FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11023
E'TOWN CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2596330
(State of incorporation) (I.R.S. Employer Identification No.)
600 South Avenue
Westfield, New Jersey 07090
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 654-1234
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, without par value New York Stock Exchange
Commission file number 0-628
ELIZABETHTOWN WATER COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-1683171
(State of incorporation) (I.R.S. Employer Identification No.)
600 South Avenue
Westfield, New Jersey 07090
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 654-1234
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Secrities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No_____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. __X__
On December 31, 1997, the aggregate market value of E'town Corporation's voting
stock held by non-affiliates was $324,901,247.
On December 31, 1997, there were 8,022,253 shares of Common Stock outstanding,
exclusive of treasury shares or shares held by subsidiaries of E'town
Corporation.
Note: All of the Common Stock of Elizabethtown Water Company is owned by E'town
Corporation.
Parts II and IV incorporate information by reference from the Annual Report to
Shareholders of E'town Corporation for the Year Ended December 31, 1997.
Part III incorporates information by reference from the definitive Proxy
Statement in connection with E'town Corporation's Annual Meeting of Shareholders
to be held on May 21, 1998.
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E'TOWN CORPORATION
ELIZABETHTOWN WATER COMPANY
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business 1
Organization 1
Service Area and Customers 1
Water Supply 2
Water Treatment Facilities and Water Quality Regulations 3
Transmission and Distribution 4
Energy Supply 4
Environmental Matters 5
Franchises 5
Employee Relations 5
Rate Matters 5
Real Estate Matters 6
Other Developments 6
Executive Officers of the Corporation and Elizabethtown 8
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for the Corporation's Common Stock and Related
Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 11
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
PART III
Item 10.Directors and Executive Officers of the Registrant 16
Item 11.Executive Compensation 16
Item 12.Security Ownership of Certain Beneficial Owners
and Management 16
Item 13.Certain Relationships and Related Transactions 16
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports
on Form 8-K 16
SIGNATURES 18
APPENDIX I
Elizabethtown Water Company and Subsidiary Consolidated
Financial Statements for the Years Ended December 31, 1997,
1996 and 1995 and Independent Auditors' Report
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E'TOWN CORPORATION
ELIZABETHTOWN WATER COMPANY
Annual Report on Form 10-K
For the year ended December 31, 1997
PART I
ITEM 1. Business
ORGANIZATION
E'town Corporation (E'town or Corporation) was originally 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. Edison Water Company (Edison) is a wholly
owned, non-regulated subsidiary of E'town formed in July 1997 to operate the
water system of the Township of Edison, New Jersey under a 20-year operating
contract.
Elizabethtown, Mount Holly and Edison 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 and
Mount Holly are public utilities and are regulated by the New Jersey Board of
Public Utilities (BPU).
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 1997.
SERVICE AREA AND CUSTOMERS
At December 31, 1997 Elizabethtown and Mount Holly furnished water
service on a retail basis to general customers and to industrial customers
served through 200,320 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.
Edison serves 11,200 customers under its contract to operate the water
system of the Township of Edison, New Jersey.
The operating revenues of Elizabethtown, Mount Holly and Edison by major
classification of customer for the twelve months ending December 31, 1997 are
as follows:
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General customers 65.8%
Sales to other systems 15.0%
Larger industrial customers 6.3%
Fire protection service/miscellaneous 12.9%
The water systems are substantially all metered except for fire
service.
Additional operating statistics appear on page 10.
WATER SUPPLY
The water supply systems of Elizabethtown and Mount Holly are physically
separate. During 1997, Elizabethtown's pumpage averaged 131.4 million
gallons per day (MGD) and Mount Holly's pumpage averaged 3.7 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 1997, 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 although beginning in March 1998, 1.0
million gallons per day is being purchased by Mount Holly from another
purveyor on a temporary basis from surface sources (see below).
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.
Mount Holly has historically obtained all of its water from wells drilled
into an aquifer, which has been subject to over-pumping. The State adopted
legislation requiring all local purveyors, including Mount Holly, to obtain
alternate supplies and reduce their withdrawals from the affected parts of
the aquifer. Mount Holly designed a project to obtain water from outside the
affected part of the aquifer for delivery into the Mount Holly system.
Management believes that this project (the "Mansfield Project") is the most
cost effective method for Mount Holly to comply with the State's regulations.
By September 1995, Mount Holly had obtained all New Jersey Department of
Environmental Protection (DEP) approvals for the Mansfield Project and was
ready to start construction when a regional purveyor appealed the granting of
Mount Holly's permits for the project. Under an August 1997 settlement among
Mount Holly, the DEP and the regional purveyor, Mount Holly will purchase 1
million gallons per day from the regional purveyor for two years while the
Mansfield Project is being constructed. Purchases began during March of 1998,
after completion of an interconnection.
Mount Holly is taking the steps necessary to recover in rates both the
costs of purchased water and the costs of the Mansfield Project. First, Mount
Holly filed a petition with the Board of Public Utilities (BPU) for a
Purchased Water Adjustment Clause (PWAC) to recover the costs of purchased
water through rates. The PWAC filing requests an increase in annual operating
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revenues of approximately $1.34 million or 40.3%. Second, Mount Holly and the
parties to Mount Holly's 1995 base rate case are participating before the BPU
in a proceeding to clarify the need for, and the cost-effectiveness of, the
Mansfield Project as the method for Mount Holly to comply with the states
restrictions on diversions from the aquifer. In addition, Mount Holly will
file a base rate case during the second quarter of 1998 to recover a portion
of the costs of the Mansfield Project, estimated at $7.3 million, as well as
$6.0 million in additions to utility plant since Mount Holly's base rates
were last adjusted in January 1996. Finally, Mount Holly intends to file a
base rate case in 1999 for the remaining costs of the Mansfield Project,
estimated to amount to $11.3 million, to coincide with the completion of the
project and the expiration of the agreement to purchase water from the other
purveyor.
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 (EPA) and the DEP
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 EPA pursuant to the Federal Safe Drinking Water
Act, as amended (SDWA), and by the DEP 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 EPA and DEP.
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 DEP and the EPA 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 EPA has established maximum contaminant
levels (MCLs) for various substances found in drinking water. As authorized
by similar state legislation, the DEP has set MCLs for certain substances
which are more restrictive than the MCLs set by the EPA. In certain cases,
the EPA and DEP have also mandated that certain treatment procedures be
followed in addition to satisfying MCLs established for specific
contaminants. The DEP 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
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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 is being
operated for compliance with the SWTR.
TRANSMISSION AND DISTRIBUTION
As of December 31, 1997, Elizabethtown Water Company's transmission and
distribution system included 2,926 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 to clean and line its older cast iron mains the
cost of which is capitalized and has 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 over the last several years to 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.
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ENVIRONMENTAL MATTERS
Elizabethtown and Mount Holly are also subject to regulation by the DEP
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 DEP
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 including the diversion permit for the Mansfield
Project discussed previously.
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, 1997, the Corporation had a total of 399 full-time
employees, of which approximately half 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. This resulted in an increase
in annual operating revenues of approximately $21.8 million. The rate
increase reflected 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%. Elizabethtown, excluding Mount Holly, earned a rate of return on
common equity of 11.0% in 1997. Elizabethtown's authorized rate of return on
common equity is currently 11.25%.
Mount Holly
Mount Holly earned a rate of return on common equity of 2.8% in 1997,
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 1997. Management expects Mount Holly to increase its
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contribution to E'town's earnings per share later in 1998 and into 1999 upon
receipt of additional rate relief so that Mount Holly can realize rates of
return comparable to authorized levels. See "Water Supply," above for further
discussion of Mount Holly's pending rate issues.
REAL ESTATE MATTERS
E'town Properties and E'town Corporation own various parcels of
undeveloped land in New Jersey carried as investments of $12.8 million in
Non-Utility Property and Other Investments - Net, in the Consolidated Balance
Sheets of E'town at December 31, 1997. E'town and Properties are proceeding
with plans to sell such properties and expect to invest the sale proceeds
into water and wastewater utility investments that produce a current return.
Properties sold one parcel in 1997 for a price of $.4 million. The sale
produced a nominal gain. Properties had previously entered into 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
all the material issues appear to have been resolved. Properties expects
several closings during 1998, including the parcel described above which, if
consummated, would result in gains.
The carrying value of each parcel includes the original cost plus any
real estate taxes, interest and, where applicable, direct costs capitalized
while rezoning or governmental approvals are or were being sought. 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 1997, the estimated net realizable value of each property exceeds
its respective carrying value as of December 31, 1997.
OTHER DEVELOPMENTS
Effective July 1, 1997, E'town, through its Edison Water Company
subsidiary, commenced operation of Edison Township's 11,200 customer water
system under a 20-year contract. E'town paid the township $5.7 million at
closing and expects to spend $5.4 million over the next three years to
upgrade the system, primarily for new meters and main cleaning and lining.
Edison Water Company receives all revenues from the township's system
(pursuant to a rate schedule set forth in the contract), pays all operating
expenses, and retains the balance to amortize its investment and earn a
return on its capital. Edison Water Company expects 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 for the first
five years 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 contract, primarily in New Jersey. While
each opportunity is unique, such endeavors generally require 'town to make
payments to the municipality and to invest capital to upgrade the utility
systems within the first several years of the contract. Like Edison, E'town
seeks to realize rates of return in these contracts comparable to levels
earned by E'town's regulated utility businesses.
E'town is negotiating with the city of Elizabeth, New Jersey to operate
its water and wastewater systems under 40- and 20-year contracts,
respectively. These contracts, if successfully negotiated, would require a
$20.0 million payment at closing and expenditures of $26.2 million during the
first three years. E'town would contract with a firm experienced in managing
large wastewater facilities for the wastewater portion of the services to be
provided.
On March 6, 1998, E'town exercised an option to acquire Applied Wastewater
Group (AWG), its joint venture partner for the past three years, in a $7.0
million stock-for-stock transaction, and is expected to close the transaction
in the second quarter of 1998. AWG designs, builds and operates wastewater
treatment plants. E'town intends to offer "one-stop shopping" for water and
wastewater services to residential and commercial developers. These services
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include the design, financing, construction and operation of water and
wastewater facilities, and, in some instances, purchase of the utilities at
project build-out, thereby adding to E'town's regulated utility customer
base. Based on AW's results in 1997, E'town expects the acquisition to add
modestly to E'town's earnings per share in 1998.
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.
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Executive Officers of the Corporation and Elizabethtown
Name Age Positions Held
Anne Evans Estabrook 53 Chairman of the Corporation since May 1997.
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).
Andrew M. Chapman 42 President of the Corporation since May
1997, Chief Financial Officer of the
Corporation from August 1989 until May 1997
and Treasurer of the Corporation from
November 1990 to May 1997. 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.
Walter M. Braswell 48 Secretary of the Corporation, Properties and
Elizabethtown since December 1990
and Vice President and General Counsel
of Elizabethtown since August 1988.
Norbert Wagner 62 Senior Vice President-Operations of
Elizabethtown since May 1992. Vice
President-Operations since March 1987.
Edward F. Cash 62 Vice President - Customer Services of
Elizabethtown since 1977.
Item 2. Properties
All principal plants and other materially important units of property of
Elizabethtown and Mount Holly are owned in fee. The Company considers that
the properties of Elizabethtown and Mount Holly are in good operating
condition.
Item 3. Legal Proceedings
In the opinion of management, litigation in which the Corporation or its
subsidiaries is involved is in the ordinary course of business and will not
have a material adverse effect on the consolidated financial condition of
the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
None
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PART II
Item 5. Market for the Corporation's Common Stock and Related Stockholder
Matters
This information is included in Exhibit 13, filed herewith, and is
incorporated herein by reference. All of the common stock of Elizabethtown
Water Company is owned by E'town.
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Item 6. Selected Financial Data
E'town Corporation
This information is included in Exhibit 13, filed herewith, and is
incorporated herein by reference.
Elizabethtown Water Company
1997 1996 1995 1994 1993
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Utility Plant (Thousands)
Utility Plant - net $ 572,785 $560,024 $507,858 $437,456 $373,293
Construction Expenditures
(excluding AFUDC) 24,612 55,125 73,789 69,981 32,517
Total Assets 646,318 640,779 580,808 502,848 437,405
Capitalization (Thousands)
Shareholder's Equity 193,354 182,293 176,685 151,624 125,765
Preferred Stock 12,000 12,000 12,000 12,000 12,000
Debt (1) 249,974 250,963 208,952 164,951 141,952
Total Capitalization $ 455,328 $445,256 $397,637 $328,575 $279,717
Capitalization Ratios
Common Stock 42% 41% 44% 46% 45%
Preferred Stock 3% 3% 3% 4% 4%
Debt (1) 55% 56% 53% 50% 51%
Earnings Applicable to
Common Stock (Thousands) $ 20,092 $15,942 $16,512 $13,369 $13,783
Operating Statistics
Revenues (Thousands)
General Customers $ 85,195 $68,797 $67,455 $62,923 $63,100
Other Water Systems 21,900 18,929 18,720 18,082 17,187
Industrial Wholesale 8,451 7,869 7,947 7,458 6,652
Fire Service/Miscellaneous 16,242 14,763 14,276 13,570 13,057
Total Revenues $ 131,788 $110,358 $108,398 $102,033 $99,996
Water Sales - Millions of Gallons (mg)
General Customers 24,333 22,890 23,999 23,551 23,883
Other Water Systems 14,504 15,049 15,569 15,691 15,109
Industrial Wholesale 3,533 3,567 3,673 3,568 3,213
System Use and Unaccounted Fo6,948 6,444 6,402 6,570 5,453
Total Water Sales 49,318 47,950 49,643 49,380 47,658
System Delivery by Source - mg
Surface 42,585 41,485 42,646 42,534 40,742
Wells 6,689 6,328 6,764 6,690 6,776
Purchased 44 137 233 156 140
Total System Delivery 49,318 47,950 49,643 49,380 47,658
Millions of Gallons Pumped:
Average Day 135 131 136 135 131
Maximum Day 205 170 183 182 191
General Information
Meters in Service 200,320 197,791 195,375 191,622 188,677
Miles of Main 2,926 2,899 2,869 2,828 2,800
Fire Hydrants Served 16,228 16,012 15,650 15,291 14,909
==============================================================================
(1) Includes long-term debt, notes payable and long-term debt-current portion.
10
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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 (E'town or
Corporation), assets and earnings. Elizabethtown and Mount Holly are
regulated water companies which, as a consolidated entity are referred to
herein as Elizabethtown Water Company (Elizabethtown Water Company). Mount
Holly contributed about 3% of the Company's consolidated operating revenues
for 1997. The following analysis sets forth significant events affecting the
financial condition of Elizabethtown at December 31, 1997, and the results of
operations for the years ended December 31, 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures Program
In 1997, capital expenditures were $24.6 million, primarily for water utility
plant. For the three years ending December 31, 2000, capital and investment
requirements for Elizabethtown are estimated to be $134.6 million, consisting
of expenditures for water utility plant ($112.7 million for Elizabethtown and
$21.9 million for Mount Holly).
Elizabethtown
While Elizabethtown's projected capital outlays have dropped from recent
years now that the Canal Road Wate 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
$62.0 million for routine projects (services, hydrants and main extensions
not funded by developers) and $50.7 million for transmission system upgrades,
a new operations center and other projects. Elizabethtown expects to file for
rate relief periodically 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 $21.9 million,
primarily for an additional supply source to comply with state regulations
designed to prevent further depletion of a local aquifer. Mount Holly plans
to file for rate relief to recover these costs, as well as to increase the
rates of return realized by Mount Holly and, therefore, Mount Holly's
contribution to E'town's earnings per share.
Mount Holly obtains all of its water from wells drilled into an aquifer,
which has been subject to over-pumping. The State adopted legislation
requiring all local purveyors, including Mount Holly, to obtain alternate
supplies and reduce their withdrawals from the affected parts of the aquifer.
Mount Holly designed a project to obtain water from outside the affected part
of the aquifer for delivery into the Mount Holly system. Management believes
that this project (the "Mansfield Project") is the most cost effective method
for Mount Holly to comply with the state's regulations.
By September 1995, Mount Holly had obtained all New Jersey Department of
Environmental Protection (DEP) approvals for the Mansfield Project and was
ready to start construction when a regional purveyor appealed the granting of
Mount Holly's permits. Under an August 1997 settlement among Mount Holly, the
11
<PAGE>
DEP and the regional purveyor, Mount Holly will purchase 1 million gallons
per day from the regional purveyor for two years while the Mansfield Project
is being constructed. Purchases began in March of 1998, after completion of
an interconnection.
Mount Holly is taking the steps necessary to recover in rates both the costs
of purchased water and the Mansfield Project. First, Mount Holly filed a
petition with the Board of Public Utilities (BPU) for a Purchased Water
Adjustment Clause (PWAC) to recover through rates the cost of purchased
water. The PWAC filing requests an increase in annual operating revenues of
$1.34 million or 40.3%. Second, Mount Holly and the parties to Mount Holly's
1995 base rate case are participating before the BPU in a proceeding to
reaffirm that the Mansfield Project is needed and is the most cost effective
method for Mount Holly to comply with the states restrictions on diversions
from the aquifer. In addition, Mount Holly will file a base rate case during
the second quarter of 1998 to recover a portion of the remaining costs of the
Mansfield Project, estimated at $7.2 million, as well as $6.0 million in
additions to utility plant since Mount Holly's base rates were last adjusted
in January 1996. Finally, Mount Holly intends to file a base rate case in
1999 for the remaining costs of the Mansfield Project, estimated to amount to
$11.3 million, to coincide with the completion of the project and the
expiration of the agreement to purchase water from the other purveyor.
Capital Resources
During 1997, Elizabethtown Water Company financed 75.2% 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, 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 New Jersey Economic Development Authority
(NJEDA) Bonds.
For the three-year period ending December 31, 2000, E'town estimates that
48.6% of its currently projected capital expenditures and investments 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 debt, proceeds of
tax-exempt NJEDA bonds, long-term notes and short-term borrowings. The NJEDA
has granted preliminary approval for the financing of almost all of
Elizabethtown's and Mount Holly'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.
Mount Holly has applied to the DEP State Revolving Fund Program for low
interest funding (approximately 3% to 3.5%) for the Mansfield Project.
Elizabethtown's senior debt is currently rated A3 and A by Moody's Investors
Service and Standard & Poor's Ratings Group, respectively.
In June 1997, Elizabethtown issued $50.0 million of tax-exempt Variable Rate
Demand Notes through the NJEDA. The proceeds of the issue were used to repay
amounts outstanding under the Company's revolving credit agreement, which
expired in July 1997.
RESULTS OF OPERATIONS
Net Income for 1997 was $20.1 million as compared to $15.9 million for 1996.
The increase in net income and earnings per share is attributable to the
$21.8 million rate increase for the new Plant in October 1996, which was
offset by the operating and financing costs of the Plant. Net income also
increased $1.4 million, primarily due to variations in the weather,
specifically the dry summer of 1997, as compared to the wet summer of 1996.
Net Income for 1996 was $15.9 million as compared to $16.5 million for 1995.
The most significant factor contributing to the decrease in net income was a
reduction in revenues due to reduced outdoor water consumption in 1996,
compared to 1995.
Operating Revenues increased $21.4 million or 19.4% in 1997 over the
comparable 1996 amount. The increase is primarily comprised of $17.7 million
from a rate increase for Elizabethtown, effective October 1996 and $3.1
million from increased water consumption. The increase in water consumption
is primarily due to the dry summer of 1997.
12
<PAGE>
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 of
$3.9 million and $.5 million, respectively, 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.
Operation Expenses increased $1.6 million or 3.6% in 1997 over the comparable
1996 amount. Increases resulting from variable costs associated with the
increase in water consumption totaled $.3 million. Labor costs increased $.6
million. The remainder of the increase is attributable to various items,
including operating costs for the Plant, information technology and other
administrative costs.
Operation Expenses increased $.6 million or 1.3% in 1996 over the comparable
1995 amount. Operation expenses decreased $.4 million for certain variable
expenses asscociated with lower water consumption. The successful
implementation of an energy conservation program in the second quarter of
1996 at the Raritan-Millstone 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.
Maintenance Expenses increased $.7 million or 11.8% in 1997 over the
comparable 1996 amount. This increase is primarily attributable to costs
associated with the maintenance of the Plant. The increase also includes $.4
million related to the costs of determining the most cost-effective method
for disposing of byproducts (waste residuals) generated from the water
treatment process at the Raritan-Millstone Plant.
Maintenance Expenses increased $.1 million or .9% in 1996 over the comparable
1995 amount. Elizabethtown had begun to substantially realize the benefits
of various preventive maintenance programs and operating efficiencies
instituted in 1996 and prior years.
Depreciation Expense increased $2.3 million or 23.7% in 1997 compared to
1996. The increase includes $2.1 million for the Plant and $.8 million for
other utility plant additions. A decrease of $.6 million resulted from
Elizabethtown no longer being required by the BPU to depreciate utility plant
acquired through Contributions In Aid of Construction and Customers' Advances
for Construction. This change was agreed to by the parties to Elizabethtown's
last rate case for which an increase was effective in October 1996.
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.
Revenue Taxes increased $2.7 million or 19.8% in 1997 and $.2 million or 1.7%
in 1996 due to the taxes on increases in operating revenues discussed above.
Real Estate, Payroll and Other Taxes increased $.2 million or 6.8% in 1997
due to additional labor costs, as well as additional property taxes. These
taxes increased $.1 million or 3.5% in 1996 due primarily to increased labor
costs.
Federal Income Taxes as a component of operating expenses increased $3.7
million or 49.8% over the comparable 1996 amount due to the changes in the
components of taxable income discussed herein.
Federal Income Taxes as a component of operating expenses decreased $.6
million or 8.0% in 1996 from the comparable 1995 amount due to the changes in
the components of taxable income discussed herein.
Other Income (Expense) decreased $2.3 million or 83.0% compared to the 1996
amount. A decrease in the equity component of Allowance for Funds Used During
Construction (AFUDC) of $3.5 million resulted from no longer capitalizing the
financing costs associated with the Plant as the facility was placed in
service in October 1996. An increase of $1.2 million for other miscellaneous
items, as well as the offsetting federal income taxes associated with the
Other Income (Expense), account for the remainder of the decrease.
13
<PAGE>
Other Income (Expense) increased $.6 million or 26.1% in 1996 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 substancial
portion of the overall increase.
Total Interest Charges increased $3.8 million or 29.8% in 1997 over the
comparable 1996 amount. The increase includes $3.0 million due to a reduction
in capitalized interest as a result of the Plant being placed in service in
October 1996. Interest expense also increased due to increased borrowings
incurred to finance capital expenditures.
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
a revolving credit agreement incurred to finance Elizabethtown's capital
program on an interim basis 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.
ECONOMIC OUTLOOK
Forward Looking Information
Information in this report includes certain forward looking statements within
the meaning of the federal securities laws. Any forward looking statements
are based upon information currently available and are subject to future
events, risks and uncertainties that could cause actual results to differ
materially from those expressed in the statements. Such events, risks and
uncertainties include, without limitation, actions of regulators, the effects
of weather on water consumption, changes in historical patterns of water
consumption and demand, including changes through increased use of
water-conserving devices, conditions in capital markets, increases in
operating expenses due to factors beyond the Company's control, changes in
environmental regulation and associated costs of compliance and other claims
or assessments made upon the Company.
Consolidated earnings for the Company for the next several years will be
determined by management continuing to focus on expansion efforts to increase
sales, as well as control costs through productivity improvements so that
realized returns remain comparable to authorized levels. Capital to finance
investments will be raised from external sources and from capital
contributions from E'town from the sale of real estate parcels.
The Company expects earnings to be down somewhat in 1998, based on an assumed
return to normal weather patterns after the unusually dry summer in 1997 and
because Elizabethtown will be completing its second year since its last rate
adjustment.
Elizabethtown and Mount Holly
Elizabethtown expects to petition the BPU for an increase in rates in the
latter part of 1998 to reflect the increases in construction, financing and
operating costs since base rates were last established in October 1996.
On October 25, 1996, a rate increase under a stipulation (1996 Stipulation)
went into effect for Elizabethtown. This resulted in an increase in annual
operating revenues of approximately $21.8 million. The rate increase
reflected 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%.
Elizabethtown, excluding Mount Holly, earned a rate of return on common
equity of 11.0% in 1997.
Mount Holly earned a rate of return on common equity of 2.8% in 1997,
compared to an authorized rate of return of 11.25%, established in its most
recent base rate proceeding. Management expects Mount Holly to increase its
contribution to earnings later in 1998 and into 1999 upon receipt of
additional rate relief so that Mount Holly can realize rates of return
comparable to authorized levels.
14
<PAGE>
Year 2000
The Company has assessed its various computer information systems for
compliance with the Year 2000. The Company has recently installed a new
enterprise financial system (SAP), which is Year 2000 compliant. In addition,
the Company uses a third-party provider for its customer billing and
information system, which was redesigned in 1997 to provide many enhancements
including Year 2000 compliance. Management believes that all integral operating
systems are Year 2000 compliant and that there will be no significant
additional costs to achieve compliance.
15
<PAGE>
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 21
of Appendix I hereto, incorporated by reference 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 1998 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 1998 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 1998
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 1998 Annual Meeting of Stockholders, and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
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, 1997, 1996
and 1995.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Statements of Consolidated Capitalization as of December 31, 1997 and
1996.
16
<PAGE>
Statement of Consolidated Shareholder's Equity for the years ended
December 31, 1997, 1996 and 1995.
Statements of Consolidated Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
E'town Corporation
A portion of the 1997 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 on pages 2 through 21 of Appendix I hereto, incorporated
by reference herein.
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 20 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, 1997, 1996 and 1995.
Supplemental Schedule of Property, Plant and Equipment at December 31,
1997 and 1996.
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, which is incorporated by
reference herein.
(b) Reports on Form 8-K: None
17
<PAGE>
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.
E'TOWN CORPORATION
March 27, 1998
By: /s/ Anne Evans Estabrook
Chairman 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 27, 1998.
Chairman and Director /s/ Anne Evans Estabrook
President and Director /s/ Andrew M Chapman
Director /s/ Thomas J. Cawley
Director /s/ Anthony S. Cicatiello
Director /s/ James W. Hughes
Director /s/ John Kean
Director /s/ Barry T. Parker
Director /s/ Hugo M. Pfaltz, Jr.
Director /s/ Chester A. Ring III
Director /s/ Joan Verplanck
Treasurer /s/ Gail P. Brady
(Principal Financial Officer)
Controller /s/ Dennis W. Doll
(Principal Accounting Officer)
18
<PAGE>
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 27, 1998
By: /s/ Anne Evans Estabrook
Chairman 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 27, 1998.
Chairman and Director /s/ Anne Evans Estabrook
President and Director /s/ Andrew M. Chapman
Director /s/ Thomas J. Cawley
Director /s/ Anthony S. Cicatiello
Director /s/ James W. Hughes
Director /s/ John Kean
Director /s/ Barry T. Parker
Director /s/ Hugo M. Pfaltz, Jr.
Director /s/ Chester A. Ring III
Director /s/ Joan Verplanck
Vice President - Finance & Treasurer /s/ Gail P. Brady
(Principal Financial Officer)
Controller /s/ Dennis W. Doll
(Principal Accounting Officer)
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
E'TOWN CORPORATION:
We have audited the consolidated financial statements of E'town Corporation
and its subsidiaries as of December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, and have issued our report
thereon dated February 18, 1998, except for the subsequent event discussed in
Note 11, as to which the date is March 6, 1998; such consolidated financial
statements and report are included in your 1997 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 Companys 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
February 18, 1998, except for Note 11
as to which the date is March 6, 1998
Parsippany, New Jersey
20
<PAGE>
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 of Costs and Deductions End of
Description: Period Expenses (A) Period
Reserve for
Uncollectible Accounts:
Year Ended 12/31/97 $566,000 $607,929 $561,929 $612,000
Year Ended 12/31/96 $532,000 $600,242 $566,242 $566,000
Year Ended 12/31/95 $463,000 $600,648 $531,648 $532,000
(A) Write-off of uncollectible accounts, net of recoveries.
<PAGE>
E'TOWN CORPORATION Supplemental
ELIZABETHTOWN WATER COMPANY Schedule
PROPERTY, PLANT AND EQUIPMENT
AT DECEMBER 31, 1997 AND 1996
ELIZABETHTOWN WATER COMPANY: 1997 1996
UTILITY PLANT IN SERVICE:
Intangible Plant $250,766 $250,766
Source of Supply Plant 20,512,918 20,502,583
Pumping Plant 57,498,323 54,666,431
Water Treatment Plant 156,601,131 156,149,004
Transmission & Distribution Plant 422,283,204 404,946,395
General Plant 19,993,728 17,444,418
Leasehold Improvements 135,793 120,548
Acquisition Adjustments 632,388 632,388
------------- --------------
Utility Plant In Service 677,908,251 654,712,533
Construction Work In Progress 9,300,824 7,994,186
============= ==============
Total Utility Plant 687,209,075 662,706,719
============= ==============
NON-UTILITY PROPERTY - NET 78,774 80,976
============= ==============
TOTAL $687,287,849 $662,787,695
============= ==============
E'TOWN CORPORATION:
UTILITY PLANT (from above) 687,209,075 662,706,719
NON-UTILITY PROPERTY - NET 12,787,851 12,769,953
============= ==============
TOTAL $699,996,926 $675,476,672
============= ==============
<PAGE>
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. Exhibits
designated with a (1) are management contracts or compensary
plans or arrangements.
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. [Form 10-K for the year 1996,
Exhibit 3(b)]
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)]
*4(c) - Note Purchase Agreement relating to the 6.79% Senior
Notes due December 15, 2007
10(a) - Incentive Stock Option Plan [Registration Statement
No. 2-99602, Exhibit 28(a)] (1)
10(b) - Savings and Investment Plan - 401(k) [Form 10-K for the
year 1994, Exhibit 10(b)]
10(c) - E'town's 1987 Stock Option Plan [Registration Statement No.
33-42509, Exhibit 28] (1)
10(d) - Management Incentive Plan [Registration Statement No.
33-38566, Exhibit 10(i)] (1)
10(e) - E'town's 1998 Stock Option Plan [Definitive Proxy
Statement for 1998 Annual Meeting of Stockholders, filed
pursuant to Rule 14a-6(b)] (1)
10(f) - E'town's 1998 Directors Stock Plan [Definitive Proxy
Statement for 1998 Annual Meeting of Stockholders, filed
pursuant to Rule 14a-6(b)] (1)
10(g) - E'town's 1990 Performance Stock Program [Registration
Statement No. 33-46532, Exhibit 10(k)] (1)
<PAGE>
Exhibit
No. Description
10(h) - E'town's Dividend Reinvestment and Stock Purchase Plan
[Registration No. 333-16713, Exhibit 4(e)]
10(i) - Change of Control Agreement for Andrew M. Chapman [Form
10-Q for the quarter ended March 31, 1995, Exhibit 10](1)
10(j) - Contract Between Edison Water Company, E'town Corporation
and the Township of Edison to Operate the Water System of
the Township of Edison, New Jersey dated as of June 25,
1997 [Form 10-Q for the quarter ended June 30, 1997,
Exhibit 10(a)]
*10(k) - Employment Contract Between E'town Corporation and
Anne Evans Estabrook (1)
*10(l) - Change in Control Agreement for Anne Evans Estabrook (1)
*11 - Statement Regarding Computation of Per Share Earnings
*13 - Portion of the 1997 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
*23 - Consent of Deloitte & Touche, LLP, Independent Auditors
*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 [Form 10-K for the
year 1996, Exhibit 3(b)]
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)]
<PAGE>
Exhibit
No. Description
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
4(i) - Indenture dated as of June 1, 1997 from Elizabethtown Water
Company to The Bank of New York, Trustee, relating to
Variable Rate Demand Debentures, due 2027 (Series B)
[Form 10-Q for the quarter ended September 30, 1997,
Exhibit 4(i)]
4(j) - Indenture dated as of June 1, 1997 from Elizabethtown
Water Company to The Bank of New York, Trustee, relating to
Variable Rate Demand Debentures, due 2027 (Series A) [Form
10-Q for the quarter ended September 30, 1997, Exhibit 4(j)]
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. [Form 10-Q for the
quarter ended June 30, 1997, Exhibit 10(b)
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)] (1)
<PAGE>
Exhibit
No. Description
10(h) - Medical Reimbursement Plan of Elizabethtown Water Company
[Form 10-K for the year ended December 31, 1992, Exhibit
10(h)] (1)
10(i) - Supplemental Executive Retirement Plan of Elizabethtown
Water Company [Form 10-Q for the year ended September 30,
1995, Exhibit 10]
*10(j) - Employment Contract Between Elizabethtown Water Company and
Anne Evans Estabrook (1)
*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.
