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, 1999
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 Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorp- orated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ___X___
On December 31, 1999, the aggregate market value of E'town Corporation's voting
stock held by non-affiliates was $543,325,968.
On December 31, 1999, there were 8,728,128 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, 1999.
<PAGE>
E'TOWN CORPORATION
ELIZABETHTOWN WATER COMPANY
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business 1
Organization 1
Pending Merger 1
Service Area and Customers 2
Water Supply 2
Water Treatment Facilities and Water Quality Regulations 3
Transmission and Distribution 4
Energy Supply 4
Environmental Matters 4
Franchises 5
Employee Relations 5
Rate Matters 5
Real Estate Matters 6
Other Matters 7
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for the Corporation's Common Stock and
Related Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 10
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management 22
Item 13. Certain Relationships and Related Transactions 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 23
SIGNATURES 25
AUDITORS' REPORT & SUPPLEMENTAL SCHEDULE 27
EXHIBIT INDEX 29
APPENDIX I
Elizabethtown Water Company and Subsidiary Consolidated Financial
Statements for the Years Ended December 31, 1999, 1998 and 1997
and Independent Auditors' Report
<PAGE>
E'TOWN CORPORATION
ELIZABETHTOWN WATER COMPANY
Annual Report on Form 10-K
For the year ended December 31, 1999
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). Applied Wastewater Management (AWWM) is a regulated wastewater
utility acquired in June 1998 and is engaged in the ownership and operation
of water and wastewater facilities. Elizabethtown, Mount Holly and AWWM are
public utilities and are regulated by the New Jersey Board of Public
Utilities (BPU). Elizabethtown, Mount Holly and AWWM comprise the Regulated
Utilities segment of the business for financial and management reporting
purposes. Liberty Water Company (Liberty) is a wholly owned, non-regulated
subsidiary of E'town formed in July 1998 to operate the water system of the
City of Elizabeth, New Jersey under a 40-year operating contract. 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. Edison and Liberty comprise
the Contract Operations segment of the business for financial and management
reporting purposes. Also acquired in June 1998, Applied Water Management,
Inc. (AWM), is engaged in the design and construction of wastewater
facilities as well as in the pumping and hauling of wastewater materials.
This entity represents the Engineering/Operations and Construction segment of
the business for financial and management reporting purposes. 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 provides the financing for its non-regulated subsidiaries
through issuance of short- and long-term debt as well as through public
equity offerings for capital contributions to all subsidiaries. E'town and
Properties comprise the Financing and Investment segment of the business for
financial and management reporting purposes.
PENDING MERGER
On November 21, 1999, E'town entered into an agreement (Merger Agreement)
with Thames Water Plc (Thames Water) under which Thames Water has agreed,
subject to certain conditions, to acquire E'town for $68 per share in cash or
approximately $607 million. Thames Water will also assume the debt of E'town.
The acquisition will take the form of a merger (Merger) of E'town with a
newly formed subsidiary of Thames Water and E'town will be the surviving
company.
Regulated Utilities Segment
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. The assets and operating results of Elizabethtown constitute the
predominant portions of E'town's assets and operating results.
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SERVICE AREA AND CUSTOMERS
At December 31, 1999, Elizabethtown and Mount Holly furnished water service
on a retail basis to general customers and to industrial customers totaling
203,711 in 54 municipalities in the counties of Union, Middlesex, Somerset,
Mercer, Hunterdon, Ocean, Morris and Burlington in New Jersey. AWWM serves
1,145 wastewater and 166 water customers.
Elizabethtown also provides, on a wholesale basis, a portion of the water
requirements of seven additional municipalities with their own retail water
systems and, of three other investor-owned water companies. Water for fire
protection service is provided to various municipalities and also to
commercial and industrial establishments.
At December 31, 1999, Edison and Liberty served 29,051 customers under their
contracts to operate the water systems of the Township of Edison and the City
of Elizabeth, both in New Jersey.
The operating revenues of E'town by major classification of customer for the
twelve months ending December 31, 1999 are as follows:
General customers 57.1%
Other water systems 13.3%
Industrial wholesale customers 4.6%
Fire service/miscellaneous 10.5%
Contract operations 7.0%
Engineering, operations and construction 7.5%
-----
Total 100.0%
=====
The water systems are substantially all metered except for fire service.
Additional operating statistics appear in Item 6.
WATER SUPPLY
The water supply systems of Elizabethtown and Mount Holly are physically
separate. During 1999, Elizabethtown's pumpage averaged 134.8 million gallons
per day (MGD) and Mount Holly's pumpage averaged 3.9 MGD. Elizabethtown and
Mount Holly believe they have sufficient water supply sources to meet the
current and expected future needs of their customers.
In 1999, surface water sources supplied approximately 90% of Elizabethtown's
supply with wells supplying the remaining 10%. All of Mount Holly's water had
been produced from wells until March,1998 at which time it began purchasing
1.0 million gallons per day from another purveyor on a temporary basis.
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 150 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.
In 1998, Mount Holly commenced a construction project, called the Mansfield
Project, to comply with New Jersey legislative restrictions to obtain
alternative water supplies, thereby reducing its water pumpage from an
aquifer, which had been subject to over-pumping by Mount Holly and various
local purveyors in a portion of southern New Jersey. A portion of this
project was placed into service in the third quarter of 1998 and the
remaining portion of the project was placed into service in late December
1999.
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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 temporarily unavailable due to poor water quality. The
Raritan-Millstone Plant (Plant), Elizabethtown's primary water treatment
plant, was placed in service in 1931 and has continually been upgraded since
that time. The Plant has a production capacity of 155 MGD. The Canal Road
Water Treatment Plant (Canal Road), Elizabethtown's secondary water treatment
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. Canal Road has an initial rated production
capacity of 40 MGD. In September 1999, Tropical Storm Floyd flooded the Plant
which required the facility to be withdrawn from service for approximately 3
days. During that time, water demands were met by Canal Road, wells and by
purchasing additional water from adjacent water utilities.
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 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 EPA'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.
Corrosion inhibitor facilities for Elizabethtown were completed in 1996. The
Company is in compliance with LCR requirements.
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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 may occur. To the
extent that contamination in excess of applicable MCLs occurs at wells
lacking aeration towers, Elizabethtown will consider building aeration
towers, if feasible and cost effective, or consider closing such wells,
thereby increasing the Company's 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 19 MGD.
In 1999 Elizabethtown removed certain wells from service due to an exceedance
of MCLs. The customers of these wells were then connected to the
Elizabethtown system.
Surface Water Treatment Rule
The operations of Elizabethtown's Plant and Canal Road are subject to the
SWTR.Improvements to the facilities are made when necessary in order to
maintain compliance with the SWTR.
TRANSMISSION AND DISTRIBUTION
As of December 31, 1999, Elizabethtown Water Company's transmission and
distribution system included 2,998 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 pre stressed 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.
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 byproduct 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 proper service. Mount Holly
has also been able to construct all facilities and obtain all necessary
diversion authorizations.
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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
A substantial portion of the operating personnel of Elizabethtown and Mount
Holly, or less than half of all E'town employees, are 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, 1999 and will expire
on January 31, 2003. The contract provides for wage increases of 1.5% on the
first of February and August beginning in 1999 through August of 2002. The
Company considers relations with both union and nonunion employees to be
satisfactory.
RATE MATTERS
Elizabethtown, Mount Holly and AWWM 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. Rate relief is sought periodically 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
In December 1997 the BPU adopted a Stipulation for rate increases for
Elizabethtown and Mount Holly, effective January 1, 1998, for the full
recovery of costs associated with SFAS No. 106 "Accounting for Employer's
Postretirement Benefits," on an accrual basis less the costs associated with
SFAS No. 106 expenses previously recovered in rates. The total increases in
annual operating revenues resulting from these Stipulations are $.39 million
for Elizabethtown and $.02 million for Mount Holly.
In accordance with the terms of the pending Merger Agreement with Thames
Water, Elizabethtown will postpone filing for rate relief to recover
additional construction and financing costs incurred since base rates were
last established in October 1996 until at least August 2000.
Mount Holly
In 1998, Mount Holly commenced a construction project, called the Mansfield
Project, to comply with New Jersey legislative restrictions to obtain
alternative water supplies, thereby reducing its water pumpage from an
aquifer, which had been subject to over-pumping by Mount Holly and various
local purveyors in a portion of southern New Jersey. A portion of this
project was placed into service in the third quarter of 1998 and the
remaining portion of the project was placed into service in late December
1999.
To settle an appeal initiated by another water purveyor in 1995 concerning
the diversion rights for the Mansfield Project, Mount Holly signed a
Stipulation in 1997 with the purveyor, the DEP and other parties, requiring
Mount Holly to purchase one million gallons per day from the other purveyor
during the two-year period that the Mansfield Project was being constructed.
Purchases began during March of 1998, after completion of an interconnection
and ended in January 2000 shortly after the Mansfield Project went into service.
In September 1997 Mount Holly filed a petition with the BPU to establish a
Purchased Water Adjustment Clause (PWAC) to reflect the cost of water
purchased from the other purveyor under the aforementioned Stipulation
Agreement. In May 1998, the BPU adopted a Stipulation signed by the parties
to the PWAC case for an increase in annual revenues under Mount Holly's PWAC
of $1.3 million or 38.9%.
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<PAGE>
Effective January 1, 2000, Mount Holly received an increase in annual rates
of $1.9 million. This increase included costs for Mount Holly's Mansfield
Project that was placed in service at the end of December 1999. The rate
decision also reflected the elimination of the PWAC. After the elimination of
the PWAC the net rate increase was $.5 million. This increase also reflects
additional construction and financing costs, as well as increases in
operating costs, since base rates were last established in January 1996.
REAL ESTATE MATTERS
Financing and Investment Segment
E'town is in the process of selling its remaining parcels of undeveloped
land. Several parcels have been sold and the proceeds are being invested into
water and wastewater projects. The eventual sale of these parcels is
contingent upon the purchaser obtaining various approvals for development.
This process could take up to several years. As of December 31, 1999, all the
remaining properties are under contract to be sold.
Contract Operations Segment
In July 1998 E'town, through Liberty, entered into a contract with the City
of Elizabeth (Elizabeth), New Jersey to operate its water system under a
40-year contract serving approximately 17,600 customers. Under the contract,
Liberty made payments to Elizabeth of $19.7 million in 1998 and $12 million
in 1999 and is obligated to make a payment of $19 million in June 2000. Also
under the terms of the contract, Liberty will deposit $57.8 million from
customer collections over the 40-year contract into a fund administered by
Elizabeth (Fund Deposits), of which $52.3 million is due after 2012, to be
used by Elizabeth to pay for capital improvements or for other water system
purposes. Liberty is responsible for $7.45 million of construction
expenditures, primarily for meter replacements, over the life of the
contract. Of these total commitments, approximately $2.5 million is expected
to be expended in the next three years. Over the life of the contract,
E'town will receive all water revenues from billing the customers of the
water system in accordance with rate increases set forth in the contract
except for the Fund Deposits discussed above. E'town is also responsible for
all operating expenses as well as the capital expenditures discussed above.
Performance by Liberty of the contract provisions is guaranteed by E'town.
In 1997 E'town, through Edison, entered into a contract with the Township
of Edison, New Jersey to operate its water system under a 20-year contract
serving approximately 11,500 customers. Edison bills and receives all water
revenues generated as a result of operating the water system and pays: (i)
all operating and maintenance expenses for the water system, (ii) certain
annual payments to the Township of Edison and (iii) costs of specific capital
improvements. Aggregate annual payments and the estimated costs of capital
improvements are expected to be approximately $25 million during the 20-year
life of the contract of which $12.5 million has been spent as of December 31,
1999. Of the total, approximately $2.9 million is expected to be expended in
the next three years. An initial payment of $5.7 million was made upon the
closing in June 1997. Performance by Edison of the contract provisions is
guaranteed by E'town.
If the Elizabeth or Edison contracts were terminated by either the Township
of Edison or the City of Elizabeth, the unamortized balance of the concession
fees and amounts paid for additional capital improvements would be refunded
to Liberty and Edison in accordance with the contracts.
Engineering/ Operations and Construction Segment
In June 1998 the Corporation purchased AWM which provides "one-stop shopping"
for water and wastewater services to residential and commercial developers.
These services include the design, construction and operation of water and
wastewater facilities and, in some instances, purchase of such utilities from
developers at project build-out by AWWM, thereby adding to E'town's regulated
utility customer base. AWM expects to incur capital expenditures of $2.0
million during the next three years. These expenditures consist primarily of
vehicles and equipment used in the construction and waste hauling operations.
In 1999, AWM acquired a septic services business for $.7 million and a group
of small, non-regulated wastewater treatment facilities for $1.0 million.
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OTHER MATTERS
In August 1999 the Governor of the State of New Jersey declared a "Water
Emergency" for the entire state and issued mandatory restrictions on outdoor,
nonessential water use. Due to unusually low levels of rainfall during June
and July the Governor deemed these measures necessary to preserve the
integrity of several of the state's reservoir and well supplies. Customers of
Elizabethtown, Mount Holly, Edison and Liberty were subject to these
restrictions. The water systems operated by E'town's subsidiaries at all
times had, and continue to have, adequate supplies of water to meet the needs
of their customers. These restrictions affected the amount of water consumed
by a substantial number of the Corporation's customers. The restrictions
were lifted in October 1999.
In September 1999, Elizabethtown withdrew its primary water treatment plant,
the Raritan-Millstone Water Treatment Plant, from service as a result of
flooding from Tropical Storm Floyd. For several days, Elizabethtown had
difficulty maintaining adequate water pressure in portions of its
distribution system because overall system production levels were
substantially less than normal. Customers in portions of a few municipalities
were without water service for approximately 3 days. Costs incurred
to repair and replace equipment damaged by the flood and to respond to
inquiries by customers, regulatory bodies and the media have been deferred
and are expected to be recoverable through insurance. The Company has
incurred $7.0 million of flood-related expenditures and has received an
advanced reimbursement of $2.0 million from its insurance carrier. The
remaining $5.0 million of flood-related expenditures is reported on the
Consolidated Balance Sheets as a deferred charge at December 31, 1999. The
loss of revenues due to below normal water consumption is not recoverable
through insurance.
In June 1999 Mount Holly purchased Homestead Water Utility, Inc. and AWWM
purchased Homestead Treatment Utility, Inc. for a combined purchase price of
$1.8 million. The entities provide water and wastewater services to
approximately 800 customers of the Homestead community in southern New Jersey.
Executive Officers of the Corporation and Elizabethtown
See Item 10 for disclosure of the executive officers of E'town and
Elizabethtown.
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Item 2. Properties
All principal plants and other materially important units of property of the
Corporation are owned in fee. The Corporation considers such property to be
in good operating condition.
Item 3. Legal Proceedings
On September 23, 1999, two parties filed separate class action lawsuits for
compensatory damages and related fees on behalf of themselves and similarly
situated residential and commercial customers against Elizabethtown Water
Company, Edison Water Company and Liberty Water Company. The lawsuit alleges
negligence regarding the quantity and quality of water services provided by
the Corporation during the period in September 1999 when Elizabethtown's
primary water treatment plant was flooded from Tropical Storm Floyd and was
withdrawn from service for approximately 3 days. Elizabethtown has notified
its insurance carrier of the lawsuit and has filed a motion for summary
judgment to dismiss the lawsuit as a class action proceeding prior to
answering the allegations. In March 2000, the New Jersey Superior Court
(NJSC) ruled that in the event the lawsuit is not dismissed, the case be
referred to the BPU for purposes of investigating the matter and reporting
its findings to the NJSC. The NJSC, in view of the BPU's findings, will then
determine what, if any, damages were suffered by the plaintiffs and what
liability, if any, rests with Elizabethtown. E'town Corporation maintains
that such allegations are without merit and believes that the plaintiffs'
chances of prevailing are not significant.
The Corporation, in the ordinary course of business, periodically becomes
involved in litigation. There is currently no litigation in progress, other
than the items discussed above, regarding environmental or other issues in
which an outcome adverse to the Corporation could have a material impact on
the financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for the Corporation's Common Stock and Related Stockholder
Matters
This information is included in Exhibit 13, filed herewith, and is
incorporated herein by reference. All of the common stock of
Elizabethtown Water Company is owned by E'town.
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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
1999 1998 1997 1996 1995
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Utility Plant (Thousands)
Utility Plant - net $ 650,771 $ 604,899 $ 572,785 $ 560,024 $ 507,858
Construction Expenditures
(excluding AFUDC) 56,635 43,500 24,612 55,125 73,789
Total Assets 741,187 683,328 646,318 640,779 580,808
Capitalization (Thousands)
Shareholder's Equity 220,461 208,573 193,354 182,293 176,685
Preferred Stock 12,000 12,000 12,000 12,000 12,000
Debt (1) 296,823 267,178 249,974 250,963 208,952
Total Capitalization $ 529,284 $ 487,751 $ 455,328 $ 445,256 $ 397,637
Capitalization Ratios
Common Stock 42% 43% 42% 41% 44%
Preferred Stock 2% 2% 3% 3% 3%
Debt (1) 56% 55% 55% 56% 53%
Earnings to Fixed Charges
Ratio 2.94 3.33 2.91 2.40 2.77
Earnings to Fixed Charges and
Preferred Dividends 2.73 3.09 2.71 2.22 2.54
Earnings Applicable to
Common Stock (Thousands) $ 20,592 $ 23,955 $ 20,092 $ 15,942 $ 16,512
Operating Statistics
Revenues (Thousands)
General Customers $ 92,111 $ 87,698 $ 85,195 $ 68,797 $ 67,455
Other Water Systems 21,597 22,181 21,900 18,929 18,720
Industrial Wholesale 7,531 8,148 8,451 7,869 7,947
Fire Service/Miscellaneous 17,067 16,820 16,242 14,763 14,276
Total Revenues $ 138,306 $ 134,847 $ 131,788 $ 110,358 $ 108,398
Water Sales - Millions of
Gallons (mg)
General Customers 25,842 24,609 24,333 22,890 23,999
Other Water Systems 13,806 14,397 14,504 15,049 15,569
Industrial Wholesale 3,270 3,482 3,533 3,567 3,673
System Use and
Unaccounted For 7,717 6,933 6,948 6,444 6,402
Total Water Sales 50,635 49,421 49,318 47,950 49,643
System Delivery by Source - mg
Surface 44,520 48,067 42,585 41,485 42,646
Wells 5,729 1,072 6,689 6,328 6,764
Purchased 386 282 44 137 233
Total System Delivery 50,635 49,421 49,318 47,950 49,643
Millions of Gallons Pumped:
Average Day 139 135 135 131 136
Maximum Day 230 196 205 170 183
General Information
Customers 203,711 200,251 197,663 195,482 192,617
Miles of Main 2,998 2,953 2,926 2,899 2,869
Fire Hydrants Served 17,644 16,402 16,228 16,012 15,650
================================================================================
(1) Includes long-term debt, notes payable and long-term debt-current portion.
See Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations and Notes to Consolidated Financial Statements
appearing elsewhere in this report.
- -9-
<PAGE>
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 by reference.
Elizabethtown Water Company and Subsidiary
The water utility operations of Elizabethtown Water Company (Elizabethtown)
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 (Company). Mount Holly contributed about 4% of
the Company's consolidated operating revenues for 1999. The following
analysis sets forth significant events affecting the financial condition of
Elizabethtown at December 31, 1999, and the results of operations for the
years ended December 31, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures Program
Elizabethtown
In 1999 net capital expenditures were $55.2 million, primarily for water utility
plant. Elizabethtown's three-year capital program includes $62.0 million for
routine projects (services, hydrants, system rehabilitation and main
extensions not funded by developers) and $73.1 million for transmission
system upgrades, a new operations center, expansion of the Canal Road Water
Treatment Plant (Canal Road) and other projects. Canal Road will be expanded
to provide for enhanced system reliability and to accomodate customer growth.
Canal Road was designed as a 40 million gallon per day (MGD) plant,
expandable to 200 MGD.
Mount Holly
During the next three years, Mount Holly expects to spend $4.7 million, of
which $3.3 million is for routine projects (services, hydrants and main
extensions not funded by developers).
In 1998 Mount Holly commenced a construction project, called the Mansfield
Project, to comply with New Jersey legislative restrictions to obtain
alternative water supplies, thereby reducing its water pumpage from an
aquifer, which had been subject to over-pumping by Mount Holly and various
local purveyors in a portion of southern New Jersey. A portion of this
project was placed into service in the third quarter of 1998 and the
remaining portion of the project was placed into service in late December
1999.
To settle an appeal initiated by another water purveyor in 1995 concerning
the diversion rights for the Mansfield Project, Mount Holly signed a
Stipulation in 1997 with the purveyor, the New Jersey Department of
Environmental Protection (DEP) and other parties, requiring Mount Holly to
purchase one million gallons per day from the other purveyor during the
two-year period that the Mansfield Project was being constructed. Purchases
began during March of 1998, after completion of an interconnection and ended
in January 2000 shortly after the Mansfield Project went into service.
In September 1997 Mount Holly filed a petition with the BPU to establish a
Purchased Water Adjustment Clause (PWAC) to reflect the cost of water
purchased from the other purveyor under the aforementioned Stipulation
agreement. In May 1998, the BPU adopted a Stipulation signed by the parties
to the PWAC case for an increase in annual revenues under Mount Holly's PWAC
of $1.3 million or 38.9%.
- -10-
<PAGE>
Effective January 1, 2000, Mount Holly received an increase in annual rates
of $1.9 million. This increase included costs for Mount Holly's Mansfield
Project that was placed in service at the end of December 1999. The rate
decision also reflected the elimination of the PWAC. After the elimination of
the PWAC the net rate increase was $.5 million. This increase also reflects
additional construction and financing costs, as well as increases in
operating costs, since base rates were last established in January 1996.
Capital Resources
During 1999 Elizabethtown financed 38.2% 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 lines
of credit and proceeds from capital contributions from E'town (funded by
issuances of Common Stock under the Corporation's Dividend Reinvestment and
Stock Purchase Plan).
For the three-year period ending December 31, 2002, Elizabethtown estimates
that 52% of its currently projected capital expenditures are expected to be
financed with internally generated funds (after payment of common stock
dividends). The balance will be financed with a combination of proceeds from
the sale of E'town common stock or capital contributions from Thames Water
after the pending Merger, long-term debt, proceeds of tax-exempt New Jersey
Economic Development Authority (NJEDA) bonds and short-term borrowings.
Elizabethtown expects to pursue additional tax-exempt financing to the extent
that final allocations are granted by the NJEDA.
In November 1998 Mount Holly closed on loan agreements that will make
available up to $13.2 million in proceeds from the issuance of unsecured
notes through the New Jersey Environmental Infrastructure Trust Financing
Program. This program provides financing through two loans. The first loan,
in the amount of $7.3 million, is through the New Jersey Environmental
Infrastructure Trust (Trust), which issued tax-exempt bonds with average
interest rates of 4.7%. The second loan, in the amount of $5.9 million, is
from the State of New Jersey, acting through the New Jersey Department of
Environmental Protection. The State is participating in the Safe Drinking
Water State Revolving Fund authorized by the Safe Drinking Water Act
amendments of 1996 whereby the federal government is funding the state loan
at no interest cost. The effective interest rate for the combined notes is
approximately 2.6%. The proceeds of the loans will be used to repay
short-term debt incurred to finance a portion of the Mansfield Project. The
Company expects to request these funds from the Trust in the second quarter
of 2000.
Interest Rate Risk
The Company is subject to the risk of fluctuating interest rates in the
normal course of business. The Company manages interest rates through the use
of fixed and, to a lesser extent, variable rate debt. As of December 31,
1999, a hypothetical single percentage point change in interest rates would
result in a $.5 million change in interest costs and earnings before tax
related to short-term and variable rate debt.
RESULTS OF OPERATIONS
Earnings Applicable to Common Stock for 1999 was $20.6 million as compared
to $24.0 million for 1998. The 1999 decrease of $3.4 million in net income is
comprised of (i) a decrease of $.7 million for lost revenues net of expenses
from reduced consumption as a result of New Jersey State-imposed water
restrictions in August for drought conditions, (ii) a decrease of $.4 million
from flooding in September of Elizabethtown's Raritan-Millstone Plant caused
by Tropical Storm Floyd (Floyd) (see Other Matters), (iii) a decrease of $2.5
million from additional operating expenses, primarily labor and benefits and
(iv) a decrease of $1.6 million from higher interest costs and depreciation.
These decreases were partially mitigated by the favorable impact of an
increase of $1.8 million in revenues, net of related expenses for higher
water consumption related to an extended dry period in the spring and early
summer of 1999.
-11-
<PAGE>
Earnings Applicable to Common Stock for 1998 was $24.0 million as compared
to $20.1 million for 1997. Net income increased by $3.9 million, primarily
comprised of (i) $.6 million due to an extended dry period in the summer of
1998 resulting in higher water consumption than in 1997 (ii) $1.3 million
from lower operating expenses due to a combination of a mild winter in 1998,
more efficient use of our work force, lower employee benefit costs and
success with our ongoing cost control efforts (iii) $.7 million as a result
of new customers and (iv) $.5 million related to refinancing short-term debt
at lower interest rates. Capitalized construction interest accounted for an
increase in net income of $.5 million.
Operating Revenues increased $3.5 million or 2.6% in 1999 over the comparable
1998 amount.Revenues increased $4.2 million due to higher water
consumption related to an extended dry period in the spring and early summer
of 1999. This favorable factor was somewhat offset by $1.6 million of lower
water consumption resulting from State-mandated water restrictions in August
and by $1.0 million from flooding in September caused by Floyd. New customers
and the PWAC rate increase for Mount Holly contributed the remaining $1.9
million to the increase in revenues.
Operating Revenues increased $3.1 million or 2.3% in 1998 over the comparable
1997 amount. The increase is primarily comprised of $1.4 million from water
service to residential and wholesale customers attributable to increased
water consumption as a result of warmer, drier weather in the summer of 1998
than in 1997. New customers accounted for $.7 million of the increase. The
PWAC rate increase for Mount Holly accounted for the remainder of the
increase.
Operation Expenses increased $5.0 million or 11.1% in 1999 over 1998. The
increase consists of (i) an increase of $2.7 million in labor, including $.8
million attributable to raises, an increase of $.7 million due to overtime
because of the weather conditions, and an increase of $.3 million due to an
increased number of employees, (ii) an increase of $.7 million for power, of
which $.1 million was attributable to the weather conditions while the
remainder was due to adverse operating conditions resulting from flooding by
Floyd, (iii) an increase of $.6 million in leasing costs as conversion
continues from ownership to leasing of all vehicles, (iv) an increase of $.3
million in purchased water by Mount Holly while the Mansfield Project was
being constructed and (iv) an increase of $.7 million from various other
operating expenses.
Operation Expenses decreased $.2 million or .4% in 1998 from 1997. The
Company experienced a decrease of $1.0 million from lower operating costs due
to a mild winter, greater work force utilization, ongoing cost control
efforts and decreased employee benefit costs. These decreases were partially
offset by an increased cost of labor, purchased water for Mount Holly and
variable costs for the higher water sales.
Maintenance Expenses increased $.6 million or 11.4% in 1999 as compared to
1998 primarily due to additional waste residual removal costs.
Maintenance Expenses decreased $.9 million or 13.3% in 1998, as compared to
1997 due to improved procurement procedures and preventative maintenance
programs.
Depreciation Expense increased $.9 million or 7.4% in 1999 and $.2 million or
1.7% in 1998 due to depreciation on utility plant additions in both years.
Revenue Taxes increased $.5 million or 2.9% in 1999 and $.2 million or 1.1%
in 1998 due to the taxes on increases in operating revenues discussed above.
Real Estate, Payroll and Other Taxes increased $.5 million or 19.4% in 1999
primarily due to increased payroll taxes as a result of payrol taxes on
higher labor costs.
Real Estate, Payroll and Other Taxes decreased $.5 million or 14.7% in 1998.
This overall decrease was comprised of additional payroll taxes due to
additional labor costs, which were offset by decreases from lower than
anticipated property taxes on the Canal Road Plant.
- -12-
<PAGE>
Federal Income Taxes as a component of operating expenses decreased $1.6
million or 12.3% in 1999 as compared to 1998 and increased $1.7 million or
15.0% in 1998 over 1997 due to changes in the components of taxable operating
income discussed herein.
Other Income (Expense) increased $.1 million or 8.5% in 1999 compared to
1998.
Other Income (Expense) increased $.3 million or 70.5% in 1998 over 1997 due
to a $.4 million increase in Allowance for Funds Used During Construction
(AFUDC), primarily for Elizabethtown's western operations center. Federal
income taxes increased $.1 million for the taxes on the AFUDC.
Total Interest Charges increased $.9 million or 5.7% in 1999. The increase
consists of $.4 million for Mount Holly's issuance of long-term notes in
November 1998 through the New Jersey Environmental Infrastructure Trust
Financing Program to finance a portion of the construction of its Mansfield
Project and $.5 million for increased short-term borrowings to finance
Elizabethtown's construction program.
Total Interest Charges decreased $1.0 million or 6.1% in 1998 due primarily
to refinancing short-term debt at lower interest rates. In addition, the debt
component of AFUDC increased $.3 million, resulting in lower interest
expense, as a result of higher construction expenditures, primarily for
Elizabethtown's new western operations center.
OTHER MATTERS
In August 1999 the Governor of the State of New Jersey declared a "Water
Emergency" for the entire state and issued mandatory restrictions on outdoor,
nonessential water use. Due to unusually low levels of rainfall during June and
July the Governor deemed these measures necessary to preserve the integrity of
several of the states reservoir and well supplies. Customers of Elizabethtown
and Mount Holly were subject to these restrictions. The water systems operated
by E'town's subsidiaries had and continue to have adequate supplies of water to
meet the needs of their customers. These restrictions affected the amount of
water consumed by a substantial number of the Corporation's customers and
reduced net income in 1999 by approximately $.68 million. The restrictions were
lifted in October 1999.
