-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AUGf1xTmiNjHXbJ+s1pQyRPzNmcroiq/mNbYzNTN9j0/25fIJmWVvAtikbQcKEQ0 WMOeBNYHgdZWjjksx+x8XA== 0000764403-96-000003.txt : 19960401 0000764403-96-000003.hdr.sgml : 19960401 ACCESSION NUMBER: 0000764403-96-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ETOWN CORP CENTRAL INDEX KEY: 0000764403 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 222596330 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11023 FILM NUMBER: 96540479 BUSINESS ADDRESS: STREET 1: 600 SOUTH AVE STREET 2: P O BOX 788 CITY: WESTFIELD STATE: NJ ZIP: 07090 BUSINESS PHONE: 9086541234 MAIL ADDRESS: STREET 1: P O BOX 788 STREET 2: C/O E'TOWN CORP CITY: WESTFIELD STATE: NJ ZIP: 07090 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELIZABETHTOWN WATER CO /NJ/ CENTRAL INDEX KEY: 0000032379 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 221683171 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-00628 FILM NUMBER: 96540480 BUSINESS ADDRESS: STREET 1: 600 SOUTH AVE STREET 2: P O BOX 788 CITY: WESTFIELD STATE: NJ ZIP: 07090 BUSINESS PHONE: 9086541234 MAIL ADDRESS: STREET 1: 600 SOUTH AVE PO BOX 788 STREET 2: 600 SOUTH AVE PO BOX 788 CITY: WESTFIELD STATE: NJ ZIP: 07090 10-K 1 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, 1995 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 reSecurities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Secrities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __X__ On December 31, 1995, the aggregate market value of E'town Corporation's voting stock held by non-affiliates was $226,636,460. On December 31, 1995, there were 7,523,202 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, 1995. Part III incorporates information by reference from the definitive Proxy Statement in connection with E'town Corporation's Annual Meeting of Shareholders to be held on May 16, 1996. E'TOWN CORPORATION ELIZABETHTOWN WATER COMPANY 1995 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I ITEM PAGE ____ ____ 1. Business...................................................... 1 Organization............................................... 1 Service Area and Customers................................. 1 Water Supply............................................... 2 Water Treatment Facilities and Water Quality Regulations................................. 3 Transmission and Distribution.............................. 6 Energy Supply.............................................. 6 Environmental Matters...................................... 7 Franchises................................................. 8 Employee Relations......................................... 8 Rate Matters............................................... 8 Real Estate Matters........................................ 9 Executive Officers of the Corporation and Elizabethtown.... 11 2. Properties.................................................... 12 3. Legal Proceedings............................................. 12 4. Submission of Matters to a Vote of Security Holders............................................. 12 PART II ITEM ____ 5. Market for the Corporation's Common Stock and Related Stockholder Matters.................................. 12 6. Selected Financial Data....................................... 13 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations......................................... 14 8. Financial Statements and Supplementary Data................... 23 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 23 PART III ITEM PAGE ____ ____ 10. Directors and Executive Officers of the Registrant............ 23 11. Executive Compensation........................................ 23 12. Security Ownership of Certain Beneficial Owners and Management........................................ 23 13. Certain Relationships and Related Transactions................................................. 23 PART IV ITEM ____ 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 23 SIGNATURES........................................................... 26 APPENDIX I Elizabethtown Water Company and Subsidiary Consolidated Financial Statements for the Years Ended December 31, 1995, 1994 and 1993 and Independent Auditors' Report E'TOWN CORPORATION ELIZABETHTOWN WATER COMPANY Form 10-K Annual Report For the year ended December 31, 1995 PART I ITEM 1. Business ORGANIZATION E'town Corporation (E'town or Corporation) was incorporated under the laws of the State of New Jersey in 1985 to serve as a holding company for Elizabethtown Water Company (Elizabethtown or Company) and its wholly owned subsidiary, The Mount Holly Water Company (Mount Holly). Elizabethtown and Mount Holly are regulated water utilities which, as a consolidated entity, are referred to herein as Elizabethtown Water Company (Elizabethtown Water Company). E'town Properties, Inc. (Properties) was incorporated in 1987 as a wholly owned and non-regulated subsidiary of E'town to acquire, develop and sell real estate holdings. Elizabethtown and Mount Holly are engaged in the distribution of water for domestic, commercial, industrial and fire protection purposes and for resale by other water companies and public bodies. Elizabethtown is a New Jersey corporation, one of whose predecessors was first incorporated in 1854. The present corporation was formed in 1961 as a result of a consolidation of Elizabethtown Water Company Consolidated and Plainfield-Union Water Company. Princeton and Somerville Water Companies were merged into Elizabethtown in 1973, and, as of January 1, 1977, Bound Brook Water Company was also merged into Elizabethtown. Elizabethtown owns all of the common stock of Mount Holly which contributed approximately 3% of the Company's consolidated operating revenues for 1995. SERVICE AREA AND CUSTOMERS At December 31, 1995 Elizabethtown and Mount Holly furnished water service on a retail basis to general customers and to industrial customers served through 195,375 meters in 54 municipalities in the counties of Union, Middlesex, Somerset, Mercer, Hunterdon, Ocean, Morris and Burlington in the central part of New Jersey. Elizabethtown also provides, on a wholesale basis, a portion of the water requirements of eight additional municipalities with their own retail water systems and of three other investor-owned water companies. Water for fire protection service is provided to 53 municipalities and also to commercial and industrial establishments. -1- The Company's operating revenues by major classifications for the twelve months ending December 31, 1995 are as follows: General customers 62.2% Sales to other systems 17.3% Larger industrial customers 7.3% Fire protection service/miscellaneous 13.2% The systems are substantially all metered except for fire service. Additional operating statistics appear on page 13. WATER SUPPLY The water supply systems of Elizabethtown and Mount Holly are physically separate. During 1995, Elizabethtown's pumpage averaged 132.5 million gallons per day (MGD) and Mount Holly's pumpage averaged 3.6 MGD. Elizabethtown and Mount Holly believe they have sufficient water supply sources to meet the current needs of their customers. Mount Holly plans to construct additional facilities, as discussed below, to augment its water supplies. In 1995, surface water sources supplied approximately 88% of Elizabethtown's supply with wells supplying the remaining 12%. All of Mount Holly's water is produced from wells. Substantially all of Elizabethtown's surface water is purchased under a long-term contract with the New Jersey Water Supply Authority (NJWSA) which requires Elizabethtown to purchase (i) 32 MGD from the state-owned Delaware and Raritan Canal which transports water from the Delaware River Basin plus (ii) 70 MGD from the Raritan River Basin which includes the state-owned Spruce Run-Round Valley Reservoir System. The safe yield of the Raritan River Basin and the Delaware and Raritan Canal is 225 MGD of which 151 MGD is presently allocated to Elizabethtown and others. The NJWSA has available and, as needed to meet system demand, Elizabethtown purchases, water over and above the Company's minimum purchase obligation. The Company continues to analyze the potential effect of federal and state regulations on the long-term capacity of Elizabethtown's wells. Since 1985, wells with an aggregate capacity of 11 MGD have been withdrawn from service due to more stringent federal and state regulations and increased groundwater contamination at certain well sites. Under state and federal regulations now in effect, Elizabethtown owns and operates wells with an aggregate safe daily yield of approximately 18 MGD. If regulations governing radionuclides in drinking water proposed by the United States Environmental Protection Agency (USEPA) are adopted, Elizabethtown's well capacity will decrease to about 13 MGD. All of Mount Holly's system delivery of 3.6 MGD in 1995 was supplied from wells. To ensure an adequate supply of quality water -2- from an aquifer serving parts of southern New Jersey, state legislation will require Mount Holly, as well as other suppliers obtaining water from designated portions of this aquifer, to reduce pumpage from its wells. Mount Holly has a plan to develop a new water supply, treatment and transmission system necessary to obtain water outside the designated portion of the aquifer and to treat the water and pump it into the Mount Holly system. This is referred to as the Mansfield Project. The project is currently estimated to cost $16.5 million excluding an Allowance for Funds Used During Construction (AFUDC). Construction is expected to begin after issuance of the final water allocation diversion permit and is expected to be completed in 1997. The land for the supply and treatment facilities has been purchased and wells have been drilled and can produce the required supply. Mount Holly has filed for rate relief relating to the Mansfield Project. On October 5, 1995, the New Jersey Department of Environmental Protection (NJDEP) granted Mount Holly a water allocation diversion permit for four wells that are to be the water supply for the Mansfield Project. On October 20, 1995, New Jersey-American Water Company requested, and was subsequently granted, an adjudicatory hearing on the permit. The Company and Mount Holly believe that the permit in question will be upheld but cannot predict the outcome of the objection. In the event that the objection is successful and the permit is rescinded Mount Holly would utilize the alternative plan of purchasing water from New Jersey-American Water Company. WATER TREATMENT FACILITIES AND WATER QUALITY REGULATIONS Elizabethtown owns and operates a treatment plant at the confluence of the Raritan and Millstone Rivers adjacent to the Delaware and Raritan Canal to treat surface waters purchased from the NJWSA. The plant can withdraw water from any of these sources, which is an advantage in the event that one source becomes contaminated. The plant was placed in service in 1931 and has continually been upgraded since that time. Elizabethtown also operates smaller treatment facilities to treat groundwater produced by certain wells. Mount Holly operates similar groundwater treatment facilities. Both the USEPA and the NJDEP regulate the operation of Elizabethtown's and Mount Holly's water treatment and distribution systems and the quality of the water Elizabethtown and Mount Holly deliver to their customers. Currently, Elizabethtown and Mount Holly believe they are in compliance, in all material respects, with all present federal and state water quality standards, including all regulations promulgated to date by the USEPA pursuant to the Federal Safe Drinking Water Act, as amended (SDWA), and by the NJDEP pursuant to similar state legislation. Elizabethtown has included certain capital projects in its three-year capital expenditure plans which it anticipates will be necessary to comply with regulations that have been proposed by the USEPA and NJDEP. Recovery of the financing -3- and operating costs of such improvements, plus those costs for any additional projects which cannot be foreseen at this time, will be requested in rates. Elizabethtown has responded to recent water quality regulations promulgated by NJDEP and the USEPA by replacing groundwater supplies with increased withdrawals of surface water. Accordingly, the proportion of supply produced from surface water has increased from 85% in 1986 to 88% in 1995. 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 attempt to constantly upgrade treatment facilities at multiple well sites. New Surface Water Treatment Plant Elizabethtown's capital program includes the construction of a new water treatment plant, the Canal Road Water Treatment Plant (Plant) to increase Elizabethtown's sustainable production capacity and provide the ability to continue to meet water quality regulations. In April 1994, the Company executed a lump-sum contract for the construction of the Plant, which will have an initial capacity of 40 MGD. Construction of the Plant is currently in progress. The current estimated cost of the Plant is approximately $100 million, excluding AFUDC. The Company has expended $83.0 million, excluding AFUDC of $7.2 million, on the Plant as of December 31, 1995. The project is proceeding on schedule, the construction contract remains on budget and the project is expected to be completed during the third quarter of 1996. In August 1993, the New Jersey Board of Public Utilities (BPU) approved a stipulation (1993 Plant Stipulation) signed by all parties to the Company's petition filed in connection with the Plant which states that the parties affirm the Plant is necessary and that the Company's estimate regarding the Plant's cost, at that time of $87 million, and construction period are reasonable. In April 1994, Elizabethtown notified all parties to the 1993 Plant Stipulation that the estimated cost of the Plant had increased. The 1993 Plant Stipulation also provides for a potential rate setting mechanism for the Plant during the construction period that has never been required to be triggered. Water Quality Regulations As required by the SDWA, the USEPA has established maximum contaminant levels (MCLs) for various substances found in drinking water. As authorized by similar state legislation, the NJDEP has set MCLs for certain substances which are more restrictive than the MCLs set by the USEPA. In certain cases, the USEPA and NJDEP have also mandated that certain treatment procedures be followed in addition to satisfying MCLs established for specific contaminants. The NJDEP is also the USEPA's agent for enforcing the SDWA in New Jersey and, in that capacity, monitors the activities of Elizabethtown and Mount Holly and reviews the results of water quality tests performed by Elizabethtown and Mount Holly for adherence to applicable regulations. -4- Regulations generally applicable to water utilities, including Elizabethtown and Mount Holly, include the Lead and Copper Rule (LCR), the MCLs established for various volatile organic compounds (VOCs), the MCLs proposed for radionuclides and the Surface Water Treatment Rule (SWTR). Lead and Copper Rule The LCR requires Elizabethtown and Mount Holly to test the quantity of lead and copper in drinking water at the customer's tap and, if certain contaminant levels (action levels) are exceeded, to notify customers and initiate a public information campaign advising customers how to minimize exposure to lead and copper. The LCR also requires Elizabethtown to add corrosion inhibitors to water to minimize leaching of lead from piping, faucets and soldered joints into water consumed at the tap. Results from two separate tests completed during 1992 within Elizabethtown and Mount Holly's systems do not indicate lead and copper concentrations above the action levels. Accordingly, public notification and a public information campaign have not been required. Capital projects including corrosion inhibitor facilities for Elizabethtown will be completed later in 1996. Elizabethtown has requested that the costs of compliance be recovered in rates in the Company's pending rate proceeding. Volatile Organic Compounds VOCs include various substances (primarily synthetic organic solvents) which have percolated into groundwater aquifers from surface sources. Elizabethtown has found VOCs in excess of the applicable MCLs in certain of its wells and has either suspended the use of such wells or constructed aeration towers which remove such contaminants from the water by venting them into the atmosphere. Because underground water flows are difficult to map, it is difficult to predict when and where contamination will occur in the future. To the extent that contamination in excess of applicable MCLs occurs at wells lacking aeration towers, Elizabethtown will consider building such facilities if feasible and cost effective, or closing such wells, thereby increasing its reliance on surface water. To date, Mount Holly has not been affected by VOC contamination. Radionuclides Radionuclides are naturally occurring radioactive substances (primarily radon) found in groundwater. Like VOCs, radon can be removed from groundwater using aeration towers. If the MCLs proposed for all radionuclides are finally adopted, Elizabethtown believes that it will abandon wells with aggregate production capacity of approximately 5 MGD, thereby further increasing Elizabethtown's reliance on surface water. Surface Water Treatment Rule The operation of Elizabethtown's existing Raritan-Millstone treatment plant is subject to the SWTR. Elizabethtown has assessed -5- the plant's sustainable production capacity, assuming operation consistent with the requirements of the SWTR, and determined that improvements to the existing plant are necessary. Specifically, Elizabethtown has installed additional pumps to increase capacity and reliability at peak times and has constructed a new building to house offices and lab facilities. Also, Elizabethtown is replacing existing chlorine gas disinfection facilities with liquid sodium hypochlorite to improve community and employee safety and will install corrosion inhibitor facilities in conformance with the LCR. TRANSMISSION AND DISTRIBUTION As of December 31, 1995, Elizabethtown Water Company's transmission and distribution system included 2,869 miles of transmission and distribution mains. Mains range in size up to 60 inches, substantially all of which are either ductile iron, cast iron or prestressed concrete pipe. Elizabethtown conducts an ongoing program costing approximately $1.0 million per year to clean and line its older cast iron mains. Such costs are capitalized and have been included in rate base in stipulations settling recent rate cases. As of December 31, 1995, Elizabethtown also had in service pumping equipment having capacities of 283 MGD for low lift pumping capacity, 577 MGD for system supply pumping capacity and 194 MGD for transfer booster pumping capacity. Distribution storage facilities as of December 31, 1995 consisted of standpipes, elevated and ground storage tanks and reservoirs with an aggregate capacity of 82 MG. Such pumping, transmission and storage facilities are necessary to maintain adequate water pressures throughout the service territory. Failure to maintain pressures could adversely affect domestic service and impede local fire departments' efforts to fight fires, particularly during peak summer loads. 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 is replacing certain electric pumps with natural gas fired pumps to reduce energy costs. Elizabethtown also has 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 or diesel fuel to operate its pumps and has cooperated with its electric suppliers -6- during their peak periods by operating non-electrical pumping facilities upon request. ENVIRONMENTAL MATTERS Elizabethtown and Mount Holly are also subject to regulation by the NJDEP with respect to water supply plans and specifications for the construction, improvement, alteration and operation of public water supply systems and with respect to the quality of any residuals from treatment plants. As a normal by-product of treating surface water, Elizabethtown's existing surface water treatment plant generates 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 and is presently removing some material off-site for beneficial reuse. Due to limited on-site storage capacity, Elizabethtown is investigating alternatives to dry the by-product for beneficial reuse. During the late 1980's, Elizabethtown withdrew a well field from service because of increased groundwater contamination and more stringent water quality regulations. Elizabethtown commissioned an engineering firm to determine whether it is feasible and cost effective to install treatment facilities so that those wells not presently complying with current regulations can be returned to service. The study was also intended to evaluate whether the resumption of pumping would have any effect on the local water table. The study concluded that it is possible to treat the water at this location and resume pumping at a quality and yield that is satisfactory to Elizabethtown. Elizabethtown is evaluating the cost-effectiveness of this approach in connection with a possible governmental grant to the municipality involved for such purpose. Preliminary cost estimates of treatment facilities necessary to return certain wells in this area to service are included in the Company's capital program. Under New Jersey law, environmental matters are addressed by the NJDEP before diversion allowances or other water supply projects are authorized. To date, Elizabethtown has been able to construct all plant facilities and obtain all diversion authorizations necessary to maintain customer service. Mount Holly has also been able to construct all facilities and obtain all diversion authorizations with the exception of the pending objection to the diversion permit for the Mansfield Project as discussed above. -7- FRANCHISES The property and franchises of Elizabethtown and Mount Holly are subject to rights of eminent domain of the State of New Jersey. These rights have been delegated by statutes now in effect to municipalities or groups of municipalities and have been or may be delegated to various public agencies. No such rights of eminent domain have been exercised since 1931. EMPLOYEE RELATIONS As of December 31, 1995, the Corporation had a total of 398 full-time employees, of which 210 were covered by union contracts. The contracts between the Company and the Utility Workers Union of America (A.F.L.-C.I.O.) were renegotiated on February 1, 1996 and will expire on January 31, 1999. The Company considers relations with both union and non-union employees to be satisfactory. RATE MATTERS Elizabethtown and Mount Holly are subject to regulation by the New Jersey Board of Public Utilities (BPU) with respect to the issuance and sale of securities, rates and service, classification of accounts, mergers, and other matters. Elizabethtown and Mount Holly periodically seek rate relief to cover the cost of increased operating expenses, increases in financing expenses due to additional investments in utility plant, and other costs of doing business. Elizabethtown On November 20, 1995, Elizabethtown filed with the BPU for an increase in rates of $31.6 million, or 29.6%. The largest portion of the request, $22.9 million, is needed to cover the cost to finance and operate the Plant. The remainder of the rate increase, $8.7 million, is needed to cover the cost to finance additional construction projects and to cover increases in operating expenses since rates were last established in February 1995. A decision by the BPU is expected in the summer of 1996. In light of the approval by the BPU of the 1993 Plant Stipulation and Elizabethtown's experience in obtaining base rate relief, Elizabethtown expects the BPU to grant timely and adequate rate relief, but cannot predict the ultimate outcome of any rate proceeding. As mentioned previously, the 1993 Plant Stipulation, approved in August 1993, states that the Plant is necessary and that the Company's estimates regarding the Plant's cost, at that time of $87 million, and construction period are reasonable. In addition, the 1993 Plant Stipulation authorizes the Company to levy a rate surcharge if the Company's pre-tax interest coverage ratio for any 12-month historical period drops below 2.0 times. The pre-tax interest coverage ratio has remained above the 2.0 times trigger level and therefore, the surcharge has not been required. The 1993 Plant Stipulation also provides that the rate of return on common shareholder's equity used to calculate the rate for the equity component of the AFUDC for the Plant will be 1.5% less than the rate of return on common shareholder's equity established in the Company's most recent base -8- rate case. The authorized rate of return on common shareholder's equity is currently 11.5%. In January 1995, the BPU approved a stipulation (1995 Stipulation) for Elizabethtown for a rate increase of $5.3 million or 5.34%, effective February 1, 1995. The 1995 Stipulation provides for an authorized rate of return on common equity of 11.5%. It also provides for recovery of the 1994 current service cost portion of the obligation accrued under Statement of Financial Accounting Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions," provided this amount is funded by the Company. Elizabethtown funded $.3 million in 1995 which represents the 1994 current service cost allowed in the 1995 Stipulation. The rate increase covered the cost to finance $62.0 million of construction projects since rates were last established in March 1993. These projects include treatment, transmission and storage facilities needed to ensure that Elizabethtown continues to meet federal and state regulations water quality and service. The increase also offset increased costs for power, labor and benefits, primarily medical. The 1995 Stipulations also provides for an increase in annual depreciation expense of approximately $.5 million. The 1995 Stipulation also required Elizabethtown to maintain a monthly average percentage of common equity to total capitalization of at least 45.1% for the 12 months ended January 31, 1996. The Company has met this requirement. Mount Holly On June 26, 1995, Mount Holly petitioned the BPU for an increase in rates, to take place in two phases. In the first phase rates would be increased by $.9 million and in the second phase by $2.8 million. The first phase is necessary to cover costs that were not reflected in rates last increased in October 1986. The second phase would cover the cost of the Mansfield Project as discussed above. On January 24, 1996, the BPU approved a stipulation (Mount Holly Stipulation) for an increase in rates of $.6 million effective as of that date. The Mount Holly Stipulation has, effectively, concluded the first phase of the rate proceeding. Mount Holly is continuing with the adjudicatory process with respect to the second phase of the petition. While management believes that the water supply, treatment and transmission project planned for Mount Holly is the most cost-effective response to the state legislation affecting the area, management cannot predict the ultimate outcome of the rate proceeding at this time. For information regarding additional rate matters see Note 8 to the Notes to Consolidated Financial Statements contained in Appendix I. REAL ESTATE MATTERS Properties and E'town currently own several parcels of land aggregating approximately 740 acres located in central New Jersey -9- having an original acquisition cost of approximately $8 million. A portion of this acreage was purchased from a third party and the balance was land formerly owned by Elizabethtown and no longer needed for utility purposes. These holdings are owned in fee. The Corporation has no plans to acquire additional real estate. Over the next several years, the Corporation expects to work with local and state officials to obtain various approvals to enhance the value and development potential of its real estate holdings while minimizing expenditures. Properties has entered into an agreement to sell a parcel of land to a developer. The agreement requires the buyer to obtain all approvals required by governmental agencies in order to develop the property. Properties may cancel the agreement if the closing does not occur by December 31, 1996. Other events have been established during this period, at which time either the buyer or Properties may cancel the agreement if certain criteria, generally relating to the development potential of the property, are not met. -10- Executive Officers of the Corporation and Elizabethtown Name Age Positions Held Robert W. Kean, Jr. 73 Chairman and Chief Executive Officer of the Corporation since 1985 and Elizabethtown since 1973. Henry S. Patterson, II 73 President of the Corporation since March 1985 and Properties since July 1987. Thomas J. Cawley 65 Vice Chairman of Elizabethtown since January 1996 and President of Elizabethtown and its subsidiary, Mount Holly since August 1992. Executive Vice President of Elizabethtown since January 1987 and Vice President of Mount Holly since 1973. Previously, Vice President, Operations since 1975. Andrew M. Chapman 40 Chief Financial Officer of the Corporation since August 1989 and Treasurer of the Corporation since November 1990. President of Elizabethtown since January 1996 and Executive Vice President of Elizabethtown from May 1994 to December 1995. He served as Senior Vice President of Elizabethtown from April 1993 to May 1994, Chief Financial Officer of Elizabethtown from November 1990 to December 1995 and Treasurer of Elizabethtown from August 1989 to May 1994. Prior to 1989, he was Director of the Office of Financial Management of the State of New Jersey, Department of Treasury and earlier, a Vice President at Shearson Lehman Brothers. Anne Evans Estabrook 51 Vice President of the Corporation since September 1987. Owner of the Elberon Development Co., (a real estate holding company) since 1984 and President of David O. Evans, Inc. (a construction company) since 1983. Walter M. Braswell 46 Secretary of the Corporation, Properties and Elizabethtown since December 1990 and Vice President and General Counsel of Elizabethtown since August 1988. Previously, Assistant Secretary and General Attorney of Elizabethtown since May 1983. Norbert Wagner 60 Senior Vice President-Operations of Elizabethtown since May 1992. Vice President-Operations since March 1987, Chief Engineer since October 1978. Edward F. Cash 60 Vice President - Customer Services of Elizabethtown since 1977. Assistant Vice President Customer Services since 1973. -11- ITEM 2. Properties All principal plants and other materially important units of property of Elizabethtown and Mount Holly are owned in fee. The Company considers that the properties of Elizabethtown and Mount Holly are in good operating condition. ITEM 3. Legal Proceedings As previously reported, several lawsuits had been filed against Elizabethtown and other parties in connection with a fire that occurred in a storage facility in 1989 resulting in damage to property stored at that facility. This matter was settled in 1995 resulting in a payment by Elizabethtown of approximately $.1 million. A provision for this estimated liability was previously recorded. In the opinion of management, other litigation in which the Corporation or its subsidiaries is involved is in the ordinary course of business and will not have a material adverse effect on the consolidated financial condition of the Corporation. ITEM 4. Submission of Matters to a Vote of Security Holders None 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. -12- 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
1995 1994 1993 1992 1991 _______________________________________________________________________________________ Utility Plant (Thousands) Utility Plant - net........ $507,858 $437,456 $373,293 $347,253 $319,421 Construction Expenditures (excluding AFUDC)........ 73,789 69,981 32,517 33,293 27,732 Total Assets (Thousands)... $580,808 $502,848 $437,405 $386,880 $371,103 Capitalization (Thousands) Shareholder's Equity....... $176,685 $151,624 $125,765 $103,024 $ 85,877 Preferred Stock............ 12,000 12,000 12,000 12,000 12,000 Debt (1)................... 208,952 164,951 141,952 147,841 154,984 Total Capitalization....... $397,637 $328,575 $279,717 $262,865 $252,861 Capitalization Ratios Common Stock............... 44% 46% 45% 39% 34% Preferred Stock............ 3% 4% 4% 5% 5% Debt (1)................... 53% 50% 51% 56% 61% Earnings Applicable to Common Stock (Thousands).. $ 16,512 $ 13,369 $ 13,783 $ 11,099 $ 10,311 Operating Statistics Revenues (Thousands) General Customers.......... $ 67,455 $ 62,923 $ 63,100 $ 55,570 $ 54,071 Other Water Systems........ 18,720 18,082 17,187 15,080 14,082 Industrial Wholesale....... 7,947 7,458 6,652 6,044 5,846 Fire Service/Miscellaneous. 14,276 13,570 13,057 12,473 12,087 Total Revenues............. $108,398 $102,033 $ 99,996 $ 89,167 $ 86,086 Water Sales-Millions of Gallons (mg) General Customers.......... 23,999 23,551 23,883 22,062 22,659 Other Water Systems........ 15,569 15,691 15,109 14,118 13,811 Industrial Wholesale....... 3,673 3,568 3,213 3,145 3,155 System Use and Unaccounted For 6,402 6,570 5,453 5,843 6,368 Total Water Sales 49,643 49,380 47,658 45,168 45,993 System Delivery by Source - mg Surface.................... 42,646 42,534 40,742 38,558 39,222 Wells...................... 6,764 6,690 6,776 6,480 6,658 Purchased.................. 233 156 140 130 113 Total System Delivery...... 49,643 49,380 47,658 45,168 45,993 Millions of Gallons Pumped: Average Day................ 136 135 131 123 126 Maximum Day................ 183 182 191 159 169 _______________________________________________________________________________________ (1) Includes long-term debt, notes payable and current portion of long-term debt.
