-----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, NCrtOjsLEOCPh47UPzGEavGI7DESZhlFdpRLn8KrJxR3AT+3YT2NXv/7XxNGxJ9t IJf8WeNVZUFAK/zTmUd2fg== 0000764403-97-000005.txt : 19970328 0000764403-97-000005.hdr.sgml : 19970328 ACCESSION NUMBER: 0000764403-97-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 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: 97564363 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: 97564364 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, 1996 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, 1996, the aggregate market value of E'town Corporation's voting stock held by non-affiliates was $246,101,797. On December 31, 1996, there were 7,781,875 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, 1996. 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 15, 1997. E'TOWN CORPORATION AND SUBSIDIARIES ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY PART I PAGE Item 1. Business 1 Organization 1 Service Area and Customers 1 Water Supply 2 Water Treatment Facilities and Water Quality Regulations 2 Transmission and Distribution 4 Energy Supply 4 Environmental Matters 4 Franchises 5 Employee Relations 5 Rate Matters 5 Real Estate Matters 6 Other Developments 6 Executive Officers of the Corporation and Elizabethtown 7 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for the Corporation's Common Stock and Related Stockholder Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 PART III Item 10. Directors and Executive Officers of the Registrant 14 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial Owners and Management 14 Item 13. Certain Relationships and Related Transactions 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14 SIGNATURES 16 APPENDIX I Elizabethtown Water Company and Subsidiary Consolidated Financial Statements for the Years Ended December 31, 1996, 1995 and 1994 and Independent Auditors' Report E'TOWN CORPORATION ELIZABETHTOWN WATER COMPANY Annual Report on Form 10-K For the year ended December 31, 1996 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. E'town also owns a 65% interest in Applied Watershed Management, LLC (AWM). AWM is a joint venture formed in 1995 to pursue opportunities in water and wastewater facilities for corporate and municipal clients. Elizabethtown and Mount Holly are engaged in the distribution of water for domestic, commercial, industrial and fire protection purposes and for resale by other water companies and public bodies. Elizabethtown is a New Jersey corporation, one of whose predecessors was first incorporated in 1854. The present corporation was formed in 1961 as a result of a consolidation of Elizabethtown Water Company Consolidated and Plainfield-Union Water Company. Elizabethtown owns all of the common stock of Mount Holly which contributed 3% of the Company's consolidated operating revenues for 1996. SERVICE AREA AND CUSTOMERS At December 31, 1996 Elizabethtown and Mount Holly furnished water service on a retail basis to general customers and to industrial customers served through 197,791 meters in 54 municipalities in the counties of Union, Middlesex, Somerset, Mercer, Hunterdon, Ocean, Morris and Burlington in the central part of New Jersey. Elizabethtown also provides, on a wholesale basis, a portion of the water requirements of eight additional municipalities with their own retail water systems and of three other investor-owned water companies. Water for fire protection service is provided to 53 municipalities and also to commercial and industrial establishments. The Company's operating revenues by major classification of customer for the twelve months ending December 31, 1996 are as follows: General customers 62.3% Sales to other systems 17.2% Larger industrial customers 7.1% Fire protection service/miscellaneous 13.4% The water systems are substantially all metered except for fire service. Additional operating statistics appear on page 9. -1- WATER SUPPLY The water supply systems of Elizabethtown and Mount Holly are physically separate. During 1996, Elizabethtown's pumpage averaged 127.6 million gallons per day (MGD) and Mount Holly's pumpage averaged 3.4 MGD. Elizabethtown and Mount Holly believe they have sufficient water supply sources to meet the current needs of their customers. Mount Holly plans to construct additional facilities, as discussed below, to augment its water supplies. In 1996, surface water sources supplied approximately 89% of Elizabethtown's supply with wells supplying the remaining 11%. All of Mount Holly's water is produced from wells. Substantially all of Elizabethtown's surface water is purchased under a long-term contract with the New Jersey Water Supply Authority (NJWSA) which requires Elizabethtown to purchase (i) 32 MGD from the state-owned Delaware and Raritan Canal which transports water from the Delaware River Basin plus (ii) 70 MGD from the Raritan River Basin which includes the state-owned Spruce Run-Round Valley Reservoir System. The safe yield of the Raritan River Basin and the Delaware and Raritan Canal is 225 MGD of which 151 MGD is presently allocated to Elizabethtown and others. The NJWSA has available, and Elizabethtown purchases, water above the Company's minimum purchase obligation on an as-needed basis. To ensure an adequate supply of quality water from an aquifer serving parts of southern New Jersey, state legislation requires Mount Holly, as well as other suppliers obtaining water from designated portions of this aquifer, to reduce pumpage from its wells. Mount Holly has a plan to develop a new water supply, treatment and transmission system necessary to obtain water outside the designated portion of the aquifer and to treat the water and pump it into the Mount Holly system. This is referred to as the Mansfield Project. The project is currently estimated to cost $16.5 million excluding an Allowance for Funds Used During Construction (AFUDC). Construction is expected to begin after issuance of the final water allocation permit. The land for the supply and treatment facilities has been purchased and wells have been drilled and can produce the required supply. Mount Holly has a rate filing pending relating to the Mansfield Project. On October 5, 1995, the New Jersey Department of Environmental Protection (NJDEP) granted Mount Holly a water allocation permit for four wells that are to be the water supply for the Mansfield Project. On October 20, 1995, another water purveyor requested of the NJDEP, and was subsequently granted, an adjudicatory hearing on the permit. For further discussion of this matter see "Rate Matters-Mount Holly" below. WATER TREATMENT FACILITIES AND WATER QUALITY REGULATIONS Elizabethtown owns and operates two treatment plants at the confluence of the Raritan and Millstone Rivers adjacent to the Delaware and Raritan Canal to treat surface water purchased from the NJWSA. The plants can withdraw water from any of the above sources, which is an advantage in the event that one source becomes contaminated. The Raritan-Millstone Plant (RM Plant) was placed in service in 1931 and has continually been upgraded since that time. The RM Plant has a production capacity of 155 MGD. The Canal Road Water Treatment Plant (Plant) was placed in service in October 1996 to increase Elizabethtown's sustainable production capacity and provide the ability to continue to meet water quality regulations. The Plant has an initial rated production capacity of 40 MGD and an installed cost of approximately $102 million, excluding an Allowance For Funds Used During Construction (AFUDC). Elizabethtown also operates smaller treatment facilities to treat groundwater produced by certain wells. Mount Holly operates similar groundwater treatment facilities. Both the United States Environmental Protection Agency (USEPA) and the NJDEP regulate the operation of Elizabethtown's and Mount Holly's water treatment and distribution systems and -2- the quality of the water Elizabethtown and Mount Holly deliver to their customers. Currently, Elizabethtown and Mount Holly believe they are in compliance, in all material respects, with all present federal and state water quality standards, including all regulations promulgated to date by the USEPA pursuant to the Federal Safe Drinking Water Act, as amended (SDWA), and by the NJDEP pursuant to similar state legislation. Elizabethtown has included certain capital projects in its three-year capital expenditure plans which it anticipates will be necessary to comply with regulations that have been proposed by the USEPA and NJDEP. Recovery of the financing and operating costs of such improvements, plus those costs for any additional projects which cannot be foreseen at this time, will be requested in rates. Elizabethtown has responded in recent years to water quality regulations promulgated by NJDEP and the USEPA by replacing groundwater supplies with increased supplies of surface water. The Company expects this trend to continue because it is preferable from the standpoint of operational efficiency and cost to modify treatment processes and facilities at one or two large plants than to constantly upgrade treatment facilities at multiple well sites. Water Quality Regulations As required by the SDWA, the USEPA has established maximum contaminant levels (MCLs) for various substances found in drinking water. As authorized by similar state legislation, the NJDEP has set MCLs for certain substances which are more restrictive than the MCLs set by the USEPA. In certain cases, the USEPA and NJDEP have also mandated that certain treatment procedures be followed in addition to satisfying MCLs established for specific contaminants. The NJDEP is also the USEPA's agent for enforcing the SDWA in New Jersey and, in that capacity, monitors the activities of Elizabethtown and Mount Holly and reviews the results of water quality tests performed by Elizabethtown and Mount Holly for adherence to applicable regulations. Regulations generally applicable to water utilities, including Elizabethtown and Mount Holly, include the Lead and Copper Rule (LCR), the MCLs established for various volatile organic compounds (VOCs), the MCLs proposed for radionuclides and the Surface Water Treatment Rule (SWTR). Lead and Copper Rule The LCR requires Elizabethtown and Mount Holly to test the quantity of lead and copper in drinking water at the customer's tap and, if certain contaminant levels (action levels) are exceeded, to notify customers and initiate a public information campaign advising customers how to minimize exposure to lead and copper. The LCR also requires Elizabethtown to add corrosion inhibitors to water to minimize leaching of lead from piping, faucets and soldered joints into water consumed at the tap. Results from two separate tests completed during 1992 within Elizabethtown and Mount Holly's systems did not indicate lead and copper concentrations above the action levels. Accordingly, public notification and a public information campaign have not been required. Corrosion inhibitor facilities for Elizabethtown were completed in 1996. Volatile Organic Compounds VOCs include various substances (primarily synthetic organic solvents) which have percolated into groundwater aquifers from surface sources. Elizabethtown has found VOCs in excess of the applicable MCLs in certain of its wells and has either suspended the use of such wells or constructed aeration towers which remove such contaminants from the water by venting them into the atmosphere. Because underground water flows are difficult to map, it is difficult to predict when and where contamination will occur in the future. To the extent that contamination in excess of applicable MCLs occurs at wells lacking aeration towers, Elizabethtown will consider building such facilities if feasible and cost effective, or closing such wells, thereby increasing its reliance on surface water. To date, Mount Holly has not been affected by VOC contamination. Radionuclides Radionuclides are naturally occurring radioactive substances (primarily radon) found in groundwater. Like VOCs, radon can be removed from groundwater using aeration towers. If the MCLs proposed for all radionuclides are finally adopted, Elizabethtown believes that it will abandon wells with aggregate -3- production capacity of approximately 5 MGD, thereby further increasing Elizabethtown's reliance on surface water. Elizabethtown currently owns and operates wells with an aggregate safe daily yield of 18 MGD. Surface Water Treatment Rule The operation of Elizabethtown's Raritan-Millstone treatment plant is subject to the SWTR. Elizabethtown has assessed the plant's sustainable production capacity, assuming operation consistent with the requirements of the SWTR, and determined that improvements to the existing plant are necessary. Specifically, Elizabethtown has installed additional pumps to increase capacity and reliability at peak times and has constructed a new building to house offices and lab facilities. Also, Elizabethtown has replaced existing chlorine gas disinfection facilities with liquid sodium hypochlorite to improve community and employee safety and has installed corrosion inhibitor facilities in conformance with the LCR. The Canal Road Water Treatment Plant has been designed and installed for compliance with the SWTR. TRANSMISSION AND DISTRIBUTION As of December 31, 1996, Elizabethtown Water Company's transmission and distribution system included 2,899 miles of transmission and distribution mains. Mains range in size up to 60 inches, substantially all of which are either ductile iron, cast iron or prestressed concrete pipe. Elizabethtown conducts an ongoing program (which is projected to cost $2.0 million for 1997) to clean and line its older cast iron mains. Such costs are capitalized and have been included in rate base in stipulations settling recent rate cases. On an ongoing basis, Elizabethtown assesses the capacity of its system to maintain adequate pressures and initiates plans to construct pumping, transmission and storage facilities as needed. ENERGY SUPPLY Elizabethtown pumps most of its water with electric power purchased from two major electric utilities. The Company has replaced certain electric pumps with natural gas-fired pumps in 1996 to reduce energy costs. In 1997, the Company expects to replace two large diesel-powered pumps with similar natural gas-fired pumps to further reduce energy costs. Elizabethtown also has other diesel powered pumping and generating facilities at its major treatment plants and at certain transfer stations to provide basic service during possible electrical shortages. Elizabethtown has not, to date, experienced any shortage of electric energy, natural gas or diesel fuel to operate its pumps and has cooperated with its electric suppliers during their peak periods by operating non-electrical pumping facilities upon request. ENVIRONMENTAL MATTERS Elizabethtown and Mount Holly are also subject to regulation by the NJDEP with respect to water supply plans and specifications for the construction, improvement, alteration and operation of public water supply systems and with respect to the quality of any residuals from treatment plants. As a normal by-product of treating surface water, Elizabethtown's existing surface water treatment plants generate silt removed from untreated river water plus residue from chemicals used in the treatment process. Historically, Elizabethtown had disposed of this material in landfills. As a result of revised regulations governing landfills, Elizabethtown has been reusing this material on site for flood protection and is presently removing some material off-site for beneficial reuse. Under New Jersey law, environmental matters are addressed by the NJDEP before diversion allowances or other water supply projects are authorized. To date, Elizabethtown has been able to construct all plant facilities and obtain all diversion authorizations necessary to maintain customer service. Mount Holly has also been able to construct all facilities and obtain all diversion authorizations with the exception of the pending objection to the diversion permit for the Mansfield Project as discussed below. -4- FRANCHISES The property and franchises of Elizabethtown and Mount Holly are subject to rights of eminent domain of the State of New Jersey. These rights have been delegated by statutes now in effect to municipalities or groups of municipalities and have been or may be delegated to various public agencies. No such rights of eminent domain have been exercised since 1931. EMPLOYEE RELATIONS As of December 31, 1996, the Corporation had a total of 400 full-time employees, of which 213 were covered by union contracts. The contracts between the Company and the Utility Workers Union of America (A.F.L.-C.I.O.) were renegotiated on February 1, 1996 and will expire on January 31, 1999. The contract provided for wage increases of 4% on February 1, 1996, 1997 and 1998, respectively. The Company considers relations with both union and non-union employees to be satisfactory. RATE MATTERS Elizabethtown and Mount Holly are subject to regulation by the New Jersey Board of Public Utilities (BPU) with respect to the issuance and sale of securities, rates and service, classification of accounts, mergers, and other matters. Elizabethtown and Mount Holly periodically seek rate relief to cover the cost of increased operating expenses, increases in financing expenses due to additional investments in utility plant, and other costs of doing business. Elizabethtown On October 25, 1996, a rate increase under a stipulation (1996 Stipulation) went into effect for Elizabethtown. The 1996 Stipulation was designed to result in an increase in annual operating revenues of $21.8 million. The rate increase reflects a full allowance for the estimated capital and operating costs for the Plant and an authorized rate of return on common equity of 11.25%. Recovery of depreciation expense on Contributions in Aid of Construction and Customers' Advances for Construction is not reflected in the rate increase. Furthermore, under the terms of the 1996 Stipulation, the Company will not be required to record such depreciation expense of approximately $.7 million annually, for the period that this rate increase is in effect. The 1996 Stipulation also allows the Company to continue to defer the transition obligation and interest associated with postretirement benefits. Mount Holly In June 1995, Mount Holly petitioned the BPU for an increase in rates, to take place in two phases. The first phase was necessary to recover costs that were not reflected in rates last increased in 1986. The second phase would recover the cost of a new water supply, treatment and transmission system necessary to obtain water outside a designated portion of an aquifer currently used by Mount Holly, and to treat and pump the water into the Mount Holly distribution system. Management believes this project is the most cost-effective alternative available to Mount Holly to comply with recent state legislation that restricts the amount of water that can be withdrawn from an aquifer in certain areas of southern New Jersey. The project, referred to as the Mansfield project, is currently estimated to cost $16.5 million, excluding AFUDC. Mount Holly has expended $2.9 million on the Mansfield Project as of December 31, 1996, excluding AFUDC. The land for the supply and treatment facilities has been purchased and test wells have been drilled and can produce the required supply. On October 5, 1995, the NJDEP granted Mount Holly a water allocation permit for four wells that are to be the water supply for this project. On October 20, 1995, another water purveyor requested of the NJDEP, and was subsequently granted, an adjudicatory hearing in opposition to the permit. Hearings on the matter before an administrative law judge are pending. A decision is expected later in 1997. The Company and Mount Holly believe that the permit in question will be upheld, but cannot predict with certainty the outcome of the matter. In the event that the objector is successful and the permit is rescinded, Mount Holly would meet its regulatory obligation to provide an alternate source of water by purchasing water from that purveyor. -5- On January 24, 1996, the BPU approved a stipulation (Mount Holly Stipulation) for an increase in rates of $.6 million effective as of that date. The Mount Holly Stipulation has, effectively, concluded the first phase of the rate proceeding. Mount Holly is continuing with the adjudicatory process with respect to the second phase of the petition. While management believes that the water supply, treatment and transmission project planned for Mount Holly is the most cost-effective response to the state legislation affecting the area, management cannot predict the ultimate outcome of the rate proceeding at this time. REAL ESTATE MATTERS Properties and E'town currently own several parcels of land aggregating approximately 740 acres located in central New Jersey having a carrying cost of approximately $13 million. A portion of this acreage was purchased from a third party and the balance was land formerly owned by Elizabethtown and no longer needed for utility purposes. These holdings are owned in fee. The Corporation has no plans to acquire additional real estate. Over the next several years, E'town and Properties will seek to sell their existing properties and expect to invest the sale proceeds into water and wastewater utility investments. Properties has executed a contract to sell one parcel for a price of $.4 million. The contract is expected to close in 1997 and produce a minimal gain. Properties executed a contract to sell another parcel to a developer. The parties expected that the contract would close prior to December 31, 1996 but the developer was unable to obtain the required municipal