<PAGE>
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, 1997 and 1996, and the related statements of consolidated
income, shareholder' equity, and cash flows for each of the three years in the
period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 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
February 18, 1998
Parsippany, New Jersey
-1-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands)
Year Ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
Operating Revenues $ 131,788 $ 110,358 $ 108,398
- --------------------------------------------------------------------------------
Operating Expenses:
Operation 45,301 43,713 43,132
Maintenance 6,548 5,859 5,806
Depreciation 12,233 9,893 8,808
Revenue taxes 16,550 13,820 13,591
Real estate, payroll and other taxes 3,064 2,869 2,772
Federal income taxes (Note 3) 11,026 7,360 8,002
- --------------------------------------------------------------------------------
Total operating expenses 94,722 83,514 82,111
- --------------------------------------------------------------------------------
Operating Income 37,066 26,844 26,287
- --------------------------------------------------------------------------------
Other Income (Expense):
Allowance for equity funds used during
construction (Note 2) 215 3,725 2,976
Federal income taxes (Note 3) (248) (1,462) (1,159)
Other - net 494 452 336
- --------------------------------------------------------------------------------
Total other income (expense) 461 2,715 2,153
- --------------------------------------------------------------------------------
Total Operating and Other Income 37,527 29,559 28,440
- --------------------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 14,030 13,011 10,892
Other interest expense - net 2,382 2,640 2,344
Capitalized interest (Note 2) (166) (3,208) (2,445)
Amortization of debt discount and expense-net 376 361 324
- --------------------------------------------------------------------------------
Total interest charges 16,622 12,804 11,115
- --------------------------------------------------------------------------------
Net Income 20,905 16,755 17,325
Preferred Stock Dividends 813 813 813
- --------------------------------------------------------------------------------
EARNINGS APPLICABLE TO COMMON STOCK $ 20,092 $ 15,942 $ 16,512
================================================================================
See Notes to Consolidated Financial Statements.
-2-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
Assets 1997 1996
- --------------------------------------------------------------------------------
Utility Plant-At Original Cost:
Utility plant in service $ 677,909 $ 654,713
Construction work in progress 9,300 7,994
- --------------------------------------------------------------------------------
Total utility plant 687,209 662,707
Less accumulated depreciation and amortization 114,424 102,683
- --------------------------------------------------------------------------------
Utility plant-net 572,785 560,024
- --------------------------------------------------------------------------------
Non-utility Property 79 81
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 4,226 3,122
Customer and other accounts receivable
(less reserve: 1997, $612, 1996, $566) 17,283 16,725
Unbilled revenues 9,663 9,356
Materials and supplies-at average cost 1,966 2,045
Prepaid insurance, taxes, other 3,461 3,742
- --------------------------------------------------------------------------------
Total current assets 36,599 34,990
- --------------------------------------------------------------------------------
Deferred Charges:
Waste residual management 936 1,064
Unamortized debt and preferred stock expenses 9,656 8,989
Taxes recoverable through future rates (Note 3) 21,439 30,435
Postretirement benefit expense (Note 10) 3,738 3,564
Other unamortized expenses 1,086 1,632
- --------------------------------------------------------------------------------
Total deferred charges 36,855 45,684
- --------------------------------------------------------------------------------
Total $ 646,318 $ 640,779
================================================================================
See Notes to Consolidated Financial Statements.
-3-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
Capitalization and Liabilities 1997 1996
- --------------------------------------------------------------------------------
Capitalization (Notes 4 and 5):
Common shareholder's equity $ 193,354 $ 182,293
Cumulative preferred stock 12,000 12,000
Long-term debt - net 231,944 181,933
- --------------------------------------------------------------------------------
Total capitalization 437,298 376,226
- --------------------------------------------------------------------------------
Current Liabilities:
Notes payable - banks (Note 5) 18,000 69,000
Long-term debt - current portion (Note 4) 30 30
Accounts payable and other liabilities 10,626 17,093
Customers' deposits 272 300
Municipal and state taxes accrued 16,817 13,887
Interest accrued 3,120 3,158
Preferred stock dividends accrued 59 59
- --------------------------------------------------------------------------------
Total current liabilities 48,924 103,527
- --------------------------------------------------------------------------------
Deferred Credits:
Customers' advances for construction 39,131 43,636
Federal income taxes (Note 3) 67,851 73,950
Unamortized investment tax credits (Note 10) 8,042 8,245
Accumulated postretirement benefits 4,209 3,596
- --------------------------------------------------------------------------------
Total deferred credits 119,233 129,427
- --------------------------------------------------------------------------------
Contributions in Aid of Construction 40,863 31,599
- --------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note 9)
- --------------------------------------------------------------------------------
Total $ 646,318 $ 640,779
================================================================================
See Notes to Consolidated Financial Statements.
-4-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(In Thousands)
December 31,
1997 1996
- --------------------------------------------------------------------------------
Common Shareholder's Equity (Notes 4 and 5):
Common stock without par value, authorized,
10,000,000 shares, issued 1997 and 1996,
1,974,902 shares $ 15,741 $ 15,741
Paid-in capital 124,560 117,457
Capital stock expense (485) (485)
Retained earnings 53,538 49,580
- --------------------------------------------------------------------------------
Total common shareholder's equity 193,354 182,293
- --------------------------------------------------------------------------------
Cumulative Preferred Stock (Note 4):
$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
Variable Rate Debentures, due 2027 50,000
7 1/4% Debentures, due 2028 50,000 50,000
The Mount Holly Water Company:
Notes Payable (due serially through 2000) 57 87
- --------------------------------------------------------------------------------
Total long-term debt 233,057 183,087
Unamortized discount-net (1,113) (1,154)
- --------------------------------------------------------------------------------
Total long-term debt-net 231,944 181,933
- --------------------------------------------------------------------------------
Total Capitalization $ 437,298 $ 376,226
================================================================================
See Notes to Consolidated Financial Statements.
-5-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY
(In Thousands)
Year Ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
Common Stock: $ 15,741 $ 15,741 $ 15,741
- --------------------------------------------------------------------------------
Paid-in Capital:
Balance at Beginning of Year 117,457 112,157 88,869
Capital contributed by parent company 7,103 5,300 23,288
- --------------------------------------------------------------------------------
Balance at End of Year 124,560 117,457 112,157
- --------------------------------------------------------------------------------
Capital Stock Expense: (485) (485) (485)
- --------------------------------------------------------------------------------
Retained Earnings:
Balance at Beginning of Year 49,580 49,272 47,500
Net income 20,905 16,755 17,325
Dividends on common stock (16,134) (15,634) (14,740)
Dividends on preferred stock (813) (813) (813)
- --------------------------------------------------------------------------------
Balance at End of Year 53,538 49,580 49,272
- --------------------------------------------------------------------------------
Total Common Shareholder's Equity $193,354 $ 182,293 $176,685
================================================================================
See Notes to Consolidated Financial Statements.
-6-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands)
Year Ended December 31,
1997 1996 1995
- -------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 20,905 $ 16,755 $ 17,325
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 12,233 9,893 8,808
Decrease (increase) in deferred charges 690 (613) 328
Deferred income taxes and investment tax
credits-net 2,693 4,853 4,487
Allowance for funds used during construction (381) (6,934) (5,421)
Other operating activities-net 362 68 (62)
Change in current assets and current liabilitie
excluding cash, short-term investments and
current portion of debt:
Customer and other accounts receivable (558) 218 (4,593)
Unbilled revenues (307) (1,912) (282)
Accounts payable and other liabilities (6,495) 365 (1,415)
Accrued/prepaid interest and taxes 3,173 (1,955) 2,353
Other 78 (133) (187)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 32,393 20,605 21,341
- --------------------------------------------------------------------------------
Cash Flows (Used) Provided by Financing Activities:
Capital contributed by parent company 7,103 5,300 23,289
Proceed from issuance of debentures 50,000 40,000
Debt and preferred stock issuance and
amortization costs (667) 396 (483)
Repayment of long-term debt (30) (30) (39)
Contributions and advances for
construction-net 4,759 2,521 3,441
Net(decrease)increase in notes payable-banks (51,000) 42,000 4,000
Dividends paid on common stock and preferred (16,842) (16,342) (15,448)
- --------------------------------------------------------------------------------
Net cash (used) provided by
financing activities (6,677) 33,845 54,760
- --------------------------------------------------------------------------------
Cash Flows Used for Investing Activities:
Utility plant expenditures (excluding allowance
for funds used during construction) (24,612) (55,125) (73,789)
- --------------------------------------------------------------------------------
Cash used for investing activities (24,612) (55,125) (73,789)
- --------------------------------------------------------------------------------
Net (Decrease) in Cash and
Cash Equivalents 1,104 (675) 2,312
Cash and Cash Equivalents at
Beginning of Year 3,122 3,797 1,485
- --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 4,226 $ 3,122 $ 3,797
================================================================================
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 16,063 $ 8,481 $ 7,833
Income taxes $ 5,981 $ 5,723 $ 4,158
Preferred stock dividends $ 708 $ 708 $ 708
See Notes to Consolidated Financial Statements.
-7-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
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). Elizabethtown and
Mount Holly are regulated water companies which, as a consolidated entity are
referred to herein as Elizabethtown Water Company (Elizabethtown Water
Company). E'town, a New Jersey holding company, is the parent company of
Elizabethtown Water Company, Edison Water Company, E'town Properties, Inc.
and owner of a 65% interest in Applied Watershed Management, LLC (AWM).
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 1.85% for 1997, 1.73% for 1996 and 1.83% for 1995.
Allowance for Funds Used During Construction
Elizabethtown and Mount Holly capitalize, 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
through depreciation charges in rates during the assets' 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 $.38 million, $6.93 million and $5.42 million for 1997,
1996 and 1995, respectively. AFUDC increased in 1996 and 1995 during the
construction of the Canal Road Water Treatment Plant.
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 Water Company files a consolidated tax return with Etown.
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.
8
<PAGE>
Customers' Advances for Construction and Contributions in Aid of Construction
Customers' 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 is customer
advances for construction that, under the terms of individual main extension
agreements, are no longer subject to refund.
Short-term Investments
Short-term investments are stated at cost, which approximates market value.
Cash Equivalents
Elizabethtown Water Company considers all highly liquid debt instruments
purchased with maturities of three months or less to be cash equivalents.
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:
9
<PAGE>
1997 1996 1995
---------------------------
(Thousands of Dollars)
Tax expense at statutory rate $11,262 $ 8,952 $ 9,270
Items for which deferred taxes
are not provided:
Difference between book
and tax depreciation 58 132 133
Other 157 (56) (37)
Investment tax credits (203) (205) (204)
---------------------------
Provision for federalincome taxes $11,274 $ 8,823 $ 9,162
===========================
The provision for federal income
taxes is composed of the following:
Current $ 7,212 $ 3,764 $ 6,409
Tax on (deposits)refunds on main
extensions 1,369 207 (1,734)
Deferred:
Tax depreciation 2,716 3,379 3,492
Capitalized interest 19 1,264 800
Main cleaning and lining 612 587 405
Other (450) (174) (8)
Investment taxcredits - net (203) (204) (202)
---------------------------
Total provision $11,274 $ 8,823 $ 9,162
===========================
In accordance with SFAS No. 109, deferred tax balances have been reflected at
Elizabethtown Water Companys current consolidated federal income tax rate,
which is 35%.
10
<PAGE>
The tax effect of significant temporary differences representing deferred
income tax assets and liabilities as of December 31, 1997 and 1996 is as
follows:
1997 1996
------------------------
(Thousands of Dollars)
Water utility plant - net $(43,611) $(40,283)
Taxes recoverable through
future rates (21,439) (30,435)
Prepaid pension expense 75 (35)
Capitalized interest (2,591) (2,573)
Waste residuals (322) (373)
Other assets 415 285
Other liabilities (378) (536)
--------------------
Net deferred income tax
liabilities $(67,851) $(73,950)
====================
4. Capitalization
E'town periodically 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
$6.98 million and $5.30 million in 1997 and 1996, 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.
11
<PAGE>
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, 1997, $7.63 million of Elizabethtown's
retained earnings were restricted under the most restrictive indenture
provision. Therefore, $37.93 million of E'town's consolidated retained
earnings were unrestricted.
On June 4, 1997, Elizabethtown issued a total of $50 million of 30-year
Variable Rate Debentures due December 2027, $25 million of Series A and $25
million of Series B, to evidence a like amount of Variable Rate Notes issued
through the New Jersey Economic Development Authority (NJEDA). The proceeds
were used to repay $50 million of balances outstanding under the Companys
revolving credit agreement. The NJEDA Notes are remarketed on a weekly basis,
at which time the interest rates on each issue are subject to change. The
rates in effect as of December 31, 1997, were 3.60% for Series A and 3.55%
for Series B.
5. Lines of Credit
Elizabethtown has $82.5 million of uncommitted lines of credit with several
banks. Information relating to bank borrowings for 1997, 1996 and 1995 is as
follows:
1997 1996 1995
---------------------------
(Thousands of Dollars)
Maximum amount outstanding $69,500 $69,000 $60,000
Average monthly amount
outstanding $40,886 $45,240 $39,636
Average interest rate at year end 6.0% 5.7% 5.9%
Compensating balances at year end $ 0 $ 0 $ 0
Weighted average interest rate
based on average daily balances 5.8% 5.8% 6.2%
12
<PAGE>
6. Financial Instruments
The carrying amounts and the estimated fair values, as of December 31, 1997
and 1996, of financial instruments issued or held by the Elizabethtown Water
Company are as follows:
1997 1996
------------------------
(Thousands of Dollars)
Cumulative preferred stock:
Carrying amount $ 12,000 $ 12,000
Estimated fair value 11,760 12,000
Long-term debt:
Carrying amount $ 231,944 $ 181,933
Estimated fair value 239,585 185,375
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:
1997 1996
-----------------------
(Thousands of Dollars)
Waste residual management $ 936 $ 1,064
Unamortized debt and
preferred stock expense 9,656 8,988
Taxes recoverable through
future rates (Note 3) 21,439 30,435
Postretirement benefit
expense (Note 10) 3,738 3,465
Safety management expense 331 418
Business process redesign 284 362
Rate case expenses 80 201
--------------------
Total $36,464 $44,933
====================
13
<PAGE>
Waste Residual Management
The costs of disposing of the byproducts generated by Elizabethtowns 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 relate to
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 during two-year
periods.
There were no regulatory liabilities at December 31, 1997 or 1996.
8. Regulatory Matters
Rates
Elizabethtown
On December 17, 1997, the BPU adopted an Order for rate increases for
Elizabethtown and Mount Holly, effective January 1, 1998, for the recovery of
costs associated with SFAS No. 106 "Employers' Accounting For Postretirement
Benefits Other Than Pensions." The resulting rate increases reflect recovery
over a 15-year period of amounts previously deferred on the Consolidated
Balance Sheets for postretirement benefits since 1993 and prospectively, the
difference between the amounts currently recovered in rates and the full SFAS
No. 106 expense on an accrual basis. The total increases in annual operating
revenues resulting from these petitions are $.39 million for Elizabethtown
and $.02 million for Mount Holly.
14
<PAGE>
On October 25, 1996, Elizabethtown received a rate increase under a
stipulation resulting in an increase in annual revenues of $21.8 million for
the construction, financing and operating costs of the Canal Road Water
Treatment Plant.
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 stipulated for a rate increase
effective February 1996 of $.55 million. 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 state
legislation that restricts the amount of water that can be withdrawn from an
aquifer in certain areas of southern New Jersey. The project is referred to
as the Mansfield Project. Mount Holly has expended $3.56 million on the
Mansfield Project as of December 31, 1997, 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. In September, the New Jersey
Department of Environmental Protection (DEP) granted Mount Holly a water
allocation permit for four wells that are to be the water supply for this
project. In October 1995, another water purveyor requested of the DEP, and
was subsequently granted, an adjudicatory hearing in opposition to the
permit. In August 1997, Mount Holly settled this matter by entering into an
agreement with the other water purveyor and the DEP. Under the agreement,
Mount Holly will purchase 1.0 million gallons per day from the other purveyor
for a period to include the later of two years or the date the Mansfield
Project is placed into service. Water purchases began in March 1998, after
completion of an interconnection.
As a result of the settlement agreement, Mount Holly expects to continue with
its plan to construct the Mansfield Project. The BPU and the parties to Mount
Holly's last rate case are participating in a proceeding connected with the
second phase of the 1995 case to clarify the need for and cost-effectiveness
of the Mansfield Project.
On September 23, 1997, Mount Holly filed a petition with the BPU to establish
a Purchased Water Adjustment Clause (PWAC) to reflect the cost of water
expected to be purchased from the purveyor under the settlement agreement
discussed above. The petition requests an increase in annual operating
revenues of approximately $1.34 million or 40.3%.
15
<PAGE>
In April 1998, Mount Holly expects to file a petition with the BPU for a rate
increase, which will reflect additional construction and financing costs, as
well as increases in operating costs since rates were last established in
January 1996. This rate case will include approximately $7.27 million of the
cost for a portion of the Mansfield Project to serve a section of Mount
Holly. This amount was part of the second phase of the 1995 rate case
discussed above. The rate case will also reflect $6.0 million in additions to
utility plant since Mount Holly's base rates were last adjusted in January
1996. A decision is expected by the end of 1998. Mount Holly expects to file
an additional rate case next year for the remaining cost of the Mansfield
Project, estimated to be $11.3 million, to coincide with the completion of
the project and the expiration of the agreement to purchase water from the
other purveyor.
9. Commitments and Contingent Liabilities
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 is $7.86 million. The Company purchases additional water
from the NJWSA on an as-needed basis. The total cost of water purchased from
the NJWSA was $8.79 million, $8.70 million and $9.34 million for 1997, 1996
and 1995, respectively.
Capital expenditures of Elizabethtown and Mount Holly are estimated to be
$112.66 million and $21.85 million, respectively, through 2000.
Expected future minimum rental payments required under noncancelable leases
with terms in excess of one year at December 31 of each of the years 1998
through 2002 are: 1998, $.65 million; 1999, $.69 million; 2000, $.72 million;
2001, $.76 million and 2002, $.77 million. Rent expense totaled $.72 million,
$.84 million and $.82 million in 1997, 1996 and 1995, respectively.
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 Corporation
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:
16
<PAGE>
1997 1996 1995
---------------------------
(Thousands of Dollars)
Service cost - benefits
earned during the year $ 1,278 $1,322 $ 915
Interest cost on projected
benefit obligation 2,618 2,480 2,156
Return on Plan assets (8,150) (4,542) (7,587)
Net amortization and
deferral 4,551 1,221 4,862
-------------------------
Net pension costs $ 297 $ 481 $ 346
=========================
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.
1997 1996
-----------------------
(Thousands of Dollars)
Market value of Plan assets $ 46,537 $ 40,016
--------------------
Actuarial present value of
Plan benefits:
Vested benefits 31,186 28,492
Non-vested benefits 101 97
-------------------
Accumulated benefit obligation 31,287 28,589
Projected increases in
compensation levels 7,458 7,183
-------------------
Projected benefit obligation 38,745 35,772
-------------------
Excess of Plan assets over
projected benefit obligation 7,793 4,244
Unrecognized net gain (7,920) (3,978)
Unrecognized prior service cost 1,535 1,724
Unrecognized transition asset (1,624) (1,891)
-------------------
Prepaid (accrued) pension expense $ (216) $ 99
===================
17
<PAGE>
The assumed rates used in determining the actuarial present value of the
projected benefit obligations were as follows:
1997 1996 1995
---------------------------
Discount rate 7.25% 7.50% 7.00%
Compensation increase 5.50% 5.50% 5.50%
Rate of return on Plan assets 9.00% 9.00% 9.00%
The Company also 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, 1997, the projected benefit
obligation of this supplemental plan was $1.43 million and the net periodic
benefit cost was $.27 million and $.25 million for 1997 and 1996,
respectively. The plan assumed a discount rate of 7.25% for 1997 and 7.50%
for 1996, and a compensation increase of 4% for both 1997 and 1996 for
purposes of determining the actuarial present value of the projected benefit
obligations.
Other Postretirement Benefits
Elizabethtown and Mount Holly provide certain health care and life insurance
benefits for substantially all of their 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 pay 25% of
future increases in the premiums the Company pays for postretirement medical
benefits.
Under SFAS No. 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 No. 106, was $7.21 million as of January 1, 1993, the
date of adoption of SFAS No. 106. The transition obligation is being
amortized over 20 years.
18
<PAGE>
The following table details the postretirement benefit obligation at
December 31:
1997 1996
-----------------------
(Thousands of Dollars)
Retirees $ 1,990 $ 2,015
Fully eligible plan participants 4,566 4,034
--------------------
Accumulated postretirement
benefit obligation 6,556 6,049
Plan assets at fair value (1,331) (764)
Unrecognized net gain 3,966 3,952
Unrecognized transition obligation (5,423) (5,772)
--------------------
Accrued postretirement
benefit obligation $ 3,768 $ 3,465
====================
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1997, and for the year
1997 was 9%. This rate decreases linearly each successive year until it
reaches 3.8% in 2007, after which the rate remains constant. The assumed
rates used in determining the actuarial present value of the projected
benefit obligations were as follows:
1997 1996 1995
-------------------------
Discount rate 7.25% 7.50% 7.00%
Rate of return on plan assets 9.00% 9.00% n/a
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, 1997, and the net postretirement service and
interest cost by approximately $.90 million and $.26 million, respectively.
19
<PAGE>
Based upon the independent actuarial study referred to above, the annual
postretirement cost calculated under SFAS No. 106 is as follows:
1997 1996 1995
-------------------------
(Thousands of Dollars)
Service cost - benefits earned
during the year $ 383 $ 416 $ 474
Interest cost on accumulated
postretirement benefit obligation 444 425 579
Return on Plan assets (57) (72)
Amortization of transition obligation 361 417 360
Amortization of gain (223)
-----------------------
Total $ 908 $1,186 $1,413
Deferred amount for regulated
companies pending recovery (273) (565) (824)
-----------------------
Net postretirement benefit expense $ 635 $ 621 $ 589
=======================
The rate increases effective January 1, 1998 allows for the full recovery of
costs associated with the implementation of SFAS No. 106, including an
amortization over 15 years of amounts previously deferred which were in
excess of amounts previously being recovered in rates. As of December 31,
1997, the amounts that have been deferred are $3.59 million and $.14 million
for Elizabethtown and Mount Holly, respectively.
20
<PAGE>
11. Quarterly Financial Data (Unaudited)
A summary of financial data for each quarter of 1997 and 1996 follows:
Earnings
Applicable
Operating Operating Net To Common
Quarter Revenues Income Income Stock
- ----------------------------------------------------------
(Thousands of Dollars Except Per Share Amounts)
1997
1st $ 30,013 $ 8,092 $ 3,885 $ 3,682
2nd 32,333 8,981 4,862 4,659
3rd 37,815 11,926 7,982 7,779
4th 31,627 8,067 4,176 3,972
- ----------------------------------------------------------
Total $131,788 $37,066 $20,905 $20,092
==========================================================
1996
1st $ 25,760 $ 5,651 $ 3,594 $ 3,391
2nd 27,263 6,484 4,365 4,163
3rd 28,173 7,146 4,911 4,708
4th 29,162 7,562 3,885 3,680
- ----------------------------------------------------------
Total $ 110,358 $26,843 $16,755 $15,942
==========================================================
Water utility revenues are subject to seasonal fluctuation due to normal
increased water consumption during the third quarter of each year.
21
<PAGE>
ETOWN CORPORATION EXHIBIT 4(C)
$12,000,000
6.79% Senior Notes due December15, 2007
- ----------------
NOTE PURCHASE AGREEMENT
- ----------------
Dated as of December15, 1997
TABLE OF CONTENTS
SECTION HEADING PAGE
SECTION1. AUTHORIZATION OF NOTES 1
SECTION2. SALE AND PURCHASE OF NOTES 1
SECTION3. CLOSINGS 1
SECTION4. CONDITIONS TO EACH CLOSING 2
Section4.1. Representations and Warranties 2
Section4.2. Performance; No Default 2
Section4.3. Compliance Certificates 2
Section4.4. Opinions of Counsel 2
Section4.5. Purchase Permitted by Applicable Law, etc 3
Section4.6. Governmental Approvals 3
Section4.7. Payment of Special Counsel Fees 3
Section4.8. Private Placement Number 3
Section4.9. Changes in Corporate Structure 3
Section4.10. Proceedings and Documents 3
SECTION5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 4
Section5.1. Organization; Power and Authority 4
Section5.2. Authorization, etc 4
Section5.3. Disclosure 4
Section5.4. Organization and Ownership of Shares of Subsidiaries 4
Section5.5. Financial Statements 5
Section5.6. Compliance with Laws, Other Instruments, etc 5
Section5.7. Governmental Authorizations, etc 5
Section5.8. Litigation; Observance of Statutes and Orders 5
Section5.9. Taxes 6
Section5.10. Title to Property; Leases 6
Section5.11. Licenses, Permits, etc 6
Section5.12. Compliance with ERISA 6
Section5.13. Private Offering by the Company 7
Section5.14. Use of Proceeds; Margin Regulations 7
Section5.15. Existing Indebtedness 8
Section5.16. Foreign Assets Control Regulations, etc 8
Section5.17. Status under Certain Statutes 8
SECTION6. REPRESENTATIONS OF THE PURCHASER 8
Section6.1. Purchase for Investment 8
Section6.2. Source of Funds 8
SECTION7. INFORMATION AS TO COMPANY 10
Section7.1. Financial and Business Information 10
Section7.2. Officers Certificate 12
Section7.3. Inspection 13
SECTION8. PREPAYMENT OF THE NOTES 13
Section8.1. Prepayments 13
Section8.2. Optional Prepayments with Make-Whole Amount 13
Section8.3. Allocation of Partial Prepayments 14
Section8.4. Maturity; Surrender, etc 14
Section8.5. Purchase of Notes 14
Section8.6. Make-Whole Amount 14
SECTION9. AFFIRMATIVE COVENANTS 16
Section9.1. Compliance with Law 16
Section9.2. Insurance 16
Section9.3. Maintenance of Properties 16
Section9.4. Payment of Taxes 16
Section9.5. Corporate Existence, etc.; Maintenance of Ownership of
Elizabethtown Water Company 17
SECTION10. NEGATIVE COVENANTS 17
Section10.1. Transactions with Affiliates 17
Section10.2. Merger, Consolidation, etc 17
Section10.3. Fixed Charges Coverage Ratio 18
Section10.4. Consolidated Common Shareholders Equity 18
Section10.5. Consolidated Debt 18
Section10.6. Liens 18
Section10.7. Sale of Assets of Elizabethtown Water Company and The
Mount Holly Water Company 18
Section10.8. Restricted Investments 19
SECTION11. EVENTS OF DEFAULT 19
SECTION12. REMEDIES ON DEFAULT, ETC 21
Section12.1. Acceleration 21
Section12.2. Other Remedies 22
Section12.3. Rescission 22
Section12.4. No Waivers or Election of Remedies, Expenses, etc 22
SECTION13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES 22
Section13.1. Registration of Notes 22
Section13.2. Transfer and Exchange of Notes 23
Section13.3. Replacement of Notes 23
SECTION14. PAYMENTS ON NOTES 24
Section14.1. Place of Payment 24
Section14.2. Home Office Payment 24
SECTION15. EXPENSES, ETC 24
Section15.1. Transaction Expenses 24
Section15.2. Survival 25
SECTION16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE
AGREEMENT 25
SECTION17. AMENDMENT AND WAIVER 25
Section17.1. Requirements 25
Section17.2. Solicitation of Holders of Notes 25
Section17.3. Binding Effect, etc 26
Section17.4. Notes Held by Company, etc 26
SECTION18. NOTICES 26
SECTION19. REPRODUCTION OF DOCUMENTS 27
SECTION20. CONFIDENTIAL INFORMATION 27
SECTION21. SUBSTITUTION OF PURCHASER 28
SECTION22. MISCELLANEOUS 28
Section22.1. Successors and Assigns 28
Section22.2. Payments Due on Non-Business Days 29
Section22.3. Severability 29
Section22.4. Construction 29
Section22.5. Counterparts 29
Section22.6. Governing Law 29
Signatures 30
SCHEDULEA INFORMATION RELATING TO PURCHASER
SCHEDULEB DEFINED TERMS
SCHEDULE5.4 Subsidiaries of the Company and Ownership of
Subsidiary Stock
SCHEDULE5.15 Existing Indebtedness
EXHIBIT1 Form of 6.79% Senior Note due December15, 2007
EXHIBIT4.4(a) Form of Opinion of Counsel for the Company
EXHIBIT4.4(b) Form of Opinion of Special New York Counsel for
the Company
EXHIBIT4.4(C) Form of Opinion of Special Counsel for the Purchaser
ETOWN CORPORATION
600 South Avenue
Westfield, New Jersey 07091-0788
6.79% SENIOR NOTES DUE DECEMBER15, 2007
Dated as of
December15, 1997
American General Life Insurance Company
c/o American General Corporation
P.O. Box 3247
Houston, Texas 77253-3247
Ladies and Gentlemen:
ETOWN CORPORATION, a New Jersey corporation (the Company), agrees with you as
follows:
SECTION1. AUTHORIZATION OF NOTES. The Company will authorize the issue and sale
of $12,000,000 aggregate principal amount of its 6.79% Senior Notes due
December15, 2007 (the Notes, such term to include any such notes issued in
substitution therefor pursuant to Section13 of this Agreement). The Notes shall
be substantially in the form set out in Exhibit1, with such changes therefrom,
if any, as may be approved by you and the Company. Certain capitalized terms
used in this Agreement are defined in ScheduleB; references to a Schedule or an
Exhibit are, unless otherwise specified, to a Schedule or an Exhibit attached to
this Agreement.
SECTION2. SALE AND PURCHASE OF NOTES. Subject to the terms and conditions of
this Agreement, the Company will issue and sell to you and you will purchase
from the Company, at each Closing provided for in Section3, Notes in the
principal amount specified opposite your name in Schedule A with respect to such
Closing at the purchase price of 100% of the principal amount thereof.
SECTION3. CLOSINGS. The sale and purchase of the Notes to be purchased by you
shall occur at the offices of Chapman and Cutler, 111 West Monroe Street,
Chicago, Illinois 60603, at 10:00 A.M. Chicago time, at not more than three
closings (each a Closing) which shall take place on December22, 1997, January8,
1998 and May15, 1998 or on such other Business Day or Business Days on or prior
to May31, 1998 as may be agreed upon by the Company and you. At each Closing the
Company will deliver to you the Notes to be purchased by you on such date in the
form of a single Note (or such greater number of Notes in denominations of at
least $100,000 as you may request) dated the date of such Closing and registered
in your name (or in the name of your nominee), against delivery by you to the
Company or its order of immediately available funds in the amount of the
purchase price therefor by wire transfer of immediately available funds for the
account of the Company to account number 2083605002512 at First Union National
Bank, Newark, New Jersey, ABA number 031201467. If at any Closing the Company
shall fail to tender such Notes to you as provided above in this Section3, or
any of the conditions specified in Section4 shall not have been fulfilled to
your satisfaction, you shall, at your election, be relieved of all further
obligations under this Agreement, without thereby waiving any rights you may
have by reason of such failure or such nonfulfillment.