In September 1999 Elizabethtown took its primary water treatment plant, the
Raritan-Millstone Water Treatment Plant, out of service as a result of
flooding from Floyd. For several days, Elizabethtown had difficulty
maintaining adequate water pressure in portions of its distribution system as
the Canal Road Plant, Elizabethtown's secondary water treatment plant, was
supplying the predominant portion of the water needs of Elizabethtown's
customers. Overall system production levels were substantially less than
normal. Customers in portions of a few municipalities were without water
service for a period of approximately 3 days. Costs incurred to repair and
replace equipment damaged by the flood and to respond to inquiries by
customers, regulatory bodies and the media are being deferred and are
expected to be recoverable through insurance. The loss of revenues
due to below normal water consumption is not recoverable through insurance
and adversely affected net income by approximately $.39 million for 1999.
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, the closing of the pending merger with Thames
Water, changes in environmental regulation and associated costs of compliance
and other claims or assessments made upon the Company.
- -13-
<PAGE>
Elizabethtown
In accordance with the terms of the pending Merger Agreement, Elizabethtown
will postpone filing for rate relief needed to recover additional construction
and financing costs incurred since base rates were last established in October
1996 until at least August 2000. Therefore, earnings from Elizabethtown will be
substantially lower in 2000 than in 1999 due to an assumed return to normal
weather conditions and postponement of the rate filing.
Mount Holly
Mount Holly had a negative rate of return on common equity of 2.6% in 1999,
compared to an authorized rate of return of 11.25%, established in its 1996
base rate case. Mount Holly earned significantly below its authorized return
in 1999 and 1998 as the Company was precluded from filing for needed rate
relief due to recently settled litigation with another purveyor. Management
expects Mount Holly to contribute positively to Elizabethtown's net income as
a result of a Stipulation Agreement approved by the BPU whereby a rate
increase of $1.9 million, or a net increase of $.5 million after elimination
of the PWAC, was effective January 1, 2000.
New Accounting Pronouncements
See Note 3 of Elizabethtown's Notes to Consolidated Financial Statements for
a discussion of new accounting standards that were effective in 1999.
Year 2000
State of Readiness
The Company assessed its significant business systems, as well as
non-critical, peripheral support systems for compliance with the Year 2000
computer challenge. The assessment concluded that all significant business
systems (i.e. customer billing and service, financial, water treatment
operating and control, water quality laboratory information and telemetric
data acquisition systems) are Year 2000 compliant. The assessment also
included inquiries as to the state of readiness of significant vendors whose
services to the Company could have an impact on the Company's ability to
deliver service to its customers. Management concluded that the delivery of
electric power as well as chemicals used in the water treatment process are
two areas of significant importance and received documentation from the
vendors who provide these services that indicates their ability to provide
service. The assessment had identified certain modifications to peripheral
support systems that have since been implemented.
The Costs To Address The Corporation's Year 2000 Issues
The significant business systems of the Company defined above are Year 2000
compliant and have been operational for up to several years. Therefore, no
further costs are expected to be incurred in connection with bringing these
systems into compliance. The peripheral support systems required the Company
to incur costs of approximately $.4 million to bring them into compliance.
At the turn of the century and to-date, the Company experienced no disruption
in the services it provides to its customers and processed transactions in
its financial, customer billing and customer services systems in the normal
course of business. Management is not currently aware of any Year
2000-related problems associated with its internal business systems or
software or with the systems or software of its vendors.
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 contained in Appendix I
hereto, incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
- -14-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Director Term
Name Age Since Expires Position
- -------------------------------------------------------------------------------
Gail P. Brady 54 N/A N/A Treasurer; Senior Vice President,
Chief Financial Officer and
Treasurer of Elizabethtown
Walter M. Braswell 50 N/A N/A Secretary; Vice President,
General Counsel and Secretary of
Elizabethtown
Thomas J. Cawley 69 1992 2002 Director
Andrew M. Chapman 44 1995 2001 Director,President; President,
Elizabethtown
Anthony S. Cicatiello 52 1996 2002 Director
Edward A. Clerico 45 See Note Below Director; President, Applied
Water Management, Inc.
Dennis W. Doll 41 N/A N/A Controller; Vice President and
Controller of Elizabethtown
Anne Evans Estabrook 55 1982 2001 Director, Chairman of the Board,
E'town Corporation and
Elizabethtown
James W. Hughes 56 1997 2000 Director
John Kean 70 1957 2002 Director
Robert W. Kean, III 52 1989 2001 Director, Vice President
Barry T. Parker 67 1983 2001 Director
Hugo M. Pfaltz 68 1980 2000 Director
Chester A. Ring, 3rd 72 1982 2002 Director
Joan Verplanck 53 1997 2000 Director
Norbert Wagner 64 N/A N/A Senior Vice President-Operations
of Elizabethtown
Family Relationships. Robert W. Kean, Jr., (Director Emeritus) is
a cousin of John Kean, Director and father of Robert W. Kean,
III, Director.
Gail P. Brady has been Treasurer of the Corporation since 1997,
Senior Vice President, Chief Financial Officer and Treasurer of
Elizabethtown since 1998 and Vice President-Finance, Regulatory
Affairs and Treasurer of Elizabethtown since 1994. She is a
trustee of Ramapo College. She has been with Elizabethtown since
1971.
Thomas J. Cawley was Vice Chairman of Elizabethtown until his
retirement in December 1996. From August 1992 to January 1996 he
served as President of Elizabethtown. He joined Elizabethtown in
1969 and served in a variety of operating positions until elected
President in 1992.
Andrew M. Chapman has been 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 until May 1997. He has been President of
Elizabethtown since January 1996, Executive Vice
President of Elizabethtown from May 1994 to December 1995, 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. He is a member of the Regional Advisory Board of PNC
Bank, N.A., New Jersey and is a member of the Board of Directors
of the Damon G.Douglas Company, a general construction company.
- -15-
<PAGE>
Anthony S. Cicatiello is the Chairman of CN Communications
International, Inc., a public relations and advertising firm, a
firm he founded in 1977.
Edward A. Clerico was appointed Director of the Corporation in
August 1998. He was not nominated for election as Director in
May 1999. In July 1999 he was reappointed as Director of the
Corporation and will remain as such until the next election of
Directors. He is President of Applied Wastewater Management,
Inc. and was the owner and founder since 1984 . The Applied
Group of companies was purchased by E'town in June 1998.
Dennis W. Doll has been Controller of the Corporation since 1997,
Vice President and Controller of Elizabethtown since 1998 and
Controller of Elizabethtown since 1994. He joined the company in
1985.
Anne Evans Estabrook has been the owner of Elberon Development
Co. (a real estate holding company) since 1984 and is President
of David O. Evans, Inc. (a construction management company). She
is a Director of Summit Bancorp and its subsidiary, Summit Bank.
She is a Public Member of the Governing Board, New Jersey
Economic Development Authority. She is a Trustee Emeritus of Cornell
University.
James W. Hughes has been Dean of the Edward J. Bloustein School
of Planning and Public Policy at Rutgers University. He has been
the Director of the Rutgers Regional Report since 1988, and has
been a member of the Rutgers University Faculty since 1971.
John Kean is Chairman of the Board and a Director of NUI
Corporation. He was President and Chief Executive Officer of NUI
Corporation until his retirement in April 1995, and until October
1994, Chairman of the Board and Director of Elizabethtown Gas
Company, which was previously a subsidiary of NUI Corporation. He
is also an Honorary President of the International Gas Union.
Robert W. Kean, III has been Vice President of the Corporation since 1997 and
Executive Vice President of Properties since July 1987.
Barry T. Parker is of counsel to the law firm of Parker, McCay &
Criscuolo, P.C. since December 1997, where he had been a partner
since 1967.
Hugo M. Pfaltz has been a principal of the law firm of Pfaltz &
Woller, P.A. since 1976.
Chester A. Ring, 3rd, was President of Elizabethtown until his
retirement in August 1992. He served as President of
Elizabethtown since June 1987.
Joan Verplanck has been President of the New Jersey Chamber of
Commerce since 1994. Prior to that she served as President of
the Morris County Chamber of Commerce.
Norbert Wagner has been Senior Vice President-Operations of
Elizabethtown since 1992 and has been with Elizabethtown since
1963.
The Directors of E'town also serve as Directors of Elizabethtown.
Section 16(a) Beneficial Ownership Reporting Compliance. None.
- -16-
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table provides certain summary information
concerning the compensation for the past three years of the
Chairman of the Board and each of the other four most highly
compensated executive officers of the Corporation (the "named
executive officers").
<TABLE>
<CAPTION>
Annual Compensation Long-Term
Compensation Awards
Fiscal Salary Bonus Other Annual Restricted Securities All Other
Name & Principal Position Year ($) ($) Compensation Stock Underlying Compensation
(1) & (2) Awards (3) Options
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anne Evans Estabrook
Chairman of the Board, 1999 $141,727 $ 7,500 0 $0 20,000 $10,354 (4)(5)(6)
E'town Corporation and 1998 114,612 0 0 30,000 8,982 (4)(5)(6)
Elizabethtown Water Company 1997 75,612 0 0 24,999 25,000 12,430 (4)(5)(6)
Andrew M. Chapman 1999 $240,323 $95,000 $0 $0 20,000 $11,544 (4)(5)(6)
President, E'town Corporation and 1998 210,996 0 0 73,171 10,944 (4)(5)(6)
Elizabethtown Water Company 1997 196,054 0 0 20,953 10,176 (4)(5)(6)
Edward A. Clerico (7) 1999 $177,989 $0 $0 $0 $ 8,825 (4)(5)(6)
President, Applied Water Management, Inc. 1998 141,522 0 0 0 6,613 (4)(5)(6)
Norbert Wagner 1999 $157,458 $24,300 $0 $0 $ 6,872 (4)(5)
Senior Vice President, 1998 145,024 10,350 0 10,334 6,329 (4)(5)
Elizabethtown Water Company 1997 135,774 0 0 8,997 5,794 (4)(5)
Gail P. Brady
Treasurer, E'town Corporation
Senior Vice President, Chief Financial 1999 $135,658 $26,700 $0 $0 $ 5,844 (4)(5)
Officer and Treasurer, 1998 129,443 8,800 0 8,779 5,854 (4)(5)
Elizabethtown Water Company 1997 120,239 0 0 5,978 5,452 (4)(5)
(1) All salaries are paid by Elizabethtown, the Corporation's principal subsidiary, except for Edward A. Clerico. Salaries are
reallocated to the Corporation as appropriate. Edward A. Clerico is paid by Applied Water Management, Inc.
(2) Includes pretax contributions to the 401(k) Plan.
(3) Represents the value as of grant date of restricted stock awards granted in 1998 and 1997, respectively, under the E'town
Corporation 1990 Performance Stock Program. The number of shares of restricted stock awarded to executive officers during
1998 and 1997 and the value of such restricted stock based on the closing price of Common Stock, of $47.375 and $40.19,
respectively, as reported on the New York Stock Exchange on December 31, 1998 and 1997 is as follows: A.E. Estabrook
868 shares, $41,122 and 823 shares, $33,076; A.M. Chapman 2,025 shares, $95,934 and 687 shares, $27,611; N. Wagner
299 shares, $14,165 and 295 shares, $11,856 and G.P. Brady 254 shares, $12,033 and 196 shares, $7,877.
(4) Includes 401(k) Plan matching contributions by Elizabethtown for 1999, 1998 and 1997, respectively, as follows:
A.E. Estabrook $4,810, $3,738, $2,952; A.M. Chapman $6,000, $6,000, $5,700; E.A. Clerico $5,000, $5,000 (for 1999 and
1998-contribution made by AWM); N. Wagner $5,663, $5,215, $4,882 and G.P. Brady $4,500, $4,510, $4,276.
(5) Includes premiums for life insurance by Elizabethtown for 1999, 1998 and 1997, respectively, as follows: A.E. Estabrook
$1,344, $1,344, $828; A.M. Chapman $1,344, $1,344, $1,176; E.A. Clerico $225, $113 (for 1999 and 1998-paid
by AWM); N. Wagner $1,209, $1,114, $912 and G.P. Brady $1,344, $1,344, $1,176.
(6) Includes Director's fees for 1999, 1998 and 1997, respectively, as follows: A.E. Estabrook $4,200, $3,900, $8,650;
A.M. Chapman $4,200, $3,600, $3,300 and E.A. Clerico $3,600, $1,500 (for 1999 and 1998).
(7) The Applied Group, of which E.A. Clerico was the founder and majority owner, was purchased by E'town Corporation on
June 12, 1998. The information in the summary compensation table has been provided for the entire year 1998.
- -17-
</TABLE>
<PAGE>
Option/SAR Grants in Last Fiscal Year
The following table provides information regarding
individual grants of stock options and stock appreciation rights
made during 1999 to the persons named in the Summary Compensation
Table, above.
<TABLE>
<CAPTION>
Potential
Individual Grants Realizable Value at
Number of Assumed Annual
Shares % of Total Rates of Stock Price
Underlying Options/SARs Exercise Appreciation for
Options/ Granted to or Base Option Term (2)
SARs Employees in Price Expiration
Name Granted (1) Fiscal Year ($/Sh) Date 5% 10%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Anne Evans Estabrook 20,000 50% $44.00 04/15/09 $1,364,880 $2,075,040
Andrew M. Chapman 20,000 50% $44.00 04/15/09 $1,364,880 $2,075,040
Edward A. Clerico -- -- -- -- -- --
Norbert Wagner -- -- -- -- -- --
Gail P. Brady -- -- -- -- -- --
(1) The options granted in 1999 are exercisable as of April 15, 2000. To date, no Stock Appreciation Rights were granted
under the 1987 Stock Option Plans, which expired in 1997.
(2) These values are not predictions of what the Corporation believes the market value of its Common Stock will be in
the next 10 years. They are merely assumed values required to be calculated in accordance with SEC rules.
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and
Year-End Option/SAR Values
The following table provides information regarding the pre-tax value realized
from the exercise of options and stock appreciation rights during 1999 and the
value of unexercised in-the-money options and stock appreciation rights held at
December 31, 1999 by the persons named in the Summary Compensation Table, above.
<TABLE>
<CAPTION>
Value of All
Number of Outstanding
Shares All Outstanding In-the-Money
Acquired Aggregate Options/SARs at Options/SARs at
On Value 12/31/99 12/31/99
Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
# ($) (1) (1) (2)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anne Evans Estabrook 32,500 $947,188 0/20,000 $0/$365,000
Andrew M. Chapman 2,200 $ 54,274 19,500/20,000 $688,350/$365,000
Edward A. Clerico -- -- -- --
Norbert Wagner -- -- 8,000/0 $281,000/0
Gail P. Brady 1,000 $ 27,125 -- --
</TABLE>
(1) No Stock Appreciation Rights were granted under the 1987 Stock Option Plan,
which expired in 1997.
(2) Based on the price of $62.25 per share, the closing price of the Common
Stock on the New York Stock Exchange, Inc. on December 31, 1999.
- -18-
<PAGE>
Pensions
The following table shows, for the salary levels and years
of service indicated, the annual pension benefits payable to
employees, including officers, upon retirement at age 65, under
Elizabethtown's non-contributory defined benefit retirement
plan. The compensation taken into account under a tax-qualified
plan is subject to a maximum annual limit under the Internal
Revenue Code of 1986, as amended, adjusted annually for cost of
living increases ($160,000 in 1997, 1998 and 1999, and $170,000
in 2000).
Highest
Consecutive
Four Year
Average
Compensation Annual Benefits for Years of Service Indicated
- --------------------------------------------------------------------------------
10 15 20 25 30 35 40 45
years years years years years years years years
- --------------------------------------------------------------------------------
$ 75,000 $12,000 $18,000 $24,000 $30,000 $36,000 $42,000 $48,000 $54,000
100,000 16,000 24,000 32,000 40,000 48,000 56,000 64,000 72,000
125,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000
150,000 24,000 36,000 48,000 60,000 72,000 84,000 96,000 108,000
175,000 28,000 42,000 56,000 70,000 84,000 98,000 112,000 126,000
200,000 32,000 48,000 64,000 80,000 96,000 112,000 128,000 144,000
225,000 36,000 54,000 72,000 90,000 108,000 126,000 144,000 162,000
250,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000
Elizabethtown's non-contributory defined benefit retirement plan provides that a
participant will receive an annual retirement benefit equal in amount to 1.6% of
the participant's final average compensation for the highest four consecutive
calendar years multiplied by the number of years of credited service (up to a
maximum of 45). Remuneration covered under the retirement plan includes base
wages only. Compensation covered by the plan for Anne Evans Estabrook, Andrew M.
Chapman, Norbert Wagner and Gail P. Brady, are approximately equal to the
amounts set forth under the caption "Salary" in the Summary Compensation Table
above. Edward A. Clerico does not participate in this plan and neither do
Directors who are not also officers or employees of the Corporation.
The annual benefit amounts shown above are not subject to any deduction for
Social Security benefits or other offset amounts. The number of years of service
now credited under the retirement plan (and the supplemental plans described
below) are as indicated for the following officers: Anne Evans Estabrook,
12 years; Andrew M. Chapman, 10 years; Norbert Wagner, 36 years and Gail P.
Brady, 28 years.
The named executive officers, with the exception of Anne Evans Estabrook
and Edward A. Clerico, are entitled to either a Supplemental Executive
Retirement Plan ("SERP") benefit upon the attainment of the normal retirement
age of 65, or a 1995 ("1995 SERP") benefit upon the attainment of the age of 62
with a minimum of 20 years service. The benefit payable under each of these
plans is an amount equal to the difference between 60% for retirement at age 65
or 55% for retirement at age 62 of the average of annual base salary and
incentive compensation payments as shown in the Salary, Bonus and Restricted
Stock Awards Columns in the Summary Compensation Table above plus other taxable
amounts for the thirty-six months prior to retirement. The SERP provides that in
the event of termination due to a change in control, a participant is credited
with an additional 10 years of service for purposes of qualifying for the 1995
SERP. The 1995 SERP also provides life insurance equal to two times compensation
if death occurs before age 55.
The estimated annual benefits payable upon retirement at age 65 for each named
executive officer entitled to SERP or 1995 SERP benefits are as follows: Andrew
M. Chapman $148,387; Norbert Wagner $17,855, and Gail P. Brady $32,824.
- -19-
<PAGE>
Compensation of Directors
(1) Standard Arrangements
Directors' Fees. Directors of the Corporation who are not officers of the
Corporation are paid by Elizabethtown an annual retainer of $15,000 which is
paid in the form of E'town Corporation common stock, and a fee of $600 for each
meeting of the Board of Directors of Elizabethtown which they attend. Such
Directors also receive the per-meeting attendance fee for each meeting of the
Board of the Corporation held on a day when there is not also a meeting of the
Board of Elizabethtown. Properties Directors receive a $1,000 annual retainer
and a fee of $600 for a Board Meeting held on days not coincident with Board
meetings of Elizabethtown. Directors who are officers of the Corporation are
paid a fee of $300 for each Board meeting of Elizabethtown they attend.
Members of committees who are not officers of the Corporation are paid a fee of
$400 for participation at committee meetings on the same day as board meetings
and a fee of $600 for committee meetings held on days other than board meetings.
No fees are paid to members of the Executive Management Committee for attendance
at meetings of that committee.
A Director cannot stand for re-election after his or her 72nd birthday. A
retired Director with 10 or more years' service on the Board of Directors (of
the Corporation or Elizabethtown) becomes eligible at age 72 to receive a
pension for life equal to the annual retainer in effect at the date the Director
becomes eligible for the pension. A retired Director with 5 to 9 years of
service will receive a pension equal to the annual retainer in effect at the
date the Director becomes eligible to receive the pension, payable for the same
number of years that the Director served on the Board.
(2) Other Arrangements
Effective May 1997, Robert W. Kean, Jr. was appointed Chairman of the Board -
Emeritus and Director Emeritus and Brendan T. Byrne and Henry S. Patterson, II
were appointed Directors Emeriti. For the two year period after their
appointment, which expired in May 1999, Directors Emeriti received the
per-meeting Directors' fee of $600 for each Board meeting which they attended.
The Corporation and Elizabethtown have consulting agreements with Robert W.
Kean, Jr. whereby he serves as Chairman Emeritus of the Boards of both companies
and Chairman of the Executive Management Committee as described above, and
renders such other consulting services as the Chairman may reasonably request.
Robert W. Kean, Jr. was paid $75,000 in consulting fees in 1999 in addition to
his pension. The Corporation also provided Mr. Kean with the use of an
automobile for 1999, with a taxable value of $13,750 to Mr. Kean in that year.
Employment Agreements
E'town and Elizabethtown have each entered into an employment agreement
with Anne Evans Estabrook effective May 15, 1997. The agreements continue
until the earliest of (i) mutual agreement of termination, (ii)
resignation, and (iii) any date on which Mrs. Estabrook no longer stands
for re-election as a Director. In addition, the respective companies may
terminate Mrs. Estabrook's employment for reasons of disability or cause
(each as defined in the agreements).
E'town has entered into an employment agreement with Andrew M. Chapman, its
current President and the President of Elizabethtown. Upon the consummation
of the merger contemplated by the Merger Agreement dated as of November 21,
1999 among the Corporation, Thames Water Plc ("Thames") and Edward
Acquisition Corp., as described on Form 8-K dated November 21, 1999, this
new employment agreement with Mr. Chapman will become effective and will
replace Mr. Chapman's existing change in control agreement with E'town,
described below.
- -20-
<PAGE>
Under the terms of the new employment agreement, Mr. Chapman will be
employed as President and Chief Executive Officer of both E'town and
Elizabethtown after the merger on terms that include the following: (i)
term of at least three years with subsequent automatic one-year renewals;
(ii) a seat on the boards of E'town, Thames Water North America, Inc. and
Elizabethtown, and, if Thames establishes a board of directors for its
businesses in the Americas, a seat on that board; (iii) initial annual base
salary of $270,000; (iv) annual bonus consisting of: (x) a
performance-related bonus equal to at least 10% of Mr. Chapman's salary;
(y) a bonus equal to 12 1/2% of Mr. Chapman's salary for each net increase
of 7,500 customer metered connections to E'town's base customer level in
the prior year; and (z) annual grant of restricted shares of the stock of
Thames having a value of up to 20% of Mr. Chapman's salary with each grant
vesting over a four-year period upon the attainment of certain performance
goals; (v) special retention bonus, payable at the commencement of the
employment agreement, equal to 20% of Mr. Chapman's salary; entitlement to
participate in all benefit plans made available for senior executive
officers; insurance and indemnification by E'town against expenses and
liabilities incurred by Mr. Chapman; and certain non-competition and
confidentiality provisions.
The agreement also provides that Mr. Chapman will receive continued salary
and benefits for a period of 24 months if he voluntarily terminates his
employment within a six-month period commencing on the earlier of (i) the
date the first rate order is received by Elizabethtown from the New Jersey
Board of Public Utilities after the merger, and (ii) the date that is 18
months after the merger. Upon termination of employment by Mr. Chapman for
good reason (as defined in the agreement) or E'town terminates his
employment other than for death, disability or cause (as defined in the
agreement), Mr. Chapman will receive salary, incentive compensation and
benefits for a period of 30 months; unvested restricted stock and stock
options will immediately vest and all restrictions on any restricted stock
or stock options held by him will be voided; and all retirement benefits
under the SERP will fully vest if he has not attained age 65, he will be
granted an additional 15 years of service for purposes of benefit accrual,
and he will become entitled to make an early payout election under the SERP
if he has completed 25 years of service.
If the amounts payable by E'town to Mr. Chapman under the agreement are
subject to the excise tax applicable to "parachute payments" under Sections
280G and 4999 of the Internal Revenue Code, E'town will pay Mr. Chapman an
additional amount so that, after payment of such excise tax, he receives a
sum equal to the original pre-tax severance payment.
Change in Control Agreements
E'town has entered into a Change in Control Agreement with each of the
named executive officers (other than Edward A. Clerico) to ensure
continuity in the management of E'town's operations in the event of a
change in control (as defined in the agreements). The agreements provide
that the named officers are entitled to a severance payment if their
employment is terminated: (i) within three years of a change in control for
a reason other than death, cause, or, in the case of all named officers
other than Andrew M. Chapman, disability; (ii) in the case of Andrew M.
Chapman only, voluntarily by Mr. Chapman within one year of a change in
control; or (iii) within three years of a change in control following a
material change in job duties, significant increase in travel, diminution
in status, position or responsibilities, reduction in compensation and
benefits or certain job relocations.
If his or her employment is terminated under those circumstances, the named
officer's severance includes: continued salary, incentive compensation and
benefits for a period of 18 to 30 months; payment on the date of
termination of an amount equal to the greater of (i) all incentive
compensation due prior to the change in control but not yet paid and (ii)
all incentive compensation due prior to termination of employment and not
yet paid or, in the case of Andrew M. Chapman and Anne Evans Estabrook, the
sum of such incentive compensation amounts; immediate vesting of any
unvested restricted stock and stock options and the voiding of all
restrictions on any restricted stock or stock options held by them; and,
with respect to the SERP (other than for Anne Evans Estabrook), full and
immediate vesting of all retirement benefits, for any officer younger than
65, the grant of an additional 10 to 15 years of service for purposes of
benefit accrual, and early payout elections in certain circumstances. With
respect to the named officers other than Andrew M. Chapman and Anne Evans
Estabrook, the officers are required to mitigate the amounts they would
receive under these agreements by seeking other employment.
With respect to Andrew M. Chapman and Anne Evans Estabrook, if the amounts
payable by E'town will be subject to the excise tax applicable to
"parachute payments" under the federal tax laws, E'town will pay the named
officer an additional amount so that, after payment of such excise tax, he
or she receives a sum equal to the original pre-tax severance payment. For
all other named officers, the amounts payable to them will be reduced, if
desired by the officer, to avoid such excise tax.
Compensation Committee Interlocks and Insider Participation. None.
- -21-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following information pertains to the common stock of the Corporation
that, to the knowledge of the Corporation, is beneficially owned, directly
or indirectly, individually and as a group, by all Directors and Executive
Officers of the Corporation and its subsidiaries, Elizabethtown Water
Company ("Elizabethtown") and E'town Properties, Inc. ("Properties"), as of
March 24, 2000. No shareholder has reported beneficial ownership of 5% or
more of the outstanding common stock.
Title of Name of Beneficial Owner No. of Percent of
Class Shares (1) Class
- ---------------------------------------------------------------------
Common Stock Gail P. Brady ................... 6,123 0.07
Thomas J. Cawley ................ 11,787 0.13
Andrew M. Chapman ............... 41,977 (2) 0.48
Anthony S. Cicatiello ........... 1,640 0.02
Edward A. Clerico ............... 112,388 1.28
Anne Evans Estabrook ............ 101,963 (3) 1.16
James W. Hughes ................. 1,790 0.02
John Kean ....................... 189,988 (4) 2.17
Robert W. Kean, Jr. ............. 217,148 (5) 2.48
Robert W. Kean, III ............. 1,389 0.02
Barry T. Parker ................. 3,734 0.04
Hugo M. Pfaltz .................. 10,458 (6) 0.12
Chester A. Ring, 3rd ............ 18,552 0.21
Joan Verplanck .................. 1,456 0.02
Norbert Wagner .................. 22,298 (7) 0.25
Directors and Officers as a group 785,675 8.96
- ---------------
(1) Includes shares held under the Elizabethtown Savings and Investment
Plan-401 (k) (the "401(k)Plan") for the Executive Officers and those
directors who retired as Executive Officers.
(2) Includes 32,000 shares subject to options which were granted to Andrew
M. Chapman, of which 20,000 are not presently exercisable, under the
Corporation's 1987 and 1997 Stock Option Plan.
(3) Includes 20,000 shares subject to options which were granted to Anne Evans
Estabrook, and are not presently exercisable, under the Corporation's 1997
Stock Option Plan.
(4) Includes 119,532 shares held under two trusts for which John Kean is a
co-trustee and John Kean shares voting and investment power with respect to
these shares.
(5) Mr. Kean is not a voting member of the board of directors. Figure includes
197,567 shares held under a trust for which Robert W. Kean, Jr. is a
co-trustee and Robert W. Kean, Jr. shares voting and investment power with
respect to these shares.
(6) Includes 1,250 shares of Common Stock issuable upon conversion of
debentures held by a partnership of which Hugo M. Pfaltz is a general
partner.
(7) Includes 8,000 shares subject to options which were granted to Norbert
Wagner and are presently exercisable under the Corporation's 1987 Stock
Option Plan.
- -22-
<PAGE>
Item 13. Certain Relationships and Related Transactions
Certain Transactions.
Utility Billing Services, Inc., a subsidiary of NUI
Corporation, of which John Kean is Chairman of the Board and a Director,
provides data processing and related services to Elizabethtown and other
subsidiaries of the Corporation. Certain of these services rendered to
Elizabethtown are pursuant to a contract which expires December 31, 2000.
The charges for all services totaled $1,044,732 for the year ended December
31, 1999.
Elizabethtown had a line of credit with Summit Bank, of which Anne Evans
Estabrook is a Director, in the amount of $10 million. At December 31,
1999, E'town had $7 million in outstanding loans from Summit Bank. Interest
charges paid to Summit Bank totaled $298,611 during 1999. Summit Bank also
serves as bond trustee for Elizabethtown for which it was paid fees of
$22,000 in 1999.
Elizabethtown has a line of credit with PNC Bank, N.A., New Jersey in the
amount of $30 million. Andrew M. Chapman serves on the Regional Advisory
Board of this bank. At December 31, 1999, there were $30 million in
outstanding loans from PNC Bank. Interest charges paid to PNC Bank totaled
$1,351,868 during 1999. PNC Bank also serves as trustee and recordkeeper
for Elizabethtown's benefit plans for which it was paid fees of $68,515 in
1999.
