A parcel was sold in 1997 for $.4 million, resulting in a
gain of less than $.1 million. Two other parcels were sold in 1998 for
$1.7 million resulting in a gain of less than $.1 million. Cash proceeds
of $1.2 million were received in 1998 for these two parcels and the
balance was financed with a one-year mortgage at an interest rate of 8%,
with full payment due in 1999. In the first quarter of 1999, Properties
sold a parcel of land in Green Brook, New Jersey, which has been under
contract since 1995, for $5.83 million, at a gain of $3.2 million ($2.08
million net of taxes). Cash proceeds of $1.50 million and $.54 million
were received in February 1999 and April 1999, respectively. The remaining
$3.83 million has been financed with a 7.75% mortgage, to be paid over two
years. The mortgage balance of $3.79 million at June 30, 1999 is included
in Customer and Other Accounts Receivable in E'town's Consolidated Balance
Sheets. The long-term portion of $1.9 million is included in this balance
and is due February 2001. The sale proceeds will be invested into water
and wastewater investments that produce a current return. Properties has
entered into contracts for sale for all of its remaining parcels. The
eventual sale of these parcels is contingent upon the purchaser obtaining
various approvals for development. This process could take several years.
Based upon independent appraisals received at various times prior to 1997
and the expected sales prices for properties under contract to be sold,
the estimated net realizable value of each property exceeds its respective
carrying value as of June 30, 1999.
In 1998 E'town exercised an option to purchase the operations of Applied
Wastewater General Partnership (AWG) to provide a full complement of water
and wastewater services and consequently closed on the transaction in June
1998. The purchase price, in a non-cash transaction, was $6.6 million
(185,005 restricted common shares) for the three companies that now
comprise AWM and $.04 million (1,305 restricted common shares) for AWWM, a
regulated wastewater utility, in a stock-for-stock transaction accounted
for as a purchase. The purchase price was subject to a potential downward
post-closing adjustment based upon a multiple of earnings for the twelve
months ended March 31, 1998. As required by the purchase contract, E'town
had undertaken an audit of AWG for such period. This process resulted in a
downward post-closing adjustment of $.9 million (25,756 shares) which has
been reflected in E'town's Consolidated Balance Sheets as of June 30,
1999. The adjusted goodwill amounts to $4.8 million as of June 30, 1999
and is being amortized over a 40-year period.
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Included in Non-Utility Property and Other Investments at June 30, 1999 is
an investment of $1.21 million ($.43 million net of related deferred
taxes) in a limited partnership that owns Solar Electric Generating System
V (SEGS), located in California. The Corporation owns a 3.19% interest in
SEGS. The transaction is being accounted for on the equity method. The
Corporation will continue to monitor the relationship between the carrying
and net realizable values of its investment in SEGS, based upon
information provided by SEGS management as well as through cash flow
analyses.
8. REGULATORY MATTERS
Rates
ELIZABETHTOWN
Elizabethtown is evaluating a potential need to file for rate relief later
in 1999 or early in 2000 to recover additional construction and financing
costs incurred since base rates were last established in October 1996.
MOUNT HOLLY
In January 1999, Mount Holly filed a petition with the BPU for a $2.09
million or 40.55% rate increase, which reflects additional construction
and financing costs, as well as increases in operating costs since base
rates were last established in January 1996. This rate case also includes
$8.96 million in costs with a corresponding rate increase of $1.30
million, for the portion of Mount Holly's Mansfield Project that was
placed in service in the third quarter of 1998. Hearings are in progress
and a decision is expected during the fall of 1999. On August 9, 1999,
Mount Holly filed a supplemental petition to this case for a rate increase
to include the cost of the remaining portion of the Mansfield Project that
will be placed into service by January 2000. This increase would also
eliminate the Purchased Water Adjustment Clause (PWAC), now in effect, as
Mount Holly will no longer be purchasing water from another purveyor as of
the date the remaining portion of the Mansfield Project goes into service.
The net rate increase associated with this supplemental petition, after
elimination of the PWAC, is $1.0 million.
9. SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires that companies disclose segment data based upon how
management makes decisions, allocates resources and measures performance.