-13- ITEM 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations E'town Corporation This information is included in Exhibit 13, filed herewith, and is incorporated herein by reference. Elizabethtown Water Company and Subsidiary The water utility operations of Elizabethtown Water Company (Elizabethtown or Company) and its subsidiary The Mount Holly Water Company (Mount Holly), presently constitute the major portion of E'town Corporation's (E'town or Corporation) assets and earnings. Mount Holly contributed 3% of Elizabethtown Water Company's consolidated operating revenues for 1995. E'town, a New Jersey holding company, is the parent company of Elizabethtown Water Company and E'town Properties, Inc. The following analysis sets forth significant events affecting the financial condition at December 31, 1995 and 1994, and the results of operations for the years ended December 31, 1995, 1994 and 1993 for Elizabethtown Water Company. LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures Program Capital expenditures were $73.8 million during 1995. Capital expenditures for the three-year period ending December 31, 1998, are estimated to be $148.9 million, of which $128.4 million is for Elizabethtown and $20.5 million for Mount Holly. A major portion of the capital outlays will occur in the first nine months of the three-year period as Elizabethtown completes its new water treatment plant. After this project is completed in late 1996, the capital outlays for Elizabethtown are expected to return to levels experienced in the early 1990s. Mount Holly expects to incur significant capital expenditures in 1997 as it constructs new water supply, treatment and transmission facilities as discussed below. Elizabethtown Elizabethtown's capital program includes the construction of a new water treatment plant, the Canal Road Water Treatment Plant (Plant), near Elizabethtown's existing plant. The Plant, which will have an initial rated production capacity of 40 million gallons per day (mgd) and has been designed to permit expansion to 200 mgd, is necessary to meet existing and anticipated customer demands and to replace groundwater supplies withdrawn from service as a result of more restrictive water quality regulations and groundwater contamination. Expansion of the Plant's production capacity beyond 40 mgd is not expected to occur in the foreseeable future. Elizabethtown's construction program also includes additional mains -14- and storage facilities necessary to serve existing and future customers. In April 1994, Elizabethtown executed a lump-sum contract for the construction of the Plant. The estimated cost of the Plant is approximately $100 million, excluding an Allowance for Funds Used During Construction (AFUDC). The Company has expended $83.0 million, excluding AFUDC of $7.2 million on the Plant, as of December 31, 1995. The project is proceeding on schedule, the construction contract remains on budget and the project is expected to be completed during the third quarter of 1996. In August 1993, the New Jersey Board of Public Utilities (BPU) approved a stipulation (1993 Plant Stipulation) signed by the Department of Ratepayer Advocate, the BPU staff and several of Elizabethtown's major wholesale customers, all of whom typically participate in Elizabethtown's rate cases. The 1993 Plant Stipulation states the Plant is necessary and the Company's estimate regarding the Plant's cost, at that time $87 million and construction period are reasonable. In April 1994, Elizabethtow-n notified all parties to the 1993 Plant Stipulation that the estimated cost of the Plant had increased. The 1993 Plant Stipulation authorizes Elizabethtown to levy a rate surcharge during the Plant's construction period if the Company's pre-tax interest coverage ratio for any 12-month historical period drops below 2.0 times. The pre-tax interest coverage has remained above the 2.0 times trigger level and therefore, the surcharge has not been required. The 1993 Plant Stipulation also provides that the rate of return on common shareholder's equity used to calculate the rate for the equity component of the AFUDC for the Plant will be 1.5% less than the rate of return on common shareholder's equity established in Elizabethtown's most recent base rate case. The authorized rate of return on Elizabethtown's common shareholder's equity is currently 11.5%. Elizabethtown has filed for a rate increase to reflect the financing and operating costs of the Plant which is expected to take effect when the Plant is completed later this year (see Economic Outlook). Mount Holly To ensure an adequate supply of quality water from an aquifer serving parts of southern New Jersey, state legislation requires Mount Holly, as well as other suppliers obtaining water from designated portions of this aquifer, to reduce pumpage from its wells. Mount Holly has received approval from the New Jersey Department of Environmental Protection (NJDEP) for its plan to develop a new water supply, treatment and transmission system necessary to obtain water outside the designated portion of the aquifer and to treat the water and pump it into the Mount Holly system. This is referred to as the Mansfield Project. The project is currently estimated to cost $16.5 million, excluding AFUDC, and is expected to be completed in 1997. The land for the supply and treatment facilities has been purchased and wells have been drilled and can produce the required supply. -15- Mount Holly has filed for rate relief relating to the Mansfield Project (see Economic Outlook). On October 5, 1995, the NJDEP granted Mount Holly a water allocation diversion permit for four wells that are to be the water supply for the Mansfield Project. On October 20, 1995, New Jersey-American Water Company requested, and was subsequently granted, an adjudicatory hearing on the permit. The Company and Mount Holly believe that the permit in question will be upheld but cannot predict the outcome of the objection. In the event that the objection is successful and the permit is rescinded, Mount Holly would utilize the alternative plan of purchasing water from New Jersey-American Water Company. CAPITAL RESOURCES During 1995, Elizabethtown, including Mount Holly, financed 8.4% of its capital expenditures from internally generated funds (after payment of common stock dividends). The balance was financed with a combination of proceeds from capital contributions from E'town (funded by sale of its Common Stock), tax exempt bonds issued through the New Jersey Economic Development Authority (NJEDA) and short-term borrowings under a revolving credit agreement discussed below. For the three-year period ending December 31, 1998, Elizabethtown, including Mount Holly, estimates 34% of its capital expenditures will be financed with internally generated funds (after payment of common stock dividends). The balance will be financed with a combination of capital contributions from the proceeds from the sale of E'town common stock, long-term debentures, proceeds of tax-exempt NJEDA bonds, short-term borrowings under the revolving credit agreement and other short-term financing. -The NJEDA has granted preliminary approval for the financing of almost all of Elizabethtown's and Mount Holly's major projects over the next three years, including the Plant. Elizabethtown expects to pursue tax-exempt financing to the extent that final allocations are granted by the NJEDA. The Company's senior debt is rated A3 and A by Moody's and Standard & Poor's, respectively. In June 1995, E'town issued 660,000 shares of common stock for net proceeds of $16.9 million which were used to fund an equity contribution to Elizabethtown. The equity contribution has been used to repay short-term debt that had been issued under Elizabethtown's revolving credit agreement to partially fund the Company's capital program, the predominant portion of which relates to the construction of the Plant. During 1995, 248,846 shares of common stock were issued for proceeds of $6.4 million under E'town's Dividend Reinvestment and Stock Purchase Plan (DRP). The proceeds are used on an ongoing basis to make capital contributions to Elizabethtown to partially fund its capital program. In December 1995, Elizabethtown issued $40.0 million of 5.60% tax-exempt Debentures through the NJEDA. The proceeds of the issue -16- were used to repay amounts outstanding under Elizabethtown's revolving credit agreement. During 1995, Elizabethtown obtained a portion of funds required for its capital program through borrowings under its revolving credit agreement (Agreement) with an agent bank and five additional banks. The Agreement provides up to $60.0 million in revolving short-term financing, which together with internal funds, other short-term financing, proceeds of future issuances of debt and preferred stock and capital contributions from E'town, is expected to be sufficient to finance Elizabethtown's and Mount Holly's capital needs through 1998. The Agreement allows Elizabethtown to borrow, repay and reborrow up to $60.0 million during the first three years, after which time Elizabethtown may convert any outstanding balances to a five-year fully amortizing term loan. The Agreement further provides that, among other covenants, Elizabethtown must maintain a percentage of common and preferred equity to total capitalization of not less than 35% and a pre-tax interest coverage ratio of at least 1.5 to 1. As of December 31, 1995, the percentage o-f Elizabethtown's common and preferred equi-ty to total capitalization, calculated in accordance with the Agreement, was 47%. For the 12 months ended December 31, 1995, Elizabethtown's pre-tax interest coverage ratio, calculated in accordance with the Agreement, was 3.12 to 1. At December 31, 1995, Elizabethtown had borrowings outstanding of $27.0 million under the Agreement at interest rates from 5.75% to 6.00%, at a weighted average rate of 5.94%. 1994 and 1993 In May 1994, E'town issued 690,000 shares of common stock for net proceeds of $18.2 million. The net proceeds were used to fund an equity contribution to Elizabethtown of $16.0 million. This contribution had been used to partially fund Elizabethtown's construction program, the predominant portion of which related to the Plant. During 1994, 273,159 shares of common stock were issued for proceeds of $7.1 million under E'town's DRP. The proceeds were used to make capital contributions to Elizabethtown to partially fund its capital program. In March 1994, Elizabethtown issued 120,000 shares of $100 par value, $5.90 Cumulative Preferred Stock for proceeds of $12.0 million at an effective rate of 7.37%. The proceeds were used to redeem $12.0 million of the Company's $8.75 Cumulative Preferred Stock. The redemption premium of $1.0 million was paid from general Company funds. In May 1993, E'town issued 575,000 shares of common stock for net proceeds of $16.6 million. The net proceeds were used to fund equity contributions to Elizabethtown of $11.0 million in May 1993 and $2.8 million in September 1993. Elizabethtown used a portion of such contributions to repay $7.0 million of short-term bank debt incurred for construction expenditures and invested the balance on a short-term basis to fund working capital requirements. -17- During 1993, 200,878 shares of common stock were issued for proceeds of $6.0 million under E'town's DRP. Such proceeds were used to fund equity contributions to Elizabethtown, primarily for Elizabethtown's capital expenditures. In November 1993, Elizabethtown issued $50.0 million of 7 1/4% Debentures due November 1, 2028. The proceeds of the issue were used to redeem $30.0 million of the Company's 8 5/8% Debentures due 2007 and $20.0 million of the Company's 10 1/8% Debentures due 2018. The aggregate redemption premiums of $2.7 million were paid from general Company funds. RESULTS OF OPERATIONS Earnings Applicable to Common Stock for 1995 were $16.5 million as compared to $13.4 million for 1994. The combined effect of a $5.3 million rate increase in February 1995 (discussed below), increases in AFUDC in 1995 and a non-recurring charge in 1994 all contributed to the increase between 1994 and 1995. Earnings Applicable to Common Stock for 1994 were $13.4 million as compared to $13.8 million for 1993. A return to more normal summer weather and water consumption patterns, the combined effect of a non-recurring charge in 1994, and increases in operating and depreciation expenses since March 1993, when rates were last increased, all contributed to the decrease between 1993 and 1994. Operating Revenues increased $6.4 million or 6.2% in 1995. Of this increase, $4.6 million relates to the rate increase, discussed below, effective February 1995. Increased consumption by retail customers and an increase in the number of customers increased revenues by $1.4 million. Revenues from industrial customers resulting from consumption increased $.2 million while revenues from other water systems resulting from consumption decreased $.2 million. Revenues from fire service customers increased $.4 million. Operating Revenues increased $2.0 million or 2.0% in 1994. Of this increase, $1.2 million relates to a rate increase discussed below, effective March 1993. Sales to retail customers related to consumption decreased by $.9 million, primarily due to a return to more normal weather patterns during the spring and summer months of 1994, compared to 1993. However, despite the return to more normal weather patterns, sales to other water systems and to large industrial customers related to consumption increased by $.6 million and $.7 million, respecti-vely. Due to normal growth within the service territory, fire service revenues increased by $.4 million. Operation Expenses increased $2.4 million or 5.9% in 1995. The increase is due, primarily, to increased costs for labor, benefits and the cost of purchased water calculated in accordance with a Purchased Water Adjustment Clause (PWAC) (see Note 8 to the Notes to Consolidated Financial Statements.) Benefit costs increased due to increases in the actuarially calculated pension expense and the cost of postemployment benefits, a portion of which is being expensed in -18- 1995 as it is recognized in rates pursuant to the 1995 Stipulation effective February 1995 (see Economic Outlook). Operation Expenses increased $2.2 million or 5.7% in 1994. The increase is due, primarily, to increased costs for labor, benefits, miscellaneous expenses and the unit cost of raw water purchased from the New Jersey Water Supply Authority (NJWSA), which is reflected in the PWAC, in addition to the cost of chemicals to treat such water. Benefit costs increased due, primarily, to an increase in the actuarially calculated pension expense. Maintenance Expenses decreased $.8 million or 12.4% in 1995. The decrease is due, primarily, to the absence in 1995 of the unusually harsh winter weather that occurred in 1994. Also, the results of preventive maintenance programs have contributed to an overall decrease in maintenance expenses. Maintenance Expenses increased $.9 million or 15.9% in 1994 due, primarily, to the effects of unusually harsh winter weather in the first quarter of 1994, in addition to an increased level of preventive maintenance at various operating facilities throughout the Company. Depreciation Expense increased $.9 million or 12.1% in 1995 and $.6 million or 7.9% in 1994 due, primarily, to additional depreciable plant being placed in service during those periods. Also, an increase in authorized depreciation rates as a result of the 1995 Stipulation, effective February 1995, accounted for $.4 million of the increase. Revenue Taxes increased $.8 million or 6.6% in 1995 and $.2 million or 2.0% in 1994, due to additional taxes on the higher revenues discussed above. Real Estate, Payroll and Other Taxes increased $.1 million or 2.0% and $.2 million or 8.1% in 1995 and 1994, respectively, due to increased payroll taxes resulting from labor cost increases. Federal Income Taxes increased $.8 million or 11.5% in 1995 and decreased $.5 million or 6.3% in 1994 due to changes in the components of taxable income discussed herein. In addition, in 1995 Elizabethtown received tax refunds related to the years 1984 and 1985 of $.1 million. Other Income increased $1.7 million in 1995 due, primarily, to an increase in the equity component of AFUDC of $1.8 million and a non-recurring litigation settlement of $.9 million in 1994 as discussed below. These increases were offset by the federal income taxes associated with the various components. Other Income decreased less than $.1 million in 1994. Included in this net decrease is a litigation settlement of $.9 million (see Note 11 to the Notes to Consolidated Financial Statements.) In addition, increases in the equity component of AFUDC of $.7 million resulted from increased construction expenditures, primarily related to the Plant. Other increases of $.3 million resulted from -19- miscellaneous items. Federal income taxes, as a result of all of the above, decreased less than $.1 million. Total Interest Charges increased $.7 million or 6.8% in 1995 due, primarily, to an increase in interest expense of $2.1 million on increased borrowings under Elizabethtown's revolving credit agreement to finance the Company's ongoing capital program, the largest component of which is the Plant. This amount was offset by an increase in the debt component of AFUDC of $1.6 million, also primarily related to the construction of the Plant. In addition, in 1995 Elizabethtown received interest on tax refunds related to 1984 and 1985 of $.1 million. Total Interest Charges decreased $1.0 million or 9.1% in 1994 due, primarily, to savings from refinancing of long-term debt in 1993. Also, an increase in the debt component of AFUDC of $.5 million resulted in a reduction of interest expense. Preferred Stock Dividends decreased less than $.1 million due to savings from the refinancing of the $8.75 series preferred stock with $5.90 series preferred stock in March 1994. ECONOMIC OUTLOOK Earnings for Elizabethtown and Mount Holly for the next several years will be determined primarily by Elizabethtown's and Mount Holly's ability to obtain adequate and timely rate relief in connection with their additions to utility plant. Elizabethtown and Subsidiary Over the last several years, governmental water quality and service regulations have required Elizabethtown and Mount Holly to make significant investments in water supply, water treatment, transmission and storage facilities, including the Plant and the Mansfield Project, to augment existing facilities. This capital program is requiring regular external financing and rate relief. Currently, Elizabethtown and Mount Holly believe they are in compliance with all water quality standards in all material respects. In November 1995, Elizabethtown filed for a $31.6 million or 29.6% rate increase primarily to cover the financing and operating costs of the Plant. While Mount Holly received a $.6 million or 19.9% rate increase effective January 1996, deliberations regarding the portion of the rate case related to the Mansfield Project, in which Mount Holly is requesting an additional 84.2% rate increase, are ongoing and awaiting the award of the final water diversion permit. Accordingly, the timing and amount of rate increases obtained by Elizabethtown and Mount Holly, in response to the pending rate requests, will be a major factor affecting earnings in 1996 and beyond. Once the new facilities, referred to above, are constructed and reflected in rates, Elizabethtown expects its internally generated cash flow to increase and capital outlays to return to levels experienced in the early 1990's. As a result, the need for external -20- financing and rate relief should become less frequent. Therefore, more so than in recent years, management's ongoing efforts to grow unit sales and control operating cost will benefit the customer by reducing the frequency of rate increases and will benefit shareholders by positively affecting earnings. On November 20, 1995, Elizabethtown filed a petition with the BPU for an increase in rates of $31.6 million, or 29.6%. The largest portion of the request, $22.9 million, is needed to cover the costs to finance and operate the Plant. The remainder of the rate increase, $8.7 million, is needed to cover the cost to finance additional construction projects and to cover increases in operating expenses since rates were last established in February 1995. A decision by the BPU is expected in the summer of 1996. In light of the approval by the BPU of the 1993 Plant Stipulation and Elizabethtown's experience in obtaining base rate relief, Elizabethtown expects the BPU to grant timely and adequate rate relief, but cannot predict the ultimate outcome of any rate proceeding. In January 1995, the BPU approved a stipulation (1995 Stipulation) for Elizabethtown for a rate increase of $5.3 million or 5.34%, effective February 1, 1995. The 1995 Stipulation provides for an authorized rate of return on common equity of 11.5%. It also provides for recovery of the 1994 current service cost portion of the obligation accrued under Statement of Financial Accounting Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions," provided this amount is funded by the Company. Elizabethtown funded $.3 million in 1995, which represents the 1994 current service cost allowed in the 1995 Stipulation. The rate increase is covering the cost to finance $62.0 million of construction projects since rates were last established in March 1993. These projects include treatment, transmission and storage facilities needed to ensure that Elizabethtown continues to meet federal and state regulations on water quality and service. The increase is also offsetting increased costs for power, labor and benefits, primarily medical. The 1995 Stipulation also provides for an increase in depreciation rates resulting in an increase in annual depreciation expense of approximately $.5 million. The 1995 Stipulation also required Elizabethtown to maintain a monthly average percentage of common equity to total capitalization of at least 45.1% for the 12 months ended January 31, 1996. The Company has met this requirement. On June 26, 1995, Mount Holly petitioned the BPU for an increase in rates, to take place in two phases. In the first phase rates would be increased by $.9 million and in the second phase by $2.8 million. The first phase is necessary to cover costs that were not reflected in rates last increased in October 1986. The second phase would cover the cost of the Mansfield Project as discussed above. The project is currently estimated to cost $16.5 million. Construction is expected to begin upon final issuance of the water allocation diversion permit from the NJDEP, and the project is expected to be completed in 1997. -21- On January 24, 1996, the BPU approved a stipulation (Mount Holly Stipulation) for an increase in rates of $.6 million effective as of that date. The Mount Holly Stipulation has, effectively, concluded the first phase of the rate proceeding. Mount Holly is continuing with the adjudicatory process with respect to the second phase of the petition. While management believes that the water supply, treatment and transmission project planned for Mount Holly is the most cost-effective response to the state legislation affecting the area, management cannot predict the ultimate outcome of the rate proceeding at this time. New Accounting Pronouncement See Note 2 of the Notes to Consolidated Financial Statements for a discussion of a new accounting standard that will become effective in 1996. -22- 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 on pages 2 through 19 of Appendix I included herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to directors of E'town and Elizabethtown is included in E'town's Proxy Statement for the 1996 Annual Meeting of Stockholders, and is incorporated herein by reference. Information regarding the executive officers of both E'town and Elizabethtown follows Item 1 in Part I of this Form 10-K. Item 11. Executive Compensation This information for E'town and Elizabethtown is included in E'town's Proxy Statement for the 1996 Annual Meeting of Stockholders, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management This information is included in E'town's Proxy Statement for the 1996 Annual Meeting of Stockholders, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions This information for E'town and Elizabethtown is included in E'town's Proxy Statement for the 1996 Annual Meeting of Stockholders, and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report: -23- 1. Financial Statements: Elizabethtown Water Company Statements of Consolidated Income for the years ended December 31, 1995, 1994 and 1993. Consolidated Balance Sheets as of December 31, 1995 and 1994. Statements of Consolidated Capitalization as of December 31, 1995 and 1994. Statement of Consolidated Shareholder's Equity for the years ended December 31, 1995, 1994 and 1993. Statements of Consolidated Cash Flows for the years ended December 31, 1995, 1994 and 1993. Notes to Consolidated Financial Statements. E'town Corporation A portion of the 1995 Annual Report to Shareholders which includes Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Other Financial and Statistical Data is filed herewith as Exhibit 13 and is herein incorporated by reference. Elizabethtown Water Company Elizabethtown Water Company's consolidated financial statements and notes thereto are included herein on pages 2 through 19 of Appendix I. E'town and Elizabethtown Water Company The Independent Auditors' Reports for E'town and Elizabethtown Water Company appear on page 28 herein and page 1 of Appendix I, respectively. 2. Financial Statement Schedules: -24- All financial schedules required to be filed contain the same data and amounts for both E'town and Elizabethtown Water Company, except for Supplemental Schedule of Property, Plant and Equipment, which includes property, plant and equipment for each company. Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1995, 1994 and 1993. Supplemental Schedule of Property, Plant and Equipment at December 31, 1995 and 1994. Other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or the notes accompanying each company's financial statements. 3. Exhibits (a) Exhibits for E'town and Elizabethtown Water Company are listed in the Exhibit Index. (b) Reports on Form 8-K: None -25- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 29, 1996 E'TOWN CORPORATION By: /s/ Robert W. Kean, Jr. _________________________ Chairman, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 29, 1996. Chairman, Chief Executive Officer and Director /s/ Robert W. Kean, Jr. _________________________ President and Director /s/ Henry S. Patterson, II _________________________ Vice President and Director /s/ Anne Evans Estabrook _________________________ Chief Financial Officer, Treasurer and Director /s/ Andrew M. Chapman _________________________ (Principal Financial & Accounting Officer) Director /s/ Brendan T. Byrne _________________________ Director /s/ Thomas J. Cawley _________________________ Director /s/ John Kean _________________________ Director /s/ Robert W. Kean III _________________________ Director /s/ Arthur P. Morgan _________________________ Director /s/ Barry T. Parker _________________________ Director /s/ Hugo M. Pfaltz, Jr. _________________________ Director /s/ Chester A. Ring III _________________________ -26- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 29, 1996 ELIZABETHTOWN WATER COMPAY By: /s/ Robert W. Kean, Jr. __________________________ Chairman, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 29, 1996. Chairman, Chief Executive Officer and Director /s/ Robert W. Kean, Jr. __________________________ Vice Chairman and Director /s/ Thomas J. Cawley __________________________ President and Director /s/ Andrew M. Chapman __________________________ Vice President - Finance & Treasurer /s/ Gail P. Brady __________________________ (Principal Financial Officer) Controller /s/ Dennis W. Doll __________________________ (Principal Accounting Officer) Director /s/ Brendan T. Byrne __________________________ Director /s/ Anne Evans Estabrook __________________________ Director /s/ John Kean __________________________ Director /s/ Robert W. Kean III __________________________ Director /s/ Arthur P. Morgan __________________________ Director /s/ Barry T. Parker __________________________ Director /s/ Henry S. Patterson, II __________________________ Director /s/ Hugo M. Pfaltz, Jr. __________________________ Director /s/ Chester A. Ring III __________________________ -27- INDEPENDENT AUDITORS' REPORT E'TOWN CORPORATION: We have audited the consolidated financial statements of E'town Corporation and its subsidiaries as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, and have issued our report thereon dated February 15, 1996; such consolidated financial statements and report are included in your 1995 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 February 15, 1996 Parsippany, New Jersey -28- E'TOWN CORPORATION SCHEDULE II ELIZABETHTOWN WATER COMPANY VALUATION AND QUALIFYING ACCOUNTS COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ________ ________ ________ ________ ________ ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD _____________ _________ ___________ __________ ___________ Reserve for Uncollectible Accounts: Year Ended December 31, 1995 $463,000 $600,648 (A) $531,648 $532,000 Year Ended December 31, 1994 $434,000 $552,459 (A) $523,459 $463,000 Year Ended December 31, 1993 $377,000 $571,116 (A) $514,116 $434,000 _________________________________ (A) Write-off of uncollectible accounts, net of recoveries. ____________________________________________________________________________ SUPPLEMENTAL SCHEDULE E'TOWN CORPORATION ELIZABETHTOWN WATER COMPANY PROPERTY, PLANT AND EQUIPMENT AT DECEMBER 31, 1995 AND 1994 1995 1994 _________ _________ ELIZABETHTOWN WATER COMPANY: ____________________________ UTILITY PLANT IN SERVICE: Intangible Plant $ 250,766 $ 250,766 Source of Supply Plant 10,073,447 9,739,125 Pumping Plant 44,838,866 43,658,801 Water Treatment Plant 53,070,107 46,008,913 Transmission & Distribution Plant 378,216,166 354,703,279 General Plant 15,373,329 14,068,349 Leasehold Improvements 117,186 110,954 Acquisition Adjustments 632,388 632,388 ____________ ____________ Utility Plant in Service 502,572,255 469,172,575 Construction Work in Progress 100,212,636 55,739,951 ____________ ____________ Total Utility Plant 602,784,891 524,912,526 NON-UTILITY PROPERTY - net 83,178 85,690 ____________ ____________ TOTAL $602,868,069 $524,998,216 ____________ ____________ ____________ ____________ E'TOWN CORPORATION: ___________________ UTILITY PLANT (as above) $602,784,891 $524,912,526 NON-UTILITY PROPERTY - net 12,151,496 12,061,574 ____________ ____________ TOTAL $614,936,387 $536,974,100 ____________ ____________ ____________ ____________ EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk(*), are filed herewith. The exhibits not so designated have heretofore been filed with the Commission and are incorporated herein by reference to the documents indicated in brackets following the description of such exhibits. E'town Corporation Exhibit No. Description 3(a) - Certificate of Incorporation of E'town Corp. [Registration Statement No. 33-42509, Exhibit 4(a)] 3(b) - By-Laws of E'town Corp. [Form 10-K for the year 1994, Exhibit 3(b)] 3(c) - Certificate of Incorporation of E'town Properties, Inc. [Registration Statement No. 33-32143, Exhibit 4(j)] 3(d) - By-Laws of E'town Properties, Inc. [Registration Statement No. 33-32143, Exhibit 4(n)] 4(a) - Rights Agreement dated as of February 4, 1991 between E'town and the Rights Agent [Registration Statement No. 33-38566, Exhibit 4(n)] 4(b) - Indenture dated as of January 1, 1987 from E'town Corporation to Boatmen's Trust, Trustee, relating to the 6 3/4% Convertible Subordinated Debentures due 2012 [Registration Statement No. 33-32143, Exhibit 4(a)] 10(a) - Incentive Stock Option Plan [Registration Statement No. 2-99602, Exhibit 28(a)] 10(b) - Savings and Investment Plan - 401(k) [Form 10-K for the year 1994, Exhibit 10(b)] 10(c) - Management Incentive Plan [Registration Statement No. 33-38566, Exhibit 10(i)] 10(d) - E'town's 1987 Stock Option Plan [Registration Statement No. 33-42509, Exhibit 28] Exhibit No. Description 10(e) - E'town's 1990 Performance Stock Program [Registration Statement No. 33-46532, Exhibit 10(k)] 10(f) - E'town's Dividend Reinvestment and Stock Purchase Plan [Registration No. 33-56013, Exhibit 4(e)] 10(g) - Change of Control Agreement [Form 10-Q for the quarter ended March 31, 1995, Exhibit 10] *11 - Statement Regarding Computation of Per Share Earnings *13 - Portion of the 1995 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. *23 - Consent of Deloitte & Touche LLP, Independent Auditors *27 - E'town Corporation - Financial Data Schedule 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. 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 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)] Exhibit No. Description 4(g) - Indenture dated as of December 1, 1989 from Elizabethtown Water Company to Citibank, N.A., Trustee, relating to the 7.20% Debentures due 2019 [Registration Statement No. 33-38566, Exhibit 4(f)] *4(h) - Indenture dated as of December 1, 1995 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 5.60% Debentures due 2025 10(a) - Contract for service to Middlesex Water Company. [Registration Statement No. 33-38566, Exhibit 10(a)] 10(b) - Contract for service to Edison Township. [Registration Statement No. 2-58262, Exhibit 13(c)] 10(c) - Contract for service to New Jersey-American Water Company. [Form 10-K for the year ended December 31, 1993, Exhibit 10(c)] 10(d) - Contract for service to City of Elizabeth. [Form 10-K for the year ended December 31, 1992, Exhibit 10(d)] 10(e) - Contract for service to Franklin Township. [Registration Statement No. 33-46532, Exhibit 10(e)] 10(f) - Contract with the New Jersey Water Supply Authority for the purchase of water from the Raritan Basin. [Registration Statement No. 33-32143, Exhibit 10(e)] 10(g) - Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1992, Exhibit 10(g)] 10(h) - Medical Reimbursement Plan of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1992, Exhibit 10(h)] 10(i) - Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-Q for the year ended September 30, 1995, Exhibit 10] Exhibit No. Description *12(a) - Computation of Ratio of Earnings to Fixed Charges *12(b) - Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends * 27 - Elizabethtown Water Company - Financial Data Schedule. APPENDIX I ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND INDEPENDENT AUDITORS' REPORT APPENDIX I ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY __________________________________________ TABLE OF CONTENTS ______________________________________________________________________ INDEPENDENT AUDITORS' REPORT STATEMENTS OF CONSOLIDATED INCOME FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1994 STATEMENTS OF CONSOLIDATED CAPITALIZATION AS OF DECEMBER 31, 1995 AND 1994 STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ______________________________________________________________________ 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, 1995 and 1994, and the related consolidated statements of income, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1995. 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 the 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 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 February 15, 1996 Parsippany, New Jersey -1- Elizabethtown Water Company and Subsidiary APPENDIX I Statements of Consolidated Income Year Ended December 31, ________________________________________ 1995 1994 1993 _____________ _____________ ____________ Operating Revenues $108,398,105 $102,032,505 $99,996,120 ____________ ____________ ____________ Operating Expenses: Operation 43,132,400 40,722,980 38,529,149 Maintenance 5,805,511 6,623,772 5,716,157 Depreciation 8,808,169 7,860,180 7,285,309 Revenue taxes 13,591,212 12,748,161 12,501,804 Real estate, payroll and other taxes 2,771,716 2,717,067 2,513,891 Federal income taxes (Note 3) 8,002,292 7,176,396 7,658,770 ____________ ____________ ___________ Total operating expenses 82,111,300 77,848,556 74,205,080 ____________ ____________ ___________ Operating Income 26,286,805 24,183,949 25,791,040 ____________ ____________ ___________ Other Income: Litigation settlement (Note 11) (932,203) Gain on sale of land 122,400 Allowance for equity funds used during construction (Note 2) 2,976,290 1,178,133 445,339 Federal income taxes (Note 3) (1,159,218) (237,599) (258,024) Other-net 335,763 432,922 169,474 ____________ ____________ ___________ Total other income 2,152,835 441,253 479,189 ____________ ____________ ___________ Total Operating and Other Income 28,439,640 24,625,202 26,270,229 ____________ ____________ ___________ Interest Charges: Interest on long-term debt 10,892,129 10,774,008 11,527,301 Other interest expense-net 2,343,903 175,507 77,921 Capitalized interest (Note 2) (2,445,093) (867,101) (391,895) Amortization of debt discount-net 323,557 319,646 224,383 ____________ ____________ ___________ Total interest charges 11,114,496 10,402,060 11,437,710 ____________ ____________ ___________ Income Before Preferred Stock Dividends 17,325,144 14,223,142 14,832,519 Preferred Stock Dividends 813,000 854,047 1,050,000 ____________ ____________ ___________ Earnings Applicable to Common Stock $ 16,512,144 $ 13,369,095 $13,782,519 ____________ ____________ ___________ ____________ ____________ ___________ See Notes to Consolidated Financial Statements. -2- Elizabethtown Water Company and Subsidiary APPENDIX I Consolidated Balance Sheets December 31, ___________________________ Assets 1995 1994 ____________ ____________ Utility Plant-at Original Cost: Utility plant in service $502,572,255 $469,172,575 Construction work in progress 100,212,636 55,739,951 ____________ ____________ Total utility plant 602,784,891 524,912,526 Less accumulated depreciation and amortization 94,926,413 87,456,550 ____________ ____________ Utility plant-net 507,858,478 437,455,976 ____________ ____________ Non-utility Property 83,178 85,690 ____________ ____________ Current Assets: Cash and cash equivalents 3,796,757 1,485,115 Customer and other accounts receivable (less reserve: 1995, $532,000; 1994, $463,000) 16,943,725 12,350,802 Unbilled revenues 7,443,656 7,161,483 Materials and supplies-at average cost 1,912,015 1,724,969 Prepaid insurance, taxes, other 1,874,338 1,410,401 Prepaid federal income taxes 1,344,630 ____________ ____________ Total current assets 31,970,491 25,477,400 ____________ ____________ Deferred Charges (Note 7): Prepaid pension expense (Note 10) 580,534 926,142 Waste residual management 970,182 546,490 Unamortized debt and preferred stock expenses 9,384,609 8,902,271 Taxes recoverable through future rates (Note 3) 26,427,627 26,339,057 Postretirement benefit expense (Note 10) 2,900,569 2,077,051 Purchased water under recovery - net 37,316 314,128 Other unamortized expenses 594,875 723,709 ____________ ____________ Total deferred charges 40,895,712 39,828,848 ____________ ____________ Total $580,807,859 $502,847,914 ____________ ____________ ____________ ____________ See Notes to Consolidated Financial Statements. -3- Elizabethtown Water Company and Subsidiary APPENDIX I Consolidated Balance Sheets December 31, ____________________________ Capitalization and Liabilities 1995 1994 ____________ ____________ Capitalization (Notes 4 and 5): Common shareholder's equity $176,684,773 $151,624,255 Cumulative preferred stock 12,000,000 12,000,000 Long-term debt-net 181,922,528 141,908,430 ____________ ____________ Total capitalization 370,607,301 305,532,685 ____________ ____________ Current Liabilities: Notes payable-banks (Note 5) 27,000,000 23,000,000 Long-term debt-current portion (Note 4) 30,000 42,000 Accounts payable and other liabilities 16,723,904 18,165,522 Customers' deposits 305,349 278,895 Municipal and state taxes accrued 13,661,620 12,831,524 Federal income taxes accrued 533,286 Interest accrued 2,937,637 2,828,464 Preferred stock dividends accrued 59,000 59,000 ____________ ____________ Total current liabilities 61,250,796 57,205,405 ____________ ____________ Deferred Credits: Customer advances for construction 45,460,749 45,554,476 Federal income taxes (Note 3) 64,886,448 60,109,244 Unamortized investment tax credits 8,448,811 8,650,537 Accumulated postretirement benefits (Note 10) 2,900,569 2,077,051 ____________ ____________ Total deferred credits 121,696,577 116,391,308 ____________ ____________ Contributions in Aid of Construction 27,253,185 23,718,516 ____________ ____________ Commitments and Contingent Liabilities (Note 9) ____________ ____________ Total $580,807,859 $502,847,914 ____________ ____________ ____________ ____________ See Notes to Consolidated Financial Statements. -4- Elizabethtown Water Company and Subsidiary APPENDIX I Statements of Consolidated Capitalization December 31, ____________________________ 1995 1994 ____________ ____________ Common Shareholder's Equity (Notes 4 and 5): Common stock without par value, authorized, 10,000,000 shares; issued 1995 and 1994, 1,974,902 shares $ 15,740,602 $ 15,740,602 Paid-in capital 112,157,348 88,868,632 Capital stock expense (484,702) (484,702) Retained earnings 49,271,525 47,499,723 ____________ ____________ Total common shareholder's equity 176,684,773 151,624,255 ____________ ____________ Cumulative Preferred Stock (Note 4): $100 par value, authorized, 200,000 shares; $5.90 series, issued and outstanding, 120,000 shares 12,000,000 12,000,000 ____________ ___________ Cumulative Preferred Stock: $25 par value, authorized, 500,000 shares; none issued Elizabethtown Water Company: 7.20% Debentures, due 2019 10,000,000 10,000,000 7 1/2% Debentures, due 2020 15,000,000 15,000,000 6.60% Debentures, due 2021 10,500,000 10,500,000 6.70% Debentures, due 2021 15,000,000 15,000,000 8 3/4% Debentures, due 2021 27,500,000 27,500,000 8% Debentures, due 2022 15,000,000 15,000,000 5.60% Debentures, due 2025 40,000,000 7 1/4% Debentures, due 2028 50,000,000 50,000,000 The Mount Holly Water Company: Notes Payable (due serially through 2000) 117,500 144,300 ____________ ____________ Total long-term debt 183,117,500 143,144,300 Unamortized discount-net (1,194,972) (1,235,870) ____________ ____________ Total long-term debt-net 181,922,528 141,908,430 ____________ ____________ Total capitalization $370,607,301 $305,532,685 ____________ ____________ ____________ ____________ See Notes to Consolidated Financial Statements. -5- Elizabethtown Water Company and Subsidiary APPENDIX I Statements of Consolidated Shareholder's Equity Year Ended December 31, _______________________________________ 1995 1994 1993 ____________ ___________ ___________ Common Stock: $ 15,740,602 $ 15,740,602 $ 15,740,602 ____________ ____________ ____________ Paid-in Capital: Balance at Beginning of Year 88,868,632 63,522,594 43,713,297 Capital contributed by parent company 23,288,716 25,346,038 19,809,297 ____________ ____________ ____________ Balance at End of Year 112,157,348 88,868,632 63,522,594 ____________ ____________ ____________ Capital Stock Expense: (484,702) (484,702) (484,702) ____________ ____________ ____________ Retained Earnings: Balance at Beginning of Year 47,499,723 46,986,485 44,054,327 Income Before Preferred Stock Dividends 17,325,144 14,223,142 14,832,519 Dividends on Common Stock (14,740,342) (12,855,857) (10,850,361) Preferred Stock Dividends (813,000) (854,047) (1,050,000) ____________ ____________ ____________ Balance at End of Year 49,271,525 47,499,723 46,986,485 ____________ ____________ ____________ Total Common Shareholder's Equity $176,684,773 $151,624,255 $125,764,979 ____________ ____________ ____________ ____________ ____________ ____________ See Notes to Consolidated Financial Statements. -6- Elizabethtown Water Company and Subsidiary APPENDIX I Statements of Consolidated Cash Flows Year Ended December 31, _____________________________________ 1995 1994 1993 ___________ ___________ ___________ Cash Provided by Operating Activities: Income Before Preferred Stock Dividends $ 17,325,144 $ 14,223,142 $ 14,832,519 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 8,808,169 7,860,180 7,285,309 Gain on sale of land (122,400) Decrease (increase) in deferred charges 327,562 (169,459) 260,600 Deferred income taxes and investment tax credits-net 4,486,908 4,256,534 3,332,558 Allowance for debt and equity funds used during construction (AFUDC) (5,421,383) (2,045,234) (837,234) Other operating activities-net (61,590) (130,902) (449,792) Change in current assets and liabilities excluding cash, short-term investments and current portion of debt: Customer and other accounts receivable (4,592,923) (462,817) (840,485) Unbilled revenues (282,173) 86,839 (688,601) Accounts payable and other liabilities (1,415,164) 8,517,848 669,078 Accrued/prepaid interest and taxes 2,353,248 (1,464,787) 232,741 Other (187,046) (101,266) (6,870) ____________ ____________ ____________ Net cash provided by operating activities 21,340,752 30,570,078 23,667,423 ____________ ____________ ____________ Cash Provided by Financing Activities: Decrease in funds held by Trustee for construction expenditures 382,306 8,519,877 Proceeds from issuance of debentures 40,000,000 50,000,000 Proceeds from issuance of preferred stock 12,000,000 Redemption of preferred stock (12,000,000) Debt and preferred stock issuance costs (482,338) (876,594) (3,139,571) Capital contributed by parent company 23,288,716 25,346,038 19,809,297 Repayment of long-term debt (38,800) (42,000) (50,042,000) Contributions and advances for construction-net 3,440,942 3,453,604 1,909,905 Net increase (decrease) in notes payable-banks 4,000,000 23,000,000 (5,500,000) Dividends paid on common and preferred stock (15,448,342) (13,631,154) (11,900,361) ____________ ____________ ____________ Net cash provided by financing activities 54,760,178 37,632,200 9,657,147 ____________ ____________ ____________ Cash Used for Investing Activities: Utility plant expenditures (excluding AFUDC) (73,789,288) (69,980,619) (32,501,865) Proceeds from sale of land 131,000 ____________ ____________ ____________ Net cash used for investing activities (73,789,288) (69,980,619) (32,370,865) ____________ ____________ ____________ Net Increase (Decrease) in Cash and Cash Equivalents 2,311,642 (1,778,341) 953,705 Cash and Cash Equivalents at Beginning of Year 1,485,115 3,263,456 2,309,751 ____________ ____________ ____________ Cash and Cash Equivalents at End of Year$ 3,796,757 $ 1,485,115 $ 3,263,456 ____________ ____________ ____________ ____________ ____________ ____________ Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 7,833,355 $ 9,952,838 $ 11,837,347 Income taxes 4,158,093 6,771,254 5,881,008 Preferred stock dividends $ 708,000 $ 805,475 $ 1,050,000 See Notes to Consolidated Financial Statements. -7- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Elizabethtown Water Company (Elizabethtown or Company) and its wholly owned subsidiary, The Mount Holly Water Company (Mount Holly), is a wholly owned subsidiary of E'town Corporation (E'town or Corporation). E'town, a New Jersey holding company, is the parent company of Elizabethtown Water Company and E'town Properties, Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include Elizabethtown and its subsidiary, Mount Holly. Significant intercompany accounts and transactions have been eliminated. Elizabethtown and Mount Holly are regulated water utilities and follow the Uniform System of Accounts, as adopted by the New Jersey Board of Public Utilities (BPU). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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 generally is computed on a straight-line basis at functional rates for various classes of assets. The provision for depreciation, as a percentage of average depreciable property, was 1.83% for 1995, 1.75% for 1994 and 1.74% for 1993. The 1995 rate case (see Note 8) allowed an increase in depreciation rates effective February 1, 1995. Allowance for Funds Used During Construction Elizabethtown and Mount Holly capitalize, as an appropriate cost of utility plant, an Allowance for Funds Used During Construction (AFUDC), which represents the cost of financing major projects during construction. AFUDC, a non-cash credit on the Statements of Consolidated Income, is added to the construction cost of the project and included in rate base and then recovered in rates during the project's useful life. AFUDC is comprised of a debt component (credited to Interest Charges), and an equity component (credited to Other Income) in the Statements of Consolidated Income. AFUDC totaled $5,421,383, $2,045,234 and $837,234 for 1995, 1994 and 1993, respectively (see Note 8). -8- Revenues Revenues are recorded based on the amounts of water delivered to customers through the end of each accounting period. This includes an accrual for unbilled revenues for water delivered from the time meters were last read to the end of the respective accounting periods. Federal Income Taxes Elizabethtown Water Company files a consolidated federal tax return with E'town. Deferred income taxes are provided for timing differences in the recognition of revenues and expenses for tax and financial statement purposes to the extent permitted by the BPU. Elizabethtown and Mount Holly account for prior years' investment tax credits by the deferral method, which amortizes the credits over the lives of the respective assets. Customer Advances for Construction and Contributions in Aid of Construction Customer Advances for Construction and Contributions in Aid of Construction represent capital provided by developers for main extensions to new real estate developments. Some portion of Customer Advances for Construction is refunded based upon the revenues that the new developments generate. Contributions in Aid of Construction are Customer Advances for Construction 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 Pronouncement In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," which is effective in 1996. The statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The resultant impairment, if any, would be measured based on the fair value of the asset. The Company believes that the adoption of SFAS 121 will not have any effect on the Company's results of operations or financial position. Reclassification Certain prior year amounts have been reclassified to conform to the current year's presentation. -9- 3. FEDERAL INCOME TAXES The computation of federal income taxes and the reconciliation of the tax provision computed at the federal statutory rate (35%) with the amount reported in the Statements of Consolidated Income follow: 1995 1994 1993 ------------------------- (Thousands of Dollars) Tax expense at statutory rate $9,270 $7,573 $7,962 Items for which deferred taxes are not provided: Capitalized interest (2) (2) Difference between book and tax depreciation 133 92 81 Investment tax credits (204) (209) (208) Other (37) (40) 84 ----------------------- Provision for federal income taxes $9,162 $7,414 $7,917 ======================= The provision for federal income taxes is composed of the following: Current $6,409 $5,087 $5,926 Tax collected on main extensions (1,734) (1,931) (1,341) Deferred: Tax depreciation 3,492 3,366 3,222 Capitalized interest 800 384 72 Main cleaning and lining 405 396 323 Other (8) 314 (91) Investment tax credits-net (202) (202) (194) ----------------------- Total provision $9,162 $7,414 $7,917 ======================= Effective January 1, 1993, the Company adopted SFAS 109, "Accounting for Income Taxes." SFAS 109 established accounting rules that changed the manner in which income tax expense is determined for accounting purposes. SFAS 109 utilizes a liability method under which deferred taxes are provided at the enacted statutory rate for all temporary differences between financial statement earnings amounts and the tax basis of existing assets or liabilities. In connection with the adoption of SFAS 109, Elizabethtown and Mount Holly recorded additional deferred taxes for water utility temporary differences not previously recognized. The increased deferred tax liability was offset by a corresponding asset representing the future revenue expected to be recovered through rates based on established regulatory practice permitting such recovery. In accordance with SFAS 109, deferred tax balances have been reflected at E'town's current consolidated federal income tax rate, which is 35%. -10- The tax effect of significant temporary differences representing deferred income tax assets and liabilities as of December 31, 1995 and 1994 is as follows: 1995 1994 --------------------- (Thousands of Dollars) Water utility plant-net $(56,956) $(53,517) Taxes recoverable through future rates (9,250) (9,219) Investment tax credit 2,957 3,028 Prepaid pension expense (203) (324) Capitalized interest (1,308) (508) Other assets 654 557 Other liabilities (780) (126) ------------------- Net deferred income tax liabilities $(64,886) $(60,109) =================== In 1995 Elizabethtown received tax refunds and interest related to the years 1984 and 1985 that contributed to an increase in net income of $206,948. 4. CAPITALIZATION In June 1995, E'town issued 660,000 shares of common stock for net proceeds of $16,863,860. The gross proceeds of $17,737,500 were used to fund equity contributions to Elizabethtown totalling $16,900,000. These equity contributions have been used to repay short-term debt that had been issued under Elizabethtown's revolving credit agreement (see below) to partially fund the Company's capital program, the predominant portion of which relates to the construction of the Canal Road Water Treatment Plant (Plant) (see Note 9). In May 1994, E'town issued 690,000 shares of common stock for net proceeds of $18,218,471. The net proceeds were used to fund an equity contribution to Elizabethtown of $16,000,000. This contribution had been used to partially fund Elizabethtown's construction program, the predominant portion of which related to the Plant. 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). E'town contributed $6,388,716 and $7,146,038 in 1995 and 1994, respectively, to Elizabethtown from the proceeds of DRP issuances. Cumulative Preferred Stock In March 1994, Elizabethtown issued 120,000 shares of $100 par value, $5.90 Cumulative Preferred Stock for proceeds of $12,000,000 at an effective rate of 7.37%. The proceeds were used to redeem $12,000,000 of the Company's $8.75 Cumulative Preferred Stock. The redemption premium of $1,050,000 was paid from general Company funds and is being amortized over 10 years for ratemaking purposes. The $5.90 Cumulative Preferred Stock is not redeemable at the option of Elizabethtown. Elizabethtown is required to redeem all 120,000 shares of the Preferred Stock on March 1, 2004 at $100 per share. 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 -11- common stock, all of which is held by E'town. At December 31, 1995, $7,753,084 of Elizabethtown's retained earnings were restricted under the most restrictive indenture provision. Therefore, $35,241,659 of E'town's consolidated retained earnings were unrestricted. In December 1995, Elizabethtown issued $40,000,000 of 5.60% tax-exempt debentures through the New Jersey Economic Development Authority (NJEDA). The proceeds of the issue were used to repay amounts outstanding under a revolving credit agreement (see Note 5). 5. LINES OF CREDIT In 1994, Elizabethtown executed a committed revolving credit agreement (Agreement) with an agent bank and five additional banks that replaced the Company's uncommitted lines of credit. The Agreement provides up to $60,000,000 in revolving short-term financing, which together with internal funds, other short-term financing, proceeds of future issuances of debt and preferred stock by Elizabethtown and capital contributions from E'town, is expected to be sufficient to finance Elizabethtown's and Mount Holly's capital needs, which are estimated to be $148,905,000 through 1998. At December 31, 1995, Elizabethtown had outstanding borrowings of $27,000,000 under the Agreement at interest rates from 5.75% to 6.00%, at a weighted average rate of 5.94%. The Agreement allows Elizabethtown to borrow, repay and reborrow up to $60,000,000 during the first three years, after which time Elizabethtown may convert any outstanding balances to a five-year, fully amortizing term loan. The Agreement further provides that, among other covenants, Elizabethtown must maintain a percentage of common and preferred equity to total capitalization of not less than 35% and a pre-tax interest coverage ratio of at least 1.5 to 1. As of December 31, 1995, the percentage of Elizabethtown's common and preferred equity to total capitalization, as calculated in accordance with the Agreement, was 47%. For the 12 months ended December 31, 1995, Elizabethtown's pre-tax interest coverage ratio, calculated in accordance with the Agreement, was 3.12 to 1. Elizabethtown has $17,000,000 of uncommitted lines of credit with several banks in addition to the lines under the Agreement. Information relating to bank borrowings for 1995, 1994 and 1993 is as follows: 1995 1994 1993 ------------------------------- (Thousands of Dollars) Maximum amount outstanding.......... $60,000 $23,000 $7,000 Average monthly amount outstanding.. $39,636 $ 2,958 $2,062 Average interest rate at year end... 5.9% 6.1% (A) Compensating balances at year end... $ 0 $ 0 $ 195 Weighted average interest rate based on average daily balances.......... 6.2% 5.7% 3.8% (A) No outstanding bank borrowings at year end. -12- 6. FINANCIAL INSTRUMENTS The carrying amounts and the estimated fair values, as of December 31, 1995 and 1994, of financial instruments issued or held by the Company, are as follows: 1995 1994 ------------------------ (Thousands of Dollars) Cumulative preferred stock (1): Carrying amount $ 12,000 $ 12,000 Estimated fair value 11,940 10,860 Long-term debt (1): Carrying amount $181,923 $141,908 Estimated fair value 189,664 129,355 (1) Estimated fair values are based upon quoted market prices for these or similar securities. 7. REGULATORY ASSETS AND LIABILITIES Certain costs incurred by Elizabethtown and Mount Holly which have been deferred have been recognized as regulatory assets and are being amortized over various periods as set forth below: 1995 1994 ----------------------- (Thousands of Dollars) Waste residual management $ 970 $ 546 Unamortized debt and preferred stock expense 9,385 8,902 Taxes recoverable through future rates (Note 3) 26,428 26,339 Postretirement benefit expense (Note 10) 2,901 2,077 Purchased water under recovery-net (Note 8) 37 314 ------------------- Total $39,721 $38,178 =================== Waste Residual Management The costs of disposing of the waste generated by Elizabethtown's and Mount Holly's water treatment plants are being amortized over three-year periods for ratemaking and financial statement purposes. No return is being earned on these deferred balances. 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 over the lives of 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 over a 10-year period for ratemaking and financial statement purposes. There were no regulatory liabilities at December 31, 1995 or 1994. 8. REGULATORY MATTERS Rates Elizabethtown On November 20, 1995, Elizabethtown filed a petition with the BPU for an increase in rates of $31,634,500 or 29.6%. The largest portion of the request, $22,925,227, is to cover the cost to finance and operate the Plant (see Note 9). The remainder of the rate request, $8,709,273 -13- is needed to cover the cost to finance additional construction projects and to cover increases in operating expenses since rates were last established in February 1995. A decision by the BPU is expected in the summer of 1996. In light of the approval by the BPU of the 1993 Plant Stipulation (discussed below) and Elizabethtown's experience in obtaining base rate relief, Elizabethtown expects the BPU to grant timely and adequate rate relief, but cannot predict the ultimate outcome of any rate proceeding. In February 1996, Elizabethtown filed a petition with the BPU for a decrease in rates of $390,318 under a Purchased Water Adjustment Clause (PWAC). This procedure, established by BPU rules, allows Elizabethtown to reflect in rates a change in the cost of water purchased from the New Jersey Water Supply Authority (NJWSA) without a complete rate case. The purpose of this request is to reflect in rates the expected decrease in the rate for water purchased by Elizabethtown from the NJWSA effective July 1, 1996. In August 1993, the BPU approved a stipulation (1993 Plant Stipulation) signed by the Department of Ratepayer Advocate, the BPU staff and several of Elizabethtown's major wholesale customers, all of whom typically participate in Elizabethtown's rate cases. The 1993 Plant Stipulation states that the Plant is necessary and that the Company's estimates regarding the Plant's cost ($87,000,000 at that time) and construction period are reasonable (see Note 9). In April 1994, Elizabethtown notified all parties to the 1993 Plant Stipulation that the estimated cost of the Plant had increased. The 1993 Plant Stipulation authorizes the Company to levy a rate surcharge during the Plant's construction period if the Company's pre-tax interest coverage ratio for any 12-month historical period drops below 2.0 times. The 1993 Plant Stipulation also provides that the rate of return on common shareholder's equity used to calculate the rate for the equity component of the AFUDC for the Plant will be 1.5% less than the rate of return on common shareholder's equity established in the Company's most recent base rate case. The authorized rate of return on common shareholder's equity is currently 11.5%. In January 1995, the BPU approved a stipulation (1995 Stipulation) for Elizabethtown for a rate increase of $5,300,000, or 5.34%, effective February 1, 1995. The 1995 Stipulation provides for an authorized rate of return on common equity of 11.5%. It also provides for recovery of the current service cost portion of the obligation accrued under SFAS 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions," provided this amount is funded by the Company (see Note 10). The rate increase is covering the cost to finance $62,000,000 of construction projects that were not reflected in the rates established in March 1993. These projects include treatment, transmission and storage facilities needed to ensure that Elizabethtown continues to meet federal and state regulations on water quality and service. The increase is also offsetting increased costs for power, labor and benefits, primarily medical. The 1995 Stipulation also provides for an increase in depreciation rates resulting in an increase in depreciation expense of approximately $469,000. The 1995 Stipulation also required Elizabethtown to maintain a percentage of common equity to total capitalization of at least 45.1% for the 12 months ended January 31, 1996. The Company has met this requirement. On July 7, 1995, the BPU approved a Stipulation for a decrease in rates under a PWAC. The Stipulation resulted in a decrease in rates -14- for the PWAC, effective July 13, 1995 of $348,527. This Stipulation reflects the decrease in rates for water purchased from the NJWSA. In June 1994, the BPU approved a Stipulation for an increase in rates under a PWAC. The Stipulation resulted in an increase in rates, effective July 1, 1994, of $334,611, reflecting the increase in rates for water purchased from the NJWSA. Mount Holly On June 26, 1995, Mount Holly petitioned the BPU for an increase in rates, to take place in two phases. In the first phase rates would be increased by $851,171 and in the second phase by $2,794,002. The first phase is necessary to cover costs that were not reflected in rates last increased in October 1986. The second phase would cover the cost of a new water supply, treatment and transmission system necessary to obtain water outside a designated portion of an aquifer currently used by Mount Holly and to treat and pump the water into the Mount Holly distribution system. Management believes this project is the most cost-effective alternative available to Mount Holly to comply with recent state legislation which restricts the amount of water that can be withdrawn from an aquifer in certain areas of southern New Jersey. The project is currently estimated to cost $16,500,000. The land for the supply and treatment facilities has been purchased and wells have been drilled and can produce the required supply. On October 5, 1995, the New Jersey Department of Environmental Protection granted Mount Holly a water allocation diversion permit for four wells that are to be the water supply for the Mansfield Project. On October 20, 1995, New Jersey-American Water Company requested, and was subsequently granted, an adjudicatory hearing on the permit. The Company and Mount Holly believe that the permit in question will be upheld, but cannot predict the outcome of the objection. In the event that the objection is successful and the permit is rescinded, Mount Holly would utilize the alternative plan of purchasing water from New Jersey-American Water Company. On January 24, 1996, the BPU approved a stipulation (Mount Holly Stipulation) for an increase in rates of $550,000, effective as of that date. The Mount Holly Stipulation has, effectively, concluded the first phase of the rate proceeding. Mount Holly is continuing with the process with respect to the second phase of the petition. While management believes that the water supply, treatment and transmission system planned for Mount Holly is the most cost-effective response to the state legislation affecting the area, we cannot predict the ultimate outcome of the rate proceeding at this time. Main Extension Refunds Previous disclosures have detailed events surrounding several lawsuits filed by developers with respect to the BPU's suggested refund formula for particular main extension agreements. The BPU's formula suggests refunds of 2 1/2 times annual revenues for each metered connection for water service. The plaintiffs had received refunds in accordance with this suggested formula. The initial petitions by the developers and the related litigation have been ongoing since 1984 with numerous BPU decisions, Appellate Division decisions and a New Jersey Supreme Court decision. -15- In June 1995, the New Jersey Supreme Court once again reviewed these matters and declined to hear the final appeal of the developers. Effectively, the BPU's suggested refund formula has been reaffirmed and therefore no refunds in excess of the 2 1/2 times revenues formula are required by the Company. Based upon the New Jersey Supreme Court's decision, the plaintiffs have withdrawn their suits. 9. COMMITMENTS Elizabethtown is obligated, under a contract that expires in 2013, to purchase from the NJWSA a minimum of 37 billion gallons of water annually. The Company purchases additional water from the NJWSA on an as-needed basis. Effective July 1, 1996, the annual cost under the contract will be $7,861,486. The total cost of water purchased from the NJWSA, including additional water purchased on an as-needed basis, was $9,344,792, $8,987,472 and $8,819,212 for 1995, 1994 and 1993, respectively. The following is a schedule by years of future minimum rental payments required under noncancelable operating leases with terms in excess of one year at: December 31, ---------------------- (Thousands of Dollars) 1996 $ 909 1997 859 1998 12 1999 -0- 2000 -0- ------ Total $1,780 ====== Rent expense totaled $820,481, $829,562 and $789,636 for 1995, 1994 and 1993, respectively. Capital expenditures through 1998 are estimated to be $148,905,000 for Elizabethtown's and Mount Holly's utility plant. Canal Road Water Treatment Plant In April 1994, following a competitive bidding process, Elizabethtown executed a lump-sum contract for the construction of the Canal Road Water Treatment Plant. The project is currently estimated to cost $100,000,000, excluding AFUDC. The project is being completed on schedule and the construction contract is on budget. The Company has expended $82,952,434, excluding AFUDC of $7,167,396, on the Plant as of December 31, 1995. Construction is expected to be completed in the third quarter of 1996. 10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan), which covers most employees. Under the Company's funding policy, the Company makes contributions that meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. -16- The components of the net pension costs (credits) are as follows: 1995 1994 1993 ------------------------- (Thousands of Dollars) Service cost--benefits earned during the year .. $ 915 $1,052 $ 899 Interest cost on projected benefit obligation .. 2,156 1,946 1,973 Return on Plan assets .......................... (7,587) 939 (1,409) Net amortization and deferral .................. 4,862 (3,860) (1,658) ------------------------- Net pension costs (credits) .................... $ 346 $ 77 $ (195) ========================= Plan assets are invested in publicly traded debt and equity securities. The reconciliations of the funded status of the Plan to the amounts recognized in the Consolidated Balance Sheets are presented below: 1995 1994 ---------------------- (Thousands of Dollars) Market value of Plan assets $36,957 $30,810 Actuarial present value of Plan benefits: ---------------- Vested benefits 25,986 20,776 Non-vested benefits 101 157 ---------------- Accumulated benefit obligation 26,087 20,933 Projected increases in compensation levels 7,877 5,642 ---------------- Projected benefit obligation 33,964 26,575 Excess of Plan assets over projected benefit ---------------- obligation 2,993 4,235 Unrecognized net gain (620) (1,337) Unrecognized prior service cost 363 451 Unrecognized transition asset (2,156) (2,423) ---------------- Prepaid pension expense $ 580 $ 926 ================ The assumed rates used in determining the actuarial present value of the projected benefit obligations were as follows: 1995 1994 1993 ------------------------ Discount rate 7.00% 8.00% 7.00% Compensation increase 5.50% 5.50% 5.50% Rate of return on Plan assets 9.00% 8.50% 8.50% The Company provides certain health care and life insurance benefits for substantially all of its retired employees. As a result of a contract negotiated in February 1996 with the Company's bargaining unit, all union and non-union employees retiring after January 1, 1997 will pay 25% of future increases in the premiums the Company pays for postretirement medical benefits. Effective January 1, 1993, the Company adopted SFAS 106. Under SFAS 106, the costs of postretirement benefits are accrued for each year the employee renders service, based on the expected cost of providing such benefits to the employee and the employee's beneficiaries and covered dependents, rather than expensing these benefits on a pay-as-you-go basis for retired employees. -17- Based upon an independent actuarial study, the transition obligation, calculated under SFAS 106, was $7,214,736 as of January 1, 1993. The transition obligation is being amortized over 20 years. The following table details the postretirement benefit obligation at December 31: 1995 1994 ---------------------- (Thousands of Dollars) Retirees $2,404 $2,457 Fully eligible plan participants 6,263 5,080 ----------------- Accumulated postretirement benefit obligation 8,667 7,537 Plan assets at fair value (320) 0 Unrecognized net gain 685 1,033 Unrecognized transition obligation (6,131) (6,493) ----------------- Accrued postretirement benefit obligation $2,901 $2,077 ================= The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1995, and for 1995, was 12%. This rate decreases linearly each successive year until it reaches 5% in 2005, after which the rate remains constant. The assumed rates used in determining the actuarial present value of the projected benefit obligations were as follows: 1995 1994 1993 ------------------------- Discount rate 7.00% 8.00% 7.00% A single percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1995, and net postretirement service and interest cost by approximately $1,260,000 and $250,000, respectively. Based upon the independent actuarial study referred to above, the annual postretirement cost calculated under SFAS 106 is as follows: 1995 1994 1993 ---------------------------- (Thousands of Dollars) Service cost - benefits earned during the year $ 474 $ 369 $ 249 Interest cost on accumulated postretirement benefit obligation 579 592 602 Amortization of transition obligation 360 361 361 --------------------------------- Total 1,413 1,322 1,212 Deferred amount for regulated companies pending recovery (824) (1,072) (1,005) --------------------------------- Net postretirement benefit expense $ 589 $ 250 $ 207 ================================= The rate increases allowed by the 1995 Stipulation and the Mount Holly Stipulation include as an allowable expense the pay-as-you-go portion of postretirement benefits as well as the current service cost, and require that the current service cost be funded. Elizabethtown funded $318,222 in 1995. These stipulations allow Elizabethtown and Mount Holly to defer the amount accrued in excess of these amounts for consideration in future rate cases. Generally accepted accounting principles permit this regulatory treatment, provided deferrals are not accumulated for a period of more than five years. As of December 31, 1995, the amount that has been deferred is $2,900,569. Recovery of Elizabethtown's deferred postretirement costs has been requested in Elizabethtown's recent rate case. Management believes that Elizabethtown -18- and Mount Holly will recover the deferred postretirement costs in future rates. 11. LEGAL MATTERS As reported in 1994, a developer asserted in a suit filed in 1991 against Elizabethtown that the Company failed to install facilities necessary to provide water service to a new development in a timely manner. In November 1994, the Company settled this matter by paying the developer $1,750,000. As part of the settlement, the developer agreed that part of this payment represented a refund of funds deposited under a main extension loan agreement for the construction of the facilities. In addition, the Company applied a portion of the settlement against an insurance reserve. The effect on 1994 earnings was $932,203 or $605,932 net of federal income taxes. The Company is seeking recovery from its insurance carriers. As previously reported, several lawsuits had been filed against Elizabethtown and other parties in connection with a fire that occurred in a storage facility in 1989 resulting in damage to property stored at that facility. This matter has been settled in 1995 resulting in a payment by Elizabethtown of $114,250. A provision for this estimated liability was previously recorded. 12. RELATED PARTY TRANSACTIONS The Company enters into various transactions with E'town and E'town Properties, Inc. Elizabethtown provides administrative and accounting services to these affiliates with are billed on a monthly basis. Elizabethtown is billed for financial services by E'town. The total of all intercompany billings was $469,548, $426,944 and $278,191 for 1995, 1994 and 1993, respectively. In addition, various expenditures are made to vendors which are common to the entities. Each entity absorbs its proportionate share of these costs. 13 QUARTERLY FINANCIAL DATA (Unaudited) A summary of financial data for each quarter of 1995 and 1994 follows: Income Before Earnings Operating Operating Preferred Applicable Quarter Revenues Income Stock Dividends to Common Stock ------------------------------------------------------------------------ (Thousands of Dollars Except Per Share Amounts) 1995 1st $25,174 $ 5,906 $ 3,653 $3,449 2nd 27,101 6,542 4,377 4,174 3rd 30,451 8,085 5,720 5,517 4th 25,672 5,754 3,575 3,372 ----------------------------------------------------- Total $108,398 $26,287 $17,325 $16,512 ===================================================== 1994 1st $ 24,657 $ 5,579 $ 3,082 $2,832 2nd 25,208 5,945 3,484 3,281 3rd 27,370 6,976 4,093 3,890 4th 24,798 5,684 3,564 3,366 ----------------------------------------------------- Total $102,033 $24,184 $14,223 $13,369 ===================================================== Water utility revenues are subject to a seasonal fluctuation due to normal increased consumption during the third quarter of each year. -19- EX-4 2 EXHIBIT 4(h) ----------------------------------------------------------- ELIZABETHTOWN WATER COMPANY TO THE BANK OF NEW YORK, TRUSTEE ----------- INDENTURE Dated as of December 1, 1995 -------------- 5.60% Debentures due 2025 ----------------------------------------------------------- TABLE OF CONTENTS/1 Page PARTIES................................................................... 1 RECITALS.................................................................. 1 Purpose of Indenture................................................... 1 Form of Debenture...................................................... 1 Compliance with legal requirements..................................... 6 ARTICLE ONE. Definitions. SECTION 1.01. Certain terms; other terms defined in Trust Indenture Act of 1939 or by reference therein in Securities Act of 1933, as amended, to have meanings therein assigned........................................ 6 Authority.......................................................... 7 Board of Directors................................................. 7 Board Resolution................................................... 7 Company............................................................ 7 Debenture or Debentures; "outstanding" with reference to Debentures..................................... 7 Debentureholder.................................................... 7 Event of Default................................................... 8 Indenture.......................................................... 8 Loan Agreement..................................................... 8 Officers' Certificate.............................................. 8 Opinion of Counsel................................................. 8 Person............................................................. 8 Principal Corporate Trust Office of the Trustee...................................................... 8 Project............................................................ 9 Responsible Officer................................................ 9 Revenue Bonds...................................................... 9 Revenue Bond Indenture............................................. 9 Revenue Bond Trustee............................................... 9 Trustee............................................................ 9 Trust Indenture Act of 1939........................................ 9 Other defined terms................................................ 10 - -------- /1 This Table of Contents does not constitute part of the Indenture and is not to have any bearing upon the interpretation of any of its terms or provisions. -i- ARTICLE TWO. Description, Execution and Exchange of Debentures. SECTION 2.01. Maturity of Debentures............................ 10 SECTION 2.02. Form of Debentures................................ 10 SECTION 2.03. Date of Debentures and denominations.............. 10 SECTION 2.04. Execution and authentication of Debentures....................................................... 11 SECTION 2.05. Exchange, registration and transfer of Debentures.................................................... 11 SECTION 2.06. Mutilated, destroyed, lost or stolen Debentures....................................................... 12 SECTION 2.07. Cancellation of surrendered Debentures....................................................... 13 SECTION 2.08. Provisions of Indenture and Debentures for sole benefit of parties and Debentureholders..................................... 13 SECTION 2.09. CUSIP Numbers..................................... 13 ARTICLE THREE. Issue of Debentures. SECTION 3.01. Amount, authentication and delivery of Debentures.................................................... 14 ARTICLE FOUR. Redemption of Debentures. SECTION 4.01. Redemption of Debentures.......................... 14 SECTION 4.02. Redemption of part only of Debentures....................................................... 15 Notice of intention to redeem...................................... 15 SECTION 4.03. When called Debentures become due and payable...................................................... 15 SECTION 4.04. When interest ceases on called Debentures....................................................... 15 ARTICLE FIVE. Particular Covenants of the Company. SECTION 5.01. Payment of principal of and interest on Debentures.................................................... 16 -ii- SECTION 5.02. Maintenance and designation of office or agency for registration of transfer, exchange and payment of Debentures.................................................... 16 SECTION 5.03. Appointment to fill vacancy in office of Trustee ..................................................... 17 SECTION 5.04. Appointment of paying agent other than Trustee..................................................... 17 SECTION 5.05. Company not to incur debt, with certain exceptions............................................... 18 Definition of "Property Additions"................................. 19 SECTION 5.06. Company covenants it will not mortgage, pledge or permit any other lien, with certain exceptions, upon any of its property now owned or here- after acquired without securing the Debentures....................................................... 21 Covenants of the Company in the event of merger, consolidation or sale................................. 22 Definition of "Excepted Property".................................. 24 SECTION 5.07. Limitations on dividends.......................... 24 SECTION 5.08. Special provision for retirement of Debentures....................................................... 24 SECTION 5.09. Company to file Compliance Certificate with Trustee annually............................................ 26 SECTION 5.10. Company to deliver documents...................... 26 ARTICLE SIX. Debentureholders' Lists and Reports by the Company and the Trustee. SECTION 6.01. Company to furnish Trustee information as to names and addresses of Debentureholders................................................. 27 SECTION 6.02. ................................................. 27 SECTION 6.03. ................................................. 27 SECTION 6.04. ................................................. 27 ARTICLE SEVEN. Remedies of the Trustee and Debentureholders on Event of Default. SECTION 7.01. Events of Default defined......................... 27 Acceleration of maturity upon Event of Default................................................. 28 Waiver of default and rescission of declaration of maturity.......................................... 28 -iii- SECTION 7.02. Covenant of Company to pay to Trustee whole amount due on Debentures on default in payment of interest or principal........................................................ 29 Trustee may remove judgment for whole amount due on Debentures on failure of Company to pay................................................ 30 Filing of proof of claim by Trustee in bankruptcy, reorganization, receivership, or other judicial proceedings...................................................... 30 SECTION 7.03. Application of moneys collected by Trustee.......................................................... 31 SECTION 7.04. Limitation on suits by holders of Debentures....................................................... 32 SECTION 7.05. Delay or omission in exercise of rights not waiver of default..................................... 33 SECTION 7.06. ........................................... 33 SECTION 7.07. ........................................... 33 SECTION 7.08. ........................................... 33 ARTICLE EIGHT. Concerning the Trustee. SECTION 8.01. Duties of Trustee prior to and after Event of Default................................................. 33 SECTION 8.02. Except as otherwise provided in Section 8.01:.................................................... 33 (a) Trustee may rely on documents believed genuine and properly signed or presented............................... 33 (b) Sufficient evidence by certain instruments provided for.......................... 34 (c) Trustee may act on Opinion of Counsel........................................... 34 (d) Trustee may require indemnity from Debentureholders.................................. 34 (e) Trustee not liable for actions in good faith believed to be authorized........................................ 34 (f) Investigation of facts by Trustee................. 34 (g) Trustee may act through agents.................... 34 (h) Trustee not required to risk own funds............................................. 35 SECTION 8.03. Trustee not liable for recitals in Indenture or in Debentures....................................... 35 Trustee not accountable for use of Debentures or proceeds........................................... 35 SECTION 8.04. Trustee, paying agent or Debenture registrar may own Debentures..................................... 35 -iv- SECTION 8.05. Moneys received by Trustee to be held in trust.................................................... 35 SECTION 8.06. Trustee entitled to compensation, reimbursement and indemnity...................................... 35 Obligations to Trustee to be secured by lien prior to Debentures...................................... 