The law firm of Parker, McCay & Criscuolo, P.C., of which Barry T. Parker
was a partner and is now of counsel, provided legal services to the
Corporation and its subsidiaries which resulted in $35,131 in legal fees
being paid to the firm in 1999.
The law firm of Lindabury, McCormick & Estabrook, of which the husband of
Anne Evans Estabrook is of counsel, provided legal services to the
Corporation and its subsidiaries that resulted in $17,617 in legal fees
being paid to the firm in 1999.
Edward A. Clerico owns land and buildings leased by a subsidiary of E'town.
Mr. Clerico received total payments in 1999 of $216,530 under this lease.
It is the opinion of management that the amounts charged for these services
were as favorable as those that would be charged for such services by
comparable unaffiliated sources. Management periodically reviews the terms
of these arrangements to ensure that the costs for these services are
comparable to those that would be charged in the general market.
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, 1999,
1998 and 1997.
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Statements of Consolidated Capitalization as of December 31, 1999 and
1998.
Statement of Consolidated Shareholder's Equity for the years ended
December 31, 1999, 1998 and 1997.
Statements of Consolidated Cash Flows for the years ended December 31,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
- -23-
<PAGE>
E'town Corporation
A portion of the 1999 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
The Independent Auditors' Report and Elizabethtown Water Company's
consolidated financial statements and notes thereto are contained in Appendix
I hereto, incorporated by reference herein.
2. Financial Statement Schedules:
E'town Corporation
Elizabethtown Water Company
Schedule II - Valuation and Qualifying Accounts for the Years Ended December
31, 1999, 1998 and 1997.
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:
(1) A report on Form 8-K was filed on November 24, 1999 . The
report included an Agreement of Merger dated November 21, 1999
among E'town Corporation, Thames Water Plc and Edward
Acquisition Corp.
(2) A report on Form 8-K was filed on December 17, 1999. The
report included an amendment dated November 21, 1999 to the
Rights Agreement dated as of February 4, 1991 between E'town
Corporation and The Bank of New York as Rights Agent.
- -24-
<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 30, 2000
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 30, 2000.
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
Director /s/ Robert W. Kean III
Director /s/ Edward A. Clerico
Treasurer /s/ Gail P. Brady
(Principal Financial Officer)
Controller /s/ Dennis W. Doll
(Principal Accounting Officer)
- -25-
<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 30, 2000
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 30, 2000.
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
Director /s/ Robert W. Kean III
Director /s/ Edward A. Clerico
Senior Vice President , Chief Financial
Officer & Treasurer /s/ Gail P. Brady
(Principal Financial Officer)
Vice President & Controller /s/ Dennis W. Doll
(Principal Accounting Officer)
- -26-
<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, 1999 and 1998, and for each of the
three years in the period ended December 31, 1999, and have issued our report
thereon dated March 9, 2000; such consolidated financial statements and
report are included in your 1999 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the financial
statement schedules of E'town Corporation and its subsidiaries, listed in
Item 14. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
March 9, 2000
Parsippany, New Jersey
- -27-
<PAGE>
Schedule II
E'TOWN CORPORATION AND SUBSIDIARIES
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 12/31/99 $1,065,000 $823,569 $573,069 $1,315,500
Year Ended 12/31/98 $612,000 $995,940 (B) $542,940 $1,065,000
Year Ended 12/31/97 $566,000 $607,929 $561,929 $612,000
(A) Write-off of uncollectible accounts, net of recoveries.
(B) Includes reserves established for Liberty Water Company, ($39,970)
and Applied Water Management, Inc., ($344,630), acquired in 1998 and
Edison Water Company ($37,400) acquired in 1997.
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
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 12/31/99 $643,000 $603,939 $573,439 $673,500
Year Ended 12/31/98 $612,000 $573,940 $542,940 $643,000
Year Ended 12/31/97 $566,000 $607,929 $561,929 $612,000
(A) Write-off of uncollectible accounts, net of recoveries.
- -28-
<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 compensatory plans or
arrangements.
E'town Corporation
Exhibit
No. Description
2 Agreement and Plan of Merger, dated as of November 21, 1999,
among E'town Corporation, Thames Water Plc and Edward
Acquisition Corp.[Form 8-K, filed November 24, 1999,
Exhibit 2.1]
3(a) - Certificate of Incorporation of E'town Corp.
[Registration Statement No. 33-42509, Exhibit 4(a)]
3(b) - By-Laws of E'town Corporation [Form 10-K for the year 1998,
Exhibit 3(c)]
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) - Amendment dated as of November 21, 1999 to the Rights
Agreement dated as of February 4, 1991 between E'town
Corporation and The Bank of New York, as Rights Agent
[Form 8-K, filed December 17, 1999, Exhibit 4]
4(c) - 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(d) - Note Purchase Agreement relating to the 6.79% Senior Notes
due December 15, 2007 [Form 10-K for the year 1997,
Exhibit 4(c)]
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)
- -29-
<PAGE>
10(g) - E'town's 1990 Performance Stock Program [Registration
Statement No. 33-46532, Exhibit 10(k)] (1)
10(h) - E'town's Dividend Reinvestment and Stock Purchase Plan
[Registration No. 333-69549, Dated December 23, 1998]
10(i) - Change in 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 [Form 10-K for the year 1997, Exhibit 10(k)] (1)
10(l) - Change in Control Agreement for Anne Evans Estabrook
[Form 10-K for the year 1997, Exhibit 10(k)] (1)
10(m) - Contract with the City of Elizabeth, New Jersey for the
Operation by E'town Corporation of the City's Water
System [Form 10-Q for the quarter ended September 30, 1998,
Exhibit 10(m)]
10(n) - Employment Agreement between Applied Water Management, Inc.
And Edward A. Clerico [Form 10-Q for the quarter ended
September 30, 1998, Exhibit 10(n)](1)
10(o) - Change in Control Agreement for certain officers [Form 10-K
for the year 1998, Exhibit 10(o)](1)
10(p) - E'town Corporation & Subsidiaries - Form of Amended and
Restated Change in Control Agreement for certain officers of
E'town Corporation and Affiliated Companies [Form 10-Q for
the quarter ended March 31, 1999, Exhibit 10(o)](1)
10(q) - E'town Corporation & Subsidiaries - Amendments to Change in
Control Agreement For Andrew M. Chapman [Form 10-Q for the
quarter ended March 31, 1999, Exhibit 10(p)](1)
10(r) - E'town Corporation & Subsidiaries - Amendments to Change in
Control Agreement For Anne E. Estabrook [Form 10-Q for the
quarter ended March 31, 1999, Exhibit 10(q)](1)
*10(s) - Employment Contract Between E'town Corporation and Andrew M.
Chapman dated November 21, 1999 (1)
*10(t) - Amended and Restated Change in Control Agreement for Certain
Officers of Affiliates of E'town Corporation dated
November 20, 1999 (1)
*12 - Computation of Ratio of Earnings to Fixed Charges
*13 - Portion of the 1999 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 - Financial Data Schedule
- -30-
<PAGE>
Elizabethtown Water Company
Exhibit
No. Description
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 1998, 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)]
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 [Form 10-K for the year 1995,
Exhibit 4(h)]
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)]
4(k) - Loan Agreement Dated November 1, 1998 Between the State of
New Jersey, Acting Through the New Jersey Department of
Environmental Protection, and The Mount Holly Water Company
[Form 10-K for the year 1998, Exhibit 4(k)]
- -31-
<PAGE>
4(l) - Loan Agreement Dated November 1, 1998 Between the New
Jersey Environmental Infrastructure Trust and The Mount Holly
Water Company [Form 10-K for the year 1998, Exhibit 4(l)]
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)
10(h) - Medical Reimbursement Plan of Elizabethtown Water Company
[Form 10-K for the year 1992, Exhibit 10(h)] (1)
10(i) - Supplemental Executive Retirement Plan of Elizabethtown
Water Company [Form 10-Q for the quarter ended September 30,
1995, Exhibit 10](1)
10(k) - Employment Contract Between Elizabethtown Water Company and
Anne Evans Estabrook [Form 10-K for the year 1997, Exhibit
10(k)] (1)
10(l) - Amendment to Supplemental Executive Retirement Plan of
Elizabethtown Water Company [Form 10-K for the year 1998,
Exhibit 10(l)](1)
*10(m) - Amendment to Supplemental Executive Retirement Plan of
Elizabethtown Water Company dated November 1, 1999 (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 - Financial Data Schedule.
- -32-
<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, 1999 and 1998, and the related statements of
consolidated income, shareholder's equity, and cash flows for each of the
three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
March 9, 2000
Parsippany, New Jersey
- -1-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands)
Year Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Operating Revenues $ 138,306 $ 134,847 $ 131,788
- --------------------------------------------------------------------------------
Operating Expenses:
Operation 50,135 45,117 45,301
Maintenance 6,321 5,674 6,548
Depreciation 13,354 12,439 12,233
Revenue taxes 17,207 16,728 16,550
Real estate, payroll and other taxes 3,119 2,613 3,064
Federal income taxes (Note 4) 11,116 12,678 11,026
- --------------------------------------------------------------------------------
Total operating expenses 101,252 95,249 94,722
- --------------------------------------------------------------------------------
Operating Income 37,054 39,598 37,066
- --------------------------------------------------------------------------------
Other Income (Expense):
Allowance for equity funds used during
construction (Note 3) 323 597 215
Other - net 990 612 494
Federal income taxes (Note 4) (460) (423) (248)
- --------------------------------------------------------------------------------
Total other income (expense) 853 786 461
- --------------------------------------------------------------------------------
Total Operating and Other Income 37,907 40,384 37,527
- --------------------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 14,661 14,721 14,030
Other interest expense - net 1,780 960 2,382
Allowance for funds used during construction (338) (456) (166)
Amortization of debt discount and expense-net 399 391 376
- --------------------------------------------------------------------------------
Total interest charges 16,502 15,616 16,622
- --------------------------------------------------------------------------------
Net Income 21,405 24,768 20,905
Preferred Stock Dividends 813 813 813
- --------------------------------------------------------------------------------
Earnings Applicable To Common Stock $ 20,592 $ 23,955 $ 20,092
================================================================================
See Notes to Consolidated Financial Statements.
- -2-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
Assets 1999 1998
- --------------------------------------------------------------------------------
Utility Plant-At Original Cost:
Utility plant in service $ 770,251 $ 714,301
Construction work in progress 17,495 15,694
- --------------------------------------------------------------------------------
Total utility plant 787,746 729,995
Less accumulated depreciation and amortization 136,975 125,096
- --------------------------------------------------------------------------------
Utility plant-net 650,771 604,899
- --------------------------------------------------------------------------------
Non-utility Property (Note 5) 7,337 7,315
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 1,342 3,598
Customer and other accounts receivable
(less reserve: 1999, $674, 1998, $643) 19,341 16,952
Unbilled revenues 10,578 10,091
Infrastructure loan funds receivable (Note 5) 5,657 5,895
Materials and supplies-at average cost 4,069 2,538
Prepaid federal income taxes 5,807 687
Prepaid insurance, other taxes, other 3,229 1,746
- --------------------------------------------------------------------------------
Total current assets 50,023 41,507
- --------------------------------------------------------------------------------
Deferred Charges:
Waste residual management (Note 8) 1,538 1,371
Unamortized debt and preferred stock expenses (Note 8) 8,900 9,368
Taxes recoverable through future rates (Notes 4 and 8) 13,466 14,226
Postretirement benefit expense (Notes 8 and 12 ) 3,145 3,490
Flood expenditures (Note 10) 5,000
Other unamortized expenses (Note 8) 1,007 1,152
- --------------------------------------------------------------------------------
Total deferred charges 33,056 29,607
- --------------------------------------------------------------------------------
Total $ 741,187 $ 683,328
================================================================================
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 1999 1998
- --------------------------------------------------------------------------------
Capitalization (Note 5):
Common shareholder's equity $ 220,461 $ 208,573
Mandatory redeemable cumulative preferred stock 12,000 12,000
Long-term debt - net 244,842 245,148
- --------------------------------------------------------------------------------
Total capitalization 477,303 465,721
- --------------------------------------------------------------------------------
Current Liabilities:
Notes payable - banks (Note 6) 51,500 22,000
Long-term debt - current portion (Note 5) 481 30
Accounts payable and other liabilities 19,989 12,457
Customers' deposits 197 248
Municipal and state taxes accrued 17,592 16,776
Interest accrued 3,745 3,228
Preferred stock dividends accrued 59 59
- --------------------------------------------------------------------------------
Total current liabilities 93,563 54,798
- --------------------------------------------------------------------------------
Deferred Credits:
Customers' advances for construction 40,019 40,874
Federal income taxes (Note 4) 69,570 64,696
Unamortized investment tax credits 7,636 7,839
Accumulated postretirement benefits (Note 12) 3,399 3,947
- --------------------------------------------------------------------------------
Total deferred credits 120,624 117,356
- --------------------------------------------------------------------------------
Contributions in Aid of Construction 49,697 45,453
- --------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note 11)
- --------------------------------------------------------------------------------
Total $ 741,187 $ 683,328
================================================================================
See Notes to Consolidated Financial Statements.
- -4-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(In Thousands Except Share Amounts)
December 31,
1999 1998
- --------------------------------------------------------------------------------
Common Shareholder's Equity (Note 5):
Common stock without par value, authorized, 15,000,000
shares, issued 1999 and 1998, 1,974,902 shares $ 15,741 $ 15,741
Paid-in capital 141,575 132,753
Capital stock expense (485) (485)
Retained earnings 63,630 60,564
- --------------------------------------------------------------------------------
Total common shareholder's equity 220,461 208,573
- --------------------------------------------------------------------------------
Preferred Shareholders' Equity: (Note 5)
Mandatory Redeemable Cumulative Preferred Stock
$100 par value, authorized, 200,000 shares; $5.90
series, issued and outstanding, 120,000 shares 12,000 12,000
Cumulative Preferred Stock:
$25 par value, authorized, 500,000 shares; none issued
- --------------------------------------------------------------------------------
Long-Term Debt (Notes 5 and 7) :
Elizabethtown Water Company:
7.20% Debentures, due 2019 10,000 10,000
7 1/2% Debentures, due 2020 15,000 15,000
6.60% Debentures, due 2021 10,500 10,500
6.70% Debentures, due 2021 15,000 15,000
8 3/4% Debentures, due 2021 27,500 27,500
8% Debentures, due 2022 15,000 15,000
5.60% Debentures, due 2025 40,000 40,000
7 1/4% Debentures, due 2028 50,000 50,000
Variable Rate Debentures, due 2027 50,000 50,000
The Mount Holly Water Company:
New Jersey Environmental Infrastructure Trust Notes
(due serially through 2018) 7,040 7,295
New Jersey Department of Environmental Protection
Notes (due serially through 2018) 5,677 5,895
9.65% Mortgage Note Payable (due 2001) 156
Note Payable (due 2000) 30
- --------------------------------------------------------------------------------
Total long-term debt 245,873 246,220
Unamortized discount-net (1,031) (1,072)
- --------------------------------------------------------------------------------
Total long-term debt-net 244,842 245,148
- --------------------------------------------------------------------------------
Total Capitalization $ 477,303 $ 465,721
================================================================================
See Notes to Consolidated Financial Statements.
- -5-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Thousands)
Year Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Common Stock: $ 15,741 $ 15,741 $ 15,741
- --------------------------------------------------------------------------------
Paid-in Capital:
Balance at Beginning of Period 132,753 124,560 117,457
Capital contributed by parent company from:
Common Stock issued under Dividend
Reinvestment and Stock Purchase Plan 8,702 7,861 6,980
Issuance of restricted and unrestricted stock
stock under compensation programs 120 332 123
- --------------------------------------------------------------------------------
Balance at End of Period 141,575 132,753 124,560
- --------------------------------------------------------------------------------
Capital Stock Expense (485) (485) (485)
- --------------------------------------------------------------------------------
Retained Earnings:
Balance at Beginning of Period 60,564 53,538 49,580
Net income 21,405 24,768 20,905
Dividends on common stock (17,526) (16,929) (16,134)
Dividends on preferred stock (813) (813) (813)
- --------------------------------------------------------------------------------
Balance at End of Period 63,630 60,564 53,538
- --------------------------------------------------------------------------------
Total Common Shareholder's Equity $ 220,461 $ 208,573 $ 193,354
================================================================================
See Notes to Consolidated Financial Statements.
- -6-
<PAGE>
APPENDIX I
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands)
Year Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 21,405 $ 24,768 $ 20,905
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 13,354 12,439 12,233
Increase in deferred charges (5,022) (501) 690
Deferred income taxes and investment tax
credits-net 4,671 3,855 2,693
Allowance for funds used during construction (661) (1,053) (381)
Other operating activities-net 726 252 485
Change in current assets and current liabilities
excluding cash, short-term investments and
current portion of debt
Customer and other accounts receivable (2,086) 331 (558)
Unbilled revenues (487) (428) (307)
Accounts payable and other liabilities 7,459 1,807 (6,495)
Accrued/prepaid interest and taxes (5,287) 1,095 3,173
Other (1,493) (572) 78
- --------------------------------------------------------------------------------
Net cash provided by operating activities 32,579 41,993 32,516
- --------------------------------------------------------------------------------
Cash Flows Provided (Used) by Financing Activities:
Capital contributed by parent company 8,702 7,861 6,980
Proceeds from issuance of debentures 50,000
Funds held in Trust by others (30) (7,234)
Proceeds from issuances of other long-term debt 7,295
Debt and preferred stock issuance and
amortization costs 474 288 (667)
Repayment of long-term debt (32) (27) (30)
Repayment of current portion of long-term debt (30)
Contributions and advances for construction 5,206 10,908 7,275
Refunds of advances for construction (2,896) (4,575) (2,516)
Net increase (decrease) in notes payable - banks 29,500 4,000 (51,000)
Dividends paid on common stock and
preferred stock (18,234) (17,637) (16,842)
- --------------------------------------------------------------------------------
Net cash provided (used) by
financing activities 22,660 879 (6,800)
- --------------------------------------------------------------------------------
Cash Flows Used for Investing Activities:
Utility plant expenditures (excluding allowance
for funds used during construction) (56,635) (43,500) (24,612)
Purchase of company (860)
- --------------------------------------------------------------------------------
Cash used for investing activities (57,495) (43,500) (24,612)
- --------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and
Cash Equivalents (2,256) (628) 1,104
Cash and Cash Equivalents at
Beginning of Period 3,598 4,226 3,122
- --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 1,342 $ 3,598 $ 4,226
================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 16,377 $ 14,459 $ 16,063
Income taxes $ 9,700 $ 7,723 $ 5,981
Preferred stock dividends $ 708 $ 708 $ 708
Noncash capital contribution by parent company $ 120 $ 332 $ 123
See Notes to Consolidated Financial Statements.
- -7-
<PAGE>
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APPENDIX I
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 in the State of New Jersey. E'town
is also the parent of E'town Properties, Inc. (Properties), Edison Water
Company (Edison), Liberty Water Company, (Liberty), Applied Water Management,
Inc. (AWM) and Applied Wastewater Management, Inc. (AWWM).
2. Pending Merger
On November 21, 1999, E'town entered into an agreement (Merger Agreement)
with Thames Water Plc (Thames Water) under which Thames Water has agreed,
subject to certain conditions, to acquire E'town for $68 per share in cash or
approximately $607 million. Thames Water will also assume the debt of E'town.
The acquisition will take the form of a merger (Merger) of E'town with a
newly formed subsidiary of Thames Water and E'town will be the surviving
company.
A special meeting of E'town shareholders is expected to be held during the
second quarter of 2000 to seek shareholder approval of the transaction. The
acquisition is also subject to approval by the New Jersey Board of Public
Utilities (BPU), the Federal Trade Commission and the Department of Justice
under the Hart-Scott-Rodino antitrust Improvement Act of 1976. Certain
clearances must also be obtained from the New Jersey environmental
regulators. The transaction is expected to close prior to the end of 2000.
3. 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 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 based on the estimated useful lives of
the assets. The balances of significant classes of assets and their
respective depreciable lives at December 31, 1999 and 1998 are as follows:
Annual
Depreciation
(Thousands of Dollars) 1999 1998 Rate
- -------------------------------------------------------------------------------
Asset Class :
Transmission and Distribution Mains $ 337,408 $ 318,363 0.99 %
Water Treatment Equipment 111,961 106,787 2.35
Services 67,154 62,213 2.77
Structures and Improvements 88,147 75,736 2.08 - 2.74
Pumping Equipment 42,704 41,082 2.59 - 3.38
Meters 27,589 23,415 2.77
Water Storage Tanks 23,658 21,232 1.37
Other 71,630 65,473 0 - 15.73
- -------------------------------------------------------------------------------
Total utility plant in service $ 770,251 $ 714,301
===============================================================================
- -8-
<PAGE>
The provision for depreciation, as a percentage of average depreciable
property, on a composite basis, was 1.82% for 1999, 1.81% for 1998 and 1.85%
for 1997.
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 lives. 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 $.66 million, $1.05 million and $.38 million for 1999,
1998 and 1997, respectively.
Revenues
Water revenues are recorded based on the amounts of water delivered to
customers through the end of each accounting period. This includes an accrual
for unbilled revenues for water delivered from the time meters were last read
to the end of the respective accounting periods.
Federal Income Taxes
Elizabethtown files a consolidated tax return with E'town. Income taxes are
allocated to Elizabethtown based upon the Company's taxable income. 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.
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, under a
contract, for main extensions to new real estate developments. CAC is
refundable to developers based upon amounts for each type and quantity of
unit constructed by the developer when the units are metered. Such contracts
have a ten-year life. CIAC represents CAC that, under the terms of
individual main extension agreements, are no longer subject to refund.
Cash Equivalents
Elizabethtown Water Company considers all highly liquid debt instruments
purchased with maturities of three months or less to be cash equivalents.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activity". In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activity - Deferral
of the Effective Date of SFAS No. 133" to defer the effective date of SFAS
No. 133 for one year. Consequently, SFAS No. 133 will now be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company does not believe this Statement will have an impact on its financial
condition and results of operations.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Use of Estimates
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.
- -9-
<PAGE>
4. 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:
(Thousands of Dollars) 1999 1998 1997
- -------------------------------------------------------------------------------
Tax expense at statutory rate $ 11,543 $ 13,255 $ 11,262
Items for which deferred taxes are
not provided:
Difference between book
and tax depreciation 147 63 58
Other 89 (14) 157
Investment tax credits (203) (203) (203)
- -------------------------------------------------------------------------------
Provision for federal income taxes $ 11,576 $ 13,101 $ 11,274
===============================================================================
The provision for federal income
taxes is comprised of the following:
Current $ 5,727 $ 8,902 $ 7,212
Tax on main extension refunds 416 525 1,369
Deferred:
Tax depreciation 3,166 3,131 2,716
Capitalized interest 56 91 19
Main cleaning and lining 758 796 612
Flood expenditures 1,750
Other (94) 40 (451)
Investment tax credits - net (203) (203) (203)
Refund from IRS (181)
- -------------------------------------------------------------------------------
Total provision $ 11,576 $ 13,101 $ 11,274
===============================================================================
Elizabethtown and Mount Holly provide deferred taxes at the enacted
statutory rate for all temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities
irrespective of the treatment for rate-making purposes. Management believes it
is probable that the accumulated tax benefits that previously have been treated
as a flow-through item to Elizabethtown and Mount Holly's customers will be
recovered from utility customers in the future. Accordingly, offsetting
regulatory assets were established. At December 31, 1999, Elizabethtown and
Mount Holly had deferred tax liabilities of $67.0 million and $2.6 million.
There were also, at December 31, 1999, offsetting regulatory assets of $12.7
million and $.8 million for Elizabethtown and Mount Holly, respectively,
representing the future revenue expected to be recovered through rates based
upon established regulatory practices which permit recovery of current taxes
payable. These amounts were determined using the enacted Federal income tax rate
of 35% and were calculated in accordance with SFAS No. 109.
The tax effect of significant temporary differences representing deferred
income tax assets and liabilities as of December 31, 1999 and 1998 is as
follows:
(Thousands of Dollars) 1999 1998
- -------------------------------------------------------------------------------
Water utility plant - net $ (51,508) $ (47,538)
Taxes recoverable through future rates (13,466) (14,226)
Prepaid pension expense (123) (29)
Capitalized interest (2,739) (2,683)
Waste residuals (539) (480)
Flood expenditures (1,750)
Other assets 720 541
Other liabilities (165) (281)
- -------------------------------------------------------------------------------
Net deferred income tax liabilities $ (69,570) $ (64,696)
===============================================================================
- -10-
<PAGE>
5. Capitalization
E'town routinely makes equity contributions to Elizabethtown which represent
the proceeds of common stock issued under E'town's Dividend Reinvestment and
Stock Purchase Plan (DRP). Such equity contributions amounted to $8.70
million, $7.86 million and $6.98 million for the years ended December 31, 1999,
1998 and 1997, respectively.
Preferred Stock
Elizabethtown's $5.90 Mandatory Redeemable 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, 1999, $7.52 million of Elizabethtown's
retained earnings were restricted under the most restrictive indenture
provision.
In November 1998 Mount Holly closed on loan agreements that will make
available up to $13.19 million in proceeds from the issuance of unsecured
notes through the New Jersey Environmental Infrastructure Trust Financing
Program. This program provides financing through two loans. The first loan,
in the amount of $7.30 million, is through the New Jersey Environmental
Infrastructure Trust (Trust), which issued tax-exempt bonds with average
interest rates of 4.7%. Non-utility Property includes $7.2 million of funds
held in trust by others relating to this financing. The second loan, in the
amount of $5.89 million, is from the State of New Jersey, acting through the
New Jersey Department of Environmental Protection. The State is participating
in the Drinking Water State Revolving Fund authorized by the Safe Drinking
Water Act amendments of 1996 whereby the federal government is funding the
state loan at no interest cost. The effective interest rate for the combined
notes is approximately 2.59%. The proceeds of the loans will finance a
portion of the Mansfield Project (see Note 9).
In June 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 Elizabethtown'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, 1999, were 5.20% for Series A and 5.10% for
Series B.
6. Lines of Credit
Elizabethtown has $90 million in lines of credit with several banks as of
December 31, 1999. Of this amount, $10 million represents a committed line of
credit. These lines, together with internal funds and proceeds of future
issuances of debt and preferred stock, and capital contributions from
proceeds from sales of common stock by E'town, are expected to be sufficient
to finance Elizabethtown's capital needs.
Information relating to bank borrowings for 1999, 1998 and 1997 is as follows:
(Thousands of Dollars) 1999 1998 1997
- -------------------------------------------------------------------------------
Maximum amount outstanding $ 51,500 $ 22,000 $ 69,500
Average monthly amount
outstanding $ 29,955 $ 14,983 $ 40,886
Average interest rate at year end 6.9% 5.9% 6.0%
Weighted average interest rate
based on average daily balances 5.9% 5.8% 5.8%
- -------------------------------------------------------------------------------
There were no compensating balances as of December 31, 1999, 1998 and 1997.
- -11-
<PAGE>
7. Financial Instruments
The carrying amounts and the estimated fair values, as of December 31, 1999
and 1998, of financial instruments issued or held by the Company are as
follows:
(Thousands of dollars) 1999 1998
- -------------------------------------------------------------------------------
Cumulative preferred stock:
Carrying amount $ 12,000 $ 12,000
Estimated fair value 11,850 13,020
Long - term debt
Carrying amount $ 244,842 $ 245,148
Estimated fair value 236,431 255,087
- -------------------------------------------------------------------------------
Estimated fair values are based upon quoted market prices for these or
similar securities.
8. Regulatory Assets and Liabilities
Certain costs incurred by Elizabethtown and Mount Holly have been deferred as
regulatory assets and are being amortized over various periods, as set forth
below:
(Thousands of dollars) 1999 1998
- -------------------------------------------------------------------------------
Waste residual management $ 1,538 $ 1,371
Unamortized debt and preferred stock expense 8,900 9,368
Taxes recoverable through future rates (Note 4) 13,466 14,226
Postretirement benefit expense (Notes 9 and 12) 3,145 3,490
Safety management expense 158 245
Business process redesign 136 210
Rate case expenses 23 7
PWAC underrecovery 480 305
- -------------------------------------------------------------------------------
Total $ 27,846 $ 29,222
===============================================================================
Waste Residual Management
The costs of disposing of the byproducts generated by Elizabethtown's and
Mount Holly's water treatment plants are being amortized and recovered in
rates over 3- and 5-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.
Purchased Water Adjustment Clause
In 1994 Elizabethtown established a Purchased Water Adjustment Clause
(PWAC), to reflect the cost of water purchased from the New Jersey Water
Supply Authority (NJWSA). The current rate for the PWAC is zero since the
costs of purchased water were reflected in the 1996 rate case; however,
because of the high pumpage in the summers of 1999 and 1998, Elizabethtown
has under-recovered its purchased water costs and therefore, has deferred
$.44 million as of December 31, 1999. As of December 31, 1999, Mount Holly
has deferred $.04 million of PWAC costs (see Note 9).
There were no regulatory liabilities at December 31, 1999 or 1998.
- -12-
<PAGE>
9. Regulatory Matters
Elizabethtown
In December 1997 the BPU adopted a Stipulation for rate increases for
Elizabethtown and Mount Holly, effective January 1, 1998, for the full
recovery of costs associated with SFAS No. 106 "Accounting for Employer's
Postretirement Benefits" on an accrual basis less the costs associated with
SFAS No. 106 expenses previously recovered in rates. The total increases in
annual operating revenues resulting from these Stipulations were $.39 million
for Elizabethtown and $.02 million for Mount Holly.
In accordance with the terms of the pending Merger Agreement, Elizabethtown
will postpone filing for rate relief until at least August 2000.
Mount Holly
In 1998 Mount Holly commenced a construction project, called the Mansfield
Project, to comply with New Jersey legislative restrictions to obtain
alternative water supplies, thereby reducing its water pumpage from an
aquifer, which had been subject to over-pumping by Mount Holly and various
local purveyors in a portion of southern New Jersey. A portion of this
project was placed into service in the third quarter of 1998 and the
remaining portion of the project was placed into service in late December
1999.