Segment data for the three and six month periods ended June 30, 1999 and
1998 is presented as follows:
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Three Months Ended Six Months Ended
June 30, June 30,
In Thousands of Dollars 1999 1998 1999 1998
- ----------------------- ---- ---- ---- ----
Operating Revenues:
Regulated Utilities $35,580 $ 32,739 $ 66,697 $ 63,246
Contract Operations 4,311 1,732 9,085 3,199
Engineering/Operations/Construction 3,733 123 5,247 250
Intersegment Elimination (2,013) (985) (3,942) (1,819)
------------------------------------
Consolidated Operating Revenues $41,611 $ 33,609 $ 77,087 $ 64,876
====================================
Operating Expenses:
Regulated Utilities $25,623 $ 23,405 $ 48,758 $ 45,510
Contract Operations 4,047 1,550 8,037 2,897
Engineering/Operations/Construction 3,634 209 5,072 335
Financing & Investment 306 227 480 433
Intersegment Elimination (2,013) (1,158) (4,114) (2,130)
------------------------------------
Consolidated Operating Expenses $31,597 $ 24,233 $ 58,233 $ 47,045
====================================
Interest Expense:
Regulated Utilities $ 4,167 $ 3,878 $ 8,033 $ 7,714
Contract Operations 309 97 599 195
Engineering/Operations/Construction 4 5
Financing & Investment 322 343 647 625
------------------------------------
Consolidated Interest Expense $4,802 $ 4,318 $ 9,284 $ 8,534
====================================
Net Income
Regulated Utilities $ 6,127 $ $5,484 $ $10,187 $ $9,926
Contract Operations (18) 107 503 164
Engineering/Operations/Construction 95 (56) 170 (55)
Financing & Investment (447) (373) 1,197 (710)
------------------------------------
Consolidated Net Income $ 5,757 $ 5,162 $ 12,057 $ 9,325
====================================
As of As of
June 30, December 31,
1999 1998
---- ----
Total Assets:
Regulated Utilities $715,51 $688,046
Contract Operations 69,802 68,539
Engineering/Operations/Construction 5,472 3,744
Financing & Investment 63,020 44,964
Intersegment Elimination (52,758) (26,551)
=================
Consolidated Total Assets: $801,050 $778,742
=================
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10. STOCK OPTIONS
In connection with the adoption of SFAS 123 "Accounting for Stock-Based
Compensation," which was effective in 1996, the Corporation elected to
continue to account for its Stock Option Plan (Plan) using the method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and provide proforma disclosure of the effect
of adopting SFAS 123. The Corporation issued stock options under the Plan
in the second quarter of 1999. The effect of accounting for these options
under SFAS 123 would be to reduce earnings by $.1 million or less $.01 per
basic share for both the three and six months periods ended June 30, 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
E'town Corporation (E'town or Corporation), a New Jersey holding
company, is the parent company of Elizabethtown Water Company
(Elizabethtown or Company), Edison Water Company (Edison), E'town
Properties, Inc. (Properties), Liberty Water Company (Liberty), Applied
Water Management, Inc. (AWM) and Applied Wastewater Management, Inc.
(AWWM). The Mount Holly Water Company (Mount Holly) is a wholly-owned
subsidiary of Elizabethtown. The assets and operating results of
Elizabethtown constitute the predominant portions of E'town's assets and
operating results. Mount Holly contributed about 3% and Liberty, AWM and
Edison each contributed 4% of the Corporation's consolidated operating
revenues for 1998. The regulated utilities, Elizabethtown, Mount Holly
and AWWM, comprise the Regulated Utilities segment, Liberty and Edison
comprise the Contract Operations segment, AWM is the
Engineering/Operations and Construction segment and E'town and
Properties comprise the Financing and Investment segment (See Note 9 to
E'town's Notes to Consolidated Financial Statements). The following
analysis sets forth significant events affecting the financial condition
of the various segments at June 30, 1999, and the results of operations
for the three and six month periods ended June 30, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures Program
For the six months ended June 30, 1999 capital expenditures were $24.4
million. Included in this total is $1.8 million for the purchase of a
regulated water and wastewater operation by Mount Holly and Applied in
June (see below), $.7 million was for capital additions for the contract
operations and $21.9 million was for other additions of, and
improvements to, water utility plant. For the three years ending
December 31, 2001, capital and investment requirements for E'town are
estimated to be $181.4 million, consisting of (I) expenditures for the
Regulated Utilities Segment ($107.5 million for Elizabethtown, $17.0
million for Mount Holly and $16.4 million for AWWM), (ii) investments in
the Contract Operations segment for concession payments by Liberty, and
capital improvements for Liberty and Edison of $39.0 million, and (iii)
investments in the Engineering/Operations/Construction segment of $1.5
million. These estimates do not include any amounts for possible
additional acquisitions or privatization activities in the three-year
period.