SECTION4. CONDITIONS TO EACH CLOSING. Your obligation to purchase and pay for
the Notes to be sold to you at each Closing is subject to the fulfillment to
your satisfaction, prior to or at such Closing, of the following conditions:
Section4.1. Representations and Warranties. The representations and warranties
of the Company in this Agreement shall be correct when made and at the time of
such Closing. Section4.2. Performance; No Default. The Company shall have
performed and complied with all agreements and conditions contained in this
Agreement required to be performed or complied with by it prior to or at such
Closing, and after giving effect to the issue and sale of the Notes (and the
application of the proceeds thereof as contemplated by Section5.14), no Default
or Event of Default shall have occurred and be continuing. Section4.3.
Compliance Certificates. (a) Officers Certificate. The Company shall have
delivered to you an Officers Certificate, dated the date of such Closing,
certifying that the conditions specified in Sections4.1, 4.2 and 4.9 have been
fulfilled. (b) Secretarys Certificate. (i) The Company shall have delivered to
you on or prior to the first Closing a certificate certifying as to the
resolutions attached thereto and other corporate proceedings relating to the
authorization, execution and delivery of the Notes and this Agreement. (ii) The
Company shall have delivered to you on or prior to each subsequent Closing a
certificate certifying as to no changes to the authorizing resolutions or any of
the other items attached to the Companys certificate delivered in connection
with the first Closing. Section4.4. Opinions of Counsel. You shall have received
opinions in form and substance satisfactory to you, dated the date of such
Closing (a)from Walter M. Braswell, Esq., Secretary of the Company, (b) from
Winthrop, Stimson, Putnam & Roberts, special New York counsel for the Company,
covering the matters set forth in Exhibits4.4(a) and 4.4(b), respectively, and
covering such other matters incident to the transactions contemplated hereby as
you or your counsel may reasonably request (and the Company hereby instructs its
counsel to deliver such opinion to you) and (c)from Chapman and Cutler, your
special counsel in connection with such transactions, substantially in the form
set forth in Exhibit4.4(c) and covering such other matters incident to such
transactions as you may reasonably request. Section4.5. Purchase Permitted by
Applicable Law, etc. On the date of such Closing your purchase of Notes shall
(i)be permitted by the laws and regulations of each jurisdiction to which you
are subject, without recourse to provisions (such as Section1405(a)(8) of the
New York Insurance Law) permitting limited investments by insurance companies
without restriction as to the character of the particular investment, (ii)not
violate any applicable law or regulation (including, without limitation,
Regulation G, T or X of the Board of Governors of the Federal Reserve System)
and (iii)not subject you to any tax, penalty or liability under or pursuant to
any applicable law or regulation, which law or regulation was not in effect on
the date hereof. If requested by you, you shall have received an Officers
Certificate certifying as to such matters of fact as you may reasonably specify
to enable you to determine whether such purchase is so permitted. Section4.6.
Governmental Approvals. The Company shall have received all necessary consents,
authorizations and approvals from all Governmental Authorities, if any,
necessary for the execution, delivery and performance by the Company of this
Agreement and the Notes, and any such consent, authorization or approval shall
be final and unappealable. Section4.7. Payment of Special Counsel Fees. Without
limiting the provisions of Section15.1, the Company shall have paid on or before
the first Closing the reasonable fees, charges and disbursements of your special
counsel referred to in Section4.4 to the extent reflected in a statement of such
counsel rendered to the Company at least one Business Day prior to the first
Closing. Section4.8. Private Placement Number. A Private Placement number issued
by Standard & Poors CUSIP Service Bureau (in cooperation with the Securities
Valuation Office of the National Association of Insurance Commissioners) shall
have been obtained for the Notes. Section4.9. Changes in Corporate Structure.
The Company shall not have changed its jurisdiction of incorporation or been a
party to any merger or consolidation and shall not have succeeded to all or any
substantial part of the liabilities of any other entity, at any time following
the date of the most recent financial statements included as part of the
Memorandum and on or prior to the date of the first Closing. Section4.10.
Proceedings and Documents. All corporate and other proceedings in connection
with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions shall be satisfactory to you and your
special counsel, and you and your special counsel shall have received all such
counterpart originals or certified or other copies of such documents as you or
they may reasonably request.
SECTION5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents
and warrants to you that: Section5.1. Organization; Power and Authority. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation, and is duly qualified as a
foreign corporation and is in good standing in each jurisdiction in which such
qualification is required by law, other than those jurisdictions as to which the
failure to be so qualified or in good standing would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. The Company
has the corporate power and authority to own or hold under lease the properties
it purports to own or hold under lease, to transact the business it transacts
and proposes to transact, to execute and deliver this Agreement and the Notes
and to perform the provisions hereof and thereof. Section5.2. Authorization,
etc. This Agreement and the Notes have been duly authorized by all necessary
corporate action on the part of the Company, and this Agreement constitutes, and
upon execution and delivery thereof each Note will constitute, a legal, valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
(i)applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors rights generally and
(ii)general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law). Section5.3. Disclosure. The
Company, through its agent, PNC Capital Markets, Inc., has delivered to you a
copy of a Confidential Private Placement Memorandum, dated November, 1997 (the
Memorandum), relating to the transactions contemplated hereby. This Agreement,
the Memorandum and the financial statements referred to in Section5.5, taken as
a whole, do not contain any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading in
light of the circumstances under which they were made. Except as disclosed in
the Memorandum or in the financial statements referred to in Section5.5, since
December31, 1996, there has been no change in the financial condition,
operations, business or properties of the Company or any of its Subsidiaries
except changes that individually or in the aggregate would not reasonably be
expected to have a Material Adverse Effect. Section5.4. Organization and
Ownership of Shares of Subsidiaries. (a)Schedule5.4 is (except as noted therein)
a complete and correct list of the Companys Subsidiaries, showing, as to each
Subsidiary, the correct name thereof, the jurisdiction of its organization, and
the percentage of shares of each class of its capital stock or similar equity
interests outstanding owned by the Company and each other Subsidiary. (b) All of
the outstanding shares of capital stock or similar equity interests of each
Subsidiary shown in Schedule5.4 as being owned by the Company and its
Subsidiaries have been validly issued, are fully paid and nonassessable and are
owned by the Company or another Subsidiary free and clear of any Lien (except as
otherwise disclosed in Schedule5.4). (c) Each Subsidiary identified in
Schedule5.4 is a corporation or other legal entity duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization, and is duly qualified as a foreign corporation or other legal
entity and is in good standing in each jurisdiction in which such qualification
is required by law, other than those jurisdictions as to which the failure to be
so qualified or in good standing would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. Each such Subsidiary
has the corporate or other power and authority to own or hold under lease the
properties it purports to own or hold under lease and to transact the business
it transacts and proposes to transact. Section5.5. Financial Statements. The
consolidated financial statements of the Company and its Subsidiaries (i)
included as part of the Memorandum, and (ii) to be delivered to you prior to the
final Closing pursuant to Section7 (including in each case the related schedules
and notes) fairly present or will fairly present in all material respects the
consolidated financial position of the Company and its Subsidiaries as of their
respective dates and the consolidated results of their operations and cash flows
for their respective periods and have been or will be prepared in accordance
with GAAP consistently applied throughout the periods involved except as set
forth in the notes thereto (subject, in the case of any interim financial
statements, to normal year-end adjustments). Section5.6. Compliance with Laws,
Other Instruments, etc. The execution, delivery and performance by the Company
of this Agreement and the Notes will not (i)contravene, result in any breach of,
or constitute a default under, or result in the creation of any Lien in respect
of any property of the Company or any Subsidiary under, any indenture, mortgage,
deed of trust, loan, purchase or credit agreement, lease, corporate charter or
by-laws, or any other Material agreement or instrument to which the Company or
any Subsidiary is bound or by which the Company or any Subsidiary or any of
their respective properties may be bound or affected, (ii)conflict with or
result in a breach of any of the terms, conditions or provisions of any order,
judgment, decree, or ruling of any court, arbitrator or Governmental Authority
applicable to the Company or any Subsidiary or (iii)violate any provision of any
statute or other ruleor regulation of any Governmental Authority applicable to
the Company or any Subsidiary. Section5.7. Governmental Authorizations, etc. No
consent, approval or authorization of, or registration, filing or declaration
with, any Governmental Authority (including, without limitation, the New Jersey
Board of Public Utilities) is required in connection with the execution,
delivery or performance by the Company of this Agreement or the Notes.
Section5.8. Litigation; Observance of Statutes and Orders. (a)Except as
disclosed in the Memorandum, there are no actions, suits or proceedings pending
or, to the knowledge of the Company, threatened against or affecting the Company
or any Subsidiary or any property of the Company or any Subsidiary in any court
or before any arbitrator of any kind or before or by any Governmental Authority
that, individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect. (b) Neither the Company nor any Subsidiary is in
default under any order, judgment, decree or ruling of any court, arbitrator or
Governmental Authority or is in violation of any applicable law, ordinance, rule
or regulation (including without limitation Environmental Laws) of any
Governmental Authority, which default or violation, individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect.
Section5.9. Taxes. The Company and its Subsidiaries have filed all income tax
returns that are required to have been filed in any jurisdiction, and have paid
all taxes shown to be due and payable on such returns and all other taxes and
assessments payable by them, to the extent such taxes and assessments have
become due and payable and before they have become delinquent, except for any
taxes and assessments (i)the amount of which is not individually or in the
aggregate Material or (ii)the amount, applicability or validity of which is
currently being contested in good faith by appropriate proceedings and with
respect to which the Company or a Subsidiary, as the case may be, has
established adequate reserves (if any) in accordance with GAAP. The Federal
income tax liabilities of the Company and its Subsidiaries have been determined
by the Internal Revenue Service for all fiscal years up to and including the
fiscal year ended December31, 1995. Section5.10. Title to Property; Leases. The
Company and its Subsidiaries have good and sufficient title to their respective
Material properties, including all such properties reflected in the most recent
audited balance sheet referred to in Section5.5 or purported to have been
acquired by the Company or any Subsidiary after said date (except as sold or
otherwise disposed of in the ordinary course of business), except for those
defects in title that, individually or in the aggregate, would not have a
Material Adverse Effect. All Material leases are valid and subsisting and are in
full force and effect in all material respects. Section5.11. Licenses, Permits,
etc. The Company and its Subsidiaries own or possess all licenses, permits,
franchises, authorizations, patents, copyrights, service marks, trademarks and
trade names, or rights thereto, that are Material, without known conflict with
the rights of others, except for those conflicts that, individually or in the
aggregate, would not have a Material Adverse Effect. Section5.12. Compliance
with ERISA. (a)The Company and each ERISA Affiliate have operated and
administered each Plan in compliance with all applicable laws except for such
instances of noncompliance as have not resulted in and could not reasonably be
expected to result in a Material Adverse Effect. Neither the Company nor any
ERISA Affiliate has incurred any liability pursuant to TitleI or IV of ERISA or
the penalty or excise tax provisions of the Code relating to employee benefit
plans (as defined in Section3 of ERISA), and no event, transaction or condition
has occurred or exists that would reasonably be expected to result in the
incurrence of any such liability by the Company or any ERISA Affiliate, or in
the imposition of any Lien on any of the rights, properties or assets of the
Company or any ERISA Affiliate, in either case pursuant to TitleI or IV of ERISA
or to such penalty or excise tax provisions or to Section401(a)(29) or 412 of
the Code, other than such liabilities or Liens as would not be individually or
in the aggregate Material. (b) The accumulated benefit obligation as determined
in accordance with Financial Accounting Standards Board Statement No. 87 under
each of the Plans (other than Multiemployer Plans), determined as of the end of
such Plans most recently ended plan year is as stated in the Memorandum and in
respect of the 1997 Plan Year, as will be stated in the audited financial
statements to be provided pursuant to Section7.1(b). (c) The Company and its
ERISA Affiliates have not incurred withdrawal liabilities (and are not subject
to contingent withdrawal liabilities) under section4201 or 4204 of ERISA in
respect of Multiemployer Plans that individually or in the aggregate are
Material. (d) The expected postretirement benefit obligation (determined as of
the last day of the Companys most recently ended fiscal year in accordance with
Financial Accounting Standards Board Statement No. 106, without regard to
liabilities attributable to continuation coverage mandated by section4980B of
the Code) of the Company and its Subsidiaries is as disclosed in the Memorandum.
(e) The execution and delivery of this Agreement and the issuance and sale of
the Notes hereunder will not involve any transaction that is subject to the
prohibitions of section406 of ERISA or in connection with which a tax could be
imposed pursuant to section4975(c)(1)(A)- (D) of the Code. The representation by
the Company in the first sentence of this Section5.12(e) is made in reliance
upon and subject to the accuracy of your representation in Section6.2 as to the
sources of the funds to be used to pay the purchase price of the Notes to be
purchased by you. Section5.13. Private Offering by the Company. Neither the
Company nor anyone acting on its behalf has offered the Notes or any similar
securities for sale to, or solicited any offer to buy any of the same from, or
otherwise approached or negotiated in respect thereof with, any person other
than you and not more than thirty-eight (38) other Institutional Investors, each
of which has been offered the Notes at a private sale for investment. Neither
the Company nor anyone acting on its behalf has taken, or will take, any action
that would subject the issuance or sale of the Notes to the registration
requirements of Section5 of the Securities Act. Section5.14. Use of Proceeds;
Margin Regulations. The Company will apply the proceeds of the sale of the Notes
(i) to refinance existing indebtedness and to fund future capital expenditures
and (ii) for investments in water and wastewater systems. No part of the
proceeds from the sale of the Notes hereunder will be used, directly or
indirectly, for the purpose of buying or carrying any margin stock within the
meaning of RegulationG of the Board of Governors of the Federal Reserve System
(12CFR207), or for the purpose of buying or carrying or trading in any
securities under such circumstances as to involve the Company in a violation of
Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a
violation of RegulationT of said Board (12 CFR 220). The Company does not own or
presently intend to carry or purchase any margin stock. As used in this Section,
the terms margin stock and purpose of buying or carrying shall have the meanings
assigned to them in said RegulationG. Section5.15. Existing Indebtedness.
Schedule5.15 sets forth a complete and correct list of all outstanding
Indebtedness of the Company and its Subsidiaries as of December15, 1997, since
which date there has been no Material change in the amounts, interest rates,
sinking funds, installment payments or maturities of the Indebtedness of the
Company or its Subsidiaries. Neither the Company nor any Subsidiary is in
default and no waiver of default is currently in effect, in the payment of any
principal or interest on any Indebtedness of the Company or such Subsidiary and
no event or condition exists with respect to any Indebtedness of the Company or
any Subsidiary the outstanding principal amount of which exceeds $500,000 that
would permit (or that with notice or the lapse of time, or both, would permit)
one or more Persons to cause such Indebtedness to become due and payable before
its stated maturity or before its regularly scheduled dates of payment.
Section5.16. Foreign Assets Control Regulations, etc. Neither the sale of the
Notes by the Company hereunder nor its use of the proceeds thereof will violate
the Trading with the Enemy Act, as amended, or any of the foreign assets control
regulations of the United States Treasury Department (31 CFR, Subtitle B,
Chapter V, as amended) or any enabling legislation or executive order relating
thereto. Section5.17. Status under Certain Statutes. Neither the Company nor any
Subsidiary is subject to regulation under the Investment Company Act of 1940, as
amended, the Public Utility Holding Company Act of 1935, as amended, the ICC
Termination Act of 1995, as amended, or the Federal Power Act, as amended.
SECTION6. REPRESENTATIONS OF THE PURCHASER. Section6.1. Purchase for Investment.
You represent that you are purchasing the Notes for your own account or for one
or more separate accounts maintained by you or for the account of one or more
pension or trust funds and not with a view to the distribution thereof, provided
that the disposition of your or their property shall at all times be within your
or their control. You understand that the Notes have not been registered under
the Securities Act and may be resold only if registered pursuant to the
provisions of the Securities Act or if an exemption from registration is
available, except under circumstances where neither such registration nor such
an exemption is required by law, and that the Company is not required to
register the Notes. Section6.2. Source of Funds. You represent that at least one
of the following statements is an accurate representation as to each source of
funds (a Source) to be used by you to pay the purchase price of the Notes to be
purchased by you hereunder: (a) the Source is an insurance company general
account within the meaning of Department of Labor Prohibited Transaction Class
Exemption (PTCE) 95-60 (issued July12, 1995) and there is no employee benefit
plan, treating as a single plan, all plans maintained by the same employer or
employee organization, with respect to which the amount of the general account
reserves and liabilities for all contracts held by or on behalf of such plan,
exceeds ten percent (10%) of the total reserves and liabilities of such general
account (exclusive of separate account liabilities) plus surplus, as set forth
in the NAIC Annual Statement filed with your state of domicile; or (b) the
Source is either (i)an insurance company pooled separate account, within the
meaning of PTCE 90-1 (issued January 29, 1990), or (ii)a bank collective
investment fund, within the meaning of the PTCE 91-38 (issued July 12, 1991)
and, except as you have disclosed to the Company in writing pursuant to this
paragraph (b), no employee benefit plan or group of plans maintained by the same
employer or employee organization beneficially owns more than 10% of all assets
allocated to such pooled separate account or collective investment fund; or (c)
the Source constitutes assets of an investment fund (within the meaning of Part
V(b) of the QPAM Exemption) managed by a qualified professional asset manager or
QPAM (within the meaning of PartV(a) of the QPAM Exemption), no employee benefit
plans assets that are included in such investment fund, when combined with the
assets of all other employee benefit plans established or maintained by the same
employer or by an affiliate (within the meaning of SectionV(c)(1) of the QPAM
Exemption) of such employer or by the same employee organization and managed by
such QPAM, exceed 20% of the total client assets managed by such QPAM, the
conditions of PartI(c) and (g) of the QPAM Exemption are satisfied, neither the
QPAM nor a person controlling or controlled by the QPAM (applying the definition
of control in SectionV(e) of the QPAM Exemption) owns a 5% or more interest in
the Company and (i)the identity of such QPAM and (ii)the names of all employee
benefit plans whose assets are included in such investment fund have been
disclosed to the Company in writing pursuant to this paragraph (c); or (d) the
Source is a governmental plan; or (e) the Source is one or more employee benefit
plans, or a separate account or trust fund comprised of one or more employee
benefit plans, each of which has been identified to the Company in writing
pursuant to this paragraph (e); or (f) the Source does not include assets of any
employee benefit plan, other than a plan exempt from the coverage of ERISA. If a
proposed transferee of the Notes identifies a plan pursuant to paragraph (b),
(c) or (e) above, the Company shall deliver a certificate on or prior to the
date of any transfer of the Notes to such transferee, which certificate shall
either state that (i)it is neither a party in interest (as defined in Title I,
Section3(14) of ERISA) nor a disqualified person (as defined in Section
4975(e)(2) of the Internal Revenue Code of 1986, as amended), with respect to
any plan identified pursuant to paragraphs (b) or (e) above, or (ii)with respect
to any plan, identified pursuant to paragraph (c) above, neither it nor any
affiliate (as defined in SectionV(c) of the QPAM Exemption) has at this time,
and during the immediately preceding one year has exercised the authority to
appoint or terminate said QPAM as manager of the assets of any plan identified
in writing pursuant to paragraph (c) above or to negotiate the terms of said
QPAMs management agreement on behalf of any such identified plans. As used in
this Section6.2, the terms employee benefit plan, governmental plan, party in
interest and separate account shall have the respective meanings assigned to
such terms in Section3 of ERISA.
SECTION7. INFORMATION AS TO COMPANY Section7.1. Financial and Business
Information. The Company shall deliver to each holder of Notes that is an
Institutional Investor: (a) Quarterly Statements promptly, and in any event,
within 60 days after the end of each quarterly fiscal period in each fiscal year
of the Company (other than the last quarterly fiscal period of each such fiscal
year), duplicate copies of, (i) a consolidated balance sheet of the Company and
its Subsidiaries as at the end of such quarter, and (ii) consolidated statements
of income, changes in shareholders equity and cash flows of the Company and its
Subsidiaries, for such quarter and (in the case of the second and third
quarters) for the portion of the fiscal year ending with such quarter, setting
forth in each case in comparative form the figures for the corresponding periods
in the previous fiscal year, all in reasonable detail, prepared in accordance
with GAAP applicable to quarterly financial statements generally, and certified
by a Senior Financial Officer as fairly presenting, in all material respects,
the financial position of the companies being reported on and their results of
operations and cash flows, subject to changes resulting from year-end
adjustments, provided that delivery within the time period specified above of
copies of the Companys Quarterly Report on Form 10-Q prepared in compliance with
the requirements therefor and filed with the Securities and Exchange Commission
shall be deemed to satisfy the requirements of this Section7.1(a); (b) Annual
Statements promptly, and in any event, within 105 days after the end of each
fiscal year of the Company, duplicate copies of, (i) a consolidated balance
sheet of the Company and its Subsidiaries, as at the end of such year, and (ii)
consolidated statements of income, changes in shareholders equity and cash flows
of the Company and its Subsidiaries, for such year, setting forth in each case
in comparative form the figures for the previous fiscal year, all in reasonable
detail, prepared in accordance with GAAP, and accompanied by an opinion thereon
of independent certified public accountants of recognized national standing,
which opinion shall state that such financial statements present fairly, in all
material respects, the financial position of the companies being reported upon
and their results of operations and cash flows and have been prepared in
conformity with GAAP, and that the examination of such accountants in connection
with such financial statements has been made in accordance with generally
accepted auditing standards, and that such audit provides a reasonable basis for
such opinion in the circumstances, provided that the delivery within the time
period specified above of the Companys Annual Report on Form 10-K for such
fiscal year (together with the Companys annual report to shareholders, if any,
prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance
with the requirements therefor and filed with the Securities and Exchange
Commission shall be deemed to satisfy the requirements of this Section7.1(b);
(c) SEC and Other Reports promptly upon their becoming available, one copy of
(i)each financial statement, report, notice or proxy statement sent by the
Company or any Subsidiary to public securities holders generally, (ii)each
regular or periodic report, each registration statement that shall have become
effective (without exhibits except as expressly requested by such holder), and
each final prospectus and all amendments thereto filed by the Company or any
Subsidiary with the Securities and Exchange Commission, and (iii)a copy of each
Annual Report of each of Elizabethtown Water Company and The Mount Holly Water
Company delivered to the New Jersey Board of Public Utilities; (d) Notice of
Default or Event of Default promptly following, and in any event within five
Business Days after a Responsible Officer becoming aware of, the existence of
any Default or Event of Default, a written notice specifying the nature and
period of existence thereof and what action the Company is taking or proposes to
take with respect thereto; (e) ERISA Matters promptly, and in any event within
five Business Days after a Responsible Officer becoming aware of, any of the
following, a written notice setting forth the nature thereof and the action, if
any, that the Company or an ERISA Affiliate proposes to take with respect
thereto: (i) with respect to any Plan, any reportable event, as defined in
section4043(c) of ERISA and the regulations thereunder, for which notice thereof
has not been waived pursuant to such regulations as then in effect on the date
hereof; or (ii) the taking by the PBGC of steps to institute, or the threatening
by the PBGC of the institution of, proceedings under section4042 of ERISA for
the termination of, or the appointment of a trustee to administer, any Plan, or
the receipt by the Company or any ERISA Affiliate of a notice from a
Multiemployer Plan that such action has been taken by the PBGC with respect to
such Multiemployer Plan; or (iii) any event, transaction or condition that could
result in the incurrence of any liability by the Company or any ERISA Affiliate
pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of
the Code relating to employee benefit plans, or in the imposition of any Lien on
any of the rights, properties or assets of the Company or any ERISA Affiliate
pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if
such liability or Lien, taken together with any other such liabilities or Liens
then existing, would reasonably be expected to have a Material Adverse Effect;
and (f) Requested Information with reasonable promptness, such other data and
information relating to the business, operations, affairs, financial condition,
assets or properties of the Company or any of its Subsidiaries or relating to
the ability of the Company to perform its obligations hereunder and under the
Notes as from time to time may be reasonably requested by any such holder of
Notes. Section7.2. Officers Certificate. Each set of financial statements
delivered to a holder of Notes pursuant to Section7.1(a) or Section7.1(b) hereof
shall be accompanied by a certificate of a Senior Financial Officer setting
forth: (a) Covenant Compliance the information (including detailed calculations)
required in order to establish whether the Company was in compliance with the
requirements of Section10.2 through 10.8 hereof, inclusive, during the quarterly
or annual period covered by the statements then being furnished (including with
respect to each such Section, where applicable, the calculations of the maximum
or minimum amount, ratio or percentage, as the case may be, permissible under
the terms of such Sections, and the calculation of the amount, ratio or
percentage then in existence); and (b) Event of Default a statement that such
officer has reviewed the relevant terms hereof and has made, or caused to be
made, under his or her supervision, a review of the transactions and conditions
of the Company and its Subsidiaries from the beginning of the quarterly or
annual period covered by the statements then being furnished to the date of the
certificate and that such review shall not have disclosed the existence during
such period of any condition or event that constitutes a Default or an Event of
Default or, if any such condition or event existed or exists (including, without
limitation, any such event or condition resulting from the failure of the
Company or any Subsidiary to comply with any Environmental Law), specifying the
nature and period of existence thereof and what action the Company shall have
taken or proposes to take with respect thereto. Section7.3. Inspection. The
Company shall permit the representatives of each holder of Notes that is an
Institutional Investor: (a) No Default if no Default or Event of Default then
exists, at the expense of such holder and upon reasonable prior notice to the
Company, to visit the principal executive office of the Company, to discuss the
affairs, finances and accounts of the Company and its Subsidiaries with the
Companys officers, and, with the consent of the Company (which consent will not
be unreasonably withheld) to visit the other offices and properties of the
Company and each Subsidiary, all at such reasonable times and as often (but not
more than twice by any such holder within any 12-month period) as may be
reasonably requested in writing; and (b) Default if a Default or Event of
Default then exists, at the expense of the Company to visit and inspect any of
the offices or properties of the Company or any Subsidiary, to examine all their
respective books of account, records, reports and other papers, to make copies
and extracts therefrom, and to discuss their respective affairs, finances and
accounts with their respective officers and (if an officer of the Company is
present) their independent public accountants (and by this provision the Company
authorizes said accountants to discuss the affairs, finances and accounts of the
Company and its Subsidiaries), all at such times and as often as may be
requested.
SECTION8. PREPAYMENT OF THE NOTES. Section8.1. Prepayments. The entire
outstanding principal amount of the Notes shall be due on December15, 2007.
Except as set forth in Section8.2, the Notes may not be prepaid prior to
maturity at the option of the Company. Section8.2. Optional Prepayments with
Make-Whole Amount. The Company may, at its option, upon notice as provided
below, prepay at any time all, or from time to time any part of, the Notes, in
an amount not less than $1,000,000 in the case of a partial prepayment, at 100%
of the principal amount so prepaid, and accrued interest thereon to the date of
prepayment, plus the Make-Whole Amount determined for the prepayment date with
respect to such principal amount. The Company will give each holder of Notes
written notice of each optional prepayment under this Section8.2 not less than
30 days and not more than 60 days prior to the date fixed for such prepayment.
Each such notice shall specify such date, the aggregate principal amount of the
Notes to be prepaid on such date, the principal amount of each Note held by such
holder to be prepaid (determined in accordance with Section8.3), and the
interest to be paid on the prepayment date with respect to such principal amount
being prepaid, and shall be accompanied by a certificate of a Senior Financial
Officer as to the estimated Make-Whole Amount due in connection with such
prepayment (calculated as if the date of such notice were the date of the
prepayment), setting forth the details of such computation. Two Business Days
prior to such prepayment, the Company shall deliver to each holder of Notes a
certificate of a Senior Financial Officer specifying the calculation of such
Make-Whole Amount as of the specified prepayment date. Section8.3. Allocation of
Partial Prepayments. In the case of each partial prepayment of the Notes, the
principal amount of the Notes to be prepaid shall be allocated among all of the
Notes at the time outstanding in proportion, as nearly as practicable, to the
respective unpaid principal amounts thereof. Section8.4. Maturity; Surrender,
etc. In the case of each prepayment of Notes pursuant to this Section8, the
principal amount of each Note to be prepaid shall mature and become due and
payable on the date fixed for such prepayment, together with interest on such
principal amount accrued to such date and the applicable Make-Whole Amount, if
any. From and after such date, unless the Company shall fail to pay such
principal amount when so due and payable, together with the interest and
Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall
cease to accrue. Any Note paid or prepaid in full shall be surrendered to the
Company and cancelled and shall not be reissued, and no Note shall be issued in
lieu of any prepaid principal amount of any Note. Section8.5. Purchase of Notes.
The Company will not and will not permit any Affiliate to purchase, redeem,
prepay or otherwise acquire, directly or indirectly, any of the outstanding
Notes except (a)upon the payment or prepayment of the Notes in accordance with
the terms of this Agreement and the Notes or (b)pursuant to an offer to purchase
made by the Company or an Affiliate pro rata to the holders of all Notes at the
time outstanding upon the same terms and conditions. Any such offer shall
provide each holder with sufficient information to enable it to make an informed
decision with respect to such offer, and shall remain open for at least 10
Business Days. If the holders of more than 25% of the principal amount of the
Notes then outstanding accept such offer, the Company shall promptly notify the
remaining holders of such fact and the expiration date for the acceptance by
holders of Notes of such offer shall be extended by the number of days necessary
to give each such remaining holder at least 10 Business Days from its receipt of
such notice to accept such offer. The Company will promptly cancel all Notes
acquired by it or any Affiliate pursuant to any payment, prepayment or purchase
of Notes pursuant to any provision of this Agreement and no Notes may be issued
in substitution or exchange for any such Notes. Section8.6. Make-Whole Amount.
The term Make-Whole Amount means, with respect to any Note, an amount equal to
the excess, if any, of the Discounted Value of the Remaining Scheduled Payments
with respect to the Called Principal of such Note over the amount of such Called
Principal, provided that the Make-Whole Amount may in no event be less than
zero. For the purposes of determining the Make-Whole Amount, the following terms
have the following meanings: Called Principal means, with respect to any Note,
the principal of such Note that is to be prepaid pursuant to Section8.2 or has
become or is declared to be immediately due and payable pursuant to Section12.1,
as the context requires. Discounted Value means, with respect to the Called
Principal of any Note, the amount obtained by discounting all Remaining
Scheduled Payments with respect to such Called Principal from their respective
scheduled due dates to the Settlement Date with respect to such Called
Principal, in accordance with accepted financial practice and at a discount
factor (applied on the same periodic basis as that on which interest on the
Notes is payable) equal to the Reinvestment Yield with respect to such Called
Principal. Reinvestment Yield means, with respect to the Called Principal of any
Note, 0.50% over the yield to maturity implied by (i)the yields reported, as of
10:00 A.M. (New York City time) on the second Business Day preceding the
Settlement Date with respect to such Called Principal, on the display designated
as Page 678 on the Dow Jones Markets, a division of Dow & Jones Company,
Telerate Access Service (or such other display as may replace Page 678 on the
Telerate Access Service) for actively traded U.S. Treasury securities having a
maturity equal to the Remaining Average Life of such Called Principal as of such
Settlement Date, or (ii)if such yields are not reported as of such time or the
yields reported as of such time are not ascertainable, the Treasury Constant
Maturity Series Yields reported, for the latest day for which such yields have
been so reported as of the second Business Day preceding the Settlement Date
with respect to such Called Principal, in Federal Reserve Statistical Release
H.15 (519) (or any comparable successor publication) for actively traded U.S.