approvals. The contract has been extended and Properties and the developer have commenced litigation against the municipality. It is not known whether or when a sale will be consummated. The carrying cost of each parcel includes the original cost plus any real estate taxes, interest and, where applicable, direct costs capitalized while rezoning or governmental approvals are or were being sought. Such costs are capitalized until the property is offered for sale, after which time such costs are expensed. Based on independent appraisals received at various times prior to 1996, the estimated net realizable value of each property exceeds its respective carrying value as of December 31, 1996. OTHER DEVELOPMENTS Following a competitive selection process, Edison Township chose to negotiate with E'town for a 20-year contract to operate the Township's water supply system. This system serves about 11,000 residential, commercial and industrial customers. The partners have completed negotiations. The transaction still requires municipal and state agency approvals. E'town expects to realize a return on its investment in the project comparable to that realized by E'town's regulated utility operations. The earnings effect is expected to be small during the first few years and is expected to increase after year five. On January 1, 1997, AWM commenced a three-year contract to operate the wastewater collection and treatment facilities owned by Environmental Disposal Corporation (EDC), which serves portions of Bedminster, Far Hills, and Peapack-Gladstone. AWM is also providing the billing and customer inquiry services. AWM has also negotiated letters of understanding with two developers whereby AWM will construct wastewater collection and treatment facilities to serve developments in Morris and Bergen counties. Each developer will pay the associated construction costs. Subsequently, AWM will repurchase the facilities, for a nominal amount, and operate the systems as regulated utilities. -6- Executive Officers of the Corporation and Elizabethtown Name Age Positions Held Robert W. Kean, Jr. 74 Chairman and Chief Executive Officer of the Corporation since 1985 and Elizabethtown since 1973. Henry S. Patterson, II 74 President of the Corporation since March 1985 and Properties since July 1987. Thomas J. Cawley 66 Vice Chairman of Elizabethtown since January 1996 and President of Elizabethtown and its subsidiary, Mount Holly since August 1992. Executive Vice President of Elizabethtown since January 1987 and Vice President of Mount Holly since 1973 (retired from Elizabethtown December 31, 1996, remains President of Mount Holly). Andrew M. Chapman 41 Chief Financial Officer of the Corporation since August 1989 and Treasurer of the Corporation since November 1990. President of Elizabethtown since January 1996 and Executive Vice President of Elizabethtown from May 1994 to December 1995. He served as Senior Vice President of Elizabethtown from April 1993 to May 1994, Chief Financial Officer of Elizabethtown from November 1990 to December 1995 and Treasurer of Elizabethtown from August 1989 to May 1994. Anne Evans Estabrook 52 Vice President of the Corporation since September 1987. Owner of the Elberon Development Co., (a real estate holding company) and President of David 0. Evans, Inc. (a construction company). Walter M. Braswell 47 Secretary of the Corporation, Properties and Elizabethtown since December 1990 and Vice President and General Counsel of Elizabethtown since August 1988. Norbert Wagner 61 Senior Vice President-Operations of Elizabethtown since May 1992. Vice President-Operations since March 1987. Edward F. Cash 61 Vice President - Customer Services of Elizabethtown since 1977. Effective May 15, 1997, Messrs. Kean and Patterson will retire from the positions described above and become Chairman Emeritus and Director Emeritus, respectively, of the Corporation and Elizabethtown. On that date Mrs. Estabrook will become Chairman of the Corporation and Elizabethtown and Mr. Chapman will become President of the Corporation while retaining his responsibilities as President of Elizabethtown. -7- ITEM 2. Properties All principal plants and other materially important units of property of Elizabethtown and Mount Holly are owned in fee. The Company considers that the properties of Elizabethtown and Mount Holly are in good operating condition. ITEM 3. Legal Proceedings In the opinion of management, litigation in which the Corporation or its subsidiaries is involved is in the ordinary course of business and will not have a material adverse effect on the consolidated financial condition of the Corporation. ITEM 4. Submission of Matters to a Vote of Security Holders None 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. -8- 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
1996 1995 1994 1993 1992 Utility Plant (Thousands) Utility Plant - net $ 560,024 $ 507,858 $ 437,456 $ 373,293 $ 347,253 Construction Expenditures (excluding AFUDC) 55,125 73,789 69,981 32,517 33,293 Total Assets 640,779 580,808 502,848 437,405 386,880 Capitalization (Thousands) Shareholder's Equity 182,293 176,685 151,624 125,765 103,024 Preferred Stock 12,000 12,000 12,000 12,000 12,000 Debt (1) 250,963 208,952 164,951 141,952 147,841 Total Capitalization $ 445,256 $ 397,637 $ 328,575 $ 279,717 $ 262,865 Capitalization Ratios Common Stock 41% 44% 46% 45% 39% Preferred Stock 3% 3% 4% 4% 5% Debt (1) 56% 53% 50% 51% 56% Earnings Applicable to Common Stock (Thousands) $ 15,942 $ 16,512 $ 13,369 $ 13,783 $ 11,099 Operating Statistics Revenues (Thousands) General Customers $ 68,797 $ 67,455 $ 62,923 $ 63,100 $ 55,570 Other Water Systems 18,929 18,720 18,082 17,187 15,080 Industrial Wholesale 7,869 7,947 7,458 6,652 6,044 Fire Service/Miscellaneous 14,763 14,276 13,570 13,057 12,473 Total Revenues $ 110,358 $ 108,398 $ 102,033 $ 99,996 $ 89,167 Water Sales - Millions of Gallons (mg) General Customers 22,890 23,999 23,551 23,883 22,062 Other Water Systems 15,049 15,569 15,691 15,109 14,118 Industrial Wholesale 3,567 3,673 3,568 3,213 3,145 System Use and Unaccounted For 6,444 6,402 6,570 5,453 5,843 Total Water Sales 47,950 49,643 49,380 47,658 45,168 System Delivery by Source - mg Surface 41,485 42,646 42,534 40,742 38,558 Wells 6,328 6,764 6,690 6,776 6,480 Purchased 137 233 156 140 130 Total System Delivery 47,950 49,643 49,380 47,658 45,168 Millions of Gallons Pumped: Average Day 131 136 135 131 123 Maximum Day 170 183 182 191 159 General Information Meters in Service 197,791 195,375 191,622 188,677 185,028 Miles of Main 2,899 2,869 2,828 2,800 2,738 Fire Hydrants Served 16,012 15,650 15,291 14,909 14,400 (1) Includes long-term debt, notes payable and long-term debt-current portion. -9-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS E'town Corporation This information is included in Exhibit 13, filed herewith, and is incorporated herein by reference. Elizabethtown Water Company and Subsidiary The water utility operations of Elizabethtown Water Company (Elizabethtown or Company) and its subsidiary The Mount Holly Water Company (Mount Holly), presently constitute the major portion of E'town Corporation's (E'town or Corporation) assets and earnings. Mount Holly contributed 3% of the Company's consolidated operating revenues for 1996. The following analysis sets forth significant events affecting the financial condition of Elizabethtown at December 31, 1996, and the results of operations for the years ended December 31, 1996 and 1995 for Elizabethtown Water Company. LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures Program Capital expenditures were $55.1 million during 1996. Of this total, $18.6 million, excluding an Allowance For Funds Used During Construction (AFUDC), was expended on the Canal Road Water Treatment Plant (Plant). Capital expenditures for the three-year period ending December 31, 1999 are estimated to be $125.3 million ($105.8 million for Elizabethtown and $19.5 million for Mount Holly). The utilities' projected capital expenditures are returning to the levels experienced in the early 1990s as Elizabethtown has completed and placed the Plant into service as discussed below. Mount Holly expects to incur significant capital expenditures in 1997 and 1998 to construct new water supply, treatment and transmission facilities as discussed below. Elizabethtown The Plant was completed and placed into service on October 24, 1996. The Plant, which has an initial rated production capacity of 40 million gallons per day (mgd), will meet existing and anticipated customer demands and replace groundwater supplies withdrawn from service as a result of more restrictive water quality regulations and groundwater contamination. Elizabethtown's three-year capital program includes $69.3 million for projects of a routine nature. This program also includes $56.0 million of major projects such as new transmission mains, improvements to pumping facilities, construction of a new operations center in the western portion of our service territory and other miscellaneous projects. Mount Holly To ensure an adequate supply of quality water from an aquifer serving parts of southern New Jersey, state legislation requires Mount Holly, as well as other suppliers obtaining water from designated portions of this aquifer, to reduce pumpage from its wells. Mount Holly has received approval from the New Jersey Department of Environmental Protection (NJDEP) for its plan to develop a new water supply, treatment and transmission system necessary to obtain water outside the designated portion of the aquifer, and to treat the water and pump it into the Mount Holly system. This is referred to as the Mansfield Project. The project is currently estimated to cost $16.5 million, excluding AFUDC, of which $13.6 million is anticipated to be spent over the next three years. Mount Holly has expended $2.9 million on the Mansfield Project as of December 31, 1996, excluding AFUDC. The land for the supply and treatment facilities has been purchased and wells have been drilled and can produce the required supply. On October 5, 1995, the NJDEP granted Mount Holly a water allocation permit for four wells that are to be the water supply for the Mansfield Project. On October 20, 1995, another water purveyor requested of the NJDEP, and was subsequently granted, an adjudicatory hearing in opposition to the permit. Hearings on the matter before an administrative law judge are pending. A decision is expected later in 1997. The Company and Mount Holly believe that the permit in question will be upheld, but cannot predict with certainty the outcome of the matter. In the event that the objector is successful and the permit is rescinded, Mount Holly would meet its regulatory obligation to provide an alternate source of water by purchasing water from that -10- purveyor. Management believes the Mansfield Project is the most cost-effective alternative available to Mount Holly to comply with recent state legislation that restricts the amount of water that can be withdrawn from the aquifer. In June 1995, Mount Holly petitioned the New Jersey Board of Public Utilities (BPU) for an increase in rates, to take place in two phases. The first phase was necessary to recover costs that were not reflected in rates last increased in 1986. The second phase would recover the cost of the Mansfield project. On January 24, 1996, the BPU approved a stipulation (Mount Holly Stipulation) for an increase in rates of $.6 million, effective as of that date. The Mount Holly Stipulation has, effectively, concluded the first phase of the rate proceeding. Mount Holly is continuing with the adjudicatory process with respect to the second phase of the petition. Capital Resources During 1996, Elizabethtown, including Mount Holly, financed 40.2% of its capital expenditures from internally generated funds (after payment of common stock dividends). The balance was financed with a combination of short-term borrowings under a revolving credit agreement discussed below, proceeds from capital contributions from E'town (funded by issuances of Common Stock under the Corporation's Dividend Reinvestment and Stock Purchase Plan) and other short-term bank borrowings. For the three-year period ending December 31, 1999, Elizabethtown, including Mount Holly, estimates that 57% of its capital expenditures are expected to be financed with internally generated funds (after payment of common stock dividends). The balance will be financed with a combination of proceeds from the sale of E'town common stock, long-term debentures, proceeds of tax-exempt New Jersey Economic Development Authority (NJEDA) bonds and short-term borrowings. The NJEDA has granted preliminary approval for the financing of almost all of Elizabethtown's major projects during the next three years and the Mansfield Project. Elizabethtown expects to pursue tax-exempt financing to the extent that final allocations are granted by the NJEDA. The Company's senior debt is currently rated A3 and A by Moody's Investors Service and Standard & Poor's Ratings Group, respectively. Standard & Poor's has recently reaffirmed the Company's A rating and has upgraded its rating outlook from "negative" to "stable." In the second quarter of 1997, Elizabethtown expects to issue $50.0 million of tax-exempt Variable Rate Demand Notes through the NJEDA. The proceeds of the issue are expected to be used to repay amounts outstanding under the revolving credit agreement discussed below. Elizabethtown continues to obtain a portion of the funds required for its capital program through borrowings under a revolving credit agreement (Agreement) with an agent bank and five additional banks. The Agreement was executed in 1994 to provide up to $60.0 million in revolving short-term financing to partially fund Elizabethtown's capital program, the predominant portion of which was the Plant. The Agreement further provides that, among other covenants, Elizabethtown must maintain a percentage of common and preferred equity to total capitalization of not less than 35% and a pre-tax interest coverage ratio of at least 1.5 to 1. As of December 31, 1996, the percentage of Elizabethtown's common and preferred equity to total capitalization, as calculated in accordance with Agreement, was 44%. For 1996, Elizabethtown's pre-tax interest coverage ratio, calculated in accordance with the Agreement, was 2.7 to 1. At December 31, 1996, Elizabethtown had outstanding borrowings of $60.0 million under the Agreement and $9.0 million of borrowings under uncommitted lines of credit. The combined borrowings were at interest rates from 5.50% to 5.88% at a weighted average rate of 5.72%. The Agreement expires in July 1997 and provides that the Company may convert any outstanding balances to a five-year, fully amortizing term loan. However, upon expiration of the Agreement, the Company expects to meet its short-term financing needs with uncommitted lines of credit. RESULTS OF OPERATIONS Earnings Applicable to Common Stock for 1996 were $15.9 million as compared to $16.5 million for 1995. The primary factor contributing to the decrease in earnings was a reduction in revenues due to reduced outdoor water consumption in 1996 compared to 1995. Earnings Applicable to Common Stock for 1995 were $16.5 million as compared to $13.4 million for 1994. The combined effect of a $5.3 million rate increase in February 1995, increases in capitalized AFUDC in 1995 and a non-recurring charge in 1994 all contributed to the increase in earnings between 1994 and 1995. -11- Operating Revenues increased $2.0 million or 1.8% in 1996 over the comparable 1995 amount. The increase in total revenues was comprised of rate increases for Elizabethtown and Mount Holly, as discussed above for Mount Holly and at Economic Outlook for Elizabethtown, which were offset by a decrease in water consumption due to unusually cool, wet summer weather in 1996. The reduction in water consumption accounted for a decrease in revenues of $2.4 million. Operating revenues increased by $3.9 million and $.5 million for the effects of the increases in rates of Elizabethtown and Mount Holly, respectively. Operating Revenues increased $6.4 million, or 6.2%, in 1995. Of this increase, $4.6 million relates to a rate increase, effective February 1995. Increased consumption by retail customers and an increase in the number of customers increased revenues by $1.4 million. Revenues from industrial customers resulting from consumption increased $.2 million, while revenues from other water systems resulting from consumption decreased $.2 million. Revenues from fire service customers increased $.4 million. Operation Expenses increased $.6 million or 1.3% in 1996 over the comparable 1995 amount. Operation expenses decreased by $.4 million for certain variable expenses associated with the reduction in water consumption discussed above. The successful implementation of an energy conservation program in the second quarter of 1996 at our Raritan-Millstone Treatment Plant reduced energy costs by $.8 million. The success of various safety programs resulted in a decrease in workers compensation premiums of $.3 million. These decreases were offset by increased labor costs of $1.6 million. Operation Expenses increased $2.4 million, or 5.9%, in 1995. The increase is due, primarily, to increased costs for labor, benefits and the cost of purchased water calculated in accordance with a Purchased Water Adjustment Clause (PWAC). Benefit costs increased due to increases in the actuarially calculated pension expense and the cost of postemployment benefits, a portion of which was expensed in 1995 as it is recognized in rates pursuant to the 1995 Stipulation effective February 1995. Maintenance Expenses increased less than $.1 million or .9% in 1996 over the comparable 1995 amount. The Company is realizing the benefits of various preventive maintenance programs and operating efficiencies instituted in the current and prior years. Maintenance Expenses decreased $.8 million, or 12.4%, in 1995. The decrease is due, primarily, to the absence in 1995 of the unusually harsh winter weather that occurred in 1994. Also, the results of preventive maintenance programs have contributed to an overall decrease in maintenance expenses. Depreciation Expense increased $1.1 million or 12.3% in 1996 as compared to 1995. The increase is due, primarily, to a higher level of depreciable plant in service and includes $.5 million of depreciation expense for the Plant for a portion of the year. Depreciation Expense increased $.9 million, or 12.1%, in 1995 due, primarily, to additional depreciable plant being placed in service during that period. Also, an increase in authorized depreciation rates as a result of the 1995 Stipulation, effective February 1995, accounted for $.4 million of the increase. Revenue Taxes increased $.2 million, or 1.7% in 1996 and $.8 million, or 6.6% in 1995 due to additional taxes on the higher revenues discussed above. Real Estate, Payroll and Other Taxes increased $.1 million or 3.5% in 1996 and $.1 million, or 2.0%, in 1995 due to increased payroll taxes resulting from labor cost increases. Federal Income Taxes as a component of operating expenses decreased $.6 million or 8.0% from the comparable 1995 amount due to the changes in the components of taxable income discussed herein. Federal Income Taxes increased $.8 million, or 11.5%, in 1995 due to changes in the components of taxable income discussed herein. In addition, in 1995 Elizabethtown received tax refunds related to the years 1984 and 1985 of $.1 million. Other Income (Expense) increased $.6 million or 26.1% as compared to the 1995 amount. An increase in the equity component of AFUDC of $.7 million, primarily from the construction of the Plant accounted for the overall increase. Other Income (Expense) increased $1.7 million in 1995 due, primarily, to an increase in the equity component of AFUDC of $1.8 million and a non-recurring litigation settlement in 1994. The increases were offset by federal income taxes associated with the various components. Total Interest Charges increased $1.7 million or 15.2% in 1996 over the comparable 1995 amount. The increase is due, primarily, to increased interest on long-term debt due to the issuance of $40.0 million of NJEDA tax-exempt debentures in December 1995 to refinance balances previously incurred under -12- the revolving credit agreement. A higher level of short-term borrowings under the revolving credit agreement incurred to finance Elizabethtown's capital program on an interim basis has also contributed to the overall increase. This increase was offset by an increase in the debt component of AFUDC resulting from Elizabethtown's higher construction work in progress balances in 1996, primarily due to the Plant. Total Interest Charges increased $.7 million, or 6.8%, in 1995 due, primarily, to an increase in interest expense of $2.1 million on increased borrowings under Elizabethtown's revolving credit agreement to finance the Company's ongoing capital program, the largest component of which was the Plant. This amount was offset by an increase in the debt component of AFUDC of $1.6 million, also primarily related to the construction of the Plant. In addition, in 1995 Elizabethtown received interest on tax refunds related to 1984 and 1985 of $.1 million. ECONOMIC OUTLOOK Forward Looking Information Certain information included in this report contains, and other materials filed or to be filed by the Corporation with the Securities and Exchange Commission (as well as information included in oral and written statements made or to be made by the Company) contain or will contain forward looking statements within the meaning of the Securities Acts of 1933 and 1934, as amended. Any forward looking information is or will be based on information available at that time and is or