REGULATED UTILITIES SEGMENT
Elizabethtown
While Elizabethtown's projected capital outlays have dropped from recent
years now that the Canal Road Water Treatment Plant (Plant) is
completed, Elizabethtown's facilities will continue to be upgraded and
expanded to handle customer growth. Elizabethtown's three-year capital
program includes $50.6 million for routine projects (services, hydrants
and main extensions not funded by developers) and $56.9 million for
transmission system upgrades, a new operations center and other
projects. Elizabethtown is evaluating a potential need to file for rate
relief later in 1999 or early in 2000 to ensure that such costs are
adequately reflected in rates (see Economic Outlook).
Mount Holly
During the next three years, Mount Holly expects to spend $17.0 million,
primarily for an additional supply source to comply with state
regulations designed to prevent further depletion of a local aquifer.
Mount Holly currently obtains all of its water from wells drilled into
an aquifer, which has been subject to over- pumping by various users in
a portion of southern New Jersey. The state adopted legislation
requiring all local purveyors, including Mount Holly, to obtain
alternate supplies and reduce their withdrawals from the affected parts
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of the aquifer. Mount Holly is constructing a Project, called the
Mansfield Project, to obtain water from outside the affected part of the
aquifer for delivery into the Mount Holly system. A portion of this
project was placed into service in the fall of 1998.
In January 1999, Mount Holly filed a petition with the BPU for a $2.09
million or 40.55% rate increase, which reflects additional construction
and financing costs, as well as increases in operating costs since base
rates were last established in January 1996. This rate case also
includes $8.96 million in costs with a corresponding rate increase of
$1.30 million, for the portion of Mount Holly's Mansfield Project that
was placed in service in the third quarter of 1998. Hearings are in
progress and a decision is expected during the fall of 1999. Mount Holly
filed a supplemental petition to this case for a rate increase to
include the cost of the remaining portion of the Mansfield Project that
will be placed into service by January 2000. This increase would also
eliminate the Purchased Water Adjustment Clause (PWAC), now in effect,
as Mount Holly will no longer be purchasing water from another purveyor
as of the date the remaining portion of the Mansfield Project goes into
service. The net rate increase associated with this supplemental
petition, after elimination of the PWAC, is $1.0 million.
AWWM
AWWM expects to incur capital expenditures of $16.4 million in the next
three years, the predominant portion of which is expected to be spent in
1999 and 2000. These expenditures are primarily for the purchase of
wastewater plants from developers upon completion of their construction
by AWM.
CONTRACT OPERATIONS SEGMENT
LIBERTY
Under the contract to operate the water system of the City of Elizabeth,
New Jersey, Liberty made payments to Elizabeth of $19.7 million in 1998
and $12.0 million in June 1999 and is contractually obligated to make a
payment to Elizabeth of $19 million in June 2000. Also, under the terms
of the contract, Liberty will deposit $57.8 million from revenues earned
during the 40-year contract, of which $52.4 million is due after 2012,
into a fund administered by Elizabeth to be used by Elizabeth to pay for
capital improvements to the water system. In addition, Liberty is
responsible for $7.8 million of construction expenditures, primarily for
meter replacements, over the life of the contract. Of the total
construction expenditures, approximately $4.0 million is expected to be
expended in the next three years.
EDISION
Under the contract to operate the water system of the Township of
Edison, New Jersey, Edison Water expects to spend $3.6 million during
the next three years to upgrade the system.
ENGINEERING/OPERATIONS/CONSTRUCTION SEGMENT
AWM
AWM expects to incur capital expenditures of $1.5 million during the
next three years. These expenditures consist primarily of vehicles and
equipment used in the construction and waste hauling operations.
Capital Resources
During 1998 E'town financed 35.5% of its capital expenditures, including
concession fees for the Regulated Utilities segment and investments in
the Contract Operations and Engineering/Operations and Construction
segment, from internally generated funds (after payment of common stock
dividends). The balance was financed with a combination of short-term
borrowings under lines of credit, proceeds from capital contributions
from E'town (funded by issuances of Common Stock under the Corporation's
Dividend Reinvestment and Stock Purchase
Plan) and long-term debt.