Treasury securities having a constant maturity equal to the Remaining Average
Life of such Called Principal as of such Settlement Date. Such implied yield
will be determined, if necessary, by (a)converting U.S. Treasury bill quotations
to bond-equivalent yields in accordance with accepted financial practice and
(b)interpolating linearly between (1)the actively traded U.S. Treasury security
with the maturity closest to and greater than the Remaining Average Life and
(2)the actively traded U.S. Treasury security with the maturity closest to and
less than the Remaining Average Life. Remaining Average Life means, with respect
to any Called Principal, the number of years (calculated to the nearest
one-twelfth year) obtained by dividing (i)such Called Principal into (ii)the sum
of the products obtained by multiplying (a)the principal component of each
Remaining Scheduled Payment with respect to such Called Principal by (b)the
number of years (calculated to the nearest one-twelfth year) that will elapse
between the Settlement Date with respect to such Called Principal and the
scheduled due date of such Remaining Scheduled Payment. Remaining Scheduled
Payments means, with respect to the Called Principal of any Note, all payments
of such Called Principal and interest thereon that would be due after the
Settlement Date with respect to such Called Principal if no payment of such
Called Principal were made prior to its scheduled due date, provided that if
such Settlement Date is not a date on which interest payments are due to be made
under the terms of the Notes, then the amount of the next succeeding scheduled
interest payment will be reduced by the amount of interest accrued to such
Settlement Date and required to be paid on such Settlement Date pursuant to
Section8.2 or 12.1. Settlement Date means, with respect to the Called Principal
of any Note, the date on which such Called Principal is to be prepaid pursuant
to Section8.2 or has become or is declared to be immediately due and payable
pursuant to Section12.1, as the context requires.
SECTION9. AFFIRMATIVE COVENANTS. The Company covenants that so long as any of
the Notes are outstanding: Section9.1. Compliance with Law. The Company will and
will cause each of its Subsidiaries to comply with all laws, ordinances or
governmental rules or regulations to which each of them is subject, including,
without limitation, Environmental Laws, and will obtain and maintain in effect
all licenses, certificates, permits, franchises and other governmental
authorizations necessary to the ownership of their respective properties or to
the conduct of their respective businesses, in each case to the extent necessary
to ensure that non-compliance with such laws, ordinances or governmental rules
or regulations or failures to obtain or maintain in effect such licenses,
certificates, permits, franchises and other governmental authorizations would
not reasonably be expected, individually or in the aggregate, to have a Material
Adverse Effect, provided that such compliance with any such law, ordinance, rule
or regulation by the Company or any Subsidiary shall not be required to the
extent that the applicability or validity thereof is contested by the Company or
such Subsidiary on a timely basis in good faith and in appropriate proceedings,
the Company or a Subsidiary has established adequate reserves therefor in
accordance with GAAP on the books of the Company or such Subsidiary and such
contest would not reasonably be expected to have a Material Adverse Effect.
Section9.2. Insurance. The Company will and will cause each of its Subsidiaries
to maintain, with financially sound and reputable insurers, insurance with
respect to their respective properties and businesses against such casualties
and contingencies, of such types, on such terms and in such amounts (including
deductibles, co-insurance and self-insurance, if adequate reserves are
maintained with respect thereto) as is customary in the case of entities of
established reputations engaged in the same or a similar business and similarly
situated. Section9.3. Maintenance of Properties. The Company will and will cause
each of its Subsidiaries to maintain and keep, or cause to be maintained and
kept, their respective properties in good repair, working order and condition
(other than ordinary wear and tear), so that the business carried on in
connection therewith may be properly conducted at all times, provided that this
Sectionshall not prevent the Company or any Subsidiary from discontinuing the
operation and the maintenance of any of its properties if such discontinuance is
desirable in the conduct of its business and the Company has concluded that such
discontinuance would not, individually or in the aggregate, have a Material
Adverse Effect. Section9.4. Payment of Taxes. The Company will and will cause
each of its Subsidiaries to file all income tax or similar tax returns required
to be filed in any jurisdiction and to pay and discharge all taxes shown to be
due and payable on such returns and all other taxes, assessments, governmental
charges, or levies payable by any of them, to the extent such taxes and
assessments have become due and payable and before they have become delinquent,
provided that neither the Company nor any Subsidiary need pay any such tax or
assessment if (i)the amount, applicability or validity thereof is contested by
the Company or such Subsidiary on a timely basis in good faith and in
appropriate proceedings, and the Company or a Subsidiary has established
adequate reserves therefor in accordance with GAAP on the books of the Company
or such Subsidiary or (ii)the nonpayment of all such taxes and assessments in
the aggregate would not reasonably be expected to have a Material Adverse
Effect. Section9.5. Corporate Existence, etc.; Maintenance of Ownership of
Elizabethtown Water Company. (a)Except as permitted by Section10.2, the Company
will at all times preserve and keep in full force and effect its corporate
existence. Subject to Section 10.7, the Company will at all times preserve and
keep in full force and effect the corporate existence of each of its Utility
Subsidiaries (unless merged into the Company or a Utility Subsidiary) and all
rights and franchises of the Company and its Utility Subsidiaries unless, in the
good faith judgment of the Company, the termination of or failure to preserve
and keep in full force and effect such corporate existence, right or franchise
would not, individually or in the aggregate, have a Material Adverse Effect. (b)
The Company will at all times own and hold 100% of the shares of the outstanding
common stock of Elizabethtown Water Company.
SECTION10. NEGATIVE COVENANTS. The Company covenants that so long as any of the
Notes are outstanding: Section10.1. Transactions with Affiliates. The Company
will not and will not permit any Subsidiary to enter into directly or indirectly
any Material transaction or Material group of related transactions (including
without limitation the purchase, lease, sale or exchange of properties of any
kind or the rendering of any service) with any Affiliate (other than the Company
or another Subsidiary), except pursuant to the reasonable requirements of the
Companys or such Subsidiarys business and upon fair and reasonable terms no less
favorable to the Company or such Subsidiary than would be obtainable in a
comparable arms-length transaction with a Person not an Affiliate. Section10.2.
Merger, Consolidation, etc. The Company shall not consolidate with or merge with
any other corporation unless: (a) the successor formed by such consolidation or
the survivor of such merger, as the case may be (the Successor Corporation),
shall be a solvent corporation organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia; (b) if
the Company is not the Successor Corporation, such corporation shall have
executed and delivered to each holder of Notes its assumption of the due and
punctual performance and observance of each covenant and condition of this
Agreement and the Notes; and (c) immediately after giving effect to such
transaction: (i) no Default or Event of Default would exist, and (ii) the
Successor Corporation would be in compliance with the provisions of Section10.5
hereof if the ratio specified thereunder were calculated as of the date of such
transaction and after giving effect thereto. Section10.3. Fixed Charges Coverage
Ratio. The Company will not, at the end of any fiscal quarter of the Company,
permit the Fixed Charges Coverage Ratio to be less than 1.5 to 1. Section10.4.
Consolidated Common Shareholders Equity. The Company will not, at any time,
permit Consolidated Common Shareholders Equity to be less than $165,000,000.
Section10.5. Consolidated Debt. The Company will not at the end of any calendar
year permit the ratio of (a)the sum of (i) Consolidated Debt plus (ii)the
aggregate Redeemable Preferred Stock of the Company and its Subsidiaries
outstanding on such date, minus $10,000,000, to (b)the sum of (i) Consolidated
Debt plus (ii)the aggregate Preferred Stock of the Company and its Subsidiaries
outstanding on such date plus (iii)Consolidated Common Shareholders Equity, to
exceed 0.65 to 1. Section10.6. Liens. The Company will not directly or
indirectly create, incur, assume or permit to exist (upon the happening of a
contingency or otherwise) any Consensual Lien on or with respect to any of the
common stock of Elizabethtown Water Company, or any income or profits therefrom,
or assign or otherwise convey any right to receive such income or profits.
Section10.7. Sale of Assets of Elizabethtown Water Company and The Mount Holly
Water Company. The Company will not permit Elizabethtown Water Company or its
Subsidiary, The Mount Holly Water Company, to make any Asset Disposition unless:
(a) in the good faith opinion of the Company, the Asset Disposition is in
exchange for consideration having a Fair Market Value at least equal to that of
the property exchanged and is in the best interest of the Company, Elizabethtown
Water Company or Mount Holly Water Company; and (b) immediately after giving
effect to the Asset Disposition, no Default or Event of Default would exist; and
(c) immediately after giving effect to the Asset Disposition, the Disposition
Value of all property that was the subject of any Asset Disposition occurring on
or after the date of the Closing would not exceed 25% of Consolidated Assets of
Elizabethtown Water Company as of December31, 1997. If the Net Proceeds Amount
for any Transfer is applied to (i) a Debenture Indenture Application, (ii) a
Debt Prepayment Application, or (iii) a Property Reinvestment Application, then
such Transfer, only for the purpose of determining compliance with subsection
(c) of this Section10.7 as of any date, shall be deemed not to be an Asset
Disposition. Section10.8. Restricted Investments. (a) Limitation. The Company
will not, and will not permit any of its Subsidiaries to, declare, make or
authorize any Restricted Investment unless immediately after giving effect to
such action: (i) the aggregate value of all Restricted Investments of the
Company and its Subsidiaries (valued immediately after such action) would not
exceed $30,000,000; and (ii) no Default or Event of Default would exist. (b)
Investments of Subsidiaries. Each Person which becomes a Subsidiary of the
Company after the date of the Closing will be deemed to have made, on the date
such Person becomes a Subsidiary of the Company, all Restricted Investments of
such Person in existence on such date.
SECTION11. EVENTS OF DEFAULT. An Event of Default shall exist if any of the
following conditions or events shall occur and be continuing: (a) the Company
defaults in the payment of any principal or Make-Whole Amount, if any, on any
Note when the same becomes due and payable, whether at maturity or at a date
fixed for prepayment or by declaration or otherwise; or (b) the Company defaults
in the payment of any interest on any Note for more than five Business Days
after the same becomes due and payable; or (c) the Company defaults in the
performance of or compliance with any term contained herein (other than those
referred to in paragraphs (a) and (b) of this Section11) and such default is not
remedied within 30 Business Days; or (d) any representation or warranty made in
writing by or on behalf of the Company or by any officer of the Company in this
Agreement or in any writing furnished in connection with the transactions
contemplated hereby proves to have been false or incorrect in any material
respect on the date as of which made; or (e) either (i)the Company or any
Subsidiary is in default (as principal or as guarantor or other surety) in the
payment of any principal of or premium or make-whole amount or interest on any
Indebtedness that is outstanding in an aggregate principal amount of at least
$5,000,000 beyond any period of grace provided with respect thereto, or (ii)the
Company or any Subsidiary is in default in the performance of or compliance with
any term of any evidence of any Indebtedness in an aggregate outstanding
principal amount of at least $5,000,000 or of any mortgage, indenture or other
agreement relating thereto or any other condition exists, and as a consequence
of such default or condition such Indebtedness has become, or has been declared
due and payable before its stated maturity or before its regularly scheduled
dates of payment; or (f) the Company or any Principal Subsidiary (i)is generally
not paying, or admits in writing its inability to pay, its debts as they become
due, (ii)files, or consents by answer or otherwise to the filing against it of,
a petition for relief or reorganization or arrangement or any other petition in
bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency,
reorganization, moratorium or other similar law of any jurisdiction, (iii)makes
an assignment for the benefit of its creditors, (iv)consents to the appointment
of a custodian, receiver, trustee or other officer with similar powers with
respect to it or with respect to any substantial part of its property, (v)is
adjudicated as insolvent or to be liquidated, or (vi)takes corporate action for
the purpose of any of the foregoing; or (g) a court or governmental authority of
competent jurisdiction enters an order appointing, without consent by the
Company or any Principal Subsidiary, a custodian, receiver, trustee or other
officer with similar powers with respect to it or with respect to any
substantial part of its property, or constituting an order for relief or
approving a petition for relief or reorganization or any other petition in
bankruptcy or for liquidation or to take advantage of any bankruptcy or
insolvency law of any jurisdiction, or ordering the dissolution, winding-up or
liquidation of the Company or any of its Principal Subsidiaries, or any such
petition shall be filed against the Company or any of its Principal Subsidiaries
and such petition shall not be dismissed within 60 days; or (h) a final judgment
or judgments for the payment of money aggregating in excess of 5% of
Consolidated Total Assets are rendered against one or more of the Company and
its Principal Subsidiaries and are not, within 60 days after entry thereof,
bonded, discharged or stayed pending appeal, or are not discharged within 60
days after the expiration of such stay; or (i) if (i)any Plan shall fail to
satisfy the minimum funding standards of ERISA or the Code for any plan year or
part thereof or a waiver of such standards or extension of any amortization
period is sought or granted under section412 of the Code, (ii)a notice of intent
to terminate any Plan shall have been filed with the PBGC or the PBGC shall have
instituted proceedings under ERISA section4042 to terminate or appoint a trustee
to administer any Plan or the PBGC shall have notified the Company or any ERISA
Affiliate that a Plan may become a subject of any such proceedings, (iii)the
Company or any ERISA Affiliate shall have incurred any liability pursuant to
Title I or IV of ERISA or the penalty or excise tax provisions of the Code
relating to employee benefit plans, (iv)the Company or any ERISA Affiliate
incurs withdrawal liability in connection with the withdrawal from any
Multiemployer Plan, or (v)the Company or any Subsidiary establishes or amends
any employee welfare benefit plan that provides post-employment welfare benefits
in a manner that would increase the liability of the Company or any Subsidiary
thereunder; provided, however, none of the events described in clauses(i)
through (v) above shall constitute an Event of Default unless any such event or
events described in clauses (i) through (v) above, either individually or
together with any other such event or events, would reasonably be expected to
have a Material Adverse Effect. As used in Section11(i), the terms employee
benefit plan and employee welfare benefit plan shall have the respective
meanings assigned to such terms in Section3 of ERISA.
SECTION12. REMEDIES ON DEFAULT, ETC. Section12.1. Acceleration. (a)If an Event
of Default with respect to the Company described in paragraph (f) or (g) of
Section11 (other than an Event of Default described in clause (i) of paragraph
(f) or described in clause (vi) of paragraph (f) by virtue of the fact that such
clause encompasses clause (i) of paragraph (f)) has occurred, all the Notes then
outstanding shall automatically become immediately due and payable. (b) If any
other Event of Default has occurred and is continuing, any holder or holders of
at least 51% in principal amount of the Notes at the time outstanding may at any
time at its or their option, by written notice or notices to the Company,
declare all the Notes then outstanding to be immediately due and payable. (c) If
any Event of Default described in paragraph (a) or (b) of Section11 has occurred
and is continuing, any holder or holders of Notes at the time outstanding
affected by such Event of Default may at any time, at its or their option, by
notice or notices to the Company, declare all the Notes held by it or them to be
immediately due and payable. Upon any Notes becoming due and payable under this
Section12.1, whether automatically or by declaration, such Note will forthwith
mature and the entire unpaid principal amount of such Note, plus (x)all accrued
and unpaid interest thereon and (y)the Make-Whole Amount determined in respect
of such principal amount (to the full extent permitted by applicable law), shall
all be immediately due and payable, in each and every case without presentment,
demand, protest or further notice, all of which are hereby waived. The Company
acknowledges, and the parties hereto agree, that each holder of a Note has the
right to maintain its investment in the Notes free from repayment by the Company
(except as herein specifically provided for) and that the provision for payment
of a Make-Whole Amount by the Company in the event that the Notes are prepaid or
are accelerated as a result of an Event of Default, is intended to provide
compensation for the deprivation of such right under such circumstances.
Section12.2. Other Remedies. If any Default or Event of Default has occurred and
is continuing, and irrespective of whether any Notes have become or have been
declared immediately due and payable under Section12.1, the holder of any Note
at the time outstanding may proceed to protect and enforce the rights of such
holder by an action at law, suit in equity or other appropriate proceeding,
whether for the specific performance of any agreement contained herein or in any
Note, or for an injunction against a violation of any of the terms hereof or
thereof, or in aid of the exercise of any power granted hereby or thereby or by
law or otherwise. Section12.3. Rescission. At any time after any Notes have been
declared due and payable pursuant to clause (b) of Section12.1, the Required
Holders, by written notice to the Company, may rescind and annul any such
declaration and its consequences if (a)the Company has paid all overdue interest
on the Notes, all principal of and Make-Whole Amount, if any, on any Notes that
are due and payable and are unpaid other than by reason of such declaration, and
all interest on such overdue principal and Make-Whole Amount, if any, and (to
the extent permitted by applicable law) any overdue interest in respect of the
Notes, at the Default Rate, (b)all Events of Default and Defaults, other than
non-payment of amounts that have become due solely by reason of such
declaration, have been cured or have been waived pursuant to Section17, and
(c)no judgment or decree has been entered for the payment of any monies due
pursuant hereto or to the Notes. No rescission and annulment under this
Section12.3 will extend to or affect any subsequent Event of Default or Default
or impair any right consequent thereon. Section12.4. No Waivers or Election of
Remedies, Expenses, etc. No course of dealing and no delay on the part of any
holder of any Note in exercising any right, power or remedy shall operate as a
waiver thereof or otherwise prejudice such holders rights, powers or remedies.
No right, power or remedy conferred by this Agreement or by any Note upon any
holder thereof shall be exclusive of any other right, power or remedy referred
to herein or therein or now or hereafter available at law, in equity, by statute
or otherwise. Without limiting the obligations of the Company under Section15,
the Company will pay to the holder of each Note on demand such further amount as
shall be sufficient to cover all costs and expenses of such holder incurred in
any enforcement or collection under this Section12, including, without
limitation, reasonable attorneys fees, expenses and disbursements.
SECTION13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. Section13.1.
Registration of Notes. The Company shall keep at its principal executive office
a register for the registration and registration of transfers of Notes. The name
and address of each holder of one or more Notes, each transfer thereof and the
name and address of each transferee of one or more Notes shall be registered in
such register. Prior to due presentment for registration of transfer, the Person
in whose name any Note shall be registered shall be deemed and treated as the
owner and holder thereof for all purposes hereof, and the Company shall not be
affected by any notice or knowledge to the contrary. The Company shall give to
any holder of a Note that is an Institutional Investor promptly upon request
therefor, a complete and correct copy of the names and addresses of all
registered holders of Notes. Section13.2. Transfer and Exchange of Notes. Upon
surrender of any Note at the principal executive office of the Company for
registration of transfer or exchange (and in the case of a surrender for
registration of transfer, duly endorsed or accompanied by a written instrument
of transfer duly executed by the registered holder of such Note or its attorney
duly authorized in writing and accompanied by the address for notices of each
transferee of such Note or part thereof), the Company shall execute and deliver,
at the Companys expense (except as provided below), one or more new Notes (as
requested by the holder thereof) in exchange therefor, in an aggregate principal
amount equal to the unpaid principal amount of the surrendered Note. Each such
new Note shall be payable to such Person as such holder may request and shall be
substantially in the form of Exhibit 1. Each such new Note shall be dated and
bear interest from the date to which interest shall have been paid on the
surrendered Note or dated the date of the surrendered Note if no interest shall
have been paid thereon. The Company may require payment of a sum sufficient to
cover any stamp tax or governmental charge imposed in respect of any such
transfer of Notes. Notes shall not be transferred in denominations of less than
$100,000, provided that if necessary to enable the registration of transfer by a
holder of its entire holding of Notes, one Note may be in a denomination of less
than $100,000. Any transferee of a Note, or purchaser of a participation
therein, shall, by its acceptance of such Note be deemed to make the same
representations to the Company regarding the Note or participation as you have
made pursuant to Section6.2, provided that such entity may (in reliance upon
information provided by the Company, which shall not be unreasonably withheld)
make a representation to the effect that the purchase by such entity of any Note
will not constitute a non-exempt prohibited transaction under Section406(a) of
ERISA. Section13.3. Replacement of Notes. Upon receipt by the Company of
evidence reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any Note (which evidence shall be, in the case of
an Institutional Investor, notice from such Institutional Investor of such
ownership and such loss, theft, destruction or mutilation), and (a) in the case
of loss, theft or destruction, of indemnity reasonably satisfactory to it
(provided that if the holder of such Note is, or is a nominee for, you or
another holder of a Note with a minimum net worth of at least $50,000,000, such
Persons own unsecured agreement of indemnity shall be deemed to be
satisfactory), or (b) in the case of mutilation, upon surrender and cancellation
thereof, the Company at its own expense shall execute and deliver, in lieu
thereof, a new Note, dated and bearing interest from the date to which interest
shall have been paid on such lost, stolen, destroyed or mutilated Note or dated
the date of such lost, stolen, destroyed or mutilated Note if no interest shall
have been paid thereon.
SECTION14. PAYMENTS ON NOTES. Section14.1. Place of Payment. Subject to
Section14.2, payments of principal, Make-Whole Amount, if any, and interest
becoming due and payable on the Notes shall be made in Westfield, New Jersey at
the principal office of the Company in such jurisdiction. The Company may at any
time, by notice to each holder of a Note, change the place of payment of the
Notes so long as such place of payment shall be either the principal office of
the Company in such jurisdiction or the principal office of a bank or trust
company in such jurisdiction. Section14.2. Home Office Payment. So long as you
or your nominee shall be the holder of any Note, and notwithstanding anything
contained in Section14.1 or in such Note to the contrary, the Company will pay
all sums becoming due on such Note for principal, Make-Whole Amount, if any, and
interest by the method and at the address specified for such purpose below your
name in Schedule A, or by such other method or at such other address as you
shall have from time to time specified to the Company in writing for such
purpose, without the presentation or surrender of such Note or the making of any
notation thereon, except that upon written request of the Company made
concurrently with or reasonably promptly after payment or prepayment in full of
any Note, you shall surrender such Note for cancellation, reasonably promptly
after any such request, to the Company at its principal executive office or at
the place of payment most recently designated by the Company pursuant to
Section14.1. The Company will afford the benefits of this Section14.2 to any
Institutional Investor that is the direct or indirect transferee of any Note
purchased by you under this Agreement and that has made the same agreement
relating to such Note as you have made in this Section14.2.
SECTION15. EXPENSES, ETC. Section15.1. Transaction Expenses. Whether or not the
transactions contemplated hereby are consummated, the Company will pay all costs
and expenses (including reasonable attorneys fees of a special counsel and, if
reasonably required, local or other counsel) incurred by you and each holder of
a Note in connection with such transactions and in connection with any
amendments, waivers or consents under or in respect of this Agreement or the
Notes (whether or not such amendment, waiver or consent becomes effective),
including, without limitation: (a)the costs and expenses incurred in enforcing
or defending (or determining whether or how to enforce or defend) any rights
under this Agreement or the Notes or in responding to any subpoena or other
legal process or informal investigative demand issued in connection with this
Agreement or the Notes, or by reason of being a holder of any Note, and (b)the
costs and expenses, including financial advisors fees, incurred in connection
with the insolvency or bankruptcy of the Company or any Subsidiary or in
connection with any work-out or restructuring of the transactions contemplated
hereby and by the Notes. The Company will pay, and will save you and each other
holder of a Note harmless from, all claims in respect of any fees, costs or
expenses if any, of brokers and finders (other than those retained by you).
Section15.2. Survival. The obligations of the Company under this Section15 will
survive the payment or transfer of any Note, the enforcement, amendment or
waiver of any provision of this Agreement or the Notes, and the termination of
this Agreement.
SECTION16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All
representations and warranties contained herein shall survive the execution and
delivery of this Agreement and the Notes, the purchase or transfer by you of any
Note or portion thereof or interest therein and the payment of any Note, and may
be relied upon by any subsequent holder of a Note, regardless of any
investigation made at any time by or on behalf of you or any other holder of a
Note. All statements contained in any certificate or other instrument delivered
by or on behalf of the Company pursuant to this Agreement shall be deemed
representations and warranties of the Company under this Agreement. Subject to
the preceding sentence, this Agreement and the Notes embody the entire agreement
and understanding between you and the Company and supersede all prior agreements
and understandings relating to the subject matter hereof.
SECTION17. AMENDMENT AND WAIVER. Section17.1. Requirements. This Agreement and
the Notes may be amended, and the observance of any term hereof or of the Notes
may be waived (either retroactively or prospectively), with (and only with) the
written consent of the Company and the Required Holders, except that (a)no
amendment or waiver of the notice periods in Section8 hereof, any of the
provisions of Section1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it
is used therein), will be effective as to you unless consented to by you in
writing, and (b)no such amendment or waiver may, without the written consent of
the holder of each Note at the time outstanding affected thereby, (i)subject to
the provisions of Section12 relating to acceleration or rescission, change the
amount or time of any prepayment or payment of principal of, or reduce the rate
or change the time of payment or method of computation of interest or of the
Make-Whole Amount on, the Notes, (ii)change the percentage of the principal
amount of the Notes the holders of which are required to consent to any such
amendment or waiver, or (iii)amend any of Sections 8 (other than the notice
periods therein), 11(a), 11(b), 12, 17 or 20. Section17.2. Solicitation of
Holders of Notes. (a) Solicitation. The Company will provide each holder of the
Notes (irrespective of the amount of Notes then owned by it) with sufficient
information, sufficiently far in advance of the date a decision is required, to
enable such holder to make an informed and considered decision with respect to
any proposed amendment, waiver or consent in respect of any of the provisions
hereof or of the Notes. The Company will deliver executed or true and correct
copies of each amendment, waiver or consent effected pursuant to the provisions
of this Section17 to each holder of outstanding Notes promptly following the
date on which it is executed and delivered by, or receives the consent or
approval of, the requisite holders of Notes. (b) Payment. The Company will not
directly or indirectly pay or cause to be paid any remuneration, whether by way
of supplemental or additional interest, fee or otherwise, or grant any security,
to any holder of Notes as consideration for or as an inducement to the entering
into by any holder of Notes or any waiver or amendment of any of the terms and
provisions hereof or of the Notes unless such remuneration is concurrently paid,
or security is concurrently granted, on the same terms, ratably to each holder
of Notes then outstanding whether or not such holder consented to such waiver or
amendment. Section17.3. Binding Effect, etc. Any amendment or waiver consented
to as provided in this Section17 applies equally to all holders of Notes and is
binding upon them and upon each future holder of any Note and upon the Company
without regard to whether such Note has been marked to indicate such amendment
or waiver. No such amendment or waiver will extend to or affect any obligation,
covenant, agreement, Default or Event of Default not expressly amended or waived
or impair any right consequent thereon. No course of dealing between the Company
and the holder of any Note nor any delay in exercising any rights hereunder or
under any Note shall operate as a waiver of any rights of any holder of such
Note. As used herein, the term this Agreement and references thereto shall mean
this Agreement as it may from time to time be amended or supplemented.
Section17.4. Notes Held by Company, etc. Solely for the purpose of determining
whether the holders of the requisite percentage of the aggregate principal
amount of Notes then outstanding approved or consented to any amendment, waiver
or consent to be given under this Agreement or the Notes, or have directed the
taking of any action provided herein or in the Notes to be taken upon the
direction of the holders of a specified percentage of the aggregate principal
amount of Notes then outstanding, Notes directly or indirectly owned by the
Company or any of its Affiliates shall be deemed not to be outstanding.
SECTION18. NOTICES. All notices and communications provided for hereunder shall
be in writing and sent (a)by telefacsimile if the sender on the same day sends a
confirming copy of such notice by a recognized overnight delivery service
(charges prepaid), or (b)by registered or certified mail with return receipt
requested (postage prepaid), or (c)by a recognized overnight delivery service
(with charges prepaid). Any such notice must be sent: (i) if to you or your
nominee, to you or it at the address specified for such communications in
Schedule A, or at such other address as you or it shall have specified to the
Company in writing, (ii) if to any other holder of any Note, to such holder at
such address as such other holder shall have specified to the Company in
writing, or (iii) if to the Company, to the Company at its address set forth at
the beginning hereof to the attention of the Treasurer, or at such other address
as the Company shall have specified to the holder of each Note in writing.
Notices under this Section18 will be deemed given only when actually received.
SECTION19. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating
thereto, including, without limitation, (a)consents, waivers and modifications
that may hereafter be executed, (b)documents received by you at the Closing
(except the Notes themselves), and (c)financial statements, certificates and
other information previously or hereafter furnished to you, may be reproduced by
you by any photographic, photostatic, microfilm, microcard, miniature
photographic or other similar process and you may destroy any original document
so reproduced. The Company agrees and stipulates that, to the extent permitted
by applicable law, any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the
original is in existence and whether or not such reproduction was made by you in
the regular course of business) and any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence. This
Section19 shall not prohibit the Company or any other holder of Notes from
contesting any such reproduction to the same extent that it could contest the
original, or from introducing evidence to demonstrate the inaccuracy of any such
reproduction.
SECTION20. CONFIDENTIAL INFORMATION. For the purposes of this Section20,
Confidential Information means information delivered to you by or on behalf of
the Company or any Subsidiary in connection with the transactions contemplated
by or otherwise pursuant to this Agreement that is proprietary in nature and
that was clearly marked or labeled or otherwise adequately identified when
received by you as being confidential information of the Company or such
Subsidiary, provided that such term does not include information that (a)was
publicly known or otherwise known to you prior to the time of such disclosure,
(b)subsequently becomes publicly known through no act or omission by you or any
person acting on your behalf, (c)otherwise becomes known to you other than
through disclosure by the Company or any Subsidiary or (d)constitutes financial
statements delivered to you under Section7.1 that are otherwise publicly
available. You will maintain the confidentiality of such Confidential
Information in accordance with procedures adopted by you in good faith to
protect confidential information of third parties delivered to you, provided
that you may deliver or disclose Confidential Information to (i)your directors,
officers, employees, agents, attorneys and affiliates (to the extent such
disclosure reasonably relates to the administration of the investment
represented by your Notes), (ii)your financial advisors and other professional
advisors who agree to hold confidential the Confidential Information
substantially in accordance with the terms of this Section20, (iii)any other
holder of any Note, (iv)any Institutional Investor to which you sell or offer to
sell such Note or any part thereof or any participation therein (if such Person
has agreed in writing prior to its receipt of such Confidential Information to
be bound by the provisions of this Section20), (v)any federal or state
regulatory authority having jurisdiction over you, (vi)the National Association
of Insurance Commissioners or any similar organization, or any nationally
recognized rating agency that requires access to information about your
investment portfolio, or (vii)any other Person to which such delivery or
disclosure may be necessary or appropriate (w)to effect compliance with any law,
rule, regulation or order applicable to you, (x)in response to any subpoena or
other legal process, (y)in connection with any litigation involving or related
to the Company, this Agreement or the Notes to which you are a party or (z)if an
Event of Default has occurred and is continuing, to the extent you may
reasonably determine such delivery and disclosure to be necessary or appropriate
in the enforcement or for the protection of the rights and remedies under your
Notes and this Agreement. Each holder of a Note, by its acceptance of a Note,
will be deemed to have agreed to be bound by and to be entitled to the benefits
of this Section20 as though it were a party to this Agreement. On reasonable
request by the Company in connection with the delivery to any holder of a Note
of information required to be delivered to such holder under this Agreement or
requested by such holder (other than a holder that is a party to this Agreement
or its nominee or any other holder that shall have previously delivered such a
confirmation), such holder will confirm in writing that it is bound by the
provisions of this Section20.
SECTION21. SUBSTITUTION OF PURCHASER. You shall have the right to substitute any
one of your Affiliates as the purchaser of the Notes that you have agreed to
purchase hereunder, by written notice to the Company, which notice shall be
signed by both you and such Affiliate, shall contain such Affiliates agreement
to be bound by this Agreement and shall contain a confirmation by such Affiliate
of the accuracy with respect to it of the representations set forth in Section6.