To settle an appeal initiated by another water purveyor in 1995 concerning
the diversion rights for the Mansfield Project, Mount Holly signed a
Stipulation in 1997 with the purveyor, the New Jersey Department of
Environmental Protection (DEP) and other parties, requiring Mount Holly to
purchase one million gallons per day from the other purveyor during the
two-year period that the Mansfield Project was being constructed. Purchases
began during March of 1998, after completion of an interconnection and ended
in January 2000 shortly after the Mansfield Project went into service.
In September 1997 Mount Holly filed a petition with the BPU to establish a
Purchased Water Adjustment Clause (PWAC) to reflect the cost of water
purchased from the other purveyor under the aforementioned agreement. In May
1998 the BPU adopted a Stipulation signed by the parties to the PWAC case
for an increase in annual revenues under Mount Holly's PWAC of $1.3 million
or 38.9%.
Effective January 1, 2000, Mount Holly received an increase in annual rates
of $1.88 million. This increase included costs for Mount Holly's Mansfield
Project that was placed in service at the end of December 1999. The rate
decision also reflected the elimination of the PWAC. After the elimination of
the PWAC the net rate increase was $.51 million. This increase also reflects
additional construction and financing costs, as well as increases in
operating costs since base rates were last established in January 1996.
In June 1999 Mount Holly purchased Homestead Water Utility, Inc. for a cash
price of $.9 million. The entity provides water services to approximately 800
customers of the Homestead community in southern New Jersey. The transaction
was accounted for as a purchase. Had the acquisition been consummated as of
January 1, 1997, the pro-forma effect on revenues and net income for the
years ended December 31, 1999, 1998 and 1997 would be immaterial.
10. Other Events
In August 1999 the Governor of the State of New Jersey declared a "Water
Emergency" for the entire state and issued mandatory restrictions on outdoor,
nonessential water use. Due to unusually low levels of rainfall during June
and July the Governor deemed these measures necessary to preserve the
integrity of several of the state's reservoir and well supplies. Customers of
Elizabethtown and Mount Holly were subject to these restrictions. The water
systems at all times had, and continue to have, adequate supplies of water to
meet the needs of their customers. These restrictions affected the amount of
water consumed by a substantial number of Elizabethtown's customers and
reduced net income by approximately $.68 million. The restrictions were
lifted in October 1999.
- -13-
<PAGE>
In September 1999, Elizabethtown withdrew its primary water treatment plant,
the Raritan-Millstone Water Treatment Plant (Plant), from service as a result
of flooding from Tropical Storm Floyd (Floyd). For several days,
Elizabethtown had difficulty maintaining adequate water pressure in portions
of its distribution system because overall system production levels were
substantially less than normal. Customers in portions of a few municipalities
were without water service for a period of up to three days. Costs incurred
to repair and replace equipment damaged by the flood and to respond to
inquiries by customers, regulatory bodies and the media have been deferred
and are expected to be recoverable through insurance. The Company has
incurred $7.0 million of flood-related expenditures and has received an
advanced reimbursement of $2.0 million from its insurance carrier. The
remaining $5.0 million of flood-related expenditures is reported on the
Consolidated Balance Sheets as a deferred charge at December 31, 1999. The
loss of revenues due to below normal water consumption is not recoverable
through insurance (see Note 11 for legal matters related to Floyd). The loss
of revenues decreased net income by $.39 million.
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, 1999, the annual cost of
water under contract is $7.63 million. The Company purchases additional water
from the NJWSA on an as-needed basis. The total cost of water purchased from
the NJWSA was $9.03 million for 1999.
Mount Holly was obligated, under a contract, to purchase water from another
purveyor, at a rate of 1 million gallons per day until such time as the
Mansfield Project was completely in service. In mid-January 2000, Mount Holly
ceased purchasing water from the other purveyor. The annual cost of the
purchased water was $1.16 million.
Capital expenditures of Elizabethtown and Mount Holly are estimated to be
$135.14 million and $4.69 million, respectively, through 2002.
Expected future minimum rental payments required under noncancelable leases
with terms in excess of one year at December 31 of each of the years 2000
through 2004 are: 2000, $.77 million; 2001, $.81 million; 2002 $.82 million;
2003, $.62 million and 2004, none. Rent expense totaled $.77 million, $.73
million and $.72 million in 1999, 1998 and 1997, respectively.
Elizabethtown leases vehicles and certain office equipment. The minimum
payments required under noncancelable leases with terms in excess of one year
at December 31 of each of the years 2000 through 2004 are: $1.64 million per
year. The lease expense was $1.37 million and $.26 million for 1999 and 1998,
respectively. There were no lease expenses for 1997 as vehicles were not
leased during that year.
Environmental, Legal and Other Matters
On September 23, 1999, two parties filed separate class action lawsuits for
compensatory damages and related fees on behalf of themselves and similarly
situated residential and commercial customers against Elizabethtown Water
Company and certain other subsidiaries of E'town. The lawsuit alleges negligence
regarding the quantity and quality of water services during the period in
September 1999 when Elizabethtown's main water treatment plant was flooded from
Tropical Storm Floyd and was withdrawn from service for approximately 3 days.
Elizabethtown has notified its insurance carrier of the lawsuit and has filed a
motion for summary judgment to dismiss the lawsuit as a class action proceeding
prior to answering the allegations. In March 2000, the New Jersey Superior Court
(NJSC) ruled that in the event the lawsuit is not dismissed, the case be
referred to the New Jersey Board of Public Utilities (BPU) for purposes of
investigating the matter and reporting its findings to the NJSC. The NJSC, in
view of the BPU's findings, will then determine what, if any, damages were
suffered by the plaintiffs and what liability, if any, rests with Elizabethtown.
The Company maintains that such allegations are without merit and believes that
the plaintiffs'chances of prevailing are not significant.
There are environmental matters that are inherent in the production,
transmission and distribution of water as well as in the treatment of
wastewater. Elizabethtown and Mount Holly are sensitive to these issues and
mitigate the environmental impact of these activities to the extent required
by the laws and regulations under which these activities are governed and
make efforts to exceed the regulatory requirements where practical.
The Company, in the ordinary course of business, periodically becomes
involved in litigation. There is currently no litigation in progress, other
than the items discussed above, regarding environmental or other issues in
which an outcome adverse to the Company could have a material impact on the
financial statements.
- -14-
<PAGE>
12. Pension Plan and Other Postretirement Benefits
Pension Plan
Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan), which
covers most employees of Elizabethtown and Mount Holly. The Plan provides for
annual benefits at retirement equal to 1.6% of the average compensation for
the highest four consecutive years, multiplied by the number of years of
credited service.
Supplemental Pension Plan
The Company also has a supplemental retirement plan for certain management
employees that is not funded. Eligibility for the designated employees is
based upon their completion of twenty years of service. Payments are based
upon 60% of the average compensation of an eligible management employee's
last three years of service, net of the amount earned under the Plan.
Benefits are payable for a period of 15 years and payments are made directly
by the Company. In 1999, the supplemental compensation plan was amended to
change the definition of compensation to include incentive compensation and
other taxable benefits. The unfunded benefit obligation at December 31, 1999
and 1998 was $2.1 million and $1.5 million, respectively.
Other Postretirement Benefits
The Company provides certain health care and life insurance benefits for
substantially all of its retired employees. As a result of a contract
negotiated in February 1996 with the Company's bargaining unit, all union and
non-union employees retiring after January 1, 1997, 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.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1999, and for 1999 was
9%. This rate decreases linearly each successive year until it reaches 3.8% in
2008, after which the rate remains constant.
The rate increases effective January 1, 1998 allow 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,
1999, the unamortized amounts that remain deferred are $3.02 million and $.13
million for Elizabethtown and Mount Holly, respectively.
Other Postretirement
Pension Plans Benefits
(Thousands of Dollars) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Funded Status
Change in benefit obligation during year:
Benefit obligation at beginning of year $ 45,538 $ 40,172 $ 7,877 $ 6,556
Service cost 1,653 1,391 238 387
Interest cost 3,083 2,836 426 482
Benefit payments (2,255) (2,092) (238) (247)
Actuarial (gain) or loss (5,539) 3,231 (2,345) 699
Plan amendments 650
- -------------------------------------------------------------------------------
Benefit obligation at end of year 43,130 45,538 5,958 7,877
- -------------------------------------------------------------------------------
Change in plan assets during year:
Fair value of plan assets at
beginning of year 51,844 46,537 2,171 1,331
Employer contributions 161 174 879 978
Benefit payments (2,255) (2,092) (238) (247)
Actual return on plan assets 9,751 7,225 286 109
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year 59,501 51,844 3,098 2,171
- -------------------------------------------------------------------------------
Reconciliation of funded status
at end of year:
Funded status 16,371 6,306 (2,860) (5,706)
Unrecognized net transition (asset)
or obligation (1,091) (1,358) 4,699 5,061
Unrecognized prior service cost 2,708 2,391
Unrecognized net (gain) or loss (18,227) (7,577) (4,999) (3,064)
- -------------------------------------------------------------------------------
Accumulated postretirement benefits* $ (239) $ (238) $ (3,160) $ (3,709)
- -------------------------------------------------------------------------------
* Recognized in the Consolidated Balance Sheets
- -15-
<PAGE>
<TABLE>
<CAPTION>
Other Postretirement
Pension Plans Benefits
(Thousands of Dollars) 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net periodic benefit cost recognized for year
Service cost $ 1,653 $ 1,391 $ 1,302 $ 238 $ 387 $ 383
Interest cost 3,083 2,836 2,713 426 482 444
Expected return on plan assets (4,564) (4,101) (3,520) (186) (109) (57)
Net amortization and deferral (12) (155) 65 164 157 138
Deferral/amortization of regulated companies 249 247 (273)
- -------------------------------------------------------------------------------------------------------
Net periodic benefit cost 160 (29) 560 891 1,164 635
- -------------------------------------------------------------------------------------------------------
Weighted - average assumptions for year
Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Rate of compensation increases 3.50% 4.00% 4.00%
Expected long-term rate of return on plan assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Weighted - average assumptions at end of year
Discount rate 7.75% 6.75% 7.25% 7.75% 6.75% 7.25%
Rate of compensation increases 3.50% 4.00% 4.00%
- ------------------------------------------------------------------------------------------------------
</TABLE>
13. Related Party Transactions
Utility Billing Services, Inc., a subsidiary of NUI Corporation, of which a
Director of Elizabethtown is Chairman of the Board and a Director, provides data
processing and related services to Elizabethtown and Mount Holly. The charges
for all services totaled $.86 million, $.72 million, and $.67 million, for 1999,
1998 and 1997, respectively. The current contract expires December 31, 2000.
A Director of Elizabethtown is also a Director of Summit Bank. Elizabethtown
paid Summit Bank to serve as a bond trustee for Elizabethtown for fees of
less than $.10 million in 1999, 1998 and 1997.
14. Quarterly Financial Data (Unaudited)
A summary of financial data for each quarter of 1999 and 1998 follows:
Earnings
Applicable
Operating Operating Net to Common
Ouarter Revenues Income Income Stock
- -------------------------------------------------------------------------------
(Thousands of Dollars)
1999
1st $ 31,066 $ 8,017 $ 4,283 $ 4,080
2nd 35,509 9,967 6,343 6,140
3rd 39,204 11,772 7,880 7,677
4th 32,527 7,298 2,899 2,695
- -------------------------------------------------------------------------------
Total $ 138,306 $ 37,054 $ 21,405 $ 20,592
===============================================================================
1998
1st $ 30,507 $ 8,402 $ 4,645 $ 4,442
2nd 32,739 9,334 5,687 5,484
3rd 38,821 12,226 8,689 8,486
4th 32,780 9,636 5,747 5,543
- -------------------------------------------------------------------------------
Total $ 134,847 $ 39,598 $ 24,768 $ 23,955
===============================================================================
Water utility revenues are subject to seasonal fluctuation due to normal
increased water consumption during the third quarter of each year.
Net income in the fourth quarter of 1999 was impacted by certain significant
operation costs, including labor and power costs indirectly attributable to a
major flood at Elizabethtown's primary water treatment plant.
- -16-
Exhibit 10(m)
AMENDMENT TO THE ELIZABETHTOWN WATER COMPANY
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective as of November 1, 1999, pursuant to Section
11.1(b) of the Elizabethtown Water Company Supplemental Executive
Retirement Plan (the "Plan"), the Plan is amended, subject to
written consent by each Participant as required by Section
11.1(b) of the Plan (which consent may be obtained in
counterparts), by adding the following new Section 11.1(c)
following Section 11.1(b) of the Plan:
"(c) In no event may the Plan be amended, modified,
terminated or
constructively terminated under Section 11.1(a) unless
there is in
place, as of the date of such amendment, modification or
termination,
another plan, fund or program that will provide retirement
income
benefits comparable or better (specifically and in the
aggregate) to
the benefits that would have been provided under the terms
of this Plan
(and the terms of the Employees' Retirement Plan of
Elizabethtown
Water Company, in the aggregate) without regard to such
amendment,
modification or termination (and without regard to the
amendment,
modification or termination of the Employees' Retirement
Plan of
Elizabethtown Water Company that gave rise to the
amendment under
Section 11.1(a) ). The preceding sentence will apply only
to
individuals who were Participants in the Plan as of the
date of such
Plan amendment, modification or termination, and will
continue to
apply to such Participants until their employment with the
Company
ends."
Elizabethtown Water Company
By: Anne Evans Estabrook
Chairman of the Board
I hereby consent to the adoption of this Amendment to the
Plan:
(Notary Seal) _________________________
Participant's Signature
Dated: November 1, 1999
The above contract applies to the following individuals:
Walter Braswell
Beth Gates
Edward Mullen
Gail Brady
Henry Patterson, III
James Cowley
Joseph Stroin
Norbert Wagner
Robert W. Kean, III
Dennis W. Doll
Andrew M. Chapman
<PAGE>
Exhibit 10(s)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, by and between E'town Corporation, a New
Jersey corporation (the "Company"), and Andrew M. Chapman, residing at
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx (the "Executive"), dated as
of the 21st day of November, 1999.
W I T N E S S E T H:
WHEREAS, the Executive has served as President of the Company and
Elizabethtown Water Company ("Elizabethtown Water");
WHEREAS, pursuant to the Agreement and Plan of Merger, dated as of
the date hereof, among Thames Water plc, a public limited company organized
under the laws of England (the "Parent"), Edward Merger Sub, a New Jersey
corporation and the Company and its subsidiaries (the "Merger Agreement"),
the parties thereto have agreed to enter into the business combination
transaction described therein;
WHEREAS, the Company and Elizabethtown Water desires that,
following the Effective Time (as defined in the Merger Agreement), the
Executive serve as its President and Chief Executive Officer, and the
Executive desires to so serve, in each case upon the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and the Executive hereby agree as follows:
Employment. The Company hereby agrees to employ the Executive, and the
Executive hereby agrees to be employed by the Company, pursuant to the terms
and conditions set forth in this Agreement.
Term. Unless the Executive's employment shall sooner terminate pursuant to
Section 5, the Company shall employ the Executive for a term commencing on
the Effective Time (the "Commencement Date") and ending on the third
anniversary thereof (the "Initial Term"). Effective upon the expiration of
the Initial Term and of each Additional Term (as defined below), the
Executive's employment shall automatically be extended, upon the same terms
and conditions, for an additional period of one year (each, an "Additional
Term"), in each such case, commencing on the expiration of the Initial Term
or the then current Additional Term. The period during which the Executive
is employed pursuant to this Agreement is referred to as the "Employment
Period."
Position and Duties. (a) During the Employment Period, the Executive shall
serve as the President and Chief Executive Officer of the Company and
Elizabethtown Water and have such duties and responsibilities as are
customarily assigned to individuals serving in such positions and such other
duties consistent with the Executive's title and position as determined by
the Board of Directors of the Company (the "Board"); his duties shall
include, without limitation, full profit and loss responsibility for the
Company and sponsorship of all growth opportunities for the Company. The
Executive shall report to (i) the Managing Director, International Operations
of Thames Water International Services Ltd. with respect to all operational
matters relating to the Company and its subsidiaries; and (ii) the Board with
respect to all other matters. In addition, the Executive shall have a dotted
line reporting relationship to the President of Thames Water North America
Inc. ("Thames North America") with respect to development and marketing
matters of the Company.
(b)During the Employment Period, the Company shall cause the
Executive to sit on the Board, and Executive shall sit on the Board of
Directors of Thames North America ("Thames Board") and Elizabethtown Water.
The Executive shall also be deputy chairman of AWM and AWWM. In addition,
should the Parent, in the future, establish a board of directors for its
businesses in the Americas, then the Executive shall be made a member of such
board. During the Employment Period, and excluding any periods of vacation,
holiday, personal leave and sick leave to which the Executive is entitled,
the Executive shall devote the Executive's full business time, attention and
ability to the business and affairs of the Company and shall use the
Executive's reasonable best efforts to carry out the Executive's
responsibilities faithfully and efficiently in a professional manner. It
shall not be considered a violation of the foregoing for the Executive to (i)
serve on corporate or civic boards reasonably approved by the Company or on
charitable boards or committees, (ii) deliver lectures or fulfill speaking
engagements and (iii) manage his or his family's personal investments, in
each case so long as such activities do not substantially interfere with the
performance of the Executive's responsibilities as an employee of the Company
in accordance with this Agreement, do not violate the Company's or the
Parent's rules and policies (or present a material conflict of interest with
the Company) and do not otherwise constitute a violation of Section 7 of this
Agreement. The Executive shall comply with the rules and policies of the
Company that are generally applicable to the Company's senior executives.
Compensation. Base Salary. During the Employment Period, the Executive
shall receive an annual base salary of $270,000, payable pursuant to the
Company's normal payroll practices, but no less frequently than monthly
("Salary"). Unless this Agreement has been earlier terminated pursuant to
Section 5, on the first anniversary of this Agreement and every anniversary
thereafter the Compensation Committee of the Board (the "Compensation
Committee") may increase the Executive's Salary from time to time as the
Compensation Committee, in its sole and absolute discretion, shall determine.
1 Bonuses.
1Performance Bonus. During the Initial Term, the Company shall pay to the
Executive an annual cash bonus (the "Performance Bonus") equal to ten (10)
percent of the Executive's Salary, as in effect for such year, if the
Executive achieves a specified performance target ("Performance Target") of
which ninety percent (90%) shall be based on net profits before taxes based
on an agreed annual budget, and ten percent (10%) shall be based on
measurable customer service/water quality targets as determined by the
Compensation Committee. Such Performance Bonus shall be increased by five
percent (5%) of the Executive's Salary for each five percent (5%) increment
over the Performance Target achieved by the Executive up to a maximum
Performance Bonus of fifty percent (50%) of the Executive's Salary, payable
as soon as reasonably practicable after the close of the Company's fiscal
year.
2 Customer Bonus. During the Employment Period and on each anniversary of the
date of signing of the Merger Agreement, the Company shall pay the Executive
a cash bonus (the "Customer Bonus") equal to twelve and one-half percent
(12.5%) of the Executive's Salary, as in effect immediately prior to such
anniversary date (or in the case of the first anniversary of the date of
signing the Merger Agreement, the date of signing the Merger Agreement), for
each net increase of 7,500 customer metered connections to the Company's base
customer level from such level on the day before the prior anniversary date,
payable as soon as reasonably practicable after the determination of the
Customer Bonus, if any. Wholesale customer metered connections shall be
credited at a rate of fifty percent (50%) of retail customer metered
connections. Such net increases shall exclude any customer metered
connections of entities or businesses acquired by the Company outside of the
State of New Jersey excluding those customer metered connections acquired
outside of the State of New Jersey where AWM had disclosed to the Parent (or
its affiliates) prior to the date hereof in connection with the due diligence
for the Merger Agreement that it had commenced marketing activities outside
of the State of New Jersey. Such net increase shall also exclude the
acquisition of any privately held water system inside the State of New Jersey
where such system has more than 20,000 metered customers.
3 Restricted Stock Bonus. Subject to the terms of the L-Tips Scheme, and
during the Employment Period, the Executive shall be eligible to receive an
annual grant of restricted shares of the stock of the Parent of up to twenty
(20) percent of Salary, as in effect on the date of such grant (with the
number of shares rounded down in the case of a fractional share). The fair
market value of such shares shall be determined on the date of such grant in
accordance with the terms of the L-Tips Scheme and the exchange rate shall be
as published in the Wall Street Journal. Each grant shall vest over a four
year period upon the attainment of performance goals specified in accordance
with the terms of the L-Tips Scheme or attainment of age 65 by the Executive
during the Employment Period. Each such grant shall be made as of the
Commencement Date and each anniversary thereof during the Employment Period.
4 Special Retention Bonus. In consideration of the Executive's entering into
this Agreement, at the Commencement Time, the Company shall pay a cash bonus
("Special Retention Bonus") equal to twenty (20) percent of the Executive's
Salary in effect immediately prior to the Commencement Time.
2 Benefit Plans and Perquisites. The Executive shall be entitled to
participate in all benefit, pension, savings, welfare, perquisite and other
plans or arrangements that the Company may establish from time to time for
its senior executive officers, subject to the terms and conditions of such
plans or arrangements. Such plans or arrangements shall be no less favorable
to the Executive than those provided to the Executive by the Company
immediately prior to the Commencement Date.
3 Expenses. During the Employment Period, the Executive shall be entitled to
receive reimbursement for all reasonable business expenses incurred by the
Executive in carrying out the Executive's duties under this Agreement in
accordance with the policies of the Company, provided that the Executive
complies with the policies, practices and procedures of the Company for
submission of expense reports, receipts, or similar documentation of such
expenses.
4 Vacation. During the Employment Period, the Executive shall be entitled to
paid vacation of five (5) weeks per year.
5 Indemnification; D&O Insurance.
1 The Company agrees that if, during or after the Employment Period, the
Executive is made a party, or is threatened to be made a party, to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), by reason of the fact that he is or was a
director, officer or employee of the Company or is or was serving at the
request of the Company as a director, officer, member, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether or not the
basis of such Proceeding is the Executive's alleged action in an official
capacity while serving as a director, officer, member, employee or agent, the
Executive shall be indemnified and held harmless by the Company to the
fullest extent legally permitted or authorized by the Company's certificate
of incorporation or bylaws or resolutions of the Board or, if greater, by the
laws of the State of New Jersey, against all cost, expense, liability and
loss (including, without limitation, attorney's fees, judgments, fines,
Employee Retirement Income Security Act of 1974, as amended ("ERISA") excise
taxes or other liabilities or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by the Executive in connection
therewith, and such indemnification shall continue as to the Executive even
if he has ceased to be a director, member, employee or agent of the Company
or other entity and shall inure to the benefit of the Executive's heirs,
executors and administrators. The Company shall advance to the Executive all
reasonable costs and expenses incurred by him in connection with a Proceeding
within 20 calendar days after receipt by the Company of a written request for
such advance. Such request shall include an undertaking by the Executive to
repay the amount of such advance if it shall ultimately be determined that he
is not entitled to be indemnified against such costs and expenses.
2 Neither the failure of the Company (including its Board, independent legal
counsel or stockholders) to have made a determination prior to the
commencement of any proceeding concerning payment of amounts claimed by the
Executive under Section 4(f)(i) above that indemnification of the Executive
is proper because he has met the applicable standard of conduct, nor a
determination by the Company (including its Board, independent legal counsel
or stockholders) that the Executive has not met such applicable standard of
conduct, shall create a presumption that the Executive has not met the
applicable standard of conduct.
(iii)The Company agrees to continue and maintain a directors' and
officers' liability insurance policy covering the Executive to the extent the
Company provides such coverage for its other executive officers.
Termination of Employment.
1 Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death or upon a determination by the Board
to terminate the Executive's employment as a result of his Disability during
the Employment Period. For purposes of this Agreement, "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.
2 By the Company. The Company may terminate the Executive's employment during
the Employment Period for Cause or without Cause. For purposes of this
Agreement, "Cause" shall mean (i) the conviction of, or entering a plea of
nolo contendre by, 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; (ii) the
commission by the Executive or 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 (iii) the continuing willful failure
of the Executive to perform the Executive's duties, as such duties were
performed by the Executive prior to the day of the Commencement Date (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. For purposes of this paragraph 5(b), no act, or failure to act,
on the Executive's part shall be considered "willful" unless done, or omitted
to be done, by the Executive not in good faith and without reasonable belief
that the Executive's action or omission was in the best interests of the
Company.
A termination for Cause shall include a determination by the Board
following the termination of the Employment Period that circumstances existed
during the Employment Period that would have justified a termination by the
Company for Cause.
3 By the Executive. The Executive may terminate employment during the
Employment Period with or without Good Reason. For purposes of this
Agreement, "Good Reason" means, without the Executive's written consent, and
after written notice (specifying the particulars thereof in reasonable
detail) and a reasonable opportunity to be heard and cure an alleged failure
are given to the Board by the Executive:
1 the assignment by the Company to the Executive of duties which (x) 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 Commencement Date other than travel to either
of the Parent's or Thames North America's principal place of business;
(y)result in either a significant reduction in the Executive's
authority and responsibility as a senior corporate executive of the
Company (other than responsibility and authority over AWM and AWWM) or
(z) the removal of the Executive from, or any failure to reappoint or
reelect the Executive to, his current position with the Company, except
in connection with a termination of the Executive's employment by the
Company for Cause, by reason of the Executive's death or Disability;
i) a change in the reporting obligations of the Executive;
ii)a reduction by the Company of the Executive's Salary, or the
failure to grant increases in the Executive's Salary pursuant to
paragraph 4(a), or on a basis at least substantially comparable to those
granted generally to other executives of the Company of comparable
title, salary and performance ratings, made in good faith;
iii) the relocation of the Company's principal executive offices to
a location outside the State of New Jersey, or a requirement by the
Company that the Executive relocate (except for required travel on the
Company's business) (x) to a location which is outside a radius of
fifty (50) miles from the Executive's place of employment with the
Company immediately prior to the Commencement Date, or (y) to a
location outside the State of New Jersey; or, in the event the Executive
expressly consents in writing to any such relocation of the Executive
outside such fifty mile radius or the State of New Jersey, the failure
by the Company to pay (or reimburse the Executive for) all reasonable
moving expenses incurred 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;
iv)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 ERISA, and bonus plans and any other plan in
which executives of the Company of comparable title and salary or
subject to similar performance criteria participate provided for by this
Agreement; or
v) the failure of the Company to obtain the express written
assumption of and agreement to perform this Agreement by any successor
as contemplated in paragraph 15(b) hereof.
4Termination Procedures. Any termination of the Executive's employment by
the Company or by the Executive shall be communicated by Notice of
Termination to the other party hereto given in accordance with this
Agreement. For purposes of this Agreement, a "Notice of Termination" means a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated
and (iii) if the Date of Termination (as defined below) is other than the
date of receipt of such notice, specifies the termination date. For purposes
of this Agreement, "Date of Termination" means (i) if the Executive's
employment is terminated by the Company or by the Executive (other than for
death or Disability), 90 days following the date of receipt of the Notice of
Termination and (ii) if the Executive's employment is terminated by reason of
death or Disability, the Date of Termination shall be the date of death of
the Executive or, in the case of Disability, the date of the determination of
the Executive's Disability, provided that the Company may pay the Executive
(at the rate of his Annual Base Salary as then in effect) in lieu of part or
all of such notice period.
The Executive shall not be entitled to give Notice of Termination
that the Executive is terminating employment with the Company with or without
Good Reason if the Executive shall have received a Notice of Termination from
the Company on or prior to the date on which the Executive desires to give a
Notice of Termination to the Company which Notice of Termination by the
Company specifies that the Company has terminated the Executive's employment
with the Company for Cause or by reason of the Executive's Disability.
Notwithstanding anything contained in this Agreement to the
contrary, the Executive shall not be entitled to give Notice of Termination
that the Executive is terminating employment with the Company for Good Reason
more than six (6) months following the occurrence of the event alleged to
constitute Good Reason.
5Effect of Termination. Effective as of any Date of Termination, or, if
earlier, as of any date specified by the Company at or following the delivery
of a Notice of Termination, the Executive shall resign, in writing, from all
Board memberships and other positions then held by him with the Company and
its Affiliates.
Obligations of the Company upon Termination.
1 General. If, during the Employment Period, the Executive's employment
terminates for any reason, the Executive (or his estate, beneficiary or legal
representative) shall be entitled to receive (i) any earned or accrued but
unpaid Salary through the Date of Termination (including with respect to
unused vacation time), (ii) in the case of any termination of employment
other than for Cause, any earned but unpaid incentive awards payable pursuant
to Section 4(b) with respect to any fiscal year of the Company ending prior
to the Date of Termination and (iii) all amounts payable and benefits accrued
under any otherwise applicable plan, policy, program or practice of the
Company (other than relating to severance) in which Executive was a
participant during his employment with Company in accordance with the terms
thereof.