36 SECTION 8.07. Right of Trustee to rely on Officers' Certificate where no other evidence specifically prescribed.......................................... 36 SECTION 8.08. Calculation of percentages of securities....................................................... 36 SECTION 8.09. Requirements for eligibility of Trustee.......................................................... 37 SECTION 8.10. (a) Resignation of Trustee..................... 37 (b) Removal of Trustee by Company or by court on Debentureholder's application....................................... 37 (c) Removal of Trustee by holders of majority in principal amount of Debentures........................................ 38 (d) Time when resignation or removal of Trustee effective.............................. 38 SECTION 8.11. Acceptance by successor to Trustee................ 38 SECTION 8.12. Successor to Trustee by merger, consolidation or succession to business......................................................... 39 SECTION 8.13............................................................... 39 ARTICLE NINE. Concerning the Debentureholders. SECTION 9.01. Evidence of action by Debenture- holders.......................................................... 40 SECTION 9.02. Proof of execution of instruments and holding of Debentures........................................ 40 SECTION 9.03. Who may be deemed owners of Debentures....................................................... 40 SECTION 9.04. Debentures owned by Company or controlled or controlling companies disregarded for certain purposes................................. 40 SECTION 9.05. Action by Debentureholders bind future holders................................................... 41 -v- ARTICLE TEN. Debentureholders' Meetings. SECTION 10.01 Purposes for which meetings may be called........................................................... 41 SECTION 10.02. Manner of calling meetings........................ 42 SECTION 10.03. Call of meetings by Company or Debentureholders................................................. 42 SECTION 10.04. Who may attend and vote at meetings............... 42 SECTION 10.05. Regulations may be made by Trustee................ 42 SECTION 10.06. Manner of voting at meetings and record to be kept................................................ 43 SECTION 10.07. Exercise of rights of Trustee or Debentureholders may not be hindered or delayed by call of meeting of Debentureholders................................................. 44 ARTICLE ELEVEN. Supplemental Indentures. SECTION 11.01 Purposes for which supplemental indentures may be entered into with- out consent of Debentureholders.................................. 44 SECTION 11.02 Modification of Indenture with consent of holders of more than 50% in principal amount of Debentures................................... 45 SECTION 11.03. Effect of supplemental indentures................. 46 SECTION 11.04. Debentures may bear notation of changes.......................................................... 46 SECTION 11.05. Opinion of Counsel................................ 46 ARTICLE TWELVE. Consolidation, Merger and Sale. SECTION 12.01. Consolidation or merger of Company and sale or conveyances of property of Company permitted............................................. 46 Assumption of obligations of Company by successor company or transferee............................... 47 SECTION 12.02. Rights and duties of successor corporation...................................................... 47 Appropriate changes may be made in phraseology and form of Debentures............................... 47 Company may consolidate or merge into itself or acquire properties of other corporations............................................... 47 -vi- SECTION 12.03. Opinion of Counsel................................ 48 ARTICLE THIRTEEN. Satisfaction and Discharge of Indenture; Deposited Moneys. SECTION 13.01. Satisfaction and discharge of Indenture........................................................ 48 SECTION 13.02 Application by Trustee of funds deposited for payment of Debentures....................................................... 49 SECTION 13.03. Repayment of moneys held by paying agent............................................................ 49 SECTION 13.04. Payment of deposited money to Company after lapse of time...................................... 49 ARTICLE FOURTEEN. Immunity of Incorporators, Stockholders, Officers, Trustees and Directors. SECTION 14.01. Incorporators, stockholders, officers, trustees and directors of Company exempt from individual liability................................. 50 ARTICLE FIFTEEN. Miscellaneous Provisions. SECTION 15.01. Successors and assigns of Company bound by Indenture............................................... 51 SECTION 15.02. Acts of board, committee or officer of successor corporation valid................................... 51 SECTION 15.03. Surrender of powers by Company.................... 51 SECTION 15.04. Required notices or demands may be served by mail................................................... 51 SECTION 15.05. Indenture and Debentures to be construed in accordance with laws of State of New York............................................. 51 SECTION 15.06. Officers' Certificate and Opinion of Counsel to be furnished upon applications or demands by Company............................... 51 SECTION 15.07. Payments due on Sundays or holidays............... 52 SECTION 15.08. Provisions required by Trust Indenture Act of 1939 to control................................. 53 SECTION 15.09. Effect of invalidity of provisions................ 53 -vii- SECTION 15.10. Indenture may be executed in counter- parts............................................................ 53 ACCEPTANCE OF TRUST........................................................ 54 TESTIMONIUM................................................................ 55 -viii- INDENTURE, dated as of December 1, 1995, between ELIZABETHTOWN WATER COMPANY, a corporation duly organized and existing under and by virtue of the laws of the State of New Jersey (hereinafter sometimes called the "Company"), party of the first part, and THE BANK OF NEW YORK, a New York banking corporation (hereinafter sometimes called the "Trustee"), party of the second part. WHEREAS, the Company is empowered to issue debentures for any of the objects and purposes of the Company; WHEREAS, for its lawful corporate purposes, the Company has duly authorized an issue of debentures designated 5.60% Debentures - due 2025 (hereinafter referred to as the "Debentures"), in an aggregate principal amount of $40,000,000, to be issued under and pursuant to the provisions hereof; and WHEREAS, the Debentures and the Trustee's certificate of authentication to be borne by the Debentures are to be substantially in the following forms, respectively: [FORM OF DEBENTURE] [FACE] $___________________ No. _______________ ELIZABETHTOWN WATER COMPANY 5.60% Debenture - due 2025 ELIZABETHTOWN WATER COMPANY, a corporation duly organized and existing under the laws of the State of New Jersey (herein referred to as the "Company"), for value received, hereby promises to pay to ______________________, or registered assigns, on December 1, 2025 or upon the earlier redemption hereof as hereinafter provided, the principal sum of ______________________ Dollars in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest thereon at the rate per annum specified in the title of this Debenture, in like coin or currency, semi-annually on June 1 and December 1 in each year, until payment of said principal sum has been made or duly provided for, from the most recent interest payment date to which interest has been paid or duly provided for (unless the date hereof is the date to which interest on the Debentures has been paid or duly provided for in which case from the date of this Debenture) or if no interest has been paid or duly provided for on the Debentures from December 1, 1995. Principal and interest shall be paid at the principal corporate trust office of The Bank of New York, New York, New York or at the office of the Company, Westfield, New Jersey, or at the duly designated office of any duly appointed alternate or successor paying agent. Reference is hereby made to the further provisions of this Debenture set forth on the reverse hereof, and such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Debenture shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture. IN WITNESS WHEREOF, ELIZABETHTOWN WATER COMPANY has caused this Debenture to be signed in its corporate name by its President or one of its Vice Presidents by his signature or a facsimile thereof and by its Secretary or one of its Assistant Secretaries by his signature or a facsimile thereof, and its corporate seal, or a facsimile thereof, to be impressed or imprinted hereon. ELIZABETHTOWN WATER COMPANY By___________________________ President. (Seal) By___________________________ Secretary. -2- [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] Dated: December __, 1995 This is one of the Debentures described in the within-mentioned Indenture. THE BANK OF NEW YORK, as Trustee, By___________________________ Authorized Signatory. [REVERSE] ELIZABETHTOWN WATER COMPANY 5.60% Debenture - due 2025 This Debenture is one of a duly authorized issue of Debentures of the Company (herein referred to as the "Debentures"), limited to the aggregate principal amount of $40,000,000, except as otherwise provided in the Indenture referred to below, all issued or to be issued under and pursuant to an indenture dated as of December 1, 1995 (herein referred to as the "Indenture"), duly executed and delivered by the Company to The Bank of New York, Trustee (herein referred to as the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights of the holders of the Debentures, the rights, duties and immunities of the Trustee and the rights and obligations of the Company thereunder. The Debentures will not be transferable except to a successor Revenue Bond Trustee. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Debentures may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of more than 50% in the aggregate principal amount of the Debentures at the time outstanding, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any indenture supplemental thereto or modifying in any manner the rights and obligations of the holders -3- of the Debentures and of the Company; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Debenture, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, without the consent of the holder of each Debenture so affected, or (ii) reduce the aforesaid percentage of Debentures, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all Debentures then outstanding. It is also provided in the Indenture that prior to any declaration of the maturity of the Debentures the holders of a majority in the aggregate principal amount of the Debentures at the time outstanding may on behalf of the holders of all of the Debentures waive any past default under the Indenture and its consequences, except a default in the payment of interest on or the principal of any of the Debentures. Any such consent or waiver by the registered holder of this Debenture shall be conclusive and binding upon such holder and upon all future holders and owners of this Debenture and of any Debenture issued in exchange herefor or in place hereof, irrespective of whether or not any notation of such consent or waiver is made upon this Debenture. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Debenture at the time and place and at the rate and in the coin or currency herein prescribed. The Debentures are issuable as registered Debentures without coupons, in denominations of $5,000 and any multiple thereof. This Debenture is transferable in the manner authorized by law. Upon due presentment of this Debenture for registration of transfer at the office or agency to be maintained by the Company in the Borough of Manhattan, City and State of New York, a new Debenture or Debentures, of authorized denominations, for a like aggregate principal amount, will be issued to the transferee as provided, and subject to the limitations, in the Indenture. No service charge will be made for any such registration of transfer, but the Company may require payment of a sum sufficient to reimburse it for any tax or other governmental charge that may be imposed in relation thereto. This Debenture may in like manner be exchanged without service charge for one or more new Debentures of other authorized denominations but of the same aggregate principal amount, all subject to the terms and conditions set forth in the Indenture. As more fully provided in the Indenture, the Debentures are redeemable at the option of the Company in whole at any time, or in part from time to time, prior to maturity on or after December 1, 2000, by the payment of the principal amount thereof and accrued interest to the date fixed for redemption, together with a premium equal to a percentage of the principal amount -4- thereof determined as set forth in the tabulation below under the heading "Redemption Price". Period (Both Dates Inclusive) Redemption Price ---------------------- ----------------- December 1, 2005 to November 30, 2006..................................102% December 1, 2006 to November 30, 2007 .................................101% December 1, 2007 and thereafter........................................100% The Debentures are subject to mandatory redemption by the Company at any time prior to maturity by payment of the principal amount thereof to be redeemed and accrued interest to the date fixed for redemption if, and to the extent that, certain New Jersey Economic Development Authority 5.60% Water Facilities Bonds (Elizabethtown Water Company Project -- 1995 Series) are called for redemption at a price equal to the principal amount to be redeemed and accrued interest to the date fixed for redemption. As more fully provided in the Indenture, the Debentures are also redeemable as a whole or in part with the proceeds of Released Property, at the principal amount thereof plus accrued interest to the date fixed for redemption. The Indenture provides that under the circumstances specified therein funds or certain securities may be deposited with the Trustee in advance of the maturity or redemption date of any of the Debentures, in trust for the payment or redemption of such Debentures, and the interest due or to become due thereon, and that thereupon all obligations of the Company in respect of such Debentures shall cease and be discharged and the holders thereof shall thereafter be restricted exclusively to such funds or securities for any and all other claims on their part under the Indenture or with respect to such Debentures. The Company, the Trustee, any paying agent and any Debenture registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Debenture shall be overdue and notwithstanding any notice of ownership or writing hereon) for the purpose of receiving payment of or on account of the principal hereof and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any Debenture registrar shall be affected by any notice to the contrary. So long as the Revenue Bond Trustee (as defined in the Indenture) is the sole registered holder of this Debenture, and has specified an account for such payments in writing to the Company, the Trustee and any paying agent, all payments of interest required hereunder shall be made by wire transfer. -5- No recourse shall be had for the payment of the principal of or the interest on this Debenture, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture or any indenture supplemental thereto, against any incorporator, stockholder, officer, trustee or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law or equity, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released by every holder hereof, as more fully provided in the Indenture. ---------------------- AND WHEREAS, all acts and things necessary to make the Debentures, when executed by the Company and authenticated and delivered by the Trustee as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute these presents a valid indenture and agreement, have been done and performed, and the execution of this Indenture and the issue hereunder of the Debentures have in all respects been duly authorized, and the Company, in the exercise of the legal right and power in it vested, executes this Indenture and proposes to make, execute, issue and deliver the Debentures; NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in order to declare the terms and conditions upon which the Debentures are and are to be authenticated, issued and delivered, and in consideration of the premises, of the purchase and acceptance of the Debentures by the holders thereof and of the sum of one dollar to it duly paid by the Trustee at the execution of these presents, the receipt whereof is hereby acknowledged, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Debentures, as follows: ARTICLE ONE. Definitions. Section 1.01. The terms defined in this Section (except as in this Indenture otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939 or which are by reference in such act defined in the Securities Act of 1933, as amended (except as herein otherwise -6- expressly provided or unless the context otherwise requires), shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of the execution of this Indenture. "Authority" shall mean the New Jersey Economic Development Authority. "Board of Directors" shall mean the Board of Directors of the Company or any committee thereof duly authorized by the Board of Directors to act hereunder. "Board Resolution" or "Resolution of the Board of Directors" shall mean a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. "Company" shall mean Elizabethtown Water Company, and, subject to the provisions of Article Twelve, shall also include its successors and assigns. "Debenture" or "Debentures" shall mean any Debenture or Debentures, as the case may be, authenticated and delivered under this Indenture. The term "outstanding", when used with reference to Debentures, shall, subject to the provisions of Section 9.04 and Article Thirteen, mean, as of any particular time, all Debentures authenticated and delivered by the Trustee under this Indenture, except (a) Debentures theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (b) Debentures or portions thereof for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee, provided that if such Debentures or portions are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as in Article Four provided, or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Debentures in lieu of or in substitution for which other Debentures shall have been authenticated and delivered pursuant to the terms of Section 2.06, unless proof satisfactory to the Trustee is presented that any such Debentures are held by holders for value without notice of any defense. "Debentureholder", "holder of Debentures", "holder", or other similar terms, shall mean the registered holder of any Debenture. The term "registered holder" shall mean the person or -7- persons in whose name or names a particular Debenture shall be registered on the register kept for that purpose in accordance with the terms of this Indenture. "Event of Default" shall mean any event specified in Section 7.01 continued for the period of time, if any, therein designated. "Indenture" shall mean this instrument as originally executed, or, if amended or supplemented, as so amended or supplemented. "Loan Agreement" shall mean the Loan Agreement dated as of December 1, 1989 between the Company and the Authority as supplemented and amended by a First Supplement to Loan Agreement dated as of October 1, 1990, a Second Supplement to Loan Agreement dated as of August 1, 1991 and a Third Supplement to Loan Agreement dated as of December 1, 1995 relating to, among other things, the issuance of $10,000,000 principal amount of 7.20% Water Facilities Bonds (Elizabethtown Water Company Project -- 1989 Series), $15,000,000 principal amount of 7 1/2% Water Facilities Refunding Bonds (Elizabethtown Water Company Project - - 1990 Series) and $10,500,000 principal amount of 6.60% Water Facilities Refunding Bonds (Elizabethtown Water Company Project - 1991 Series A) and $15,000,000 principal amount of 6.70% Water Facilities Refunding Bonds (Elizabethtown Water Company Project - 1991 Series B) and $40,000,000 principal amount of 5.60% Water Facilities Bonds (Elizabethtown Water Company Project - 1995 Series), or if further amended or supplemented, as so further amended or supplemented. "Officers' Certificate" shall mean a certificate signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company. Each such certificate shall include the statements provided for in Section 15.06, if and to the extent required by the provisions thereof. "Opinion of Counsel" shall mean an opinion in writing signed by legal counsel who shall be satisfactory to the Trustee, and who may be an employee of or counsel to the Company. Each such opinion shall include the statements provided for in Section 15.06, if and to the extent required by the provisions thereof. "Person" shall mean an individual, partnership, corporation, association, joint venture, trust or unincorporated association and shall include a government or political subdivision thereof and any governmental agency or public benefit corporation. "Principal Corporate Trust Office" means the office of the Trustee in New York, New York at which any particular time its corporate trust business shall be principally administered, which office at the date hereof is located at 101 Barclay Street, -8- 21st Floor, New York, New York 10286, Attention: Corporate Trust Trustee Administration, except that, with respect to presentation of Securities for payment or registration of transfers and exchanges and the location of the Security Registrar, such term means the office or agency of the Trustee in said city at which at any particular time its corporate agency business shall be conducted, which at the date hereof is located at 101 Barclay Street, New York, New York 10286, Attention: Corporate Trust Services Window. "Project" shall mean those certain facilities of the Company financed pursuant to the Loan Agreement and described therein. "Responsible Officer" when used with respect to the Trustee shall mean the chairman or vice chairman of the board of directors, the chairman of the executive committee, the president, any vice president, the secretary, the treasurer, any senior trust officer, any trust officer, any second or assistant vice president, any assistant secretary, any assistant treasurer, any assistant cashier, or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. "Revenue Bonds" shall mean the Authority's $40,000,000 principal amount of 5.60% Water Facilities Refunding Bonds (Elizabethtown Water Company Project -- 1995 Series). "Revenue Bond Indenture" shall mean the Indenture of Trust dated as of December 1, 1989 between the Authority and the Revenue Bond Trustee, as supplemented and amended by a First Supplement to Indenture of Trust dated as of October 1, 1990, a Second Supplement to Indenture of Trust dated as of August 1, 1991 and a Third Supplement to Indenture of Trust dated as of December 1, 1995, pursuant to which the Revenue Bonds are issued, or if further amended or supplemented, as so further amended or supplemented. "Revenue Bond Trustee" shall mean the trustee under the Revenue Bond Indenture for the time being, whether original or successor. "Trustee" shall mean the Trustee under this Indenture for the time being, whether original or successor. "Trust Indenture Act of 1939", subject to the provisions of Sections 11.01 and 11.02, shall mean the Trust Indenture Act of 1939 as in force at the date of execution of this Indenture. -9- Certain other terms are defined in Articles Two, Five, Seven and Eight. ARTICLE TWO. Description, Execution and Exchange of Debentures. Section 2.01. The Debentures shall mature on December 1, 2025. Section 2.02. The Debentures and the Trustee's certificate of authentication to be borne by the Debentures shall be substantially of the tenor and purport as in this Indenture above recited, and may have such letters, numbers or other marks of identification and such legends or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any law or regulation of any stock exchange on which the Debentures may be listed, or to conform to usage. Section 2.03. The Debentures shall be issuable as registered Debentures without coupons in denominations of $5,000 and multiples thereof. Each Debenture shall be dated the date of its authentication and shall bear interest, payable semi-annually on June and December 1 of each year from the most recent interest payment date to which interest has been paid or duly provided for (unless the date of such Debenture is the date to which interest on the Debentures has been paid or duly provided for, in which case from the date of such Debenture), or, if no interest has been paid or duly provided for on the Debentures, from December 1, 1995. The persons in whose names Debentures are registered at the close of business on the record date with respect to a semi-annual interest payment date shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of any Debenture upon any registration of transfer or exchange thereof subsequent to such record and prior to such interest payment date; provided, however, that if and to the extent the Company shall default in the payment of the interest due on such interest payment date, such defaulted interest shall be paid to the persons in whose names the Debentures are registered at the close of business on the day preceding the date such defaulted interest is paid, unless a record date shall be fixed by the Company for the payment of such defaulted interest by notice given by mail by or on behalf of the Company to the holders of Debentures not less than 15 days preceding such record date, which record date shall not be more -10- than 15 days before the date for such payment, then to the persons in whose names outstanding Debentures are registered on such record date. The term "record date" as used with respect to a semi-annual interest payment date shall mean the close of business on the May or November 15, as the case may be, next preceding such interest payment date, or if such May 15 or November 15 is not a business day, the business day next preceding such May 15 or November 15, the term "business day" meaning for this purpose a day which in The City of New York is not a day on which banking institutions are authorized by law to close. Section 2.04. The Debentures shall be signed on behalf of the Company by its President or a Vice President, and by its Secretary or an Assistant Secretary, and its corporate seal, or a facsimile thereof, shall be thereon impressed or imprinted. The signature of any such President, Vice President, Secretary or Assistant Secretary may be facsimile. The Company may use the signature or facsimile signature or any person who shall be any such officer of the Company at the time of the execution of Debentures, irrespective of the date as of which the same shall be authenticated, or of any person who shall have been any such officer of the Company, notwithstanding the fact that at the time the Debentures shall be authenticated and delivered or disposed of, he shall have ceased to be such officer of the Company. The Company may deliver Debentures executed by the Company to the Trustee for authentication. The Trustee shall thereupon authenticate and make available for delivery said Debentures to or upon the written orders of the Company. Only such Debentures as shall bear thereon a certificate of authentication substantially in the form herein before recited, executed by the Trustee, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee upon any Debenture executed by the Company shall be conclusive evidence that the Debenture so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. Section 2.05. The Company shall keep at the office or agency to be maintained by the Company as provided in Section 5.02 a register or registers in which, subject to such reasonable regulations as it may prescribe, it will register all Debentures, and upon due presentment for registration or transfer of any Debenture at such office or agency, the Company shall execute and register and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Debenture or Debentures for a like aggregate principal amount of Debentures of any authorized denominations, bearing numbers not contemporaneously outstanding. The several authorized denominations of Debentures shall be interchangeable in equal aggregate principal amounts. -11- Debentures to be exchanged shall be surrendered at the office or agency to be maintained by the Company for the purpose as provided in Section 5.02 and the Company shall execute and register and the Trustee shall authenticate and deliver in exchange therefor the Debenture or Debentures which the Debenture holder making the exchange shall be entitled to receive, bearing numbers not contemporaneously outstanding. All Debentures presented or surrendered for registration of transfer, exchange, redemption or payment shall (if so required by the Company or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee duly executed by, the registered holder or his attorney duly authorized in writing. For any exchange or registration of transfer of Debentures, the Company, at its option, may require the payment of a sum sufficient to reimburse it for any tax or other governmental charge that may be imposed in relation thereto. No service shall be made for any such transaction. The Company shall not be required to make registration of transfers or exchanges of Debentures for a period of fifteen days next preceding any selection of Debentures to be redeemed, nor shall it be required to make registration of transfers or exchange of any Debentures or portions thereof called or being called for redemption, except, in the case of any Debenture to be redeemed in part only, the portion thereof not being redeemed. Section 2.06. In case any Debenture shall become mutilated or be destroyed, lost or stolen, the Company in its discretion may issue a new Debenture of like tenor bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debenture or in lieu of and substitution for the Debenture so destroyed, lost or stolen. In every case the applicant for a substituted Debenture shall furnish to the Company and to the Trustee such security or indemnity as may be required by them to save each of them, and, if requested, any paying agents and Debenture registrars of the Company, harmless from all risk, however remote, and the applicant shall also furnish to the Company and to the Trustee evidence to their satisfaction of the mutilation, destruction, loss or theft of the applicant's Debenture and of the ownership thereof. The Trustee shall authenticate any such substituted Debenture and deliver the same upon the written request or authorization of any officer of the Company. Upon the issue of any substituted Debenture, the Company may require the payment of a sum sufficient to cover any stamp tax or other governmental charge that may be imposed incident thereto and any other expenses, including counsel fees and expenses, of the Company, the Trustee and any paying agent or Debenture registrar, connected therewith. In case any Debenture which has matured or is about to mature shall become mutilated or be destroyed, lost -12- or stolen, the Company may, instead of issuing a substitute Debenture, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debenture) if the applicant for such payment shall furnish to the Company and to the Trustee such security or indemnity as may be required by them to save each of them harmless, and evidence to the satisfaction of the Company and the Trustee of the mutilation, destruction, loss or theft of such Debenture and of the ownership thereof. Every Debenture issued pursuant to the provisions of this Section in substitution for any Debenture which is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debenture shall be found at any time, or be enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debentures duly issued hereunder. All Debentures shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures and shall preclude any and all other rights or remedies, notwithstanding any law or statute existing or hereinafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. Section 2.07. All Debentures surrendered for the purpose of payment, redemption, exchange or registration of transfer shall be delivered to the Trustee and canceled by it, and no Debentures shall be issued in lieu of any thereof except as expressly required or permitted by any of the provisions of this Indenture. With the consent of the Company, the Trustee may, but shall not be required to, destroy canceled Debentures and deliver a certificate thereof to the Company. If the Company shall acquire any of the Debentures, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debentures unless and until the same are delivered to the Trustee, or surrendered to the Trustee, for cancellation. Section 2.08. Nothing in this Indenture or in the Debentures, expressed or implied, shall give or be construed to give to any person, firm or corporation, other than the parties hereto and the holders of the Debentures, any legal or equitable right, remedy or claim under or in respect of this Indenture, or under any covenant, condition or provision herein contained, all of the covenants, conditions and provisions herein being for the sole benefit of the parties hereto and of the holders of the Debentures. Section 2.09. The Company in issuing the Debentures may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as -13- a convenience to holders of Debentures; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Debentures or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debentures, and any such redemption shall not be affected by any defect in or omission of such numbers. ARTICLE THREE. Issue of Debentures. Section 3.01. Debentures not to exceed the aggregate principal amount of $40,000,000, except as provided in Section 2.06, may, upon the execution of this Indenture or from time to time thereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Debentures to or upon the written order of the Company signed by its President or a Vice President and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary, without further action by the Company. As a general matter, the Debentures issued under this Indenture evidence indebtedness under the Loan Agreement and are not transferable except to a successor Revenue Bond Trustee. ARTICLE FOUR. Redemption of Debentures. Section 4.01. The Debentures are redeemable prior to maturity, in accordance with the provisions of this Article Four, at the principal amount thereof and accrued interest to the date fixed for redemption (but if the date fixed for redemption is a semi-annual interest payment date, the interest installment payable on such date shall be paid to the holder at the close of business on the record date for such interest payment date), together, in certain cases, with a premium, all as set forth in the form of Debenture provided for herein. The Trustee, upon the request of the Company (evidenced by a copy of a Board Resolution, delivered to the Trustee at least 60 days prior to the redemption date) and notification by the Revenue Bond Trustee, signed by a Vice President or Trust Officer (delivered to the Trustee at least 35 days prior to the redemption date), that an equal principal amount of Revenue Bonds are to be redeemed and specifying the premium, if any, to be paid on such redemption, shall, for and on behalf of and in the name of the Company, mail or cause to be mailed a notice of redemption with respect to the principal amount of Debentures specified in such request. -14- Section 4.02. In case of a redemption of a part only of the Debentures, the Trustee shall select the particular Debentures or parts thereof, which shall be $5,000 or multiples thereof, so to be redeemed according to such method as the Trustee shall deem proper in its discretion. Notice of redemption to the holder of any Debenture which is to be redeemed in whole or in part shall be mailed by or on behalf of the Company, not less than thirty days prior to the date fixed for redemption, to him at his last address appearing upon the registry books. Failure duly to give such notice by mailing to the holder of any Debenture designated for redemption in whole or in part shall not affect the validity of the proceedings for the redemption of any other Debenture. The notice of redemption to each holder of Debentures to be redeemed shall specify the Debentures or parts thereof held by such holder to be redeemed, which shall be $5,000 or multiples thereof, the date fixed for redemption, the CUSIP numbers (if any) of such Debentures, the redemption price at which Debentures are to be redeemed and the place where payment of the redemption price is to be made upon surrender of the Debentures, and shall state that interest accrued to the date fixed for redemption will be paid in the manner specified in said notice, that from said date interest thereon will cease to accrue, and, in the case of any Debenture which is to be redeemed in part only, that on and after the redemption date, upon surrender of such Debenture, a new Debenture or Debentures of authorized denominations in aggregate principal amount equal to the unremedied portion of such Debenture will be issued. Such notice shall also state that it is subject to the receipt of the redemption moneys by the Trustee prior to the date fixed for redemption, and that such notice, and the Company's request to the Trustee to mail such notice, shall be of no effect unless such moneys are received prior to such date. Section 4.03. Notice of redemption having been mailed, and the Trustee having prior to the date fixed for redemption specified in the notice of redemption received for the purpose an amount in cash sufficient to redeem all of the Debentures called for redemption, the Debentures called for redemption shall become due and payable on such date fixed for redemption. Section 4.04. On and after the date fixed for redemption, if the moneys for the redemption of the Debentures to be redeemed shall have been received by the Trustee, such Debentures shall cease to bear interest. All moneys on deposit with the Trustee for the redemption of Debentures shall, subject to the provisions of Section 13.04 hereof, be held in trust for account of the holders of the Debentures so to be redeemed, and shall be paid to them, respectively, upon presentation and surrender of said Debentures. -15- If any Debenture of a denomination larger than $5,000 shall be called for redemption in part only, upon presentation of any such Debenture so called for redemption, the payment with respect to said Debenture shall be made and Debentures for the unpaid balance of the principal amount of the Debenture so presented shall be authenticated and delivered by the Trustee without charge therefor to the holder thereof. On and after the date fixed for such redemption, interest shall be payable only on the portion of such Debenture not so called for redemption and only such portion shall be deemed outstanding and continue to be entitled to the benefits of this Indenture. Anything in this Indenture contained to the contrary notwithstanding, if the giving of the notice of redemption shall have been completed as provided in Section 4.02, or if provision satisfactory to the Trustee for the giving of such notice shall have been made, and if the Company shall have deposited in trust with the Trustee funds sufficient to redeem the Debentures (or parts thereof) to be redeemed on the date fixed for redemption, together with interest accrued to the date fixed for redemption, then all obligations of the Company in respect of such Debentures (or parts thereof) shall cease and be discharged and the holders of such Debentures or parts thereof) shall thereafter be restricted exclusively to such funds for any and all claims of whatsoever nature on their part under this Indenture or in respect to such Debentures (or parts thereof). ARTICLE FIVE. Particular Covenants of the Company. The Company covenants as follows: Section 5.01. The Company will duly and punctually pay or cause to be paid the principal of and interest on each of the Debentures at the time and place and in the manner provided herein and in the Debentures. Section 5.02. As long as any of the Debentures remain outstanding, the Company will maintain an office or agency or offices or agencies in the Borough of Manhattan, City and State of New York, where the Debentures may be presented for registration of transfer and exchange as in this Indenture provided, and where notices and demands to or upon the Company in respect of the Debentures or of this Indenture may be served, and where the Debentures may be presented for payment. Until otherwise designated by the Company in a notice to the Trustee, such office or agency for all of the above purposes shall be the principal corporate trust office of the Trustee in the Borough of Manhattan, City and State of New York. -16- Section 5.03. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 8.10, a Trustee, so that there shall at all times be a Trustee hereunder. Section 5.04. (a) If the Company shall appoint a paying agent other than the Trustee, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section, (1) that it will hold all sums held by it as such agent for the payment of the principal of, premium, if any, or interest on the Debentures (whether such sums have been paid to it by the Company or by any other obligor on the Debentures) in trust for the benefit of the holders of the Debentures, or of the Trustee, as the case may be, (2) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Debentures) to make any payment of the principal of or interest on the Debentures when the same shall be due and payable, and (3) that at any time during the continuance of any Event of Default upon the written request of the Trustee, it will forthwith pay to the Trustee all sums so held by such paying agent. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of, premium, if any, or interest on, the Debentures, set aside, segregate and hold in trust for the benefit of the holders of the Debentures, a sum sufficient to pay such principal, premium, if any, or interest so becoming due and payable and will notify the Trustee of any failure (by it or any other obligor on the Debentures) to take such action. (c) Whenever the Company shall have one or more paying agents, it will, prior to each due date of the principal of, premium, if any, or interest on, the Debentures, deposit with a paying agent a sum sufficient to pay the principal, premium, if any, or interest, so becoming due, such sum to be held in trust for the benefit of the persons entitled to such principal, premium, if any, or interest, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. (d) Anything in this Section to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by it, or any paying agent hereunder, as required -17- by this Section, such sums to be held by the Trustee upon the trusts herein contained. (e) Anything in this Section to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section is subject to the provisions of Section 13.04 hereof. Section 5.05. The Company covenants that, so long as any Debentures shall be outstanding under this Indenture, it will not create, assume or incur, or in any other manner become directly or indirectly liable in respect of, any indebtedness, in addition to its 7.20% Debentures due 2019, its 7-1/2% Debentures due 2020, its 6.60% Debentures due 2021, its 6.70% Debentures due 2021, its 8-3/4% Debentures due 2021, its 8% Debentures due 2022, its 7-1/4% Debentures due 2028 and the Debentures, except the following: (a) current operating liabilities and current or other obligations (other than for borrowed money) incurred in the ordinary course of business; (b) Current Indebtedness; (c) indebtedness (in addition to that referred to in subdivisions (a) and (b) above and (d) below) in an aggregate amount not in excess of $10,000,000 at any one time outstanding; and (d) indebtedness (in addition to that referred to in subdivisions (a), (b) and (c) above) in an aggregate amount not in excess of the sum of $20,000,000 plus 65% of the Amount of Net Property Additions at the time the Company first becomes liable in respect of any such indebtedness. The Company covenants that, so long as any Debentures shall be outstanding under this Indenture, it will not create, assume or incur, or in any manner become directly or indirectly liable in respect of, any indebtedness (in addition to its 7.20% Debentures due 2019, its 7-1/2% Debentures due 2020, its 6.60% Debentures due 2021, its 6.70% Debentures due 2021, its 8-3/4% Debentures due 2021, its 8% Debentures due 2002, its 7-1/4% Debentures due 2028, the Debentures and that referred to in subdivisions (a), (b) and (c) above), unless the Gross Income of the Company, for a period of 12 consecutive calendar months within the 15 calendar months immediately preceding the incurring by the Company of such indebtedness, shall have been at least equal to twice the Annual Interest Charges. The term "Current Indebtedness" as used herein shall mean indebtedness in an aggregate amount not in excess of 20% of the total capitalization of the Company at the time and which is expressed to be payable on demand or to mature less than one year after the date of creation or issuance thereof. The total -18- capitalization of the Company shall be deemed to consist of the sum of (i) the principal amount of all outstanding indebtedness of the Company represented by bonds, debentures, notes or other evidences of indebtedness (other than Current Indebtedness), (ii) the aggregate of the par or stated value represented by all issued and outstanding capital stock of all classes of the Company, including premiums received on the issue of such capital stock, and (iii) the surplus of the Company, including earned, capital, paid-in and other surplus. The term "Amount of Net Property Additions" as used herein shall mean the balance, if any, remaining after deducting the Retirements from the Amount of Property Additions, as of any particular time. The term "Amount of Property Additions" as used herein shall mean the Cost or, if less, the fair value to the Company at the time of the actual acquisition by the Company, of Property Additions. The term "Property Additions" as used herein shall mean all tangible property owned by the Company and made, constructed or otherwise acquired by it subsequent to December 31, 1975, which the Company is authorized to acquire, own and operate and which is used or useful in the business of impounding, storing, transmitting, producing, manufacturing, transporting, distribution or supplying water for any and all purposes. Permanent improvements, extensions, additions or replacements in the process or construction or erection, shall be included as Property Additions as of any particular time, insofar as actually constructed or erected after December 31, 1975, and before such particular time. There shall not be included as Property Additions (a) Excepted Property, (b) going value or good will, as such, (c) any item of property retired the retirement of which has not been credited to utility plant account, (d) any item of property acquired to replace a similar item of property whose retirement has not been credited to utility plant account, or any item of property whose cost has been charged or is properly chargeable to repairs, maintenance or other operating expense account or whose cost has been charged or is not properly chargeable to utility plant account, or (e) any property not located in the State of New Jersey or in a State contiguous thereto. The term "Retirements" as used herein shall mean the Cost of Fundable Property which, subsequent to December 31, 1975, shall have become worn out or permanently unserviceable, or shall have been lost, sold, destroyed, abandoned, surrendered on lapse of title, taken by eminent domain, purchased by any governmental or public body pursuant to any right reserved to or vested in it, or otherwise disposed of by the Company or retired from service for any reason, or shall have permanently ceased to be used or useful in the business of the Company. Accounting adjustments of utility plant accounts or reclassification of utility plant -19- accounts or amortization of any plant account to comply with any order of any regulatory body and which do not represent or reflect the permanent retirement from a plant account subsequent to December 31, 1975 of any Fundable Property shall not be included in Retirements. The term "Fundable Property" as used herein shall mean (a) all property owned by the Company on December 31, 1975 (except such property as would not be included in Property Additions if acquired subsequent to December 31, 1975) and (b) Property Additions. The term "Cost" as used herein, when used with respect to any particular property, shall mean the cost (or, if not known, estimated cost) thereof to the person first devoting it to public service, without deducting therefrom applicable reserves for depreciation and/or retirements and/or depletion and/or obsolescence. In determining Cost in cases in which property, part of which constitutes Fundable Property and part does not, is or has been acquired for a consideration not divided between such parts, or, in cases where the consideration given for property is not allocated to the various items of property acquired, the consideration may be allocated to the various parts and items of property acquired in any reasonable manner which is in accordance with the requirements of any systems of accounting with which the Company is compelled to comply by any provision of law, or, if there be no such requirements, in accordance with good accounting practice. The term "Gross Income" as used herein shall mean gross operating revenues from all sources (whether or not subject to refund) after deducting therefrom operating expenses. In computing gross operating revenues, there shall be included net non-operating revenues, if any (including income from securities, whether of subsidiaries or not), in an amount not more than 20% of Gross Income after deducting therefrom net non-operating revenues. In computing operating expenses, there shall be included all operating expenses, including accruals for taxes (except that taxes on undistributed earnings, income and excess profits and any like taxes measured by income and charges in lieu of any thereof made because of the deferment in payment of any such tax shall be excluded from operating expenses, and any credit to income subsequently made on account of any such prior charge shall be excluded from gross operating revenues), rentals, insurance, actual charges for current repairs and maintenance and charges to expense or income to provide for depreciation, renewals, replacements, depletion or retirement of property and for property loss (but excluding interest, charges deducted in computing net non-operating revenues and charges to income for the amortization (i) of debt discount and expense and (ii) of utility plant account or amounts transferred therefrom). If any of the property owned by the Company at the time any computation of Gross Income is made shall have been acquired during or after any period for which Gross Income is to be computed, the Gross -20- Income of such property (computed in the manner in this Section provided for the computation of the Gross Income of the Company) during such period or such part of such period as shall have preceded the acquisition thereof, to the extent that the same have not otherwise been included and can be determined, shall be included in the Gross Income of the Company for all purposes of this Indenture, and the Gross Income which can be determined of any property disposed of by the Company during or after such period shall not be treated as Gross Income of the Company. The term "Annual Interest Charges" as used herein shall mean the interest requirements for twelve months upon all indebtedness of the Company (including any indebtedness, whether or not created or assumed by the Company, on which the Company customarily pays interest charges or which is secured by a lien on any property of the Company, but excluding (a) indebtedness represented by customers' deposits, (b) current operating liabilities and current or other obligations (other than for borrowed money) incurred in the ordinary course of business, (c) indebtedness for the purchase, payment or redemption of which money in the necessary amount shall have been deposited in trust, and (d) Current Indebtedness) to be outstanding upon the incurring by the Company of the indebtedness in connection with which the computation is made. Section 5.06. The Company covenants that, so long as any Debentures shall be outstanding under the Indenture, it will not at any time mortgage or pledge, or permit any other lien (other than Excepted Encumbrances) to become a lien on, any property owned by the Company just prior to such time, to secure any other indebtedness, without making effective provision whereby the Debentures shall (so long as any such other indebtedness shall be so secured) be secured (along with any other indebtedness similarly entitled to be equally and ratably secured) by a direct lien (on all the property, other than Excepted Property, owned by the Company just prior to the time such other lien shall have become a lien on any of the property of the Company) prior to the lien or liens securing any and all such other indebtedness; provided, however, that this restriction shall not be applicable to nor prevent (a) the pledging by the Company of its assets as security for the payment of any tax, assessment or other similar charge demanded of the Company by any governmental authority or public body so long as the Company in good faith contests its liability to pay the same, or as security to be deposited with any governmental authority or public body for any purpose at any time required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege, license or right; or (b) the pledging by the Company of any assets for the purpose of securing a stay or discharge or for any other -21- purpose in the course of any legal proceeding in which the Company is a party; or (c) making good faith deposits in connection with tenders, contracts or leases to which the Company is a party. The Company covenants that, so long as any Debentures shall be outstanding under this Indenture, if, upon any consolidation or merger of the Company with or into any other corporation, or upon any sale or conveyance of all or substantially all of the property of the Company as an entirety, or upon any acquisition by the Company of the property of another corporation substantially as an entirety or upon any merger of any other corporation into the Company, any of the property (other than Excepted Property) owned by the Company just prior thereto, would thereupon become subject to any lien (other than Excepted Encumbrances), the Company, prior to such consolidation, merger, sale, conveyance or acquisition, will take appropriate action whereby the Debentures shall (so long as such property shall be subject to such lien) be secured (along with any other indebtedness similarly entitled to be equally and ratably secured) by a direct lien on such portion of the property of the Company prior to all other liens, other than Excepted Encumbrances and other than any liens existing thereon just prior to such consolidation, merger, sale, conveyance or acquisition. Any instrument creating a lien pursuant to the requirements of this Section shall contain reasonable and customary provisions for the enforcement of such lien and for the release of, or substitution for, the property subjected to such lien. Such direct lien shall be evidenced by an appropriate instrument or instruments executed and delivered to the Trustee (or to the extent legally necessary, to another trustee as additional or separate trustee). The Trustee, subject to the provisions of Section 8.01 hereof, may receive an Opinion of Counsel as conclusive evidence that any such instrument is in customary form and complies with the foregoing provisions of this paragraph; and the Trustee shall not be under any duty or responsibility to any holder of any Debenture with respect to the form, validity or enforceability of any such instrument which it may accept in reliance in good faith upon any such opinion. If the Company shall fail to create a direct lien to secure the Debentures, as required by the foregoing provisions of this Section, an equitable lien shall exist to the same extent and on the same property as though the Company had created such direct lien. The term "Excepted Encumbrances" as used herein shall mean as of any particular time any of the following: (i) liens for taxes, assessments or governmental charges not delinquent and liens for workmen's compensation -22- awards and similar obligations not delinquent and liens for taxes, assessments or governmental charges delinquent but the validity of which is being contested at the time by the Company in good faith by appropriate proceedings diligently conducted; (ii) any liens securing indebtedness neither assumed nor guaranteed by the Company nor on which it customarily pays interest, existing in or relating to real estate acquired by the Company for transmission, distribution or right-of-way purposes, or in connection with its usual operations; (iii) easements or reservations in any property of the Company created for the purpose of roads, railroads, railroadside tracks, electric lines, pipe lines, sewers, water and gas transmission and distribution mains, conduits, water rights of the State of New Jersey or others, building and use restrictions and defects of title to, or leases of, any parts of the property of the Company which do not in the opinion of the Company's counsel materially impair the use of the property as an entirety in the operation of the business of the Company; (iv) undetermined liens and charges incidental to current construction, including mechanics', laborers', materialmen's and similar liens not delinquent; (v) any obligations or duties affecting the property of the Company to any municipality or public authority with respect to any franchise, grant, license, permit or certificate; (vi) rights reserved to or vested in any municipality or public authority to control or regulate any property of the Company or to use such property in a manner which does not materially impair the use of such property for the purposes for which it is held by the Company; (vii) judgments in course of appeal or otherwise in contest and secured by sufficient bond or security; (viii) any irregularities in or deficiencies of title to any rights of way for mains or pipes and/or appurtenances thereto or other improvements thereon and to any real estate used or to be used primarily for right of way purposes, provided that the Company shall have obtained from the apparent owner of the lands or estates covered by any such right of way an instrument purporting by its terms to grant the use thereof for the construction, operation or maintenance of such main, pipe, appurtenance or improvement for which the same are used or are to be used, or provided that the Company has power, under eminent domain or similar statutes, to remove such irregularities or deficiencies; or -23- (ix) any other lien on any property owned by the Company to secure any indebtedness so long as the aggregate principal amount of all such indebtedness is not in excess of $10,000,000. The term "Excepted Property" as used herein shall mean (a) cash, bonds, stocks, obligations and other securities; (b) choses in action, accounts and bills receivable, judgments and other evidences of indebtedness and contracts, leases and operating agreements; (c) stock in trade, merchandise, equipment, apparatus, materials or supplies manufactured or acquired for the purpose of sale and/or resale in the usual course of business or consumable in the operation of any of the properties of the Company or held for the purpose of repairing or replacing (in whole or in part) any rolling stock, buses, motor coaches, trucks, automobiles or other vehicles or aircraft; (d) timber, gas, oil, minerals (including developed and undeveloped natural gas reserves and natural gas in underground storage or otherwise), mineral rights and royalties; (e) materials or products generated, manufactured, produced or purchased by the Company for sale, distribution or use in the ordinary course of its business; (f) office furniture and equipment, tools, rolling stock, buses, motor coaches, trucks, automobiles and other vehicles and aircraft; and (g) the Company's franchise to be a corporation. Section 5.07. The Company covenants that, so long as any Debentures shall be outstanding under this Indenture, it will not declare or pay any dividends or make any other distribution (except dividends payable or distributions made in shares of capital stock of the Company) on or in respect of any of its Common Stock, or purchase or otherwise acquire for a consideration any shares of its Common Stock (except out of the proceeds derived from the sale of additional shares of its Common Stock subsequent to November 30, 1995), if the aggregate of such dividends and distributions and such consideration for purchase or other acquisition of shares of its Common Stock made by the Company after December 31, 1975 would exceed the sum of (a) the earned surplus of the Company accumulated after December 31, 1975 and determined without any deduction on account of such dividends, distributions or acquisitions and (b) $10,000,000. The term "consideration" as used in this Section shall mean cash or fair value if the consideration be other than cash. Charges to earned surplus with corresponding credits to utility plant acquisition adjustment account or utility plant adjustment account or any similar account or to any reserve for the purpose of ultimately disposing thereof and any provisions for amortization of any amounts included in utility plant acquisition account or utility plant adjustment account or in any similar account shall be disregarded in determining earned surplus accumulated after December 31, 1975. Section 5.08. The Company covenants that, so long as any Debentures shall be outstanding under this Indenture, if the -24- Proceeds of Released Property in any period of 12 consecutive calendar months shall amount to $5,000,000 or more, and if, immediately subsequent to the receipt of such $5,000,000 (or the part hereof making the total thereof $5,000,000 or more), the ratio of the aggregate principal amount of all outstanding indebtedness of the Company represented by bonds, debentures, notes or other evidences of indebtedness (other than Current Indebtedness) to the net book value of the Company's utility plant accounts exceeds 60%, then the Company will use such Proceeds of Released Property to redeem Debentures or to redeem or to redeem 7.20% Debentures due 2019 issued by the Company (herein called the "7.20% Debentures due 2019") or to redeem 7-1/2% Debentures due 2020 issued by the Company (herein called the "7-1/2% Debentures due 2020") or to redeem 6.60% Debentures due 2021 issued by the Company (herein called the "6.60% Debentures due 2021") or to redeem 6.70% Debentures due 2021 issued by the Company (herein called the "6.70% Debentures due 2021") or to redeem 8-3/4% Debentures due 2021 issued by the Company (herein called the "8-3/4% Debentures due 2021") or to redeem 8% Debentures due 2022 issued by the Company (herein called the "8% Debentures due 2022") or to redeem 7-1/4% Debentures due 2028 issued by the Company (herein called the "7- 1/4% Debentures due 2028") or to redeem other debentures issued by the Company under indentures having a provision substantially similar to this Section 5.08 ("Subsequent Debentures") at the earliest practicable date at a redemption price equal to the principal amount thereof plus accrued interest to the date of redemption; provided, however, that the Company shall not be required so to use any part of such Proceeds of Released Property as to which the Company shall have given to the Trustee (within 30 days after such receipt) an Officers' Certificate stating that the Company intends, within a period of one year thereafter, to apply such part to the making, constructing or otherwise acquiring of Property Additions. If any such Officers' Certificate shall so state, the Company covenants so to apply such part within such one year as stated in such Officers' Certificate or, to the extent that it does not so apply such part, to use such part within such one year to redeem Debentures or to redeem 7.20% Debentures due 2019 or to redeem 7-1/2% Debentures due 2020 or to redeem 6.60% Debentures due 2021 or to redeem 6.70% Debentures due 2021 or to redeem 8-3/4% Debentures due 2021 or to redeem 8% Debentures due 2022 or to redeem 7-1/4% Debentures due 2028 or to redeem Subsequent Debentures. In lieu of using any such Proceeds of Released Property for redemption as aforesaid, the Company may deliver to the Trustee for cancellation Debentures or may deliver for cancellation to the trustee under the indenture pursuant to which the 7.20% Debentures due 2019 were issued 7.20% Debentures due 2019, or may deliver for cancellation to the trustee under the indenture pursuant to which the 7 1/2% Debentures due 2020 were issued 7-1/2% Debentures due 2020, or may deliver for cancellation to the trustee under the indenture pursuant to which the 6.60% Debentures due 2021 were issued 6.60% Debentures due -25- 2021, or may deliver for cancellation to the Trustee under the indenture pursuant to which the 6.70% Debentures due 2021 were issued 6.70% Debentures due 2021, or may deliver for cancellation to the trustee under the indenture pursuant to which the 8-3/4% Debentures due 2021 were issued 8-3/4% Debentures due 2021, or may deliver for cancellation to the trustee under the indenture pursuant to which the 8% Debentures due 2022 were issued 8% Debentures due 2022, or may deliver for cancellation to the trustee under the indenture pursuant to which the 7-1/4% Debentures due 2028 were issued 7-1/4% Debentures due 2028, or may deliver for cancellation to the trustee under any indenture pursuant to which any Subsequent Debentures were issued such Subsequent Debentures, in each case with all unmatured coupons, if any, appertaining thereto, theretofore reacquired by the Company and not theretofore so delivered, and in any such case the obligation of the Company to use such Proceeds of Released Property for redemption shall be reduced to the extent of the aggregate principal amount of Debentures or the 7.20% Debentures due 2019 or 7 1/2% Debentures due 2020 or 6.60 Debentures due 2021 or 6.70% Debentures due 2021 or 8-3/4% Debentures due 2021 or 8% Debentures due 2022 or 7-1/4% Debentures due 2028 or Subsequent Debentures so delivered. All Debentures so delivered to the Trustee shall be canceled by the Trustee. The term "Proceeds of Released Property" as used herein and in the Debentures shall mean the aggregate amount of the consideration received or to be received by the Company on the actual sale or other actual disposition (subsequent to the execution of this Indenture) of any property included in utility plant accounts (including therein an amount equivalent to any part of such consideration consisting of other than cash at the fair value thereof to the Company at the time of such sale or other disposition, as determined in good faith by the Board of Directors of the Company, and excluding therefrom an amount equivalent to any consideration received or to be received by the Company on the sale or other disposition of any property (i) which property shall have become worn out or permanently unserviceable and the book value of which shall have been credited to utility plant accounts upon the retirement thereof or (ii) to the extent that the consideration so received or to be received shall constitute Property Additions) after deducting from such amount, to the extent paid or payable by the Company, all expenses and all taxes (including income taxes, if any) upon or in respect of any such sale or other disposition. Section 5.09. The Company will deliver to the Trustee within 120 days after the end of each fiscal year of the Company the Officers' Certificate required by Section 314(a)(4) of the Trust Indenture Act. See Section 314(a)(4) of the Trust Indenture Act. Section 5.10. The Company will deliver to the Trustee true and correct copies of the Loan Agreement and the Revenue -26- Bond Indenture as originally executed and all amendments or supplements thereto. ARTICLE SIX. Debentureholders' Lists and Reports by the Company and the Trustee. Section 6.01. The Company shall deliver to the Trustee, semi-annually, not more than 15 days after each record date, the information required by Section 312(a) of the Trust Indenture Act. See Section 312 of the Trust Indenture Act. Section 6.02. See Section 312 of the Trust Indenture Act. Section 6.03. See Section 314(a) of the Trust Indenture Act. Section 6.04. On or before June 1 in each year, beginning June 1, 1996, so long as any Debentures are outstanding hereunder, the Trustee shall transmit by mail to the Debentureholders the report required by Section 313(a) of the Trust Indenture Act, if such report is required. See Trust Indenture Act Sections 311(b) and 313. ARTICLE SEVEN. Remedies of the Trustee and Debentureholders on Event of Default. Section 7.01. In case one or more of the following Events of Default shall have occurred and be continuing, that is to say: (a) default in the due and punctual payment of any installment of interest upon any of the Debentures as and when the same shall become due and payable, and continuance of such default for a period of thirty days; or (b) default in the due and punctual payment of the principal of any of the Debentures as and when the same shall become due and payable either at maturity, by declaration as authorized by this Indenture, or otherwise; or (c) failure on the part of the Company duly to observe or perform any other of the covenants, conditions or agreements on the part of the Company in the Debentures or in this Indenture contained for a period of sixty days after -27- the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Company by the Trustee, or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the Debentures at the time outstanding; or (d) a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company a bankrupt or insolvent, or approving a petition seeking reorganization of the Company under Title 11, United States Code or any other similar applicable Federal or State law, and such decree or order shall have continued undischarged and unstayed for a period of sixty days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of the Company or of all or substantially all of its property, or for the winding up or liquidation of its affairs shall have been entered, and such decree or order shall have remained in force undischarged and unstayed for a period of sixty days; or (e) the Company shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under Title 11, United States Code or any other similar applicable Federal or State law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or of all or substantially all of its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; or (f) an event of default, as defined in (i) any indenture or trust agreement securing or protecting any debt of the Company now or hereafter outstanding aggregating more than $10,000,000, or (ii) in the Revenue Bond Indenture, shall happen and be then continuing and such debt shall be or become due and payable, prior to the date on which the same would otherwise become due and payable, provided that, in the case of clause (i), such acceleration shall not be rescinded or annulled within ten days after written notice thereof to the Company from the Trustee or to the Company and the Trustee from the holders of not less than 25% in principal amount of the Debentures then outstanding hereunder; then and in each and every such case, so long as such Event of Default shall not have been remedied, unless the principal of all the Debentures shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debentures then outstanding hereunder, by -28- notice in writing to the Company (and to the Trustee if given by the Debentureholders), may declare the principal of all the Debentures then outstanding to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due payable, anything in this Indenture or in the said Debentures contained to the contrary notwithstanding. This provision, however, is subject to the condition that if, at any time after the principal of the Debentures shall have been so declared due and payable, but before the Debentures shall have become due by their terms and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debentures then outstanding and the principal of any and all Debentures then outstanding which shall have become due otherwise than by acceleration (with interest upon such principal and, to the extent that payment of such interest is enforceable under applicable law, upon overdue installments of interest, at the rate per annum expressed in the Debentures to the date of such payment or deposit) and the amount payable to the Trustee under Section 8.06, and any and all defaults under the Indenture, other than the nonpayment of principal on Debentures then outstanding which shall not have become due by their terms, shall have been remedied or provisions shall have been made therefor to the satisfaction of the Trustee -- then and in every such case the holders of a majority in aggregate principal amount of the Debentures then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default, or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Company and the Trustee shall continue as though no such proceedings had been taken, subject to any applicable order or ruling in a court of competent jurisdiction. Section 7.02. The Company covenants that (1) in case default shall be made in the payment of any installment of interest on any of the Debentures, as and when the same shall become due and payable, and such default shall have continued for a period of thirty days, or (2) in case default shall be made in the payment of the principal of any of the Debentures when the same shall have become due and payable, whether upon maturity of the Debentures or upon declaration as authorized by this Indenture or otherwise -- then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders -29- of the Debentures then outstanding, the whole amount that then shall have become due and payable on all such Debentures for principal or interest, as the case may be, with interest upon the overdue principal and (to the extent that payment of such interest is enforceable under applicable law) upon overdue installments of interest at the rate per annum expressed in the Debentures; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, and the amount payable to the Trustee under Section 8.06. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or other obligor upon the Debentures and collect in the manner provided and to the extent permitted by law out of the property of the Company or other obligor upon the Debentures wherever situated the monies adjudged or decreed to be payable. The Trustee shall be entitled and empowered, either in its own name or as trustee of an express trust, or as attorney-in-fact for the holders of the Debentures, or in any one or more of such capacities, to file such proof of debt, amendment of proof of debt, claim, petition or other document as may be necessary or advisable in order to have the claims of the Trustee and of the holders of the Debentures allowed in any equity receivership, insolvency, bankruptcy, liquidation, readjustment, reorganization or other judicial proceedings relative to the Company or any other obligor on the Debentures or their creditors, or affecting their property. The Trustee is hereby irrevocably appointed (and the successive respective holders of the Debentures by taking and holding the same shall be conclusively deemed to have so appointed the Trustee) the true and lawful attorney-in-fact of the respective holders of the Debentures, with authority to make and file in the respective names of the holders of the Debentures or on behalf of the holders of the Debentures as a class, subject to deduction from any such claims of the amounts of any claims filed by any of the holders of the Debentures themselves, any proof of debt, amendment of proof of debt, claim, petition or other document in any such proceedings and to receive payment of any sums becoming distributable on account thereof, and to execute any such other papers and documents and to do and perform any and all such acts and things for and on behalf of such holders of the Debentures as may be necessary or advisable in the opinion of the Trustee in order to have the respective claims of the Trustee and of the holders of the Debentures against the Company or its property allowed in any such proceeding, and to receive payment of or on account of such claims; provided, however, that nothing contained in this Indenture shall be deemed to give to the Trustee any -30- right to accept or consent to any plan of reorganization or otherwise by action of any character in any such proceeding to waive or change in any way any right of any Debentureholder. All rights of action and of asserting claims under this Indenture, or under any of the Debentures, may be enforced by the Trustee without the possession of any of the Debentures, or the production thereof on any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Debentures, subject to the provisions of this Indenture. In case of an Event of Default hereunder the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Section 7.03. Any monies collected by the Trustee pursuant to Section 7.02, shall be applied in the order following, at the date or dates fixed by the Trustee, upon presentation of the several Debentures, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of costs and expenses of collection and of all amounts payable to the Trustee under Section 8.06; Second: In case the principal of the outstanding Debentures shall not have become due and be unpaid, to the payment of interest on the Debentures, in the order of the maturity of the installments of such interest, with interest (so far as may be lawful and if such interest has been collected by the Trustee) upon the overdue installments of interest at the rate per annum expressed in the Debentures, such payments to be made ratably to the persons entitled thereto, without discrimination or preference; Third: In case the principal of the outstanding Debentures shall have become due, by declaration as authorized by this Indenture or otherwise, to the payment of the whole amount then owing and unpaid upon the Debentures for principal and interest, with interest on the overdue principal and (so far as may be lawful and if such interest has been collected by the Trustee) upon overdue installments of interest at the rate per annum expressed in the -31- Debentures; and in case such monies shall be insufficient to pay in full the whole amount so due and unpaid upon the Debentures, then to the payment of such principal and interest, without preference or priority of principal over interest, or of interest over principal, or of any installment of interest over any other installment of interest, or of any Debenture over any other Debenture, ratably to the aggregate of such principal and accrued and unpaid interest; and Fourth: To the payment of the remainder, if any, to the Company, its successors or assigns, or to whomsoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct. Section 7.04. Except as otherwise expressly provided in this Section, no holder of any Debenture shall have any right by virtue or by availing of any provision in this Indenture or otherwise to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture, for the appointment of a receiver or trustee, for the execution of any trust or power hereof, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Debentures then outstanding shall have made written request upon the Trustee either to proceed to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name as trustee hereunder and shall have offered or caused the holders of the Revenue Bonds to have offered, to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee within a reasonable time (which in no event shall be less than sixty days) after its receipt of such notice, request and offer of indemnity, shall have failed to proceed to exercise such powers or to institute any such action, suit or proceeding; it being understood and intended, and being expressly covenanted by the taker and holder of every Debenture with every other taker and holder and the Trustee, that no one or more holders of Debentures shall have any right in any manner whatever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other of such Debentures, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debentures. For the protection and enforcement of the provisions of this Section, each and every Debentureholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. Nothing herein contained shall, however, affect or impair the right, which is absolute and unconditional, of any -32- Debentureholder to receive and to institute suit to enforce the payment of the principal of and interest on his Debentures at and after the respective due dates (including, subject to the provisions of Section 7.01, maturity by declaration pursuant to this Indenture or otherwise) of such principal or interest, or the obligation of the Company, which is also absolute and unconditional, to pay the principal of and interest on each of the Debentures to the respective holders thereof at the times and places in the Debentures expressed. Section 7.05. No delay or omission of the Trustee or of any holder of any of the Debentures to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 7.04, every power and remedy given by this Article or by law to the Trustee or to the Debentureholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Debentureholders. Section 7.06. See Section 316(a)(1) of the Trust Indenture Act. Section 7.07. See Section 315(b) of the Trust Indenture Act. Section 7.08. See Section 315(e) of the Trust Indenture Act. ARTICLE EIGHT. Concerning the Trustee. Section 8.01. See Trust Indenture Act, including Section 315(a), (b), (c) and (d) thereof. Section 8.02. Except as otherwise provided in Section 8.01: (a) The Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, Officers' Certificate, certificate of auditors, or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond, debenture or other paper or document, including without limitation documents delivered to it pursuant to Section 5.10 (which documents the Trustee may rely on as not being amended or supplemented other than to the extent any amendments or supplements have been delivered to it) believed by it to be genuine and to have been signed or presented by the proper party or parties; -33- (b) Any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) The Trustee may consult with counsel of its selection and any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance with such Opinion of Counsel; (d) The Trustee shall be under no obligation to exercise any of the trusts or powers vested in it by this Indenture at the request, order or direction of any of the Debentureholders, pursuant to the provisions of this Indenture, unless such Debentureholders or the holders of the Revenue Bonds shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) The Trustee shall not be personally liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (f) Prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture or other paper or document unless requested in writing so to do by the holders of not less than a majority in principal amount of the Debentures then outstanding; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding. The reasonable expense of every such investigation shall be paid by the Company or, if paid by the Trustee, shall be repaid by the Company upon demand; (g) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or -34- negligence on the part of any agent or attorney appointed by it hereunder; and (h) None of the provisions of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any personal financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Section 8.03. The recitals contained herein and in the Debentures (other than the certificate of authentication on the Debentures) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Debentures. The Trustee shall not be accountable for the use or application by the Company of any of the Debentures or of the proceeds of such Debentures, or for the use or application of any moneys paid over by the Trustee in accordance with any provision of this Indenture, or for the use or application of any moneys received by any paying agent. Section 8.04. The Trustee or any paying agent or any Debenture registrar, in its individual or any other capacity, may become the owner or pledgee of Debentures with the same rights it would have if it were not Trustee, paying agent or Debenture registrar. Section 8.05. Subject to the provisions of Section 13.04, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any moneys received by it hereunder except such as it may agree in writing with the Company to pay thereon. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys shall be paid from time to time upon the written order of the Company, signed by its President, a Vice President, its Treasurer or an Assistant Treasurer. Section 8.06. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as the Company and the Trustee shall from time to time agree to in writing (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) for all services rendered by it in the execution of the trusts hereby created and in the exercise and performance of any of the powers and duties hereunder of the Trustee, and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and -35- advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify the Trustee for, and to hold it harmless against, any and all loss, damage, claims, liability or expense incurred without negligence or bad faith on the part of the Trustee, and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability in the premises. The obligations of the Company under this Section to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify the Trustee shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debentures. Section 8.07. Except as otherwise provided in Section 8.01, whenever in the administration of the trusts of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by an Officers' Certificate, and such certificate shall be full warrant to the Trustee for any action taken, suffered or omitted by it under the provisions of this Indenture upon the faith thereof. Section 8.08. See Section 310(b) of the Trust Indenture Act. In addition, excluded from the operation of Section 310(b)(1) of the Trust Indenture Act are the following: the Indenture dated as of December 1, 1989 between the Company and Citibank, N.A., Trustee, pursuant to which the Company's 7.20% Debentures due 2019 are outstanding, the Indenture dated as of October 1, 1990 between the Company and Citibank, N.A., Trustee, pursuant to which the Company's 7 1/2% Debentures due 2020 are outstanding, the Indenture dated as of August 1, 1991 between the Company and The Bank of New York, Trustee, pursuant to which the Company's 6.60% Debentures due 2021 are outstanding, and the Indenture dated as of August 1, 1991 between the Company and The Bank of New York, Trustee, pursuant to which the Company's 6.70.% Debentures due 2021 are outstanding, the Indenture dated as of October 1, 1991 between the Company and The Bank of New York, Trustee, pursuant to which the Company's 8- 3/4.% Debentures due 2021 are outstanding, the Indenture dated as of September 1, 1992 between the Company and The Bank of New York, Trustee, pursuant to which the Company's 8% Debentures due 2022 are outstanding, and the Indenture dated as of November 1, 1993 between the Company and The Bank of New York, Trustee, -36- pursuant to which the Company's 7-1/4% Debentures due 2028 are outstanding. Section 8.09. The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States or any State or Territory or of the District of Columbia authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $5,000,000, subject to supervision or examination by Federal, State, Territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect specified in Section 8.10. Section 8.10. (a) The Trustee, or any successor hereafter appointed, may at any time resign and be discharged from the trust hereby created by mailing notice thereof to the Company and to the Debentureholders whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of Section 6.02(a) hereof. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors of the Company, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within thirty days after the mailing of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Debentureholder who has been a bona fide holder of a Debenture or Debentures for at least six months may, subject to the provisions of Section 7.08, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur-- (1) the Trustee shall fail to comply with the provisions of Section 310(b) of the Trust Indenture Act after written request therefor by the Company or by any Debentureholder who has been a bona fide holder of a Debenture or Debentures for at least six months, or -37- (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 8.09 and shall fail to resign after written request therefor by the Company or by any such Debentureholder, or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors of the Company, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 7.08, any Debentureholder who has been a bona fide holder of a Debenture or Debentures for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Debentures at the time outstanding may at any time remove the Trustee and appoint a successor trustee. (d) Any resignation or removal of the Trustee and any appointment of a successor trustee pursuant to any of the provisions of this Section shall become effective upon acceptance of appointment by the successor trustee as provided in Section 8.11. Section 8.11. Any successor trustee appointed as provided in Section 8.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein. The predecessor trustee shall, nevertheless, at the written request of the successor trustee, and upon payment of any amount then due it pursuant to Section 8.06, pay over to the successor trustee all moneys at the time held by it hereunder; and the Company and the predecessor trustee shall execute and deliver such instruments and do such other things as may reasonably be required for more fully and certainly vesting and confirming in the successor trustee all such rights, powers, duties and obligations. Any Trustee ceasing to act shall -38- nevertheless retain a lien on all funds held or collected by such Trustee to secure any amount due it pursuant to Section 8.06. No successor trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 8.08 and eligible under the provisions of Section 8.09. Upon acceptance of appointment by a successor trustee as provided in this Section, the Company shall mail notice of the succession of such trustee hereunder to all Debentureholders at their last addresses appearing upon the register. If the Company fails to mail such notice in the prescribed manner within 10 days after the acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. Section 8.12. Any corporation into which the Trustee may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Trustee shall be a party, or any corporation succeeding to the business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be qualified under the provisions of Section 8.08 and eligible under the provisions of Section 8.09, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Debentures shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Debentures so authenticated; and in case at that time any of the Debentures shall not have been authenticated, any successor to the Trustee may authenticate such Debentures either in the name of any predecessor hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debentures or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor trustee or authenticate Debentures in the name of any predecessor trustee shall apply only to its successor or successors by merger, conversion or consolidation. Section 8.13. See Section 311 of the Trust Indenture Act. -39- ARTICLE NINE. Concerning the Debentureholders. Section 9.01. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Debentures may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Debentureholders in person or by attorney or proxy appointed in writing, or (b) by the record of the holders of Debentures voting in favor thereof at any meeting of Debentureholders duly called and held in accordance with the provisions of Article Ten, or (c) by a combination of such instrument or instruments and any such record of such a meeting of Debentureholders. Section 9.02. Subject to the provisions of Section 8.01, proof of the execution of any instrument by a Debentureholder or his attorney or proxy and proof of the holding by any person of any of the Debentures shall be sufficient for any purpose of this Indenture if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Debentures shall be proved by the register of such Debentures or by a certificate of the Debenture registrar. The record of any Debentureholders' meeting shall be proved in the manner provided in Section 10.06. Section 9.03. The Company, the Trustee, any paying agent and any Debenture registrar may deem and treat the person in whose name any Debenture shall be registered upon the register as the absolute owner of such Debenture (whether or not such Debenture shall be overdue and notwithstanding any notice of ownership or writing thereon), for the purpose of receiving payment of or on account of the principal of and interest and premium, if any, on such Debenture and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any Debenture registrar shall be affected by any notice to the contrary. All such payments so made to any such registered holder, for the time being or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Debenture. Section 9.04. In determining whether the holders of the requisite aggregate principal amount of Debentures have concurred in any direction, consent or waiver under this -40- Indenture, Debentures which are owned by the Company or any other obligor on the Debentures or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Debentures shall be disregarded and deemed not to be outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver only Debentures which the Trustee knows are so owned shall be so disregarded. Debentures so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section, if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Debentures and that the pledgee is not a person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Section 9.05. Any demand, request, waiver, consent or vote of the holder of any Debenture shall be conclusive and binding upon such holder and upon all future holders and owners of such Debenture, and of any Debenture issued in exchange therefor or in place thereof, irrespective of whether or not any notation in regard thereto is made upon such Debenture. Any action taken by the holders of the majority or percentage in aggregate principal amount of the Debentures specified in this Indenture in connection with such action shall be conclusively binding upon the Company, the Trustee and the holders of all the Debentures. ARTICLE TEN. Debentureholders' Meetings. Section 10.01. A meeting of Debentureholders may be called at any time and from time to time pursuant to the provisions of this Article Ten for any of the following purposes: (1) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Debentureholders pursuant to any of the provisions of Article Seven; (2) to remove the Trustee and appoint a successor trustee pursuant to the provisions of Article Eight; (3) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 11.02; or -41- (4) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of the Debentures under any other provision of this Indenture, or authorized or permitted by law. Section 10.02. The Trustee may at any time call a meeting of Debentureholders to take any action specified in Section 10.01, to be held at such time and at such place in the Borough of Manhattan, City and State of New York, as the Trustee shall determine. Notice of every meeting of the Debentureholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed not less than fifteen days prior to the date fixed for the meeting to the Debentureholders whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of Section 6.02(a) hereof or obtained in accordance with the provisions of Section 6.01 hereof. Any meeting of Debentureholders shall be valid without notice if the holders of all Debentures then outstanding are present in person or by proxy or if notice is waived before or after the meeting by the holders of all Debentures outstanding, and if the Company and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice. Section 10.03. In case at any time the Company, pursuant to a resolution of its Board of Directors or the holders of at least 20% in aggregate principal amount of the Debentures then outstanding, shall request the Trustee to call a meeting of Debentureholders to take any action specified in Section 10.01, by written request setting forth in reasonable detail the action proposed to be taken at the meeting and the time and place in the Borough of Manhattan, City and State of New York, for such meeting, the Trustee shall mail notice of such meeting as provided in Section 10.02 within twenty days after receipt of such request. Section 10.04. To be entitled to vote at any meeting of Debentureholders a person shall (a) be a holder of one or more Debentures or (b) be a person appointed by an instrument in writing as proxy for the holder or holders of Debentures by a holder of one or more Debentures. The only persons who shall be entitled to be present or to speak at any meeting of Debentureholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. Section 10.05. Notwithstanding any other provision of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Debentureholders, in regard to proof of the holding of Debentures and of the -42- appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. Except as otherwise permitted or required by any such regulations, the holding of Debentures shall be proved in the manner specified in Section 9.02 and the appointment of any proxy shall be proved in the manner specified in Section 9.02. Pursuant to the foregoing authority the Trustee may fix, in advance, a date as a record date for determining the Debentureholders entitled to notice of, or to vote at, any meeting, such date to be not less than fifteen nor more than forty-five days prior to the date fixed for such meeting. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by request of the Company or Debentureholders as provided in Section 10.03, in which case the Company or such Debentureholders, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the holders of a majority in principal amount of the Debentures represented at the meeting and entitled to vote. Subject to the provisions of Section 9.04, at any meeting each Debentureholder or proxy shall be entitled to one vote for each $1,000 principal amount of Debentures, provided, however, that no vote shall be cast or counted at any meeting in respect of any Debentures challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Debentures held by him or instruments in writing as aforesaid duly designating him as the person to vote on behalf of other Debentureholders. Any meeting of Debentureholders duly called pursuant to the provisions of Section 10.02 or 10.03 may be adjourned from time to time, and the meeting may be held as so adjourned without further notice. Section 10.06. The vote upon any resolution submitted to any meeting of Debentureholders shall be by written ballots on which shall be subscribed the signatures of the holders of Debentures or of their representatives by proxy. The permanent chairman of the meeting shall appoint two inspectors of votes, who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Debentureholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more person having knowledge of the facts, setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 10.02. The record shall be signed and -43- verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. Section 10.07. Nothing in this Article Ten contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Debentureholders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Debentureholders under any of the provisions of this Indenture or of the Debentures. ARTICLE ELEVEN. Supplemental Indentures. Section 11.01. The Company, when authorized by a resolution of its Board of Directors, and the Trustee, subject to the conditions and restrictions of this Indenture contained, may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act of 1939 as then in effect) for one or more of the following purposes: (a) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company pursuant to Article Twelve; (b) to add to the covenants and agreements of the Company in this Indenture contained such further covenants and agreements thereafter to be observed, and to surrender any right or power herein reserved to or conferred upon the Company; and (c) to cure any ambiguity or to correct or supplement any defective or inconsistent provisions contained in this Indenture or in any supplemental indenture. The Trustee is hereby authorized to join with the Company in the execution of any supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations which may be therein contained, but the Trustee shall not be obligated to enter into any such supplemental indenture which affects the -44- Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section may be executed by the Company and the Trustee without the consent of the holders of any of the Debentures at the time outstanding, notwithstanding any of the provisions of Section 11.02. Section 11.02. With the consent (evidenced as provided in Section 9.01) of the holders (or persons entitled to vote, or to give consents respecting the same) of more than 50% in aggregate principal amount of the Debentures at the time outstanding, the Company, when authorized by a resolution of its Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act of 1939 as then in effect) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights and obligations of the holders of the Debentures and of the Company; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Debenture, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, without the consent of the holder of each Debenture so affected, or (ii) reduce the aforesaid percentage of Debentures, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all Debentures then outstanding. Upon the request of the Company, accompanied by a copy of a resolution of its Board of Directors certified by the secretary or an assistant secretary of the Company authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Debentureholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion but shall not be obligated to enter into such supplemental indenture. It shall not be necessary for the consent of the Debentureholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Company shall mail a notice, setting forth in general terms the substance of such supplemental indenture, to all Debentureholders at their last addresses appearing upon the register. Any failure of the Company to mail such notice, or any -45- defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. Section 11.03. Upon the execution of any supplemental indenture pursuant to the provisions of this Article, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debentures shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. Section 11.04. Debentures authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article, or after any action taken at a Debentureholders' meeting pursuant to Article Ten, may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture or as to any action taken at any such meeting; and, in such case, suitable notation may be made upon outstanding Debentures after proper presentation and demand. If the Company or the Trustee shall so determine, new Debentures so modified as to conform, in the opinion of the Trustee and the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture, or to any action taken at any such meeting, may be prepared by the Company, authenticated by the Trustee and delivered in exchange for the Debentures then outstanding, upon demand of, and without cost to, the holders thereof, upon surrender of such Debentures. Section 11.05. The Trustee, subject to the provisions of Section 8.01, may receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article Eleven is authorized or permitted by the terms of this Indenture and that it is not inconsistent therewith. ARTICLE TWELVE. Consolidation, Merger and Sale. Section 12.01. Nothing contained in this Indenture or in any of the Debentures shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company), or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale or conveyance (or successive sales or conveyances) of the property and assets of the Company (or of its successor or successors) as an entirety or substantially as an -46- entirety, to any other corporation (whether or not affiliated with the Company) authorized to acquire the same; provided, however, and the Company hereby covenants and agrees that, upon any such consolidation, merger, sale or conveyance, the due and punctual payment of the principal of and interest on all the Debentures, according to their tenor, and the due and punctual performance and observance of all the terms, covenants and conditions of this Indenture to be kept or performed by the Company, shall be expressly assumed, by indenture supplemental hereto, satisfactory in form to the Trustee, executed and delivered to the Trustee by the corporation formed by such consolidation, or into which the Company shall have been merged, or by the corporation which shall have acquired such property and assets. In the event of any such sale or conveyance the predecessor Company may be dissolved, wound up and liquidated at any time thereafter. Section 12.02. In case of any such consolidation, merger, sale or conveyance and upon the execution by the successor corporation of an indenture supplemental hereto, as provided in Section 12.01, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part. Such successor corporation thereupon may issue either in its own name or in the name of the Company, with such suitable reference, if any, to such consolidation, merger, sale or conveyance as may be required by the Trustee, any or all of the Debentures issuable hereunder which theretofore shall not have been issued by the Company and delivered to the Trustee; and, upon the written order of such successor corporation, instead of the Company, and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Debentures which previously shall have been executed by the Company and any Debentures which such successor corporation thereafter shall cause to be executed in accordance with the provisions of this Indenture and delivered to the Trustee for that purpose. All the Debentures so issued shall in all respects have the same legal rank and benefit under this Indenture as the Debentures theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Debentures had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale or conveyance such changes in phraseology and form (but not in substance) may be made in the Debentures thereafter to be issued as may be appropriate). Nothing contained in this Indenture or in any of the Debentures shall prevent the Company from consolidating with, or merging into itself, or acquiring by purchase or otherwise all or any part of the property of, any other corporation (whether or not affiliated with the Company). -47- Section 12.03. The Trustee, subject to the provisions of Section 8.01, may receive an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale or conveyance, and any such assumption, complies with the provisions of this Article. ARTICLE THIRTEEN. Satisfaction and Discharge of Indenture; Deposited Moneys. Section 13.01. If: (1) Either (i) the Company shall deliver to the Trustee for cancellation all Debentures (other than Debentures deemed not to be outstanding under clause (c) of the definition thereof) not theretofore canceled or delivered to the Trustee for cancellation, or (ii) the Company shall have deposited in trust with the Trustee cash sufficient to pay at maturity or upon redemption (after notice of redemption has been duly given or provided for) all of the Debentures (other than Debentures deemed not to be outstanding under clause (c) of the definition thereof) not theretofore canceled or delivered to the Trustee for cancellation, including principal, premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, or (iii) the Company shall have deposited in trust with the Trustee direct obligations of the United States or obligations the principal of and interest on which are fully guaranteed by the United States, and which are not subject to prepayment, redemption or call prior to their stated maturity, in such amounts and maturing at such times that the proceeds of said obligations, together with the income that can be predetermined will accrue thereon by reference to the terms thereof (without consideration of any reinvestment thereof), to be received upon their respective maturities and interest payment dates will provide funds sufficient to pay the principal, premium, if any, and interest due or to become due to the date of maturity or to the redemption date, as the case may be, with respect to all of the Debentures (other than Debentures deemed not to be outstanding under clause (c) of the definition thereof) not theretofore canceled or delivered to the Trustee for cancellation, provided that the Trustee shall have been irrevocably instructed to apply the proceeds of said obligations to the payment of such principal, premium and interest with respect to such Debentures, or (iv) the Company shall have deposited in trust with the Trustee any combination of cash or obligations referred to in (ii) and (iii), (2) the Company shall pay or cause to be paid all other sums payable with respect to the Debentures, and (3) the Company shall deliver to the Trustee and the Revenue Bond Trustee an Officers' Certificate and an Opinion of -48- Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of the entire indebtedness on the Debentures have been complied with, then (a) this Indenture shall cease to be of further effect (except as otherwise provided herein) and on or after such maturity date or redemption date, as the case may be, the Trustee, on demand of, and at the expense of, the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture; and (b) all obligations of the Company in respect of the Debentures shall cease and be discharged and the holders of such Debentures shall thereafter be restricted exclusively to such funds for any and all claims of whatever nature on their part under this Indenture or with respect to such Debentures; provided, however, that, in no event shall the Company be discharged from (i) any payment obligation in respect of Debentures deemed not to be outstanding under clause (c) of the definition thereof if such obligations continue to be valid obligations under applicable law, (ii) any obligations under Sections 2.05 and 2.06 (except that Debentures issued upon registration of transfer or exchange or in lieu of mutilated, lost, destroyed or stolen Debentures shall not be deemed to be such obligations) or (iii) any obligations under Sections 6.01, 8.06, 13.02, 13.03 and 13.04; further provided, however, that the rights and privileges of the Trustee under this Indenture shall survive any such discharge. The Company hereby agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Debentures, and without bad faith or negligence. Section 13.02. All moneys deposited with the Trustee pursuant to Section 13.01 shall be held in trust and applied by it to the payment, to the holders of the particular Debentures for the payment or redemption of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal, premium, if any, and interest. Section 13.03. In connection with the satisfaction and discharge of this Indenture all moneys then held by any paying agent under the provisions of this Indenture shall, upon demand of the Company or Trustee, be paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys. Section 13.04. In case the holder of any Debenture entitled to payment hereunder at any time outstanding hereunder shall not, within two years after the maturity date of such Debenture or the date fixed for the redemption of any such -49- Debenture, claim the amount on deposit with the Trustee or other depositary for the payment of such Debenture, the Trustee or other depositary shall pay over to or upon the written order of the Company the amount so deposited, upon receipt of a request signed by the President or a Vice President of the Company, and thereupon the Trustee or other depositary shall be released from any and all further liability with respect to the payment of such Debenture and the holder of said Debenture shall be entitled (subject to any applicable statute of limitations) to look only to the Company as an unsecured creditor for the payment thereof. ARTICLE FOURTEEN. Immunity of Incorporators, Stockholders, Officers, Trustees and Directors. Section 14.01. No recourse under or upon any obligation, covenant or agreement of this Indenture, or of any Debenture, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer, trustee or director, as such, past, present or future, of the Company or of any predecessor or successor corporation, either directly through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law or equity, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers, trustees or directors of the Company, as such, or of any predecessor or successor corporation, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Debentures or implied therefrom; and that any and all such liability is hereby expressly waived and released by every holder of Debentures as a condition of, and as a consideration for, the execution of this Indenture and the issue of such Debentures. -50- ARTICLE FIFTEEN. Miscellaneous Provisions. The provisions of the Trust Indenture Act which impose duties on any person (including provisions automatically deemed included in an indenture by the Trust Indenture Act unless the indenture provides that such provisions are excluded which provision is hereby expressly excluded other than Section 316(a)(2) of the Trust Indenture Act) are a part of and govern this Indenture. If any provision hereof limits, qualifies or conflicts with any of the duties imposed by operation of the Trust Indenture Act, the Trust Indenture Act shall control. Section 15.01. All the covenants, stipulations, promises and agreements in this Indenture contained by or in behalf of the Company shall bind its successors and assigns, whether so expressed or not. Section 15.02. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful successor of the Company. Section 15.03. The Company by instruments in writing executed by authority of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company and thereupon such power so surrendered shall terminate both as to the Company and as to any successor corporation. Section 15.04. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Debentures to or on the Company may be given or served by being deposited postage prepaid in a post-office letterbox addressed (until another address is filed in writing by the Company with the Trustee), as follows: Elizabethtown Water Company, 600 South Avenue, Westfield NJ 07090. Any notice, election, request or demand by any Debentureholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made at the principal corporate trust office of the Trustee in the Borough of Manhattan, City and State of New York. Section 15.05. This Indenture and each Debenture shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said state. Section 15.06. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the -51- Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. Any certificate, statement or opinion of an officer of the Company may be based, in so far as it relates to legal matters, upon a certificate or opinion of or representations by counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of counsel may be based (in so far as it relates to factual matters information with respect to which is in the possession of the Company) upon the certificate, statement or opinion of or representations by an officer or officers of the Company, unless such counsel knows that the certificate, statement or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of an officer of the Company or of counsel may be based, in so far as it relates to accounting matters, upon a certificate or opinion of or representations by an accountant or firm of accountants in the employ of the Company, unless such officer or counsel, as the case may be, knows that the certificate or opinion or representations with respect to the accounting matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Section 15.07. In any case where the date of maturity of interest on or principal of the Debentures or the date fixed for redemption of any Debenture shall be a Sunday or legal holiday or a date on which banking institutions in the city of -52- payment are authorized by law to close, then payment of interest, principal or premium may be made on the next succeeding day not a Sunday or a legal holiday or a date on which banking institutions in the city of payment are authorized by law to close with the same force and effect as if made on the nominal date and no interest shall accrue for the period after such nominal date. Section 15.08. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in this Indenture which is required to be included in this Indenture by any of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, such required provision shall control. Section 15.09. In case any one or more of the provisions contained in this Indenture or in the Debentures shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Debentures, but this Indenture and such Debentures shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. Section 15.10. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. The Bank of New York, the party of the second part, hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. -53- IN WITNESS WHEREOF, Elizabethtown Water Company, the party of the first part, has caused this Indenture to be signed in its corporate name and acknowledged by its President, or one of its Vice Presidents, and its corporate seal to be affixed hereunto, duly attested by its Secretary or an Assistant Secretary; and The Bank of New York, the party of the second part, has caused this Indenture to be signed and acknowledged by one of its Assistant Vice Presidents, and its corporate seal to be affixed hereunto, duly attested by one of its Assistant Treasurers, all as of the day and year first above written. ELIZABETHTOWN WATER COMPANY, (Seal) By /s/ Gail P. Brady ---------------------------- Gail P. Brady Vice President Attest: /s/ Walter M. Braswell - --------------------------- Walter M. Braswell Secretary THE BANK OF NEW YORK, as Trustee (Seal) By /s/ Robert F. McIntyre -------------------------------- Robert F. McIntyre Assistant Vice President Attest: /s/ Marie E. Trimboli - --------------------------- Marie E. Trimboli Assistant Treasurer -54- STATE OF NEW JERSEY ) ) ss.: COUNTY OF UNION ) On this 12th day of December, 1995, before me, the subscriber, a Notary Public within and for the County of Union, in the State of New Jersey, personally appeared Gail P. Brady, to me personally known, who, being by me duly sworn, did say that she resides at 49 Howell Drive, Verona New Jersey and is a Vice President of Elizabethtown Water Company, one of the corporations described in and which executed the foregoing instrument; that she knows the corporate seal of the said corporation and that the seal affixed to said instrument is the corporate seal of said corporation; and that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors and that she subscribed her name thereto by like authority; and said Walter M. Braswell acknowledged said instrument to be the free act and deed of said corporation. My commission as Notary Public as aforesaid expires /s/ Brenda H. Willis ------------------------------- Brenda H. Willis Notary Public of New Jersey My Commission Expires June 22, 1999 -55- STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK) On this 17th day of December, 1995, before me, the subscriber, a Notary Public within and for the County of New York, in the State of New York, personally appeared ROBERT F. McINTYRE, to me personally known, who, being by me duly sworn, did say that he resides at 1108 Hudson Street, Hoboken, New Jersey 07080 and is an Assistant Vice President of The Bank of New York, one of the corporations described in and which executed the foregoing instrument; that he knows the corporate seal of the said corporation and that the seal affixed to said instrument is the corporate seal of said corporation; and that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors and that he subscribed his name thereto by like authority; and said ROBERT F. McINTYRE acknowledged said instrument to be the free act and deed of said corporation. My commission as Notary Public as aforesaid expires /s/ Karen Katlan ------------------------------- Karen Katlan Notary Public, State of New York No. 01KA4994374 Qualified in New York County Commission Expires April 6, 1996 -56- EX-11 3 Exhibit 11 E'TOWN CORPORATION AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS 1995 1994 1993 _________ _________ _________ PRIMARY _______ EARNINGS Income Before Preferred Stock Dividends of Subsidiary $16,108,533 $12,941,790 $14,879,828 Deduct: Preferred Stock Dividends 813,000 854,047 1,050,000 ___________ ___________ ___________ Net Income Available for Common Stock $15,295,533 12,087,743 13,829,828 ___________ ___________ ___________ ___________ ___________ ___________ SHARES Weighted Average Number of Common Shares Outstanding 7,093,027 6,207,564 5,330,641 Assuming Exercise of Options Reduced by the Number of Shares Which Could Have Been Purchased With the Proceeds From Exercise of Such Options 2,156 2,845 7,298 ___________ ___________ ___________ Weighted Average Number of Common Shares Outstanding as Adjusted 7,095,183 6,210,409 5,337,939 ___________ ___________ ___________ ___________ ___________ ___________ Primary Earnings Per Share of Common Stock $ 2.16 $ 1.95 $ 2.59 ___________ ___________ ___________ ___________ ___________ ___________ ASSUMING FULL DILUTION ______________________ EARNINGS Income Before Preferred Stock Dividends of Subsidiary $16,108,533 $12,941,790 $14,879,828 Deduct: Preferred Stock Dividends 813,000 854,047 1,050,000 Add: After Tax Interest Expense Applicable to 6 3/4% Convertible Subordinated Debentures 524,066 542,195 550,843 ___________ __________ ___________ Adjusted Net Income $15,819,599 12,629,938 14,380,671 ___________ __________ ___________ ___________ __________ ___________ SHARES Weighted Average Number of Common Shares Outstanding 7,093,027 6,207,564 5,330,641 Assuming Exercise of Options Reduced by the Number of Shares Which Could Have Been Purchased With the Proceeds From Exercise of Such Options 2,156 2,845 7,298 Assuming Conversion of 6 3/4% Convertible Subordinated Debentures (a) 298,613 308,943 313,869 ___________ __________ ___________ Weighted Average Number of Common Shares Outstanding as Adjusted 7,393,796 6,519,352 5,651,808 ___________ __________ ___________ ___________ __________ ___________ Fully Diluted Earnings Per Share of Common Stock $ 2.14 $ 1.94 $ 2.54 ___________ __________ ___________ ___________ __________ ___________ (a) Convertible at $40 per share. EX-12 4 Exhibit 12(a) Elizabethtown Water Company & Subsidiary Computation of Ratio of Earnings to Fixed Charges 1995 1994 1993 1992 1991 ________ ________ ________ ________ ________ EARNINGS: Income before preferred stock dividends $17,325,144 $14,223,142 $14,832,519 $12,149,343 $11,361,063 Federal income taxes 9,161,510 7,413,995 7,916,794 6,021,464 5,630,265 Interest charges 11,114,496 10,402,060 11,437,710 10,623,801 11,016,414 ___________ ___________ ___________ ___________ ___________ Earnings available to cover fixed charges $37,601,150 $32,039,197 $34,187,023 $28,794,608 $28,007,742 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ FIXED CHARGES: Interest on long term debt 10,892,129 10,774,008 11,527,301 10,516,521 10,585,336 Other interest 2,343,903 175,507 77,921 514,122 535,834 Amortization of debt discount - net 323,557 319,646 224,383 209,631 287,180 ___________ ___________ ___________ ___________ ___________ Total fixed charges $13,559,589 $11,269,161 $11,829,605 $11,240,274 $11,408,350 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Ratio of Earnings to Fixed Charges 2.77 2.84 2.89 2.56 2.46 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Earnings to Fixed Charges represents the sum of Income Before Preferred Stock Dividends, 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. EX-12 5 Exhibit 12(b) Elizabethtown Water Company & Subsidiary Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends 1995 1994 1993 1992 1991 ________ ________ ________ ________ ________ EARNINGS: Income before preferred stock dividends $17,325,144 $14,223,142 $14,832,519 $12,149,343 $11,361,063 Federal income taxes 9,161,510 7,413,995 7,916,794 6,021,464 5,630,265 Interest charges 11,114,496 10,402,060 11,437,710 10,623,801 11,016,414 ___________ ___________ ___________ ___________ ___________ Earnings available to cover fixed charges $37,601,150 $32,039,197 $34,187,023 $28,794,608 $28,007,742 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ FIXED CHARGES AND PREFERRED DIVIDENDS: Interest on long term debt 10,892,129 10,774,008 11,527,301 10,516,521 10,585,336 Preferred dividend requirement (1) 1,242,929 1,299,326 1,610,429 1,570,446 1,570,446 Other interest 2,343,903 175,507 77,921 514,122 535,834 Amortization of debt discount - net 323,557 319,646 224,383 209,631 287,180 ___________ ___________ ___________ ___________ ___________ Total fixed charges $14,802,518 $12,568,487 $13,440,034 $12,810,720 $12,978,796 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Ratio of Earnings to Fixed Charges and Preferred Dividends 2.54 2.55 2.54 2.25 2.16 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ (1) Preferred Dividend Requirement: Preferred dividends $813,000 $854,047 $1,050,000 $1,050,000 $1,050,000 Effective tax rate 34.59% 34.27% 34.80% 33.14% 33.14% ___________ ___________ ___________ ___________ ___________ Preferred dividend requirement $1,242,929 $1,299,326 $1,610,429 $1,570,446 $1,570,446 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Earnings to Fixed Charges and Preferred Dividends represents the sum of Income Before Preferred Stock Dividends, Federal income taxes and Interest Charges (which is reduced by Capitalized interest), divided by Fixed Charges. Fixed Charges and Preferred Dividends consist of interest on long and short-term debt (which is not reduced by capitalized interest), dividends on Preferred Stock on a pre-tax basis and Amortization of debt discount. EX-13 6 Portion of the 1995 Annual Report to Shareholders for the year ended December 31, 1995 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) and E'town