will be subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. Consolidated earnings for Elizabethtown Water Company for the next several years will be determined by (i) Elizabethtown's ability to increase sales and to further control operating expenses through improved productivity, (ii) Mount Holly's, and later Elizabethtown's, ability to obtain adequate and timely rate relief in connection with future utility plant additions. Elizabethtown expects earnings to increase approximately 15% in 1997 as the Company realizes the full impact of its $21.8 million rate increase effective in October 1996 in addition to realizing the benefits of ongoing cost control efforts. This expectation assumes a return to normal weather conditions in 1997. On October 25, 1996, a rate increase under a stipulation (1996 Stipulation) went into effect for Elizabethtown. The 1996 Stipulation was designed to result in an increase in annual operating revenues of $21.8 million. The rate increase reflects a full allowance for the estimated capital and operating costs for the Plant and an authorized rate of return on common equity of 11.25%. Recovery of depreciation expense on Contributions in Aid of Construction and Customers' Advances for Construction is not reflected in the rate increase. Furthermore, under the terms of the 1996 Stipulation, the Company will not be required to record such depreciation expense of approximately $.7 million annually, for the period that this rate increase is in effect. The 1996 Stipulation also allows the Company to continue to defer the transition obligation and interest associated with postretirement benefits. Elizabethtown, excluding Mount Holly, earned a rate of return on common equity of 9.0% in 1996. Elizabethtown's authorized rate of return on common equity is currently 11.25%. In 1997, Elizabethtown expects to substantially close this gap between its earned return on common equity in 1996 and its authorized return. This assumes a return to normal summer weather conditions and outdoor water use. Realizing rates of return in 1998 comparable to authorized levels will require continued customer additions and the success of ongoing cost control efforts, as well as rate relief later in that year. Mount Holly earned a rate of return on common equity of 3.5% in 1996, compared to an authorized rate of return of 11.25% established in its most recent rate proceeding. Mount Holly contributed $.02 to E'town's consolidated earnings per share in 1996. Management expects Mount Holly to increase its contribution to E'town's earnings per share by obtaining additional rate relief so that Mount Holly can realize rates of return comparable to authorized levels upon the completion of Mount Holly's Mansfield project, and recovery of the costs of that and other projects in rates. New Accounting Pronouncement See Note 2 of the Notes to Consolidated Financial Statements for a discussion of a new accounting standard that was effective in 1996. -13- Item 8. Financial Statements and Supplementary Data The information for E'town is included in Exhibit 13, filed herewith, and is incorporated herein by reference. The information for Elizabethtown Water Company is on pages 2 through 16 of Appendix I included herein. Item 9. Changes in and Disagreements with Accountants on Acccounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to directors of E'town and Elizabethtown is included in E'town's Proxy Statement for the 1997 Annual Meeting of Stockholders, and is incorporated herein by reference. Information regarding the executive officers of both E'town and Elizabethtown is included under Item I in Part I of this Form 10-K. Item 11. Executive Compensation This information for E'town and Elizabethtown is included in E'town's Proxy Statement for the 1997 Annual Meeting of Stockholders, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management This information is included in E'town's Proxy Statement for the 1997 Annual Meeting of Stockholders, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions This information for E'town and Elizabethtown is included in E'town's Proxy Statement for the 1997 Annual Meeting of Stockholders, and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report: 1. Financial Statements: Elizabethtown Water Company Statements of Consolidated Income for the years ended December 31, 1996, 1995 and 1994. Consolidated Balance Sheets as of December 31, 1996 and 1995. Statements of Consolidated Capitalization as of December 31, 1996 and 1995. -14- Statement of Consolidated Shareholder's Equity for the years ended December 31, 1996, 1995 and 1994. Statements of Consolidated Cash Flows for the years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. E'town Corporation A portion of the 1996 Annual Report to Shareholders which includes Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Other Financial and Statistical Data is filed herewith as Exhibit 13 and is herein incorporated by reference. Elizabethtown Water Company Elizabethtown Water Company's consolidated financial statements and notes thereto are included herein on pages 2 through 16 of Appendix I. E'town and Elizabethtown Water Company The Independent Auditors' Reports for E'town (as to certain financial statement schedules) and Elizabethtown Water Company appear on page 18 herein and page 1 of Appendix I, respectively. 2. Financial Statement Schedules: All financial schedules required to be filed contain the same data and amounts for both E'town and Elizabethtown Water Company, except for Supplemental Schedule of Property, Plant and Equipment, which includes property, plant and equipment for each company. Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1996, 1995 and 1994. Supplemental Schedule of Property, Plant and Equipment at December 31, 1996 and 1995. Other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or the notes accompanying each company's financial statements. 3. Exhibits (a) Exhibits for E'town and Elizabethtown Water Company are listed in the Exhibit Index. (b) Reports on Form 8-K: None -15- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 20, 1997 E'TOWN CORPORATION By: /s/ Robert W. Kean, Jr. Chairman, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 20, 1997. Chairman, Chief Executive Officer and Director /s/ Robert W. Kean, Jr. President and Director /s/ Henry S. Patterson, II Vice President and Director /s/ Anne Evans Estabrook Chief Financial Officer, Treasurer and Director /s/ Andrew M. Chapman (Principal Financial & Accounting Officer) Director /s/ Brendan T. Byrne Director /s/ Thomas J. Cawley Director /s/ Anthony S. Cicatiello Director /s/ John Kean Director /s/ Robert W. Kean III Director /s/ Barry T. Parker Director /s/ Hugo M. Pfaltz, Jr. Director /s/ Chester A. Ring III -16- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ELIZABETHTOWN WATER COMPANY March 20, 1997 By: /s/ Robert W. Kean, Jr. Chairman, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 20, 1997. Chairman, Chief Executive Officer and Director /s/ Robert W. Kean, Jr. Vice Chairman and Director /s/ Thomas J. Cawley President and Director /s/ Andrew M. Chapman Vice President - Finance & Treasurer /s/ Gail P. Brady (Principal Financial Officer) Controller /s/ Dennis W. Doll (Principal Accounting Officer) Director /s/ Brendan T. Byrne Director /s/ Anthony S. Cicatiello Director /s/ Anne Evans Estabrook Director /s/ John Kean Director /s/ Robert W. Kean III Director /s/ Barry T. Parker Director /s/ Henry S. Patterson, II Director /s/ Hugo M. Pfaltz, Jr. Director /s/ Chester A. Ring III -17- INDEPENDENT AUDITORS' REPORT E'TOWN CORPORATION: We have audited the consolidated financial statements of E'town Corporation and its subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated February 19, 1997; such consolidated financial statements and report are included in your 1996 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of E'town Corporation and its subsidiaries, listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Parsippany, NJ February 19, 1997 -18- E'TOWN CORPORATION Schedule II ELIZABETHTOWN WATER COMPANY VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E Additions Balance at Charged to Balance at Beginning ofCosts and Deductions End of Description: Period Expenses (A) Period Reserve for Uncollectible Accounts: Year Ended 12/31/9$532,000 $600,242 $566,242 $566,000 Year Ended 12/31/9$463,000 $600,648 $531,648 $532,000 Year Ended 12/31/9$434,000 $552,459 $523,459 $463,000 (A) Write-off of uncollectible accounts, net of recoveries. E'TOWN CORPORATION ELIZABETHTOWN WATER COMPANY PROPERTY, PLANT AND EQUIPMENT AT DECEMBER 31, 1996 AND 1995 ELIZABETHTOWN WATER COMPANY: 1996 1995 UTILITY PLANT IN SERVICE: Intangible Plant $250,766 $250,766 Source of Supply Plant 20,502,583 10,073,447 Pumping Plant 54,666,431 44,838,866 Water Treatment Plant 156,149,004 53,070,107 Transmission & Distribution Plant 404,946,395 378,216,166 General Plant 17,444,418 15,373,329 Leasehold Improvements 120,548 117,186 Acquisition Adjustments 632,388 632,388 ------------ ------------ Utility Plant In Service 654,712,533 502,572,255 Construction Work In Progress 7,994,186 100,212,636 ------------ ------------ Total Utility Plant 662,706,719 602,784,891 NON-UTILITY PROPERTY - NET 80,976 83,178 ------------ ------------ TOTAL $662,787,695 $602,868,069 ============ ============ E'TOWN CORPORATION: UTILITY PLANT (from above) 662,706,719 602,784,891 NON-UTILITY PROPERTY - NET 12,769,953 12,151,496 ------------ ------------ TOTAL $675,476,672 $614,936,387 ============ ============ EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk(*), are filed herewith. The exhibits not so designated have heretofore been filed with the Commission and are incorporated herein by reference to the documents indicated in brackets following the description of such exhibits. E'town Corporation Exhibit No. Description 3(a) - Certificate of Incorporation of E'town Corp. [Registration Statement No. 33-42509, Exhibit 4(a)] *3(b) - By-Laws of E'town Corp. 3(c) - Certificate of Incorporation of E'town Properties, Inc. [Registration Statement No. 33-32143, Exhibit 4(j)] 3(d) - By-Laws of E'town Properties, Inc. [Registration Statement No. 33-32143, Exhibit 4(n)] 4(a) - Rights Agreement dated as of February 4, 1991 between E'town and the Rights Agent [Registration Statement No. 33-38566, Exhibit 4(n)] 4(b) - Indenture dated as of January 1, 1987 from E'town Corporation to Boatmen's Trust, Trustee, relating to the 6 3/4% Convertible Subordinated Debentures due 2012 [Registration Statement No. 33-32143, Exhibit 4(a)] 10(a) - Incentive Stock Option Plan [Registration Statement No. 2-99602, Exhibit 28(a)] 10(b) - Savings and Investment Plan - 401(k) [Form 10-K for the year 1994, Exhibit 10(b)] 10(c) - Management Incentive Plan [Registration Statement No. 33-38566, Exhibit 10(i)] 10(d) - E'town's 1987 Stock Option Plan [Registration Statement No. 33-42509, Exhibit 281 10(e) - E'town's 1990 Performance Stock Program [Registration Statement No. 33-46532, Exhibit 10(k)] 10(f) - E'town's Dividend Reinvestment and Stock Purchase Plan [Registration No. 333-16713, Exhibit 4(e)] 10(g) - Change of Control Agreement [Form 10-Q for the quarter ended March 31, 1995, Exhibit 10] *11 - Statement Regarding Computation of Per Share Earnings *13 - Portion of the 1996 Annual Report to Shareholders which includes Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Other Financial and Statistical Data and is herein incorporated by reference. *21- Subsidiaries of the Corporation *27- E'town Corporation - Financial Data Schedule Elizabethtown Water Company 3(a) - Form of Restated Certificate of Incorporation of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1994, Exhibit 3(a)] *3(b) - By-Laws of Elizabethtown Water Company 4(a) - Indenture dated as of November 1, 1994 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 7 1/4% Debentures due 2028. [Form 10-K for year ended December 31, 1994, Exhibit 4(a)] 4(b) - Indenture dated as of September 1, 1992 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 8% Debentures due 2022 [Form 10-K for year ended December 31, 1993, Exhibit 4(a)] 4(c) - Indenture dated as of October 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 8 3/4% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(f)] 4(d) - Indenture dated as of August 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 6.60% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(g)] 4(e) - Indenture dated as of August 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 6.70% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(h)] 4(f) - Indenture dated as of October 1, 1990 from Elizabethtown Water Company to Citibank, N.A., Trustee, relating to the 7 1/2% Debentures due 2020 [Registration Statement No. 33-38566, Exhibit 4(e)] 4(g) - Indenture dated as of December 1, 1989 from Elizabethtown Water Company to Citibank, N.A., Trustee, relating to the 7.20% Debentures due 2019 [Registration Statement No. 33-38566, Exhibit 4(f)] 4(h) - Indenture dated as of December 1, 1995 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 5.60% Debentures due 2025 10(a)- Contract for service to Middlesex Water Company. [Registration Statement No. 33-38566, Exhibit 10(a)] 10(b)- Contract for service to Edison Township. [Registration Statement No. 2-58262, Exhibit 13(c)] 10(c)- Contract for service to New Jersey-American Water Company. [Form 10-K for the year ended December 31, 1993, Exhibit 10(c)] 10(d)- Contract for service to City of Elizabeth. [Form 10-K for the year ended December 31, 1992, Exhibit 10(d)] 10(e)- Contract for service to Franklin Township. [Registration Statement No. 33-46532, Exhibit 10(e)] 10(f)- Contract with the New Jersey Water Supply Authority for the purchase of water from the Raritan Basin. [Registration Statement No. 33-32143, Exhibit 10(e)] 10(g)- Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1992, Exhibit 10(g)] 10(h)- Medical Reimbursement Plan of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1992, Exhibit 10(h)] 10(i)- Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-Q for the year ended September 30, 1995, Exhibit 10] *12(a)-Computation of Ratio of Earnings to Fixed Charges *12(b)-Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends *21 - Subsidiaries of the Company *23 - Consent of Deloitte & Touche LLP, Independent Auditors *27 - Elizabethtown Water Company - Financial Data Schedule. APPENDIX I INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDER AND BOARD OF DIRECTORS OF ELIZABETHTOWN WATER COMPANY: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of Elizabethtown Water Company and its subsidiary as of December 31, 1996 and 1995, and the related statements of consolidated income, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Elizabethtown Water Company and its subsidiary at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Parsippany, NJ February 19, 1997 -1- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED INCOME
Year Ended December 31, 1996 1995 1994 Operating Revenues $ 110,358,349 $ 108,398,105 $ 102,032,505 ------------- ------------- ------------- Operating Expenses: Operation 43,713,177 43,132,400 40,722,980 Maintenance 5,859,167 5,805,511 6,623,772 Depreciation 9,893,391 8,808,169 7,860,180 Revenue taxes 13,819,646 13,591,212 12,748,161 Real estate, payroll and other taxes 2,869,066 2,771,716 2,717,067 Federal income taxes (Note 3) 7,360,461 8,002,292 7,176,396 ------------- ------------- ------------- Total operating expenses 83,514,908 82,111,300 77,848,556 ------------- ------------- ------------- Operating Income 26,843,441 26,286,805 24,183,949 ------------- ------------- ------------- Other Income (Expense): Allowance for equity funds used during construction (Note 2) 3,725,234 2,976,290 1,178,133 Litigation settlement (932,203) Federal income taxes (Note 3) (1,462,076) (1,159,218) (237,599) Other - net 452,127 335,763 432,922 ------------- ------------- ------------- Total other income (expense) 2,715,285 2,152,835 441,253 ------------- ------------- ------------- Total Operating and Other Income 29,558,726 28,439,640 24,625,202 ------------- ------------- ------------- Interest Charges: Interest on long-term debt 13,011,069 10,892,129 10,774,008 Other interest expense - net 2,640,117 2,343,903 175,507 Capitalized interest (Note 2) (3,208,636) (2,445,093) (867,101) Amortization of debt discount and expense-net 361,012 323,557 319,646 ------------- ------------- ------------- Total interest charges 12,803,562 11,114,496 10,402,060 ------------- ------------- ------------- Income Before Preferred Stock Dividends of Subsidiary 16,755,164 17,325,144 14,223,142 Preferred Stock Dividends 813,000 813,000 854,047 ------------- ------------- ------------- Earnings Applicable to Common Stock $ 15,942,164 $ 16,512,144 $ 13,369,095 ============= ============= ============= See Notes to Consolidated Financial Statements. -2-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995 Assets Utility Plant-At Original Cost: Utility plant in service $ 654,712,533 $ 502,572,255 Construction work in progress 7,994,186 100,212,636 ------------- ------------- Total utility plant 662,706,719 602,784,891 Less accumulated depreciation and amortization 102,682,572 94,926,413 ------------- ------------- Utility plant-net 560,024,147 507,858,478 ------------- ------------- Non-utility Property 80,976 83,178 ------------- ------------- Current Assets: Cash and cash equivalents 3,121,958 3,796,757 Customer and other accounts receivable (less reserve: 1996, $566,000; 1995, $532,000) 16,725,298 16,943,725 Unbilled revenues 9,356,122 7,443,656 Materials and supplies-at average cost 2,044,748 1,912,015 Prepaid insurance, taxes, other 3,741,645 1,874,338 ------------- ------------- Total current assets 34,989,771 31,970,491 ------------- ------------- Deferred Charges (Note 7): Prepaid pension expense (Note 10) 99,210 580,534 Waste residual management 1,064,454 970,182 Unamortized debt and preferred stock expenses 8,988,426 9,384,609 Taxes recoverable through future rates (Note 3) 30,434,909 26,427,627 Postretirement benefit expense (Note 10) 3,465,272 2,900,569 Other unamortized expenses 1,631,837 632,191 ------------- ------------- Total deferred charges 45,684,108 40,895,712 ------------- ------------- Total $ 640,779,002 $ 580,807,859 ============= ============= See Notes to Consolidated Financial Statements. -3-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995 Capitalization and Liabilities Capitalization (Notes 4 and 5): Common shareholder's equity $ 182,292,832 $ 176,684,773 Cumulative preferred stock 12,000,000 12,000,000 Long-term debt - net 181,933,425 181,922,528 ------------- ------------- Total capitalization 376,226,257 370,607,301 ------------- ------------- Current Liabilities: Notes payable - banks (Note 5) 69,000,000 27,000,000 Long-term debt - current portion (Note 4) 30,000 30,000 Accounts payable and other liabilities 17,093,249 16,723,904 Customers' deposits 300,561 305,349 Municipal and state taxes accrued 13,886,634 13,661,620 Federal income taxes accrued 533,286 Interest accrued 3,157,869 2,937,637 Preferred stock dividends accrued 59,000 59,000 ------------- ------------- Total current liabilities 103,527,313 61,250,796 ------------- ------------- Deferred Credits: Customers' advances for construction 43,636,080 45,460,749 Federal income taxes (Note 3) 73,950,218 64,886,448 Unamortized investment tax credits 8,244,937 8,448,811 Accumulated postretirement benefits (Note 10) 3,595,542 2,900,569 ------------- ------------- Total deferred credits 129,426,777 121,696,577 ------------- ------------- Contributions in Aid of Construction 31,598,655 27,253,185 ------------- ------------- Commitments and Contingent Liabilities (Note 9) Total $ 640,779,002 $ 580,807,859 ============= ============= See Notes to Consolidated Financial Statements. -4-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED CAPITALIZATION
December 31, 1996 1995 Common Shareholder's Equity (Notes 4 and 5): Common stock without par value, authorized, 10,000,000 shares,issued 1996 and 1995, 1,974,902 shares $ 15,740,602 $ 15,740,602 Paid-in capital 117,457,348 112,157,348 Capital stock expense (484,702) (484,702) Retained earnings 49,579,584 49,271,525 ------------- ------------- Total common shareholders' equity 182,292,832 176,684,773 ------------- ------------- 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 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) 87,500 117,500 ------------- ------------- Total long-term debt 183,087,500 183,117,500 Unamortized discount-net (1,154,075) (1,194,972) ------------- ------------- Total long-term debt-net 181,933,425 181,922,528 ------------- ------------- Total Capitalization $ 376,226,257 $ 370,607,301 ============= ============= See Notes to Consolidated Financial Statements. -5-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY
Year Ended December 31, 1996 1995 1994 Common Stock: $ 15,740,602 $ 15,740,602 $ 15,740,602 ------------- ------------- ------------- Paid-in Capital: Balance at Beginning of Year 112,157,348 88,868,632 63,522,594 Capital contributed by parent company 5,300,000 23,288,716 25,346,038 ------------- ------------- ------------- Balance at End of Year 117,457,348 112,157,348 88,868,632 ------------- ------------- ------------- Capital Stock Expense: (484,702) (484,702) (484,702) ------------- ------------- ------------- Retained Earnings: Balance at Beginning of Year 49,271,525 47,499,723 46,986,485 Income before preferred stock dividends 16,755,164 17,325,144 14,223,142 Dividends on common stock (15,634,105) (14,740,342) (12,855,857) Dividends on preferred stock (813,000) (813,000) (854,047) ------------- ------------- ------------- Balance at End of Period 49,579,584 49,271,525 47,499,723 ------------- ------------- ------------- Total Common Shareholder's Equity $ 182,292,832 $ 176,684,773 $ 151,624,255 ============= ============= ============= See Notes to Consolidated Financial Statements. -6-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31, 1996 1995 1994 Cash Flows from Operating Activities: Income before preferred stock dividends $ 16,755,164 $ 17,325,144 $ 14,223,142 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 9,893,391 8,808,169 7,860,180 (Increase) decrease in deferred charges (612,594) 327,562 (169,459) Deferred income taxes and investment tax credits-net 4,852,614 4,486,908 4,256,534 Capitalized interest and AFUDC (6,933,870) (5,421,383) (2,045,234) Other operating activities-net 68,369 (61,590) (130,902) Change in current assets and current liabilities excluding cash, short-term investments and current portion of debt: Customer and other accounts receivable 218,427 (4,592,923) (462,817) Unbilled revenues (1,912,466) (282,173) 86,839 Accounts payable and other liabilities 364,557 (1,415,164) 8,517,848 Accrued/prepaid interest and taxes (1,955,347) 2,353,248 (1,464,787) Other (132,732) (187,046) (101,266) ------------- ------------- ------------- Net cash provided by operating activities 20,605,513 21,340,752 30,570,078 ------------- ------------- ------------- Cash Flows Provided by Financing Activities: Decrease in funds held by Trustee for construction expenditures 382,306 Proceed from issuance of debentures 40,000,000 Proceed from issuance of preferred stock 12,000,000 Redemption of preferred stock (12,000,000) Capital contributed by parent company 5,300,000 23,288,716 25,346,038 Debt and preferred stock issuance/amortization costs 396,183 (482,338) (876,594) Repayment of long-term debt (30,000) (38,800) (42,000) Contributions and advances for construction-net 2,520,801 3,440,942 3,453,604 Net increase in notes payable - banks 42,000,000 4,000,000 23,000,000 Dividends paid on common stock (16,342,106) (15,448,342) (13,631,154) ------------- ------------- ------------- Net cash provided by financing activities 33,844,878 54,760,178 37,632,200 ------------- ------------- ------------- Cash Flows Used for Investing Activities: Utility plant expenditures (excluding allowance for funds used during construction) (55,125,190) (73,789,288) (69,980,619) ------------- ------------- ------------- Cash used for investing activities (55,125,190) (73,789,288) (69,980,619) ------------- ------------- ------------- Net (Decrease) Increase in Cash and Cash Equivalents (674,799) 2,311,642 (1,778,341) Cash and Cash Equivalents at Beginning of Year 3,796,757 1,485,115 3,263,456 ------------- ------------- ------------- Cash and Cash Equivalents at End of Year $ 3,121,958 $ 3,796,757 $ 1,485,115 ============= ============= ============= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 8,481,253 $ 7,833,355 $ 9,952,838 Income taxes $ 5,723,350 $ 4,158,093 $ 6,771,254 Preferred stock dividends $ 708,000 $ 708,000 $ 805,475 See Notes to Consolidated Financial Statements. -7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization Elizabethtown Water Company (Elizabethtown or Company) and its wholly owned subsidiary, The Mount Holly Water Company (Mount Holly) is a wholly owned subsidiary of E'town Corporation (E'town or Corporation). E'town, a New Jersey holding company, is the parent company of Elizabethtown Water Company, E'town Properties and owner of a 65% interest in Applied Watershed Management. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include Elizabethtown and its subsidiary, Mount Holly. Significant intercompany accounts and transactions have been eliminated. Elizabethtown and Mount Holly are regulated water utilities and follow the Uniform System of Accounts, as adopted by the New Jersey Board of Public Utilities (BPU). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Utility Plant and Depreciation Income is charged with the cost of labor, materials and other expenses incurred in making repairs and minor replacements and in maintaining the properties. Utility plant accounts are charged with the cost of improvements and major replacements of property. When depreciable property is retired or otherwise disposed of, the cost thereof, plus the cost of removal net of salvage, is charged to accumulated depreciation. Depreciation is generally computed on a straight-line basis at functional rates for various classes of assets. The provision for depreciation, as a percentage of average depreciable property, was 1.73% for 1996, 1.83% for 1995 and 1.75 % for 1994. Allowance for Funds Used During Construction Elizabethtown capitalizes, as an appropriate cost of utility plant, an Allowance for Funds Used During Construction (AFUDC), which represents the cost of financing major projects during construction. AFUDC, a non-cash credit on the Statements of Consolidated Income, is added to the construction cost of the project and included in rate base and then recovered in rates during the project's useful life. AFUDC is comprised of a debt component (credited to Interest Charges), and an equity component (credited to Other Income) in the Statements of Consolidated Income. AFUDC totaled $6,933,870, $5,421,383 and $2,045,234 for 1996, 1995 and 1994, respectively (see Note 8). Revenues Revenues are recorded based on the amounts of water delivered to customers through the end of each accounting period. This includes an accrual for unbilled revenues for water delivered from the time meters were last read to the end of the respective accounting periods. Federal Income Taxes Elizabethtown files a consolidated federal tax return with E'town. Deferred income taxes are provided for temporary differences in the recognition of revenues and expenses for tax and financial statement purposes to the extent permitted by the BPU. Elizabethtown and Mount Holly account for prior years' investment tax credits by the deferral method, which amortizes the credits over the lives of the respective assets. Customer Advances for Construction and Contributions in Aid of Construction Customer Advances for Construction (CAC) and Contributions in Aid of Construction (CIAC) represent capital provided by developers for main extensions to new real estate developments. Some portion of CAC is refunded based upon the revenues that the new developments generate. CIAC are customer advances for -8- construction that, under the terms of individual main extension agreements, are no longer subject to refund. As of October 25, 1996, Elizabethtown is no longer recording depreciation on CAC and CIAC property, in accordance with a rate decision effective as of that date (See Note 10). Cash Equivalents Elizabethtown Water Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents. New Accounting Pronouncement The Company has adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was effective in 1996. The statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The resultant impairment, if any, would be measured based on the fair value of the asset. The Company does not have any impaired assets. Reclassification Certain prior year amounts have been reclassified to conform to the current year's presentation. 3. Federal Income Taxes The computation of federal income taxes and the reconciliation of the tax provision computed at the federal statutory rate (35%) with the amount reported in the Statements of Consolidated Income follow: 1996 1995 1994 (Thousands of Dollars) Tax expense at statutory rate $ 8,952 $ 9,270 $ 7,573 Items for which deferred taxes are not provided: Difference between book and tax depreciation 132 133 92 Investment tax credits (205) (204) (209) Other (56) (37) (42) -------- ------- ------- Provision for federal income taxes $ 8,823 $ 9,162 $ 7,414 ========= ======== ======== The provision for federal income taxes is composed of the following: Current $ 3,764 $ 6,409 $ 5,087 Tax on main extensions 207 (1,734) (1,931) Deferred: Tax depreciation 3,379 3,492 3,366 Capitalized interest 1,264 800 384 Main cleaning and lining 587 405 396 Other (174) (8) 314 Investment tax credits - net (204) (202) (202) ------- ------- ------- Total provision $8,823 $ 9,162 $ 7,414 ======= ======= ======= In accordance with SFAS 109, deferred tax balances have been reflected at E'town's current consolidated federal income tax rate, which is 35%. -9- The tax effect of significant temporary differences representing deferred income tax assets and liabilities as of December 31, 1996 and 1995 is as follows: 1996 1995 (Thousands of Dollars) Water utility plant - net $(63,474) $(56,956) Taxes recoverable through future rates (9,871) (9,250) Investment Tax Credit 2,627 2,957 Prepaid pension expense (35) (203) Capitalized interest (2,573) (1,308) Waste residuals (373) (340) Other assets 285 994 Other liabilities (536) (780) -------- -------- Net deferred income tax liabilities $(73,950) $(64,886) ======== ======== 4. Capitalization In June 1995, E'town issued 660,000 shares of common stock for net proceeds of $16,863,860. The gross proceeds of $17,737,500 were used to fund equity contributions to Elizabethtown totaling $16,900,000. These equity contributions were used to repay short-term debt that had been issued under Elizabethtown's revolving credit agreement (see below) to partially fund the Company's capital program. E'town routinely makes equity contributions to Elizabethtown from the proceeds of common stock issued under E'town's Dividend Reinvestment and Stock Purchase Plan (DRP). E'town contributed $5,300,000 and $6,388,716 in 1996 and 1995, respectively, to Elizabethtown from the proceeds of DRP issuances. Cumulative Preferred Stock Elizabethtown's $5.90 Cumulative Preferred Stock is not redeemable at the option of the Company. Elizabethtown is required to redeem the entire issue at $100 per share on March 1, 2004. Long-term Debt Elizabethtown's long-term debt indentures restrict the amount of retained earnings available to Elizabethtown to pay cash dividends (which is the primary source of funds available to the Corporation for payment of dividends on its common stock) or acquire Elizabethtown's common stock, all of which is held by E'town. At December 31, 1996, $7,689,840 of Elizabethtown's retained earnings were restricted under the most restrictive indenture provision. Therefore, $34,744,065 of E'town's consolidated retained earnings were unrestricted. In the second quarter of 1997, Elizabethtown expects to issue $50,000,000 of tax-exempt Variable Rate Demand Notes, through the New Jersey Economic Development Authority (NJEDA). The proceeds of the issue are expected to be used to repay amounts outstanding under a revolving credit agreement (see Note 5). In December 1995, Elizabethtown issued $40,000,000 of 5.60% tax-exempt debentures through the NJEDA. The proceeds of the issue were used to repay amounts outstanding under the revolving credit agreement. 5. Lines of Credit Elizabethtown has a committed revolving credit agreement (Agreement) with an agent bank and five additional banks. The Agreement was executed in 1994 to provide up to $60,000,000 in revolving short-term financing to partially finance Elizabethtown's capital program, the predominant portion of which was the Canal Road Water Treatment Plant (Plant) (see Note 8). The Agreement expires in July 1997 at which time the Company may convert any outstanding balances to a five-year, fully amortizing term loan. After July 1997, the Company expects to meet its short-term financing needs with uncommitted lines of -10- credit. These lines, together with internal funds and proceeds of future issuances of debt and preferred stock by Elizabethtown and capital contributions by E'town, are expected to be sufficient to finance Elizabethtown's and Mount Holly's capital needs, which are estimated to be $125,327,000 through 1999. At December 31, 1996, Elizabethtown had outstanding borrowings of $60,000,000 under the Agreement and $9,000,000 of borrowings under uncommitted lines of credit. The combined borrowings were at interest rates of 5.50% to 5.88%, at a weighted average rate of 5.72%. Of the $60,000,000 outstanding under the Agreement at December 31, 1996, $50,000,000 is expected to be repaid with the proceeds of the Variable Rate Demand Notes to be issued in the second quarter of 1997 as discussed in Note 4. The Agreement further provides that, among other covenants, Elizabethtown must maintain a percentage of common and preferred equity to total capitalization of not less than 35% and a pre-tax interest coverage ratio of at least 1.5 to 1. As of December 31, 1996, the percentage of Elizabethtown's common and preferred equity to total capitalization, calculated in accordance with the Agreement, was 44%. For the 12 months ended December 31, 1996, Elizabethtown's pre-tax interest coverage ratio, calculated in accordance with the Agreement, was 2.72 to 1. Information relating to bank borrowings for 1996, 1995 and 1994 is as follows: 1996 1995 1994 (Thousands of Dollars) Maximum amount outstanding $ 69,000 $ 60,000 $ 23,000 Average monthly amount outstanding $ 45,240 $ 39,636 $ 2,958 Average interest rate at year end 5.7% 5.9% 6.1% Compensating balances at year end$ 0 $ 0 $ 0 Weighted average interest rate based on average daily balances 5.8% 6.2% 5.7% 6. Financial Instruments The carrying amounts and the estimated fair values, as of December 31, 1996 and 1995, of financial instruments issued or held by the Company are as follows: 1996 1995 (Thousands of Dollars) Cumulative preferred stock: Carrying amount $ 12,000 $ 12,000 Estimated fair value 12,000 11,940 Long-term debt: Carrying amount $181,933 $181,923 Estimated fair value 185,375 189,664 Estimated fair values are based upon quoted market prices for these or similar securities. -11- 7. Regulatory Assets and Liabilities Certain costs incurred by Elizabethtown and Mount Holly, which have been deferred, have been recognized as regulatory assets and are being amortized over various periods as set forth below: 1996 1995 (Thousands of Dollars) Waste residual management $ 1,064 $ 970 Unamortized debt and preferred stock expense 8,988 9,385 Taxes recoverable through future rates (Note 3) 30,435 26,428 Postretirement benefit expense (Note 10) 3,465 2,901 Safety management expense 418 302 Business process redesign 362 235 Rate case expenses 201 110 --------- --------- Total $ 44,933 $ 40,331 ========= ========= Waste Residual Management The costs of disposing of the waste generated by Elizabethtown's and Mount Holly's water treatment plants are being amortized and recovered in rates over three and five-year periods, respectively, for ratemaking and financial statement purposes. No return is being earned on the deferred balances related to these programs. Unamortized Debt and Preferred Stock Expenses Costs incurred in connection with the issuance or redemption of long-term debt have been deferred and are being amortized and recovered in rates over the lives of the respective issues for ratemaking and financial statement purposes. Costs incurred in connection with the issuance and redemption of preferred stock have been deferred and are being amortized and recovered in rates over a 10-year period for ratemaking and financial statement purposes. Other Safety management expenses and business process redesign expenses were studies undertaken by the Company and are being amortized and recovered in rates over five years. Rate case expenses are being substantially recovered in rates over two-year periods. There were no regulatory liabilities at December 31, 1996 or 1995. 8. Regulatory Matters Rates Elizabethtown On October 25, 1996, Elizabethtown received a rate increase under a stipulation (1996 Stipulation) resulting in an increase in annual revenues of $21,800,000. The rate increase reflects a full allowance for the estimated capital cost of the Plant of $100,000,000 in addition to estimated AFUDC of $12,598,151. The increase also reflects a full allowance for the estimated operating costs of the Plant. The Plant went into service on October 24, 1996. The total cost of the Plant is estimated to be $101,554,469 in addition to AFUDC of $13,499,744. The 1996 Stipulation provides that actual costs in excess of the original estimated cost of $100,000,000 will be considered in future rate cases. The rate increase also reflects an authorized rate of return on common equity of 11.25%. Recovery of depreciation expense on CIAC and CAC is not reflected in the rate increase and the Company is no longer required to record, for financial statement purposes, such depreciation expense of approximately $700,000 annually, for the period that this rate increase is in effect. The 1996 Stipulation also allows the Company to continue to defer the transition obligation and interest associated with postretirement benefits as well as to continue to recover in rates the current service cost portion of the obligation for postretirement benefits. In addition, the 1996 Stipulation -12- reflects $246,292 for the effect of the Purchased Water Adjustment Clause, for which a separate petition was filed in February 1996 and subsequently withdrawn due to the inclusion of this item in the 1996 Stipulation. In February 1995, Elizabethtown received a rate increase that yielded $5,300,000 in annual revenues as a result of a stipulation (1995 Stipulation). This Stipulation provided for an authorized rate of return on common equity of 11.5%. The increase also provided for recovery of the cost to finance $62,000,000 of construction projects since rates had last been established in March 1993 as well as increased costs for power, labor and benefits, primarily medical. Mount Holly In June 1995, Mount Holly petitioned the BPU for an increase in rates, to take place in two phases. The first phase was necessary to recover costs that were not reflected in rates last increased in 1986. The second phase would recover the cost of a new water supply, treatment and transmission system necessary to obtain water outside a designated portion of an aquifer currently used by Mount Holly, and to treat and pump the water into the Mount Holly distribution system. Management believes this project is the most cost-effective alternative available to Mount Holly to comply with recent state legislation that restricts the amount of water that can be withdrawn from an aquifer in certain areas of southern New Jersey. The project, referred to as the Mansfield project, is currently estimated to cost $16,500,000, excluding AFUDC. Mount Holly has expended $2,855,587 on the Mansfield Project as of December 31, 1996, excluding AFUDC. The land for the supply and treatment facilities has been purchased and test wells have been drilled and can produce the required supply. On October 5, 1995, the New Jersey Department of Environmental Protection (NJDEP) granted Mount Holly a water allocation diversion permit for four wells that are to be the water supply for this project. On October 20, 1995, another water purveyor requested of the NJDEP, and was subsequently granted, an adjudicatory hearing in opposition to the permit. Hearings on the matter before an administrative law judge are pending. A decision is expected later in 1997. The Company and Mount Holly believe that the permit in question will be upheld, but cannot predict with certainty the outcome of the matter. In the event that the objector is successful and the permit is rescinded, Mount Holly would meet its regulatory obligation to provide an alternate source of water by purchasing water from that purveyor. On January 24, 1996, the BPU approved a stipulation (Mount Holly Stipulation) for an increase in rates of $550,000, effective as of that date. The Mount Holly Stipulation has, effectively, concluded the first phase of the rate proceeding. 9. Commitments Elizabethtown is obligated, under a contract that expires in 2013, to purchase from the New Jersey Water Supply Authority (NJWSA) a minimum of 37 billion gallons of water annually. Effective July 1, 1997, the annual cost of water under contract will be $7,861,486. The Company purchases additional water from the NJWSA on an as-needed basis. The total cost of water purchased from the NJWSA was $8,695,370, $9,344,792 and $8,987,472 for 1996, 1995 and 1994, respectively. The Elizabethtown has committments under long-term leases of $817,264 for 1997 and $12,330 for 1998. Substantially all of these committments expire in November 1997. Rent expense totaled $836,400, $820,481 and $829,562 for 1996, 1995 and 1994, respectively. Capital expenditures through 1999 are estimated to be $125,327,000 for Elizabethtown's and Mount Holly's utility plant. 