For the three-year period ending December 31, 2001, E'town estimates
that 52.2% of its currently projected capital expenditures and
concession fees for all segments are expected to be financed with
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internally generated funds (after payment of common stock dividends).
The balance will be financed with a combination of proceeds from the
sale of E'town common stock, medium-term notes, proceeds of tax-exempt
New Jersey Economic Development Authority (NJEDA) bonds, and short-term
borrowings. Mount Holly's Mansfield Project will be financed by
requisitions from the New Jersey Environmental Infrastructure Trust
Financing Program. The NJEDA has granted preliminary approval for the
financing of almost all of Elizabethtown's major projects during the
next three years. Elizabethtown expects to pursue additional tax-exempt
financing to the extent that final allocations are granted by the NJEDA.
In October 1998, E'town filed a registration statement with the
Securities and Exchange Commission (SEC) to issue up to $75 million of
unsecured medium-term notes. The SEC is currently reviewing the filing,
E'town plans to issue approximately $30 million of these notes later in
1999 to repay short-term debt incurred to finance the acquisition of the
contract to operate the water system of the City of Elizabeth and
capital costs for the non-regulated subsidiaries.
In November 1998 Mount Holly closed on two loans that will provide up to
$13.2 million in 2.60% financing for the Mansfield Project through the
New Jersey Environmental Infrastructure Trust Financing Program. The
first loan, in the amount of $7.3 million, is through the New Jersey
Environmental Infrastructure Trust (Trust), which issued tax-exempt
bonds with average interest rates of 4.7%. The second loan, in the
amount of $5.9 million, is from the state of New Jersey, acting through
the New Jersey Department of Environmental Protection, funded by federal
monies at no interest cost. The effective interest rate for the combined
notes is approximately 2.59%.
E'town's senior debt is currently rated A3 and A- and Elizabethtown's
senior debt is currently rated A3 and A by Moody's Investors Service and
Standard & Poor's Ratings Group, respectively.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
INTEREST RATE RISK
The Corporation is subject to the risk of fluctuating interest rates in
the normal course of business. The Corporation manages interest rates
through the use of fixed and, to a lesser extent, variable rate debt. A
hypothetical single percentage point change in interest rates for the
three months ended June 30, 1999 would result in a $.3 million change in
interest costs and earnings before tax related to short-term and
variable rate debt.
RESULTS OF OPERATIONS
Net Income for the three months ended June 30, 1999 was $5.8 million or
$.67 per share on a basic basis as compared to $5.2 million or $.63 per
share for the same period in 1998. Net income for the six months ended
June 30, 1999 was $12.1 million or $1.41 per share as compared to $9.3
million or $1.15 per share for the same period in 1998. Net income
increased in the second quarter over the same quarter last year due
primarily to an increase in operating revenues from increased water
consumption at Elizabethtown due to unusually hot, dry weather and in
addition, by $2.1 million or $.24 per share for the six month period due
to an after-tax gain on the sale of a real estate parcel in the first
quarter. Also, revenues and expenses increased for the three and six
month periods due to the operations of Liberty and AWM which were formed
in the second quarter of 1998.
Operating Revenues increased $8.0 million or 23.8% and $12.1 million or
18.8% for the three and six month periods ended June 30, 1999 and 1998,
respectively, compared to the same periods in 1998. The increases
resulted primarily from revenues of AWM and Liberty which began
operations in June and July 1998, respectively. AWM contributed an
increase of $3.7 million to revenues and contract operations, including
Liberty, contributed an increase of $1.30 million to revenues, net of
$1.4 million of intercompany sales/expenses, for the three month period.
AWM contributed an increase of $5.2 million to revenues and contract
operations, including Liberty, contributed an increase of $3.2 million
to revenues, net of $2.6 million of intercompany sales/expenses for the
six month period. The regulated utilities revenues increased $2.8
million and $3.3 million for the three and six month periods,
respectively, over the same periods last year due to increased water
consumption due to unusually hot, dry weather.