Upon receipt of such notice, wherever the word you is used in this Agreement
(other than in this Section21), such word shall be deemed to refer to such
Affiliate in lieu of you. In the event that such Affiliate is so substituted as
a purchaser hereunder and such Affiliate thereafter transfers to you all of the
Notes then held by such Affiliate, upon receipt by the Company of notice of such
transfer, wherever the word you is used in this Agreement (other than in this
Section21), such word shall no longer be deemed to refer to such Affiliate, but
shall refer to you, and you shall have all the rights of an original holder of
the Notes under this Agreement.
SECTION22. MISCELLANEOUS. Section22.1. Successors and Assigns. All covenants and
other agreements contained in this Agreement by or on behalf of any of the
parties hereto bind and inure to the benefit of their respective successors and
assigns (including, without limitation, any subsequent holder of a Note) whether
so expressed or not. Section22.2. Payments Due on Non-Business Days. Anything in
this Agreement or the Notes to the contrary notwithstanding, any payment of
principal of or Make-whole Amount or interest on any Note that is due on a date
other than a Business Day shall be made on the next succeeding Business Day
without including the additional days elapsed in the computation of the interest
payable on such next succeeding Business Day. Section22.3. Severability. Any
provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall (to the full extent permitted by law) not invalidate or
render unenforceable such provision in any other jurisdiction. Section22.4.
Construction. Each covenant contained herein shall be construed (absent express
provision to the contrary) as being independent of each other covenant contained
herein, so that compliance with any one covenant shall not (absent such an
express contrary provision) be deemed to excuse compliance with any other
covenant. Where any provision herein refers to action to be taken by any Person,
or which such Person is prohibited from taking, such provision shall be
applicable whether such action is taken directly or indirectly by such Person.
Section22.5. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one instrument. Each counterpart may consist of a number of copies
hereof, each signed by less than all, but together signed by all, of the parties
hereto. Section22.6. Governing Law. This Agreement shall be construed and
enforced in accordance with, and the rights of the parties shall be governed by,
the law of the State of New York excluding choice-of-law principles of the law
of such State that would require the application of the laws of a jurisdiction
other than such State. * * * * * If you are in agreement with the foregoing,
please sign the form of agreement on the accompanying counterpart of this
Agreement and return it to the Company, whereupon the foregoing shall become a
binding agreement between you and the Company. Signatures Very truly yours,
ETOWN CORPORATION
By
[Title]
The foregoing is hereby
agreed to as of the
date thereof.
AMERICAN GENERAL LIFE INSURANCE COMPANY
By
Its
INFORMATION RELATING TO PURCHASERS
NAME AND ADDRESS OF PURCHASER
PRINCIPAL AMOUNT OF NOTES TO BE
PURCHASED
AMERICAN GENERAL LIFE INSURANCE COMPANY
c/o American General Corporation
Attention: Investment Research Department, A37-01
P. O. Box 3247
Houston, Texas 77253-3247
December22, 1997 Closing: $4,000,000
January8, 1998 Closing: $6,000,000
May15, 1998 Closing: $2,000,000
Overnight Mailing Address:
2929 Allen Parkway
Houston, Texas 77019-2155
Facsimile No. (713) 831-1366
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as Etown
Corporation, 6.79% Senior Notes due 2007, PPN269242 B@1, principal or interest)
to:
ABA #011000028
State Street Bank and Trust Company
Boston, Massachusetts 02101
Re: American General Life Insurance Company
AC-0125-880-5
OBI=PPN # and description of payment
Fund Number PA 40
Notices
All notices of payment on or in respect of the Notes and written
confirmation of each such payment to:
American General Life Insurance Company and PA 40
c/o State Street Bank and Trust Company
Insurance Services Custody (AH2)
1776 Heritage Drive
North Quincy, Massachusetts 02171
Attention: Susan Collins, Manager Insurance Services
Facsimile Number: (617) 985-4923
Duplicate payment notices and all other correspondences to be addressed as
first provided above. Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 25-0598210
DEFINED TERMS GENERAL PROVISIONS Where the character or amount of any asset
or liability or item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be made for the
purposes of this Agreement, the same shall be done in accordance with GAAP, to
the extent applicable, except where such principles are inconsistent with the
express requirements of this Agreement.
DEFINITIONS As used herein, the
following terms have the respective meanings set forth below or set forth in the
Sectionhereof following such term: Affiliate means, at any time, and with
respect to any Person, any other Person that at such time directly or indirectly
through one or more intermediaries Controls, or is Controlled by, or is under
common Control with, such first Person. As used in this definition, Control
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise. Unless the context
otherwise clearly requires, any reference to an Affiliate is a reference to an
Affiliate of the Company. Asset Disposition means any Transfer except: (a) any
(i) Transfer from a Subsidiary of Elizabethtown Water Company to Elizabethtown
Water Company or a Wholly-Owned Subsidiary of Elizabethtown Water Company; (ii)
Transfer from Elizabethtown Water Company to a Wholly-Owned Subsidiary of
Elizabethtown Water Company; and (iii) Transfer from Elizabethtown Water Company
to a Subsidiary of Elizabethtown Water Company (other than a Wholly-Owned
Subsidiary of Elizabethtown Water Company) or from a Subsidiary of Elizabethtown
Water Company to another Subsidiary of Elizabethtown Water Company (other than a
Wholly-Owned Subsidiary of Elizabethtown Water Company), which in either case is
for Fair Market Value, so long as immediately before and immediately after the
consummation of any such Transfer and after giving effect thereto, no Default or
Event of Default exists; and (b) any Transfer made in the ordinary course of
business and involving only property that is either (i) inventory held for sale
or (ii) pipes and other utility plant assets, equipment, vehicles, fixtures,
supplies or materials no longer required in the operation of the business of
Elizabethtown Water Company or any Subsidiary of Elizabethtown Water Company or
that is worn out, permanently unserviceable or obsolete. Business Day means
(a)for the purposes of Section8.6 only, any day other than a Saturday, a Sunday
or a day on which commercial banks in New York City are required or authorized
to be closed, and (b)for the purposes of any other provision of this Agreement,
any day other than a Saturday, a Sunday or a day on which commercial banks in
Newark, New Jersey or New York, New York are required or authorized to be
closed. Capital Lease means, at any time, a lease with respect to which the
lessee is required concurrently to recognize the acquisition of an asset and the
incurrence of a liability in accordance with GAAP. Capital Lease Obligation
means, with respect to any Person and a Capital Lease, the amount of the
obligation of such Person as the lessee under such Capital Lease which would, in
accordance with GAAP, appear as a liability on a balance sheet of such Person.
Closing is defined in Section3. Code means the Internal Revenue Code of 1986, as
amended from time to time, and the rules and regulations promulgated thereunder
from time to time. Company means Etown Corporation, a New Jersey corporation.
Confidential Information is defined in Section20. Consensual Lien means any Lien
that is voluntarily agreed to or consented to by the Company or that has been
granted or created by the Company for the benefit of any other Person.
Consolidated Assets means, at any time, the total assets of the Company and its
Subsidiaries which would be shown as assets on a consolidated balance sheet of
the Company and its Subsidiaries as of such time prepared in accordance with
GAAP, after eliminating all amounts properly attributable to minority interests,
if any, in the stock and surplus of Subsidiaries. Consolidated Common
Shareholders Equity means, at any time, (a) the sum of (i) the par value (or
value stated on the books of the corporation) of the common stock of the Company
and its Subsidiaries plus (ii) the amount of the paid-in capital and retained
earnings of the Company and its Subsidiaries, in each case as such amounts would
be shown on a consolidated balance sheet of the Company and its Subsidiaries as
of such time prepared in accordance with GAAP, provided that there shall be
excluded from this clause(a) treasury stock and common stock subscribed and
unissued, minus (b) to the extent included in clause (a), all amounts properly
attributable to minority interests, if any, in the stock and surplus of
Subsidiaries. Consolidated Debt means, as of any date of determination, the
total of all Debt of the Company and its Subsidiaries outstanding on such date,
after eliminating all offsetting debits and credits between the Company and its
Subsidiaries and all other items required to be eliminated in the course of the
preparation of consolidated financial statements of the Company and its
Subsidiaries in accordance with GAAP. Consolidated Income Available for Fixed
Charges means, with respect to any period, Consolidated Net Income for such
period plus all amounts deducted in the computation thereof on account of
(a)Fixed Charges and (b)taxes imposed on or measured by income or excess
profits. Consolidated Net Income means, with reference to any period, the income
(or loss) of the Company and its Subsidiaries for such period, before
Distributions paid during such period by the Company and its Subsidiaries (taken
as a cumulative whole excluding Extraordinary Items), as determined in
accordance with GAAP, after eliminating all offsetting debits and credits
between the Company and its Subsidiaries and all other items required to be
eliminated in the course of the preparation of consolidated financial statements
of the Company and its Subsidiaries in accordance with GAAP. Consolidated
Operating Revenues means, for any period, the operating revenues of the Company
and its Subsidiaries which would be shown as operating revenues on a
consolidated statement of income of the Company and its Subsidiaries for such
period prepared in accordance with GAAP. Debenture Indenture Application means,
with respect to any Transfer of property, the application by Elizabethtown Water
Company within 365 days of such Transfer of the Net Proceeds Amount with respect
to such Transfer in accordance with Section 5.08 (and the related definitions)
of the Indenture dated as of October15, 1988 between Elizabethtown Water Company
and Citibank, N.A., as trustee, as amended through the date of the first Closing
(or any provision of any other Debenture Indenture which is substantially the
same as such Section 5.08 (and the related definitions)). Debenture Indentures
means (i)the Indentures pursuant to which the Debentures of Elizabethtown Water
Company listed on Schedule 5.15 were issued and are outstanding, and
(ii)substantially similar Indentures pursuant to which future series of the
Debentures of Elizabethtown Water Company may be issued. Debt means, with
respect to any Person, without duplication, (a) its liabilities for borrowed
money; (b) its liabilities for the deferred purchase price of property acquired
by such Person (excluding accounts payable arising in the ordinary course of
business but including, without limitation, all liabilities created or arising
under any conditional sale or other title retention agreement with respect to
any such property); (c) its Capital Lease Obligations; (d) all liabilities for
borrowed money secured by any Lien with respect to any property owned by such
Person (whether or not it has assumed or otherwise become liable for such
liabilities); and (e) any Guaranty of such Person with respect to liabilities of
a type described in any of clauses (a) through (d) hereof. Debt of any Person
shall include all obligations of such Person of the character described in
clauses (a) through (e) to the extent such Person remains legally liable in
respect thereof notwithstanding that any such obligation is deemed to be
extinguished under GAAP. Debt Prepayment Application means, with respect to any
Transfer of property, the application within 180days of such Transfer (other
than in a Debenture Indenture Application) of cash in an amount equal to the Net
Proceeds Amount with respect to such Transfer to pay Debt of the Subsidiary of
the Company making such Transfer, Elizabethtown Water Company or any
Wholly-Owned Subsidiary (other than Debt owing to the Company, any of its
Subsidiaries or any Affiliate and Debt in respect of any revolving credit or
similar credit facility providing the Company or any of its Subsidiaries with
the right to obtain loans or other extensions of credit from time to time,
except to the extent that in connection with such payment of Debt the
availability of credit under such credit facility is permanently reduced by an
amount not less than the amount of such proceeds applied to the payment of such
Debt). Default means an event or condition the occurrence or existence of which
would, with the lapse of time or the giving of notice or both, become an Event
of Default. Default Rate means that rate of interest that is the greater of
(i)2% per annum above the rate of interest stated in clause (a) of the first
paragraph of the Notes or (ii)2% over the rate of interest publicly announced by
The Bank of New York in New York, New York as its base or prime rate.
Disposition Value means, at any time, with respect to any property (a) in the
case of property that does not constitute Subsidiary Stock, the book value
thereof, valued at the time of such disposition in good faith by the Company,
and (b) in the case of property that constitutes Subsidiary Stock, an amount
equal to that percentage of book value of the assets of the Subsidiary that
issued such stock as is equal to the percentage that the book value of such
Subsidiary Stock represents of the book value of all of the outstanding capital
stock of such Subsidiary (assuming, in making such calculations, that all
Securities convertible into such capital stock are so converted and giving full
effect to all transactions that would occur or be required in connection with
such conversion) determined at the time of the disposition thereof, in good
faith by the Company. Distribution means, in respect of any corporation,
association or other business entity dividends paid on Preferred Stock of such
corporation, association or other business entity (except distributions in such
stock or other equity interest). Environmental Laws means any and all Federal,
state, local, and foreign statutes, laws, regulations, ordinances, rules,
judgments, orders, decrees, permits, concessions, grants, franchises, licenses,
agreements or governmental restrictions relating to pollution and the protection
of the environment or the release of any materials into the environment,
including but not limited to those related to hazardous substances or wastes,
air emissions and discharges to waste or public systems. ERISA means the
Employee Retirement Income Security Act of 1974, as amended from time to time,
and the rules and regulations promulgated thereunder from time to time in
effect. ERISA Affiliate means any trade or business (whether or not
incorporated) that is treated as a single employer together with the Company
under section414 of the Code. Event of Default is defined in Section11. Exchange
Act means the Securities Exchange Act of 1934, as amended. Extraordinary Items
shall mean extraordinary items as defined and determined in accordance with
GAAP. Fair Market Value means, at any time and with respect to any property, the
sale value of such property that would be realized in an arms-length sale at
such time between an informed and willing buyer and an informed and willing
seller (neither being under a compulsion to buy or sell). Fixed Charges means,
with respect to any period, the sum of (a)Interest Charges for such period plus
(b)Lease Rentals for such period. Fixed Charges Coverage Ratio means, at the end
of any fiscal quarter of the Company, the ratio of (a) Consolidated Income
Available for Fixed Charges for the period of four consecutive fiscal quarters
ending at the end of such fiscal quarter, to (b)the sum of (i)Fixed Charges for
such period plus (ii)Distributions paid during such period by the Company and
its Subsidiaries. GAAP means generally accepted accounting principles as in
effect from time to time in the United States of America. Governmental Authority
means (a) the government of (i) the United States of America or any State or
other political subdivision thereof, or (ii) any jurisdiction in which the
Company or any Subsidiary conducts all or any part of its business, or which
asserts jurisdiction over any properties of the Company or any Subsidiary, or
(b) any entity exercising executive, legislative, judicial, regulatory or
administrative functions of, or pertaining to, any such government. Guaranty
means, with respect to any Person, any obligation (except the endorsement in the
ordinary course of business of negotiable instruments for deposit or collection)
of such Person guaranteeing or in effect guaranteeing (whether by reason of
being a general partner of a partnership or otherwise) any Indebtedness,
dividend or other obligation of any other Person in any manner, whether directly
or indirectly, including (without limitation) obligations incurred through an
agreement, contingent or otherwise, by such Person: (a) to purchase such
Indebtedness or obligation or any property constituting security therefor; (b)
to advance or supply funds (i) for the purchase or payment of such indebtedness
or obligation, or (ii) to maintain any working capital or other balance sheet
condition or any income statement condition of any other Person or otherwise to
advance or make available funds for the purchase or payment of such Indebtedness
or obligation; (c) to lease properties or to purchase properties or services
primarily for the purpose of assuring the owner of such Indebtedness or
obligation of the ability of any other Person to make payment of the
Indebtedness or obligation; or (d) otherwise to assure the owner of such
Indebtedness or obligation against loss in respect thereof. In any computation
of the Indebtedness or other liabilities of the obligor under any Guaranty, the
Indebtedness or other obligations that are the subject of such Guaranty shall be
assumed to be direct obligations of such obligor. holder means, with respect to
any Note, the Person in whose name such Note is registered in the register
maintained by the Company pursuant to Section13.1. Indebtedness with respect to
any Person means, at any time, without duplication, (a) its liabilities for
borrowed money and its redemption obligations in respect of mandatorily
Redeemable Preferred Stock; (b) its liabilities for the deferred purchase price
of property acquired by such Person (excluding accounts payable arising in the
ordinary course of business but including all liabilities created or arising
under any conditional sale or other title retention agreement with respect to
any such property); (c) all liabilities appearing on its balance sheet in
accordance with GAAP in respect of Capital Leases; (d) all liabilities for
borrowed money secured by any Lien with respect to any property owned by such
Person (whether or not it has assumed or otherwise become liable for such
liabilities); (e) all its liabilities in respect of letters of credit or
instruments serving a similar function issued or accepted for its account by
banks and other financial institutions (whether or not representing obligations
for borrowed money); (f) Swaps of such Person; and (g) any Guaranty of such
Person with respect to liabilities of a type described in any of clauses (a)
through (f) hereof. Institutional Investor means (a)any original purchaser of a
Note, (b)any holder of a Note holding more than 10% of the aggregate principal
amount of the Notes then outstanding, and (c)any bank, trust company, savings
and loan association or other financial institution, any pension plan, any
investment company, any insurance company, any broker or dealer holding Notes
other than in trading accounts, or any other similar financial institution or
entity, regardless of legal form. Interest Charges means, with respect to any
period, the sum (without duplication) of the following (in each case,
eliminating all offsetting debits and credits between the Company and its
Subsidiaries and all other items required to be eliminated in the course of the
preparation of consolidated financial statements of the Company and its
Subsidiaries in accordance with GAAP): (a)all interest in respect of Debt of the
Company and its Subsidiaries (including imputed interest on Capital Lease
Obligations) to the extent deducted in determining Consolidated Net Income for
such period, together with all interest capitalized or deferred during such
period and not deducted in determining Consolidated Net Income for such period,
and (b)all debt discount and expense amortized or required to be amortized in
the determination of Consolidated Net Income for such period. Lease Rentals
means, with respect to any period, the sum of the minimum amount of rental and
other obligations required to be paid during such period by the Company or any
Subsidiary as lessee under all leases of real or personal property (other than
(i)any leases with annual rentals that do not exceed $10,000 in the case of any
single lease and $100,000 in the aggregate for all such leases excluded pursuant
to this clause (i), and (ii) Capital Leases), excluding any amounts required to
be paid by the lessee (whether or not therein designated as rental or additional
rental) (a)which are on account of maintenance and repairs, insurance, taxes,
assessments, water rates and similar charges, or (b)which are based on profits,
revenues or sales realized by the lessee from the leased property or otherwise
based on the performance of the lessee. Lien means, with respect to any Person,
any mortgage, lien, pledge, charge, security interest or other encumbrance, or
any interest or title of any vendor, lessor, lender or other secured party to or
of such Person under any conditional sale or other title retention agreement or
Capital Lease, upon or with respect to any property or asset of such Person
(including in the case of stock, stockholder agreements, voting trust agreements
and all similar arrangements). Make-Whole Amount is defined in Section8.6.
Material means material in relation to the business, operations, affairs,
financial condition, assets, or properties of the Company and its Subsidiaries
taken as a whole. Material Adverse Effect means a material adverse effect on
(a)the business, operations, affairs, financial condition, assets or properties
of the Company and its Subsidiaries taken as a whole, or (b)the ability of the
Company to perform its obligations under this Agreement and the Notes, or (c)the
validity or enforceability of this Agreement or the Notes. Memorandum is defined
in Section5.3. Multiemployer Plan means any Plan that is a multiemployer plan
(as such term is defined in section4001(a)(3) of ERISA). Net Proceeds Amount
means, with respect to any Transfer of any Property by any Person, an amount
equal to the difference of (a) the aggregate amount of the consideration (valued
at the Fair Market Value of such consideration at the time of the consummation
of such Transfer) received by such Person in respect of such Transfer, minus (b)
all ordinary and reasonable out-of-pocket costs and expenses actually incurred
by such Person in connection with such Transfer. Notes is defined in Section1.
Officers Certificate means a certificate of a Senior Financial Officer or of any
other officer of the Company whose responsibilities extend to the subject matter
of such certificate. PBGC means the Pension Benefit Guaranty Corporation
referred to and defined in ERISA or any successor thereto. Person means an
individual, partnership, corporation, limited liability company, association,
trust, unincorporated organization, or a government or agency or political
subdivision thereof. Plan means an employee benefit plan (as defined in
section3(3) of ERISA) that is or, within the preceding five years, has been
established or maintained, or to which contributions are or, within the
preceding five years, have been made or required to be made, by the Company or
any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate
may have any liability. Preferred Stock means, in respect of any corporation,
shares of the capital stock of such corporation that are entitled to preference
or priority over any other shares of the capital stock of such corporation in
respect of payment of dividends or distribution of assets upon liquidation.
Principal Subsidiary means any Subsidiary for which either (i)total assets equal
or exceed 30% of Consolidated Assets or (ii)operating revenues for the
immediately preceding four fiscal quarters equal or exceed 30% of Consolidated
Operating Revenues for such period. property or properties means, unless
otherwise specifically limited, real or personal property of any kind, tangible
or intangible, choate or inchoate. Property Reinvestment Application means, with
respect to any Transfer of property, the satisfaction of each of the following
conditions: (a) the application within 180days of such Transfer (other than in a
Debenture Indenture Application) of an amount equal to the Net Proceeds Amount
with respect to such Transfer to the acquisition by the Subsidiary of the
Company making such Transfer, Elizabethtown Water Company or a Wholly-Owned
Subsidiary of utility property of such Subsidiary to be used in the ordinary
course of business of such Subsidiary and which has a Fair Market Value (after
deduction for any Liens attributable thereto) at least equal to the Disposition
Value of the property sold; and (b) the Company shall have delivered a
certificate of a Responsible Officer of the Company to each holder of a Note
referring to Section10.7 and identifying the property that was the subject of
such Transfer if such Transfer shall have resulted in a Net Proceeds Amount
greater than $500,000, the Disposition Value of such property, and the nature,
terms, amount and application of the proceeds from the Transfer. QPAM Exemption
means Prohibited Transaction Class Exemption 84-14 issued by the United States
Department of Labor. Redeemable means, with respect to the capital stock of any
Person, each share of such Persons capital stock that is: (a) redeemable,
payable or required to be purchased or otherwise retired or extinguished, or
convertible into Debt of such Person (i)at a fixed or determinable date, whether
by operation of sinking fund or otherwise, (ii)at the option of any Person other
than such Person, or (iii)upon the occurrence of a condition not solely within
the control of such Person; or (b) convertible into other Redeemable capital
stock. Required Holders means, at any time, the holders of at least 51% in
principal amount of the Notes at the time outstanding (exclusive of Notes then
owned by the Company or any of its Affiliates). Responsible Officer means any
Senior Financial Officer and any other officer of the Company with
responsibility for the administration of the relevant portion of this agreement.
Restricted Investments means all investments in cash in the common equity
interests of Persons which are not primarily engaged in the generation,
distribution or sale of electric energy or natural gas or the distribution or
sale of water, or the furnishing of communications services, or water treatment
and analysis services, or in the treatment of wastewater. Security shall have
the same meaning as in Section 2(a)(1) of the Securities Act. Securities Act
means the Securities Act of 1933, as amended from time to time. Senior Financial
Officer means the chief financial officer, principal accounting officer,
treasurer or controller of the Company. Subsidiary means, as to any Person, any
corporation, association, limited liability company, or other business entity (a
Business Entity) in which such Person and/or one or more of its Subsidiaries own
directly or indirectly a majority of (a)the combined voting power of all classes
of voting stock having general voting power under ordinary circumstances to
elect a majority of the directors of such Business Entity, if it is a
corporation, (b)the capital interest or profits interest of such Business
Entity, if it is a partnership, joint venture or similar entity or (c)the
beneficial interest of such Business Entity, if it is a trust, association or
other unincorporated organization. Unless the context otherwise clearly
requires, any reference to a Subsidiary is a reference to a Subsidiary of the
Company. Subsidiary Stock means, with respect to any Person, the stock (or any
options or warrants to purchase stock or other Securities exchangeable for or
convertible into stock) of any Subsidiary of such Person. Swaps means, with
respect to any Person, payment obligations with respect to interest rate swaps,
currency swaps and similar obligations obligating such Person to make payments,
whether periodically or upon the happening of a contingency. For the purposes of
this Agreement, the amount of the obligation under any Swap shall be the amount
determined in respect thereof as of the end of the then most recently ended
fiscal quarter of such Person, based on the assumption that such Swap had
terminated at the end of such fiscal quarter, and in making such determination,
if any agreement relating to such Swap provides for the netting of amounts
payable by and to such Person thereunder or if any such agreement provides for
the simultaneous payment of amounts by and to such Person, then in each such
case, the amount of such obligation shall be the net amount so determined.
Transfer means, with respect to any Person, any transaction in which such Person
sells, conveys, transfers or leases (as lessor) any of its property, including,
without limitation, Subsidiary Stock. For purposes of determining the
application of the Net Proceeds Amount in respect of any Transfer, the Company
may designate any Transfer as one or more separate Transfers each yielding a
separate Net Proceeds Amount. In any such case, the Disposition Value of any
property subject to each such separate Transfer shall be determined by ratably
allocating the aggregate Disposition Value of all property subject to all such
separate Transfers to each such separate Transfer on a proportionate basis.
Utility Subsidiary means any Subsidiary of the Company that is generally subject
to regulation by the New Jersey Board of Public Utilities or any other public
service commission, public utility commission or similar regulatory authority in
the United States of America or any State or other political subdivision
thereof. Wholly-Owned Subsidiary means any Subsidiary of Elizabethtown Water
Company all of the equity interests (except directors qualifying shares) and
voting interests are owned by any one or more of Elizabethtown Water Company and
Elizabethtown Water Companys other Wholly-Owned Subsidiaries.
[FORM OF NOTE]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY STATE SECURITIES LAW, AND MAY NOT BE
TRANSFERRED IN VIOLATION THEREOF.
ETOWN CORPORATION
6.79% SENIOR NOTE DUE DECEMBER15, 2007
No. R-[_______] [Date] $[__________] PPN 269242 B@1 FOR VALUE RECEIVED, the
undersigned, ETOWN CORPORATION (herein called the Company), a corporation
organized and existing under the laws of the State of New Jersey, hereby
promises to pay to [_____________________] or registered assigns, the principal
sum of [______________] DOLLARS on December15, 2007 with interest (computed on
the basis of a 360-day year of twelve 30-day months) (a)on the unpaid balance
thereof at the rate of 6.79% per annum from the date hereof, payable
semiannually, on the fifteenth day of June and December in each year, commencing
with the June15 or December15 next succeeding the date hereof, until the
principal hereof shall have become due and payable, and (b)to the extent
permitted by law on any overdue payment (including any overdue prepayment) of
principal, any overdue payment of interest and any overdue payment of any
Make-Whole Amount (as defined in the Note Purchase Agreement referred to below),
payable semiannually as aforesaid (or, at the option of the registered holder
hereof, on demand), at a rate per annum from time to time equal to the greater
of (i)8.79% or (ii)2% over the rate of interest publicly announced by The Bank
of New York from time to time in New York, New York as its base or prime rate.
Payments of principal of, interest on and any Make-Whole Amount with respect to
this Note are to be made in lawful money of the United States of America in
Westfield, New Jersey at the principal office of the Company in such
jurisdiction or at such other place as the Company shall have designated by
written notice to the holder of this Note as provided in the Note Purchase
Agreement referred to below. This Note is one of a series of Senior Notes
(herein called the Notes) issued pursuant to the Note Purchase Agreement, dated
as of December15, 1997 (as from time to time amended, the Note Purchase
Agreement), between the Company and American General Life Insurance Company and
is entitled to the benefits thereof. Each holder of this Note will be deemed, by
its acceptance hereof, (i)to have agreed to the confidentiality provisions set
forth in Section20 of the Note Purchase Agreement and (ii)to have made the
representation set forth in Section6.2 of the Note Purchase Agreement, provided
that such holder may (in reliance upon information provided by the Company,
which shall not be unreasonably withheld) make a representation to the effect
that the purchase by such holder of any Note will not constitute a non-exempt
prohibited transaction under Section406(a) of ERISA. This Note is a registered
Note and, as provided in the Note Purchase Agreement, upon surrender of this
Note for registration of transfer, duly endorsed, or accompanied by a written
instrument of transfer duly executed, by the registered holder hereof or such
holders attorney duly authorized in writing, a new Note for a like principal
amount will be issued to, and registered in the name of, the transferee. Prior
to due presentment for registration of transfer, the Company may treat the
person in whose name this Note is registered as the owner hereof for the purpose
of receiving payment and for all other purposes, and the Company will not be
affected by any notice to the contrary. This Note is subject to optional
prepayment, in whole or from time to time in part, at the times and on the terms
specified in the Note Purchase Agreement, but not otherwise. If an Event of
Default, as defined in the Note Purchase Agreement, occurs and is continuing,
the principal of this Note may be declared or otherwise become due and payable
in the manner, at the price (including any applicable Make-Whole Amount) and
with the effect provided in the Note Purchase Agreement. This Note shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the law of the State of New York excluding choice-of-law
principles of the law of such State that would require the application of the
laws of a jurisdiction other than such State.
ETOWN CORPORATION
By
[Title:]
FORM OF OPINION OF COUNSEL
TO THE COMPANY
Each closing opinion of Walter M. Braswell, Esq., counsel for the Company, which
is called for by Section4.4 of the Note Purchase Agreement, shall be dated the
date of the respective Closing and addressed to you, shall be satisfactory in
scope and form to you and shall be to the effect that:
1. The Company is a corporation, duly incorporated, validly existing and
in good standing under the laws of the State of New Jersey, has the corporate
power and the corporate authority to execute and perform the Note Purchase
Agreement and to issue the Notes and has the full corporate power and the
corporate authority to conduct the activities in which it is now engaged and is
duly licensed or qualified and is in good standing as a foreign corporation in
each jurisdiction in which the character of the properties owned or leased by it
or the nature of the business transacted by it makes such licensing or
qualification necessary.
2. Each Subsidiary of the Company is a corporation or other legal entity
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is duly licensed or qualified as a foreign
corporation or other legal entity and is in good standing in each jurisdiction
in which the character of the properties owned or leased by it or the nature of
the business transacted by it makes such licensing or qualification necessary
and all of the issued and outstanding shares of capital stock of each such
Subsidiary have been duly issued, are fully paid and nonassessable and are owned
by the Company, by one or more Subsidiaries, or by the Company and one or more
Subsidiaries.
3. The Note Purchase Agreement has been duly authorized by all necessary
corporate action on the part of the Company, has been duly executed and
delivered by the Company and constitutes valid contract of the Company.
4. The Notes have been duly authorized by all necessary corporate action
on the part of the Company, have been duly executed and delivered by the Company
and constitute valid obligations of the Company.
5. No approval, consent or withholding of objection on the part of, or
filing, registration or qualification with, any New Jersey governmental body
(including, without limitation, the New Jersey Board of Public Utilities), is
necessary in connection with the execution, delivery and performance of the Note
Purchase Agreement or the Notes.
6. The issuance and sale of the Notes and the execution, delivery and
performance by the Company of the Note Purchase Agreement do not conflict with
any New Jersey law or any order of any New Jersey court or governmental
authority or agency applicable to or binding on the Company, or conflict with or
result in any breach of any of the provisions of or constitute a default under
or result in the creation or imposition of any Lien upon any of the property of
the Company pursuant to the provisions of the Certificate of Incorporation or
By-laws of the Company or any agreement or other instrument known to such
counsel to which the Company is a party or by which the Company may be bound.
7. There is no litigation pending or, to the best knowledge of such
counsel, threatened which in such counsels opinion could reasonably be expected
to have a materially adverse effect on the Companys business or assets, or which
would question the validity of the Note Purchase Agreement or the Notes or
impair the ability of the Company to issue and deliver the Notes or to comply
with the provisions of the Note Purchase Agreement. The opinion of Walter M.
Braswell, Esq. shall cover such other matters relating to the sale of the Notes
as you may reasonably request. With respect to matters of fact on which such
opinion is based, such counsel shall be entitled to rely on appropriate
certificates of public officials and officers of the Company.
FORM OF OPINION OF SPECIAL NEW YORK COUNSEL
FOR THE COMPANY
Each closing opinion of Winthrop, Stimson, Putnam & Roberts, special New
York counsel for the Company, which is called for by Section4.4 of the Note
Purchase Agreement, shall be dated the date of the respective Closing and
addressed to you, shall be satisfactory in scope and form to you and shall be to
the effect that:
1. The Note Purchase Agreement constitutes the legal and binding contract of the
Company, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance or similar laws affecting creditors rights
generally, and general principles of equity (regardless of whether the
application of such principles is considered in a proceeding in equity or at
law).