10. Pension Plan and Other Postretirement Benefits Pension Plan Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan), which covers most employees. Under the Company's funding policy, the Company makes contributions that meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. -13- The components of the net pension costs for the Retirement Plan are as follows: 1996 1995 1994 (Thousands of Dollars) Service cost - benefits earned during the year $ 1,322 $ 915 $ 1,052 Interest cost on projected benefit obligation 2,480 2,156 1,946 Return on Plan assets (4,542) (7,587) 939 Net amortization and deferral 1,221 4,862 (3,860) ------- -------- ------ Net pension costs $ 481 $ 346 $ 77 ======= ======== ====== Plan assets are invested in publicly traded debt and equity securities. The reconciliations of the funded status of the Plan to the amounts recognized in the Consolidated Balance Sheets are presented below: 1996 1995 (Thousands of Dollars) Market value of Plan assets $40,016 $ 36,957 ------- -------- Actuarial present value of Plan benefits: Vested benefits 28,492 25,986 Non-vested benefits 97 101 ------- ------- Accumulated benefit obligation 28,589 26,087 Projected increases in compensation levels 7,183 7,877 ------- ------- Projected benefit obligation 35,772 33,964 ------- ------- Excess of Plan assets over projected benefit obligation 4,244 2,993 Unrecognized net gain (3,978) (620) Unrecognized prior service cost 1,724 363 Unrecognized transition asset (1,891) (2,156) ------- -------- Prepaid pension expense $ 99 $ 580 ======= ======= The Company has a supplemental retirement plan for certain management employees that is not funded. Benefit payments under this plan are made directly by the Company. At December 31, 1996, the projected benefit obligation of this supplemental plan was $1,400,326 and the net periodic benefit cost for 1996 was $251,279. The assumed rates used in determining the actuarial present value of the projected benefit obligations were as follows: 1996 1995 1994 Discount rate 7.50% 7.00% 8.00% Compensation increase 5.50% 5.50% 5.50% Rate of return on Plan assets 9.00% 9.00% 8.50% Other Postretirement Benefits The Company provides certain health care and life insurance benefits for substantially all of its retired employees. As a result of a contract negotiated in February 1996 with the Company's bargaining unit, all union and non-union employees retiring after January 1, 1997 will pay 25% of future increases in the premiums the Company pays for postretirement medical benefits. Under SFAS 106, the costs of postretirement benefits are accrued for each year the employee renders service, based on the expected cost of providing such benefits to the employee and the employee's beneficiaries and covered dependents, rather than expensing these benefits on a pay-as-you-go basis. -14- Based upon an independent actuarial study, the transition obligation, calculated under SFAS 106, was $7,214,736 as of January 1, 1993, the date of adoption of SFAS 106. The transition obligation is being amortized over 20 years. The following table details the postretirement benefit obligation at December 31: 1996 1995 (Thousands of Dollars) Retirees $ 2,015 $ 2,404 Fully eligible plan participants 4,034 6,263 -------- --------- Accumulated postretirement benefit obligation 6,049 8,667 Plan assets at fair value (764) (320) Unrecognized net gain 3,952 685 Unrecognized transition obligation (5,772) (6,131) -------- -------- Accrued postretirement benefit obligation $ 3,465 $ 2,901 ======== ======== The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1996 and for 1996 was 9%. This rate decreases linearly each successive year until it reaches 3.8% in 2006, after which the rate remains constant. The assumed rates used in determining the actuarial present value of the projected benefit obligations were as follows: 1996 1995 1994 Discount rate 7.50% 7.00% 8.00% A single percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, and the net postretirement service and interest cost by approximately $1,370,000 and $186,000, respectively. Based upon the independent actuarial study referred to above, the annual postretirement cost calculated under SFAS 106 is as follows: 1996 1995 1994 (Thousands of Dollars) Service cost - benefits earned during the year $ 416 $ 474 $ 369 Interest cost on accumulated postretirement benefit obligation 425 579 592 Return on Plan assets (72) Amortization of transition obligation 417 360 361 ------- ------- ------- Total 1,186 1,413 1,322 Deferred amount for regulated companies pending recovery (565) (824) (1,072) ------- ------- ------- Net postretirement benefit expense $ 621 $ 589 $ 250 ======= ======= ======= The rate increases allowed by the 1996 Stipulation and the Mount Holly Stipulation include as a recoverable expense the pay-as-you-go portion of postretirement benefits as well as the current service cost to the extent such current service cost is funded. Elizabethtown funded $347,151 in 1996 and $318,222 in 1995. Mount Holly funded $25,045 for 1996. These Stipulations allow Elizabethtown and Mount Holly to defer the amount accrued in excess of the portions being recovered in rates for consideration in future rate filings. As of December 31, 1996, the amount that has been deferred is $3,465,272. On January 8, 1997, the BPU issued a generic Order for regulated New Jersey -15- utilities approving a stipulation related to the implementation of SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". The stipulation developed general guidelines for mechanisms which would be available for recovery of costs consistent with SFAS 106. Elizabethtown and Mount Holly will file for a rate increase in 1997, solely related to the recovery of SFAS 106 costs, to be effective by January 1, 1998. 11. Quarterly Financial Data (Unaudited) A summary of financial data for each quarter of 1996 and 1995 follows: Earnings Income Before Applicable Operating Operating Preferred Stock to Common Quarter Revenues Income Dividends Stock (Thousands of Dollars) 1996 1st $ 25,760 $ 5,651 $ 3,594 $ 3,391 2nd 27,263 6,484 4,365 4,163 3rd 28,173 7,146 4,911 4,708 4th 29,162 7,562 3,885 3,680 --------- --------- --------- --------- Total $ 110,358 $ 26,843 $ 16,755 $ 15,942 ========= ========= ========= ========= 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 ========= ========= ========= ========= Water utility revenues are subject to seasonal fluctuation due to normal increased water consumption during the third quarter of each year. -16- EX-3 2 BY-LAWS OF E'TOWN CORPORATION ARTICLE I STOCKHOLDERS Section 1. Annual Meeting. A meeting of the stockholders of the company shall be held annually in the State of New Jersey at a location selected by the Chairman and approved by the Board of Directors between the hours of eleven and twelve o'clock in the forenoon, on the first Monday of May in each year, if not a legal holiday, and if a legal holiday, then on the next succeeding Monday not a legal holiday or at such other time and place during regular business hours as may be fixed by the Board of Directors, for the purpose of electing directors and for the transaction of such other business as may be properly brought before the meeting. Written notice of the Annual Meeting, stating the day, hour and place thereof, and the business to be transacted thereat, shall be mailed at least 10 days prior to the meeting to each stockholder of record at his address as the same appears on the stock books of the company. A failure to mail such notice, or any irregularity in such notice, shall not affect the validity of any annual meeting, or of any proceedings at any such meeting. Section 2. Notice of Stockholder Business. (1) At an annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (a) pursuant to the company's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the company who is a stockholder of record at the time of giving of the notice provided for in this By-law, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this By-law. (2) For business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph 1 of this By-law, the stockholder must have given timely notice thereof in writing to the Secretary of the company. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal office of the company not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the meeting is changed by more than 30 days from such anniversary date, notice by the stockholder to be timely must be received no later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the company's books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (c) the class and number of shares of the company which are owned beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf the proposal is made, together with documentary support for any claim of beneficial ownership, and (d) any material interest of such stockholder of record and the beneficial owner, if any, on whose behalf the proposal is made in such business. (3) Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this By-law. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures prescribed by these By-laws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this By-law, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this By-law. Section 3. Special Meetings. Special meetings of the stockholders of the company may be held in the State of New Jersey at a location selected by the Chairman and approved by the Board of Directors, or at such other place as may be fixed by the Board of Directors, whenever called in writing by the Chairman, by a vote of the Board of Directors, or upon written request addressed to the Secretary by stockholders holding at least forty per cent (40%) of the capital stock. Such request shall state the purpose or purposes of the proposed meeting. Written notice of each special meeting, stating the day, hour and place thereof, and the business to be transacted thereat, shall be mailed at least 10 days prior to the meeting to each stockholder of record at his address as the same appears on the stock books of the company. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 4. Quorum. At any meeting of the stockholders the holders of the majority of the capital stock issued and outstanding, present in person or represented by proxy, shall constitute a quorum for all purposes. If the holders of the amount of stock necessary to constitute a quorum shall fail to attend in person or by proxy at the time and place fixed by these By-laws for an annual meeting, or fixed by notice as above provided for a special meeting, a majority in interest of the stockholders present in person or by proxy may adjourn, from time to time, until holders of the amount of stock requisite to constitute a quorum shall attend. Section 5. Voting. At each meeting of the stockholders every stockholder shall be entitled to vote in person, or by proxy appointed by instrument in writing, subscribed by said stockholder or by his duly authorized attorney, and delivered to the inspectors at the meeting; and each stockholder shall have one vote for each share of capital stock having voting powers standing registered in his name, but no share of capital stock shall be voted on at any meeting which has been transferred on the books of the company subsequent to the record date fixed by the Board of Directors. All voting for election of Directors shall be by ballot. At each meeting of the stockholders a full, true and complete list in alphabetical order of all stockholders entitled to vote at such meeting, and indicating the number of shares held by each, certified by the Secretary or by the Treasurer, shall be furnished for the inspection of any stockholder for reasonable periods during the meeting. Only the persons in whose names shares of capital stock stand on the books of the company, as evidenced by the list of the stockholders so furnished, shall be entitled to vote in person or by proxy on the shares so standing in their names. Section 6. Inspectors. At each meeting of the stockholders the polls shall be opened and closed, the proxies and ballots shall be received and taken in charge, and all questions touching the qualifications of voters and the validity of proxies and the acceptance or rejection of a voter, shall be decided upon by one or more inspectors. The inspectors shall be appointed by the Chairman of the meeting and the inspectors shall be sworn to faithfully perform their duties, and shall, in writing, certify the returns showing the result of the election or ballot. The inspectors may or may not be stockholders, but any inspector may not be a candidate for the office of Director. In case of failure to appoint inspectors, the stockholders at any meeting may elect an inspector or inspectors to act at the meeting. The Board of Directors may also appoint one or more inspectors to discharge the duties set forth above in respect of the qualification and tabulation of written consents of stockholders without a meeting. ARTICLE II BOARD OF DIRECTORS Section 1. Management of Company. The property, business, and affairs of the company shall be managed and controlled by its Board of Directors. The Directors shall act only as a board and the individual Directors shall have no power as such. Section 2. Number, Term of Office and Qualifications of Board. The Board of Directors shall consist of eleven (11) persons, subject to change from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). Directors need not be stockholders. No person who has reached age 72 shall stand for election or re-election as a Director. The term of office of the various Directors shall be as provided in Article Fourth of the Corporation's Certificate of Incorporation. Section 3. Nominations of Directors. (1) Only persons who are nominated in accordance with the procedures set forth in these By-laws shall be eligible to serve as Directors. Nominations of persons for election to the Board of Directors of the company may be made at a meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the company who is a stockholder of record at the time of giving of notice provided for in this By-law, who shall be entitled to vote for the election of Directors at the meeting and who complies with the notice procedures set forth in this By- law. (2) Nominations by stockholders shall be made pursuant to timely notice in writing to the Secretary. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal office of the company (a) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is changed by more than 30 days from such anniversary date, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure was made, and (b) in the case of a special meeting at which Directors are to be elected, not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (b) as to the stockholder giving the notice (i) the name and address, as they appear on the company's books, of such stockholder and (ii) the class and number of shares of the company which are beneficially owned by such stockholder and also which are owned of record by such stockholder; and (c) as to the beneficial owner, if any, on whose behalf the nomination is made, (i) the name and address of such person, (ii) the class and number of shares of the company which are beneficially owned by such person, and (iii) documentary support for such claim of beneficial ownership. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. (3) Except as provided in Section 4 of this Article II, no person shall be eligible to serve as a Director of the company unless nominated in accordance with the procedures set forth in this By-law. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these By-laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this By-law, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this By-law. Section 4. Vacancies. Whenever any vacancy shall occur in the Board, including a vacancy caused by an increase in the number of Directors, it may be filled by a majority of the remaining Directors, even though less than a quorum. Section 5. Place of Meeting. The Directors may hold their meetings, and keep the books of the company at the office of the company in Westfield, New Jersey, or at such other place or places as the Board from time to time may lawfully determine. Section 6. Regular Meetings. Regular meetings of the Board of Directors shall be held monthly on the third Thursday of each month, if not a legal holiday, and if a legal holiday, then on the next succeeding Thursday not a legal holiday (or at such other time as may be fixed by the Board of Directors). No notice shall be required for any such regular meetings of the Board. Section 7. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by the Chairman, President, or by not less than one-third of the Directors for the time being in office. The Secretary shall give notice of each special meeting by mailing the same at least two days before the meeting or by telegraphing the same at least one day before the meeting to each Director, but such notice may be waived by any Director. At any time at which every Director shall be present, even though without notice, any business may be transacted. Section 8. Quorum. A majority of the Board of Directors for the time being in office shall constitute a quorum for the transaction of business, but if at any meeting of the Board there be less than a quorum present a majority of those present may adjourn the meeting from time to time until a quorum shall be present. Section 9. Committees. The Board of Directors may delegate, from time to time, to suitable committees any duties that are required to be executed during the intervals between the meetings of the Board, and such committee shall report to the Board of Directors when and as required. Section 10. Designation of Depositories. The Board of Directors shall designate the trust company, or trust companies, bank or banks in which shall be deposited the money or securities of the company. Section 11. Contracts with Directors, etc. Inasmuch as the Directors of this company are or may be persons of large and diversified business interest, and are likely to be connected with other corporations with which from time to time this company must have business dealings, no material contract or other transaction between this company and any other corporation shall be affected by the fact that Directors of this company are interested in, or are Directors or Officers of, such other corporation. The Board of Directors in its discretion may submit any contract or act for approval or ratification at any annual meeting of the stockholders, or at any meeting of the stockholders called for the purpose of considering any such act or contract; and any contract or act that shall be approved or be ratified by the vote of the holders of a majority of the capital stock of the company which is represented in person or by proxy at such meeting (provided that a lawful quorum of stockholders be there represented in person or by proxy) shall be valid and as binding upon the company and upon all the stockholders as though it had been approved or ratified by every stockholder of the company. Section 12. Compensation of Directors. For attendance at any meeting of the Board of Directors or participation in such meeting as provided in Section 13 hereof, every Director may receive reasonable Director's fees to be fixed by the Board for attendance at each meeting. The Board may provide for the payments to committee members of reasonable fees for attendance at a meeting of a committee. Section 13. Compensation of Officers and Employees. The compensation of all Officers shall be fixed by the Board of Directors and of all employees not mentioned in these By-laws by the Officer or Officers so authorized by the Board of Directors. Section 14. Telephone Meetings. Any regular or special meeting of the Board or any committee may be held entirely or partially by telephone conference call or similar communication equipment provided that all members of the Board or any committee are able to hear each other at one time. ARTICLE III OFFICERS Section 1. Enumeration of, Election, Removal of. The Officers of the company shall be a Chairman, President, Secretary, Treasurer, and such other Officers as shall from time to time be provided for by the Board of Directors. The Chairman and President shall be Directors of the company and any one person may hold any two or more of the offices enumerated above, as the Board of Directors may provide. The Officers of the company shall be appointed at the first meeting of the Board of Directors after the annual election of Director's, which may be on the day of the annual election, and they shall hold office for one year, and until their respective successors shall have been duly appointed and qualified, provided, however, that all Officers, agents and employees of the company shall be subject to removal at any time by the affirmative vote of a majority of the whole Board of Directors. In its discretion, the Board of Directors, by a vote of the majority thereof, may leave unfilled for such period as it may fix by resolution any office. Section 2. Powers and Duties of Chairman. The Chairman shall preside at all meetings of the stockholders and the Board of Directors. He shall have general charge and supervision of the business of the company. He may sign and execute all authorized bonds, debentures, contracts, notes or obligations in the name of the company, and with the Treasurer, and Assistant Treasurer, or Secretary, or Assistant Secretary, may sign all certificates of the share in the capital stock of the company. He shall from time to time make such reports of the affairs of the company as the Board of Directors may require and shall annually present a report of the preceding year's business to the Board of Directors, which report may be read at the annual meeting of the stockholders. He shall do and perform such other duties as may be from time to time assigned to him by the Board of Directors. Section 3. Powers and Duties of President. The President shall possess the powers and may perform the duties of the Chairman in his absence or disability. He shall have charge of the general management of the company under the supervision of the Chairman. He may sign and execute all authorized bonds, debentures, contracts, and with the Treasurer, Assistant Treasurer, Secretary or Assistant Secretary, may sign all certificates of the shares of the capital stock of the company. He shall do and perform such other duties as may be from time to time assigned to him by the Board of Directors. Section 4. Powers and Duties of Secretary. The Secretary shall keep the minutes of all meetings of the stockholders and all meetings of the Board of Directors. He shall attend to the giving and service of all notices of the company; he may sign with the Chairman, President, Executive Vice President or Vice President in the name of the company all contracts authorized by the Board of Directors and when required by the Board of Directors, or permitted by these By-laws he shall affix the seal of