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Operation Expenses increased $5.3 million or 44.5% and $8.7 million or
37.8% for the three and six months ended June 30, 1999, respectively
compared to the same periods in 1998. The increases were due primarily
to the inclusion of the operation expenses of Liberty and AWM in
E'town's consolidated financial results. AWM accounted for $2.8 million
and $4.1 million of the increases for the three and six month periods,
respectively. Liberty accounted for $1.1 million and $1.9 million of the
increases for the three and six month periods, respectively. The
increases attributable to Liberty are net of intercompany purchases of
wholesale water from Elizabethtown of $1.0 million and $2.1 million for
the three and six month periods, respectively. E'town Corporation and
E'town Properties combined accounted for increases of $.2 million for
both the three and six month periods while Edison experienced decreases
of $.2 million and $.4 million for the three and six month periods,
respectively. Elizabethtown's operation expenses increased $1.2 million
and $2.1 million for the three and six month periods, respectively,
primarily due to additional labor costs for additional employees and
variable costs associated with higher water consumption. Mount Holly's
operation costs increased $.4 million and $.6 million for the three and
six month periods, respectively, primarily due to the cost, which is
reflected in utility rates under the PWAC, of purchasing water from
another purveyor, as discussed above.
Maintenance Expenses increased $.6 million or 38.7% and $.7 million or
21.2% for the three and six months ended June 30, 1999, respectively
compared to the same periods in 1998. These increases are due to the
operations of Applied and Liberty. Maintenance costs remained relatively
constant for Elizabethtown, Mount Holly and Edison, primarily due to
favorable weather conditions in the winter of 1999 as well as ongoing
preventive maintenance programs and cost control efforts.
Depreciation and Amortization Expense increased $.5 million or 16.9% and
$1.1 million or 16.6% for the three and six month periods, respectively,
primarily due to the amortization of concession fees associated with the
contract to operate the water system of the city of Elizabeth, New
Jersey. Depreciation expense also increased due to a higher level of
depreciable plant in service.
Revenue Taxes decreased $.5 million or 11.3% and $.4 million or 4.5% for
the three and six month periods, respectively, primarily due to
increased sales of water by Elizabethtown due to hot, dry weather in the
second quarter of 1999.
Real Estate, Payroll and Other Taxes Expenses increased $.1 million or
13.2% and $.2 million or 15.2% for the three and six month periods,
respectively, primarily due to increased payroll taxes as a result of
higher wage levels and additional employees.
Federal Income Taxes as a component of operating expenses increased $.2
million or 6.7% and $.2 million or 3.1% for the three and six month
periods, respectively due to increases in taxable income.
Other Income (Expense) increased $.3 million or 89.9% and $2.5 million
or 566.6% for the three and six month periods, respectively. The
increase for the second quarter is due primarily to a settlement of
litigation of $.3 million ($.2 million net of taxes). The increase on
six month-to-date basis is due primarily to a gain on the sale of real
estate in the first quarter of 1999 of $3.2 million ($2.1 million net of
taxes).
Total Interest Charges increased $.5 million or 11.2% and $.8 million or
8.8% for the three and six month periods, respectively, due primarily to
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<PAGE>
an increase in short- and long-term interest expense as a result of the
issuance short-term bank notes to finance a scheduled concession payment
of $12.0 million by Liberty to the City of Elizabeth, additional
short-term bank notes to finance Elizabethtown and Mount Holly's ongoing
capital programs and the issuance of long-term notes by Mount Holly in
November 1998 through the New Jersey Environmental Infrastructure Trust
Financing Program to finance the construction of Mount Holly's Mansfield
Project.
ECONOMIC OUTLOOK
Forward Looking Information
Information in this report includes certain forward looking statements
within the meaning of the Federal securities laws. Any forward looking
statements are based upon information currently available and are
subject to future events, risks and uncertainties that could cause
actual results to differ materially from those expressed in the
statements. Such events, risks and uncertainties include, without
limitation, actions of regulators and legislators, the effects of
weather on water consumption, changes in historical patterns of water
consumption and demand, including changes through increased use of
water-conserving devices, conditions in capital and real estate markets,
increases in operating expenses due to factors beyond the Corporation's
control, changes in environmental regulation and associated costs of
compliance and additional investments or acquisitions which may be made
by the Corporation.