2. The Notes constitute the legal and binding
obligations of the Company enforceable in accordance with their terms, subject
to bankruptcy, insolvency, fraudulent conveyance or similar laws affecting
creditors rights generally, and general principles of equity (regardless of
whether the application of such principles is considered in a proceeding in
equity or at law).
3. No approval, consent or withholding of objection on the part of, or filing,
registration or qualification with, any governmental body, Federal, state or
local (including, without limitation, the New Jersey Board of Public Utilities),
is necessary in connection with the execution, delivery and performance of the
Note Purchase Agreement or the Notes.
4. The issuance and
sale of the Notes and the execution, delivery and performance by the Company of
the Note Purchase Agreement do not conflict with any law or any order of any
court or governmental authority or agency applicable to or binding on the
Company, or conflict with or result in any breach of any of the provisions of or
constitute a default under or result in the creation or imposition of any Lien
upon any of the property of the Company pursuant to the provisions of the
Certificate of Incorporation or By-laws of the Company or any agreement or other
instrument known to such counsel to which the Company is a party or by which the
Company may be bound.
5. The issuance, sale and delivery of the Notes under the
circumstances contemplated by the Note Purchase Agreement do not, under existing
law, require the registration of the Notes under the Securities Act of 1933, as
amended, or the qualification of an indenture under the Trust Indenture Act of
1939, as amended.
6. The issuance of the Notes and the use of the proceeds of the sale of the
Notes in accordance with the provisions of and contemplated by the Note Purchase
Agreement do not violate or conflict with Regulations G, T or X of the Board of
Governors of the Federal Reserve System.
7. The Company is not
an investment company, or a company controlled by an investment company, under
the Investment Company Act of 1940, as amended. The opinion of Winthrop,
Stimson, Putnam & Roberts shall cover such other matters relating to the sale of
the Notes as you may reasonably request. With respect to matters of fact on
which such opinion is based, such counsel shall be entitled to rely on
appropriate certificates of public officials and officers of the Company.
FORM OF OPINION OF SPECIAL COUNSEL
TO THE PURCHASERS
_________________, 199__
American General Life Insurance Company
Houston, Texas
Re: $12,000,000 6.79% Senior Notes
Due December15, 2007
of
ETOWN CORPORATION
Ladies and Gentlemen: We have acted as your special counsel in connection
with your purchase on the date hereof of $[__________] aggregate principal
amount of the 6.79% Senior Notes due December15, 2007 (the Notes) of Etown
Corporation, a New Jersey corporation (the Company), issued under and pursuant
to the Note Purchase Agreement as of December15, 1997 (the Note Purchase
Agreement), between the Company and you. In that connection, we have examined
the following: (a) The Note Purchase Agreement; (b) A copy of the Certificate of
Incorporation of the Company and all amendments thereto certified by the
Secretary of State of the State of New Jersey and the Certificate of the
Secretary of State of the State of New Jersey evidencing that the Company is in
good standing in such state (the Good Standing Certificate); (c) A copy of the
By-laws of the Company, as amended to the date hereof, and a copy of the
resolutions adopted by the Board of Directors of the Company with respect to the
authorization of the Note Purchase Agreement, the issuance, sale and delivery of
the Notes and related matters, each as certified by the Secretary of the
Company; (d) The opinion of Walter M. Braswell, Esq., counsel for the Company,
dated the date hereof and delivered responsive to Section4.4(a) of the Note
Purchase Agreement, and the opinion of Winthrop, Stimson, Putnam & Roberts,
special New York counsel to the Company, dated the date hereof and delivered
responsive to Section 4.4(b) of the Note Purchase Agreement; (e) The Notes
delivered on the date hereof; (f) Such certificates of officers of the Company
and of public officials as we have deemed necessary to give the opinions
hereinafter expressed; and (g) Such other documents and matters of law as we
have deemed necessary to give the opinions hereinafter expressed. We believe
that each opinion referred to in clause (d) above is satisfactory in scope and
form and that you are justified in relying thereon. Our opinion as to matters
referred to in paragraph1 below is based solely upon an examination of the
Certificate of Incorporation, the By-laws and the Good Standing Certificate of
the Company and the Business Corporation Act of the State of New Jersey. We have
also relied, as to certain factual matters, upon appropriate certificates of
public officials and officers of the Company and upon representations of the
Company and you delivered in connection with the issuance and sale of the Notes.
Based upon the foregoing, we are of the opinion that:
1. The Company is a
corporation, validly existing and in good standing under the laws of the State
of New Jersey and has the corporate power and the corporate authority to execute
and deliver the Note Purchase Agreement and to issue the Notes.
2. The Note
Purchase Agreement has been duly authorized by all necessary corporate action on
the part of the Company, has been duly executed and delivered by the Company and
constitutes the legal, valid and binding contract of the Company enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
conveyance and similar laws affecting creditors rights generally, and general
principles of equity (regardless of whether the application of such principles
is considered in a proceeding in equity or at law).
3. The Notes have been duly
authorized by all necessary corporate action on the part of the Company, and the
Notes being delivered on the date hereof have been duly executed and delivered
by the Company and constitute the legal, valid and binding obligations of the
Company enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent conveyance and similar laws affecting creditors rights
generally, and general principles of equity (regardless of whether the
application of such principles is considered in a proceeding in equity or at
law).
4. The issuance, sale and delivery of the Notes under the circumstances
contemplated by the Note Purchase Agreement do not, under existing law, require
the registration of the Notes under the Securities Act of 1933, as amended, or
the qualification of an indenture under the Trust Indenture Act of 1939, as
amended. Our opinion is limited to the laws of the State of New York, the
Business Corporation Act of the State of New Jersey and the Federal laws of the
United States and we express no opinion on the laws of any other jurisdiction.
Respectfully submitted,
Model Form No. 1 Version of September13, 1994
Model Form No. 1 Version of September13, 1994
Draft of December 19, 1997
1463181
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- -5-
- -2-
Etown Corporation Note Purchase Agreement
Etown Corporation Note Purchase Agreement
- -38-
- -39-
- -1-
- -41-
SCHEDULEA
(to Note Purchase Agreement)
B-54
B-53
SCHEDULEB
(to Note Purchase Agreement)
E-1-56
E-1-1
EXHIBIT1
(to Note Purchase Agreement)
E-4.4(a)-58
E-4.4(a)-1
EXHIBIT4.4(a)
(to Note Purchase Agreement)
E-4.4(b)-60
E-4.4(b)-1
EXHIBIT4.4(b)
(to Note Purchase Agreement)
E-4.4(c)-64
E-4.4(c)-63
EXHIBIT4.4(c)
(to Note Purchase Agreement)
E'TOWN CORPORATION EXHIBIT 10(K)
EMPLOYMENT AGREEMENT
Agreement made this 15th day of May, 1997 between E'town
Corporation (the "Corporation"), and Anne Evans Estabrook (the "Executive").
WHEREAS, the Corporation desires to employ the Executive as the
Chairman of the Corporation's Board of Directors, and the Executive desires
to accept employment with the Corporation, but only on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the Corporation and the Executive hereby
agree as follows:
1. The Corporation shall employ the Executive, and the Executive
shall serve the Corporation, for the period beginning May 15, 1997 and ending
on the earliest to occur of (i) a date which may be mutually agreed between
the Corporation and the Executive, (ii) any date on which the Executive
resigns her position, and (iii) any date on which the Executive no longer
stands for re-election as a director.
2. The Executive shall serve the Corporation as Chairman of the
Company's Board of Directors (the "Board"). During the term of this
Agreement, the Executive (a) shall attend and preside at all regular and
special meetings of the Board, (b) serve as a non-voting ex-officio member
of all committees of the Board, (c) shall serve as a member of the Executive
Management Committee of the Corporation, (d) shall advise the President of
the Corporation regarding strategic and policy matters facing the
Corporation, (e) shall promote the interests of the Corporation with its
various external constituencies, such as investors, analysts, and State and
community leaders, and (f) shall perform such other duties and exercise such
powers as may be from time to time be assigned to or vested in her by the
Board.
3. During the term of this agreement, the Executive shall be paid
by Elizabethtown Water Company and a portion of her salary will be billed to
the Corporation based upon an allocation formula.
4. Unless terminated in accordance with the following provisions
of this paragraph 4, the Corporation shall continue to employ the Executive
and the Executive shall continue to work for the Corporation, during the term
of this Agreement.
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<PAGE>
a. This Agreement shall terminate automatically upon the
death of the Executive.
b. The Corporation may terminate the Executives employment
if the Executive suffers from a physical or mental disability to an extent
that renders it impracticable for the Executive to continue performing her
duties hereunder. The Executive shall be deemed to be so disabled if (i) a
physician selected by the Corporation advises the Corporation that the
Executive's physical or mental condition will render the Executive unable to
perform her duties for a period exceeding three consecutive months, or (ii)
due to a physical or mental condition, the Executive has not substantially
performed her duties hereunder for a period of three consecutive months.
c. The Corporation may terminate the Executive's employment
at any time for cause; cause shall mean (i) a default or other breach by the
Executive of her obligations under this Agreement, (ii) failure by the
Executive diligently and competently to perform her duties under this
Agreement, or (iii) misconduct, dishonesty, or other act by the Executive
detrimental to the good will of the Corporation or damaging to the
Corporation's relationships with its customers, suppliers or employees.
d. Upon termination pursuant to a, b or c above, the
Corporation shall pay the Executive or her estate any salary earned and
unpaid to the date of termination.
5. This Agreement constitutes the entire agreement between the
parties hereto with respect to the Executive's employment by the Corporation,
and supersedes and is in full substitution for any and all prior
understandings or agreements with respect to the Executive's employment.
6. This Agreement may be amended only by an instrument in writing
signed by the parties hereto, and any provision hereof may be waived only by
an instrument in writing signed by the party or parties against whom or which
enforcement of such waiver is sought.
7. This Agreement is binding on and is for the benefit of the
parties hereto and their respective successors, heirs, executors,
administrators and other legal representatives. Neither this Agreement nor
any right or obligation hereunder may be assigned by the Corporation (except
to an affiliate) or by the Executive.
8. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey.
9. This Agreement may be executed in several counterparts, each
of which shall be deemed an original, but all of which shall constitute one
and the same instrument.
2
<PAGE>
IN WITNESS WHEREOF, the Corporation and the Executive have executed
this Agreement as of the date first written above.
E'TOWN CORPORATION
By: /s/ Andrew M. Chapman
______________________________
Andrew M. Chapman, President
/s/ Anne Evans Estabrook
______________________________
Anne Evans Estabrook
3
<PAGE>
ELIZABETHTOWN WATER COMPANY
EMPLOYMENT AGREEMENT
Agreement made this 15th day of May, 1997 between Elizabethtown
Water Company (the "Company"), and Anne Evans Estabrook (the "Executive").
WHEREAS, the Company desires to employ the Executive as the
Chairman of the Compan's Board of Directors, and the Executive desires to
accept employment with the Company, but only on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the Company and the Executive hereby agree
as follows:
1. The Company shall employ the Executive, and the Executive
shall serve the Company, for the period beginning May 15, 1997 and ending on
the earliest to occur of (i) a date which may be mutually agreed between the
Company and the Executive, (ii) any date on which the Executive resigns her
position, and (iii) any date on which the Executive no longer stands for
re-election as a director.
2. The Executive shall serve the Company as Chairman of the
Company's Board of Directors (the "Board"). During the term of this
Agreement, the Executive (a) shall attend and preside at all regular and
special meetings of the Board, (b) serve as a non-voting ex-officio member
of all committees of the Board, (c) shall serve as a member of the Executive
Management Committee of the Company, (d) shall advise the President of the
Company regarding strategic and policy matters facing the Company, (e) shall
promote the interests of the Company with its various external
constituencies, such as investors, analysts, and State and community leaders,
and (f) shall perform such other duties and exercise such powers as may be
from time to time be assigned to or vested in her by the Board.
3. a. During the term of this Agreement, the Company shall pay
the Executive a salary that shall be set annually be the Board. The annual
salary for the twelve-month period beginning May 15, 1997 shall be $125,000,
$25,000 of which shall be payable in Restricted Stock of E'town Corporation
(based on the closing price as of May 15, 1997) issued under the E'town
Corporation 1990 Performance Stock Program, and the remainder of which shall
be payable periodically in accordance with the Company's then prevailing
payroll practices. The restriction period for the Restricted Stock payable
hereunder shall be three years.
b. The Executive shall be entitled to participate in E'town
Corporation's 1987 Stock Option Plan and shall be entitled to such expense
accounts, perquisites of office, fringe benefits, continued participation in
the Company-sponsored plans, recognizing her years of service as an officer
of E'town Corporation, and other incidences of employment as the Company
generally provides to its employees and officers having rank and seniority at
the Company comparable to the Executive, but specifically excluding benefits
under the SERP.
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<PAGE>
4. Unless terminated in accordance with the following provisions
of this paragraph 4, the Company shall continue to employ the Executive and
the Executive shall continue to work for the Company, during the term of this
Agreement.
a. This Agreement shall terminate automatically upon the
death of the Executive.
b. The Company may terminate the Executive's employment if
the Executive suffers from a physical or mental disability to an extent that
renders it impracticable for the Executive to continue performing her duties
hereunder. The Executive shall be deemed to be so disabled if (i) a
physician selected by the Company advises the Company that the Executive's
physical or mental condition will render the Executive unable to perform her
duties for a period exceeding three consecutive months, or (ii) due to a
physical or mental condition, the Executive has not substantially performed
her duties hereunder for a period of three consecutive months.
c. The Company may terminate the Executive's employment at
any time for cause; cause shall mean (i) a default or other breach by the
Executive of her obligations under this Agreement, (ii) failure by the
Executive diligently and competently to perform her duties under this
Agreement, or (iii) misconduct, dishonesty, or other act by the Executive
detrimental to the good will of the Company or damaging to the Company's
relationships with its customers, suppliers or employees.
d. Upon termination pursuant to a, b or c above, the Company
shall pay the Executive or her estate any salary earned and unpaid to the
date of termination.
5. This Agreement constitutes the entire agreement between the
parties hereto with respect to the Executive's employment by the Company, and
supersedes and is in full substitution for any and all prior understandings
or agreements with respect to the Executive's employment.
6. This Agreement may be amended only by an instrument in writing
signed by the parties hereto, and any provision hereof may be waived only by
an instrument in writing signed by the party or parties against whom or which
enforcement of such waiver is sought.
7. This Agreement is binding on and is for the benefit of the
parties hereto and their respective successors, heirs, executors,
administrators and other legal representatives. Neither this Agreement nor
any right or obligation hereunder may be assigned by the Company (except to
an affiliate) or by the Executive.
8. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey.
2
<PAGE>
9. This Agreement may be executed in several counterparts, each
of which shall be deemed an original, but all of which shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the Company and the Executive have executed
this Agreement as of the date first written above.
ELIZABETHTOWN WATER COMPANY
By: /s/ Andrew M. Chapman
____________________________
Andrew M. Chapman, President
/s/ Anne Evans Estabrook
____________________________
Anne Evans Estabrook
3
<PAGE>
CHANGE IN CONTROL AGREEMENT EXHIBIT 10(L)
THIS AGREEMENT dated and entered into effective as of the 15th day of
May, 1997, by and between E'town Corporation, a New Jersey corporation
(together with its affiliated companies, the "Company"), and Anne Evans
Estabrook,(the "Executive").
W I T N E S S E T H:
WHEREAS, should the Company receive a proposal from or engage in
discussions with a third person concerning a possible business combination
with or the acquisition of a substantial portion of voting securities of the
Company, the Board of Directors of the Company (the "Board") has deemed it
imperative that it and the Company be able to rely on the Executive to
continue to serve in her position and that the Board and the Company be able
to rely upon her advice as being in the best interests of the Company and its
shareholders without concern that the Executive might be distracted by the
personal uncertainties and risks that such a proposal or discussions might
otherwise create; and
WHEREAS, the Company desires to reward the Executive for her valuable,
dedicated service to the Company should her service be terminated under
circumstances hereinafter described; and
WHEREAS, the Board therefore considers it in the best interests of the
Company and its shareholders for the Company to enter into this Change in
Control Agreement with the Executive;
NOW, THEREFORE, to assure the Company of the Executive's continued
dedication and the availability of her advice and counsel in the event of any
such proposal, to induce the Executive to remain in the employ of the Company
and to reward the Executive for her valuable, dedicated service to the
Company should her service be terminated under circumstances hereinafter
described, and for other good and valuable consideration, the receipt and
adequacy whereof each party acknowledges, the Company and the Executive agree
as follows:
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<PAGE>
1. OPERATION, EFFECTIVE DATE, AND TERM OF AGREEMENT.
(a) This Agreement shall commence on the date hereof and continue in
effect through December 31, 1997; provided, however, that commencing on
January 1, 1998 and each succeeding January 1 thereafter, the term of this
Agreement shall be extended automatically for one additional year unless not
later than September 30 of the preceding year the Company shall have given
notice to the Executive that it does not wish to extend this Agreement.
(b) This Agreement is effective and binding on both parties hereto as
of the date hereof. Notwithstanding its present effectiveness, the
provisions of paragraphs 3 and 4 of this Agreement shall become operative
only when, as and if there has been a "Change in Control of the Company" (as
hereinafter defined). For purposes of this Agreement, a "Change in Control
of the Company" shall be deemed to have occurred if
(X) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or a
person engaging in a transaction of the type described in clause
(Z) of this subsection but which does not constitute a change in
control under such clause, hereafter becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing more than 50%
of the combined voting power of the Company's then outstanding
securities; or
(Y) during any period of twenty-four consecutive months
during the term of this Agreement, individuals who at the beginning
of such period constitute the Board and any new director (other
than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in
clauses (X) or (Z) of this subsection) whose election by the Board,
or nomination for election by the Company shareholders, was
approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of
the period or whose election or nomination for election was
previously so approved ("Continuing Members"), cease for any reason
to constitute a majority thereof; or
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<PAGE>
(Z) the shareholders of the Company approve or, if no
shareholder approval is required or obtained, the Company completes
a merger, consolidation or similar transaction of the Company with
or into any other corporation, or a binding share exchange
involving the Company's securities, other than any such transaction
which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 75% of the combined
voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such transaction, or
the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all the
Company's assets.
2. EMPLOYMENT OF EXECUTIVE.
Nothing herein shall affect any right which the Executive or the Company
may otherwise have to terminate the Executive's employment by the Company at
any time in any lawful manner, subject always to the Company's providing to
the Executive the payments and benefits specified in paragraphs 3 and 4 of
this Agreement to the extent hereinbelow provided.
In the event any person commences a tender or exchange offer, circulates
a proxy statement to the Company's shareholders or takes other steps designed
to effect a Change in Control of the Company as defined in paragraph 1 of
this Agreement, the Executive agrees that she will not voluntarily leave the
employ of the Company and will continue to perform her regular duties and to
render the services provided by the Executive to the Company until such
person has abandoned or terminated her efforts to effect a Change in Control
of the Company or until a Change in Control of the Company has occurred.
Should the Executive voluntarily terminate her employment before any such
effort to effect a Change in Control of the Company has commenced, or after
any such effort has been abandoned or terminated without effecting a Change
in Control of the Company and no such effort is then in process, this
Agreement shall automatically terminate and be of no further force or effect.
3
<PAGE>
3. TERMINATION FOLLOWING CHANGE IN CONTROL.
(a) If any of the events described in paragraph 1 hereof constituting a
Change in Control of the Company shall have occurred, the Executive shall be
entitled to the benefits provided in paragraph 4 hereof upon the subsequent
termination of her employment within the applicable period set forth in
paragraph 4 hereof following such Change in Control of the Company unless
such termination is (i) due to the Executive's death; or (ii) by the Company
by reason of the Executive's Disability (as hereinafter defined) or for Cause
(as hereinafter defined); or (iii) by the Executive other than for Good
Reason (as hereinafter defined).
(b) If following a Change in Control of the Company the Executive's
employment is terminated by reason of her death or Disability, the Executive
shall be entitled to death or long-term disability benefits, as the case may
be, from the Company no less favorable than the maximum benefits to which she
would have been entitled had the death or termination for Disability occurred
at any time during the six month period prior to the Change in Control of the
Company. If prior to any such termination for Disability, the Executive
fails to perform her duties as a result of incapacity due to physical or
mental illness, she shall continue to receive her Salary (as hereinafter
defined) less any benefits as may be available to her under the Company's
disability plans until her employment is terminated for Disability.
(c) If the Executive's employment shall be terminated by the Company
for Cause or by the Executive other than for Good Reason, the Company shall
pay to the Executive her full Salary through the Date of Termination at the
rate in effect at the time Notice of Termination is given, and the Company
shall have no further obligations to the Executive under this Agreement.
(d) For purposes of this Agreement:
(i) "Disability" shall mean the Executive's incapacity due to
physical or mental illness such that the Executive shall have
become qualified to receive benefits under the Company's long-term
disability plans or any equivalent coverage required to be provided
to the Executive pursuant to any other plan or agreement, whichever
is applicable.
(ii) "Cause" shall mean:
(A) the conviction of the Executive for a felony, or the
willful commission by the Executive of a criminal or other act
that in the judgment of the Board causes or will probably
cause substantial economic damage to the Company or
substantial injury to the business reputation of the Company;
(B) the commission by the Executive of an act of fraud in the
performance of such Executive's duties on behalf of the
Company that causes or will probably cause economic damage to
the Company; or
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<PAGE>
(C) the continuing willful failure of the Executive to perform
her duties, as such duties were performed by the Executive
prior to the day of the Change of Control of the Company
(other than any such failure resulting from the Executive's
incapacity due to physical or mental illness) after written
notice thereof (specifying the particulars thereof in
reasonable detail) and a reasonable opportunity to be heard
and cure such failure are given to the Executive by the
Compensation Committee of the Board.
For purposes of this subparagraph (d)(ii), no act, or failure to
act, on the Executive's part shall be considered "willful" unless done, or
omitted to be done, by her not in good faith and without reasonable belief
that her action or omission was in the best interests of the Company.
(iii) "Good Reason" shall mean:
(A) The assignment by the Company to the Executive of duties
without the Executive's express written consent, which (i) are
materially different or require travel significantly more time
consuming or extensive than the Executive's duties or business
travel obligations immediately prior to the Change in Control
of the Company, or (ii) result in either a significant
reduction in the Executive's authority and responsibility as a
senior corporate executive of the Company when compared to the
highest level of authority and responsibility assigned to the
Executive at any time during the six (6) month period prior to
the Change in Control of the Company, or, (iii) without the
Executive's express written consent, the removal of the
Executive from, or any failure to reappoint or reelect the
Executive to, the highest title held since the date six (6)
months before the Change in Control of the Company, except in
connection with a termination of the Executive's employment by
the Company for Cause, or by reason of the Executive' death or
Disability;
(B) A reduction by the Company of the Executive's Salary, or
the failure to grant increases in the Executive's Salary on a
basis at least substantially comparable to those granted to
other executives generally of the Company of comparable title,
salary and performance ratings, made in good faith;
5
<PAGE>
(C) The relocation of the Company's principal executive
offices to a location outside the State of New Jersey, or the
Company's requiring the Executive to be based anywhere other
than the Company's principal executive offices except for
required travel on the Company's business to an extent
substantially consistent with the Executive's business travel
obligations immediately prior to the Change in Control of the
Company, or in the event of any relocation of the Executive
with the Executive's express written consent, the failure by
the Company to pay (or reimburse the Executive for) all
reasonable moving expenses by the Executive relating to a
change of principal residence in connection with such
relocation and to indemnify the Executive against any loss
realized in the sale of the Executive's principal residence in
connection with any such change of residence, all to the
effect that the Executive shall incur no loss upon such sale
on an after tax basis;
(D) The failure by the Company to continue to provide the
Executive with substantially the same welfare benefits (which
for purposes of this Agreement shall mean benefits under all
welfare plans as that term is defined in Section 3(1) of the
Employee Retirement Income Security Act of 1974, as amended),
and perquisites, including participation on a comparable basis
in any plan similar to the plan in which the Executive
participated in immediately prior to such Change in Control of
the Company, or with a package of welfare benefits and
perquisites, that is substantially comparable in all material
respects to such welfare benefits and perquisites; or
(E) The failure of the Company to obtain the express written
assumption of and agreement to perform this Agreement by any
successor as contemplated in subparagraph 5(d) hereof.
(iv) "Dispute" shall mean (i) in the case of termination of
employment of the Executive with the Company by the Company for
Disability or Cause, that the Executive challenges the existence of
Disability or Cause and (ii) in the case of termination of
employment of the Executive with the Company by the Executive for
Good Reason, that the Company challenges the existence of Good
Reason.
6
<PAGE>
(v) "Salary" shall mean the Executive's average annual
compensation reported on United States Internal Revenue Service
Form W-2 ("Form W-2").
(vi) "Incentive Compensation" in any year shall mean the amount
the Executive has elected to defer in such year and the amount
accrued, if any, under any plan, arrangement or contract providing
for the deferral of compensation between the Company and the
Executive which is not reported on Form W-2, including, without
limitation, any employer contributions by the Company on behalf of
the Executive in accordance with the terms and conditions of any
401(k) plan in which executives of the Company of comparable title
and salary participate.
(e) Any purported termination of employment by the Company by
reason of the Executive's Disability or for Cause, or by the Executive for
Good Reason shall be communicated by written Notice of Termination (as
hereinafter defined) to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice given by the
Executive or the Company, as the case may be, which shall indicate the
specific basis for termination and shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for determination of any
payments due under this Agreement. The Executive shall not be entitled to
give a Notice of Termination that the Executive is terminating her employment
with the Company for Good Reason more than six (6) months following the
occurrence of the event alleged to constitute Good Reason. The Executive's
actual employment by the Company shall cease on the Date of Termination (as
hereinafter defined) specified in the Notice of Termination, even though such
Date of Termination for all other purposes of this Agreement may be extended
in the manner contemplated in the second sentence of Paragraph 3(f).
(f) For purposes of this Agreement, the "Date of Termination"
shall mean the date specified in the Notice of Termination, which shall be
not more than ninety (90) days after such Notice of Termination is given, as
such date may be modified pursuant to the next sentence. If within thirty
(30) days after any Notice of Termination is given, the party who receives
such Notice of Termination notifies the other party that a Dispute exists,
the Date of Termination shall be the date on which the Dispute is finally
determined, either by mutual written agreement of the parties, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected);
provided, that the Date of Termination shall be extended by a notice of
7
<PAGE>
Dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such Dispute with reasonable diligence and
provided further that pending the resolution of any such Dispute, the Company
shall continue to pay the Executive the same Salary and to provide the
Executive with the same or substantially comparable welfare benefits and
perquisites that the Executive was paid and provided immediately prior to the
Change in Control of the Company. Should a Dispute ultimately be determined
in favor of the Company, then all sums paid by the Company to the Executive
from the date of termination specified in the Notice of Termination until
final resolution of the Dispute pursuant to this paragraph shall be repaid
promptly by the Executive to the Company, with interest at the average prime
rate generally prevailing from time to time among major New York City banks
and all options, rights and stock awards granted to the Executive during such
period shall be cancelled or returned to the Company. The Executive shall
not be obligated to pay to the Company the cost of providing the Executive
with welfare benefits and perquisites for such period unless the final
judgment, order or decree of a court or other body resolving the Dispute
determines that the Executive acted in bad faith in giving a notice of
Dispute. Should a Dispute ultimately be determined in favor of the
Executive, then the Executive shall be entitled to retain all sums paid to
the Executive under this paragraph 3(f) pending resolution of the Dispute and
shall be entitled to receive, in addition, the payments and other benefits
provided for in paragraph 4 hereof to the extent not previously paid
hereunder.
4. PAYMENTS UPON TERMINATION.
If within three (3) years after a Change in Control of the Company,
the Company shall terminate the Executive's employment other than by reason
of the Executive's death, Disability or for Cause or if the Executive shall
terminate her employment for Good Reason then,
(a) The Company will continue to pay to the Executive, for a
period of thirty (30) months following the Date of Termination, as
compensation for services rendered by the Executive on or before
the Executive's Date of Termination, the Executive's Salary and
Incentive Compensation (subject to any applicable payroll taxes or
other taxes required to be withheld computed at the rate for
supplemental payments) at the highest rate in effect during the
twenty-four (24) month period ending on the day on which the Change
in Control of the Company occurred; and
(b) For a period of thirty (30) months following the Date of
Termination, the Company shall provide, at the Company's expense,
the Executive and the Executive's spouse and children with full
benefits under any employee benefit plan or arrangement in which
the Executive participated immediately prior to the day on which
the Change in Control of the Company occurred, including, without
limitation, any hospital, medical and dental insurance with
substantially the same coverage and benefits as were provided to
the Executive immediately prior to the day on which the Change in
Control of the Company occurred; and
8
<PAGE>
(c) The Company will pay on the date of Termination to the
Executive as compensation for services rendered on or before the
Executive's Date of Termination, in addition to the amounts set
forth in paragraph 4(a) above, a sum equal to all Incentive
Compensation and other incentive awards due to the Executive
immediately prior to the day on which the Change in Control of the
Company occurred but not yet paid; and
(d) For a period of thirty (30) months following the Date of
Termination, the Company shall provide to the Executive, at the
Company's expense, the automobile provided by the Company to the
Executive immediately prior to the day on which the Change in
Control of the Company occurred (or a comparable automobile) and
the Company shall reimburse the Executive any and all expense
incurred by the Executive in connection with the use of such
automobile during such thirty month period to the extent that the
Company reimburses generally other executives of comparable title,
salary and performance ratings; and
(e) Any restricted Stock in the Executive's account as an officer
of the Company which is not vested in the Executive as of the
Change in Control of the Company shall become vested, and all such
restrictions thereon (including, but not limited to, any
restrictions on the transferability of such Stock), and any
restrictions on any other restricted stock awarded to the Executive
through any plan or arrangement of the Company on or before the
Change in Control of the Company, shall become null and void and of
no further force and effect, immediately upon the Change in Control
of the Company; and
(f) In event that any payment or benefit received or to be
received by the Executive in connection with a Change in Control of
the Company or the termination of the Executive's employment
(whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company) (collectively with the
payments and benefits hereunder, "Total Payments") would not be
deductible in whole or in part by the Company as the result of
Section 280G of the Internal Revenue Code of 1986, as amended and
the regulations thereunder (the "Code"), the payments and benefits
hereunder shall be reduced until no portion of the Total Payments
is not deductible by reducing to the extent necessary the payment
under paragraph 3(a) hereof. For purposes of this limitation (i)
no portion of the Total Payments the receipt or enjoyment of which
the Executive shall have effectively waived in writing prior to the
date of payment shall be taken into account, (ii) no portion of the
Total Payments shall be taken into account which, in the opinion of
tax counsel selected by the Executive and acceptable to the
Company's independent auditors, is not likely to constitute a
"parachute payment" within the meaning of Section 280G(b)(2) of the
Code, and (iii) the value of any non-cash benefit or any deferred
payment or benefit included in the Total Payments shall be
determined by the Company's independent auditors in accordance with
the principles of Sections 280G(d)(3) and (4) of the Code.
9
<PAGE>
5. GENERAL.
(a) The Executive shall retain in confidence any
proprietary or other confidential information known to her
concerning the Company and its business so long as such
information is not publicly disclosed and disclosure is not
required by an order of any governmental body or court.
Notwithstanding anything to the contrary contained herein, this
paragraph 5(a) shall survive any expiration or termination of
this Agreement for any reason whatsoever.