the company thereto; he shall have charge of all books and papers as the Board of Directors may direct, all of which shall, at all reasonable times, be open to the examination of any Director, upon application at the office of the company during business hours; he may sign with the Chairman, President, Executive Vice President or a Vice President, all certificates of shares of capital stock; he shall in general perform all of the duties incident to the office of the Secretary, subject to the control of the Board of Directors and shall do and perform such other duties as may from time to time be assigned to him by the Board of Directors. Section 5. Powers and Duties of Treasurer. The Treasurer shall have custody of all funds and securities of the company; when necessary or proper, he shall endorse on behalf of the company for collection, checks, notes and other obligations, and shall deposit the same to the credit of the company in such bank, or banks, or depository as the Board of Directors may designate; he shall execute jointly with such other Officer as may be designated by By-law or by resolution of the Board of Directors, all bills of exchange and promissory notes of the company; he may sign with the Chairman, President, Executive Vice President, or a Vice President, all certificates of shares in capital stock; whenever required by the Board of Directors, he shall render a statement of his cash account; he shall regularly in books of the company to be kept by him for the purpose, keep a full and accurate amount of all moneys received and paid by him on account of the company; he shall, at all reasonable times, exhibit his books and accounts to any Director of the company upon application at the office of the company during business hours; he shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors; and he shall have such other powers and he shall perform such other duties as may be assigned to him by the Board of Directors, from time to time. He shall give bond for the faithful performance of his duties as Treasurer as the Board of Directors may direct. Section 6. Indemnification of Directors and Officers. The company shall indemnify each Director or Officer of the company and any person who, at the request of the company, has served as a Director, Officer, or trustee of another corporation in which the company has a financial interest against reasonable costs, expenses and counsel fees paid or incurred (including any judgments, fines or reasonable settlements exclusive of any amount paid to the company in settlement) in connection with the defense of any action, suit or proceeding in which such person is named as a party by reason of having been such Director, Officer, or trustee or by reason of any action taken or not taken in such capacity unless such Officer, Director or trustee is finally adjudged to have been derelict in the performance of his duties as Director, Officer or trustee. If any action, suit or proceeding is settled or otherwise terminated as against such Director, Officer or trustee without a final determination on the merits and the Board of Directors of the company shall determine that such Director, Officer or trustee has not in any substantial way been derelict in the performance of his duties as charged in such action, suit or proceeding, the company shall indemnify such Director, Officer or trustee as aforesaid. Such rights of indemnification are not exclusive of any rights to which a Director or Officer of the company may have pursuant to statute or otherwise. ARTICLE IV CAPITAL STOCK Section 1. Certificate of Shares. Each holder of capital stock of the company shall be entitled to a stock certificate signed by the Chairman, President, or a Vice President and either the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, certifying the number of shares owned by him in the company. However, when the certificate is signed by the transfer agent, or an assistant transfer agent, or by a transfer clerk on behalf of the company and a registrar, the signature of the Chairman, President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be facsimiles. All certificates shall be consecutively numbered. The name of the person owning the shares represented thereby, with the number of such shares and the date of issue, shall be entered in the company's books. No certificate shall be valid unless it is signed as provided above in this Section 1 of Article IV of the By-laws. All certificates surrendered to the company shall be canceled, and no new certificate shall be issued until the former certificate shall have been surrendered and canceled, or such proof that the certificate has been lost, damaged or destroyed as the Board of Directors may require and in such event a new certificate may be issued, but the Board of Directors may require such security as they deem appropriate. Section 2. Transfer of Shares. Shares in the capital stock of the company shall be transferred on the books of the company by the holder thereof in person, or by his attorney, upon surrender and cancellation of certificates for a like number of shares. Section 3. Rules and Regulations as to Issue, Transfer and Registration of Shares of Stock. The Board of Directors shall have power and authority to make all such rules and regulations as they deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the company. The Board of Directors may appoint a transfer agent and registrar of transfers, and require all stock certificates to bear the signature of such transfer agent and of such registrar of transfers. Section 4. Closing of Transfer Books. The stock transfer books may be closed for the meetings of the stockholders, and for the payment of dividends, during such periods as from time to time may be fixed by the Board of Directors, and during such periods no stock shall be transferrable. Section 5. Fixing Date for Determination of Stockholders' Rights. (1) The Board of Directors is authorized from time to time to fix in advance a date as a record date for the determination of the stockholders entitled to notice of and to vote at any meeting of stockholders, or with regard to any other corporate action or event, as provided in the New Jersey Business Corporation Act, and in such case only stockholders of record on the date so fixed shall be entitled to such notice of and to vote at any such meeting, or to participate in or otherwise be included with respect to any other corporate action or event, and notwithstanding any transfer of any stock on the books of the company after any such record date fixed as aforesaid. Any record date for determining stockholders entitled to give a written consent to any action without a meeting shall be fixed as provided in paragraph (2) of this By-law. (2) The Board of Directors may fix a record date for determining the stockholders entitled to consent to corporate action in writing without a meeting and may also fix a date for tabulation of consents. Such record date shall not be more than 60 days before the date fixed for tabulation of the consents or, if no date has been fixed for tabulation, more than 60 days before the last day on which consents received may be counted as provided by the New Jersey Business Corporation Act. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date and a date for tabulation of consents. If no record date has been fixed by resolution of the Board of Directors within 10 days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the company by delivery to its principal place of business to the attention of the Secretary. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. If no date for the tabulation of consents has been fixed by the Board of Directors within 10 days of the date on which the request described above is received, such tabulation shall be the 55th day after the record date fixed by the Board of Directors (or otherwise established) pursuant to this By-law; provided, however, that if such day falls on a Saturday, Sunday or legal holiday, the tabulation date shall be the next following day which is not a Saturday, Sunday or legal holiday. (3) In the event of the delivery to the company of a written consent or consents purporting to authorize or take corporate action and/or related revocations (each such written consent and related revocation is referred to in this paragraph as a "Consent"), the Secretary shall provide for the safekeeping of such Consent and shall conduct such reasonable investigation as such Officer deems necessary or appropriate for the purpose of ascertaining the validity of such Consent and all matters incident thereto, including, without limitation, whether the holders of shares having the requisite voting power to authorize or take the action specified in the Consent have given consent and whether the corporate action purported to be authorized or taken may legally be taken by the stockholders of the company; provided, however, that if the Board of Directors designates one or more inspectors in connection with such matters as provided in Article I, Section 6 of these By-laws, such inspectors shall discharge the functions of the Secretary under this paragraph. Notwithstanding any tabulation of consents or investigation as described above, the Consent shall not become effective as stockholder action until (i) all requirements for notice to non-consenting stockholders prescribed by the New Jersey Business Corporation Action are met, and (ii) the final termination of any proceedings which may have been commenced in any court of competent jurisdiction for an adjudication of any legal issue incident to determining the validity of the Consent has occurred, unless such court shall have determined that such proceedings are not being pursued expeditiously and in good faith. In conducting the investigation required by this paragraph, the Secretary or the inspectors (as the case may be) may, at the expense of the company, retain special legal counsel and any other necessary or appropriate professional advisors, and such other personnel as they may deem necessary or appropriate, to assist them. ARTICLE V DIVIDENDS Section 1. Dividends. Dividends may be declared by the Board of Directors from time to time as may be permitted by the laws of the State of New Jersey, and shall be payable at such times as the Board may determine. ARTICLE VI CHECKS, NOTES, CONTRACTS, ETC. Section 1. Checks and Notes. Payment shall be made by checks or check voucher, all of which shall be signed by the Chairman, or President and the Treasurer or Assistant Treasurer, or by any two Officers of the company as the Board of Directors may from time to time direct, except that the Board of Directors may provide by resolution for special subsidiary checking accounts and their manner of operation for payroll, dividend and other purposes. Bills receivable, drafts and other evidence of indebtedness to the company, shall be endorsed for the purpose of discount or collection by the Treasurer or Assistant Treasurer, or such other Officer or Officers of the company as the Board of Directors may from time to time by resolution designate. No bills or notes or other evidence of indebtedness shall be executed by or on behalf of the company unless the Board of Directors shall authorize the same. Such authority may be general or confined to specific instances. Section 2. Contracts and Instruments. The Board of Directors may authorize any Officer or Officers, agent or agents, to enter into any contract or execute and deliver any conveyance or instrument in the name of and on behalf of the company, and such authority may be general or confined to specific instances. When the execution of any contract, conveyance or other instrument has been authorized without specification of the executing Officers, the Chairman, President, Secretary or Treasurer may execute the same in the name and behalf of the company and may affix the corporate seal and attest thereto, unless otherwise directed or required by the Board of Directors, or required by law. ARTICLE VII MISCELLANEOUS PROVISIONS Section 1. Fiscal Year. The fiscal year of the company shall begin on the first day of January in each and every year, and all accounts shall be brought up to the close of the year. Section 2. Principal Office. The principal office of this company shall be at 600 South Avenue, Westfield, New Jersey, but the Board of Directors may at any regular or special meeting change the place of such office, upon the adoption of a resolution providing therefor by the votes of at least two-thirds of its members. This company may have other offices at such places as the Board of Directors shall designate and the business of this company may require. Section 3. Officers' Voting Stock. The Chairman, President, or a Vice President, shall have full power and authority on behalf of this company to attend and act, and to vote in person or by proxy at any meeting of stockholders of any corporation in which this corporation may own and hold stock, and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such stock and which, as the owner thereof, the company might have possessed and exercised if present. The Board of Directors, by resolution, from time to time, may confer like powers upon any person or persons. ARTICLE VIII CORPORATE SEAL Section 1. The corporate seal of this company shall be as shown by the following impression: ARTICLE IX AMENDMENT OF BY-LAWS Section 1. These by-laws may be amended, altered or repealed by the Board of Directors. EX-3 3 ELIZABETHTOWN WATER COMPANY 600 South Avenue Westfield, New Jersey 07090 BY - L A W S ADOPTED - June 30, 1961 Revised - May 7, 1973 Revised - February 19, 1975 Revised - December 21, 1977 Revised - July 15, 1982 Revised - December 16, 1982 Revised - June 21, 1984 Revised - December 18, 1986 Revised - June 21, 1990 Revised - May 15, 1997 INDEX to BY-LAWS ARTICLE I - STOCKHOLDERS Page Section 1. Annual Meeting 1 Section 2. Special Meetings 1 Section 3. Quorum 2 Section 4. Voting 3 Section 5. Inspectors 4 ARTICLE II - BOARD OF DIRECTORS Section 1. Number, Eligibility and Term of Office 5 Section 2. Vacancies 5 Section 3. Place of Meetings 5 Section 4. Regular Meetings 5 Section 5. Special Meetings 6 Section 6. Quorum 6 Section 7. Committees 7 Section 8. Designation of Depositories 7 Section 9. Contracts with Directors, Etc. 7 Section 10. Compensation of Directors 8 Section 11. Compensation of Officers and Employees 8 ARTICLE III - OFFICERS Section 1. Enumeration of, Election, Removal of 8 Section 2. Powers and Duties of Chairman 9 Section 3. Powers and Duties of Vice Chairman 10 Section 4. Powers and Duties of President 10 Section 5. Powers and Duties of Executive 10 Vice President Section 6. Powers and Duties of Vice President 11 Section 7. Powers and Duties of Secretary 11 Section 8. Powers and Duties of Assistant 12 Secretary Section 9. Powers and Duties of Treasurer 12 Section 10. Powers and Duties of Assistant 13 Treasurer ARTICLE IV - CAPITAL STOCK Page Section 1. Certificate of Shares 14 Section 2. Transfer of Shares 15 Section 3. Rules and Regulations as to Issue, 15 Transfer and Registration of Shares of Stock Section 4. Closing Transfer Books 15 Section 5. Fixing Date for Determination of Stockholders' Rights 15 ARTICLE V - DIVIDENDS AND WORKING CAPITAL Section 1. Dividends 16 Section 2. Working Capital 16 ARTICLE VI - CHECKS, NOTES, CONTRACTS, ETC. Section 1. Checks and Notes 17 Section 2. Contracts and Instruments 18 ARTICLE VII - MISCELLANEOUS PROVISIONS Section 1. Fiscal Year 18 Section 2. Principal Office 18 Section 3. Officers' Voting Stock 19 Section 4. Rules of Order for Meetings 19 ARTICLE VIII - CORPORATE SEAL 20 ARTICLE IX - AMENDMENT OF BY-LAWS 20 BY-LAWS OF ELIZABETHTOWN WATER COMPANY ARTICLE I STOCKHOLDERS Section 1. Annual Meeting. A meeting of the stockholders of the company shall be held annually at the principal office of the company in the State of New Jersey, between the hours of eleven and twelve o'clock in the fore-noon, or at such other time during regular business hours as may be stated by the notice of the meeting, on the first Monday of May in each year, if not a legal holiday, and if a legal holiday, then on the next succeeding Monday not a legal holiday for the purpose of electing directors and for the transaction of such other business as may be brought before the meeting. Written notice of the Annual Meeting shall be mailed at least twenty (20) days prior to the meeting to each stockholder of record at his address as the same appears on the stock books of the company. A failure to mail such notice, or any irregularity in such notice, shall not affect the validity of any annual meeting, or of any proceedings at any such meeting. Section 2. Special Meetings. Special meetings of the stockholders of the company may be held at the principal office of the company in the State of New Jersey, whenever called in writing, by a vote of the majority of the Board of Directors, or upon written request by stockholders holding ten per cent (10%) of the capital stock addressed to the Secretary. Written notice of each special meeting, stating the day, hour and place thereof, and in general terms the business to be transacted thereat, shall be mailed at least ten (10) days prior to the meeting to each stockholder of record at his address as the same appears on the stock book of the company. If all the stockholders shall waive notice of a special meeting, no notice of such meeting shall be required; and whenever all the stockholders shall meet in person or by proxy, such meeting shall be valid for all purposes without call or notice, and at such meeting any corporate action may be taken. Section 3. Quorum. At any meeting of the stockholders the holders of the majority of the capital stock issued and outstanding, present in person or represented by proxy, shall constitute a quorum for all purposes. if the holders of the amount of stock necessary to constitute a quorum shall fail to attend in person or by proxy at the time and place fixed by these by-laws for an annual meeting, or fixed by notice as above provided for a special meeting called by the directors or stockholders, a majority in interest of the stockholders present in person or by proxy may adjourn, from time to time, without notice other than by announcement at the meeting, until holders of the amount of stock requisite to constitute a quorum shall attend. At any such adjourned meeting of which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 4. Voting. At each meeting of the stockholders every stockholder shall be entitled to vote in person, or by proxy appointed by instrument in writing, subscribed by said stockholder or by his duly authorized attorney, and delivered to the inspectors at the meeting; and each stockholder shall have one vote for each share of capital stock having voting powers standing registered in his name, but no share of capital stock shall be voted on at any meeting which has been transferred on the books of the corporation subsequent to the record date fixed by the Board of Directors. All voting for election of directors shall be by ballot. At each meeting of the stockholders a full, true and complete list in alphabetical order of all stockholders entitled to vote at such meeting, and indicating the number of shares held by each, certified by the secretary or by the treasurer, shall be furnished. Only the persons in whose names shares of capital stock stand on the books of the company, as evidenced by the list of the stockholders so furnished, shall be entitled to vote in person or by proxy on the shares so standing in their names. Upon demand of any stockholder, the votes upon any question before the meeting, shall be made by ballot. Section 5. Inspectors. At each meeting of the stockholders the polls shall be opened and closed, the proxies and ballots shall be received and taken in charge, and all questions touching the qualifications of voters and the validity of proxies and the acceptance or rejection of a voter, shall be decided upon by two or more inspectors. The inspectors shall be appointed by the presiding officer of the meeting and the inspectors shall be sworn to faithfully perform their duties, and shall, in writing, certify the returns showing the result of the election or ballot. The inspectors may or may not be stockholders, but any inspector may not be a candidate for the office of director. In case of failure to appoint inspectors, the stockholders at any meeting may elect an inspector or inspectors to act at the meeting. ARTICLE II BOARD OF DIRECTORS Section 1. Number, Eligibility and Term of Office. The business and the property of the company shall be managed and controlled by the Board of Directors. There shall be eleven (11) directors, who shall be elected annually by ballot at the Annual Meeting of the Stockholders and shall hold office for one year, and until their successors are elected and qualified. The directors shall act only as a board and the individual director shall have no power as such. Section 2. Vacancies. Any vacancy in the board, including a vacancy caused by an increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors, even though less than a quorum of the Board, or by a sole remaining director. Section 3. Place of Meeting. The directors may hold their meetings, and keep the books of the company at the office of the company in the City of Elizabeth, County of Union, State of New Jersey, or at such other place or places as the Board from time to time may lawfully determine. Section 4. Regular Meetings. Regular meetings of the Board of Directors shall be held monthly on the third Thursday of each month, if not a legal holiday, and if a legal holiday, then at the next succeeding Thursday not a legal holiday. No notice shall be required for any such regular meetings of the Board. The Board of Directors may designate some other day for the regular monthly meeting in which case notice of the meeting shall be given as provided for Special Meetings, but such notice may be waived by any director. Section 5. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by the chairman, president or by not less than one-third of the directors for the time being in office. The secretary shall give notice of each special meeting by mailing the same at least two days before the meeting or by telegraphing the same at least one day before the meeting to each director, but such notice may be waived by any director. At any time at which every director shall be present, even though without notice, any business may be transacted. Section 6. Quorum. A majority of the Board of Directors for the time being in office shall constitute a quorum for the transaction of business, but if at any meeting of the Board there be less than a quorum present a majority of these present may adjourn the meeting from time to time until a quorum shall be present. Section 7. Committees. The Board of Directors, by Resolution adopted by a majority of the entire Board may appoint from among its members, an executive committee and one or more other committees. Except as otherwise provided by law, the executive committee shall have and may exercise all the authority of the Board of Directors when the Board is not in session, and each such other committee of the Board shall have and may exercise the authority of the Board to the extent provided in the resolution of appointment. The Chairman and President shall be ex officio members of all committees. The Board of Directors shall be kept informed of the actions taken by any Committee. Section 8. Designation of Depositories. The Board of Directors shall designate the trust company, or trust companies, bank or banks in which shall be deposited the money or securities of the company. Section 9. Contracts and Directors, etc. Inasmuch as the directors of this company are or may be men of large and diversified business interests, and are likely to be connected with other corporations with which from time to time this company must have business dealings, no material contract or other transaction between this company and any other corporation shall be affected by the fact that directors of this company are interested in, or are directors or officers of, such other corporation. The Board of Directors in its discretion may submit any contract or act for approval or ratification at any annual meeting of the stockholders, or at any meeting of the stockholders called for the purpose of considering any such act or contract; and any contract or act that shall be approved or be ratified by the vote of the holders of a majority, of the capital stock of the company which is represented in person or by proxy at such meeting (provided that a lawful quorum of stockholders be there represented in person or by proxy) shall be valid and as binding upon the company and upon all the stockholders as though it had been approved or ratified by every stockholder of the company. Section 10. Compensation of Directors. For his attendance at any meeting of the Board of Directors, or committee every director shall receive reasonable director's fees to be fixed by the Board for attendance at each meeting. Section 11. Compensation of Officers and Employees. The compensation of all officers shall be fixed by the Board of Directors and of all employees not mentioned in these by-laws by the officer or officers so authorized by the Board of Directors. ARTICLE III OFFICERS Section 1. Enumeration of, Election, Removal of. The officers of the company shall be a chairman, president, executive vice president, one or more vice presidents, secretary, an assistant secretary, treasurer, an assistant treasurer, and such other officers as shall from time to time be provided for by the Board of Directors. The chairman and president shall be directors of the company and any one person may hold any two or more of the offices enumerated above, as the Board of Directors may provide. The officers of the company shall be appointed at the first meeting of the Board of Directors after the annual election of directors, which may be on the day of the annual election, and they shall hold office for one year, and until their respective successors shall have been duly appointed and qualified, provided, however, that all officers, agents and employees of the company shall be subject to removal at any time by the affirmative vote of a majority of the whole Board of Directors. In its discretion, the Board of Directors, by a vote of the majority thereof, may leave unfilled for such period as it may fix by resolution any office. Section 2. Powers and Duties of Chairman. The Chairman shall preside at all meetings of the stockholders and the Board of Directors. He shall have general charge and supervision of the business of the company. He may sign and execute all authorized bonds, debentures, contracts, notes or obligations in the name of the company, and with the treasurer, an assistant treasurer, or secretary, or assistant secretary, may sign all certificates of the shares in the capital stock of the company. He shall from time to time make such reports of the affairs of the company as the Board of Directors may require and shall annually present a report of the preceding year's business to the Board of Directors, which report may be read at the annual meeting of the stockholders. He shall do and perform such other duties as may be from time to time assigned to him by the Board of Directors. Section 3. Powers and Duties of Vice Chairman. The Vice chairman shall have all the powers as the Chairman enumerated in Section 2 above in his absence or disability. He shall have such other powers and shall perform such other duties as may from time to time be assigned to him by the Board of Directors. Section 4. Powers and Duties of President. The president shall possess the powers and may perform the duties of the chairman in his absence or disability. He shall have charge of the general management of the company under the supervision of the chairman. He may sign and execute all authorized bonds, debentures, contracts, notes or obligations in the name of the company, and with the treasurer, assistant treasurer, secretary, or assistant secretary, may sign all certificates of the shares of the capital stock of the company. He shall do and perform such other duties as may be from time to time assigned to him by the Board of Directors. Section 5. Powers and Duties of Executive Vice President. The executive vice president shall possess the powers and may perform the duties of the president in his absence or inability. He shall assist the president in the general management of the company. He may sign and execute all authorized bonds, debentures, contracts, notes or obligations in the name of the company, and with the treasurer, assistant treasurer, secretary or assistant secretary, may sign all certificates of the shares of the capital stock of the company. He shall do and perform such other duties as may be from time to time assigned to him by the Board of Directors. Section 6. Powers and Duties of Vice President. A vice president shall have all the powers as the executive vice president enumerated in Section 5 above in his absence or disability. He shall have such other powers and shall perform such other duties as may from time to time be assigned to him by the Board of Directors. Section 7. Powers and Duties of Secretary. The secretary shall keep the minutes of all meetings of the stock holders and all meetings of the Board of Directors. He shall attend to the giving and service of all notices of the company; he may sign with the chairman, president, executive vice president or vice president in the name of the company all contracts authorized by the Board of Directors and when required by the Board of Directors, or permitted by these by-laws he shall affix the seal of the company thereto; he shall have charge of all books and papers as the Board of Directors may direct, all of which shall, at all reasonable times, be open to the examination of any director, upon application at the office of the company during business hours, he may sign with the chairman, president, executive vice president or a vice president, all certificates of shares of capital stock; he shall in general perform all of the duties incident to the office of the secretary, subject to the control of the Board of Directors and shall do and perform such other duties as may from time to time be assigned to him by the Board of Directors. Section 8. Powers and Duties of Assistant Secretary. The assistant secretary shall have the same powers as the secretary in his absence or disability, and he shall have such other powers, and he shall perform such other duties as may be assigned to him from time to time by the Board of Directors. Section 9. Powers and Duties of Treasurer. The treasurer shall have custody of all funds and securities of the company which may have come into his hands; when necessary or proper, he shall endorse on behalf of the company for collection, checks, notes and other obligations, and shall deposit the same to the credit of the company in such bank, or banks, or depository as the Board of Directors may designate; jointly with such other officer as may be designated by by-law or by resolution of the Board of Directors, all bills of exchange and promissory notes of the company; he may sign with the chairman, president, executive vice president, or a vice president, all certificates of shares in the capital stock; whenever required by the Board of Directors, he shall render a statement of his cash account, he shall regularly in books of the company to be kept by him for the purpose, keep a full and accurate amount of all moneys received and paid by him on account of the company; he shall, at all reasonable times, exhibit his books and accounts to any director of the company upon application at the office of the company during business hours; he shall perform all acts incident to the position of treasurer, subject to the control of the Board of Directors; and he shall have such other powers and he shall perform such other duties as may be assigned to him by the Board of Directors, from time to time. He shall give bond for the faithful performance of his duties as treasurer as the Board of Directors may direct. Section 10. Powers and Duties of Assistant Treasurer. The assistant treasurer shall have the same powers as the treasurer in his absence or disability, and he shall have such other powers and he shall perform such other duties as may be assigned to him by the Board of Directors from time to time. He shall give bond for the faithful performance of his duties as assistant treasurer as the Board of Directors may direct. ARTICLE IV CAPITAL STOCK Section 1. Certificate of Shares. Each holder of capital stock of the company shall be entitled to a stock certificate signed by the chairman, president, or a vice president and either the treasurer or an assistant treasurer, or the secretary or an assistant secretary, certifying the number of shares owned by him in the company. However, when the certificate is signed by the transfer agent, or an assistant transfer agent, or by a transfer clerk on behalf of the company and a registrar, the signature of the chairman, president, vice president, treasurer, assistant treasurer, secretary or assistant secretary may be facsimiles. All certificates shall be consecutively numbered. The name of the person owning the shares represented thereby, with the - -number of such shares and the date of issue, shall be entered in the company's books. No certificate shall be valid unless it be signed as provided above in this Section I of Article IV of the by-laws. All certificates surrendered to the company shall be cancelled, and no new certificate shall be issued until the former certificate shall have been surrendered and cancelled, or such proof that the certificate has been lost, damaged or destroyed as the Board of Directors may require, and in that event a new certificate may be issued, but the Board of Directors may require such security as they deem appropriate. Section 2. Transfer of Shares. Shares in the capital stock of the company shall be transferred on the books of the company by the holder thereof in person, or by his attorney, upon surrender and cancellation of certificates for a like number of shares. Section 3. Rules and Regulations as to Issue, Transfer and Registration of Shares of Stock. The Board of Directors shall have power and authority to make all such rules and regulations as they deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the company. The Board of Directors may appoint a transfer agent and registrar of transfers, and require all stock certificates to bear the signature of such transfer agent and of such registrar of transfers. Section 4. Closing of Transfer Books. The stock transfer books may be closed for the meetings of the stockholders, and for the payment of dividends, during such periods as from time to time may be fixed by the Board of Directors, and during such periods no stock shall be transferable. Section 5. Fixing Date for Determination of Stockholders' Rights. The Board of Directors is authorized from time to time to fix in advance a date not exceeding sixty (60) nor less than ten (10) days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date of allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the stockholders entitled to notice of and to vote at any such meeting, or any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of capital stock, and in such case only stockholders of record on the date so fixed shall be entitled to such notice of and vote at any such meeting, or to receive payment of such dividend, or allotment of rights, or exercise such rights, as the case may be, and notwithstanding any transfer of any stock on the books of the company after any such record date fixed as aforesaid. ARTICLE V DIVIDENDS AND WORKING CAPITAL Section 1. Dividends. Dividends may be declared by the Board of Directors from time to time out of the surplus or net profits of the company, and shall be payable at such times as the Board may determine. Section 2. Working Capital. Before payment of any dividends or making any distribution of profits, there may be set aside out of the net profits of the company such sum or sums as the Board of Directors may from time to time in their discretion think proper as working capital or as a reserve fund to meet contingencies, and from time to time the Board of Directors may increase, diminish and vary such working capital or such reserve fund in their absolute judgment and discretion. ARTICLE VI CHECKS, NOTES, CONTRACTS, ETC. Section 1. Checks and Notes. Payment shall be made by checks or check voucher, all of which shall be signed by the chairman, or president and the treasurer or assistant treasurer, or by any two officers of the company as the Board of Directors may from time to time direct, except that the Board of Directors may provide by resolution for special subsidiary checking accounts and their manner of operation for payroll, dividend and other purposes. Bills receivable, drafts and other evidence of indebtedness to the company, shall be endorsed for the purpose of discount or collection by the treasurer or assistant treasurer, or such other officer or officers of the company as the Board of Directors may from time to time by resolution designate. No bills or notes or other evidence of indebtedness shall be executed by or on behalf of the company unless the Board of Directors shall authorize the same. Such authority may be general or confined to specific instances. Section 2. Contracts and Instruments. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any conveyance or instrument in the name of and on behalf of the company, and such authority may be general or confined to specific instances. When the execution of any contract, conveyance or other instrument has been authorized without specification of the executing officers, the chairman, president or a vice president and the secretary or assistant secretary, may execute the same in the name and behalf of the company and may affix the corporate seal and attest thereto, unless otherwise directed or required by the Board of Directors. ARTICLE VII MISCELLANEOUS PROVISIONS Section 1. Fiscal Year. The fiscal year of the company shall begin on the first day of January in each and every year, and all accounts shall be brought up to the close of the year. Section 2. Principal Office. The principal office of this company shall be at One Elizabethtown Plaza, City of Elizabeth, County of Union, State of New Jersey, but the Board of Directors may at any regular or special meeting change the place of such office, upon the adoption of a resolution providing therefor by the votes of at least two thirds of its members. This company may have other offices at such places as the Board of Directors shall designate and the business of this company may require. Section 3. Officers' Voting Stock. The chairman, president, or a vice president, shall have full power and authority on behalf of this company to attend and act, and to vote in person or by proxy at any meeting of stockholders of any corporation in which this corporation may own and hold stock, and at any such meeting shall possess and may exercise any and all the rights and powers incident to the ownership of such stock and which, as the owner thereof, the company might have possessed and exercised if present. The Board of Directors, by resolution, from time to time, may confer like powers upon any person or persons. Section 4. Rules of Order for Meetings. Robert's Rules of Order Revised, Seventy-fifth Anniversary Edition, are adopted as rules of order for all meetings of the company where not in conflict with law, the corporate charter and these by-laws, but these rules of order may be suspended by a majority vote of those entitled to vote at the meeting, either in person or by proxy. ARTICLE VIII CORPORATE SEAL Section 1. The corporate seal of this company shall be as shown by the following impression: ARTICLE IX AMENDMENT OF BY-LAWS Section 1. These by-laws may be amended by the Board of Directors as provided in section (a) of Article IV of the Joint Agreement of Consolidation, or as provided by law. EX-11 4 E'TOWN CORPORATION AND SUBSIDIARIES Exhibit 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
1996 1995 1994 PRIMARY EARNINGS Income Before Preferred Stock Dividends of Subsidiary $ 15,886,268 $ 16,108,533 $ 12,941,790 Deduct: Preferred Stock Dividends 813,000 813,000 854,047 ------------ ------------ ------------ Net Income Available for Common Stock $ 15,073,268 $ 15,295,533 $ 12,087,743 ============ ============ ============ SHARES Weighted Average Number of Common Shares Outstanding 7,668,300 7,093,027 6,207,564 Assuming Exercise of Options Reduced by the Number of Shares Which Could Have Been Purchased With the Proceeds From Exercise of Such Options 6,100 2,156 2,845 Weighted Average Number of Common Shares ------------ ------------ ------------ Outstanding As Adjusted 7,674,400 7,095,183 6,210,409 ------------ ------------ ------------ Primary Earnings Per Share of Common Stock $ 1.96 $ 2.16 $ 1.95 ============ ============ ============ ASSUMING FULL DILUTION EARNINGS Income Before Preferred Stock Dividends of Subsidiary $ 15,886,268 $ 16,108,533 $ 12,941,790 Deduct: Preferred Stock Dividends 813,000 813,000 854,047 Add: After Tax Interest Expense Applicable to 6 3/4% Convertible Subordinated Debentures 513,350 524,066 542,195 ------------ ------------ ------------ Adjusted Net Income $ 15,586,618 $ 15,819,599 $ 12,629,938 ============ ============ ============ SHARES Weighted Average Number of Common Shares Outstanding 7,668,300 7,093,027 6,207,564 Assuming Exercise of Options Reduced by the Number of Shares Which Could Have Been Purchased With the Proceeds 6,100 2,156 2,845 From Exercise of Such Options Assuming Conversion of 6 3/4% Convertible Subordinated Debentures (a) 291,707 299,613 308,943 ------------ ------------ ------------ Weighted Average Number of Common Shares Outstanding as Adjusted 7,966,107 7,393,796 6,519,352 ------------ ------------ ------------ Fully Diluted Earnings Per Share of Common Stock $ 1.96 $ 2.14 $ 1.94 ============ ============ ============ (a) Convertible at $40 per share.
EX-12 5 ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
1996 1995 1994 1993 1992 EARNINGS: Income before preferred stock dividends $ 16,755,164 $ 17,325,144 $ 14,223,142 $ 14,832,519 $ 12,149,343 Federal income taxes 8,822,537 9,161,510 7,413,995 7,916,794 6,021,464 Interest charges 12,803,562 11,114,496 10,402,060 11,437,710 10,623,801 ------------ ------------ ------------ ------------ ------------ Earnings available to cover fixed charges $ 38,381,263 $ 37,601,150 $ 32,039,197 $ 34,187,023 $ 28,794,608 ============ ============ ============ ============ ============ FIXED CHARGES: Interest on long-term debt 13,011,069 10,892,129 10,774,008 11,527,301 10,516,521 Other interest 2,640,117 2,343,903 175,507 77,921 514,122 Amortization of debt discount - net 361,012 323,557 319,646 224,383 209,631 ------------ ------------ ------------ ------------ ------------ Total fixed charges $ 16,012,198 $ 13,559,589 $ 11,269,161 $ 11,829,605 $ 11,240,274 ============ ============ ============ ============ ============ Ratio of Earnings to Fixed Charges 2.40 2.77 2.84 2.89 2.56 ============ ============ ============ ============ ============ 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. Construction), Dividends on Preferred Stock on a pre-tax basis and Amortization of debt discount.