Properties, Inc. (Properties). The Mount Holly Water Company (Mount Holly) is a wholly owned subsidiary of Elizabethtown. Mount Holly contributed 3% of the Company's consolidated operating revenues for 1995. The assets and operating results of Elizabethtown constitute the predominant portions of E'town's assets and operating results. The following analysis sets forth significant events affecting the financial condition of E'town and Elizabethtown at December 31, 1995, and the results of operations for the years ended December 31, 1995, 1994 and 1993. LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures Program Consolidated capital expenditures, primarily for water utility plant, were $73.9 million during 1995. Capital expenditures for the three-year period ending December 31, 1998, are estimated to be $149.8 million, of which $148.9 million is for utility plant ($128.4 million for Elizabethtown and $20.5 million for Mount Holly) and $.9 million is for non-utility expenditures. A major portion of the utilities' capital outlays will occur in the first nine months of the three-year period as Elizabethtown completes its new water treatment plant. After this project is completed in late 1996, the capital outlays for Elizabethtown are expected to return to levels experienced in the early 1990s. Mount Holly expects to incur significant capital expenditures in 1997 as it constructs new water supply, treatment and transmission facilities as discussed below. Elizabethtown Elizabethtown's capital program includes the construction of a new water treatment plant, the Canal Road Water Treatment Plant (Plant), near Elizabethtown's existing plant. The Plant, which will have an initial rated production capacity of 40 million gallons per day (mgd) and has been designed to permit expansion to 200 mgd, is necessary to meet existing and anticipated customer demands and to replace groundwater supplies withdrawn from service as a result of more restrictive water quality regulations and groundwater contamination. Expansion of the Plant's production capacity beyond 40 mgd is not expected to occur in the foreseeable future. Elizabethtown's construction program also includes additional mains and storage facilities necessary to serve existing and future customers. In April 1994, Elizabethtown executed a lump-sum contract for the construction of the Plant. The estimated cost of the Plant is approximately $100 million, excluding an Allowance for Funds Used During Construction (AFUDC). The Company has expended $83.0 million, excluding AFUDC of $7.2 million on the Plant, as of December 31, 1995. The project is proceeding on schedule, the construction contract remains on budget and the project is expected to be completed during the third quarter of 1996. In August 1993, the New Jersey Board of Public Utilities (BPU) approved a stipulation (1993 Plant Stipulation) signed by the Department of Ratepayer Advocate, the BPU staff and several of Elizabethtown's major wholesale customers, all of whom typically participate in Elizabethtown's rate cases. The 1993 Plant Stipulation states the Plant is necessary and the Company's estimate regarding the Plant's cost, at that time $87 million and construction period are reasonable. In April 1994, Elizabethtow-n notified all parties to the 1993 Plant Stipulation that the estimated cost of the Plant had increased. The 1993 Plant Stipulation authorizes Elizabethtown to levy a rate surcharge during the Plant's construction period if the Company's pre-tax interest coverage ratio for any 12-month historical period drops below 2.0 times. The pre-tax interest coverage has remained above the 2.0 times trigger level and therefore, the surcharge has not been required. The 1993 Plant Stipulation also provides that the rate of return on common shareholder's equity used to calculate the rate for the equity component of the AFUDC for the Plant will be 1.5% less than the rate of return on common shareholder's equity established in Elizabethtown's most recent base rate case. The authorized rate of return on Elizabethtown's common shareholder's equity is currently 11.5%. Elizabethtown has filed for a rate increase to reflect the financing and operating costs of the Plant which is expected to take effect when the Plant, is completed later this year (see Economic Outlook). Mount Holly To ensure an adequate supply of quality water from an aquifer serving parts of southern New Jersey, state legislation requires Mount Holly, as well as other suppliers obtaining water from designated portions of this aquifer, to reduce pumpage from its wells. Mount Holly has received approval from the New Jersey Department of Environmental Protection (NJDEP) for its plan to develop a new water supply, treatment and transmission system necessary to obtain water outside the designated portion of the aquifer and to treat the water and pump it into the Mount Holly system. This is referred to as the Mansfield Project. The project is currently estimated to cost $16.5 million, excluding AFUDC, and is expected to be completed in 1997. The land for the supply and treatment facilities has been purchased and wells have been drilled and can produce the required supply. Mount Holly has filed for rate relief relating to the Mansfield Project (see Economic Outlook.) On October 5, 1995, the NJDEP granted Mount Holly a water allocation diversion permit for four wells that are to be the water supply for the Mansfield Project. On October 20, 1995, New Jersey-American Water Company requested, and was subsequently granted, an adjudicatory hearing on the permit. The Company and Mount Holly believe that the permit in question will be upheld but cannot predict the outcome of the objection. In the event that the objection is successful and the permit is rescinded, Mount Holly would utilize the alternative plan of purchasing water from New Jersey-American Water Company. CAPITAL RESOURCES During 1995, Elizabethtown, including Mount Holly, financed 8.4% of its capital expenditures from internally generated funds (after payment of common stock dividends). The balance was financed with a combination of proceeds from capital contributions from E'town (funded by sale of its Common Stock), tax exempt bonds issued through the New Jersey Economic Development Authority (NJEDA) and short-term borrowings under a revolving credit agreement discussed below. For the three-year period ending December 31, 1998, Elizabethtown, including Mount Holly, estimates 34.4% of its capital expenditures will be financed with internally generated funds (after payment of common stock dividends). The balance will be financed with a combination of proceeds from the sale of E'town common stock, long-term debentures, proceeds of tax-exempt NJEDA bonds and short-term borrowings under the revolving credit agreement. -The NJEDA has granted preliminary approval for the financing of almost all of Elizabethtown's major projects over the next three years, including the Plant. Elizabethtown expects to pursue tax-exempt financing to the extent that final allocations are granted by the NJEDA. The Company's senior debt is rated A3 and A by Moody's and Standard & Poor's, respectively. In June 1995, E'town issued 660,000 shares of common stock for net proceeds of $16.9 million which were used to fund an equity contribution to Elizabethtown of $16.9 million. The equity contribution has been used to repay short-term debt that had been issued under Elizabethtown's revolving credit agreement to partially fund the Company's capital program, the predominant portion of which relates to the construction of the Plant. During 1995, 248,846 shares of common stock were issued for proceeds of $6.4 million under E'town's Dividend Reinvestment and Stock Purchase Plan (DRP). The proceeds are used on an ongoing basis to make capital contributions to Elizabethtown to partially fund its capital program. In December 1995, Elizabethtown issued $40.0 million of 5.60% tax-exempt Debentures through the NJEDA. The proceeds of the issue were used to repay amounts outstanding under Elizabethtown's revolving credit agreement. During 1995, Elizabethtown obtained a portion of funds required for its capital program through borrowings under its revolving credit agreement (Agreement) with an agent bank and five additional banks. The Agreement provides up to $60.0 million in revolving short-term financing, which together with internal funds, other short-term financing, proceeds of future issuances of debt and preferred stock and capital contributions from E'town, is expected to be sufficient to finance Elizabethtown's and Mount Holly's capital needs through 1998. The Agreement allows Elizabethtown to borrow, repay and reborrow up to $60.0 million during the first three years, after which time Elizabethtown may convert any outstanding balances to a five-year fully amortizing term loan. The Agreement further provides that, among other covenants, Elizabethtown must maintain a percentage of common and preferred equity to total capitalization of not less than 35% and a pre-tax interest coverage ratio of at least 1.5 to 1. As of December 31, 1995, the percentage o-f Elizabethtown's common and preferred equi-ty to total capitalization, calculated in accordance with the Agreement, was 47%. For the 12 months ended December 31, 1995, Elizabethtown's pre-tax interest coverage ratio, calculated in accordance with the Agreement, was 3.12 to 1. At December 31, 1995, Elizabethtown had borrowings outstanding of $27.0 million under the Agreement at interest rates from 5.75% to 6.00%, at a weighted average rate of 5.94%. 1994 and 1993 In May 1994, E'town issued 690,000 shares of common stock for net proceeds of $18.2 million. The net proceeds were used to fund an equity contribution to Elizabethtown of $16.0 million. This contribution had been used to partially fund Elizabethtown's construction program, the predominant portion of which related to the Plant. The balance of the proceeds had been used to fund working capital requirements of the Corporation. During 1994, 273,159 shares of common stock were issued for proceeds of $7.1 million under E'town's DRP. The proceeds were used to make capital contributions to Elizabethtown to partially fund its capital program. In March 1994, Elizabethtown issued 120,000 shares of $100 par value, $5.90 Cumulative Preferred Stock for proceeds of $12.0 million at an effective rate of 7.37%. The proceeds were used to redeem $12.0 million of the Company's $8.75 Cumulative Preferred Stock. The redemption premium of $1.0 million was paid from general Company funds. In May 1993, E'town issued 575,000 shares of common stock for net proceeds of $16.6 million. The net proceeds were used to fund equity contributions to Elizabethtown of $11.0 million in May 1993 and $2.8 million in September 1993. Elizabethtown used a portion of such contributions to repay $7.0 million of short-term bank debt incurred for construction expenditures and invested the balance on a short-term basis to fund working capital requirements. During 1993, 200,878 shares of common stock were issued for proceeds of $6.0 million under E'town's DRP. Such proceeds were used to fund equity contributions to Elizabethtown, primarily for Elizabethtown's capital expenditures. In August 1993, E'town, Properties and Elizabethtown sold three parcels of land totalling 260 acres to the Somerset County Park Commission for $3.4 million. Of the total proceeds received by E'town, $2.2 million was used to fund an equity contribution to Elizabethtown and the remainder was used to fund working capital requirements of the Corporation. In November 1993, Elizabethtown issued $50.0 million of 7 1/4% Debentures due November 1, 2028. The proceeds of the issue were used to redeem $30.0 million of the Company's 8 5/8% Debentures due 2007 and $20.0 million of the Company's 10 1/8% Debentures due 2018. The aggregate redemption premiums of $2.7 million were paid from general Company funds. RESULTS OF OPERATIONS Net Income for 1995 was $15.3 million or $2.16 per share on a primary basis as compared to $12.1 million or $1.95 per share for 1994. The combined effect of a $5.3 million rate increase in February 1995 (discussed below), increases in AFUDC in 1995 and a non-recurring charge in 1994 all contributed to the increase in net income between 1994 and 1995. Earnings Per Share of Common Stock in 1995 were further affected by an increase in outstanding shares. Net Income for 1994 was $12.1 million or $1.95 per share on a primary basis, as compared to $13.8 million or $2.59 per share for 1993. A return to more normal summer weather and water consumption patterns, the combined effect of non-recurring charges in 1994, and increases in operating and depreciation expenses since March 1993, when rates were last increased, all contributed to the decrease in net income between 1993 and 1994. Earnings Per Share of Common Stock in 1994 were further affected by an increase in shares outstanding. Operating Revenues increased $6.4 million or 6.2% in 1995. Of this increase, $4.6 million relates to the rate increase, discussed below, effective February 1995. Increased consumption by retail customers and an increase in the number of customers increased revenues by $1.4 million. Revenues from industrial customers resulting from consumption increased $.2 million while revenues from other water systems resulting from consumption decreased $.2 million. Revenues from fire service customers increased $.4 million. Operating Revenues increased $2.0 million or 2.0% in 1994. Of this increase, $1.2 million relates to a rate increase discussed below, effective March 1993. Sales to retail customers related to consumption decreased by $.9 million, primarily due to a return to more normal weather patterns during the spring and summer months of 1994, compared to 1993. However, despite the return to more normal weather patterns, sales to other water systems and to large industrial customers related to consumption increased by $.6 million and $.7 million, respecti-vely. Due to normal growth within the service territory, fire service revenues increased by $.4 million. Operation Expenses increased $2.8 million or 6.7% in 1995. The increase is due, primarily, to increased costs for labor, benefits and the cost of purchased water calculated in accordance with a Purchased Water Adjustment Clause (PWAC) (see Note 10 to the Notes to Consolidated Financial Statements.) Benefit costs increased due to increases in the actuarially calculated pension expense and the cost of postemployment benefits, a portions which is being expensed in 1995 as it is recognized in rates pursuant to the 1995 Stipulation effective February 1995 (see Economic Outlook - Elizabethtown and Subsidiary.) Operation Expenses increased $2.1 million or 5.3% in 1994. The increase is due, primarily, to increased costs for labor, benefits, miscellaneous expenses and the unit cost of raw water purchased from the New Jersey Water Supply Authority (NJWSA), which is reflected in the PWAC, in addition to the cost of chemicals to treat such water. Benefit costs increased due, primarily, to an increase in the actuarially calculated pension expense. Maintenance Expenses decreased $.8 million or 12.4% in 1995. The decrease is due, primarily, to the absence in 1995 of the unusually harsh winter weather that occurred in 1994. Also, the results of preventive maintenance programs have contributed to an overall decrease in maintenance expenses. Maintenance Expenses increased $.9 million or 15.9% in 1994 due, primarily, to the effects of unusually harsh winter weather in the first quarter of 1994, in addition to an increased level of preventive maintenance at various operating facilities throughout the Company. Depreciation Expense increased $.9 million or 12.1% in 1995 and $.6 million or 7.9% in 1994 due, primarily, to additional depreciable plant being placed in service during those periods. Also, an increase in authorized depreciation rates as a result of the 1995 Stipulation, effective February 1995, accounted for $.4 million of the increase. Revenue Taxes increased $.8 million or 6.6% in 1995 and $.2 million or 2.0% in 1994, due to additional taxes on the higher revenues discussed above. Real Estate, Payroll and Other Taxes increased $.1 million or 2.4% and $.1 million or 3.0% in 1995 and 1994, respectively, due to increased payroll taxes resulting from labor cost increases. Federal Income Taxes increased $.8 million or 12.4% in 1995 and decreased $.4 million or 5.6% in 1994 due to changes in the components of taxable income discussed herein. Contributing to the increase in 1995 and also offsetting the decrease in 1994 is $.2 million and $.1 million, respectively, for the effect on federal income taxes of the settlement with the Internal Revenue Service from an audit of the Corporation's tax returns. In addition, in 1995 the Corporation received tax refunds related to the years 1984 and 1985 of $.1 million (see Economic Outlook - E'town.) Other Income increased $2.0 million in 1995 due, primarily, to an increase in the equity component of AFUDC of $1.8 million and a non-recurring litigation settlement of $.9 million in 1994 as discussed below. These increases were offset by the federal income taxes associated with the various components. Other Income decreased $1.2 million in 1994. Included in this net decrease is a litigation settlement of $.9 million (see Note 13 to the Notes to Consolidated Financial Statements.) Also included in the net decrease is a gain on the sale of land in 1993 of $1.7 million. Other income decreased by $.2 million due to the effect of adjusting the carrying values of certain investments downward to their estimated net realizable values (see Economic Outlook-Properties.) This decrease included a downward adjustment of $.1 million in the Corporation's investment in Solar Electric Generating System V (SEGS). In addition, increases in the equity component of AFUDC of $.7 million resulted from increased construction expenditures, primarily related to the Plant. Other increases of $.2 million resulted from miscellaneous items. Federal income taxes, as a result of all of the above, decreased $.8 million. Total Interest Charges increased $.5 million or 4.6% in 1995 due, primarily, to an increase in interest expense of $2.1 million on increased borrowings under Elizabethtown's revolving credit agreement to finance the Company's ongoing capital program, the largest component of which is the Plant. This amount was offset by an increase in the debt component of AFUDC of $1.5 million, also primarily related to the construction of the Plant. In addition, in 1995 the Corporation received interest on tax refunds related to 1984 and 1985 of $.1 million. Total Interest Charges decreased $.7 million or 6.2% in 1994 due, primarily, to savings from refinancing of long-term debt in 1993. Also, an increase in the debt component of AFUDC of $.5 million resulted in a reduction of interest expense. Offsetting the decrease in Total Interest Charges in 1994 is $.3 million related to the tentative settlement of the Internal Revenue Service audit referred to above. Preferred Stock Dividends decreased less than $.1 million due to savings from the refinancing of the $8.75 series preferred stock with $5.90 series preferred stock in March 1994. ECONOMIC OUTLOOK Consolidated earnings for E'town for the next several years will be determined primarily by Elizabethtown's and Mount Holly's ability to obtain adequate and timely rate relief in connection with their additions to utility plant and, to a lesser degree, the ability of Properties and E'town to generate earnings from their unregulated businesses. Elizabethtown and Subsidiary Over the last several years, governmental water quality and service regulations have required Elizabethtown and Mount Holly to make significant investments in water supply, water treatment, transmission and storage facilities, including the Plant and the Mansfield Project, to augment existing facilities. This capital program is requiring regular external financing and rate relief. Currently, Elizabethtown and Mount Holly believe they are in compliance with all water quality standards in all material respects. In November 1995, Elizabethtown filed for a $31.6 million or 29.6% rate increase primarily to cover the financing and operating costs of the Plant. While Mount Holly received a $.6 million or 19.9% rate increase effective January 1996, deliberations regarding the portion of the rate case related to the Mansfield Project, in which Mount Holly is requesting an additional 84.2% rate increase, are ongoing and awaiting the award of the final water diversion permit. Accordingly, the timing and amount of rate increases obtained by Elizabethtown and Mount Holly, in response to the pending rate requests, will be a major factor affecting earnings in 1996 and beyond. Once the new facilities, referred to above, are constructed and reflected in rates, Elizabethtown expects its internally generated cash flow to increase and capital outlays to return to levels experienced in the early 1990's. As a result, the need for external financing and rate relief should become less frequent. Therefore, more so than in recent years, management's ongoing efforts to grow unit sales and control operating cost will benefit the customer by reducing the frequency of rate increases and will benefit shareholders by positively affecting earnings. On November 20, 1995, Elizabethtown filed a petition with the BPU for an increase in rates of $31.6 million, or 29.6%. The largest portion of the request, $22.9 million, is needed to cover the costs to finance and operate the Plant. The remainder of the rate increase, $8.7 million, is needed to cover the cost to finance additional construction projects and to cover increases in operating expenses since rates were last established in February 1995. A decision by the BPU is expected in the summer of 1996. In light of the approval by the BPU of the 1993 Plant Stipulation and Elizabethtown's experience in obtaining base rate relief, Elizabethtown expects the BPU to grant timely and adequate rate relief, but cannot predict the ultimate outcome of any rate proceeding. In January 1995, the BPU approved a stipulation (1995 Stipulation) for Elizabethtown for a rate increase of $5.3 million or 5.34%, effective February 1, 1995. The 1995 Stipulation provides for an authorized rate of return on common equity of 11.5%. It also provides for recovery of the 1994 current service cost portion of the obligation accrued under Statement of Financial Accounting Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions," provided this amount is funded by the Company. Elizabethtown funded $.3 million in 1995, which represents the 1994 current service cost allowed in the 1995 Stipulation. The rate increase is covering the cost to finance $62.0 million of construction projects since rates were last established in March 1993. These projects include treatment, transmission and storage facilities needed to ensure that Elizabethtown continues to meet federal and state regulations on water quality and service. The increase is also offsetting increased costs for power, labor and benefits, primarily medical. The 1995 Stipulation also provides for an increase in depreciation rates resulting in an increase in annual depreciation expense of approximately $.5 million. The 1995 Stipulation also required Elizabethtown to maintain a monthly average percentage of common equity to total capitalization of at least 45.1% for the 12 months ended January 31, 1996. The Company has met this requirement. On June 26, 1995, Mount Holly petitioned the BPU for an increase in rates, to take place in two phases. In the first phase rates would be increased by $.9 million and in the second phase by $2.8 million. The first phase is necessary to recover costs that were not reflected in rates last increased in October 1986. The second phase would recover the cost of the Mansfield Project as discussed above. The project is currently estimated to cost $16.5 million. Construction is expected to begin upon final issuance of the water allocation diversion permit from the NJDEP, and the project is expected to be completed in 1997. On January 24, 1996, the BPU approved a stipulation (Mount Holly Stipulation) for an increase in rates of $.6 million effective as of that date. The Mount Holly Stipulation has, effectively, concluded the first phase of the rate proceeding. Mount Holly is continuing with the adjudicatory process with respect to the second phase of the petition. While management believes that the water supply, treatment and transmission project planned for Mount Holly is the most cost-effective response to the state legislation affecting the area, management cannot predict the ultimate outcome of the rate proceeding at this time. E'town In 1995, the Corporation entered into a three-year joint venture agreement with Applied Wastewater General Partnership (AWG) to form a New Jersey limited liability company, Applied Watershed Management, L.L.C. (AWM). AWG is a unit of several privately held and affiliated companies providing design, engineering, construction and operating services for water and wastewater facilities in the western portion of Elizabethtown's service area. AWM intends to design, finance, engineer, construct, own, operat-e and/or sell water and wastewater facilities for municipal and corporate clients, primarily in New Jersey. E'town has agreed to provide capital contributions to AWM of up to $.5 million to finance AWM's working capital needs. E'town may provide additional financing for particular projects of AWM. AWG will provide the substantial portion of the operations-related services required to be performed by AWM. Either party may terminate the agreement at any time. Included in Non-utility Property and Other Investments at December 31, 1995 is an investment of $1.4 million ($.3 million net of related deferred taxes), in a limited partnership that owns SEGS, located in California. The Internal Revenue Service (Service) has concluded an examination of the Corporation's federal income tax returns for the tax years 1987 through 1992. The Service had raised issues related to tax deductions taken initially in 1988 for certain land transactions. In February 1995, the Corporation reached a tentative agreement to settle this matter with the Service. This settlement resulted in a charge to net income for the year ended December 31, 1994 of approximately $.3 million or $.05 per common share. An additional charge of $.2 million or $.02 per common share has been recognized in 1995 for the final assessment. In addition, in 1995 the Corporation received tax refunds and interest related to 1984 and 1985 that contributed to an increase in net income of approximately $.2 million or $.03 per common share. Properties Also included in Non-utility Property and Other Investments in the Consolidated Balance Sheets of E'town at December 31, 1995 is $12.1 million of investments in various parcels of undeveloped land in New Jersey. The carrying value of each parcel includes the original cost plus any real estate taxes, interest and, where applicable, direct costs capitalized while rezoning or governmental approvals are or were being sought. Based upon independent appraisals received at various times prior to and during- 1995, the estimated net realizable value of each property exceeds its respective carrying value as of December 31, 1995. Properties continues to seek permits for its Mansfield property and, accordingly, continues to capitalize various carrying charges. During the second quarter of 1993, the carrying value of the Mansfield property exceeded its estimated net realizable value. This is due to the fact that the Mansfield property is not yet ready for its intended use and, therefore, various carrying charges continue to be capitalized while based upon prior appraisals, the estimated net realizable value of the property had remained constant. Charges of $.4 million, $.4 million and $.2 million for 1995, 1994 and 1993, respectively, to adjust the ca-rrying value of the Mansfield property, have been reflected in the Statements of Consolidated Income and Consolidated Balance Sheets. Properties expects to continue capitalizing carrying charges on the Mansfield property until it is ready for its intended use. In October 1995, Properties obtained more favorable zoning treatment for the Mansfield property. As a result of the rezoning, a recent appraisal has revealed that the market value of the property has increased to the extent that, barring any significant changes in the circumstances surrounding this property, no further adjustments to the carrying value are presently expected. The Corporation will continue to monitor the relationship between the carrying and net realizable values of its properties through updated appraisals and of its investment in SEGS based upon information provided by SEGS management and through cash flow analyses. Properties has entered into an agreement to sell a parcel of land to a developer. The agreement requires the buyer to obtain all approvals required by governmental agencies in order to develop the property. Properties may cancel the agreement if the closing does not occur by December 31, 1996. Other events have been established during this period, at which time either the buyer or Properties may cancel the agreement if certain criteria, generally relating to the development potential of the property, are not met. New Accounting Pronouncements See Note 2 of the Notes to Consolidated Financial Statements for a discussion of two new accounting standards that will become effective in 1996. E'town Corporation and Subsidiaries Statements of Consolidated Income Year Ended December 31, ________________________________________ 1995 1994 1993 ____________ _____________ ____________ Operating Revenues $108,398,105 $102,032,505 $ 99,996,120 ____________ ____________ ____________ Operating Expenses: Operation 44,148,007 41,373,842 39,280,920 Maintenance 5,805,511 6,623,772 5,716,157 Depreciation 8,808,169 7,860,180 7,285,309 Revenue taxes 13,591,212 12,748,161 12,501,804 Real estate, payroll and other taxes 2,853,169 2,786,746 2,706,447 Federal income taxes (Note 3) 7,611,389 6,768,887 7,170,406 ____________ ____________ ____________ Total operating expenses 82,817,457 78,161,588 74,661,043 ____________ ____________ ____________ Operating Income 25,580,648 23,870,917 25,335,077 ____________ ____________ ____________ Other Income: Litigation settlement (Note 13) (932,203) Gain on sale of land 1,685,521 Allowance for equity funds used during construction (Note 2) 2,976,290 1,178,133 445,339 Write-down of non-utility property and other investments (Note 7) (350,319) (481,754) (269,315) Federal income taxes (Note 3) (1,141,771) (138,970) (790,320) Other--net 741,397 632,878 396,515 ____________ ____________ ____________ Total other income 2,225,597 258,084 1,467,740 ____________ ____________ ____________ Total Operating and Other Income 27,806,245 24,129,001 26,802,817 ____________ ____________ ____________ Interest Charges: Interest on long-term debt 11,696,183 11,610,777 12,374,224 Other interest expense--net 2,389,684 470,038 95,848 Capitalized interest (Note 2) (2,746,128) (1,247,666) (805,882) Amortization of debt discount--net 357,973 354,062 258,799 ____________ ____________ ____________ Total interest charges 11,697,712 11,187,211 11,922,989 ____________ ____________ ____________ Income Before Preferred Stock Dividends of Subsidiary 16,108,533 12,941,790 14,879,828 Preferred Stock Dividends 813,000 854,047 1,050,000 ____________ ____________ ____________ Net Income $ 15,295,533 $ 12,087,743 $ 13,829,828 ____________ ____________ ____________ ____________ ____________ ____________ Earnings Per Share of Common Stock (Note 2): Primary $ 2.16 $ 1.95 $ 2.59 ____________ ____________ ____________ ____________ ____________ ____________ Fully Diluted $ 2.14 $ 1.94 $ 2.54 ____________ ____________ ____________ ____________ ____________ ____________ Average Number of Shares Outstanding for the Calculation of Earnings Per Share: Primary 7,095,183 6,210,409 5,337,939 ____________ ____________ ____________ ____________ ____________ ____________ Fully Diluted 7,393,796 6,519,352 5,651,808 ____________ ____________ ____________ ____________ ____________ ____________ Dividends Paid Per Common Share $ 2.04 $ 2.04 $ 2.01 ____________ ____________ ____________ ____________ ____________ ____________ See Notes to Consolidated Financial Statements. E'town Corporation and Subsidiaries Consolidated Balance Sheets December 31, ___________________________ Assets 1995 1994 ____________ ____________ Utility Plant--At Original Cost: Utility plant in service $502,572,255 $469,172,575 Construction work in progress 100,212,636 55,739,951 ____________ ____________ Total utility plant 602,784,891 524,912,526 Less accumulated depreciation and amortization 94,926,413 87,456,550 ____________ ____________ Utility plant--net 507,858,478 437,455,976 ____________ ____________ Non-utility Property and Other Investments (Note 7) 13,601,191 13,468,879 ____________ ____________ Current Assets: Cash and cash equivalents 4,925,400 4,254,708 Short-term investments 30,622 30,622 Customer and other accounts receivable (less reserve: 1995, $532,000; 1994, $463,000) 15,984,043 12,346,871 Unbilled revenues 7,443,656 7,161,483 Materials and supplies--at average cost 1,912,015 1,724,969 Prepaid insurance, taxes, other 1,874,338 1,410,401 Prepaid federal income taxes 711,860 ____________ ____________ Total current assets 32,170,074 27,640,914 ____________ ____________ Deferred Charges (Note 9): Prepaid pension expense (Note 12) 512,691 871,181 Waste residual management 970,182 325,785 Unamortized debt and preferred stock expenses 9,938,130 9,490,208 Taxes recoverable through future rates (Note 3) 26,427,627 26,339,057 Postretirement benefit expense (Note 12) 2,900,569 2,077,051 Purchased water under recovery-net 37,316 314,128 Other unamortized expenses 739,857 997,286 ____________ ____________ Total deferred charges 41,526,372 40,414,696 ____________ ____________ Total $595,156,115 $518,980,465 ____________ ____________ ____________ ____________ See Notes to Consolidated Financial Statements. December 31, ____________________________ Capitalization and Liabilities 1995 1994 ____________ ____________ Capitalization (Notes 4 and 5): Common shareholders' equity $177,080,580 $152,970,602 Cumulative preferred stock 12,000,000 12,000,000 Long-term debt--net 193,673,528 154,073,430 ____________ ____________ Total capitalization 382,754,108 319,044,032 ____________ ____________ Current Liabilities: Notes payable--banks (Note 6) 27,000,000 23,000,000 Long-term debt--current portion (Note 4) 30,000 42,000 Accounts payable and other liabilities 16,826,104 18,249,580 Customers' deposits 305,349 278,895 Municipal and state taxes accrued 13,661,620 12,831,524 Federal income taxes accrued (Note 3) 150,735 Interest accrued 3,268,134 3,173,468 Preferred stock dividends accrued 59,000 59,000 ____________ ____________ Total current liabilities 61,300,942 57,634,467 ____________ ____________ Deferred Credits: Customer advances for construction 45,460,749 45,554,476 Federal income taxes (Note 3) 66,825,738 62,115,801 State income taxes (Note 3) 173,365 162,008 Unamortized investment tax credits 8,448,811 8,650,537 Accumulated postretirement benefits (Note 12) 2,939,217 2,100,628 ____________ ____________ Total deferred credits 123,847,880 118,583,450 ____________ ____________ Contributions in Aid of Construction 27,253,185 23,718,516 ____________ ____________ Commitments and Contingent Liabilities (Note 11) ____________ ____________ Total $595,156,115 $518,980,465 ____________ ____________ ____________ ____________ See Notes to Consolidated Financial Statements. E'town Corporation and Subsidiaries Statements of Consolidated Capitalization December 31, ____________________________ 1995 1994 ____________ ____________ E'town Corporation: Common Shareholders' Equity (Notes 4 and 5): Common stock without par value, authorized, 15,000,000 shares; issued 1995, 7,549,078 shares; 1994, 6,624,663 shares $138,667,930 $114,136,195 Paid-in capital 1,315,025 1,315,025 Capital stock expense (5,159,834) (4,286,194) Retained earnings 42,994,743 42,439,552 Less cost of treasury stock; 1995, 25,876 shares; 1994, 22,032 shares (737,284) (633,976) ____________ ____________ Total common shareholders' equity 177,080,580 152,970,602 ____________ ____________ Elizabethtown Water Company: Cumulative Preferred Stock (Note 4): $100 par value, authorized, 200,000 shares; $5.90 series, issued and outstanding, 120,000 shares 12,000,000 12,000,000 ____________ ___________ Cumulative Preferred Stock: $25 par value, authorized, 500,000 shares; none issued Long-Term Debt (Note 4): E'town Corporation: 6 3/4% Convertible Subordinated Debentures, due 2012 11,751,000 12,165,000 Elizabethtown Water Company: 7.20% Debentures, due 2019 10,000,000 10,000,000 7 1/2% Debentures, due 2020 15,000,000 15,000,000 6.60% Debentures, due 2021 10,500,000 10,500,000 6.70% Debentures, due 2021 15,000,000 15,000,000 8 3/4% Debentures, due 2021 27,500,000 27,500,000 8% Debentures, due 2022 15,000,000 15,000,000 7 1/4% Debentures, due 2028 50,000,000 50,000,000 5.60% Debentures, due 2025 40,000,000 The Mount Holly Water Company: Notes Payable (due serially through 2000) 117,500 144,300 ____________ ____________ Total long-term debt 194,868,500 155,309,300 Unamortized discount--net (1,194,972) (1,235,870) ____________ ____________ Total long-term debt--net 193,673,528 154,073,430 ____________ ____________ Total capitalization $382,754,108 $319,044,032 ____________ ____________ ____________ ____________ See Notes to Consolidated Financial Statements. E'town Corporation and Subsidiaries Statements of Consolidated Shareholders' Equity Year Ended December 31, _______________________________________ 1995 1994 1993 ____________ ___________ ___________ Common Stock: Balance at Beginning of Year $114,136,195 $ 87,842,657 $ 64,261,763 Public sale of common stock (1995, 660,000 shares; 1994, 690,000 shares; 1993, 575,000 shares) 17,737,500 19,147,500 17,465,625 Common stock issued under Dividend Reinvestment and Stock Purchase Plan (1995, 248,846 shares; 1994, 273,159 shares; 1993, 200,878 shares) 6,388,716 7,146,038 6,009,298 Exercise of stock options (1995, 15,569 shares; 1993, 4,050 shares) 405,519 105,971 ____________ ____________ ____________ Balance at End of Year 138,667,930 114,136,195 87,842,657 ____________ ____________ ____________ Paid-in Capital: 1,315,025 1,315,025 1,315,025 ____________ ____________ ____________ Capital Stock Expense: Balance at Beginning of Year (4,286,194) (3,357,165) (2,479,987) Expenses incurred for the issuance and sale of common stock (873,640) (929,029) (877,178) ____________ ____________ ____________ Balance at End of Year (5,159,834) (4,286,194) (3,357,165) ____________ ____________ ____________ Retained Earnings: Balance at Beginning of Year 42,439,552 43,207,666 40,228,199 Net income 15,295,533 12,087,743 13,829,828 Dividends on Common Stock (1995 and 1994, $2.04, 1993, $2.01) (14,740,342) (12,855,857) (10,850,361) ____________ ____________ ____________ Balance at End of Year 42,994,743 42,439,552 43,207,666 ____________ ____________ ____________ Treasury Stock: Balance at Beginning of Year (633,976) (633,976) (575,107) Cost of shares redeemed to exercise stock options (1995, 3,844 shares; 1993, 1,676 shares) (103,308) (58,869) ____________ ____________ ____________ Balance at End of Year (737,284) (633,976) (633,976) ____________ ____________ ____________ Total Common Shareholders' Equity $177,080,580 $152,970,602 $128,374,207 ____________ ____________ ____________ ____________ ____________ ____________ See Notes to Consolidated Financial Statements. E'town Corporation and Subsidiaries Statements of Consolidated Cash Flows Year Ended December 31, -------------------------------------
1995 1994 1993 ___________ ___________ ___________ Cash Flows from Operating Activities: Net Income $ 15,295,533 $ 12,087,743 $ 13,829,828 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 8,808,169 7,860,180 7,285,309 Write-down of non-utility property and other investments 350,319 481,754 269,315 Gain on sale of land (1,685,521) Decrease (increase) in deferred charges 248,334 (159,348) 271,191 Deferred income taxes and investment tax credits--net 4,430,998 3,865,417 3,274,054 Capitalized interest and AFUDC (5,722,418) (2,425,799) (1,251,221) Other operating activities--net 16,327 19,833 (390,231) Change in current assets and current liabilities excluding cash, short-term investments and current portion of debt: Customer and other accounts receivable (3,637,172) (315,457) (998,517) Unbilled revenues (282,173) 86,839 (688,601) Accounts payable and other liabilities (1,397,022) 8,576,745 662,837 Accrued/prepaid interest and taxes 1,323,420 (1,082,193) 1,283,955 Other (187,046) (101,267) (6,870) ____________ ____________ ____________ Net cash provided by operating activities 19,247,269 28,894,447 21,855,528 ____________ ____________ ____________ Cash Flows Provided by Financing Activities: Decrease in funds held by Trustee for construction expenditures 382,306 8,519,877 Proceeds from issuance of debentures 40,000,000 50,000,000 Proceeds from issuance of common stock 23,554,787 25,364,509 22,644,847 Proceeds from issuance of preferred stock 12,000,000 Redemption of preferred stock (12,000,000) Debt and preferred stock issuance costs (447,922) (842,178) (3,105,156) Repayment of long-term debt (452,800) (374,000) (50,245,000) Contributions and advances for construction--net 3,440,942 3,453,604 1,909,905 Net increase (decrease) in notes payable--banks 4,000,000 23,000,000 (6,500,000) Dividends paid on common stock (14,740,342) (12,855,857) (10,850,361) ____________ ____________ ____________ Net cash provided by financing activities 55,354,665 38,128,384 12,374,112 ____________ ____________ ____________ Cash Flows Used for Investing Activities: Utility plant expenditures (excluding AFUDC) (73,789,288) (69,980,619) (32,516,755) Development costs of land (excluding capitalized interest) (141,954) (163,976) (194,842) Proceeds from sale of land 3,450,000 ____________ ____________ ____________ Cash used for investing activities (73,931,242) (70,144,595) (29,261,597) ____________ ____________ ____________ Net Increase (Decrease) in Cash and Cash Equivalents 670,692 (3,121,764) 4,968,043 Cash and Cash Equivalents at Beginning of Year 4,254,708 7,376,472 2,408,429 ____________ ____________ ____________ Cash and Cash Equivalents at End of Year $ 4,925,400 $ 4,254,708 $ 7,376,472 ____________ ____________ ____________ ____________ ____________ ____________ Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 8,350,882 $ 10,416,716 $ 12,296,508 Income taxes 4,746,176 6,771,254 5,881,008 Preferred stock dividends of subsidiary $ 708,000 $ 805,475 $ 1,050,000 See Notes to Consolidated Financial Statements.