E'town Corporation and Subsidiaries
During the next several years, management will seek to increase earnings
per share by (I) maximizing earned returns on the Regulated Utilities
segment through expansion efforts to increase sales and cost control
measures and (ii) investing in water and wastewater assets (including
municipal privatization contracts, as well as designing, constructing,
operating and purchasing wastewater assets through AWM and AWWM,
discussed below) which produce a current return. The Corporation intends
to continue to sell Properties' real estate holdings during the next
several years to fund a portion of the investment planned for the
regulated and non-regulated businesses. The balance of such funding will
be generated from internal and external sources.
Earnings per share will vary going forward due to the effect of weather
on costs and pumpage, timing and adequacy of rate relief, time elapsed
since the last rate increase, the nonrecurring effect of real estate
sales and other factors. For 1999 E'town expects consolidated earnings
per share to be marginally greater than in 1998 due to an unusually hot,
dry summer in 1999 and gains on the sale of real estate. These increases
are expected to be offset somewhat by an increase in the number of
outstanding shares.
Other Matters
On August 5, 1999 the Governor of the State of New Jersey declared a
"Water Emergency" for the entire state and issued mandatory restrictions
on outdoor, nonessential water use. Due to unusually low levels of
rainfall during June and July the Governor deemed these measures
necessary to preserve the integrity of several of the states reservoir
and well supplies. Customers of Elizabethown, Mount Holly, Edison and
Liberty are subject to these restrictions. The water systems operated by
E'town's subsidiaries have adequate supplies of water to meet the needs
of their customers. While it is anticipated these restrictions will
likely affect the amount of water consumed by a substantial number of
the Corporation's customers, management believes that the revenues
generated from water sales in the third quarter of 1999 will exceed
those generated in the third quarter of 1998 as well as exceed our
expectations for the third quarter of 1999.
Regulated Utilities Segment
Elizabethtown, Mount Holly and AWWM
Elizabethtown is evaluating a potential need to file for rate relief
later in 1999 or early in 2000 to recover additional construction and
financing costs incurred since base rates were last established in
October 1996.
Mount Holly earned a rate of return on common equity of 4.7% in 1998,
compared to an authorized rate of return of 11.25%, established in its
most recent rate proceeding. Mount Holly contributed $.04 to E'town's
-24-
<PAGE>
consolidated earnings per share in 1998. Management expects Mount Holly
to increase its contribution to E'town's earnings per share in 2000 upon
receipt of additional rate relief from the rate increase filed in
January 1999, so that Mount Holly can realize rates of return comparable
to authorized levels. Mount Holly earned significantly below its
authorized return in 1998 and 1997 as the Company was precluded from
filing for needed rate relief due to recently settled litigation with
another purveyor.
AWWM expects to realize rates of return comparable to those earned by
Elizabethtown on its anticipated investments of $16.4 million in new
wastewater facilities during the next several years.
In June 1999, Mount Holly purchased the water operations of Homestead
Water Utility, Inc. and AWWM purchased the wastewater operations of
Homestead Treatment Utility, Inc. for a combined purchase price of $1.8
million. The entities provide water and wastewater services to
approximately 800 customers of the Homestead community in southern New
Jersey.
Contract Operations Segment
Liberty
Effective July 1, 1998, E'town, through its Liberty Water Company
subsidiary, commenced operation of the 17,900 customer water supply
system of the city of Elizabeth under a 40-year contract. Liberty is
expected to realize a return on its capital in an amount similar to that
currently earned by E'town's regulated operations.
Edison
Effective July 1, 1997, E'town, through its Edison Water Company
subsidiary, commenced operation of Edison Township's 11,600-customer
water system under a 20-year contract. Edison is expected to realize a
return on its capital in an amount similar to that currently earned by
E'town's regulated operations. Contributions to earnings will be small
through 2002 and then will increase as rate increases specified in the
contract take effect.
E'town continues to pursue opportunities to operate municipal water and
wastewater systems under long-term contracts, primarily in New Jersey.
E'town will focus on opportunities where it may have an advantage due to
location or experience in operation.
Engineering/Operations/Construction
AWM
AWM provides "one-stop shopping" for water and wastewater services to
residential and commercial developers. These services include the
design, construction and operation of water and wastewater facilities
and, in some instances, purchase of such utilities at project build-out
by AWWM, thereby adding to E'town's regulated utility customer base.
E'town expects the
acquisition to increase its contribution to E'town's earnings per share
for 1999.