(b) Subject to paragraph 5(f) below, the Company's
obligation to pay the Executive the compensation and to make the
arrangements provided herein shall be absolute and unconditional
and shall not be affected by any circumstance, including, without
limitation, any setoff, counterclaim, recoupment, defense or
other right which the Company may have against the Executive or
anyone else. All amounts payable by the Company hereunder shall
be paid without notice or demand. Except as expressly provided
herein, the Company waives all rights which it may now have or
may hereafter have conferred upon it, by statute or otherwise, to
terminate, cancel or rescind this Agreement in whole or in part.
Except as provided in paragraph 5(f) herein, each and every
payment made hereunder by the Company shall be final and the
Company will not seek to recover for any reason all or any part
of such payment from the Executive or any person entitled
thereto.
(c) The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the
Company, by written agreement in form and substance satisfactory
to the Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had
taken place.
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<PAGE>
As used in this Agreement, "Company" shall mean the Company
as hereinbefore defined and any successor to its business and/or
assets as aforesaid which executes and delivers the agreement
provided for in this paragraph 5 or which otherwise becomes bound
by all the terms and provisions of this Agreement by operation of
law.
(d) This Agreement shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devises and legatees. If the Executive should die
while any amounts would still be payable to the Executive
hereunder if she had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Executive's devisee, legatee or
other designee or, if there be no such designee, to the
Executive's estate. The obligations of the Executive hereunder
shall not be assignable by the Executive.
(e) Nothing in this Agreement shall be deemed to entitle
the Executive to continued employment with the Company and the
rights of the Company to terminate the employment of the
Executive shall continue as fully as though this Agreement were
not in effect.
(f) The Executive shall be required to mitigate the amount
of any payment or other benefit provided for in this Agreement by
seeking other employment of similar responsibility, salary and
benefits and, upon any such employment of the Executive, all
payments or other benefits provided for in this Agreement then or
thereafter due to the Executive shall thereupon immediately cease
and this Agreement shall be of no further force and effect.
6. NOTICE.
For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when delivered or
mailed by United States registered mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive:
Anne Evans Estabrook
xxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxx
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<PAGE>
If to the Company:
E'town Corporation
600 South Avenue
Westfield, New Jersey 07090
or to such other address as either party may have furnished to
the other in writing in accordance herewith, except that notices
of change of address shall be effective only upon receipt.
7. MISCELLANEOUS.
No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing, signed by the Executive and such officer as
may be specifically designated by the Board. No waiver by either
party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a
waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No assurances or
representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement.
However, this Agreement is in addition to, and not in lieu of,
any other plan providing for payments to or benefits for the
Executive or any agreement now existing, or which hereafter may
be entered into, between the Company and the Executive. The
validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of New
Jersey.
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<PAGE>
8. VALIDITY.
The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full
force and effect. Any provision in this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective only to the extent of such
prohibition or unenforceability without invalidating or affecting
the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date set forth above.
E'TOWN CORPORATION
By:
/S/ Andrew M. Chapman
Name: Andrew M. Chapman
Title: President
EXECUTIVE
/S/Anne Evans Estabrook
ANNE EVANS ESTABROOK
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<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In Thousands Except Per Share Amounts)
Year Ended December 31,
1997 1996 1995
---------------------------------
BASIC
EARNINGS
Income Before Preferred Stock
Dividends of Subsidiary $ 20,073 $ 15,886 $16,109
Deduct: Preferred Stock Dividends (813) (813) (813)
-----------------------------------
Net Income Available for Common Stock $ 19,260 $ 15,073 $15,296
===================================
SHARES
Weighted Average Common Shares Outstanding 7,891 7,668 7,093
-----------------------------------
Basic Earnings Per Share of Common Stock $ 2.44 $ 1.96 $ 2.16
===================================
DILUTED
EARNINGS
Income Before Preferred Stock Dividends
of Subsidiary $ 20,073 $ 15,886 $16,109
Deduct: Preferred Stock Dividends (813) (813) (813)
Add: After Tax Interest Expense Applicable
to 6 3/4% Convertible Subordinated Debentures 500 513 524
-----------------------------------
Adjusted Net Income $ 19,760 $ 15,586 $15,820
===================================
SHARES
Weighted Average Number of Common Shares
Outstanding 7,891 7,668 7,093
Shares Which Could Have Been Purchased
With the Proceeds From Exercise of Stock Options 40 6 2
Assuming Conversion Of 6 3/4% Convertible
Subordinated Debentures (a) 284 292 299
-----------------------------------
Weighted Average Number of Common Shares
Outstanding as Adjusted 8,215 7,966 7,394
-----------------------------------
Diluted Earnings Per Share of Common Stock $ 2.41 $ 1.96 $ 2.14
===================================
(a) Convertible at $40 per share.
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY Exhibit 12A(a)
Computation of Ratio of Earnings to Fixed Charges
(In Thousands Except Ratios)
Year Ended December 31,
1997 1996 1995
----------------------------------
EARNINGS:
Income before preferred stock dividends $ 20,905 $ 16,755 $17,325
Federal income taxes 11,274 8,822 9,161
Interest charges 16,622 12,804 11,115
-----------------------------------
Earnings available to cover fixed charges 48,801 38,381 37,601
-----------------------------------
FIXED CHARGES:
Interest on long-term debt 14,030 13,011 10,892
Other interest 2,382 2,640 2,344
Amortization of debt discount - net 376 361 324
-----------------------------------
Total fixed charges 16,788 16,012 13,560
-----------------------------------
Ratio of Earnings to Fixed Charges 2.91 2.40 2.77
===================================
Earnings to Fixed Charges represents the sum of Income Before Preferred Stock
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.
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY Exhibit 12(b)
Computation of Ratio of Earnings to Fixed Charges
and Preferred Dividends
(In Thousands Except Ratios)
Year Ended December 31,
1997 1996 1995
----------------------------------
EARNINGS:
Income before preferred stock dividends $ 20,905 $ 16,755 $ 17,325
Federal income taxes 11,274 8,822 9,161
Interest charges 16,622 12,804 11,115
-----------------------------------
Earnings available to cover fixed charges 48,801 38,381 37,601
-----------------------------------
FIXED CHARGES AND PREFERRED DIVIDENDS:
Interest on long-term debt 14,030 13,011 10,892
Preferred dividend requirement (1) 1,251 1,241 1,243
Other interest 2,382 2,640 2,344
Amortization of debt discount - net 376 361 324
-----------------------------------
Total fixed charges 18,039 17,253 14,803
-----------------------------------
Ratio of Earnings to Fixed Charges
and Preferred Dividends 2.71 2.22 2.54
===================================
(1) Preferred Dividend Requirement:
Preferred dividends 813 813 813
Effective tax rate 35.04% 34.49% 34.59%
-----------------------------------
Preferred dividend requirement $ 1,251 $ 1,241 $ 1,243
===================================
Earnings to Fixed Charges and Preferred Dividends represents the sum of
Income Before Preferred Stock Dividends, 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.
Portion of the 1997 Annual Report to Shareholders for the year ended
December 31, 1997 which is incorporated by reference in this filing
on Form 10-K.
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) and E'town Properties, Inc. (Properties) and
owner of a 65% interest in Applied Watershed Management, LLC (AWM). 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 and Edison each contributed about 3% of the Company's consolidated
operating revenues for 1997. The following analysis sets forth significant
events affecting the financial condition of E'town and Elizabethtown at
December 31, 1997, and the results of operations for the years ended December
31, 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures Program
In 1997, capital expenditures were $30.9 million, primarily for water
utility plant. For the three years ending December 31, 2000, capital and
investment requirements for E'town are estimated to be $142.0 million,
consisting of (i) expenditures for water utility plant ($112.7 million for
Elizabethtown and $21.9 million for Mount Holly) and, (ii) investments in
non-regulated water and wastewater operations including systems operated by
E'town or its subsidiaries under privatization contracts ($7.4 million). See
"Economic Outlook" for a discussion of privatization activities and the
Applied wastewater Group (AWG) acquisition. These estimates do not include
any amounts for the proposed Elizabeth contract or possible additional
acquisition activities in the three-year period.
Elizabethtown
While Elizabethtow'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
$62.0 million for routine projects (services, hydrants and main extensions
not funded by developers) and $50.7 million for transmission system upgrades,
a new operations center and other projects. Elizabethtown expects to file for
rate relief periodically 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 $21.9 million,
primarily for an additional supply source to comply with state regulations
designed to prevent further depletion of a local aquifer. Mount Holly plans
to file for rate relief to recover these costs, as well as to increase the
rates of return realized by Mount Holly and, therefore, Mount Holly's
contribution to E'town's earnings per share.
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Mount Holly obtains all of its water from wells drilled into an aquifer,
which has been subject to over-pumping. The State adopted legislation
requiring all local purveyors, including Mount Holly, to obtain alternate
supplies and reduce their withdrawals from the affected parts of the aquifer.
Mount Holly designed a project to obtain water from outside the affected part
of the aquifer for delivery into the Mount Holly system. Management believes
that this project (the "Mansfield Project") is the most cost effective method
for Mount Holly to comply with the state regulations.
By September 1995, Mount Holly had obtained all New Jersey Department of
Environmental Protection (DEP) approvals for the Mansfield Project and was
ready to start construction when a regional purveyor appealed the granting of
Mount Holly's permits. Under an August 1997 settlement among Mount Holly, the
DEP and the regional purveyor, Mount Holly will purchase 1 million gallons
per day from the regional purveyor for two years while the Mansfield Project
is being constructed. Purchases began during March of 1998, after completion
of an interconnection.
Mount Holly is taking the steps necessary to recover in rates both the costs
of purchased water and the Mansfield Project. First, Mount Holly filed a
petition with the Board of Public Utilities (BPU) for a Purchased Water
Adjustment Clause (PWAC) to recover the costs of purchased water through
rates. The PWAC filing requests a 40.3% rate increase. Second, Mount Holly
and the parties to Mount Holly's 1995 base rate case are participating before
the BPU in a proceeding to reaffirm that the Mansfield Project is needed and
is the most cost effective method for Mount Holly to comply with the state
restrictions on diversions from the aquifer. In addition, Mount Holly will
file a base rate case during the second quarter of 1998 to recover a portion
of the costs of the Mansfield Project, estimated at $7.2 million, as well as
$6.0 million in additions to utility plant since Mount Holly's base rates
were last adjusted in January 1996. Finally, Mount Holly intends to file a
base rate case in 1999 for the remaining costs of the Mansfield Project,
estimated to amount to $11.3 million, to coincide with the completion of the
project and the expiration of the agreement to purchase water from the other
purveyor.
Capital Resources
During 1997, 'town financed 71.7% of its capital expenditures for
Elizabethtown (including Mount Holly) and investments in the non-regulated
operations (Edison and AWM) from internally generated funds (after payment of
common stock dividends). The balance was financed with a combination of
long-term debt, short-term borrowings under a revolving credit agreement,
short-term borrowings under lines of credit, proceeds from capital
contributions from 'town (funded by issuances of Common Stock under the
Corporation's Dividend Reinvestment and Stock Purchase Plan) and long-term
New Jersey Economic Development Authority (NJEDA) Bonds.
2
<PAGE>
For the three-year period ending December 31, 2000, E'town estimates that
50.2% of its currently projected capital expenditures and investments 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 debt, proceeds of
tax-exempt NJEDA bonds, long-term notes and short-term borrowings. Additional
external financing may be required to finance the proposed Elizabeth
contract, future acquisitions or investments in the three-year period. 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. Mount Holly has applied to
the DEP State Revolving Fund Program for low interest funding (approximately
3% to 3.5%) for the Mansfield Project.
Elizabethtown's senior debt is currently rated A3 and A by Moody's Investors
Service and Standard & Poor's Ratings Group, respectively.
In June 1997, Elizabethtown issued $50.0 million of tax-exempt Variable Rate
Demand Notes through the NJEDA. The proceeds of the issue were used to repay
amounts outstanding under the Company's revolving credit agreement, which
expired in July 1997.
RESULTS OF OPERATIONS
Net Income for 1997 was $19.3 million or $2.44 per share on a basic basis as
compared to $15.1 million or $1.96 per share for 1996. The increase in net
income and earnings per share is attributable to the $21.8 million rate
increase for the new Plant in October 1996, which was offset by the operating
and financing costs of the Plant. Net income also increased $1.4 million, or
$.17 per share, primarily due to variations in the weather, specifically the
dry summer of 1997, as compared to the wet summer of 1996.
Net Income for 1996 was $15.1 million or $1.96 per share on a basic basis as
compared to $15.3 million or $2.16 per share for 1995. The most significant
factor contributing to the decrease in net income was a reduction in revenues
due to reduced outdoor water consumption in 1996, compared to 1995. In
addition, an increase in the average number of shares outstanding contributed
to the decrease in earnings per share of common stock.
Operating Revenues increased $23.4 million or 21.2% in 1997 over the
comparable 1996 amount. The increase is primarily comprised of $17.7 million
from a rate increase for Elizabethtown, effective October 1996, $1.5 million
from the operation of Edison Water Company (net of water purchased from
Elizabethtown) and $3.1 million from increased water consumption. The
increase in water consumption is primarily due to the dry summer of 1997.
3
<PAGE>
Operating Revenues increased $2.0 million or 1.9% in 1996 over the comparable
1995 amount. The increase in total revenues was comprised of rate increases
for Elizabethtown and Mount Holly of
$3.9 million and $.5 million, respectively, 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.
Operation Expenses increased $3.2 million or 7.1% in 1997 over the comparable
1996 amount. An increase of $.9 million resulted from the operations of
Edison Water Company, which was formed in July 1997. Increases resulting from
variable costs associated with the increase in water consumption totaled $.3
million. Other increases included costs associated with Applied Watershed
Management of $.5 million and labor costs of $.6 million. The remainder of
the increase is attributable to various items, including operating costs for
the Plant, information technology and other administrative costs.
Operation Expenses increased $.7 million or 1.5% in 1996 over the comparable
1995 amount. Operation expenses decreased $.4 million for certain variable
expenses associated with lower water consumption. The successful
implementation of an energy conservation program in the second quarter of
1996 at the Raritan-Millstone 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.
Maintenance Expenses increased $.7 million or 12.7% in 1997 over the
comparable 1996 amount. This increase is primarily attributable to costs
associated with the maintenance of the Plant. The increase also includes $.4
million related to the costs of determining the most cost-effective method
for disposing of byproducts (waste residuals) generated from the water
treatment process at the Raritan-Millstone Plant.
Maintenance Expenses increased $.1 million or .9% in 1996 over the comparable
1995 amount. The Company had begun to substantially realize the benefits of
various preventive maintenance programs and operating efficiencies instituted
in 1996 and prior years.
Depreciation Expense increased $2.5 million or 25.3% in 1997 compared to
1996. The increase includes $2.1 million for the Plant and $.8 million for
other utility plant additions. A decrease of $.6 million resulted from
Elizabethtown no longer being required by the BPU to depreciate utility plant
acquired through Contributions In Aid of Construction and Customers' Advances
for Construction. This change was agreed to by the parties to Elizabethtown's
last rate case for which an increase was effective in October 1996.
4
<PAGE>
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.
Revenue Taxes increased $2.7 million or 19.8% in 1997 and $.2 million or 1.7%
in 1996 due to the taxes on increases in operating revenues discussed above.
Real Estate, Payroll and Other Taxes increased $.2 million or 6.8% in 1997
due to additional labor costs, as well as additional property taxes. These
taxes increased $.1 million or 3.5% in 1996 due primarily to increased labor
costs.
Federal Income Taxes as a component of operating expenses increased $3.7
million or 54.4% over the comparable 1996 amount due to the changes in the
components of taxable income discussed herein.
Federal Income Taxes as a component of operating expenses decreased $.8
million or 10.8% in 1996 from the comparable 1995 amount due to the changes
in the components of taxable income discussed herein.
Other Income (Expense) decreased $2.2 million or 73.9% compared to the 1996
amount. A decrease in the equity component of Allowance for Funds Used During
Construction (AFUDC) of $3.5 million resulted from no longer capitalizing the
financing costs associated with the Plant as the facility was placed in
service in October 1996. An increase of $.2 million for other miscellaneous
items, as well as the offsetting federal income taxes associated with the
Other Income (Expense), account for the remainder of the decrease.
Other Income (Expense) increased $.7 million or 31.0% in 1996 compared to the
1995 amount. An increase in the equity component of AFUDC of $.7 million,
primarily from the construction of the Plant, as well as a decrease from
write-downs in 1995 of the carrying value of certain non-utility property,
accounted for the overall increase.
Total Interest Charges increased $4.0 million or 30.2% in 1997 over the
comparable 1996 amount. The increase includes $3.1 million due to a reduction
in capitalized interest as a result of the Plant being placed in service in
October 1996. Interest expense also increased due to increased borrowings
incurred to finance capital expenditures, the Edison contract and working
capital needs.
Total Interest Charges increased $1.6 million or 13.8% 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
a revolving credit agreement incurred to finance Elizabethtown's capital
program on an interim basis 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.
5
<PAGE>
ECONOMIC OUTLOOK
Forward Looking Information
Information in this report includes certain forward looking statements
within the meaning of the federal securities laws. Any forward looking
statements are based upon information currently available and are subject to
future events, risks and uncertainties that could cause actual results to
differ materially from those expressed in the statements. Such events, risks
and uncertainties include, without limitation, actions of regulators, the
effects of weather on water consumption, changes in historical patterns of
water consumption and demand, including changes through increased use of
water-conserving devices, conditions in capital and real estate markets,
future acquisitions and privatization activities, increases in operating
expenses due to factors beyond the Corporation's control, changes in
environmental regulation and associated costs of compliance and other claims
or assessments made upon the Corporation.
E'town Corporation and Subsidiaries
Consolidated earnings for E'town for the next several years will be
determined by related but different strategies for the regulated and
non-regulated businesses. For Elizabethtown and Mount Holly, management will
continue to focus on expansion efforts to increase sales, as well as control
costs through productivity improvements so that realized returns remain
comparable to authorized levels. For the non-regulated businesses, management
seeks to invest in water and wastewater assets (including municipal
privatization contracts, as well as designing, constructing, operating and
purchasing wastewater assets through the proposed AWG acquisition, discussed
below) which produce a current return. Capital to finance investments in both
the regulated and non-regulated businesses will be raised from external
sources and from the sale of real estate parcels owned by E'town and
Properties.
E'town expects earnings from the regulated operations to be somewhat lower in
1998, based on an assumed return to normal weather patterns after the
unusually dry summer in 1997and because Elizabethtown will be completing its
second year since its last rate adjustment. However, consistent with E'town's
strategy to sell its real estate properties (discussed below) management
expects to realize gains from property sales in 1998. Based upon these
factors, management expects earnings per share to be similar to those
reported for 1997.
6
<PAGE>
Elizabethtown and Subsidiary - Regulated Utilities
Elizabethtown expects to petition the BPU for an increase in rates in the
later part of 1998 to reflect the increases in construction, financing and
operating costs since base rates were last established in October 1996.
On October 25, 1996, a rate increase under a stipulation (1996 Stipulation)
went into effect for Elizabethtown. This resulted in an increase in annual
operating revenues of approximately $21.8 million. The rate increase
reflected 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%.
Elizabethtown, excluding Mount Holly, earned a rate of return on common
equity of 11.0% in 1997. Elizabethtown's authorized rate of return on common
equity is currently 11.25%.
Mount Holly earned a rate of return on common equity of 2.8% in 1997,
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 1997. Management expects Mount Holly to increase its
contribution to E'town's earnings per share later in 1998 and into 1999 upon
receipt of additional rate relief so that Mount Holly can realize rates of
return comparable to authorized levels.
E'town
Non-regulated Operations
Edison Water Company
Effective July 1, 1997, E'town, through its Edison Water Company subsidiary,
commenced operation of Edison Township's 11,200- customer water system under
a 20-year contract. E'town paid the township $5.7 million at closing and
expects to spend $5.4 million over the next three years to upgrade the
system, primarily for new meters and main cleaning and lining. Edison Water
Company receives all revenues from the townshi's system (pursuant to a rate
schedule set forth in the contract), pays all operating expenses, and retains
the balance to amortize its investment and earn a return on its capital.
Edison Water Company expects 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 for the first five years and then
will increase as rate increases specified in the contract take effect.
Other Privatization Opportunities
E'town continues to pursue opportunities to operate municipal water and
wastewater systems under long-term contract, primarily in New Jersey. E'town
has recently commenced negotiations with the city of Elizabeth, New Jersey to
operate its water and wastewater systems under 40- and 20-year contracts,
respectively. These contracts, if successfully negotiated, would require a
$20.0 million payment at closing and expenditures of $26.2 million during the
first three years. E'town would contract with a firm experienced in managing
large wastewater facilities for the wastewater portion of the services to be
provided. While each opportunity is unique, such endeavors generally require
E'town to make payments to the municipality and to invest capital to upgrade
the utility systems within the first several years of the contract. Like
Edison, E'town seeks to realize rates of return in these contracts comparable
to levels earned by E'town's regulated utility businesses.
7
<PAGE>
AWG Acquisition
On March 6, 1998, E'town exercised an option to acquire Applied Wastewater
Group (AWG), its joint venture partner for the past three years, in a $7.0
million stock-for-stock transaction, and is expected to close the transaction
in the second quarter of 1998. AWG designs, builds and operates wastewater
treatment plants. E'town intends to offer"one-stop shopping" for water and
wastewater services to residential and commercial developers. These services
include the design, financing, construction and operation of water and
wastewater facilities and, in some instances, purchase of such utilities at
project build-out, thereby adding to E'town's regulated utility customer
base. Based on AWG's results in 1997, E'town expects the acquisition to add
modestly to E'town's earnings per share in 1998.
Real Estate and Other Investments
E'town Properties and E'town Corporation own various parcels of undeveloped
land in New Jersey carried as investments of $12.8 million in Non-Utility
Property and Other Investments -- Net, in the Consolidated Balance Sheets of
E'town at December 31, 1997. E'town and Properties are proceeding with plans
to sell such properties and expect to invest the sale proceeds into water and
wastewater utility investments that produce a current return.
Properties sold one parcel in 1997 for a price of $.4 million. The sale
produced a nominal gain. Properties had previously entered into 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 had been extended and
all the material issues appear to have been resolved. Properties expects
several closings during 1998, including the parcel described above which, if
consummated, would result in gains.
The carrying value of each parcel includes the original cost plus any real
estate taxes, interest and, where applicable, direct costs capitalized while
rezoning or governmental approvals are or were being sought. 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 1997, the estimated net realizable value of each property exceeds
its respective carrying value as of December 31, 1997.
Included in Non-Utility Property and Other Investments at December 31, 1997
is an investment of $1.3 million ($.3 million net of related deferred taxes)
in a limited partnership that owns Solar Electric Generating System V (SEGS),
located in California. SEGS contributed $.02 to E'town's consolidated
earnings per share and paid cash dividends to E'town of $.2 million in 1997.
8
<PAGE>
E'town will continue to monitor the relationship between the carrying and net
realizable values of its properties through updated appraisals, when
appropriate, and of its investment in SEGS based on information provided by
SEGS management.
New Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements for a discussion
of two new accounting standards that were effective in 1997.
Year 2000
The Company has assessed its various computer information systems for
compliance with theYear 2000. The Company has recently installed a new
enterprise financial system (SAP), which is Year 2000 compliant. In
addition, the Company uses a third-party provider for its customer billing
and information system, which was redesigned in 1997 to provide many
enhancements including Year 2000 compliance. Management believes that all
integral operating systems are Year 2000 compliant and that there will be no
significant additional costs to achieve compliance.
9
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands Except Per Share Amounts)
Year Ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
Operating Revenues $ 133,826 $ 110,409 $ 108,398
- --------------------------------------------------------------------------------
Operating Expenses:
Operation 47,982 44,807 44,148
Maintenance 6,606 5,859 5,806
Depreciation 12,396 9,893 8,808
Revenue taxes 16,550 13,820 13,591
Real estate, payroll and other taxes 3,152 2,952 2,853
Federal income taxes (Note 3) 10,487 6,791 7,611
- --------------------------------------------------------------------------------
Total operating expenses 97,173 84,122 82,817
- --------------------------------------------------------------------------------
Operating Income 36,653 26,287 25,581
- --------------------------------------------------------------------------------
Other Income (Expense):
Allowance for equity funds used during
construction (Note 2) 215 3,725 2,976
Write-down of non-utility property (Note 7) (350)
Federal income taxes (Note 3) (408) (1,570) (1,142)
Other - net 953 760 742
- --------------------------------------------------------------------------------
Total other income (expense) 760 2,915 2,226
- --------------------------------------------------------------------------------
Total Operating and Other Income 37,413 29,202 27,807
- --------------------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 14,807 13,800 11,696
Other interest expense - net 2,560 2,645 2,390
Capitalized interest (Note 2) (438) (3,524) (2,746)
Amortization of debt discount and expense-net 411 395 358
- --------------------------------------------------------------------------------
Total interest charges 17,340 13,316 11,698
- --------------------------------------------------------------------------------
Income Before Preferred Stock Dividends
of Subsidiary 20,073 15,886 16,109
Preferred Stock Dividends 813 813 813
- --------------------------------------------------------------------------------
Net Income $ 19,260 $ 15,073 $ 15,296
================================================================================
Earnings Per Share of Common Stock (Note 2):
- --------------------------------------------------------------------------------
Basic $ 2.44 $ 1.96 $ 2.16
Diluted $ 2.41 $ 1.96 $ 2.14
- --------------------------------------------------------------------------------
Average Number of Shares Outstanding for
the Calculation of Earnings Per Share:
- --------------------------------------------------------------------------------
Basic 7,891 7,668 7,093
Diluted 8,215 7,966 7,394
- --------------------------------------------------------------------------------
Dividends Paid Per Common Share $ 2.04 $ 2.04 $ 2.04
================================================================================
See Notes to Consolidated Financial Statements.
10
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
Assets 1997 1996
- --------------------------------------------------------------------------------
Utility Plant-At Original Cost:
Utility plant in service $ 678,590 $ 654,713
Construction work in progress 9,336 7,994
- --------------------------------------------------------------------------------
Total utility plant 687,926 662,707
Less accumulated depreciation and amortization 114,587 102,683
- --------------------------------------------------------------------------------
Utility plant-net 573,339 560,024
- --------------------------------------------------------------------------------
Non-utility Property and Other
Investments - Net (Note 7) 20,016 14,113
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 6,233 3,228
Short-term investments 31 31
Customer and other accounts receivable
(less reserve: 1997, $612, 1996, $566) 17,539 16,187
Unbilled revenues 10,412 9,356
Materials and supplies-at average cost 1,966 2,045
Prepaid insurance, taxes, other 3,733 3,918
- --------------------------------------------------------------------------------
Total current assets 39,914 34,765
- --------------------------------------------------------------------------------
Deferred Charges:
Waste residual management 936 1,064
Unamortized debt and preferred stock expenses 10,263 9,508
Taxes recoverable through future rates (Note 3) 21,439 30,435
Postretirement benefit expense (Note 12) 3,738 3,478
Other unamortized expenses 1,259 1,820
- --------------------------------------------------------------------------------
Total deferred charges 37,635 46,305
- --------------------------------------------------------------------------------
Total $ 670,904 $ 655,207
================================================================================
See Notes to Consolidated Financial Statements.
11
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
Capitalization and Liabilities 1997 1996
- --------------------------------------------------------------------------------
Capitalization (Notes 4 and 5):
Common shareholders' equity $ 193,923 $ 183,513
Cumulative preferred stock 12,000 12,000
Long-term debt - net 247,298 193,481
- --------------------------------------------------------------------------------
Total capitalization 453,221 388,994
- --------------------------------------------------------------------------------
Current Liabilities:
Notes payable - banks (Note 6) 23,000 69,000
Long-term debt - current portion (Note 4) 30 30
Accounts payable and other liabilities 11,569 16,197
Customers' deposits 272 300
Municipal and state taxes accrued 16,817 13,887
Interest accrued 3,456 3,483
Preferred stock dividends accrued 59 59
- --------------------------------------------------------------------------------
Total current liabilities 55,203 102,956
- --------------------------------------------------------------------------------
Deferred Credits:
Customers' advances for construction 39,131 43,636
Federal income taxes (Note 3) 69,916 75,942
State income taxes 196 185
Unamortized investment tax credits 8,042 8,245
Accumulated postretirement benefits (Note 12) 4,332 3,650
- --------------------------------------------------------------------------------
Total deferred credits 121,617 131,658
- --------------------------------------------------------------------------------
Contributions in Aid of Construction 40,863 31,599
- --------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note 11)
- --------------------------------------------------------------------------------
Total $ 670,904 $ 655,207
================================================================================
See Notes to Consolidated Financial Statements.
12
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(In Thousands Except Share Amounts)
December 31,
1997 1996
- --------------------------------------------------------------------------------
E'town Corporation:
Common Shareholders' Equity (Notes 4 and 5):
Common stock without par value, authorized,
15,000,000 shares, issued 1997, 8,054,461
shares; 1996, 7,807,751 share $ 153,162 $ 145,661
Paid-in capital 1,315 1,315
Capital stock expense (5,160) (5,160)
Retained earnings 45,560 42,434
Less cost of treasury stock; 1997, 32,208
shares; 1996, 25,876 shares (954) (737)
- --------------------------------------------------------------------------------
Total common shareholders' equity 193,923 183,513
- --------------------------------------------------------------------------------
Elizabethtown Water Company:
Cumulative Preferred Stock (Note 4):
$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 (Note 4):
E'town Corporation:
6 3/4% Convertible Subordinated
Debentures, due 2012 11,354 11,548
6.79% Senior Notes, due 2007 4,000
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
The Mount Holly Water Company:
Notes Payable (due serially through 2000) 57 87
- --------------------------------------------------------------------------------
Total long-term debt 248,411 194,635
Unamortized discount-net (1,113) (1,154)
- --------------------------------------------------------------------------------
Total long-term debt-net 247,298 193,481
- --------------------------------------------------------------------------------
Total Capitalization $ 453,221 $ 388,994
================================================================================
See Notes to Consolidated Financial Statements.
13
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Thousands Except Share and Per Share Amounts)
Year Ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
Common Stock:
Balance at Beginning of Year $145,661 $138,668 $114,136
Public sale of common stock 17,738
Common stock issued under Dividend
Reinvestment and stock Purchase Plan
(1997, 227,992 shares, 1996, 258,673 shares,
1995, 248,846 shares) 6,980 6,993 6,389
Issuance of restricted stock (1997,
4,033 shares) 123
Exercise of stock options (1997, 14,685 shares,
1995, 15,569 shares) 398 405
- --------------------------------------------------------------------------------
Balance at End of Year 153,162 145,661 138,668
- --------------------------------------------------------------------------------
Paid-in Capital: 1,315 1,315 1,315
- --------------------------------------------------------------------------------
Capital Stock Expense:
Balance at Beginning of Year (5,160) (5,160) (4,286)
Expeses incurred to issue common stock (874)
- --------------------------------------------------------------------------------
Balance at End of Year (5,160) (5,160) (5,160)
- --------------------------------------------------------------------------------
Retained Earnings:
Balance at Beginning of Year 42,434 42,995 42,439
Net Income 19,260 15,073 15,296
Dividends on common stock (1997, 1996
and 1995 $2.04) (16,134) (15,634) (14,740)
- --------------------------------------------------------------------------------
Balance at End of Year 45,560 42,434 42,995
- --------------------------------------------------------------------------------
Treasury Stock:
Balance at Beginning of Year (737) (737) (737)
Exercise of stock options (1997, 6,332
shares, 1995, 3,844 shares) (217) (103)
- --------------------------------------------------------------------------------
Balance at End of Year (954) (737) (737)
- --------------------------------------------------------------------------------
Total Common Shareholders' Equity $193,923 $183,513 $177,955
================================================================================
See Notes to Consolidated Financial Statements.