E'TOWN CORPORATION AND SUBSIDIARIES 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) and E'town Properties, Inc. (Properties). The Mount Holly Water Company (Mount Holly) is a wholly owned subsidiary of Elizabethtown. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include E'town and its subsidiaries. Significant intercompany accounts and transactions have been eliminated. Elizabethtown and Mount Holly are regulated water utilities and follow the Uniform System of Accounts, as adopted by the New Jersey Board of Public Utilities (BPU). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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 generally is computed on a straight-line basis at functional rates for various classes of assets. The provision for depreciation, as a percentage of average depreciable property, was 1.83% for 1995, 1.75% for 1994 and 1.74% for 1993. The 1995 rate case (see Note 10) allowed an increase in depreciation rates effective February 1, 1995. Allowance for Funds Used During Construction Elizabethtown capitalizes, as an appropriate cost of utility plant, an Allowance for Funds Used During Construction (AFUDC), which represents the cost of financing major projects during construction. AFUDC, a non-cash credit on the Statements of Consolidated Income, is added to the construction cost of the project and included in rate base and then recovered in rates during the project's useful life. AFUDC is comprised of a debt component (credited to Interest Charges), and an equity component (credited to Other Income) in the Statements of Consolidated Income. AFUDC totaled $5,421,383, $2,045,234 and $837,234 for 1995, 1994 and 1993, respectively (see Note 10). Non-utility Property Properties capitalizes direct costs, real estate taxes and interest costs associated with real estate parcels that are being developed. These costs are expensed on parcels ready for their intended use. The amount of interest capitalized for 1995, 1994 and 1993 totaled $301,035, $380,566 and $413,987, respectively (see Note 7). Revenues Revenues are recorded based on the amounts of water delivered to customers through the end of each accounting period. This includes an accrual for unbilled revenues for water delivered from the time meters were last read to the end of the respective accounting periods. Federal Income Taxes E'town files a consolidated federal tax return. Deferred income taxes are provided for temporary differences between the bases of assets and liabilities for tax and financial statement purposes for E'town and Properties. Deferred income taxes are also provided for each regulated water utility to the extent permitted by the BPU. The regulated water utilities account for prior years' investment tax credits by the deferral method, which amortizes the credits over the lives of the respective assets. The non-regulated companies utilize the flow-through method to account for investment tax credits. This method treats the credits as a reduction of federal income taxes in the year the credits arise. Customer Advances for Construction and Contributions in Aid of Construction Customer Advances for Construction and Contributions in Aid of Construction represent capital provided by developers for main extensions to new real estate developments. Some portion of Customer Advances for Construction is refunded based upon the revenues that the new developments generate. Contributions in Aid of Construction are Customer Advances for Construction that, under the terms of individual main extension agreements, are no longer subject to refund. Short-term Investments Short-term investments are stated at cost, which approximates market value. Earnings Per Share of Common Stock Primary earnings per share are computed on the basis of the weighted average number of shares outstanding, plus common stock equivalents, assuming all stock options are exercised. Fully diluted earnings per share assumes both the conversion of the 6 3/4% Convertible Subordinated Debentures and the common stock equivalents referred to above. 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 March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," which is effective in 1996. The statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The resultant impairment, if any, would be measured based on the fair value of the asset. The Corporation believes that the adoption of SFAS 121 will not have any effect on the Corporation's results of operations or financial position. SFAS 123 "Accounting for Stock-Based Compensation" which will be adopted by the Corporation in 1996, includes certain elective provisions which, if followed, would require the Corporation to record compensation for awards made under the E'town Corporation 1987 Stock Option Plan (Stock Option Plan). The Corporation has 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." SFAS 123 will not have any effect on the results of operations but will require expanded disclosure regarding the Corporation's Stock Option Plan. Reclassification Certain prior year amounts have been reclassified to conform to the current year's presentation. 3. FEDERAL INCOME TAXES The computation of federal income taxes and the reconciliation of the tax provision computed at the federal statutory rate (35%) with the amount reported in the Statements of Consolidated Income follow: 1995 1994 1993 ------------------------ (Thousands of Dollars) Tax expense at statutory rate ........ $8,701 $6,947 $7,994 Items for which deferred taxes are not provided: Capitalized interest ............... (2) (2) Difference between book and tax depreciation ..................... 133 92 81 Investment tax credits.............. (204) (209) (208) Other............................... 123 80 96 ----------------------- Provision for federal income taxes.... $8,753 $6,908 $7,961 ======================= The provision for federal income taxes is composed of the following: Current .............................. $6,068 $4,983 $6,180 Tax collected on main extensions ..... (1,734) (1,931) (1,341) Deferred: Tax depreciation.................... 3,447 3,324 3,183 Capitalized interest................ 905 517 217 Main cleaning and lining............ 405 396 323 Other............................... (136) (179) (407) Investment tax credits--net........... (202) (202) (194) ----------------------- Total provision ...................... $8,753 $6,908 $7,961 ======================= Effective January 1, 1993, the Company adopted SFAS 109, "Accounting for Income Taxes." SFAS 109 established accounting rules that changed the manner in which income tax expense is determined for accounting purposes. SFAS 109 utilizes a liability method under which deferred taxes are provided at the enacted statutory rate for all temporary differences between financial statement earnings amounts and the tax basis of existing assets or liabilities. In addition, the adoption of SFAS 109 resulted in a credit to Federal Income Taxes of $63,271 and a charge to Real Estate, Payroll and Other Taxes of $141,068 in 1993 to record the changes in deferred income taxes payable by the non-regulated companies. In connection with the adoption of SFAS 109, Elizabethtown and Mount Holly recorded additional deferred taxes for water utility temporary differences not previously recognized. The increased deferred tax liability was offset by a corresponding asset representing the future revenue expected to be recovered through rates based on established regulatory practice permitting such recovery. In accordance with SFAS 109, deferred tax balances have been reflected at E'town's current consolidated federal income tax rate, which is 35%. The tax effect of significant temporary differences representing deferred income tax assets and liabilities as of December 31, 1995 and 1994 is as follows: 1995 1994 ---------------------- (Thousands of Dollars) Water utility plant--net $(56,956) $(53,517) Non-utility property (955) (1,061) Other investments (1,022) (969) Taxes recoverable through future rates (9,250) (9,219) Investment tax credit 2,957 3,028 Prepaid pension expense (166) (301) Capitalized interest (1,308) (508) Other assets 654 557 Other liabilities (780) (126) ------------------- Net deferred income tax liabilities $(66,826) $(62,116) =================== The Internal Revenue Service (Service) has concluded an examination of the Corporation's federal income tax returns for the tax years 1987 through 1992. The Service had raised issues related to tax deductions taken initially in 1988 for certain land transactions. In February 1995, the Corporation reached a tentative agreement to settle this matter with the Service. This resulted in a charge to net income for the year ended December 31, 1994 of $310,445 or $.05 per common share. An additional charge of $168,610 or $.02 per share has been recognized in 1995 based upon the final assessment. In addition, in 1995 the Corporation received tax refunds and interest related to the years 1984 and 1985 that contributed to an increase in net income of $206,948 or $.03 per common share. 4. CAPITALIZATION In June 1995, E'town issued 660,000 shares of common stock for net proceeds of $16,863,860. The gross proceeds of $17,737,500 were used to fund equity contributions to Elizabethtown totalling $16,900,000. These equity contributions have been used to repay short-term debt that had been issued under Elizabethtown's revolving credit agreement (see below) to partially fund the Company's capital program, the predominant portion of which relates to the construction of the Canal Road Water Treatment Plant (Plant) (see Note 11). In May 1994, E'town issued 690,000 shares of common stock for net proceeds of $18,218,471. The net proceeds were used to fund an equity contribution to Elizabethtown of $16,000,000. This contribution had been used to partially fund Elizabethtown's construction program, the predominant portion of which related to the Plant. The balance of the net proceeds had been used to fund working capital requirements of the Corporation. 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). E'town contributed $6,388,716 and $7,146,038 in 1995 and 1994, respectively, to Elizabethtown from the proceeds of DRP issuances. In January 1991, the Board of Directors of E'town adopted 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 purchase additional shares of common stock on terms that allow them to significantly increase their percentage of ownership of the Corporation's common stock. Such Rights may be redeemed by the Board of Directors. Cumulative Preferred Stock In March 1994, Elizabethtown issued 120,000 shares of $100 par value, $5.90 Cumulative Preferred Stock for proceeds of $12,000,000 at an effective rate of 7.37%. The proceeds were used to redeem $12,000,000 of the Company's $8.75 Cumulative Preferred Stock. The redemption premium of $1,050,000 was paid from general Company funds and is being amortized over 10 years for ratemaking purposes. The $5.90 Cumulative Preferred Stock is not redeemable at the option of Elizabethtown. Elizabethtown is required to redeem all 120,000 shares of the Preferred Stock on March 1, 2004 at $100 per share. 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, 1995, $7,753,084 of Elizabethtown's retained earnings were restricted under the most restrictive indenture provision. Therefore, $35,241,659 of E'town's consolidated retained earnings were unrestricted. In December 1995, Elizabethtown issued $40,000,000 of 5.60% tax-exempt debentures through the New Jersey Economic Development Authority (NJEDA). The proceeds of the issue were used to repay amounts outstanding under a revolving credit agreement (see Note 6). E'town's 6 3/4% Convertible Subordinated Debentures are convertible to E'town common stock at $40 per share. At December 31, 1995, 293,775 shares of common stock were reserved for issuance upon exercise of the conversion rights. 5. STOCK OPTION PLAN E'town has a Stock Option Plan, a qualified non-compensatory 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 plan provides that any options granted may be exercised at any time up to an expiration date, not to exceed 10 years from the date of each grant. A summary of the details of stock option grants and outstanding balances is presented below: Options Year Options Option Options Outstanding Granted Granted Price Exercised or Expired 12/31/95 12/31/94 ---------------------------------------------------------------------- 1985 26,369 $26.17 2,250 (1991) (A) 3,300 (1992) 4,050 (1993) 11,819 (1995) 4,950 (1995) (A) -0- 16,769 1987 36,000 $25.67 4,050 (1989) 3,750 (1990) 3,750 (1991) 4,500 (1991) (A) 11,700 (1992) 3,750 (1995) 4,500 (1995) (A) -0- 8,250 1989 7,500 $24.67 7,500 7,500 1990 7,500 $26.67 7,500 7,500 1995 77,000 $27.12 77,000 ------------------------------------------------------------------------ Total 154,369 62,369 92,000 40,019 ======================================================================== (A) Expired Options 6. LINES OF CREDIT In 1994, Elizabethtown executed a committed revolving credit agreement (Agreement) with an agent bank and five additional banks that replaced the Company's uncommitted lines of credit. The Agreement provides up to $60,000,000 in revolving short-term financing, which together with internal funds, other short-term financing, proceeds of future issuances of debt and preferred stock by Elizabethtown and capital contributions from E'town, is expected to be sufficient to finance Elizabethtown's and Mount Holly's capital needs, which are estimated to be $148,905,000 through 1998. At December 31, 1995, Elizabethtown had outstanding borrowings of $27,000,000 under the Agreement at interest rates from 5.75% to 6.00%, at a weighted average rate of 5.94%. The Agreement allows Elizabethtown to borrow, repay and reborrow up to $60,000,000 during the first three years, after which time Elizabethtown may convert any outstanding balances to a five-year, fully amortizing term loan. The Agreement further provides that, among other covenants, Elizabethtown must maintain a percentage of common and preferred equity to total capitalization of not less than 35% and a pre-tax interest coverage ratio of at least 1.5 to 1. As of December 31, 1995, the percentage of Elizabethtown's common and preferred equity to total capitalization, as calculated in accordance with the Agreement, was 47%. For the 12 months ended December 31, 1995, Elizabethtown's pre-tax interest coverage ratio, calculated in accordance with the Agreement, was 3.12 to 1. E'town has $30,000,000 of uncommitted lines of credit with several banks in addition to the lines under the Agreement, of which $17,000,000 is available to Elizabethtown. Information relating to bank borrowings for 1995, 1994 and 1993 is as follows: 1995 1994 1993 ------------------------------- (Thousands of Dollars) Maximum amount outstanding.......... $60,000 $23,000 $8,000 Average monthly amount outstanding.. $39,636 $ 2,958 $2,514 Average interest rate at year end... 5.9% 6.1% (A) Compensating balances at year end... $ 0 $ 0 $ 195 Weighted average interest rate based on average daily balances.......... 6.2% 5.7% 3.8% (A) No outstanding bank borrowings at year end. 7. NON-UTILITY PROPERTY AND OTHER INVESTMENTS Included in Non-utility Property and Other Investments at December 31, 1995 is an investment of $1,358,016 ($258,991 net of related deferred taxes) in a limited partnership that owns Solar Electric Generating System V (SEGS), located in California. Also included in Non-utility Property and Other Investments at December 31, 1995 and 1994 is $12,141,419 and $12,048,749, respectively, of investments in various parcels of undeveloped land in New Jersey. The carrying value of each parcel includes the original cost plus any real estate taxes, interest and, where applicable, direct costs capitalized while rezoning or governmental approvals are, or were, being sought. Based upon independent appraisals received at various times, prior to and during 1995, the estimated net realizable value of each property exceeds its respective carrying value as of December 31, 1995. Properties continues to seek permits for its Mansfield property and, accordingly, continues to capitalize various carrying charges. During the second quarter of 1993, the carrying value of the Mansfield property exceeded its estimated net realizable value. This was due to the fact that the Mansfield property was not ready for its intended use and various carrying charges were being capitalized while, based upon prior appraisals, the market value of the property had remained constant. Charges of $350,319, $381,754 and $183,789 for the years ended December 31, 1995, 1994 and 1993, respectively, to adjust the carrying value of the Mansfield property, have been reflected in the Statements of Consolidated Income and Consolidated Balance Sheets. Properties expects to continue capitalizing carrying charges on the Mansfield property until it is ready for its intended use. In October 1995, Properties obtained more favorable zoning treatment for the Mansfield property. As a result of the rezoning, a recent appraisal has revealed that the market value of the property has increased to the extent that, barring any significant changes in the circumstances surrounding this property, further adjustments to reduce the carrying value by the amount of the capitalized carrying charges are not presently expected. The Corporation will continue to monitor the relationship between the carrying and net realizable values of its properties through updated appraisals and its investment in SEGS through cash flow analyses. Properties has entered into an agreement to sell a parcel of land to a developer. The agreement requires the buyer to obtain all approvals required by governmental agencies in order to develop the property. Properties may cancel the agreement if the closing does not occur by December 31, 1996. Other events have been established during this period, at which time either the buyer or Properties may cancel the agreement if certain criteria, generally relating to the development potential of the property, are not met. 8. FINANCIAL INSTRUMENTS The carrying amounts and the estimated fair values, as of December 31, 1995 and 1994, of financial instruments issued or held by the Corporation, are as follows: 1995 1994 ------------------------ (Thousands of Dollars) Short-term investments (1): Carrying amount $ 31 $ 31 Estimated fair value 38 34 Cumulative preferred stock (1): Carrying amount $ 12,000 $ 12,000 Estimated fair value 11,940 10,860 Long-term debt (1): Carrying amount $193,674 $154,073 Estimated fair value 200,710 139,910 (1) Estimated fair values are based upon quoted market prices for these or similar securities. 9. REGULATORY ASSETS AND LIABILITIES Certain costs incurred by Elizabethtown and Mount Holly which have been deferred have been recognized as regulatory assets and are being amortized over various periods as set forth below: 1995 1994 ---------------------- (Thousands of Dollars) Waste residual management $ 970 $ 546 Unamortized debt and preferred stock expense 9,385 8,902 Taxes recoverable through future rates (Note 3) 26,428 26,339 Postretirement benefit expense (Note 12) 2,901 2,077 Purchased water under recovery-net (Note 10) 37 314 ------------------- Total $39,721 $38,178 =================== Waste Residual Management The costs of disposing of the waste generated by Elizabethtown's and Mount Holly's water treatment plants are being amortized over three-year periods for ratemaking and financial statement purposes. No return is being earned on these deferred balances. 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 over the lives of 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 over a 10-year period for ratemaking and financial statement purposes. There were no regulatory liabilities at December 31, 1995 or 1994. 10. REGULATORY MATTERS Rates Elizabethtown On November 20, 1995, Elizabethtown filed a petition with the BPU for an increase in rates of $31,634,500 or 29.6%. The largest portion of the request, $22,925,227, is to cover the cost to finance and operate the Plant (see Note 11). The remainder of the rate request, $8,709,273, is needed to cover the cost to finance additional construction projects and to cover increases in operating expenses since rates were last established in February 1995. A decision by the BPU is expected in the summer of 1996. In light of the approval by the BPU of the 1993 Plant Stipulation (discussed below) and Elizabethtown's experience in obtaining base rate relief, Elizabethtown expects the BPU to grant timely and adequate rate relief, but cannot predict the ultimate outcome of any rate proceeding. In February 1996, Elizabethtown filed a petition with the BPU for a decrease in rates of $390,318 under a Purchased Water Adjustment Clause (PWAC). This procedure, established by BPU rules, allows Elizabethtown to reflect in rates a change in the cost of water purchased from the New Jersey Water Supply Authority (NJWSA) without a complete rate case. The purpose of this request is to reflect in rates the expected decrease in the rate for water purchased by Elizabethtown from the NJWSA effective July 1, 1996. In August 1993, the BPU approved a stipulation (1993 Plant Stipulation) signed by the Department of Ratepayer Advocate, the BPU staff and several of Elizabethtown's major wholesale customers, all of whom typically participate in Elizabethtown's rate cases. The 1993 Plant Stipulation states that the Plant is necessary and that the Company's estimates regarding the Plant's cost ($87,000,000 at that time) and construction period are reasonable (see Note 11). In April 1994, Elizabethtown notified all parties to the 1993 Plant Stipulation that the estimated cost of the Plant had increased. The 1993 Plant Stipulation authorizes the Company to levy a rate surcharge during the Plant's construction period if the Company's pre-tax interest coverage ratio for any 12-month historical period drops below 2.0 times. The 1993 Plant Stipulation also provides that the rate of return on common shareholder's equity used to calculate the rate for the equity component of the AFUDC for the Plant will be 1.5% less than the rate of return on common shareholder's equity established in the Company's most recent base rate case. The authorized rate of return on common shareholder's equity is currently 11.5%. In January 1995, the BPU approved a stipulation (1995 Stipulation) for Elizabethtown for a rate increase of $5,300,000, or 5.34%, effective February 1, 1995. The 1995 Stipulation provides for an authorized rate of return on common equity of 11.5%. It also provides for recovery of the current service cost portion of the obligation accrued under SFAS 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions," provided this amount is funded by the Company (see Note 12.) The rate increase is covering the cost to finance $62,000,000 of construction projects that were not reflected in the rates established in March 1993. These projects include treatment, transmission and storage facilities needed to ensure that Elizabethtown continues to meet federal and state regulations on water quality and service. The increase is also offsetting increased costs for power, labor and benefits, primarily medical. The 1995 Stipulation also provides for an increase in depreciation rates resulting in an increase in depreciation expense of approximately $469,000. The 1995 Stipulation also required Elizabethtown to maintain a percentage of common equity to total capitalization of at least 45.1% for the 12 months ended January 31, 1996. The Company has met this requirement. On July 7, 1995, the BPU approved a Stipulation for a decrease in rates under a PWAC. The Stipulation resulted in a decrease in rates for the PWAC, effective July 13, 1995 of $348,527. This Stipulation reflects the decrease in rates for water purchased from the NJWSA. In June 1994, the BPU approved a Stipulation for an increase in rates under a PWAC. The Stipulation resulted in an increase in rates, effective July 1, 1994, of $334,611, reflecting the increase in rates for water purchased from the NJWSA. Mount Holly On June 26, 1995, Mount Holly petitioned the BPU for an increase in rates, to take place in two phases. In the first phase rates would be increased by $851,171 and in the second phase by $2,794,002. The first phase is necessary to cover costs that were not reflected in rates last increased in October 1986. The second phase would cover the cost of a new water supply, treatment and transmission system necessary to obtain water outside a designated portion of an aquifer currently used by Mount Holly and to treat and pump the water into the Mount Holly distribution system. Management believes this project is the most cost-effective alternative available to Mount Holly to comply with recent state legislation which restricts the amount of water that can be withdrawn from an aquifer in certain areas of southern New Jersey. The project is currently estimated to cost $16,500,000. The land for the supply and treatment facilities has been purchased and wells have been drilled and can produce the required supply. On October 5, 1995, the New Jersey Department of Environmental Protection granted Mount Holly a water allocation diversion permit for four wells that are to be the water supply for the Mansfield Project. On October 20, 1995, New Jersey-American Water Company requested, and was subsequently granted, an adjudicatory hearing on the permit. The Company and Mount Holly believe that the permit in question will be upheld, but cannot predict the outcome of the objection. In the event that the objection is successful and the permit is rescinded, Mount Holly would utilize the alternative plan of purchasing water from New Jersey-American Water Company. On January 24, 1996, the BPU approved a stipulation (Mount Holly Stipulation) for an increase in rates of $550,000, effective as of that date. The Mount Holly Stipulation has, effectively, concluded the first phase of the rate proceeding. Mount Holly is continuing with the process with respect to the second phase of the petition. While management believes that the water supply, treatment and transmission system planned for Mount Holly is the most cost-effective response to the state legislation affecting the area, we cannot predict the ultimate outcome of the rate proceeding at this time. Main Extension Refunds Previous disclosures have detailed events surrounding several lawsuits filed by developers with respect to the BPU's suggested refund formula for particular main extension agreements. The BPU's formula suggests refunds of 2 1/2 times annual revenues for each metered connection for water service. The plaintiffs had received refunds in accordance with this suggested formula. The initial petitions by the developers and the related litigation have been ongoing since 1984 with numerous BPU decisions, Appellate Division decisions and a New Jersey Supreme Court decision. In June 1995, the New Jersey Supreme Court once again reviewed these matters and declined to hear the final appeal of the developers. Effectively, the BPU's suggested refund formula has been reaffirmed and therefore no refunds in excess of the 2 1/2 times revenues formula are required by the Company. Based upon the New Jersey Supreme Court's decision, the plaintiffs have withdrawn their suits. 11. COMMITMENTS Elizabethtown is obligated, under a contract that expires in 2013, to purchase from the NJWSA a minimum of 37 billion gallons of water annually. The Company purchases additional water from the NJWSA on an as-needed basis. Effective July 1, 1996, the annual cost under the contract will be $7,861,486. The total cost of water purchased from the NJWSA, including additional water purchased on an as-needed basis, was $9,344,792, $8,987,472 and $8,819,212 for 1995, 1994 and 1993, respectively. The following is a schedule by years of future minimum rental payments required under noncancelable operating leases with terms in excess of one year at: December 31, ---------------------- (Thousands of Dollars) 1996 $ 909 1997 859 1998 12 1999 -0- 2000 -0- ------ Total $1,780 ====== Rent expense totaled $820,481, $829,562 and $789,636 for 1995, 1994 and 1993, respectively. Capital expenditures through 1998 are estimated to be $149,781,000 of which $148,905,000 is for Elizabethtown's and Mount Holly's utility plant and $876,000 is for non-utility expenditures. Canal Road Water Treatment Plant In April 1994, following a competitive bidding process, Elizabethtown executed a lump-sum contract for the construction of the Canal Road Water Treatment Plant. The project is currently estimated to cost $100,000,000, excluding AFUDC. The project is being completed on schedule and the construction contract is on budget. The Company has expended $82,952,434, excluding AFUDC of $7,167,396, on the Plant as of December 31, 1995. Construction is expected to be completed in the third quarter of 1996. Joint Venture In March 1995, the Corporation entered into a three-year joint venture agreement with Applied Wastewater General Partnership (AWG) to form a New Jersey limited liability company, Applied Watershed Management, L.L.C. (AWM). AWG is a unit of several privately held and affiliated companies providing design, engineering, construction and operating services for water and wastewater facilities in the western portion of Elizabethtown's service area. AWM intends to design, finance, engineer, construct, own, operate and/or sell water and wastewater facilities for municipal and corporate clients, primarily in New Jersey. E'town has agreed to provide capital contributions to AWM of up to $500,000 to finance AWM's working capital needs. AWG shall provide the substantial portion of the operations-related services required to be performed by AWM. Either party may terminate the agreement at any time. 12. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan), which covers most employees. Under the Company's funding policy, the Corporation makes contributions that meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The components of the net pension costs (credits) are as follows: 1995 1994 1993 ------------------------- (Thousands of Dollars) Service cost--benefits earned during the year .. $ 929 $1,068 $ 913 Interest cost on projected benefit obligation .. 2,170 1,960 1,986 Return on Plan assets .......................... (7,630) 944 (1,417) Net amortization and deferral .................. 4,890 (3,881) (1,666) ------------------------- Net pension costs (credits) .................... $ 359 $ 91 $ (184) ========================= Plan assets are invested in publicly traded debt and equity securities. The reconciliations of the funded status of the Plan to the amounts recognized in the Consolidated Balance Sheets are presented below: 1995 1994 ---------------------- (Thousands of Dollars) Market value of Plan assets ..................... $37,171 $30,981 ---------------- Actuarial present value of Plan benefits: Vested benefits ............................... 26,115 20,864 Non-vested benefits ........................... 101 158 ---------------- Accumulated benefit obligation ................ 26,216 21,022 Projected increases in compensation levels .... 8,005 5,733 ---------------- Projected benefit obligation .................... 34,221 26,755 ---------------- Excess of Plan assets over projected benefit obligation ..................................... 2,950 4,226 Unrecognized net gain ........................... (636) (1,374) Unrecognized prior service cost ................. 365 453 Unrecognized transition asset ................... (2,166) (2,434) ---------------- Prepaid pension expense.......................... $ 513 $ 871 ================ The assumed rates used in determining the actuarial present value of the projected benefit obligations were as follows: 1995 1994 1993 ----------------------------- Discount rate ...................... 7.00% 8.00% 7.00% Compensation increase .............. 5.50% 5.50% 5.50% Rate of return on Plan assets ...... 9.00% 8.50% 8.50% The Corporation provides certain health care and life insurance benefits for substantially all of its retired employees. As a result of a contract negotiated in February 1996 with the Company's bargaining unit, all union and non-union employees retiring after January 1, 1997 will pay 25% of future increases in the premiums the Company pays for postretirement medical benefits. Effective January 1, 1993, the Corporation adopted SFAS 106. Under SFAS 106, the costs of postretirement benefits are accrued for each year the employee renders service, based on the expected cost of providing such benefits to the employee and the employee's beneficiaries and covered dependents, rather than expensing these benefits on a pay-as-you-go basis for retired employees. Based upon an independent actuarial study, the transition obligation, calculated under SFAS 106, was $7,255,745 as of January 1, 1993. The transition obligation is being amortized over 20 years. The following table details the postretirement benefit obligation at December 31: 1995 1994 ---------------------- (Thousands of Dollars) Retirees $2,404 $2,457 Fully eligible plan participants 6,366 5,134 ----------------- Accumulated postretirement benefit obligation 8,770 7,591 Plan assets at fair value (320) 0 Unrecognized net gain 656 1,040 Unrecognized transition obligation (6,167) (6,530) ----------------- Accrued postretirement benefit obligation $2,939 $2,101 ================= The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1995, and for 1995, was 12%. This rate decreases linearly each successive year until it reaches 5% in 2005, after which the rate remains constant. The assumed rates used in determining the actuarial present value of the projected benefit obligations were as follows: 1995 1994 1993 -------------------------- Discount rate 7.00% 8.00% 7.00% A single percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1995, and net postretirement service and interest cost by approximately $1,260,890 and $247,753, respectively. Based upon the independent actuarial study referred to above, the annual postretirement cost calculated under SFAS 106 is as follows: 1995 1994 1993 --------------------------------- (Thousands of Dollars) Service cost - benefits earned during the year $ 480 $ 376 $ 254 Interest cost on accumulated postretirement benefit obligation 585 596 605 Amortization of transition obligation 363 363 363 --------------------------------- Total 1,428 1,335 1,222 Deferred amount for regulated companies pending recovery (824) (1,072) (1,005) --------------------------------- Net postretirement benefit expense $ 604 $ 263 $ 217 ================================= The rate increases allowed by the 1995 Stipulation and the Mount Holly Stipulation include as an allowable expense the pay-as-you-go portion of postretirement benefits as well as the current service cost, and require that the current service cost be funded. Elizabethtown funded $318,222 in 1995. These stipulations allow Elizabethtown and Mount Holly to defer the amount accrued in excess of these amounts for consideration in future rate cases. Generally accepted accounting principles permit this regulatory treatment, provided deferrals are not accumulated for a period of more than five years. As of December 31, 1995, the amount that has been deferred is $2,900,569. Recovery of Elizabethtown's deferred postretirement costs has been requested in Elizabethtown's recent rate case. Management believes that Elizabethtown and Mount Holly will recover the deferred postretirement costs in future rates. 13. LEGAL MATTERS As reported in 1994, a developer asserted in a suit filed in 1991 against Elizabethtown that the Company failed to install facilities necessary to provide water service to a new development in a timely manner. In November 1994, the Company settled this matter by paying the developer $1,750,000. As part of the settlement, the developer agreed that part of this payment represented a refund of funds deposited under a main extension loan agreement for the construction of the facilities. In addition, the Company applied a portion of the settlement against an insurance reserve. The effect on 1994 earnings was $932,203 or $605,932 net of federal income taxes. The Company is seeking recovery from its insurance carriers. As previously reported, several lawsuits had been filed against Elizabethtown and other parties in connection with a fire that occurred in a storage facility in 1989 resulting in damage to property stored at that facility. This matter has been settled in 1995 resulting in a payment by Elizabethtown of $114,250. A provision for this estimated liability was previously recorded. 14. QUARTERLY FINANCIAL DATA (Unaudited) A summary of financial data for each quarter of 1995 and 1994 follows: Primary Fully Diluted Operating Operating Net Earnings Per Earnings Per Quarter Revenues Income Income Share Share -------------------------------------------------------------------------- (Thousands of Dollars Except Per Share Amounts) 1995 1st $ 25,174 $ 5,845 $ 3,015 $ .45 $ .45 2nd 27,101 6,458 4,175 .61 .61 3rd 30,451 7,873 5,151 .69 .68 4th 25,672 5,405 2,955 .41 .40 ------------------------------------------------------------------- Total $108,398 $25,581 $15,296 $2.16 $2.14 =================================================================== 1994 1st $ 24,657 $ 5,513 $ 2,537 $ .45 $ .45 2nd 25,208 5,807 2,965 .49 .49 3rd 27,370 6,914 3,673 .56 .56 4th 24,798 5,637 2,913 .45 .44 ------------------------------------------------------------------- Total $102,033 $23,871 $12,088 $1.95 $1.94 =================================================================== Water utility revenues are subject to a seasonal fluctuation due to normal increased consumption during the third quarter of each year. 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, 1995 and 1994, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of E'town Corporation and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Parsippany, New Jersey February 15, 1996 OTHER FINANCIAL AND STATISTICAL DATA
1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------- UTILITY PLANT (Thousands) Utility Plant-net $ 507,858 $ 437,456 $ 373,293 $ 347,253 $ 319,421 Construction Expenditures (excluding AFUDC) 73,789 69,981 32,517 33,293 27,732 CAPITALIZATION (Thousands) Shareholders' Equity 177,081 152,971 128,374 102,750 84,544 Preferred Stock 12,000 12,000 12,000 12,000 12,000 Debt(1) 220,703 177,115 154,448 161,541 169,648 Total Capitalization 409,784 342,086 294,822 276,291 266,192 CAPITALIZATION RATIOS Common Stock 43% 44% 44% 37% 32% Preferred Stock 3% 4% 4% 4% 4% Debt(1) 54% 52% 52% 59% 64% COMMON STOCK DATA Earnings Per Share: Primary $ 2.16 $ 1.95 $ 2.59 $ 2.21 $ 2.32 Fully Diluted 2.14 1.94 2.54 2.18 2.28 Dividends Per Share 2.04 2.04 2.01 2.00 2.00 Book Value Per Share 23.54 23.17 22.76 21.14 20.21 Average Shares Outstanding: Primary 7,095,183 6,210,409 5,337,939 4,627,814 4,080,118 Fully Diluted 7,393,796 6,519,352 5,651,808 4,950,768 4,413,178 Number of Common Shareholders 5,504 5,493 5,240 4,832 3,965 OPERATING STATISTICS Revenues (Thousands) General Customers $ 67,455 $ 62,923 $ 63,100 $ 55,570 $ 54,071 Other Water Systems 18,720 18,082 17,187 15,080 14,082 Industrial Wholesale 7,947 7,458 6,652 6,044 5,846 Fire Service/Miscellaneous 14,276 13,570 13,057 12,473 12,087 Total Revenues $ 108,398 $ 102,033 $ 99,996 $ 89,167 $ 86,086 Net Income $ 15,296 $ 12,088 $ 13,830 $ 10,231 $ 9,485 WATER SALES - Millions of Gallons (mg) General Customers 23,999 23,551 23,883 22,062 22,659 Other Water Systems 15,569 15,691 15,109 14,118 13,811 Industrial Wholesale 3,673 3,568 3,213 3,145 3,155 System Use and Unaccounted For 6,402 6,570 5,453 5,843 6,368 Total Water Sales 49,643 49,380 47,658 45,168 45,993 SYSTEM DELIVERY BY SOURCE - mg Surface 42,646 42,534 40,742 38,558 39,222 Wells 6,764 6,690 6,776 6,480 6,658 Purchased 233 156 140 130 113 Total System Delivery 49,643 49,380 47,658 45,168 45,993 MILLIONS OF GALLONS PUMPED: Average Day 136 135 131 123 126 Maximum Day 183 182 191 159 169 GENERAL INFORMATION Meters in Service 195,375 191,622 188,677 185,028 182,019 Miles of Main 2,869 2,828 2,800 2,738 2,694 Fire Hydrants Served 15,650 15,291 14,909 14,400 13,987 Total Employees 398 386 384 379 374 (1) Includes long-term debt, notes payable and long-term debt-current portion.
STOCK PRICE AND DIVIDEND DATA - E'town's Common Stock is traded on the New York Stock Exchange under the symbol ETW. 1995 - ---------------------------------------------------- QUARTER 1ST 2ND 3RD 4TH CLOSING PRICE LOW: $24.87 $25.37 $25.62 $27.00 HIGH: $26.37 $27.25 $27.00 $30.12 DIVIDEND PAID .51 .51 .51 .51 - ---------------------------------------------------- 1994 - ---------------------------------------------------- QUARTER 1ST 2ND 3RD 4TH CLOSING PRICE LOW: $29.63 $26.13 $26.00 $23.50 HIGH: $32.00 $30.00 $27.75 $27.13 DIVIDEND PAID .51 .51 .51 .51 - ---------------------------------------------------- EX-23 7 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in E'town Corporation's Registration Statement No. 33-56013 on Form S-3 and Nos. 33-49812, 33-44210 and 33-42509 on Forms S-8 of our reports dated February 15, 1996 and to the incorporation by reference in Elizabethtown Water Company's Registration Statement No. 33-19600 on Form S-8 of our report dated February 15, 1996, appearing or incorporated by reference in this Annual Report on Form 10-K of E'town Corporation and Elizabethtown Water Company for the year ended December 31, 1995. /s/ Deloitte & Touche LLP March 28, 1996 Parsippany, New Jersey EX-27 8
UT 0000764403 E'TOWN CORPORATION YEAR DEC-31-1995 DEC-31-1995 PER-BOOK 507,858,478 13,601,191 32,170,074 41,526,372 0 595,156,115 137,930,646 (3,844,809) 42,994,743 177,080,580 0 12,000,000 193,673,528 27,000,000 0 0 30,000 0 0 0 185,372,007 595,156,115 108,398,105 7,611,389 75,206,068 82,817,457 25,580,648 2,225,597 27,806,245 11,697,712 16,108,533 813,000 15,295,533 14,740,342 11,696,183 19,247,269 $2.16 $2.14
EX-27 9
UT 0000032379 ELIZABETHTOWN WATER COMPANY YEAR DEC-31-1995 DEC-31-1995 PER-BOOK 507,858,478 83,178 31,970,491 40,895,712 0 580,807,859 15,740,602 111,672,646 49,271,525 176,684,773 0 12,000,000 181,922,528 27,000,000 0 0 30,000 0 0 0 183,170,558 580,807,859 108,398,105 8,002,292 74,109,008 82,111,300 26,286,805 2,152,835 28,439,640 11,114,496 17,325,144 813,000 16,512,144 14,740,342 10,892,129 21,340,752 0 0
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