2 Termination During the Initial Term. If, during the Initial Term, the
Company terminates the Executive's employment, other than for Cause, death or
Disability, or the Executive terminates employment for Good Reason, the
Company shall, subject to Section 12, in addition to the amounts provided in
paragraph (a) above and excluding any amounts provided in paragraphs (c) and
(d) below, pay to the Executive (or his estate, beneficiary or legal
representative):
i) 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 awards payable under Section 4(b) (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 Date of
Termination; and
ii)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 Date of Termination, 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 Date of Termination; and
iii) 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 (or a comparable automobile) or
automobile allowance, as the case may be, provided by the Company to the
Executive immediately prior to the Date of Termination and the Company
shall reimburse the Executive any and all expenses 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 and salary or subject to comparable
performance criteria; and
iv)any restricted stock of the Parent in the Executive's account
(including any stock granted under the L-Tips Scheme) as an officer of
the Company and any stock options granted to the Executive on or prior
to the Date of Termination which are not vested in the Executive as of
the Date of Termination shall become immediately 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 or stock options awarded to the Executive through any
plan, arrangement or contract of the Company on or before the Date of
Termination, shall be null and void and of no further force and effect
and the Company agrees to accelerate and make immediately exercisable in
full all unmatured installments of all outstanding stock options to
acquire stock of the Company which the Executive holds as of the Date of
Termination; and
v) the Executive's retirement benefits in effect immediately prior
to the date on which a Change in Control of the Company occurred under
the Company's Supplemental Executive Retirement Plan or any successor
plan in effect on the date on which a Change in Control of the Company
occurred (the "SERP"), shall become fully vested and nonforfeitable on
the Date of Termination and (i) if the Executive has not attained the
age of 65 as of the Date of Termination, the Executive shall be deemed
to have attained the age of 65 as of the Date of Termination for
purposes of the normal retirement provisions of the SERP, and (ii) the
Executive shall be deemed to have accumulated fifteen (15) years of
continuous service on the Date of Termination for purposes of the
benefit accrual provisions of the SERP, in addition to the number of
years of service already accumulated by the Executive as of the Date of
Termination. In satisfaction of the Company's obligations under this
Section 6(b)(v), the Company shall purchase an annuity or similar
instrument owned by the Executive and payable to the Executive (or the
Executive's beneficiaries, as the case may be) which provides for
payment to the Executive of the SERP retirement benefits consistent with
the provisions of Article 10 of the SERP which payment shall commence,
subject to the Executive's right to make an Early Payout Election (as
hereinafter defined), as of a date which is no later than sixty (60)
days after the day on which the Executive attains the age 65
("Retirement Age"). Notwithstanding the foregoing sentence, the
Executive shall be entitled to elect to receive such payment of the SERP
retirement benefits before the Executive's Retirement Age (an "Early
Payout Election") if the Executive has completed on the Date of
Termination twenty-five (25) Years of Service, which Years of Service
shall include the fifteen (15) years of additional continuous service
which the Executive is deemed to have accumulated on the Date of
Termination, in addition to the number of years of service already
accumulated by the Executive as of the Date of Termination, in
accordance with subparagraph (ii) of this Section 6(b)(v). In the
event that the Executive makes an Early Payout Election in accordance
with this Section 6(b)(v), payment of the Executive's SERP retirement
benefits under such annuity or similar instrument purchased by the
Company under such annuity or similar instrument purchased by the
Company under this Section 6(b)(v) shall commence as of a date which is
no later than sixty (60) days after the day on which the Executive
attains the age of 62; provided, however, that the SERP retirement
benefits payable in accordance with the Early Payout Election by the
Executive shall be calculated using the reduced percentage from 60% to
55% consistent with the provisions of Section 6.2 of the SERP. Such
annuity or other instrument shall be purchased and delivered to the
Executive by the Company within thirty (30) days after the Date of
Termination. In the event that the Executive elects to make an Early
Payout Election in accordance with this Section 6(b)(v), the Executive
shall deliver to the Company a written notice of the Executive's Early
Payout Election within ten (10) calendar days after the Date of
Termination.
3 Special Termination. If, during the six (6) month period commencing on the
earlier of either (i) the date of the first BPU rate order received by the
Company's subsidiary, Elizabethtown Water after the Commencement Date; or
(ii) eighteen (18) months from the Commencement Date, as the case may be, the
Executive terminates employment with the Company and Elizabethtown Water,
exercised in his sole discretion without Cause, the Company shall, subject to
Section 12, in addition to the amounts provided in paragraph (a) above and
excluding any amounts provided in paragraphs (b) and (d) of this section, pay
to the Executive (or his estate, beneficiary or legal representative):
1 for a period of twenty-four (24) 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
(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
Date of Termination; and
i) for a period of twenty-four (24) 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 Date of Termination, 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 Date of Termination; and
ii)for a period of twenty-four (24) months following the Date of
Termination, the Company shall provide to the Executive, at the
Company's expense, the automobile (or a comparable automobile) or
automobile allowance, as the case may be, provided by the Company to the
Executive immediately prior to the Date of Termination and the Company
shall reimburse the Executive any and all expenses incurred by the
Executive in connection with the use of such automobile during such
twenty-four month period to the extent that the Company reimburses
generally other executives of comparable title and salary or subject to
comparable performance criteria; and
iii) any restricted stock of the Parent which is unvested as of the
Date of Termination shall become null and void; and
iv)the Executive's retirement benefits in effect immediately prior
to the Date of Termination under the Company's SERP shall be determined
in accordance with the SERP except for the provisions relating to a
Change of Control (as such term is defined in the SERP).
4 Termination during the Additional Term. If, during the Additional Term, the
Company terminates the Executive's employment, other than for Cause, death or
Disability, or the Executive terminates employment for Good Reason, the
Company shall, subject to Section 12, in addition to the amounts provided in
paragraph (a) above and excluding any amounts provided in paragraphs (b) and
(c) above, pay to the Executive (or his estate, beneficiary or legal
representative):
i) for a period of twelve (12) 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
(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
Date of Termination; and
ii)benefits required to be provided by the Company pursuant to
section 4980B of the Internal Revenue Code of 1986, as amended (the
"Code") ("COBRA").
1.Covenant Not to Compete. The Executive acknowledges and agrees that the
Company has a legitimate interest in being protected from the Executive's
being employed in a position of management by an entity that competes with
the Company. The Executive and the Company have considered carefully how best
to protect the legitimate interests of the Company without unreasonably
restricting the economic interests of the Executive, and hereby agree to the
following restrictions, in addition to those contained in Section 8, as the
most reasonable and equitable under the circumstances. During the Employment
Period and for the period during which the Executive receives payments,
pursuant to Sections 6(b), (c) or (d) hereof, after the Executive's
termination of employment with the Company, but in no event beyond the period
with respect to which the Executive is entitled to Salary after termination
of employment (the "Restriction Period"), the Executive will not, directly or
indirectly (whether as sole proprietor, partner or venturer, stockholder,
director, officer, employee or consultant or in any other capacity as
principal or agent or through any person, subsidiary or employee acting as
nominee or agent):
5 Conduct or engage in or be interested in or associated with any person,
firm, association, partnership, corporation or other entity that, within the
"Territory" (as defined below), directly competes with any service or product
that the Company actually provides to its customers, or that the Company has
taken substantial steps to commence providing that is (i) a significant part
of the Company's business or (ii) intended to be a significant part of the
Company's business in the Company's business plan, in each case determined as
of the Date of Termination (the "Business"), provided that the foregoing
shall not apply if the Executive's interest or association with such
competitor is unrelated to the Business. "Territory" shall mean the
geographic area in which services or products are actually provided by the
Company, or that the Company has taken substantial steps to commence
providing that is (i) a significant part of the Company's business or (ii)
intended to be a significant part of the Company's business in the Company's
business plan, in each case determined as of the Date of Termination.
6 Take any action, directly or indirectly, to finance, guarantee or provide
any other material assistance to any person, firm association, partnership,
corporation or other entity which conducts or engages in the Business in the
Territory with respect to any activity that competes with the Business;
7 Influence or attempt to influence any person, firm, association,
partner-ship, corporation or other entity who is a contracting party with the
Company at any time during the Restriction Period to terminate any written
agreement with the Company except to the extent the Executive is acting on
behalf of the Company in good faith; or
8 Hire or attempt to hire for employment any person who is employed by the
Company at the time of hiring or attempted hiring or whose active employment
with the Company ceased less than six months prior to such time, or attempt
to influence any such person to terminate employment with the Company, except
to the extent the Executive is acting on behalf of the Company in good faith;
provided, however, that nothing herein shall prohibit the Executive from
general advertising for personnel not specifically targeting any employee or
other personnel of the Company.
9 The restrictive provisions of this Agreement shall not prohibit the
Executive from having as an investment an equity interest in the securities
of any corporation engaged in the Business, which securities are listed on a
recognized securities exchange or traded in the over-the-counter market to
the extent that such interest does not exceed 2% of the value or voting power
of such corporation and does not constitute control of such corporation.
For purposes of this Section 7 and Sections 8, 9 and 10 of this Agreement,
the term "Company" shall include the Company or with respect to the Business
or Territory in which the Executive is involved, its affiliates.
2.Confidential Information. The Executive acknowledges and agrees that all
material information that is not publicly available or generally known in the
industry concerning the Company's business including, without limitation,
information relating to its products, customer lists, pricing, trade secrets,
patents, business methods, and cost data, business plans and strategies
(collectively, the "Confidential Information") is and shall remain the
property of the Company. The Executive recognizes and agrees that all of the
material Confidential Information, whether developed by the Executive or made
available to the Executive, other than information that is not material to
the Company or generally known to the public or generally known in the
industry, is a unique asset of the business of the company, the disclosure of
which would be damaging to the Company. Accordingly, the Executive agrees
to hold such material Confidential Information in a fiduciary capacity for
the benefit of the Company. The Executive agrees that he will not at any
time during or within 10 years after the Executive's employment with the
Company for any reason, directly or indirectly, disclose to any person any
material Confidential Information the disclosure of which could harm the
Company, other than information that is already known to the public or
generally known in the industry, except as may be required in the ordinary
course of business of the Company or as may be required by law. Promptly
upon the termination of this Agreement for any reason, the Executive agrees
to return to the Company any and all documents, memoranda, drawings, notes
and other papers and items (including all copies thereof, whether electronic
or otherwise) embodying any Confidential Information of the Company which are
in the possession or control of the Executive. Information concerning the
Company's business that becomes public as a result of the Executive's breach
of this Section 8 shall be treated as Confidential Information as defined in
this Section 8. The Executive shall not be deemed to have breached this
Section 8 unless the disclosure of such Confidential Information actually
causes harm to the Company or any of its affiliates.
3.Breach of Certain Provisions. The Executive acknowledges that a violation
on the Executive's part of any of the covenants contained in Sections 7 or 8
of this Agreement would cause immeasurable and irreparable damage to the
Company. The Executive represents that his economic means and circumstances
are such that the provisions of this Agreement, including the
non-competition, non-solicitation of employees, confidentiality and Company
property provisions, will not prevent him from providing for himself and his
family on a basis satisfactory to him and them. Accordingly, the Executive
agrees that the Company shall be entitled to injunctive relief in any court
of competent jurisdiction for any actual or threatened violation of any such
covenant in addition to any other remedies it may have. The Executive agrees
that in the event that any arbitrator or court of competent jurisdiction
shall finally hold that any provision of Sections 7 or 8 hereof is void or
constitutes an unreasonable restriction against the Executive, the provisions
of such Section shall not be rendered void but shall apply to such extent as
such arbitrator or court may determine constitutes a reasonable restriction
under the circumstances. Any breach by the Executive of the provisions of
Sections 7 or 8 of this Agreement shall relieve the Company of all
obligations to any further payments to the Executive pursuant to this
Agreement or otherwise under any incentive or equity awards made by the
Company.
4.Property of the Company. The Executive acknowledges that from time to time
in the course of providing services pursuant to this Employment Agreement, he
shall have the opportunity to inspect and use certain property, both tangible
and intangible, of the Company, including Confidential Information. The
Executive hereby agrees that such property shall remain the exclusive
property of the Company and shall be returned to the Company upon the
Executive's termination of employment.
5.Litigation; Cooperation. If this Agreement is terminated by the Company
other than for Cause or by the Executive for Good Reason, in consideration of
the payments to be made to the Executive by the Company pursuant to Section
6(b) of this Agreement, the Executive agrees, during the period that the
Company is actually making such payments to the Executive and providing
benefits to the extent required pursuant to Section 6(b), to provide to the
Company and its affiliates truthful and complete cooperation including, but
not limited to, the Executive's appearance at interviews and depositions at
reasonable times (taking into account the Executive's then employment and
place of residence) in all regulatory and litigation matters relating to the
Company and the Executive's employment by the Company, whether or not such
matters have been commenced at the time of such termination, and to provide
to counsel to the Company and its affiliates, upon request, all documents in
the Executive's possession or under his control relating to such regulatory
and litigation matters, all at no additional compensation to the Executive;
provided, however, that the Company will reimburse the Executive for (a) all
reasonable expenses, including travel, lodging, meals and attorneys' fees and
(b) any salary forfeited by the Executive or vacation time consumed by him
during time spent by the Executive, in connection with the foregoing.
6.Release. In consideration of the payments to be made to the Executive
pursuant to Section 6(b), (c) or (d) of this Agreement and as a condition to
the payment thereof, the Executive acknowledges that all such payments, if
made in accordance with the terms of this Agreement, shall constitute
complete satisfaction of all obligations owed by the Company to the Executive
hereunder and shall further constitute the Executive's sole remedy against
the Company regarding the Executive's employment hereunder. The parties
hereby agree that if this Section 12 becomes applicable they will execute a
mutually acceptable general release to reflect the provisions of this
Section.
7.Certain Additional Payments by the Company.
10Anything in this Agreement to the contrary notwithstanding, in the event it
shall be determined that any payment award, benefit or distribution by the
Company to or for the benefit of the Executive (whether pursuant to the terms
of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 13) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Code or any
corresponding provisions of state or local tax laws, or any interest or
penalties are incurred by the Executive with respect to such excise tax (such
excise tax together with any such interest and penalties, are hereinafter
collectively referred to as (the "Excise Tax")), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including, but not
limited to, any income taxes, Excise Taxes and any interest or penalties
imposed with respect to any such taxes) imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payments.
11 Subject to the provisions of Section 13(c), all determinations required to
be made under this Section 13, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by the Company in
good faith in consultation with the Executive and his advisors, which shall
provide detailed supporting calculations to the Executive within fifteen (15)
business days of the receipt of notice from the Executive that there has been
a Payment (or, if later, within fifteen (15) days of the date it is
determined by the Company that the Payment is subject to the Excise Tax).
Any Gross-Up Payment, as determined pursuant to this Section 13, shall be
paid by the Company to the Executive within five days of the receipt of the
Company's determination. As a result of the uncertainty in the application
of Section 4999 of the Code, it is possible that Gross-Up Payments which will
not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 13(c) and the
Executive thereafter is required to make a payment of any Excise Tax, any
such Underpayment shall be promptly paid by the Company to or for the benefit
of the Executive. If it is established pursuant to a final determination of
a court or an Internal Revenue Service proceeding or the opinion of
independent counsel agreed upon by the parties that the Excise Tax is less
than the amount taken into account under Section 13(a) of this Agreement, the
Executive shall repay to the Company within thirty (30) days of the
Executive's receipt of notice of such final determination or opinion the
portion of the Gross-Up Payment attributable to such reduction (plus the
portion of the Gross-Up Payment attributable to the Excise Tax and federal,
state and local income tax imposed on the Gross-Up Payment being repaid by
the Executive if such repayment results in a reduction in Excise Tax or a
federal, state and local income tax deduction) plus any interest received by
the Executive on the amount of such repayment.
12 The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than ten business days after the Executive
is informed in writing of such claim and shall appraise the Company of the
nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of the
30-day period following the date on which the Executive gives such notice to
the Company (or such shorter period ending on the date that any payment of
taxes with respect to such claim is due). If the Company notifies the
Executive in writing prior to the expiration of such period that it desires
to contest such claim, the Executive shall:
A(give the Company any information reasonably requested by the
Company relating to such claim,
B(take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim
by an attorney reasonably selected by the Company.
C(cooperate with the Company in good faith in order effectively to
contest such claim, and
D(permit the Company to participate in any proceedings relating to
such claim; provided, however, that the Company shall bear and pay directly
all costs and expenses (including additional interest and penalties) incurred
in connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 13(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option,
may pursue or forgo any and all administrative appeals, proceedings, hearings
and conferences with the taxing authority in respect of such claim and may,
at its sole option, either direct the Executive to pay the tax claimed and
sue for a refund or contest the claim in any permissible manner, and the
Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as the Company shall determine; provided, however,
that if the Company directs the Executive to pay such claim and sue for a
refund, the Company shall advance the amount of such payment to the
Executive, on an interest-free basis and shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penal-ties with respect thereto) imposed with respect
to such advance or with respect to any imputed income with respect to such
advance; and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amounts claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be entitled to
settle or contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
13 If, after the receipt by the Executive of an amount advanced by the Company
pursuant to Section 13(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 13(c)) promptly pay to
the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
the Executive of an amount advanced by the Company pursuant to Section 13(c),
a determination is made that the Executive shall not be entitled to any
refund with respect to such claim and the Company does not notify the
Executive in writing of its intent to contest such denial of refund prior to
the expiration of 30 days after such determination, then such advance shall
be forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid.
8.Arbitration. Any dispute, controversy, or question arising under, out of,
or relating to this Agreement (or the breach thereof) or, Executive's
employment with the Company or termination thereof (including, but not
limited to, claims of discrimination), shall be referred for arbitration to
be held in New Jersey (or such other place as the parties and the arbitrator
shall agree) to a neutral arbitrator selected by the Executive and the
Company and this shall be the exclusive and sole means for resolving such
dispute (other than for injunctive relief under Section 9 of this Agreement).
The arbitration shall be conducted in accordance with the Employment
Arbitration Rules (the "Rules") of the American Arbitration Association (the
"AAA") in effect at the time of the arbitration, except that the arbitrator
shall be selected by alternatively striking from a list of five arbitrators
supplied by the AAA, and the decision of the arbitrator shall be governed by
the rule of law. Such right to submit a dispute arising hereunder to
arbitration and the decision of the neutral arbitrator shall be final,
conclusive and binding on all parties and interested persons and no action at
law or in equity shall be instituted or, if instituted, further prosecuted by
either party other than to enforce the award of the neutral arbitrator. The
arbitrator shall take submissions and hear testimony, if necessary, and shall
render a written decision as promptly as possible. The arbitrator may
require discovery for good cause shown. Each party shall bear its own costs
and expenses incurred in connection with any such arbitration; provided the
Company will initially pay for the fees, time, charges and expenses of the
arbitrator and the AAA; provided, further, that the arbitrator shall be
entitled to award to the prevailing party reimbursement of its reasonable
legal costs and expenses (including with respect to the arbitrator and the
AAA).
9.Successors.
14 This Agreement is personal to the Executive and, without the prior written
consent of the Company, shall not be assignable by the Executive except by
will or the laws of descent and distribution. This Agreement shall inure to
the benefit of and be enforceable by the Executive's legal representatives.
15 This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns, provided that the Company may not
assign this Agreement except in connection with the assignment or disposition
of all or substantially all of the assets or stock of the Company. In the
event of such assignment, a failure by the successor to specifically assume,
in a writing reasonably acceptable in form and content to the Executive, and
delivered to the Executive, the obligations and liabilities of the Company
hereunder shall be deemed a material breach of this Agreement. Except as
specifically provided in this Agreement, "Company" shall mean both the
Company as defined above and any such successor that assumes and agrees to
perform this Agreement, by operation of law or otherwise.
10.Miscellaneous.
16 This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New Jersey, without reference to its conflict of law
rules.
17 All notices and other communications under this Agreement shall be in
writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Andrew M. Chapman
XXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
(Home Address)
If to the Company:
Thames Water North America Inc.
Two Stamford Plaza - 15th Floor
281 Tresser Boulevard
Stamford, CT 06091
Attn: Jeremy Pelczer
With a copy to:
Thames Water North America Inc.
Two Stamford Plaza - 15th Floor
281 Tresser Boulevard
Stamford, CT 06091
Attn: Ronald E. Walsh
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.
18 The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable
and continue in full force and effect to the fullest extent consistent with
law.
19 Notwithstanding any other provision of this Agreement, the Company may
withhold from amounts payable under this Agreement, and shall pay over to the
appropriate authorities in a manner consistent with all applicable
requirements, all federal, state, local and foreign taxes that are required
to be withheld by applicable laws or regulations.
20 The Executive's or the Company's failure to insist upon strict compliance
with any provision of, or to assert any right under, this Agreement shall not
be deemed to be a waiver of such provision or right or of any other provision
of or right under this Agreement. This Agreement may not be amended or
modified except by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
21 Except as provided herein, the Executive and the Company acknowledge that
this Agreement constitutes the entire agreement between the parties and
supersedes any prior agreement between the Executive and the Company
concerning the subject matter hereof, including, but not limited to, the
change of control agreement between the Executive and Company and any
amendment thereto (the "Prior Agreement"). The Executive agrees that the
Prior Agreement shall terminate as of the Commencement Date, and the
Executive explicitly waives any rights to payments or benefits under the
Prior Agreement, other than any earned or accrued base salary, bonus or other
amounts payable or benefits owed and unpaid prior to the Commencement Date.
The Executive shall not be entitled to participate in any severance plans or
programs of the Company during the Employment Period.
22 This Agreement shall be of no force and effect if the Merger (as defined in
the Merger Agreement) does not become effective and shall automatically
expire if the Merger Agreement is terminated.
23 This Agreement may be executed in several counterparts, each of which be
deemed an original, and said counterparts shall constitute but one and the
same instrument.
24 The Company and Thames North America will be jointly and severally liable
for all obligations and agreements of each of them hereunder.
25 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; provided, that, this provision shall not
constitute a waiver by the Executive of his rights under this Agreement.
26 The Executive shall not be required to mitigate damages or the amount of
any payment or other benefit provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment or other benefit
provided for in this Agreement then or thereafter due to the Executive be
reduced or modified by any compensation or other payment or benefit earned or
received by the Executive as the result of or in connection with any
employment of the Executive by another employer after the Date of
Termination, or otherwise.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth above.
EXECUTIVE
/s/ Andrew M. Chapman
____________________________
ANDREW M. CHAPMAN
E'TOWN CORPORATION
/s/ Anne Evans Estabrook
______________________________
Name:
Title:
THAMES WATER NORTH AMERICA INC.
/s/ Ronald E. Walsh
______________________________
Name: Ronald E. Walsh
Title: Vice President
<PAGE>
Exhibit 10(t)
AMENDMENT TO
AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT
Dated August 20, 1998
by and between
Executives named below
and
E'TOWN CORPORATION
This Amendment ("Amendment") to the Amended and Restated
Change In Control Agreement, dated as of August 20, 1998 between
Executive Named Below (the "Executive") and E'TOWN CORPORATION
(the "Company"), is made effective as of this 20th day of
November, 1999 by and between the Executive and the Company.
WITNESSETH:
WHEREAS, the Company has entered into that certain Amended
and Restated Change in Control Agreement with the Executive,
dated as of August 20, 1998 (the "Agreement"), which sets forth
the terms and conditions under which benefits and payments shall
be made by the Company or its successor to the Executive upon any
termination of the Executive's employment with the Company in the
event of a change in control of the Company as defined in the
Agreement; and
WHEREAS, the parties hereto have agreed to make certain
clarifications to the terms and conditions of the Agreement, as
are reflected herein;
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the
parties, the parties hereto, intending to be legally bound
hereby, agree to amend the Agreement as follows:
1. Paragraph 4(f) of the Agreement is amended by replacing
paragraph 4(f) in its entirety with the following:
"4(f). the Executive's retirement benefits in
effect immediately prior to the date on which a
Change in Control of the Company occurred under
the Company's Supplemental Executive Retirement
Plan, or any successor plan in effect on the date
on which a Change in Control of the Company
occurred (the "SERP"), shall become fully vested
and nonforfeitable on the Date of Termination and
(i) if the Executive has not attained the age of
65 as of the Date of Termination, the Executive
shall be deemed to have attained the age of 65 as
of the Date of Termination for purposes of the
normal retirement provisions of the SERP, and (ii)
the Executive shall be deemed to have accumulated
ten (10) years of continuous service on the Date
of Termination for purposes of the benefit accrual
provisions of the SERP, in addition to the number
of years of service already accumulated by the
Executive as of the Date of Termination. In
satisfaction of the Company's obligations under
this paragraph 4(f), the Company shall purchase an
annuity or similar instrument owned by the
Executive and payable to the Executive (or the
Executive's beneficiaries, as the case may be)
which provides for payment to the Executive of the
SERP retirement benefits consistent with the
provisions of Article 10 of the SERP which payment
shall commence, subject to the Executive's right
to make an Early Payout Election (as hereinafter
defined), as of a date which is no later than
sixty (60) days after the day on which the
Executive attains the age 65 ("Retirement Age").
Notwithstanding the foregoing sentence, the
Executive shall be entitled to elect to receive
such payment of the SERP retirement benefits
before the Executive's Retirement Age (an "Early
Payout Election") if the Executive has completed
on the Date of Termination twenty-five (25) Years
of Service, which Years of Service shall include
the ten (10) years of additional continuous
service which the Executive is deemed to have
accumulated on the Date of Termination, in
addition to the number of years of service already
accumulated by the Executive as of the Date of
Termination, in accordance with subparagraph (ii)
of this paragraph 4(f). In the event that the
Executive makes an Early Payout Election in
accordance with this paragraph 4(f), payment of
the Executive's SERP retirement benefits under
such annuity or similar instrument purchased by
the Company under this paragraph 4(f) shall
commence as of a date which is no later than sixty
(60) days after the day on which the Executive
attains the age of 62; provided, however, that the
SERP retirement benefits payable in accordance
with the Early Payout Election by the Executive
shall be calculated using the reduced percentage
from 60% to 55% consistent with the provisions of
Section 6.2 of the SERP. Such annuity or other
instrument shall be purchased and delivered to the
Executive by the Company within thirty (30) days
after the Date of Termination. In the event that
the Executive elects to make an Early Payout
Election in accordance with this paragraph 4(f),
the Executive shall deliver to the Company a
written notice of the Executive's Early Payout
Election within ten (10) calendar days after the
Date of Termination; and"
2. If any of the terms and conditions of the Agreement are
inconsistent with the terms and conditions of this Amendment, the
terms and conditions of this Amendment shall supercede such
inconsistent terms and conditions of the Agreement. Except to
the extent changed or modified herein, all terms and conditions
of the Agreement shall remain unchanged and be in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the day and year first written above.
EXECUTIVE:
/s/ Executive named below
E'TOWN CORPORATION
By: /s/ Anne Evans Estabrook
Anne Evans Estabrook, Chairman of the Board
The above contract applies to the following individuals:
Walter Braswell
Beth Gates
Edward Mullen
Gail Brady
Henry Patterson, III
James Cowley
Joseph Stroin
Norbert Wagner
Robert W. Kean, III
Dennis W. Doll
Andrew M. Chapman
Exhibit 12
E'TOWN CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(In Thousands Except Ratios)
Year Ended December 31,
1999 1998 1997 1996 1995
------------------------------------------------------
EARNINGS:
Net income $ 20,487 $ 22,330 $ 19,260 $ 15,073 $ 15,296
Federal income taxes 11,488 12,226 10,895 8,361 8,753
Interest charges 19,416 17,826 17,340 13,316 11,698
------------------------------------------------------
Earnings available to
cover fixed charges 51,391 52,382 47,495 36,750 35,747
------------------------------------------------------
FIXED CHARGES:
Interest on long-term debt 16,109 16,217 14,807 13,800 11,696
Other interest 3,256 1,641 2,560 2,645 2,390
Amortization of debt
discount - net 446 438 411 395 358
------------------------------------------------------
Total fixed charges $ 19,811 $ 18,296 $ 17,778 $ 16,840 $ 14,444
------------------------------------------------------
Ratio of Earnings
to Fixed Charges 2.59 2.86 2.67 2.18 2.47
======================================================
Earnings to Fixed Charges represents the sum of Net Income,
Federal income taxes and Interest Charges (which is reduced by
Capitalized interest), divided by Fixed Charges.
Fixed Charges consist of interest on long and short-term debt (which is not
reduced by Capitalized Interest), and Amortization of debt discount.
<PAGE>
Exhibit 12(a)
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
Computation of Ratio of Earnings to Fixed Charges
(In Thousands Except Ratios)
Year Ended December 31,
1999 1998 1997 1996 1995
-----------------------------------------------------
EARNINGS:
Net income $ 21,405 $ 24,768 $ 20,905 $ 16,755 $ 17,325
Federal income taxes 11,576 13,101 11,274 8,822 9,161
Interest charges 16,502 15,616 16,622 12,804 11,115
-----------------------------------------------------
Earnings available to
cover fixed charges 49,483 53,485 48,801 38,381 37,601
-----------------------------------------------------
FIXED CHARGES:
Interest on long-term debt 14,661 14,721 14,030 13,011 10,892
Other interest 1,780 960 2,382 2,640 2,344
Amortization of debt
discount - net 399 391 376 361 324
-----------------------------------------------------
Total fixed charges $ 16,840 $ 16,072 $ 16,788 16,012 13,560
-----------------------------------------------------
Ratio of Earnings to
Fixed Charges 2.94 3.33 2.91 2.40 2.77
=====================================================
Earnings to Fixed Charges represents the sum of Net Income,
Dividends, Federal income taxes and Interest Charges (which is reduced by
Allowance for Debt Funds Used During Construction), divided by Fixed Charges.
Fixed Charges consist of interest on long and short-term debt (which is not
reduced by Allowance for Debt Funds Used During Construction), and
Amortization of debt discount.