Financing and Investment Segment
E'town and Properties
E'town is in the process of selling its various parcels of undeveloped
land carried as investments of $9.3 million at June 30, 1999. One of the
real estate parcels was sold in 1997 for $.4 million, resulting in a
gain of less than $.1 million. Two other parcels were sold in 1998 for
$1.7 million resulting in a gain of less than $.1 million. In the first
quarter of 1999, Properties sold a parcel of land in Green Brook, New
Jersey, which has been under contract since 1995, for $5.83 million, at
a gain of $3.2 million ($2.08 million net of taxes). Cash proceeds of
$1.50 million and $.54 million were received in February 1999 and April
1999, respectively. The remaining $3.83 million has been financed with a
7.75% mortgage, to be paid over two years. The sale proceeds will be
invested into water and wastewater investments that produce a current
return. Properties has entered into contracts for the sale of all of its
remaining parcels at prices that exceed the carrying cost of such
properties. The eventual sale of these parcels is contingent upon the
purchaser obtaining various approvals for development and could take
-25-
<PAGE>
several years. E'town expects to invest the sale proceeds from the
remaining parcels into water and wastewater utility investments that
produce a current return. The Corporation has no plans to make
additional investments other than in water and wastewater projects.
New Accounting Pronouncements
See Note 2 of E'town's Notes to Consolidated Financial Statements for a
discussion of new accounting standards.
Year 2000
State of Readiness
The Corporation has assessed its significant business systems, as well
as non-critical, peripheral support systems for compliance with the Year
2000 computer challenge. The assessment concluded that all significant
business systems (i.e. customer billing and service, financial, water
treatment operating and control, water quality laboratory information
and telemetric data acquisition systems) are Year 2000 compliant. The
assessment also included inquiries as to the state of readiness of
significant vendors whose services to the Corporation could have an
impact on the Corporation's ability to deliver service to its customers.
Management concluded that the delivery of electric power as well as
chemicals used in the water treatment process are two areas of
significant importance and received documentation from the vendors who
provide these services that indicates their ability to provide service.
Therefore, the Corporation expects no disruption in the services it
provides to its customers and expects to process transactions in its
financial, customer billing and customer services systems. The
assessment did identify certain peripheral support systems that need to
be addressed. A plan to address these is being implemented on schedule.
The Costs To Address The Corporation's Year 2000 Issues
The significant business systems of the Corporation defined above are
Year 2000 compliant and have been operational for up to several years.
Therefore, no further costs are expected to be incurred in connection
with bringing these systems into compliance. The peripheral support
systems that are being addressed will require the Corporation to incur
costs to bring them into compliance. The total of these costs were
originally estimated at less than $.2 million. This amount remains a
reasonable estimate.
Risks Associated With The Corporation's Year 2000 Issues
Management believes that all identifiable issues with respect to Year
2000 compliance have been addressed, or will be addressed, in sufficient
time and in sufficient detail to preclude any disruption in service or
adverse effect on the Corporation's financial profile. Management,
therefore, believes that risks associated with this issue are minimal
with respect to those areas, which are internal to the Corporation and
over which management exercises control. Those areas that are external
to the Corporation i.e., issues associated with our vendors, have been
mitigated to the extent possible through inquiry of our vendors, tests
of their claims of Year 2000 compliance and development of contingency
plans as considered appropriate.
Contingency Plan
There are operational contingency plans in place on an ongoing basis to
address issues, such as natural disasters, that could result in a
disruption of service. These procedures would be activated in the event
that certain physical facilities were not operable as a result of
failures by our vendors associated with Year 2000 issues. In addition,
Elizabethtown Water Company has alternative electric, natural gas and
diesel generation capacity that could sustain a significant level of
pumping capacity for an indefinite period of time.
-26-
<PAGE>
PART II - OTHER INFORMATION
Items 1 - 5:
Nothing to Report.