14
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands)
Year Ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $ 19,260 $ 15,073 $ 15,296
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 12,396 9,893 8,808
Write-down of non-utility property 350
Decrease (increase) in deferred charges 699 (638) 248
Deferred income taxes and investment tax
credits-net 2,778 4,917 4,431
Capitalized interest and AFUDC (653) (7,249) (5,722)
Other operating activities-net 382 305 16
Change in current assets and current liabilities
excluding cash, short-term investments and
current portion of debt:
Customer and other accounts receivable (1,352) (203) (3,637)
Unbilled revenues (1,056) (1,912) (282)
Accounts payable and other liabilities (4,656) (634) (1,397)
Accrued/prepaid interest and taxes 3,088 (1,755) 1,323
Other 99 (133) (187)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 30,985 17,664 19,247
- --------------------------------------------------------------------------------
Cash Flows Provided by Financing Activities:
Proceeds from issuance of common stock 7,284 6,993 23,555
Proceed from issuance of debentures and other
long-term debt 54,000 40,000
Debt and preferred stock issuance and
amortization costs (755) 430 (448)
Repayment of long-term debt (224) (233) (453)
Contributions and advances for
construction-net 4,759 2,521 3,441
Net (decrease) increase in notes
payable - banks (46,000) 42,000 4,000
Dividends paid on common stock (16,134) (15,634) (14,740)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 2,930 36,077 55,355
- --------------------------------------------------------------------------------
Cash Flows Used for Investing Activities:
Utility plant expenditures (excluding allowance
for funds used during construction) (25,329) (55,125) (73,790)
Purchase of Edison operating contract (5,810)
Proceeds from sale of land 440
Development costs of land (excluding
capitalized interest) (211) (313) (142)
- --------------------------------------------------------------------------------
Cash used for investing activities (30,910) (55,438) (73,932)
- --------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and
Cash Equivalents 3,005 (1,697) 670
Cash and Cash Equivalents at
Beginning of Period 3,228 4,925 4,255
- --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 6,233 $ 3,228 $ 4,925
================================================================================
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 16,719 $ 8,966 $ 8,351
Income taxes $ 6,023 $ 5,723 $ 4,746
Preferred stock dividends $ 708 $ 708 $ 708
See Notes to Consolidated Financial Statements.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
E'town Corporation (E'town or Corporation), a New Jersey holding company, is
the parent company of Elizabethtown Water Company (Elizabethtown or Company),
Edison Water Company (Edison) and E'town Properties, Inc. (Properties) and
owner of a 65% interest in Applied Watershed Management, LLC (AWM). The Mount
Holly Water Company (Mount Holly) is a wholly-owned subsidiary of
Elizabethtown.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include E'town and its subsidiaries.
Significant intercompany accounts and transactions have been eliminated.
Elizabethtown and Mount Holly are regulated water utilities and follow the
Uniform System of Accounts, as adopted by the New Jersey Board of 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 1.85% for 1997, 1.73% for
1996 and 1.83% for 1995.
Allowance for Funds Used During Construction
Elizabethtown and Mount Holly capitalize, 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
through depreciation charges in rates during the assets' 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 $.38 million, $6.93 million and $5.42 million for 1997,
1996 and 1995, respectively. AFUDC increased in 1996 and 1995 during the
construction of the Canal Road Water Treatment Plant.
16
<PAGE>
Non-utility Property
Costs associated with real estate parcels are being expensed, as incurred.
Properties had capitalized direct costs, real estate taxes and interest costs
associated with certain real estate parcels as they were being developed. All
the parcels were available for sale as of November 1997. The amount of
interest capitalized for 1997, 1996 and 1995 totaled $.27 million, $.32
million and $.30 million, respectively (see Note 7).
Revenues
Revenues are recorded based on the amounts of water delivered to customers
through the end of each accounting period. This includes an accrual for
unbilled revenues for water delivered from the time meters were last read to
the end of the respective accounting periods.
Federal Income Taxes
E'town files a consolidated federal tax return. Deferred income taxes are
provided for temporary differences between the bases of assets and
liabilities for tax and financial statement purposes for E'town and
Properties. Deferred income taxes are also provided for each regulated water
utility to the extent permitted by the BPU. The regulated water utilities
account for prior years' investment tax credits by the deferral method, which
amortizes the credits over the lives of the respective assets. The
non-regulated companies utilize the flow-through method to account for
investment tax credits. This method treats the credits as a reduction of
federal income taxes in the year the credits arise.
Customers' Advances for Construction and Contributions in Aid of Construction
Customers' 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 is customer
advances for construction that, under the terms of individual main extension
agreements, are no longer subject to refund.
Short-term Investments
Short-term investments are stated at cost, which approximates market value.
Earnings Per Share of Common Stock
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 (see below).
Cash Equivalents
The Corporation considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
17
<PAGE>
New Accounting Pronouncements
The Corporation has adopted Statement of Financial Accounting Standards
(SFAS) No. 128,"Earnings Per Share," which is effective for financial
statements issued after December 15, 1997. The pronouncement simplifies the
calculation of earnings per share in that a calculation of"basic" earnings
per share is reported in lieu of primary earnings per share. Basic earnings
per share includes only the weighted average number of common shares
outstanding for the period and does not consider the dilutive effect of the
Corporation's 6 3/4% Convertible Subordinated Debentures or the effect of
outstanding stock options. The calculations of basic and diluted earnings per
share for the three years ended December 31, 1997 follow:
(Thousands of Dollars Except
Per Share Amounts) 1997 1996 1995
-----------------------
Basic:
Net income $19,260 $15,073 $15,297
Average common shares
outstanding 7,891 7,668 7,093
-----------------------
Basic earnings per share $ 2.44 $ 1.96 $ 2.16
=======================
Diluted:
Net income $19,260 $15,073 $15,297
After tax interest expense
applicable to 6 3/4%
Convertible Subordinated
Debentures 500 513 524
-----------------------
Adjusted net income $19,760 $15,586 $15,821
=======================
Average common shares
outstanding 7,891 7,668 7,093
Additional shares from assumed
exercise of stock options 40 6 2
Additional shares from assumed
conversion of 6 3/4% Convertible
Subordinated Debentures 284 292 299
-----------------------
Average common shares
outstanding as adjusted 8,215 7,966 7,394
-----------------------
Diluted earnings per share $ 2.41 $1.96 $2.14
=======================
The Financial Accounting Standards Board has issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
is effective for fiscal years beginning after
December 15, 1997. The pronouncement requires disclosure of selected
information about operating segments in interim financial reports. Based upon
the relative immateriality of the Corporation's business segments, no
additional disclosures are required.
18
<PAGE>
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:
1997 1996 1995
-------------------------
(Thousands of Dollars)
Tax expense at
statutory rate $10,843 $8,486 $ 8,701
Items for which
deferred taxes are
not provided:
Difference between
book and tax
depreciation 58 132 133
Other 197 (55) 123
Investment tax credits (203) (202) (204)
-----------------------
Provision for federal
income taxes $10,895 $8,361 $8,753
=======================
The provision for
federal income
taxes is composed of
the
following:
Current $ 6,759 $3,249 $6,068
Tax on (deposits)
refunds on main
extensions 1,369 207 (1,734)
Deferred:
Tax depreciation 2,670 3,333 3,447
Capitalized
interest 114 1,375 905
Main cleaning and
lining 612 587 405
Other (426) (186) (136)
Investment tax
credits - net (203) (204) (202)
Total provision -----------------------
$10,895 $8,361 $8,753
=======================
In accordance with SFAS No. 109, deferred tax balances have been reflected at
E'town's current consolidated federal income tax rate, which is 35%.
19
<PAGE>
The tax effect of significant temporary differences representing deferred
income tax assets and liabilities as of December 31, 1997 and 1996 is as
follows:
1997 1996
----------------------
(Thousands of Dollars)
Water utility plant - net $(43,611) $(40,283)
Non-utility property 25 41
Other investments (833) (878)
Taxes recoverable through
future rates (21,439) (30,435)
Prepaid pension expense 103 (5)
Capitalized interest (3,891) (3,777)
Waste residuals (322) (373)
Other assets 429 304
Other liabilities (377) (536)
------------------
Net deferred income tax
liabilities $(69,916) $(75,942)
==================
4. Capitalization
E'town periodically makes equity contributions to Elizabethtown from the
proceeds of common stock issued under E'tow's Dividend Reinvestment and
Stock Purchase Plan (DRP). E'town contributed
$6.98 million and $5.30 million in 1997 and 1996, respectively, to
Elizabethtown, from the proceeds of DRP issuances.
The Corporation maintains a Shareholders' Rights Plan (Rights Plan).
Generally, under the Rights Plan, if a person or group acquires 10% or more
of the Corporation's common stock or announces a tender offer for the
Corporation's common stock, non-acquiring shareholders may, under certain
circumstances, exercise rights (Rights) to allow them to significantly
increase their percentage of ownership of the Corporation's common stock.
Such Rights may be redeemed by the Board of Directors.
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, 1997, $7.63 million of Elizabethtown's
retained earnings were restricted under the most restrictive indenture
provision. Therefore, $37.93 million of E'town's consolidated retained
earnings were unrestricted.
On December 22, 1997, E'town signed an agreement to issue $12 million of
6.79% Senior Notes due December 15, 2007. E'town issued $4 million of these
notes on December 22, 1997, and the proceeds of the notes were used to make
capital contributions to Elizabethtown for purposes of financing its ongoing
capital program. E'town issued $6 million of these notes in January 1998 for
purposes of repaying E'town's outstanding short-term debt and will issue the
remaining notes in May 1998. 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 December 31, 1997,
the fixed charges coverage ratio was 2.6 to 1 and the debt to total
capitalization ratio was .59 to 1, calculated in accordance with the Note
Agreement.
On June 4, 1997, Elizabethtown issued a total of $50 million of 30-year
Variable Rate Debentures due December 2027, $25 million of Series A and $25
million of Series B, to evidence a like amount of Variable Rate Notes issued
through the New Jersey Economic Development Authority (NJEDA). The proceeds
were used to repay $50 million of balances outstanding under the Company's
revolving credit agreement. The NJEDA Notes are remarketed on a weekly basis,
at which time the interest rates on each issue are subject to change. The
rates in effect as of December 31, 1997, were 3.60% for Series A and 3.55%
for Series B.
20
<PAGE>
E'tow's 6 3/4% Convertible Subordinated Debentures are convertible to E'town
common stock at $40 per share. At December 31, 1997, 283,850 shares of
common stock were reserved for issuance upon exercise of the conversion rights.
5. Stock Option Plan
E'town had a Stock Option Plan, a qualified incentive plan under which
options to purchase shares of E'town's common stock have been granted to
certain officers and other key employees at prices not less than the fair
market value at the date of grant. The Stock Option Plan provided that any
options granted may be exercised at any time up to an expiration date, not to
exceed 10 years from the date of each grant. The Stock Option Plan expired
May 4, 1997. The 1997 options were granted before that date. E'town will
seek shareholder approval in 1998 for a new Stock Option Plan.
A summary of the details of stock option grants and outstanding balances
is presented below:
Year Options Option Options Outstanding
Granted Granted Price 12/31/97 12/31/96
- ------------------------------------------------
1989 7,500 $24.67 7,500 7,500
1990 7,500 $26.67 7,500 7,500
1995 77,000 $27.12 60,315 77,000
1996 4,000 $26.87 4,000 4,000
1997 25,000 $29.75 25,000
- ------------------------------------------------
Total 104,315 96,000
================================================
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 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 effect of accounting for options under SFAS 123 would be to reduce
basic earnings per share by $.01 for 1997, less than $.01 for 1996 and by
$.01 for 1995.
21
<PAGE>
6. Lines of Credit
E'town has $87.5 million of uncommitted lines of credit with several banks,
of which $82.5 million is available to Elizabethtown. Information relating to
bank borrowings for 1997, 1996 and 1995 is as follows:
1997 1996 1995
----------------------
(Thousands of Dollars)
Maximum amount
outstanding $69,500 $69,000 $60,000
Average monthly
amount
outstanding $43,525 $45,240 $39,636
Average interest rate
at year end 6.2% 5.7% 5.9%
Compensating balances
at year end $ 0 $ 0 $ 0
Weighted average
interest rate
basedon average daily
balances 5.8% 5.8% 6.2%
7. Non-Utility Property and Other Investments
Included in Non-Utility Property and Other Investments at December 31, 1997
and 1996 is an investment of $1.33 million and $1.25 million, respectively,
($.30 million and $.19 million net of related deferred taxes) in a limited
partnership that owns Solar Electric Generating System V (SEGS), located in
California.
Also included in Non-Utility Property and Other Investments at December 31,
1997 and 1996 is
$12.79 million and $12.77 million, respectively, of investments in various
parcels of undeveloped land in New Jersey. The carrying value of each parcel
includes the original cost plus any real estate taxes, interest and, where
applicable, direct costs capitalized while rezoning or governmental approvals
were being sought. Based upon independent appraisals received at various
times prior to 1997, the estimated net realizable value of each property
exceeds its respective carrying value as of December 31, 1997.
Properties made incremental improvements to its Mansfield, New Jersey
property and, accordingly, capitalized various carrying charges. In prior
years, the carrying value of the Mansfield property exceeded its estimated
net realizable value. This was due to the fact that the Mansfield property
was not yet ready for its intended use and various carrying charges were
being capitalized while, based upon prior appraisals, the market value of the
property had remained constant. Charges of $.35 million during the first
three quarters of 1995, to adjust the carrying value of the Mansfield
property, were reflected in the Statements of Consolidated Income and
Consolidated Balance Sheets. In October 1995, Properties obtained more
favorable zoning treatment for the Mansfield property. As a result of the
rezoning, an appraisal in late 1995 had revealed that the market value of the
property had increased to the extent that further adjustments to reduce the
carrying value are not presently expected. Properties capitalized carrying
charges on the Mansfield property through October 1997, when the parcel was
deemed ready for its intended use.
22
<PAGE>
The Corporation will continue to monitor the relationship between the
carrying and net realizable values of its properties through updated
appraisals, when appropriate, and its investment in SEGS based upon
information provided by SEGS management and through cash flow analyses.
In 1995, Properties entered into an agreement to sell a parcel of land to a
developer. The agreement intended that the transaction would close prior to
December 31, 1996. The developer had been unable to obtain approval from the
municipality for an appropriate number of buildable units. All of the
material issues have been resolved and a sale is expected to be consummated
in 1998.
8. Financial Instruments
The carrying amounts and the estimated fair values, as of December 31, 1997
and 1996, of financial instruments issued or held by the Corporation are as
follows:
1997 1996
--------------------
(Thousands of Dollars)
Short-term investments:
Carrying amount $ 31 $ 31
Estimated fair value 59 45
Cumulative preferred stock:
Carrying amount $ 12,000 $ 12,000
Estimated fair value 11,760 12,000
Long-term debt:
Carrying amount $247,298 $193,481
Estimated fair value 254,599 196,288
Estimated fair values are based upon quoted market prices for these or
similar securities.
23
<PAGE>
9. 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:
1997 1996
-----------------------
(Thousands of Dollars)
Waste residual management $ 936 $ 1,064
Unamortized debt and
preferred stock expense 9,656 8,988
Taxes recoverable through
future rates (Note 3) 21,439 30,435
Postretirement benefit
expense (Note 12) 3,738 3,465
Safety management expense 331 418
Business process redesign 284 362
Rate case expenses 80 201
---------------------
Total $36,464 $ 44,933
=====================
Waste Residual Management
The costs of disposing of the byproducts generated by Elizabethtown's and
Mount Holl'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 relate to
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 during two-year
periods.
There were no regulatory liabilities at December 31, 1997 or 1996.
24
<PAGE>
10. Regulatory Matters
Rates
Elizabethtown
On December 17, 1997, the BPU adopted an Order for rate increases for
Elizabethtown and Mount Holly, effective January 1, 1998, for the recovery of
costs associated with SFAS No. 106 "Employers' Accounting For Postretirement
Benefits Other Than Pensions." The resulting rate increases reflect recovery
over a 15-year period of amounts previously deferred on the Consolidated
Balance Sheets for postretirement benefits since 1993 and prospectively, the
difference between the amounts currently recovered in rates and the full SFAS
No. 106 expense on an accrual basis. The total increases in annual operating
revenues resulting from these petitions are $.39 million for Elizabethtown
and $.02 million for Mount Holly.
On October 25, 1996, Elizabethtown received a rate increase under a
stipulation resulting in an increase in annual revenues of $21.8 million for
the construction, financing and operating costs of the Canal Road Water
Treatment Plant.
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 stipulated for a rate increase
effective February 1996 of $.55 million. 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 state
legislation that restricts the amount of water that can be withdrawn from an
aquifer in certain areas of southern New Jersey. The project is referred to
as the Mansfield Project. Mount Holly has expended $3.56 million on the
Mansfield Project as of December 31, 1997, 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.
In September 1995, the New Jersey Department of Environmental Protection
(DEP) granted Mount Holly a water allocation permit for four wells that are to
be the water supply for this project. In October 1995, another water
purveyor requested of theJDEP, and was subsequently granted, an adjudicatory
hearing in opposition to the permit. In August 1997, Mount Holly settled this
matter by entering into an agreement with the other water purveyor and the
DEP. Under the agreement, Mount Holly will purchase 1.0 million gallons per
day from the other purveyor for a period to include the later of two years or
the date the Mansfield Project is placed into service. Purchases of water
began in March 1998, after completion of an interconnection.
As a result of the settlement agreement, Mount Holly expects to continue with
its plan to construct the Mansfield Project. The BPU and the parties to Mount
Holl's last rate case are participating in a proceeding connected with the
second phase of the 1995 case to clarify the need for and cost-effectiveness
of the Mansfield Project.
25
<PAGE>
On September 23, 1997, Mount Holly filed a petition with the BPU to establish
a Purchased Water Adjustment Clause (PWAC) to reflect the cost of water
expected to be purchased from the purveyor under the settlement agreement
discussed above. The petition requests an increase in annual operating
revenues of approximately $1.34 million or 40.3%.
In April 1998, Mount Holly expects to file a petition with the BPU for a rate
increase, which will reflect additional construction and financing costs, as
well as increases in operating costs since rates were last established in
January 1996. This rate case will include approximately $7.27 million of the
cost for a portion of the Mansfield Project to serve a section of Mount
Holly. This amount was part of the second phase of the 1995 rate case
discussed above. The rate case will also reflect $6.0 million in additions to
utility plant since Mount Holl's base rates were last adjusted in January
1996. A decision is expected by the end of 1998. Mount Holly expects to file
an additional rate case next year for the remaining cost of the Mansfield
Project, estimated to be $11.3 million, to coincide with the completion of
the project and the expiration of the agreement to purchase water from the
other purveyor.
11. Commitments and Contingent Liabilities
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 is $7.86 million. The Company purchases additional water
from the NJWSA on an as-needed basis. The total cost of water purchased from
the NJWSA was
$8.79 million, $8.70 million and $9.34 million for 1997, 1996 and 1995,
respectively.
On June 25, 1997, E'town and the Township of Edison, New Jersey, signed an
agreement for 'town to operate the water supply system for a portion of the
township for a 20-year period. E'town formed a wholly-owned subsidiary, Edison
Water Company, for the purpose of managing the assets and operations of the
Edison Township system. The Edison system serves approximately 11,200
residential, commercial and industrial customers. Under the terms of the
contract, Edison Water Company expects to make expenditures of approximately
$25 million during the 20-year period, which include capital improvements to
the water system, as well as payments to the township of Edison. Of this
total ,approximately $14 million is expected to be expended in the first
three years, including the initial payment of $5.70 million, which was made
upon closing.
E'town has entered into negotiations with the city of Elizabeth, New Jersey
to operate its water and wastewater systems under a 40- and 20-year contract,
respectively. These contracts, if successfully negotiated, would require a
$20.0 million payment at closing and expenditures of $26.2 million during the
first three years. E'town would contract with a firm experienced in managing
large wastewater facilities for the wastewater portion of the services to be
provided.
26
<PAGE>
Capital expenditures of E'town and its subsidiaries are estimated to be
$141.95 million through 2000, of which $134.51 million is for Elizabethtown's
and Mount Holly's utility plant and $7.44 million is for non-utility
expenditures.
Expected future minimum rental payments required under noncancelable leases
with terms in excess of one year at December 31 of each of the years 1998
through 2002 are: 1998,
$.65 million; 1999, $.69 million; 2000, $.72 million; 2001, $.76 million and
2002, $.77 million. Rent expense totaled $.72 million, $.84 million and $.82
million in 1997, 1996 and 1995, respectively.
Joint Venture
In 1995, the Corporation entered into a three-year joint venture agreement
with Applied Wastewater Group (AWG) to form a New Jersey limited liability
company, Applied Watershed Management, LLC (AWM). AWG is a unit of several
privately held and affiliated companies providing design, engineering,
construction and operating services for water and wastewater facilities.
E'town has determined it is in the Corporation's long-term interest to
exercise an option to purchase the operations of AWG to provide a full
complement of water and wastewater services and on March 6, 1998, exercised
such option. A closing is expected in the second quarter of 1998. The
purchase price is expected to be approximately $7 million, payable in E'town
Corporation Common Stock, a significant portion of which is expected to be
issued with restrictions related to liquidation.
12. 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
Corporation 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:
1997 1996 1995
----------------------------
(Thousands of Dollars)
Service cost - benefits
earned during the year $ 1,291 $ 1,341 $ 929
Interest cost on
projected benefit
obligation 2,635 2,498 2,170
Return on Plan assets (8,196) (4,569) (7,630)
Net amortization and
deferral 4,579 1,229 4,890
-------------------------
Net pension costs $ 309 $ 499 $ 359
=========================
27
<PAGE>
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.
1997 1996
-----------------------
(Thousands of Dollars)
Market value of Plan assets $46,803 $40,257
--------------------
Actuarial present value of
Plan benefits:
Vested benefits 31,331 28,645
Non-vested benefits 101 96
--------------------
Accumulated benefit
obligation 31,432 28,741
Projected increases in
compensation levels 7,568 7,297
--------------------
Projected benefit obligation 39,000 36,038
--------------------
Excess of Plan assets over
projected benefit
obligation 7,803 4,219
Unrecognized net gain (8,016) (4,049)
Unrecognized prior service
cost 1,549 1,741
Unrecognized transition asset (1,631) (1,898)
--------------------
Prepaid (accrued) pension
expense $ (295) $ 13
====================
The assumed rates used in determining the actuarial present value of the
projected benefit obligations were as follows:
1997 1996 1995
---------------------------
Discount rate 7.25% 7.50% 7.00%
Compensation increase 5.50% 5.50% 5.50%
Rate of return on Plan assets 9.00% 9.00% 9.00%
28
<PAGE>
The Corporation also has a supplemental retirement plan for certain
management employees that is not funded. Benefit payments under this plan are
made directly by the Corporation. At December 31, 1997, the projected benefit
obligation of this supplemental plan was $1.45 million and the net periodic
benefit cost was $.27 million and $.25 million for 1997 and 1996,
respectively. The plan assumed a discount rate of 7.25% for 1997 and 7.50%
for 1996, and a compensation increase of 4% for both 1997 and 1996 for
purposes of determining the actuarial present value of the projected benefit
obligations.
Other Postretirement Benefits
The Corporation 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, pay 25% of future
increases in the premiums the Company pays for postretirement medical
benefits.
Under SFAS No. 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 No. 106, was $7.26 million as of January 1, 1993, the
date of adoption of SFAS No. 106. The transition obligation is being
amortized over 20 years.
The following table details the postretirement benefit obligation at
December 31:
1997 1996
----------------------
(Thousands of Dollars)
Retirees $ 1,990 $ 2,015
Fully eligible plan
participants 4,614 4,107
------------------
Accumulated postretirement
benefit obligation 6,604 6,122
Plan assets at fair value (1,331) (764)
Unrecognized net gain 3,973 3,964
Unrecognized transition obligation (5,442) (5,804)
------------------
Accrued postretirement benefit
obligation $ 3,804 $ 3,518
==================
29
<PAGE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1997, and for the year
1997 was 9%. This rate decreases linearly each successive year until it
reaches 3.8% in 2007, after which the rate remains constant. The assumed
rates used in determining the actuarial present value of the projected
benefit obligations were as follows:
1997 1996 1995
--------------------------
Discount rate 7.25% 7.50% 7.00%
Rate of return on
plan assets 9.00% 9.00% n/a
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, 1997, and the net postretirement service and
interest cost by approximately $.90 million and $.26 million, respectively.
Based upon the independent actuarial study referred to above, the annual
postretirement cost calculated under SFAS No. 106 is as follows:
1997 1996 1995
---------------------------
(Thousands of Dollars)
Service cost - benefits
earned during the year $ 389 $ 423 $ 480
Interest cost on
accumulated postretirement
benefit obligation 449 430 585
Return on Plan assets (57) (72)
Amortization of
transition obligation 363 419 363
Amortization of gain (223)
------------------------
Total 921 1,200 1,428
Deferred amount for
regulated companies
pending recovery (273) (564) (824)
------------------------
Net postretirement
benefit expense $ 648 $ 636 $ 604
=======================
The rate increases effective January 1, 1998, allows for the full recovery of
costs associated with the implementation of SFAS No. 106, including an
amortization over 15 years of amounts previously deferred, which were in
excess of amounts previously being recovered in rates. As of December 31,
1997, the amounts that have been deferred are $3.59 million and $.14 million
for Elizabethtown and Mount Holly, respectively.
30
<PAGE>
13. Quarterly Financial Data (Unaudited)
A summary of financial data for each quarter of 1997 and 1996 follows:
Basic Diluted
Operating Operating Net Earnings Earnings
Quarter Revenues Income Income Per Share Per Share
(Thousands of Dollars Except Per Share Amounts)
- ---------------------------------------------------------
1997
1st $ 30,121 $ 8,011 $ 3,470 $ .44 $ .44
2nd 32,463 8,785 4,405 .56 .55
3rd 38,643 11,776 7,454 .93 .92
4th 32,599 8,081 3,931 .51 .50
- -------------------------------------------------------
Total $133,826 $36,653 $19,260 $2.44 $ 2.41
=======================================================
1996
1st $ 25,761 $ 5,568 $ 3,176 $ .42 $ .42
2nd 27,265 6,355 3,918 .51 .51
3rd 28,173 6,977 4,454 .58 .57
4th 29,210 7,387 3,525 .45 .46
- -------------------------------------------------------
Total $110,409 $26,287 $15,073 $1.96 $ 1.96
=======================================================
Water utility revenues are subject to seasonal fluctuation due to normal
increased water consumption during the third quarter of each year.
31
<PAGE>
INDEPENDENT AUDITOR' REPORT
To the Shareholders and Board of Directors of E'town Corporation:
We have audited the accompanying consolidated balance sheets and statements
of consolidated capitalization of E'town Corporation and its subsidiaries as
of December 31, 1997 and 1996, and the related statements of consolidated
income, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of E'town Corporation and its
subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche
Parsippany, New Jersey
February 18, 1998, except for Note 11,
as to which the date is March 6, 1998
32
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
OTHER FINANCIAL AND STATISTICAL DATA
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
Utility Plant (Thousands)
Utility Plant - net $573,339 $560,024 $507,858 $437,456 $373,293
Construction Expenditures
(excluding AFUDC) 25,329 55,125 73,789 69,981 32,517
Capitalization (Thousands)
Shareholders' Equity 193,923 183,512 177,081 152,971 128,374
Preferred Stock 12,000 12,000 12,000 12,000 12,000
Debt (1) 270,328 262,511 220,703 177,115 154,448
Total Capitalization $476,251 $458,023 $409,784 $342,086 $294,822
Capitalization Ratios
Common Stock 41% 40% 43% 44% 44%
Preferred Stock 2% 3% 3% 4% 4%
Debt (1) 57% 57% 54% 52% 52%
Common Stock Data
Earnings Per Share:
Basic $ 2.44 $ 1.96 $ 2.16 $ 1.95 $ 2.59
Diluted 2.41 1.96 2.14 1.94 2.54
Dividends Per Share 2.04 2.04 2.04 2.04 2.01
Book Value Per Share $ 24.17 $ 23.58 $ 23.54 $ 23.17 $ 22.76
Average Shares
Outstanding: (Thousands)
Basic 7,891 7,668 7,093 6,210 5,338
Diluted 8,215 7,966 7,394 6,519 5,652
Operating Statistics
Revenues (Thousands)
General Customers $ 87,998 $ 68,797 $ 67,455 $ 62,923 $ 63,100
Other Water Systems 20,096 18,929 18,720 18,082 17,187
Industrial Wholesale 8,451 7,869 7,947 7,458 6,652
Fire Service/
Miscellaneous 17,281 14,814 14,276 13,570 13,057
Total Revenues $133,826 $110,409 $108,398 $102,033 $ 99,996
Net Income $ 19,260 $ 15,073 $ 15,296 $ 12,088 $ 13,830
Water Sales - Millions
of Gallons (mg)
General Customers 25,640 22,890 23,999 23,551 23,883
Other Water Systems 13,341 15,049 15,569 15,691 15,109
Industrial Wholesale 3,533 3,567 3,673 3,568 3,213
System Use and
Unaccounted For 6,948 6,444 6,402 6,570 5,453
Total Water Sales 49,462 47,950 49,643 49,380 47,658
System Delivery
by Source - mg
Surface 42,585 41,485 42,646 42,534 40,742
Wells 6,689 6,328 6,764 6,690 6,776
Purchased 188 137 233 156 140
Total System Delivery 49,462 47,950 49,643 49,380 47,658
Millions of Gallons Pumped:
Average Day 135 131 136 135 131
Maximum Day 205 170 183 182 191
General Information
Meters in Service 200,320 197,791 194,660 191,622 188,677
Miles of Main 2,926 2,899 2,869 2,828 2,800
Fire Hydrants Served 16,228 16,012 15,650 15,291 14,909
Total Employees 399 400 398 386 384
================================================================================
(1) Includes long-term debt, notes payable and long-term debt current portion.
33
<PAGE>
Stock Price And Dividend Data - E'town's Common Stock is traded on the
New York Stock Exchange under the symbol ETW.
1997
- ------------------------------------------------
Quarter 1st 2nd 3rd 4th
Closing Price
Low: $ 29.12 $ 29.50 $ 30.50 $ 31.87
High: $ 31.75 $ 34.87 $ 34.00 $ 40.50
Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51
================================================
1996
- -------------------------------------------------
Quarter 1st 2nd 3rd 4th
Closing Price
Low: $ 27.25$ $ 26.50 $ 25.62 $ 28.50
High: $ 30.12 $ 29.37 $ 27.00 $ 31.62
Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51
=================================================
34
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE CORPORATION
All subsidiaries of E'town Corporation as of December 31, 1997 are as follows:
State of
Name Incorporation
Elizabethtown Water Company New Jersey
E'town Properties, Inc. Delaware
Edison Water Company New Jersey
Applied Watershed Management, LLC (1)
(1) Joint venture formed as a Limited Liability Company. The company is
65%-owned by E'town Corporation.
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE COMPANY
All subsidiaries of Elizabethtown Water Company as of December 31, 1997 are
as follows:
State of
Name Incorporation
The Mount Holly Water Company New Jersey
EXHIBIT 23
INDEPENDENT AUDITOR' CONSENT
We consent to the incorporation by reference in E'town Corporation's
Registration Statement No. 33-316713 on Form S-3 and Nos. 33-49812, 33-44210
and 33-42509 on Forms S-8 of our reports dated February 18, 1998 (except for
Note 11 to the financial statements as to which the date is March 6, 1998)
and to the incorporation by reference in Elizabethtown Water Company's
Registration Statement No. 33-19600 on Form S-8 and Nos. 33-68579 and
33-51917 on Forms S-3 of our report dated February 18, 1998, appearing or
incorporated by reference in this Annual Report on Form 10-K of E'town
Corporation and Elizabethtown Water Company for the year ended December 31,
1997.
/s/ Deloitte & Touche
Parsippany, New Jersey
March 27, 1998
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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