<PAGE>
Exhibit 12(b)
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
Computation of Ratio of Earnings to Fixed Charges
and Preferred Dividends
(In Thousands Except Ratios)
Year Ended December 31,
1999 1998 1997 1996 1995
----------------------------------------------------
EARNINGS:
Net income $ 21,405 $ 24,768 $ 20,905 $ 16,755 $ 17,325
Federal income taxes 11,576 13,101 11,274 8,822 9,161
Interest charges 16,502 15,616 16,622 12,804 11,115
-----------------------------------------------------
Earnings available to
cover fixed charges 49,483 53,485 48,801 38,381 37,601
-----------------------------------------------------
FIXED CHARGES AND
PREFERRED DIVIDENDS:
Interest on long-term debt 14,661 14,721 14,030 13,011 10,892
Preferred dividend
requirement (1) 1,253 1,243 1,251 1,241 1,243
Other interest 1,780 960 2,382 2,640 2,344
Amortization of debt
discount - net 399 391 376 361 324
-----------------------------------------------------
Total fixed charges $ 18,093 $ 17,315 $ 18,039 $ 17,253 $ 14,803
-----------------------------------------------------
Ratio of Earnings to
Fixed Charges and
Preferred Dividends 2.73 3.09 2.71 2.22 2.54
=====================================================
(1) Preferred Dividend
Requirement:
Preferred dividends 813 813 813 813 813
Effective tax rate 35.10% 34.60% 35.04% 34.49% 34.59%
-----------------------------------------------------
Preferred dividend
requirement $ 1,253 $ 1,243 $ 1,251 1,241 1,243
=====================================================
Earnings to Fixed Charges and Preferred Dividends represents the sum of
Net Income, Federal income taxes and Interest
Charges (which is reduced by Allowance for Debt Funds Used During
Construction), divided by Fixed Charges. Fixed Charges and Preferred
Dividends consist of interest on long and short-term debt (which is not
reduced by Allowance for Debt Funds Used During Construction), dividends
on Preferred Stock on a pre-tax basis and Amortization of debt discount.
Exhibit 13
Exhibit 13 represents the portion of the 1999 Annual Report to Shareholders
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), E'town Properties, Inc. (Properties), Liberty Water
Company (Liberty), Applied Water Management, Inc. (AWM) and Applied Wastewater
Management, Inc. (AWWM). The Mount Holly Water Company (Mount Holly) is a
wholly-owned subsidiary of Elizabethtown. The assets and operating results of
Elizabethtown constitute the predominant portions of E'town's assets and
operating results. Mount Holly , Liberty, AWM and Edison contributed 3.2%, 5.4%,
7.4% and 1.6%, respectively, of the Corporation's consolidated operating
revenues for 1999. Elizabethtown, Mount Holly and AWWM comprise the Regulated
Utilities segment, Liberty and Edison comprise the Contract Operations segment,
AWM is the Engineering/Operations and Construction segment and E'town and
Properties comprise the Financing and Investment segment (see Note 16 to
E'town's Notes to Consolidated Financial Statements). The following analysis
sets forth significant events affecting the financial condition of the various
segments at December 31, 1999, and the results of operations for the years ended
December 31, 1999 and 1998.
PENDING MERGER
On November 21, 1999, E'town entered into an agreement (Merger Agreement) with
Thames Water Plc (Thames Water) under which Thames Water has agreed, subject to
certain conditions, to acquire E'town for $68 per share in cash or approximately
$607 million. Thames Water will also assume the debt of E'town. The acquisition
will take the form of a merger (Merger) of E'town with a newly formed subsidiary
of Thames Water and E'town will be the surviving company.
A special meeting of shareholders is expected to be held during the second
quarter of 2000 to seek shareholder approval of the transaction. The acquisition
is also subject to approval by the New Jersey Board of Public Utilities (BPU),
the Federal Trade Commission and the Department of Justice under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976. Certain clearances must
also be obtained from the New Jersey environmental regulators. The transaction
is expected to close prior to the end of 2000.
- -1-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures Program
Net capital expenditures were $62.3 million in 1999. Included in this total
are $57.4 million for additions and improvements to water utility plant and
wastewater facilities, $1.8 million for the purchase of a regulated water and
wastewater operation by Mount Holly and AWWM and $3.1 million for capital
additions under privatization contracts. For the three years ending December 31,
2002, capital and investment requirements for E'town are estimated to be $171.4
million, consisting of (i) expenditures for the Regulated Utilities Segment
($135.1 million for Elizabethtown, $4.7 million for Mount Holly and $5.2 million
for AWWM), (ii) investments in the Contract Operations segment for concession
payments by Liberty and capital improvements for Liberty and Edison of $24.4
million and (iii) investments in the Engineering/Operations and Construction
segment of $2.0 million. See "Economic Outlook" for a discussion of Contract
Operations. These estimates do not include any amounts for possible additional
acquisitions or privatization activities in the three-year period.
REGULATED UTILITIES SEGMENT
Elizabethtown
Elizabethtown's three-year capital program includes $62.0 million for routine
projects (services, hydrants, system rehabilitation and main extensions not
funded by developers) and $73.1 million for transmission system upgrades, a new
operations center, expansion of the Canal Road Water Treatment Plant (Canal
Road) and other projects. Canal Road will be expanded to provide for enhanced
system reliability and to accommodate customer growth. Canal Road was designed
as a 40 million gallon per day (MGD) plant, expandable to 200 MGD.
Mount Holly
During the next three years, Mount Holly expects to spend $4.7 million, of which
$3.3 million is for routine projects (services, hydrants and main extensions not
funded by developers).
In 1998 Mount Holly commenced a construction project, called the Mansfield
Project, to comply with New Jersey legislative restrictions to obtain
alternative water supplies, thereby reducing its water pumpage from an aquifer,
which had been subject to over-pumping by Mount Holly and various local
purveyors in a portion of southern New Jersey. A portion of this project was
placed into service in the third quarter of 1998 and the remaining portion of
the project was placed into service in late December 1999.
- -2-
<PAGE>
To settle an appeal initiated by another water purveyor in 1995 concerning the
diversion rights for the Mansfield Project, Mount Holly signed a Stipulation in
1997 with the purveyor, the New Jersey Department of Environmental Protection
(DEP) and other parties, requiring Mount Holly to purchase one million gallons
per day from the other purveyor during the two-year period that the Mansfield
Project was being constructed. Purchases began during March of 1998, after
completion of an interconnection and ended in January 2000 shortly after the
Mansfield Project went into service.
In September 1997 Mount Holly filed a petition with the BPU to establish a
Purchased Water Adjustment Clause (PWAC) to reflect the cost of water purchased
from the other purveyor under the aforementioned Stipulation Agreement. In May
1998 the BPU adopted a Stipulation signed by the parties to the PWAC case for an
increase in annual revenues under Mount Holly's PWAC of $1.3 million or 38.9%.
Effective January 1, 2000, Mount Holly received an increase in annual rates of
$1.9 million. This increase included costs for Mount Holly's Mansfield Project
that was placed in service at the end of December 1999. The rate decision also
reflected the elimination of the PWAC. After the elimination of the PWAC, the
net rate increase was $.5 million. This increase also reflects additional
construction and financing costs, as well as increases in operating costs, since
base rates were last established in January 1996.
AWWM
In June 1998 the Corporation purchased AWWM, which is a regulated wastewater
utility. AWWM owns and operates water and wastewater facilities. In some
instances, AWWM purchases the wastewater facilities from developers that were
constructed by AWM. These purchases add to E'town's regulated utility customer
base. AWWM expects to incur capital expenditures of $5.1 million in the next
three years for purchases of wastewater plants from developers.
In June 1999 Mount Holly purchased Homestead Water Utility, Inc. and AWWM
purchased Homestead Treatment Utility, Inc. for a combined purchase price of
$1.8 million. The entities provide water and wastewater services to
approximately 800 customers of the Homestead community in southern New Jersey.
CONTRACT OPERATIONS SEGMENT
LIBERTY
In July 1998 E'town, through Liberty, entered into a contract with the city of
Elizabeth (Elizabeth), New Jersey to operate its water system under a 40-year
contract serving approximately 17,600 customers. Under the contract, Liberty
made payments to Elizabeth of $19.7 million in 1998 and $12 million in 1999 and
is obligated to make a payment of $19 million in June 2000. Also under the terms
of the contract, Liberty will deposit $57.8 million from customer collections
during the 40-year contract into a fund administered by Elizabeth (Fund
Deposits), of which $52.3 million is due after 2012, to be used by Elizabeth to
pay for capital improvements or for other water system purposes. Liberty is
responsible for $7.45 million of construction expenditures, primarily for meter
replacements, during the life of the contract. Of these total commitments,
approximately $2.5 million is expected to be expended in the next three years.
During the life of the contract, E'town will receive all water revenues from
billing the customers of the water system in accordance with rate increases set
forth in the contract except for the Fund Deposits discussed above. E'town is
also responsible for all operating expenses as well as the capital expenditures
discussed above. Performance by Liberty of the contract provisions is guaranteed
by E'town.
- -3-
<PAGE>
EDISION
In 1997 E'town, through Edison, entered into a contract with the township of
Edison, New Jersey to operate its water system under a 20-year contract serving
approximately 11,500 customers. Edison bills and receives all water revenues
generated as a result of operating the water system and pays: (i) all operating
and maintenance expenses for the water system, (ii) certain annual payments to
the township of Edison and (iii) costs of specific capital improvements.
Aggregate annual payments and the estimated costs of capital improvements are
expected to be approximately $25 million during the 20-year life of the
contract, of which $12.5 million has been spent as of December 31, 1999. Of the
total, approximately $2.9 million is expected to be expended in the next three
years. An initial payment of $5.7 million was made upon the closing in June
1997. Performance by Edison of the contract provisions is guaranteed by E'town.
If the Elizabeth or Edison contracts were terminated by either the township of
Edison or the city of Elizabeth, the unamortized balance of the concession fees
and amounts paid for additional capital improvements would be refunded to
Liberty and Edison in accordance with the contracts.
ENGINEERING/OPERATIONS AND CONSTRUCTION SEGMENT
AWM
In June 1998 the Corporation purchased AWM, which provides one-stop shopping for
water and wastewater services to residential and commercial developers. These
services include the design, construction and operation of water and wastewater
facilities and, in some instances, purchase of such utilities from developers at
project build-out by AWWM, thereby adding to E'town's regulated utility customer
base. AWM expects to incur capital expenditures of $2.0 million during the next
three years. These expenditures consist primarily of vehicles and equipment used
in the construction and waste hauling operations. In 1999 AWM acquired a septic
services business for $.7 million and a group of small non-regulated wastewater
treatment facilities for $1.0 million.
Capital Resources
During 1999 E'town financed 37.0% of its capital expenditures, including capital
expenditures for the Regulated Utilities segment and investments in the Contract
Operations and Engineering/ Operations and Construction segments, from
internally generated funds (after payment of common stock dividends). The
balance was financed with a combination of short-term borrowings under lines of
credit, proceeds from capital contributions from E'town (funded by issuances of
Common Stock under the Corporation's Dividend Reinvestment and Stock Purchase
Plan) and proceeds from the sale of real estate.
- -4-
<PAGE>
For the three-year period ending December 31, 2002, E'town estimates that 52% of
its currently projected capital expenditures and concession fee obligations for
all segments are expected to be financed with internally generated funds (after
payment of common stock dividends). The balance will be financed with a
combination of proceeds from the sale of E'town common stock or capital
contributions from Thames Water after the pending Merger, medium-term notes,
long-term debt, proceeds of tax-exempt New Jersey Economic Development Authority
(NJEDA) bonds and short-term borrowings. Elizabethtown expects to pursue
additional tax-exempt financing to the extent that final allocations are granted
by the NJEDA.
In February 2000 E'town issued $30 million of 7.69% Senior Notes due 2010 in a
private placement. The proceeds were used to repay short-term debt incurred to
finance the acquisition of the contract to operate the water system of the city
of Elizabeth and capital costs for the non-regulated subsidiaries.
In November 1998 Mount Holly closed on loan agreements that will make available
up to $13.2 million in proceeds from the issuance of unsecured notes through the
New Jersey Environmental Infrastructure Trust Financing Program. This program
provides financing through two loans. The first loan, in the amount of $7.3
million, is through the New Jersey Environmental Infrastructure Trust (Trust),
which issued tax-exempt bonds with average interest rates of 4.7%. The second
loan, in the amount of $5.9 million, is from the state of New Jersey, acting
through the DEP. The State is participating in the Safe Drinking Water State
Revolving Fund authorized by the Safe Drinking Water Act amendments of 1996
whereby the federal government is funding the state loan at no interest cost.
The effective interest rate for the combined notes is approximately 2.6%. The
proceeds of the loans will be used to repay short-term debt incurred to finance
a portion of the Mansfield Project. The Company expects to request these funds
from the Trust in the second quarter of 2000.
During 1999 Moody's Investors Services raised E'town's senior debt rating to A3
while keeping the rating of Elizabethtown's senior debt at A2. Subsequent to the
signing of the Merger Agreement, Standard & Poor's upgraded the ratings on
E'town's senior debt from A- to A and on Elizabethtown's senior debt from A to
A+. The rating upgrades reflect E'town's pending Merger with Thames Water.
- -5-
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
INTEREST RATE RISK
The Corporation is subject to the risk of fluctuating interest rates in the
normal course of business. The Corporation manages interest rates through the
use of fixed and, to a lesser extent, variable rate debt. As of December 31,
1999, a hypothetical single percentage point change in annual interest rates
would result in a $1.4 million change in interest costs related to short-term
and variable rate debt.
RESULTS OF OPERATIONS
Net Income for 1999 was $20.5 million or $2.39 per share on a basic basis as
compared to $22.3 million or $2.70 per basic share for the same period in 1998.
The 1999 decrease of $1.8 million in net income or $.31 in net income per
basic share is comprised of (i) a decrease of $1.0 million or $.12 per share for
costs incurred for the pending Merger, (ii) a decrease of $.7 million or $.08
per share for lost revenues net of expenses from reduced consumption as a result
of New Jersey state-imposed water restrictions in August for drought conditions,
(iii) a decrease of $.4 million or $.05 per share from flooding in September of
Elizabethtown's Raritan-Millstone Plant caused by Tropical Storm Floyd (Floyd)
(see Other Matters), (iv) a decrease of $2.5 million or $.29 per share from
additional operating expenses, primarily labor and benefits, (v) a decrease of
$1.6 million or $.19 per share from higher interest costs and depreciation and
(vi) a decrease of $.4 million or $.05 per share from operations of the
Engineering/Operations and Construction segment. These decreases were partially
mitigated by the favorable impact of increases of (i) $1.8 million or $.21 per
share for higher water consumption related to an extended dry period in the
spring and early summer of 1999, (ii) an increase of $ 2.0 million or $.23 per
share for the after-tax gain on the sale of a real estate parcel in Green Brook,
New Jersey and (iii) an increase of $1.0 million or $.12 per share reflecting
the earnings of the Contract Operations segment, which includes operations of
Liberty for a full year in 1999. The decrease in earnings per basic share also
included a decrease of $.09 for the effect of additional shares issued under the
Dividend Reinvestment and Stock Purchase Plan.
Net income for 1998 was $22.3 million or $2.70 per share on a basic basis
as compared to $19.3 million or $2.44 per basic share for 1997.
The 1998 increase of $3.1 million or $.26 per basic share is principally
comprised of (i) an increase of $.6 million or $.07 per share due to an
extended dry period in the summer of 1998 resulting in higher water
consumption than in 1997 (ii) an increase of $ 1.1 million or $.13 per
share from lower operating expenses due to a combination of a mild winter
in 1998, more efficient use of our work force, lower employee benefit costs
and success with our ongoing cost control efforts and (iii) an increase of
$.5 million or $.06 per share from the earnings of the Contract Operations
and Engineering/Operations and Construction segments, which were new
operations in 1998 and (iv) an increase of $.5 million or $.06 per share
due to capitalized construction interest. The increase in basic earnings
per share was partially offset by an increase in the number of outstanding
shares.
- -6-
<PAGE>
Operating Revenues increased $16.7 million or 11.5% in 1999 as compared
with the comparable 1998 amount. Revenues from the Regulated Utilities
segment increased $4.2 million principally due to higher water consumption
related to an extended dry period in the spring and early summer of 1999.
These favorable factors were somewhat offset by $1.6 million of lower water
consumption resulting from state-mandated water restrictions in August and
by $1.0 million from flooding in September caused by Floyd. New customers
and the PWAC rate increase for Mount Holly primarily accounted for the
remaining $2.3 million increase in the Regulated Utilities segment. The
revenues of the Contract Operations segment increased $6.7 million and the
revenues of the Engineering/Operations and Construction segment increased
$6.1 million from 1998 reflecting a full year of operations in 1999 for
Liberty and AWM, respectively.
Operating Revenues increased $11.7 million or 8.7% in 1998 as compared with
the comparable 1997 amount. The increase from the Regulated Utilities
segment is primarily comprised of $1.4 million from water service to
residential and wholesale customers attributable to increased water
consumption as a result of warmer, drier weather in the summer of 1998 than
in 1997. New customers and the PWAC rate increase for Mount Holly primarily
accounted for the remainder of an increase in the Regulated Utilities
segment of $1.8 million. The revenue increase includes $3.3 million from
the Contract Operations segment, comprised of Edison and Liberty. The
Engineering/Operations and Construction segment contributed $5.2 million to
operating revenues.
Operation Expenses increased $17.0 million or 31.6% in 1999 as compared with
1998. The increases in the Regulated Utilities segment consist of (i) an
increase of $2.7 million in labor, including $.8 million attributable to raises,
an increase of $.7 million due to overtime because of the weather conditions,
and an increase of $.3 million due to an increased number of employees, (ii) an
increase of $.7 million for power, of which $.1 million was attributable to the
weather conditions while the remainder was due to adverse operating conditions
resulting from flooding by Floyd, (iii) an increase of $.6 million in leasing
costs as conversion continues from ownership to leasing of all vehicles and (iv)
an increase of $.9 million from various other operating expenses. The Financing
and Investment segment expensed $1.6 million of one-time costs related to the
pending Merger with Thames Water. Operation expenses of the Contract Operations
segment increased $3.4 million and operation expenses of the
Engineering/Operations and Construction segment increased $7.1 million,
reflecting a full year of operations in 1999 for Liberty and AWM, respectively.
- -7-
<PAGE>
Operation Expenses increased $5.9 million or 12.2% in 1998 over the
comparable 1997 amount. The operation expenses (net of intercompany expenses) of
the Contract Operations and Engineering/Operations and Construction segments,
which were newly established businesses in 1998, accounted for $7.1 million of
the increase. The Regulated Utilities segment experienced decreases of $1.0
million from lower operating costs due to a mild winter, greater work force
utilization, ongoing cost control efforts and decreased employee benefit costs.
These decreases were partially offset by increased cost of labor, purchased
water to Mount Holly and variable costs for the higher water sales.
Maintenance Expenses increased $.2 million or 3.5% in 1999 as compared to
1998. The increase occurred primarily in the Regulated Utilities segment for
waste residual costs.
Maintenance Expenses decreased $.1 million or 1.0% in 1998 as compared with
the comparable 1997 amount due to improved procurement procedures and preventive
maintenance programs.
Depreciation and Amortization Expense increased $2.1 million or 15.5% in
1999 compared to 1998. Of the increase, $1.0 million represents depreciation on
additional utility plant in the Regulated Utilities segment. The remainder of
the increase represents amortization of the concession fees for Liberty
reflecting a full year of operations in 1999 and depreciation on additional
wastewater plants acquired by AWM in 1999.
Depreciation and Amortization Expense increased $1.3 million or 10.4% in
1998 compared to 1997 of which $.9 million represents amortization of initial
concession fees and capital expenditures for the Contract Operations segment.
The balance represents depreciation on utility plant additions for the Regulated
Utility segment.
Revenue Taxes increased $.6 million or 3.3% and $.2 million or 1.2% for the
Regulated Utiliies Segment in 1999 and 1998, respectively, as a result of
increases in taxable operating revenues discussed above.
Real Estate, Payroll and Other Taxes increased $1.0 million or 34.5% in
1999 primarily due to increased payroll taxes as a result of higher labor costs
in the Regulated Utilities segment and inclusion of payroll and real estate
taxes for AWM for a full year in the Engineering/Operations and Construction
segment.
Real estate, Payroll and Other Taxes decreased $.1 million or 4.0% in 1998.
This overall decrease was comprised of additional payroll taxes due to
additional labor costs, which were offset by decreases from lower than
anticipated property taxes on the Canal Road Plant.
- -8-
<PAGE>
Federal Income Taxes as a component of operating expenses decreased $1.9
million or 16.0% in 1999 as compared to 1998 and increased $1.2 million or 11.4%
in 1998 over 1997 due to changes in taxable operating income for each segment.
Other Income (Expense) increased $2.1 million or 209.0% compared to the
1998 amount due to a gain on the sale of real estate of $3.2 million ($2.1
million net of taxes) in the Financing and Investment segment.
Other Income (Expense) increased $.2 million or 32.4% in 1998 as compared
to 1997 due to a $.4 million increase in Allowance for Funds Used During
Construction (AFUDC), primarily related to Elizabethtown's western operations
center. Federal income taxes increased $.1 million for the taxes on the AFUDC.
Total Interest Charges increased $1.6 million or 8.9% in 1999 of which $.9
million is for the Regulated Utilities segment. The $.9 million increase
consists of $.4 million for Mount Holly's issuance of long-term notes in
November 1998 through the New Jersey Environmental Infrastructure Trust
Financing Program to finance a portion of the construction of its Mansfield
Project and $.5 million for increased short-term borrowings to finance the
construction program. In the Contract Operations Segment, interest expenses
increased $.5 million, reflecting a full year of Liberty's operations and
additional short-term borrowing by Liberty in order to finance a scheduled
concession payment of $12.0 million in June, 1999 to the city of Elizabeth. The
remainder of the increase resulted from short-term borrowings in the Financing
and Investment segment to finance capital contributions to the Contract
Operations segment.
Total interest charges increased $.5 million or 2.8% in 1998 as compared with
the comparable 1997 amount due to increased borrowing for utility plant
expenditures for the Regulated Utilities segment and for the concession fee for
Liberty. The debt component of AFUDC increased $.3 million, resulting in lower
interest expense, as a result of higher construction expenditures, primarily for
Elizabethtown's new western operations center. This decrease in interest charges
was offset by the absence in 1998 of capitalized interest on real estate
investments for Properties of $.3 million.
OTHER MATTERS
In August 1999 the Governor of the State of New Jersey declared a Water
Emergency for the entire state and issued mandatory restrictions on outdoor,
nonessential water use. Due to unusually low levels of rainfall during June and
July the Governor deemed these measures necessary to preserve the integrity of
several of the state's reservoir and well supplies. Customers of Elizabethtown,
Mount Holly, Edison and Liberty were subject to these restrictions. The water
systems operated by E'town's subsidiaries at all times had, and continue to
have, adequate supplies of water to meet the needs of their customers. These
restrictions affected the amount of water consumed by a substantial number of
the Corporation's customers and reduced net income in 1999 by approximately $.68
million. The restrictions were lifted in October 1999.
- -9-
<PAGE>
In September 1999 Elizabethtown withdrew its primary water treatment plant,
the Raritan-Millstone Water Treatment Plant, from service as a result of
flooding from Floyd. For several days, Elizabethtown had difficulty maintaining
adequate water pressure in portions of its distribution system because overall
system production levels were substantially less than normal. Customers in
portions of a few municipalities were without water service for a period of up
to three days. Costs incurred to repair and replace equipment damaged by the
flood and to respond to inquiries by customers, regulatory bodies and the media
are being deferred and are expected to be recoverable through insurance.
The Company has incurred $7.0 million of flood-related expenditures and has
received an advanced reimbursement of $2.0 million from its insurance carrier.
The remaining $5.0 million of flood-related expenditures has been deferred. The
loss of revenues due to below normal water consumption is not recoverable
through insurance and adversely affected net income by approximately $.39
million for 1999.
ECONOMIC OUTLOOK
Forward Looking Information
Information in this report includes certain forward looking statements
within the meaning of the Federal securities laws regarding future earnings,
capital expenditures and anticipated actions of regulators, among other things.
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, changes in historical patterns of water
consumption and demand, including changes through increased use of
water-conserving devices, conditions in capital and real estate markets,
increases in operating expenses due to factors beyond the Corporation's control,
the closing of the pending Merger with Thames Water Plc, changes in
environmental regulation and associated costs of compliance and additional
investments or acquisitions which may be made by the Corporation.
E'town Corporation and Subsidiaries
Earnings are expected to be lower in 2000 than in 1999 for the following
reasons: (i) an assumed return to historical average water consumption patterns
as a result of a return to normal weather conditions (ii) additional expenses in
2000 in connection with the Merger and (iii) Elizabethtown will not file for
needed rate relief until early in 2001 as a condition of the Merger Agreement.
During the next several years, management will seek to increase earnings by
(i) maximizing earned returns on the Regulated Utilities segment through
expansion efforts to increase sales, cost control measures and obtaining timely
and adequate rate relief and (ii) investing in water and wastewater assets
including municipal privatization contracts, as well as designing, constructing,
operating and purchasing wastewater assets through AWM and AWWM, discussed
below. The Corporation intends to continue to sell Properties' real estate
holdings during the next several years to fund a portion of the investment
planned for the regulated and non-regulated businesses. The balance of such
funding will be generated from internal and external sources.
- -10-
<PAGE>
Regulated Utilities Segment
In accordance with the terms of the pending Merger Agreement, Elizabethtown
will postpone filing for rate relief needed to recover additional construction
and financing costs incurred since base rates were last established in October
1996 until at least August 2000. Therefore, earnings from Elizabethtown will be
lower in 2000 than in 1999 due to an assumed return to normal weather
conditions and postponement of the rate filing.
Mount Holly had a negative rate of return on common equity of 2.6% in 1999,
compared to an authorized rate of return of 11.25%, established in its 1996 base
rate case. Mount Holly earned significantly below its authorized return in 1999
and 1998 because the Company was precluded from filing for needed rate relief
due to recently settled litigation with another purveyor. Management expects
Mount Holly to contribute positively to E'town's earnings per share in 2000 as a
result of a Stipulation Agreement approved by the BPU whereby a rate increase of
$1.9 million, or a net increase of $.5 million after elimination of the PWAC,
was effective January 1, 2000.
AWWM expects to become profitable in the next several years after it expands
its customer base.
Contract Operations Segment
Liberty
Liberty is expected to realize a return on its capital in an amount similar to
that currently earned by E'town's regulated operations.
Edison
Contributions to earnings will be small through 2002 and then will increase as
rate increases specified in the contract take effect. Beyond 2002 Edison is
expected to realize a return on its capital in an amount similar to that
currently earned by E'town's regulated operations.
E'town continues to pursue opportunities to operate municipal water and
wastewater systems under long-term contracts, primarily in New Jersey. E'town
will focus on opportunities where it may have an advantage due to location or
experience in operation.
Engineering/Operations and Construction
AWM
AWM continues to develop its business model to provide a complete
complement of wastewater services to design, build and operate stand-alone
wastewater treatment facilities with a focus on the Northeast region of the
United States. Acquisition of new business is largely dependent on demographic
and economic factors as well as the competitive nature of proposing on such
work. These efforts are expected to contribute marginally to earnings in 2000 as
the business model continues to be implemented.
- -11-
<PAGE>
Financing and Investment Segment
E'town and Properties
E'town is in the process of selling its remaining parcels of undeveloped
land. Several parcels have been sold and the proceeds are being invested in
water and wastewater projects.
The eventual sale of these parcels is contingent upon the purchaser
obtaining various approvals for development. This process could take up to
several years. As of December 31, 1999, all the remaining properties are under
contract to be sold.
New Accounting Pronouncements
See Note 3 of E'town's Notes to Consolidated Financial Statements for a
discussion of new accounting standards.
Year 2000 State of Readiness
The Corporation assessed its significant business systems, as well as
non-critical, peripheral support systems for compliance with the Year 2000
computer challenge. The assessment concluded that all significant business
systems (i.e. customer billing and service, financial, water treatment operating
and control, water quality laboratory information and telemetric data
acquisition systems) are Year 2000 compliant. The assessment also included
inquiries as to the state of readiness of significant vendors whose services to
the Corporation could have an impact on the Corporation's ability to deliver
service to its customers. Management concluded that the delivery of electric
power as well as chemicals used in the water treatment process were two areas of
significant importance and received documentation from the vendors who provide
these services that indicated their ability to provide service. The assessment
had identified certain modifications to peripheral support systems that have
since been implemented.
The Costs To Address The Corporation's Year 2000 Issues
The significant business systems of the Corporation defined above are Year
2000 compliant and have been operational for up to several years. Therefore, no
further costs are expected to be incurred in connection with bringing these
systems into compliance. The peripheral support systems required the Corporation
to incur costs of approximately $.4 million to bring them into compliance.
At the turn of the century, and to-date, the Corporation has experienced no
disruption in the services it provides to its customers and processed
transactions in its financial, customer billing and customer services systems in
the normal course of business. Management is not currently aware of any Year
2000-related problems associated with its internal business systems or software
or with the systems or software of its vendors.
- -12-
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands Except Per Share Amounts)
Year Ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------
Operating Revenues $ 162,195 $ 145,480 $ 133,826
- -------------------------------------------------------------------------------
Operating Expenses:
Operation 70,845 53,844 47,982
Maintenance 6,766 6,539 6,606
Depreciation and amortization 15,796 13,679 12,396
Revenue taxes 17,296 16,743 16,550
Real estate, payroll and other taxes 4,070 3,027 3,152
Federal income taxes (Note 4) 9,814 11,685 10,487
- -------------------------------------------------------------------------------
Total operating expenses 124,587 105,517 97,173
- -------------------------------------------------------------------------------
Operating Income 37,608 39,963 36,653
- -------------------------------------------------------------------------------
Other Income (Expense):
Allowance for equity funds used during
construction (Note 3) 363 607 215
Gain on sale of land (Note 8) 3,197 135 34
Other - net 1,222 805 919
Federal income taxes (Note 4) (1,674) (541) (408)
- -------------------------------------------------------------------------------
Total other income (expense) 3,108 1,006 760
- -------------------------------------------------------------------------------
Total Operating and Other Income 40,716 40,969 37,413
- -------------------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 16,109 16,217 14,807
Other interest expense - net 3,256 1,641 2,560
Capitalized interest (Note 3) (395) (470) (438)
Amortization of debt discount and expense-net 446 438 411
- -------------------------------------------------------------------------------
Total interest charges 19,416 17,826 17,340
- -------------------------------------------------------------------------------
Income Before Preferred Stock Dividends
of Subsidiary 21,300 23,143 20,073
Preferred Stock Dividends 813 813 813
- -------------------------------------------------------------------------------
Net Income $ 20,487 $ 22,330 $ 19,260
===============================================================================
Earnings Per Share of Common Stock (Note 3):
- -------------------------------------------------------------------------------
Basic $ 2.39 $ 2.70 $ 2.44
Diluted $ 2.36 $ 2.66 $ 2.41
- -------------------------------------------------------------------------------
Average Number of Shares Outstanding for
the Calculation of Earnings Per Share:
- -------------------------------------------------------------------------------
Basic 8,572 8,263 7,891
Diluted 8,871 8,567 8,215
- -------------------------------------------------------------------------------
Dividends Paid Per Common Share $ 2.04 $ 2.04 $ 2.04
===============================================================================
See Notes to Consolidated Financial Statements.