Item 6(a) - Exhibits
Exhibits to Part I:
Exhibit 12 - E'town Corporation and Subsidiaries -
Computation of Ratio of Earnings to Fixed Charges
Exhibit 12(a) - Elizabethtown Water Company - Computation of
Ratio of Earnings to Fixed Charges
Exhibit 12(b) - Elizabethtown Water Company - Computation of
Ratio of Earnings to Fixed Charges and Preferred
Dividends
Exhibit 27 - E'town Corporation and Subsidiaries and
Elizabethtown Water Company and Subsidiary -
Financial Data Schedules
Item 6(b) - Reports on Form 8-K
None
-27-
<PAGE>
E'TOWN CORPORATION
ELIZABETHTOWN WATER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1999
E'TOWN CORPORATION
ELIZABETHTOWN WATER COMPANY
/s/ Gail P. Brady
________________________________
Gail P. Brady
Treasurer
/s/ Dennis W. Doll
________________________________
Dennis W. Doll
Controller
-28-
Exhibit 12
E'TOWN CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(In Thousands Except Ratios)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
EARNINGS:
Net income $ 5,757 $ 5,162 $ 12,057 $ 9,325
Federal income taxes 3,164 2,842 6,620 5,149
Interest charges 4,802 4,318 9,284 8,534
---------------------------------
Earnings available to cover fixed charges 13,723 12,322 27,961 23,008
---------------------------------
FIXED CHARGES:
Interest on long-term debt 4,239 4,048 8,373 8,033
Other interest 565 286 856 500
Amortization of debt discount - net 110 109 220 217
---------------------------------
Total fixed charges $ 4,914 $ 4,443 $ 9,449 $ 8,750
---------------------------------
Ratio of Earnings to Fixed Charges 2.79 2.77 2.96 2.63
=================================
Earnings to Fixed Charges represents the sum of Net Income,
Federal income taxes and Interest Charges (which is reduced by
Capitalized interest), divided by Fixed Charges.
Fixed Charges consist of interest on long and short-term debt (which is not
reduced by Capitalized Interest), and Amortization of debt discount.
Exhibit 12(a)
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
Computation of Ratio of Earnings to Fixed Charges
(In Thousands Except Ratios)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
EARNINGS:
Net income $ 6,343 $ 5,687 $ 10,626 $10,332
Federal income taxes 3,369 3,017 5,630 5,473
Interest charges 4,163 3,878 8,028 7,714
---------------------------------
Earnings available to cover fixed charges 13,875 12,582 24,284 23,519
---------------------------------
FIXED CHARGES:
Interest on long-term debt 3,862 3,713 7,619 7,337
Other interest 315 192 378 398
Amortization of debt discount - net 98 98 196 195
---------------------------------
Total fixed charges $ 4,275 $ 4,003 $ 8,193 $ 7,930
---------------------------------
Ratio of Earnings to Fixed Charges 3.25 3.14 2.96 2.97
=================================
Earnings to Fixed Charges represents the sum of Net Income,
Dividends, Federal income taxes and Interest Charges (which is reduced by
Allowance for Debt Funds Used During Construction), divided by Fixed Charges.
Fixed Charges consist of interest on long and short-term debt (which is not
reduced by Allowance for Debt Funds Used During Construction), and
Amortization of debt discount.
Exhibit 12(b)
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
Computation of Ratio of Earnings to Fixed Charges
and Preferred Dividends
(In Thousands Except Ratios)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
EARNINGS:
Net income $ 6,343 $ 5,687 $ 10,626 $10,332
Federal income taxes 3,369 3,017 5,630 5,473
Interest charges 4,163 3,878 8,028 7,714
---------------------------------
Earnings available to cover fixed charges 13,875 12,582 24,284 23,519
---------------------------------
FIXED CHARGES AND PREFERRED DIVIDENDS:
Interest on long-term debt 3,862 3,713 7,619 7,337
Preferred dividend requirement (1) 311 311 621 621
Other interest 315 192 378 398
Amortization of debt discount - net 98 98 196 195
---------------------------------
Total fixed charges $ 4,586 4,314 8,814 8,551
---------------------------------
Ratio of Earnings to Fixed Charges
and Preferred Dividends 3.03 2.92 2.76 2.75
=================================
(1) Preferred Dividend Requirement:
Preferred dividends 203 203 406 406
Effective tax rate 34.69% 34.66% 34.63% 34.63%
---------------------------------
Preferred dividend requirement $ 311 $ 311 $ 621 $ 621
=================================
Earnings to Fixed Charges and Preferred Dividends represents the sum of
Net Income, Federal income taxes and Interest
Charges (which is reduced by Allowance for Debt Funds Used During
Construction), divided by Fixed Charges. Fixed Charges and Preferred
Dividends consist of interest on long and short-term debt (which is not
reduced by Allowance for Debt Funds Used During Construction), dividends
on Preferred Stock on a pre-tax basis and Amortization of debt discount.
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