- -13-
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands)
Year Ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------
Cash Flows Provided by Operating Activities:
Net Income $ 20,487 $ 22,330 $ 19,260
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 15,796 13,679 12,396
Gain on sale of land (3,197) (135) (34)
Increase in deferred charges (4,749) (736) 699
Deferred income taxes and investment tax
credits-net 4,641 3,592 2,778
Capitalized interest and AFUDC (758) (1,077) (653)
Other operating activities-net 4,114 (1,061) 416
Change in current assets and current liabilities
excluding cash, short-term investments and
current portion of debt:
Customer accounts, notes and
other receivables (9,571) (7,181) (1,352)
Unbilled revenues (774) (1,786) (1,056)
Accounts payable and other liabilities 11,861 7,876 (4,656)
Accrued/prepaid interest and taxes (4,375) 1,440 3,088
Other (1,017) 138 5
- -------------------------------------------------------------------------------
Net cash provided by operating activities 32,458 37,079 30,891
- -------------------------------------------------------------------------------
Cash Flows Provided by Financing Activities:
Proceeds from issuance of common stock 9,779 8,453 7,378
Funds held in Trust by others (30) (7,234)
Proceeds from issuance of debentures 54,000
Debt and preferred stock issuance and
amortization costs 643 213 (755)
Issuance of other long-term debt 15,295
Repayment of current portion of long-term debt (30)
Repayment of long-term debt (99) (1,381) (224)
Contributions and advances for construction 6,460 11,590 7,275
Refunds of customer advances for construction (3,076) (2,364) (2,516)
Net increase (decrease) in notes payable-banks 45,478 21,022 (46,000)
Dividends paid on common stock (17,526) (16,929) (16,134)
- -------------------------------------------------------------------------------
Net cash flows provided by financing
activities 41,599 28,665 3,024
- -------------------------------------------------------------------------------
Cash Flows Used for Investing Activities:
Utility plant (excluding allowance for funds
used during construction) (60,834) (43,582) (24,612)
Purchase of companies (1,800)
Investment in privatization contracts (12,000) (19,856) (5,810)
Capital expenditures on nonregulated property (3,065) (3,799) (928)
Proceeds from sale of land 2,069 1,200 440
- -------------------------------------------------------------------------------
Net cash flows used for investing activities (75,630) (66,037) (30,910)
- -------------------------------------------------------------------------------
Net (Decrease) Increase in Cash
and Cash Equivalents (1,573) (293) 3,005
Cash and Cash Equivalents at
Beginning of Period 5,940 6,233 3,228
- -------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 4,367 $ 5,940 $ 6,233
===============================================================================
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 19,726 $ 16,532 $ 16,719
Income taxes $ 9,700 $ 7,723 $ 6,023
Preferred stock dividends $ 708 $ 708 $ 708
Noncash issuance of common stock $ 1,021 $ 7,709 $ 123
See Notes to Consolidated Financial Statements.
- -14-
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
Assets 1999 1998
- -------------------------------------------------------------------------------
Utility Plant-At Original Cost:
Utility plant in service $ 779,485 $ 717,985
Construction work in progress 17,441 16,580
- -------------------------------------------------------------------------------
Total utility plant 796,926 734,565
Less accumulated depreciation and amortization 137,587 125,262
- -------------------------------------------------------------------------------
Utility plant-net 659,339 609,303
- -------------------------------------------------------------------------------
Non-utility Property and Other
Investments - Net (Note 8) 85,163 84,945
- -------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 4,367 5,940
Customer and other accounts receivable
(less reserve: 1999, $1,316, 1998, $1,065) 30,129 23,200
Mortgage and other notes receivable (Note 8) 4,600 1,520
Unbilled revenues 12,972 12,198
Infrastructure loan funds receivable (Note 5) 5,657 5,895
Materials and supplies-at average cost 4,069 2,538
Prepaid federal income taxes 4,617 808
Prepaid insurance, taxes, other 3,663 1,676
- -------------------------------------------------------------------------------
Total current assets 70,074 53,775
- -------------------------------------------------------------------------------
Deferred Charges:
Waste residual management (Note 10) 1,538 1,371
Unamortized debt and preferred stock expenses (Note 10) 9,419 10,050
Taxes recoverable through future rates (Notes 4 and 10) 13,466 14,226
Postretirement benefit expense (Notes 10 and 14) 3,145 3,490
Flood expenditures (Note 12) 5,000
Other unamortized expenses (Note 10) 1,164 1,582
- -------------------------------------------------------------------------------
Total deferred charges 33,732 30,719
- -------------------------------------------------------------------------------
Total $ 848,308 $ 778,742
===============================================================================
See Notes to Consolidated Financial Statements.
- -15-
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
Capitalization and Liabilities 1999 1998
- -------------------------------------------------------------------------------
Capitalization (Notes 2, 5 and 6):
Common shareholders' equity $ 229,233 $ 215,472
Mandatory redeemable cumulative preferred stock 12,000 12,000
Redeemable preferred stock 227 227
Long-term debt - net 266,015 286,908
- -------------------------------------------------------------------------------
Total capitalization 507,475 514,607
- -------------------------------------------------------------------------------
Current Liabilities:
Notes payable - banks (Note 7) 89,500 44,022
Long-term debt - current portion (Note 5) 494 30
Accounts payable and other liabilities 31,434 19,469
Contract obligations payable (Note 5) 19,000 12,000
Customers' deposits 263 248
Municipal and state taxes accrued 17,682 16,789
Interest accrued 4,219 3,675
Preferred stock dividends accrued 59 59
- -------------------------------------------------------------------------------
Total current liabilities 162,651 96,292
- -------------------------------------------------------------------------------
Deferred Credits:
Customers' advances for construction 41,321 41,102
Federal income taxes (Note 4) 71,236 66,487
State income taxes 302 207
Unamortized investment tax credits 7,636 7,839
Accumulated postretirement benefits (Note 14) 3,571 4,090
- -------------------------------------------------------------------------------
Total deferred credits 124,066 119,725
- -------------------------------------------------------------------------------
Contributions in Aid of Construction 54,116 48,118
- -------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note 13)
- -------------------------------------------------------------------------------
Total $ 848,308 $ 778,742
===============================================================================
See Notes to Consolidated Financial Statements.
- -16-
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(In Thousands Except Share Amounts)
December 31,
1999 1998
- -------------------------------------------------------------------------------
Common Shareholders' Equity:
E'town Corporation:
Common stock without par value, authorized,
15,000,000 shares, issued 1999, 8,760,682
shares; 1998, 8,504,344 shares $ 180,124 $ 169,324
Paid-in capital 1,315 1,315
Capital stock expense (5,160) (5,160)
Retained earnings 53,922 50,961
Less cost of treasury stock; 1999 and 1998, 32,554 shares (968) (968)
- -------------------------------------------------------------------------------
Total common shareholders' equity 229,233 215,472
- -------------------------------------------------------------------------------
Preferred Shareholders' Equity (Note 5)
Elizabethtown Water Company:
Mandatory Redeemable Cumulative Preferred Stock:
$100 par value, authorized, 200,000 shares; $5.90 series,
issued and outstanding, 120,000 shares 12,000 12,000
Cumulative Preferred Stock:
$25 par value, authorized, 500,000 shares; none issued
Applied Wastewater Management, Inc:
Redeemable Preferred Stock:
No par value, non-cumulative, issued and
outstanding, 227 shares 227 227
- -------------------------------------------------------------------------------
Total preferred shareholders' equity 12,227 12,227
- -------------------------------------------------------------------------------
Long-Term Debt (Notes 5, 8 and 9):
E'town Corporation:
6 3/4% Convertible Subordinated Debentures, due 2012 8,705 10,499
6.79% Senior Notes, due 2007 12,000 12,000
Liberty Water Company:
Contract Obligations Payable 19,000
Applied Wastewater/Applied Water Management:
6% Note Payable (due serially through 2027) 204 261
9.65% Mortgage Note Payable (due 2001) 264
Elizabethtown Water Company:
7.20% Debentures, due 2019 10,000 10,000
7 1/2% Debentures, due 2020 15,000 15,000
6.60% Debentures, due 2021 10,500 10,500
6.70% Debentures, due 2021 15,000 15,000
8 3/4% Debentures, due 2021 27,500 27,500
8% Debentures, due 2022 15,000 15,000
5.60% Debentures, due 2025 40,000 40,000
7 1/4% Debentures, due 2028 50,000 50,000
Variable Rate Debentures, due 2027 50,000 50,000
The Mount Holly Water Company:
New Jersey Environmental Infrastructure Trust Notes
(due serially through 2018) 7,040 7,295
New Jersey Department of Environmental Protection
Notes(due serially through 2018) 5,677 5,895
9.65% Mortgage Note Payable (due 2001) 156
Note payable (due 2000) 30
- -------------------------------------------------------------------------------
Total long-term debt 267,046 287,980
Unamortized (discount) premium-net (1,031) (1,072)
- -------------------------------------------------------------------------------
Total long-term debt-net 266,015 286,908
- -------------------------------------------------------------------------------
Total Capitalization $ 507,475 $ 514,607
===============================================================================
See Notes to Consolidated Financial Statements.
- -17-
<PAGE>
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Thousands Except Share Amounts)
Year Ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------
Common Stock:
Balance at Beginning of Year $ 169,324 $ 153,162 $ 145,661
Common stock issued under Dividend Reinvestment
and Stock Purchase Plan (1999, 197,547 shares;
1998, 213,568 shares; 1997, 227,992 shares) 8,702 7,861 6,980
Redemption of Convertible Debentures (1999,
44,225 shares; 1998, 18,100 shares) 1,769 724
Issuance of restricted and unrestricted stock
under compensation programs (1999, 2,822
shares; 1998, 9,590 shares; 1997, 4,033 shares) 119 332 123
(Cancellation) issuance of restricted stock for
acquisitions (1999,(25,756) shares; 1998,
186,310 shares)(Note 8) (867) 6,653
Exercise of stock options (1999, 37,500 shares;
1998, 22,315 shares; 1997, 14,685 shares) 1,077 592 398
- -------------------------------------------------------------------------------
Balance at End of Year 180,124 169,324 153,162
- -------------------------------------------------------------------------------
Paid-in Capital 1,315 1,315 1,315
- -------------------------------------------------------------------------------
Capital Stock Expense (5,160) (5,160) (5,160)
- -------------------------------------------------------------------------------
Retained Earnings:
Balance at Beginning of Year 50,961 45,560 42,434
Net Income 20,487 22,330 19,260
Dividends on common stock (1999, 1998 and
1997, $2.04) (17,526) (16,929) (16,134)
- -------------------------------------------------------------------------------
Balance at End of Year 53,922 50,961 45,560
- -------------------------------------------------------------------------------
Treasury Stock:
Balance at Beginning of Year (968) (954) (737)
Cost of shares redeemed to exercise stock
options (1998, 346 shares; 1997, 6,332 shares) (14) (217)
- -------------------------------------------------------------------------------
Balance at End of Year (968) (968) (954)
- -------------------------------------------------------------------------------
Total Common Shareholders' Equity $ 229,233 $ 215,472 $ 193,923
===============================================================================
See Notes to Consolidated Financial Statements.
- -18-
<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),
E'town Properties, Inc. (Properties), Edison Water Company (Edison), Liberty
Water Company (Liberty), Applied Water Management, Inc. (AWM) and Applied
Wastewater Management, Inc. (AWWM). The Mount Holly Water Company (Mount
Holly) is a wholly owned subsidiary of Elizabethtown. The assets and
operating results of Elizabethtown constitute the predominant portions of
E'town's assets and operating results. The regulated utilities,
Elizabethtown, Mount Holly and AWWM, comprise the Regulated Utilities
segment, Liberty and Edison comprise the Contract Operations segment, AWM is
the Engineering/Operations and Construction segment and E'town and Properties
comprise the Financing and Investment segment.
2. Pending Merger
On November 21, 1999, E'town entered into an agreement (Merger Agreement)
with Thames Water Plc (Thames Water) under which Thames Water has agreed,
subject to certain conditions, to acquire E'town for $68 per share in cash or
approximately $607 million. Thames Water will also assume the debt of E'town.
The acquisition will take the form of a merger (Merger) of E'town with a
newly formed subsidiary of Thames Water and E'town will be the surviving
company.
A special meeting of shareholders is expected to be held during the second
quarter of 2000 to seek shareholder approval of the transaction. The
acquisition is also subject to approval by the New Jersey Board of Public
Utilities (BPU), the Federal Trade Commission and the Department of Justice
under the Hart-Scott-Rodino Antitrust Improvement Act of 1976. Certain
clearances must also be obtained from the New Jersey environmental
regulators. The transaction is expected to close prior to the end of 2000.
3. 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. AWWM is a
regulated wastewater utility. All three companies follow the Uniform System
of Accounts, as adopted by the BPU.
Use of Estimates
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.
- -19-
<PAGE>
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 based on the estimated useful lives of
the assets. The balances of significant classes of assets and their
respective depreciable lives at December 31, 1999 and 1998 are as follows:
Annual
Depreciation
(THOUSANDS OF DOLLARS) 1999 1998 Rate
=============================================================================
Asset Class:
Transmission and Distribution Mains $ 337,408 $ 318,363 0.99%
Water Treatment Equipment 111,961 106,787 2.35%
Services 67,154 62,213 2.77%
Structures and Improvements 88,147 75,736 2.08% - 2.74%
Pumping Equipment 42,704 41,082 2.59% - 3.38%
Meters 27,589 23,415 2.77%
Water Storage Tanks 23,658 21,232 1.37%
Other 80,864 69,157 0% - 15.73%
- -----------------------------------------------------------------------------
Total utility plant in service $ 779,485 $ 717,985
=============================================================================
The provision for depreciation, as a percentage of average depreciable
property, on a composite basis, was 1.82% for 1999, 1.81% for 1998 and 1.85%
for 1997.
Allowance for Funds Used During Construction
Elizabethtown, Mount Holly and AWWM 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 lives. 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 $.76 million, $1.08 million and $.38 million for 1999,
1998 and 1997, respectively.
Non-utility Property
Ongoing 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 and
therefore, no interest was capitalized in 1999 or 1998.
Revenues
Water 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.
- -20-
<PAGE>
The construction division of AWM engages in fixed-price and modified
fixed-price contracts for the construction of wastewater facilities. These
revenues are recognized on the percentage-of-completion method, measured by
the cost-to-cost method. Contract costs, under the percentage-of-completion
method, include all direct material and labor costs and those indirect costs
related to contract performance such as tools and vehicle costs.
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 the non-regulated
companies. 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.
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, under a
contract, for main extensions to new real estate developments. CAC is
refundable to developers based upon amounts for each type and quantity of
unit constructed by the developer when the units are metered. Such contracts
have a ten-year life. CIAC represents CAC that, under the terms of
individual main extension agreements, are no longer subject to refund.
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 assumes the
exercise of all stock options (see Note 6). The calculations of basic and
diluted earnings per share for the three years ended December 31, 1999 follow:
(THOUSANDS OF DOLLARS) 1999 1998 1997
===============================================================================
Basic:
Net Income $ 20,487 $ 22,330 $ 19,260
Average common shares outstanding 8,572 8,263 7,891
- -------------------------------------------------------------------------------
Basic earnings per share $ 2.39 $ 2.70 $ 2.44
===============================================================================
Diluted:
Net income $ 20,487 $ 22,330 $ 19,260
After tax interest expense
applicable to 6 3/4% Convertible
Subordinated Debentures 429 488 500
- -------------------------------------------------------------------------------
Adjusted net income $ 20,916 $ 22,818 $ 19,760
- -------------------------------------------------------------------------------
Average common shares outstanding 8,572 8,263 7,891
Additional shares from assumed
exercise of stock options 81 42 40
Additional shares from assumed
conversion of 6 3/4% Convertible
Subordinated Debentures 218 262 284
- -------------------------------------------------------------------------------
Average common shares outstanding as adjusted 8,871 8,567 8,215
- -------------------------------------------------------------------------------
Diluted earnings per share $ 2.36 $ 2.66 $ 2.41
===============================================================================
- -21-
<PAGE>
Cash Equivalents
The Corporation considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activity". In June 1999 the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activity - Deferral
of the Effective Date of SFAS No. 133" to defer the effective date of SFAS
No. 133 for one year. Consequently, SFAS No. 133 will now be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Corporation does not believe this Statement will have an impact on its
financial condition and results of operations.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
4. 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 amounts
reported in the Statements of Consolidated Income follow:
(THOUSANDS OF DOLLARS) 1999 1998 1997
========================================================================
Tax expense at statutory rate $ 11,476 $ 12,378 $ 10,843
Items for which deferred taxes are
not provided:
Difference between book
and tax depreciation 147 63 58
Other 68 (12) 197
Investment tax credits (203) (203) (203)
- ------------------------------------------------------------------------
Provision for federal income taxes $ 11,488 $ 12,226 $ 10,895
========================================================================
The provision for federal income
taxes is comprised of the following:
Current $ 5,766 $ 8,301 $ 6,759
Tax on main extension refunds 416 525 1,369
Deferred:
Tax depreciation 3,099 3,086 2,670
Capitalized interest (27) 91 114
Main cleaning and lining 759 796 612
Flood expenditures 1,750
Other (72) (189) (426)
Investment tax credits - net (203) (203) (203)
Refund from IRS (181)
- ------------------------------------------------------------------------
Total provision $ 11,488 $ 12,226 $ 10,895
========================================================================
- -22-
<PAGE>
The Regulated Utilities Segment provides deferred taxes at the enacted
statutory rate for all temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities
irrespective of the treatment for rate making purposes. Management believes
it is probable that the accumulated tax benefits that previously have been
treated as a flow-through item to the regulated utility customers will be
recovered from these customers in the future. Accordingly, offsetting
regulatory assets have been established. At December 31, 1999, the regulated
utilities had deferred tax liabilities of $13.47 million. There were also, at
December 31, 1999, offsetting regulatory assets for the same amounts
representing the future revenue expected to be recovered through rates based
upon established regulatory practices which permit recovery of current taxes
payable. These amounts were determined using the enacted federal income tax
rate of 35% and were calculated in accordance with SFAS No. 109.
The tax effect of significant temporary differences representing deferred
income tax assets and liabilities as of December 31, 1999 and 1998 is as
follows:
(THOUSANDS OF DOLLARS) 1999 1998
====================================================================
Water utility plant - net $ (51,534) $ (47,538)
Non - utility property 286 251
Other investments (742) (787)
Taxes recoverable through future rates (13,466) (14,226)
Capitalized interest (3,847) (3,983)
Waste residuals (539) (480)
Flood expenditures (1,750)
Other assets 746 562
Other liabilities (390) (286)
- --------------------------------------------------------------------
Net deferred income tax liabilities $ (71,236) $ (66,487)
====================================================================
5. Capitalization
E'town routinely makes equity contributions to Elizabethtown which represent
a portion of the proceeds of common stock issued under E'town's Dividend
Reinvestment and Stock Purchase Plan (DRP). Such equity contributions
amounted to $8.70 million, $7.86 million and $6.98 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
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. Pursuant to the terms
of the Merger Agreement with Thames Water, the Corporation has amended its
Rights Plan so that the Corporation may proceed to consummate the Merger
without triggering the provisions of the Rights Plan and the Rights would
expire immediately prior to the effective time of the Merger (see Note 2).
- -23-
<PAGE>
Preferred Stock
Elizabethtown's $5.90 Mandatory Redeemable 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.
AWWM's no par value, non-cumulative preferred stock has no cumulative
dividend rights and is redeemable at the option of the Corporation. There
are no liquidation preferences specified with respect to this class of
preferred stock.
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, 1999, $7.52 million of Elizabethtown's
retained earnings were restricted under the most restrictive indenture
provision. Therefore, $46.40 million of E'town's consolidated retained
earnings were unrestricted.
In February 2000 E'town issued $30 million of 7.69% Senior Notes due 2010 in a
private placement. The proceeds were used to repay short-term debt incurred to
finance the acquisition of the contract to operate the water system of the
city of Elizabeth and capital costs for the non-regulated subsidiaries.
In November 1998 Mount Holly closed on loan agreements that will make
available up to $13.19 million in proceeds from the issuance of unsecured
notes through the New Jersey Environmental Infrastructure Trust Financing
Program. This program provides financing through two loans. The first loan,
in the amount of $7.30 million, is through the New Jersey Environmental
Infrastructure Trust (Trust), which issued tax-exempt bonds with average
interest rates of 4.7%. The second loan, in the amount of $5.89 million, is
from the state of New Jersey, acting through the New Jersey Department of
Environmental Protection (DEP). The State is participating in the Safe Drinking
Water State Revolving Fund authorized by the Safe Drinking Water Act
amendments of 1996 whereby the federal government is funding the state loan
at no interest cost. The effective interest rate for the combined notes is
approximately 2.59%. The proceeds of the loans will be used to repay
short-term debt incurred to finance the Mansfield Project (see Note 11). The
Company expects to request these funds from the Trust in the second quarter
of 2000.
E'town has outstanding $12 million of 6.79% Senior Notes due December 15,
2007. E'town issued $4 million of these notes in December 1997, $6 million in
January 1998 and $2 million in May 1998. The proceeds were used to finance
capital additions for Edison as well as to meet working capital needs.
The Note Agreements for E'town's 7.69% and 6.79% Senior Notes require 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, 1999, the fixed charges coverage ratio was 2.5 to 1 and the
debt to total capitalization ratio was .62 to 1, calculated in accordance with
the Note Agreements.
- -24-
<PAGE>
In June 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 Elizabethtown'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, 1999 were 5.20% for Series A and 5.10% for Series B.
E'town's 6 3/4% Convertible Subordinated Debentures are convertible to E'town
common stock at $40 per share. At December 31, 1999, 217,625 shares of common
stock were reserved for issuance upon exercise of the conversion rights.
Liberty, under its contract with the city of Elizabeth, made an installment
payment of $12 million in June 1999 and is obligated to make a payment of $19
million in June 2000, which has been recorded as contract obligations payable
in the financial statements (see Note 8).
The aggregate maturities of long-term debt (including the portion classified
as current and contract obligations payable) for each of the five years
succeeding December 31, 1999 are: 2000, $19.49 million; 2001, $1.00 million;
2002, $.59 million; 2003, $.60 million and 2004, $.61 million.
6. Performance Stock Plan and Stock Option Plan
The Corporation has a Performance Stock Plan whereby restricted stock is
awarded to key employees and is amortized over three years as compensation
expense. The Corporation has recognized compensation expense of less than $.1
million for each of the three years ended December 31, 1999. No restricted
stock was issued to employees in 1999. The individual share prices of
restricted shares issued for 1998 and 1997 were $34.56, and $30.50,
respectively.
E'town has 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 provides that any
options may be exercised after one year from date of grant up to an
expiration date, not to exceed 10 years from grant date.
A summary of the details of stock option grants and outstanding balances is
presented below:
Year Options Option Options Outstanding
Granted Granted Price 12/31/99 12/31/98 12/31/97
- ------------------------------------------------------------------------------
1989 7,500 $24.67 2,200 7,500
1990 7,500 26.67 7,500 7,500 7,500
1995 77,000 27.12 34,000 44,300 60,315
1996 4,000 26.87 2,000 2,000 4,000
1997 25,000 29.75 25,000 25,000
1998 4,000 41.00 4,000 4,000
1999 40,000 44.00 40,000
- ------------------------------------------------------------------------------
Total 87,500 85,000 104,315
==============================================================================
- -25-
<PAGE>
Weighted
Number Average
of Options Option Price
- ----------------------------------------------------------------
Options outstanding at 12/31/96 96,000 $26.88
- ----------------------------------------------------------------
Granted * 25,000 29.75
Exercised (14,685) (27.12)
Forfeited (2,000) (27.12)
- ----------------------------------------------------------------
Options outstanding at 12/31/97 104,315 27.53
- ----------------------------------------------------------------
Granted * 4,000 41.00
Exercised (22,315) (26.52)
Forfeited (1,000) (27.12)
- ----------------------------------------------------------------
Options outstanding at 12/31/98 85,000 28.44
- ----------------------------------------------------------------
Granted * 40,000 44.00
Exercised (37,500) (28.73)
Forfeited 0 0
- ----------------------------------------------------------------
Options outstanding at 12/31/99 87,500 $35.43
================================================================
* Options are exercisable after one year from date of grant.
In connection with the adoption of SFAS No. 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 No. 123. The effect of accounting for stock-based compensation under
SFAS No. 123 would be to reduce earnings by $.07 million, $.03 million and
$.06 million for 1999, 1998 and 1997, respectively, and $.008, $.004 and
$.008 per share for 1999, 1998 and 1997, respectively. The fair values of
the options granted for 1999, 1998 and 1997 were $2.58, $5.14 and $3.38,
respectively. This calculation was based upon the Black-Scholes option
pricing model for 1999, 1998 and 1997, respectively as follows: expected
volatility 13%, 30% and 30%; dividend yield 4.6%, 4.3% and 6.5%; risk-free
interest rate 6.2%, 7% and 7%.
The Corporation has a Directors' Stock Plan established in 1998 whereby
directors are compensated for their annual retainer in E'town Corporation common
stock. The Corporation issued 2,856 and 3,464 shares in 1999 and 1998,
respectively, of which the related effect on compensation expense was recorded
as an operation expense. The director may elect to receive the common stock as
either restricted or unrestricted stock.
7. Lines of Credit
E'town has $115 million in lines of credit with several banks, of which up to
$55 million is available to E'town for use by the Corporation or its
unregulated subsidiaries and of which $90 million is available to
Elizabethtown as of December 31, 1999. Of the lines available to
Elizabethtown, $10 million represents a committed line of credit.
- -26-
<PAGE>
Information relating to bank borrowings for 1999, 1998 and 1997 is as follows:
(THOUSANDS OF DOLLARS) 1999 1998 1997
=====================================================================
Maximum amount outstanding $ 89,500 $ 44,000 $ 69,500
Average monthly amount
outstanding $ 60,182 $ 26,238 $ 43,525
Average interest rate at year end 6.8 % 5.9 % 6.2
Weighted average interest rate
based on average daily balances 5.8 % 6.0 % 5.8
=====================================================================
There were no compensating balances as of December 31, 1999, 1998 and 1997.
8. Non-Utility Property and Other Investments
The detail of amounts included in Non-Utility Property and Other Investments
at December 31, 1999 is as follows:
(THOUSANDS OF DOLLARS) 1999 1998
====================================================================
Funds held in trust by others $ 7,264 $ 7,234
Concession fees on privatization
contracts - net of amortization 53,946 55,505
Capital assets for privatization
contracts - net of amortization 6,165 3,341
Investments in real estate 9,049 11,341
Goodwill - net of amortization 5,036 5,401
Investment in SEGS 1,089 1,214
Other capital assets 2,429 637
Other 185 272
- --------------------------------------------------------------------
Total $ 85,163 $ 84,945
====================================================================
In July 1998 E'town, through Liberty, entered into a contract with the city
of Elizabeth (Elizabeth), New Jersey to operate its water system under a
40-year contract serving approximately 17,600 customers. Under the contract,
Liberty made payments to Elizabeth of $19.7 million in 1998 and $12 million
in 1999 and is obligated to make a payment of $19 million in June 2000. These
amounts have been included in the table above in concession fees on
privatization contracts, net of amortization. These concession fees are being
amortized on a straight-line basis over the life of the contract. Also
under the terms of the contract, Liberty will deposit $57.8 million from
customer collections during the 40-year contract into a fund administered by
Elizabeth (Fund Deposits), of which $52.3 million is due after 2012, to be
used by Elizabeth to pay for capital improvements or for other water system
purposes. As these funds will be controlled by Elizabeth, they will be
accounted for as a pass-through from customers to Elizabeth and will not be
included in revenues or expenses. Liberty is responsible for $7.45 million of
construction expenditures, primarily for meter replacements, during the life of
the contract. Of these total commitments, approximately $2.45 million is
expected to be expended in the next three years. During the life of the
contract, E'town will receive all water revenues from billing the customers
of the water system in accordance with rate increases set forth in the
contract, except for the Fund Deposits discussed above. E'town is also
responsible for all operating expenses as well as the capital expenditures
discussed above. Performance by Liberty of the contract provisions is
guaranteed by E'town.
- -27-
<PAGE>
E'town also performs the commercial billing operations for the wastewater
system of Elizabeth. E'town does not operate the wastewater system. E'town
does the wastewater billing for Elizabeth and remits all cash collected to
Elizabeth. Included in the Consolidated Balance Sheets of E'town as Customer
and Other Accounts Receivable at December 31, 1999 and 1998 are the
receivables from the customers of Elizabeth for wastewater services in the
amount of $5.05 million and $3.37 million, respectively. An equal amount of
liability to Elizabeth is included in Accounts Payable and Other Liabilities
which has been established to reflect E'town's obligation to remit these
funds to Elizabeth as collected.
In 1997 E'town, through Edison, entered into a contract with the township
of Edison, New Jersey to operate its water system under a 20-year contract
serving approximately 11,500 customers. Edison bills and receives all water
revenues generated as a result of operating the water system of the township
of Edison, New Jersey and pays all the expenses under the contract. Edison
expects to make expenditures of approximately $25 million during the 20-year
life of the contract of which $12.48 million has been spent as of December
31, 1999. Construction expenditures, as they are incurred, are being
amortized on a straight-line basis over the remaining life of the contract.
Expenditures include capital improvements to the water system as well as
contract payments to the township of Edison. Of the total, approximately
$2.94 million is expected to be expended in the next three years of the
contract. An initial payment of $5.7 million was made upon the closing in
June 1997 and has been included in the table above in concession fees on
privatization contracts, net of amortization. Performance by Edison of the
contract provisions is guaranteed by E'town.
If the Elizabeth or Edison contracts were terminated by either the township
of Edison or the city of Elizabeth, the unamortized balance of the concession
fees and amounts paid for additional capital improvements would be refunded
to Liberty and Edison in accordance with the contracts.
Also included in Non-Utility Property and Other Investments at December 31, 1999
and 1998 are $9.05 million and $11.34 million, respectively, of investments in
various parcels of undeveloped land in New Jersey.
One of the real estate parcels was sold in 1997 for $.4 million, resulting
in a gain of less than $.1 million. Two other parcels were sold in 1998 for
$1.7 million resulting in a gain of less than $.1 million. Cash proceeds of
$1.2 million were received in 1998 for these two parcels and the balance
was financed with a one-year mortgage at an interest rate of 8%, which was
paid in 1999. In February 1999 Properties sold a parcel of land, which has
been under contract since 1995 in Green Brook, New Jersey for $5.83
million, at a gain of $2.00 million net of taxes. Cash proceeds of $1.99
million were received in 1999. The remaining $4.33 million, at time of
closing, was financed with a 7.75% mortgage, to be paid over 2 years. The
mortgage balance, including accrued interest, of $3.84 million is included
in Mortgage and Other Notes Receivable in E'town's Consolidated Balance
Sheets. Properties sold a small parcel in Clinton, New Jersey in 1999 for
$.6 million at a gain of less than $.1 million net of taxes. The sale
proceeds are being invested into water and wastewater projects. Properties
has entered into contracts for sale for all of its remaining parcels. The
eventual sale of these parcels is contingent upon the purchaser obtaining
various approvals for development. This process could take up to several
years. As of December 31, 1999, all the remaining properties are under
contract to be sold. Based upon the expected sales prices for these
properties under the contracts, the estimated net realizable value of each
property exceeds its respective carrying value as of December 31, 1999.
- -28-
<PAGE>
E'town purchased the operations of Applied Wastewater General Partnership
(AWG) in June 1998 to provide a full complement of water and wastewater
services. The original purchase price, in a non-cash transaction, was $6.61
million (185,005 restricted common shares issued) for the three companies
that now comprise AWM and $.04 million (1,305 restricted common shares
issued) for AWWM, a regulated wastewater utility, in a stock-for-stock
transaction accounted for as a purchase. The purchase price was subject to a
potential downward post-closing adjustment based upon a multiple of earnings
for the twelve months ended March 31, 1998. As required by the purchase
contract, E'town had undertaken an audit of AWG for such period. This process
resulted in a downward post-closing adjustment of $.9 million (25,756 shares),
which has been reflected in E'town's 1999 Consolidated Balance Sheet. The
adjusted goodwill amounts to $4.76 million as of December 31, 1999 and is
being amortized over a 40-year period. Had the acquisition been consummated
as of January 1, 1997, the proforma effect on revenues, net income and
earnings per share for the years ended December 31, 1999, 1998 and 1997 would
be immaterial.
Included in Non-Utility Property and Other Investments at December 31, 1999
and 1998 is an investment of $1.09 million and $1.21 million, respectively,
($.35 million and $.43 million net of related deferred taxes) in a limited
partnership that owns Solar Electric Generating System V (SEGS), located in
California. The Corporation owns a 3.19% interest in SEGS. The investment is
being accounted for on the equity method. The Corporation continues to
monitor the relationship between the carrying and net realizable values of
its investment in SEGS, based upon information provided by SEGS management as
well as through cash flow analyses.
During 1999 AWM made certain investments in non-regulated wastewater assets
for $1.7 million. Of this amount $1.2 million was recorded as other capital
assets and $.5 million was recorded as goodwill. The goodwill is being
amortized over 10 years.
9. Financial Instruments
The carrying amounts and the estimated fair values, as of December 31, 1999
and 1998, of financial instruments issued by the Corporation are as follows:
(THOUSANDS OF DOLLARS) 1999 1998
=============================================================
Cumulative preferred stock:
Carrying amount $ 12,227 $ 12,227
Estimated fair value 12,077 13,247
Long - term debt:
Carrying amount $ 266,015 $ 286,908
Estimated fair value 261,686 299,630
=============================================================
Estimated fair values for preferred and debt instruments are based upon
quoted market prices for these or similar securities.
- -29-
<PAGE>
10. Regulatory Assets and Liabilities
Certain costs incurred by Elizabethtown and Mount Holly have been deferred as
regulatory assets and are being amortized over various periods, as set forth
below:
(THOUSANDS OF DOLLARS) 1999 1998
==========================================================
Waste residual management $ 1,538 $ 1,371
Unamortized debt and preferred
stock expense 8,900 9,368
Taxes recoverable through future
rates (Note 4) 13,466 14,226
Postretirement benefit expense
(Notes 11 and 14) 3,145 3,490
Safety management expense 158 245
Business process redesign 136 210
Rate case expenses 23 7
PWAC underrecovery 480 305
- ----------------------------------------------------------
Total $ 27,846 $ 29,222
==========================================================
Waste Residual Management
The costs of disposing of the byproducts generated by Elizabethtown's and
Mount Holly's water treatment plants are being amortized and recovered in
rates over 3- and 5-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.
Purchased Water Adjustment Clause
In 1994 Elizabethtown established a Purchased Water Adjustment Clause
(PWAC), to reflect the cost of water purchased from the New Jersey Water
Supply Authority (NJWSA). The current rate for the PWAC is zero since the
costs of purchased water were reflected in the 1996 rate case; however,
because of the high pumpage in the summers of 1999 and 1998, Elizabethtown
has under-recovered its purchased water costs and therefore, has deferred
$.44 million as of December 31, 1999. As of December 31, 1999, Mount Holly
has deferred $.04 million of PWAC costs (see Note 11).
There were no regulatory liabilities at December 31, 1999 or 1998.
- -30-
<PAGE>
11. Regulatory Matters
Elizabethtown
In December 1997 the BPU adopted a Stipulation for rate increases for
Elizabethtown and Mount Holly, effective January 1, 1998, for the full
recovery of costs associated with SFAS No. 106 "Accounting for Employer's
Postretirement Benefits" on an accrual basis less the costs associated with
SFAS No. 106 expenses previously recovered in rates. The total increases in
annual operating revenues resulting from these Stipulations were $.39 million
for Elizabethtown and $.02 million for Mount Holly.
In accordance with the terms of the pending Merger Agreement, Elizabethtown
will postpone filing for rate relief until the Merger has been consummated.
Mount Holly
In 1998 Mount Holly commenced a construction project, called the Mansfield
Project, to comply with New Jersey legislative restrictions to obtain
alternative water supplies, thereby reducing its water pumpage from an
aquifer, which had been subject to over-pumping by Mount Holly and various
local purveyors in a portion of southern New Jersey. A portion of this
project was placed into service in the third quarter of 1998 and the
remaining portion of the project was placed into service in late December
1999.
To settle an appeal initiated by another water purveyor in 1995 concerning
the diversion rights for the Mansfield Project, Mount Holly signed a Stipulation
in 1997 with the purveyor, the DEP and other parties, requiring Mount Holly to
purchase one million gallons per day from the other purveyor during the two-year
period that the Mansfield Project was being constructed. Purchases began during
March of 1998, after completion of an interconnection and ended in January 2000
shortly after the Mansfield Project went into service.
In September 1997 Mount Holly filed a petition with the BPU to establish a
Purchased Water Adjustment Clause (PWAC) to reflect the cost of water
purchased from the other purveyor under the aforementioned agreement. In May
1998 the BPU adopted a Stipulation signed by the parties to the PWAC case
for an increase in annual revenues under Mount Holly's PWAC of $1.3 million
or 38.9%.
Effective January 1, 2000, Mount Holly received an increase in annual rates
of $1.88 million. This increase included costs for Mount Holly's Mansfield
Project that was placed in service at the end of December 1999. The rate
decision also reflected the elimination of the PWAC. After the elimination of
the PWAC the net rate increase was $.51 million. This increase also reflects
additional construction and financing costs, as well as increases in
operating costs since base rates were last established in January 1996.
In June 1999 Mount Holly purchased Homestead Water Utility, Inc. and AWWM
purchased Homestead Treatment Utility, Inc. for a combined cash price of
$1.8 million. The entities provide water and wastewater services to
approximately 800 customers of the Homestead community in southern New Jersey.
The transactions were accounted for as purchases. Had the acquisitions been
consummated as of January 1, 1997, the proforma effect on revenues, net
income and earnings per share for the years ended December 31, 1999, 1998 and
1997 would be immaterial.
- -31-
<PAGE>
12. Other Events
In August 1999 the Governor of the State of New Jersey declared a "Water
Emergency" for the entire state and issued mandatory restrictions on outdoor,
nonessential water use. Due to unusually low levels of rainfall during June
and July the Governor deemed these measures necessary to preserve the
integrity of several of the state's reservoir and well supplies. Customers of
Elizabethtown, Mount Holly, Edison and Liberty were subject to these
restrictions. The water systems operated by E'town's subsidiaries at all
times had, and continue to have, adequate supplies of water to meet the needs
of their customers. These restrictions affected the amount of water consumed
by a substantial number of the Corporation's customers and reduced net income in
1999 by approximately $.68 million. The restrictions were lifted in October
1999.
In September 1999 Elizabethtown withdrew its primary water treatment plant,
the Raritan-Millstone Water Treatment Plant (Plant), from service as a result
of flooding from Tropical Storm Floyd (Floyd). For several days,
Elizabethtown had difficulty maintaining adequate water pressure in portions
of its distribution system because overall system production levels were
substantially less than normal. Customers in portions of a few municipalities
were without water service for a period of approximately 3 days. Costs incurred
to repair and replace equipment damaged by the flood and to respond to
inquiries by customers, regulatory bodies and the media have been deferred
and are expected to be recoverable through insurance. The Company has
incurred $7.0 million of flood-related expenditures and has received an
advanced reimbursement of $2.0 million from its insurance carrier. The
remaining $5.0 million of flood-related expenditures is reported on the
Consolidated Balance Sheets as a deferred charge at December 31, 1999. The
loss of revenues due to below normal water consumption is not recoverable
through insurance (see Note 13 for legal matters related to Floyd). The loss
of revenues decreased net income in 1999 by approximately $.39 million.
13. 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, 1999, the annual cost of
water under contract is $7.63 million. The Company purchases additional water
from the NJWSA on an as-needed basis. The total cost of water purchased from
the NJWSA was $9.03 million in 1999.
In connection with E'town's agreement to operate the water systems of the
township of Edison and the city of Elizabeth, E'town has certain contractual
commitments which are set forth in Note 8.
Capital expenditures of E'town and its subsidiaries are estimated to be
$152.36 million, exclusive of concession fees, through 2002, of which $144.99
million is for utility expenditures by Elizabethtown, Mount Holly and AWWM
and $7.37 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 2000
through 2004 are: 2000, $1.04 million; 2001, $1.06 million; 2002 $.92
million; 2003, $.62 million and 2004, none. Rent expense totaled $.99
million, $.83 million and $.72 million in 1999, 1998 and 1997, respectively.
Elizabethtown and AWM lease vehicles and certain office equipment. The
minimum payments required under noncancelable leases with terms in excess of
one year at December 31 of each of the years 2000 through 2004 are: $1.66
million, $1.65 million, $1.64 million, $1.64 million and $1.64 million. The
lease expense was $1.39 million and $.29 million for 1999 and 1998,
respectively. There was no lease expense for 1997.
- -32-
<PAGE>
In connection with the pending Merger the Corporation retained a financial
advisor. The total estimated fee for the financial advisor is $ 4.50 million
of which $ 1.09 million was expensed in 1999 in connection with the Merger
announcement, $ .66 million is due upon shareholder approval and the
remainder is due when the transaction is consummated.
Upon the consummation of the pending Merger, the Corporation will become
obligated to make a payment of $.4 million to an officer of the Corporation
as consideration for efforts to bring the transaction to completion.
Also in connection with the pending Merger, subsequent to the consummation of
the transaction, the Corporation may become obligated to make payments to
officers of Elizabethtown and Properties under change in control agreements
presently in effect between the Corporation and the officers. The extent of
personnel decisions that could potentially trigger the provisions of these
agreements are not presently known and therefore, the amounts of any
potential obligations are not presently determinable.
Environmental, Legal and Other Matters
On September 23, 1999, two parties filed separate class action lawsuits for
compensatory damages and related fees on behalf of themselves and similarly
situated residential and commercial customers against Elizabethtown Water
Company, Edison Water Company and Liberty Water Company. The lawsuit alleges
negligence regarding the quantity and quality of water services provided by
the Corporation during the period in September 1999 when Elizabethtown's Plant
was flooded from Floyd and was withdrawn from service for approximately 3 days.
Elizabethtown has notified its insurance carrier of the lawsuit and has filed
a motion for summary judgment to dismiss the lawsuit as a class action
proceeding prior to answering the allegations. In March 2000 the New Jersey
Superior Court (NJSC) ruled that in the event the lawsuit is not dismissed,
the case be referred to the BPU for purposes of investigating the matter and
reporting its findings to the NJSC. The NJSC, in view of the BPU's findings,
will then determine what, if any, damages were suffered by the plaintiffs and
what liability, if any, rests with Elizabethtown. E'town Corporation maintains
that such allegations are without merit and believes that the plaintiffs'
chances of prevailing are not significant.
There are environmental matters that are inherent in the production,
transmission and distribution of water as well as in the treatment of
wastewater. The Corporation is sensitive to these issues and mitigates the
environmental impact of these activities to the extent required by the laws
and regulations under which these activities are governed and makes efforts
to exceed the regulatory requirements where practical.
The Corporation, in the ordinary course of business, periodically becomes
involved in litigation. There is currently no litigation in progress, other
than the items discussed above, regarding environmental or other issues in
which an outcome adverse to the Corporation could have a material impact on
the financial statements.
- -33-
<PAGE>
14. Pension Plan and Other Postretirement Benefits
Pension Plan
Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan), which
covers most employees of Elizabethtown, Mount Holly and Properties. The Plan
provides for annual benefits at retirement equal to 1.6% of the average
compensation for the highest four consecutive years, multiplied by the number
of years of credited service.
Supplemental Pension Plan
The Corporation also has a supplemental retirement plan for certain
management employees that is not funded. Eligibility for the designated
employees is based upon their completion of twenty years of service.
Payments are based upon 60% of the average compensation of an eligible
management employee's last three years of service, net of the amount earned
under the Plan. Benefits are payable for a period of 15 years and payments
are made directly by the Corporation. In 1999 the supplemental compensation
plan was amended to change the definition of compensation to include
incentive compensation and other taxable benefits. The unfunded benefit
obligation at December 31, 1999 and 1998 was $2.13 million and $1.51 million,
respectively.
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 Corporation's bargaining unit, all union
and non-union employees retiring after January 1, 1997, pay 25% of future
increases in the premiums the Corporation 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.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1999, and for 1999 was
9%. This rate decreases linearly each successive year until it reaches 3.8% in
2008, after which the rate remains constant.
The rate increases effective January 1, 1998 allow 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,
1999, the unamortized amounts that remain deferred are $3.02 million and $.13
million for Elizabethtown and Mount Holly, respectively.
The accompanying tables set forth the funded status of the Company's Plan and
other postretirement benefit plans as of December 31 1999 and 1998 and
reconciliations of the components of net periodic pension and postretirement
benefit costs for the years 1999, 1998 and 1997:
- -34-
<PAGE>
Other Postretirement
Pension Plans Benefits
(THOUSANDS OF DOLLARS) 1999 1998 1999 1998
===============================================================================
Funded Status
Change in benefit obligation during year:
Benefit obligation at beginning of year $45,880 $40,447 $ 7,938 $ 6,604
Service cost 1,672 1,407 241 390
Interest cost 3,109 2,855 430 486
Benefit payments (2,256) (2,092) (238) (247)
Actuarial (gain) or loss (5,615) 3,263 (2,359) 705
Plan amendments 691
- -------------------------------------------------------------------------------
Benefit obligation at end of year 43,481 45,880 6,012 7,938
===============================================================================
Change in plan assets during year:
Fair value of plan assets at
beginning of year 52,153 46,803 2,171 1,331
Employer contributions 161 174 879 978
Benefit payments (2,256) (2,092) (238) (247)
Actual return on plan assets 9,811 7,268 286 109
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year 59,869 52,153 3,098 2,171
===============================================================================
Reconciliation of funded status at end of year:
Funded status 16,389 6,273 (2,914) (5,767)
Unrecognized net transition (asset)
or obligation (1,097) (1,365) 4,716 5,079
Unrecognized prior service cost 2,771 2,415
Unrecognized net (gain) or loss (18,422) (7,662) (5,014) (3,063)
- -------------------------------------------------------------------------------
Accumulated postretirement benefits* $ (359) $ (339)$(3,212) $(3,751)
===============================================================================
* Recognized in the Consolidated Balance Sheets
<TABLE>
<CAPTION>
Pension Plans Other Postretirement Benefits
(THOUSANDS OF DOLLARS) 1999 1998 1997 1999 1998 1997
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net periodic benefit cost recognized for year:
Service cost $ 1,672 $ 1,407 $ 1,322 $ 241 $ 390 $ 389
Interest cost 3,109 2,855 2,734 430 486 449
Expected return on plan assets (4,592) (4,125) (3,542) (186) (109) (57)
Net amortization and deferral (7) (153) 66 165 158 140
Deferral/amortization for regulated companies 249 247 (273)
- ----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost 182 (16) 580 899 1,172 648
==================================================================================================================================
Weighted - average assumptions for year:
Discount rate 6.75 % 7.25 % 7.50 % 6.75 % 7.25 % 7.50%
Rate of compensation increases 3.50 % 4.00 % 4.00 %
Expected long - term rate of return on plan assets 9.00 % 9.00 % 9.00 % 9.00 % 9.00 % 9.00%
Weighted - average assumptions at end of year:
Discount rate 7.75 % 6.75 % 7.25 % 7.75 % 6.75 % 7.25%
Rate of compensation increases 3.50 % 4.00 % 4.00 %
==================================================================================================================================
</TABLE>
- -35-
<PAGE>
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, 1999, and the net postretirement service and
interest cost by approximately $.81 million and $.11 million, respectively.
15. Related Party Transactions
Utility Billing Services, Inc., a subsidiary of NUI Corporation, of which a
Director of E'town is Chairman of the Board and a Director, provides data
processing and related services to Elizabethtown and other subsidiaries of the
Corporation. The charges for all services totaled $1.04 million, $.93 million,
and $.72 million, for 1999, 1998 and 1997, respectively. The current contract
expires December 31, 2000.
The Corporation has a line of credit effective October 1999 in the amount of
$10 million with Summit Bank. A Director of E'town and of Elizabethtown is
also a Director of Summit Bank. At December 31, 1999, E'town had loans
outstanding with Summit Bank in the amount of $7.0 million. Total interest
charges paid to Summit Bank by E'town were $.30 million, $.07 million and
$.35 million for 1999, 1998 and 1997, respectively. Summit Bank also serves
as a bond trustee for Elizabethtown for which Elizabethtown has paid fees of
less than $.10 million in 1999, 1998 and 1997.
AWM leases office space from a Director of E'town. Total rent payments were
$.24 million for 1999 and $.10 million for the portion of 1998 that the
Corporation owned AWM.
16. Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires that companies disclose segment data based upon how
management makes decisions, allocates resources and measures performance. The
1999, 1998 and 1997 segment data is presented as follows:
<TABLE>
<CAPTION>
Engineering/ Financing
(THOUSANDS OF DOLLARS) Regulated Contract Operations/ and
Utilities Operations Construction Investment Eliminations Total
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1999
Revenues $ 138,791 $ 19,363 $ 12,439 $ (8,398) $ 162,195
Operating Expenses 102,017 16,640 12,564 $ 1,679 (8,313) 124,587
Depreciation and Amortization Expense 13,534 1,807 335 120 15,796
Interest Expense 16,574 1,312 63 1,467 19,416
Net Income (Loss) 20,263 1,489 (189) (1,076) 20,487
Total Assets 750,690 72,921 7,506 51,574 (34,383) 848,308
Total Debt (1) 299,398 44,624 2,067 59,660 (30,740) 375,009
==============================================================================================================================
1998
Revenues $ 134,943 $ 12,126 $ 5,735 $ $ (7,324) $ 145,480
Operating Expenses 95,432 10,968 5,699 635 (7,217) 105,517
Depreciation and Amortization Expense 12,500 1,035 81 63 13,679
Interest Expense 15,619 843 (6) 1,370 17,826
Net Income (Loss) 23,871 420 43 (2,192) 188 22,330
Total Assets 688,046 68,539 3,744 44,964 (26,551) 778,742
Total Debt (1) 268,056 31,000 179 44,499 (774) 342,960
==============================================================================================================================
(1) Includes long-term debt, notes payable, long-term debt - current portion and contract obligations payable.
</TABLE>
- -36-
<PAGE>
The Regulated Utilities segment provides water and wastewater services
through Elizabethtown, Mount Holly and AWWM. This segment is regulated by the
BPU.
The Contract Operations segment is comprised of Liberty and Edison and
provides water services under contract to municipalities.
The Engineering/Operations/Construction segment is comprised of AWM and
provides engineering, operating and construction services, primarily in the
wastewater field.
The Financing and Investment segment is comprised of Properties and E'town.
E'town provides the equity financing for all the other segments and debt
financing for all segments other than the Regulated Utilities segment.
Properties owns real estate parcels.
Eliminations are comprised of the accounting entries necessary to eliminate
intercompany sales, expenses and investments.
17. Quarterly Financial Data (Unaudited)
A summary of financial data for each quarter of 1999 and 1998 follows:
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Basic Diluted
Operating Operating Net Earnings Earnings
Quarter Revenues Income Income Per Share Per Share
==========================================================================
1999
1st $ 35,476 $ 8,675 $ 6,300 $ 0.74 $ 0.73
2nd 41,611 10,179 5,757 0.67 0.66
3rd 45,593 12,809 7,953 0.92 0.91
4th 39,515 5,945 477 0.06 0.06
- --------------------------------------------------------------------------
Total $162,195 $ 37,608 $ 20,487 $ 2.39 $ 2.36
==========================================================================
1998
1st $ 31,267 $ 8,455 $ 4,163 $ 0.52 $ 0.51
2nd 33,609 9,376 5,162 0.63 0.62
3rd 43,907 12,917 8,555 1.02 1.00
4th 36,697 9,215 4,450 0.53 0.53
- --------------------------------------------------------------------------
Total $145,480 $ 39,963 $ 22,330 $2.70 $ 2.66
==========================================================================
Water utility revenues are subject to seasonal fluctuation due to normal
increased water consumption during the third quarter of each year.
Net income in the fourth quarter of 1999 was impacted by certain significant
operation costs, including costs associated with the pending Merger
and labor and power costs indirectly attributable to a major flood at
Elizabethtown's primary water treatment plant.
- -37-
<PAGE>
INDEPENDENT AUDITORS' 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, 1999 and 1998, and the related statements of consolidated
income, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. 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 amounts and disclosures in 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, 199 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche
March 9, 2000
Parsippany, New Jersey
<PAGE>
<TABLE>
<CAPTION>
Other Financial and Statistical Data
1999 1998 1997 1996 1995
=================================================================================================================
<S> <C> <C> <C> <C> <C>
UTILITY PLANT (THOUSANDS)
Utility Plant - net $ 659,339 $ 609,303 $ 572,785 $ 560,024 $ 507,858
Construction Expenditures (excluding AFUDC) 60,834 43,582 24,612 55,125 73,789
TOTAL ASSETS (THOUSANDS) 848,308 778,742 670,904 655,207 59,156
CAPITALIZATION (THOUSANDS)
Shareholders' Equity 229,233 215,472 193,923 183,512 177,081
Preferred Stock 12,227 12,227 12,000 12,000 12,000
Debt (1) $ 375,009 $ 342,960 $ 270,328 $ 262,511 $ 220,703
Total Capitalization $ 616,469 $ 570,659 $ 476,251 $ 458,023 $ 409,784
CAPITALIZATION RATIOS
Common Stock 37% 38% 41% 40% 43%
Preferred Stock 2% 2% 2% 3% 3%
Debt (1) 61% 60% 57% 57% 54%
EARNINGS TO FIXED CHARGES RATIO 2.59 2.86 2.67 2.18 2.47
COMMON STOCK DATA
Earnings Per Share:
Basic $ 2.39 $ 2.70 $ 2.44 $ 1.96 $ 2.16
Diluted 2.36 2.66 2.41 1.96 2.14
Dividends Per Share 2.04 2.04 2.04 2.04 2.04
Book Value Per Share $ 26.26 $ 25.43 $ 24.17 $ 23.58 $ 23.54
Average Shares Outstanding: (Thousands)
Basic 8,572 8,263 7,891 7,668 7,093
Diluted 8,871 8,567 8,215 7,966 7,394
REVENUES (THOUSANDS)
General Customers $ 92,595 $ 87,794 $ 85,195 $ 68,797 $ 67,455
Other Water Systems 21,597 22,181 21,900 18,929 18,720
Industrial Wholesale 7,531 8,148 8,451 7,869 7,947
Fire Service/Miscellaneous 17,068 16,820 16,754 14,814 14,276
Contract Operations 19,363 12,126 3,330
Engineering Operations & Construction 12,439 5,735
Elimination of Intercompany Sales (8,398) (7,324) (1,804)
Total Revenues $ 162,195 $ 145,480 $ 133,826 $ 110,409 $ 108,398
NET INCOME $ 20,487 $ 22,330 $ 19,260 $ 15,073 $ 15,296
WATER SALES - MILLIONS OF GALLONS (MG)
General Customers 25,852 24,614 24,333 22,890 23,999
Other Water Systems 13,806 14,396 14,504 15,049 15,569
Industrial Wholesale 3,270 3,482 3,533 3,567 3,673
Contract Operations 8,051 5,091 1,307
System Use and Unaccounted For 7,718 6,934 6,948 6,444 6,402
Elimination of Intercompany Sales (5,165) (3,899) (1,163)
Total Water Sales 53,532 50,618 49,462 47,950 49,643
SYSTEM DELIVERY BY SOURCE (MG)
Surface 44,520 48,067 42,585 41,485 42,646
Wells 5,740 1,072 6,689 6,328 6,764
Purchased 8,437 5,378 1,351 137 233
Elimination of Intercompany Sales (5,165) (3,899) (1,163)
Total System Delivery 53,532 50,618 49,462 47,950 49,643
MILLIONS OF GALLONS PUMPED
Average Day 147 139 135 131 136
Maximum Day 241 217 205 170 183
CUSTOMERS
Regulated Utilities 205,022 200,536 197,663 195,482 192,617
Contract Operations 29,051 29,471 11,207
Engineering/Operations/Construction 4,605 4,437 4,057
Total Customers 238,678 234,444 212,927 195,482 192,617
GENERAL INFORMATION
Miles of Main 3,014 2,955 2,926 2,899 2,869
Fire Hydrants Served 17,668 16,426 16,228 16,012 15,650
=================================================================================================================
(1) Includes long-term debt, notes payable, long-term debt - current portion and contract obligations payable.
As of March 29, 2000 there were 5,182 holders of record of E'town's Common Stock.
See Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations and Notes to Consolidated Financial Statements
appearing elsewhere in this report.
</TABLE>
<PAGE>
STOCK PRICE AND DIVIDEND DATA:
E'TOWN'S COMMON STOCK IS TRADED ON THE NEW YORK
STOCK EXCHANGE UNDER THE SYMBOL ETW.
1999 1st 2nd 3rd 4th
================================================================
Quarter
Closing Price:
Low: $ 37.44 $ 39.44 $ 45.56 $ 43.56
High: $ 46.81 $ 46.88 $ 53.13 $ 62.88
Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51
================================================================
1998 1st 2nd 3rd 4th
================================================================
Quarter
Closing Price:
Low: $ 34.38 $ 33.88 $ 36.44 $ 40.75
High: $ 39.69 $ 38.06 $ 43.75 $ 47.38
Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51
================================================================
SUBSIDIARIES OF THE CORPORATION
Subsidiaries of E'town Corporation and Elizabethtown Water Company as of
December 31, 1999 are as follows:
State of
Name Incorporation
Elizabethtown Water Company New Jersey
The Mount Holly Water Company (subsidiary) New Jersey
E'town Properties, Inc. Delaware
Edison Water Company New Jersey
Liberty Water Company New Jersey
Applied Water Management, Inc. New Jersey
Applied Wastewater Management, Inc. New Jersey
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-69549 on Form S-3 and Registration Statement Nos. 33-49812, 33-19600 and
333-56819 on Form S-8 of E'town Corporation of our reports dated March 9, 2000
and to the incorporation by reference in Registration Statement Nos. 33-68579
and 33-51917 on Form S-3 of Elizabethtown Water Company of our report dated
March 9, 2000, appearing in 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, 1999.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 30, 2000
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<NAME> E'town Corporation & Subsidiaries
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<PERIOD-END> DEC-31-1999
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12,000
227
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<SHORT-TERM-NOTES> 89,500
<LONG-TERM-NOTES-PAYABLE> 13,341
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 250,839
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<FN>
All amounts in thousands of dollars except per share amounts.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000032379
<NAME> Elizabethtown Water Company & Subsidiary
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
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<FN>
All amounts in thousands of dollars.
</FN>
</TABLE>