EX-12 6 ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY Exhibit 12 (b) Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends
1996 1995 1994 1993 1992 EARNINGS: Income before preferred stock dividends $ 16,755,164 $ 17,325,144 $ 14,223,142 $ 14,832,519 $ 12,149,343 Federal income taxes 8,822,537 9,161,510 7,413,995 7,916,794 6,021,464 Interest charges 12,803,562 11,114,496 10,402,060 11,437,710 10,623,801 ------------ ------------ ------------ ------------ ------------ Earnings available to cover fixed charges $ 38,381,263 $ 37,601,150 $ 32,039,197 $ 34,187,023 $ 28,794,608 ============ ============ ============ ============ ============ FIXED CHARGES AND PREFERRED DIVIDENDS: Interest on long-term debt 13,011,069 10,892,129 10,774,008 11,527,301 10,516,521 Preferred dividend requirement (1) 1,241,032 1,242,929 1,299,326 1,610,429 1,570,446 Other interest 2,640,117 2,343,903 175,507 77,921 514,122 Amortization of debt discount - net 361,012 323,557 319,646 224,383 209,631 ------------ ------------ ------------ ------------ ------------ Total fixed charges $ 17,253,230 $ 14,802,518 $ 12,568,487 $ 13,440,034 $ 12,810,720 ============ ============ ============ ============ ============ Ratio of Earnings to Fixed Charges and Preferred Dividends 2.22 2.54 2.55 2.54 2.25 ============ ============ ============ ============ ============ (1) Preferred Dividend Requirement: Preferred dividends 813,000 813,000 854,047 1,050,000 1,050,000 Effective tax rate 34.49% 34.59% 34.27% 34.80% 33.14% ------------ ------------ ------------ ------------ ------------ Preferred dividend requirement $ 1,241,032 $ 1,242,929 $ 1,299,326 $ 1,610,429 $ 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 7 Portion of the 1996 Annual Report to Shareholders for the year ended December 31, 1996 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), E'town Properties, Inc. (Properties) and owner of a 65% interest in Applied Watershed Management, LLC (AWM). The Mount Holly Water Company (Mount Holly) is a wholly owned subsidiary of Elizabethtown. The assets and operating results of Elizabethtown constitute the predominant portions of E'town's assets and operating results. Mount Holly contributed 3% of the Company's consolidated operating revenues for 1996. The following analysis sets forth significant events affecting the financial condition of E'town and Elizabethtown at December 31, 1996, and the results of operations for the years ended December 31, 1996 and 1995. LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures Program Capital expenditures, primarily for water utility plant, were $55.4 million during 1996. Of this total, $18.6 million, excluding an Allowance For Funds Used During Construction (AFUDC), was expended on the Canal Road Water Treatment Plant (Plant). Capital expenditures for the three-year period ending December 31, 1999 are estimated to be $126.1 million, of which $125.3 million is for utility plant ($105.8 million for Elizabethtown and $19.5 million for Mount Holly), and $.8 million is for non-utility expenditures. The utilities' projected capital expenditures are returning to the levels experienced in the early 1990s as Elizabethtown has completed and placed the Plant into service as discussed below. Mount Holly expects to incur significant capital expenditures in 1997 and 1998 to construct new water supply, treatment and transmission facilities as discussed below. Elizabethtown The Plant was completed and placed into service on October 24, 1996. The Plant, which has an initial rated production capacity of 40 million gallons per day (mgd), will meet existing and anticipated customer demands and replace groundwater supplies withdrawn from service as a result of more restrictive water quality regulations and groundwater contamination. Elizabethtown's three-year capital program includes $69.3 million for projects of a routine nature. This program also includes $56.0 million of major projects such as new transmission mains, improvements to pumping facilities, construction of a new operations center in the western portion of our service territory and other miscellaneous projects. Mount Holly To ensure an adequate supply of quality water from an aquifer serving parts of southern New Jersey, state legislation requires Mount Holly, as well as other suppliers obtaining water from designated portions of this aquifer, to reduce pumpage from its wells. Mount Holly has received approval from the New Jersey Department of Environmental Protection (NJDEP) for its plan to develop a new water supply, treatment and transmission system necessary to obtain water outside the designated portion of the aquifer, and to treat the water and pump it into the Mount Holly system. This is referred to as the Mansfield Project. The project is currently estimated to cost $16.5 million, excluding AFUDC, of which $13.6 million is anticipated to be spent over the next three years. Mount Holly has expended $2.9 million on the Mansfield Project as of December 31, 1996, excluding AFUDC. The land for the supply and treatment facilities has been purchased and wells have been drilled and can produce the required supply. On October 5, 1995, the NJDEP granted Mount Holly a water allocation permit for four wells that are to be the water supply for the Mansfield Project. On October 20, 1995, another water purveyor requested of the NJDEP, and was subsequently granted, an adjudicatory hearing in opposition to the permit. Hearings on the matter before an administrative law judge are pending. A decision is expected later in 1997. The Company and Mount Holly believe that the permit in question will be upheld, but cannot predict with certainty the outcome of the matter. In the event that the objector is successful and the permit is rescinded, Mount Holly would meet its regulatory obligation to provide an alternate source of water by purchasing water from that purveyor. Management believes the Mansfield Project is the most cost-effective alternative available to Mount Holly to comply with recent state legislation that restricts the amount of water that can be withdrawn from the aquifer. In June 1995, Mount Holly petitioned the New Jersey Board of Public Utilities (BPU) for an increase in rates, to take place in two phases. The first phase was necessary to recover costs that were not reflected in rates last increased in 1986. The second phase would recover the cost of the Mansfield project. On January 24, 1996, the BPU approved a stipulation (Mount Holly Stipulation) for an increase in rates of $.6 million, effective as of that date. The Mount Holly Stipulation has, effectively, concluded the first phase of the rate proceeding. Capital Resources During 1996, Elizabethtown, including Mount Holly, financed 40.2% of its capital expenditures from internally generated funds (after payment of common stock dividends). The balance was financed with a combination of short-term borrowings under a revolving credit agreement discussed below, proceeds from capital contributions from E'town (funded by issuances of Common Stock under the Corporation's Dividend Reinvestment and Stock Purchase Plan) and other short-term bank borrowings. For the three-year period ending December 31, 1999, Elizabethtown, including Mount Holly, estimates that 57% of its capital expenditures are expected to be financed with internally generated funds (after payment of common stock dividends). The balance will be financed with a combination of proceeds from the sale of E'town common stock, long-term debentures, proceeds of tax-exempt New Jersey Economic Development Authority (NJEDA) bonds and short-term borrowings. The NJEDA has granted preliminary approval for the financing of almost all of Elizabethtown's major projects during the next three years and the Mansfield Project. Elizabethtown expects to pursue tax-exempt financing to the extent that final allocations are granted by the NJEDA. The Company's senior debt is currently rated A3 and A by Moody's Investors Service and Standard & Poor's Ratings Group, respectively. Standard & Poor's has recently reaffirmed the Company's A rating and has upgraded its rating oulook from "negative" to "stable." In the second quarter of 1997, Elizabethtown expects to issue $50.0 million of tax-exempt Variable Rate Demand Notes through the New Jersey Economic Development Authority (NJEDA). The proceeds of the issue are expected to be used to repay amounts outstanding under the revolving credit agreement discussed below. Elizabethtown continues to obtain a portion of the funds required for its capital program through borrowings under a revolving credit agreement (Agreement) with an agent bank and five additional banks. The Agreement was executed in 1994 to provide up to $60.0 million in revolving short-term financing to partially fund Elizabethtown's capital program, the predominant portion of which was the Plant. The Agreement further provides that, among other covenants, Elizabethtown must maintain a percentage of common and preferred equity to total capitalization of not less than 35% and a pre-tax interest coverage ratio of at least 1.5 to 1. As of December 31, 1996, the percentage of Elizabethtown's common and preferred equity to total capitalization, as calculated in accordance with Agreement, was 44%. For 1996, Elizabethtown's pre-tax interest coverage ratio, calculated in accordance with the Agreement, was 2.7 to 1. At December 31, 1996 Elizabethtown had outstanding borrowings of $60.0 million under the Agreement and $9.0 million of borrowings under uncommitted lines of credit. The combined borrowings were at interest rates from 5.50% to 5.88% at a weighted average rate of 5.72%. The Agreement expires in July 1997 and provides that the Company may convert any outstanding balances to a five-year, fully amortizing term loan. However, upon expiration of the Agreement, the Company expects to meet its short-term financing needs with uncommitted lines of credit. RESULTS OF OPERATIONS Net Income for 1996 was $15.1 million or $1.96 per share on a primary basis as compared to $15.3 million or $2.16 per share for 1995. The primary factor contributing to the decrease in net income was a reduction in revenues due to reduced outdoor water consumption in 1996 compared to 1995. In addition, an increase in the average number of shares outstanding contributed to the decrease in Earnings Per Share of Common Stock. 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, increases in capitalized 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. Operating Revenues increased $2.0 million or 1.9% in 1996 over the comparable 1995 amount. The increase in total revenues was comprised of rate increases for Elizabethtown and Mount Holly, as discussed above for Mount Holly and at Economic Outlook for Elizabethtown, which were offset by a decrease in water consumption due to unusually cool, wet summer weather in 1996. The reduction in water consumption accounted for a decrease in revenues of $2.4 million. Operating revenues increased by $3.9 million and $.5 million for the effects of the increases in rates of Elizabethtown and Mount Holly, respectively. Operating Revenues increased $6.4 million, or 6.2%, in 1995. Of this increase, $4.6 million relates to a rate increase, effective February 1995. Increased consumption by retail customers and an increase in the number of customers increased revenues by $1.4 million. Revenues from industrial customers resulting from consumption increased $.2 million, while revenues from other water systems resulting from consumption decreased $.2 million. Revenues from fire service customers increased $.4 million. Operation Expenses increased $.7 million or 1.5% in 1996 over the comparable 1995 amount. Operation expenses decreased by $.4 million for certain variable expenses asscociated with the reduction in water consumption discussed above. The successful implementation of an energy conservation program in the second quarter of 1996 at our Raritan-Millstone Treatment Plant reduced energy costs by $.8 million. The success of various safety programs resulted in a decrease in workers compensation premiums of $.3 million. These decreases were offset by increased labor costs of $1.6 million. Operation Expenses increased $2.8 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. Benefit costs increased due to increases in the actuarially calculated pension expense and the cost of postemployment benefits, a portion of which was expensed in 1995 as it is recognized in rates pursuant to the 1995 Stipulation effective February 1995. Maintenance Expenses increased $.1 million or .9% in 1996 over the comparable 1995 amount. The Company is realizing the benefits of various preventive maintenance programs and operating efficiencies instituted in the current and prior years. Maintenance Expenses decreased $.8 million, or 12.4%, in 1995. The decrease is due, primarily, to the absence in 1995 of the unusually harsh winter weather that occurred in 1994. Also, the results of preventive maintenance programs have contributed to an overall decrease in maintenance expenses. Depreciation Expense increased $1.1 million or 12.3% in 1996 as compared to 1995. The increase is due, primarily, to a higher level of depreciable plant in service and includes $.5 million of depreciation expense for the Plant for a portion of the year. Depreciation Expense increased $.9 million, or 12.1%, in 1995 due, primarily, to additional depreciable plant being placed in service during that period. Also, an increase in authorized depreciation rates as a result of the 1995 Stipulation, effective February 1995, accounted for $.4 million of the increase. Revenue Taxes increased $.2 million, or 1.7% in 1996 and $.8 million, or 6.6% in 1995 due to additional taxes on the higher revenues discussed above. Real Estate, Payroll and Other Taxes increased $.1 million or 3.5% in 1996 and $.1 million, or 2.4%, in 1995 due to increased payroll taxes resulting from labor cost increases. Federal Income Taxes as a component of operating expenses decreased $.8 million or 10.8% from the comparable 1995 amount due to the changes in the components of taxable income discussed herein. Federal Income Taxes increased $.8 million, or 12.4%, in 1995 due to changes in the components of taxable income discussed herein. Contributing to the increase in 1995 is $.2 million for the remaining 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. Other Income (Expense) increased $.7 million or 31.0% as compared to the 1995 amount. An increase in the equity component of AFUDC of $.7 million, primarily from the construction of the Plant ,as well as a decrease from write-downs in 1995 of the carrying value of certain non-utility property, accounted for the overall increase. 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 in 1994. Total Interest Charges increased $1.6 million or 13.8% in 1996 over the comparable 1995 amount. The increase is due, primarily, to increased interest on long-term debt due to the issuance of $40.0 million of NJEDA tax-exempt debentures in December 1995 to refinance balances previously incurred under the revolving credit agreement. A higher level of short-term borrowings under the revolving credit agreement incurred to finance Elizabethtown's capital program on an interim basis has also contributed to the overall increase. This increase was offset by an increase in the debt component of AFUDC resulting from Elizabethtown's higher construction work in progress balances in 1996, primarily due to the Plant. Total Interest Charges increased $.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 $1.6 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. ECONOMIC OUTLOOK Forward Looking Information Certain information included in this report contains, and other materials filed or to be filed by the Corporation with the Securities and Exchange Commission (as well as information included in oral and written statements made or to be made by the Corporation) contain or will contain forward looking statements within the meaning of the Securities Acts of 1933 and 1934, as amended. Any forward looking information is or will be based on information available at that time and is or will be subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. E'town Corporation and Subsidiaries Consolidated earnings for E'town for the next several years will be determined by (i) Elizabethtown's ability to increase sales and to further control operating expenses through improved productivity, (ii) Mount Holly's, and later Elizabethtown's, ability to obtain adequate and timely rate relief in connection with future utility plant additions and, to a lesser degree, (iii) the ability of E'town and Properties to generate returns from their unregulated businesses. E'town expects earnings and earnings per share to increase approximately 15% in 1997 as Elizabethtown realizes the full impact of its $21.8 million rate increase effective in October 1996, in addition to realizing the benefits of ongoing cost control efforts. This expectation assumes a return to normal weather conditions in 1997. Elizabethtown and Subsidiary - Regulated Utilities On October 25, 1996, a rate increase under a stipulation (1996 Stipulation) went into effect for Elizabethtown. This will result in an increase in annual operating revenues of $21.8 million. The rate increase reflects a full allowance for the estimated capital and operating costs for the Plant and an authorized rate of return on common equity of 11.25%. Recovery of depreciation expense on Contributions in Aid of Construction and Customers' Advances for Construction is not reflected in the rate increase. Furthermore, under the terms of the 1996 Stipulation, the Company will not be required to record such depreciation expense of approximately $.7 million annually, for the period that this rate increase is in effect. The 1996 Stipulation also allows the Company to continue to defer the transition obligation and interest associated with postretirement benefits. Elizabethtown, excluding Mount Holly, earned a rate of return on common equity of 9.0% in 1996. Elizabethtown's authorized rate of return on common equity is currently 11.25%. In 1997, Elizabethtown expects to substantially close this gap between its earned return on common equity in 1996 and its authorized return. This assumes a return to normal summer weather conditions and outdoor water use. Realizing rates of return in 1998 comparable to authorized levels will require continued customer additions and the success of ongoing cost control efforts, as well as rate relief later in that year. Mount Holly earned a rate of return on common equity of 3.5% in 1996, compared to an authorized rate of return of 11.25% established in its most recent rate proceeding. Mount Holly contributed $.02 to E'town's consolidated earnings per share in 1996. Management expects Mount Holly to increase its contribution to E'town's earnings per share by obtaining additional rate relief so that Mount Holly can realize rates of return comparable to authorized levels upon the completion of Mount Holly's Mansfield project, and recovery of the costs of that and other projects in rates. E'town and Properties The activities of E'town and Properties are not regulated by the BPU. E'town Following a competitive selection process, Edison Township chose to negotiate with E'town for a 20-year contract to operate the Township's water supply system. This system serves about 11,000 residential, commercial and industrial customers. The partners have completed negotiations. The transaction still requires municipal and state agency approvals. E'town expects to realize a return on its investment in the project comparable to that realized by E'town's regulated utility operations. The earnings effect is expected to be small during the first few years and is expected to increase after year five. In order to form AWM, in 1995 the Corporation entered into a three-year joint venture agreement with Applied Wastewater General Partnership (AWG) a unit of several privately held and affiliated companies providing design, engineering, construction and operating services for water and wastewater facilities. AWM has been pursuing opportunities 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 $.5 million to finance AWM's working capital needs. E'town may provide additional financing for particular projects of AWM. AWG has been providing the substantial portion of the operations-related services required to be performed by AWM. Either party may terminate the agreement at any time. E'town formed AWM to expand its range of services to include wastewater, particularly to the smaller communities that surround the franchise areas of Elizabethtown and Mount Holly. On January 1, 1997, AWM commenced a three-year contract to operate the wastewater collection and treatment facilities owned by Environmental Disposal Corporation (EDC), which serves portions of Bedminster, Far Hills, and Peapack-Gladstone. AWM is also providing the billing and customer inquiry services. AWM has also negotiated letters of understanding with two developers whereby AWM will construct wastewater collection and treatment facilities to serve developments in Morris and Bergen counties. Each developer will pay the associated construction costs. Subsequently, AWM will repurchase the facilities, for a nominal amount, and operate the systems as regulated utilities. Included in Non-Utility Property and Other Investments at December 31, 1996 is an investment of $1.2 million ($.2 million net of related deferred taxes) in a limited partnership that owns Solar Electric Generating System V (SEGS), located in California. SEGS contributed $.01 to E'town's consolidated earnings per share and paid cash dividends to E'town of $.3 million in 1996. Properties E'town Properties and E'town Corporation own various parcels of undeveloped land in New Jersey carried as investments of $12.8 million in Non-Utility Property and Other Investments - Net in the Consolidated Balance Sheets of E'town at December 31, 1996. During the next few years, E'town and Properties will seek to sell such properties and expect to invest the sale proceeds into water and wastewater utility investments that produce a current return. Properties has executed a contract to sell one parcel for a price of $.4 million. The contract is expected to close in 1997 and produce a minimal gain. Properties executed a contract to sell another parcel to a developer. The parties expected that the contract would close prior to December 31, 1996 but the developer was unable to obtain the required municipal approvals. The contract has been extended and Properties and the developer have commenced litigation against the municipality. It is not known whether or when a sale will be consummated. The carrying value of each parcel includes the original cost plus any real estate taxes, interest and, where applicable, direct costs capitalized while rezoning or governmental approvals are or were being sought. Such costs are capitalized until the property is offered for sale, after which time such costs are expensed. Based on independent appraisals received at various times prior to 1996, the estimated net realizable value of each property exceeds its respective carrying value as of December 31, 1996. E'town will continue to monitor the relationship between the carrying and net realizable values of its properties through updated appraisals, when appropriate, and of its investment in SEGS based on information provided by SEGS management. New Accounting Pronouncements See Note 2 of the Notes to Consolidated Financial Statements for a discussion of two new accounting standards that were effective in 1996. E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME
Year Ended December 31, 1996 1995 1994 Operating Revenues $ 110,409,378 $ 108,398,105 $ 102,032,505 ------------- ------------- ------------- Operating Expenses: Operation 44,806,856 44,148,007 41,373,842 Maintenance 5,859,167 5,805,511 6,623,772 Depreciation 9,893,391 8,808,169 7,860,180 Revenue taxes 13,819,646 13,591,212 12,748,161 Real estate, payroll and other taxes 2,952,219 2,853,169 2,786,746 Federal income taxes (Note 3) 6,790,979 7,611,389 6,768,887 ------------- ------------- ------------- Total operating expenses 84,122,258 82,817,457 78,161,588 ------------- ------------- ------------- Operating Income 26,287,120 25,580,648 23,870,917 ------------- ------------- ------------- Other Income (Expense): Allowance for equity funds used during construction (Note 2) 3,725,234 2,976,290 1,178,133 Write-down of non-utility property and other investments (Note 7) (350,319) (481,754) Litigation settlement (932,203) Federal income taxes (Note 3) (1,569,962) (1,141,771) (138,970) Other - net 760,373 741,397 632,878 ------------- ------------- ------------- Total other income (expense) 2,915,645 2,225,597 258,084 ------------- ------------- ------------- Total Operating and Other Income 29,202,765 27,806,245 24,129,001 ------------- ------------- ------------- Interest Charges: Interest on long-term debt 13,799,531 11,696,183 11,610,777 Other interest expense - net 2,645,262 2,389,684 470,038 Capitalized interest (Note 2) (3,523,724) (2,746,128) (1,247,666) Amortization of debt discount and expense-net 395,428 357,973 354,062 ------------- ------------- ------------- Total interest charges 13,316,497 11,697,712 11,187,211 ------------- ------------- ------------- Income Before Preferred Stock Dividends of Subsidiary 15,886,268 16,108,533 12,941,790 Preferred Stock Dividends 813,000 813,000 854,047 ------------- ------------- ------------- Net Income $ 15,073,268 $ 15,295,533 $ 12,087,743 ============= ============= ============= Earnings Per Share of Common Stock (Note 2): Primary $ 1.96 $ 2.16 $ 1.95 ============= ============= ============= Fully Diluted $ 1.96 $ 2.14 $ 1.94 ============= ============= ============= Average Number of Shares Outstanding for the Calculation of Earnings Per Share: Primary 7,674,400 7,095,183 6,210,409 ============= ============= ============= Fully Diluted 7,966,107 7,393,796 6,519,352 ============= ============= ============= Dividends Paid Per Common Share $ 2.04 $ 2.04 $ 2.04 ============= ============= ============= See Notes to Consolidated Financial Statements.
E'TOWN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 1996 1996 Assets Utility Plant-At Original Cost: Utility plant in service $ 654,712,533 $ 502,572,255 Construction work in progress 7,994,186 100,212,636 ------------- ------------- Total utility plant 662,706,719 602,784,891 Less accumulated depreciation and amortization 102,682,572 94,926,413 ------------- ------------- Utility plant-net 560,024,147 507,858,478 ------------- ------------- Non-utility Property and Other Investments - Net (Note 7) 14,112,969 13,601,191 ------------- ------------- Current Assets: Cash and cash equivalents 3,228,167 4,925,400 Short-term investments 30,622 30,622 Customer and other accounts receivable (less reserve: 1996, $566,000; 1995, $532,000) 16,187,426 15,984,043 Unbilled revenues 9,356,122 7,443,656 Materials and supplies-at average cost 2,044,748 1,912,015 Prepaid insurance, taxes, other 3,917,698 1,874,338 ------------- ------------- Total current assets 34,764,783 32,170,074 ------------- ------------- Deferred Charges (Note 9): Prepaid pension expense (Note 12) 13,254 512,691 Waste residual management 1,064,454 970,182 Unamortized debt and preferred stock expenses 9,507,531 9,938,130 Taxes recoverable through future rates (Note 3) 30,434,909 26,427,627 Postretirement benefit expense (Note 12) 3,465,272 2,900,569 Other unamortized expenses 1,820,028 777,173 Total deferred charges 46,305,448 41,526,372 ------------- ------------- Total $ 655,207,347 $ 595,156,115 ============= ============= See Notes to Consolidated Financial Statements.
E'TOWN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995 Capitalization and Liabilities Capitalization (Notes 4 and 5): Common shareholders' equity $ 183,512,357 $ 177,080,580 Cumulative preferred stock 12,000,000 12,000,000 Long-term debt - net 193,481,425 193,673,528 ------------- ------------- Total capitalization 388,993,782 382,754,108 ------------- ------------- Current Liabilities: Notes payable - banks (Note 6) 69,000,000 27,000,000 Long-term debt - current portion (Note 4) 30,000 30,000 Accounts payable and other liabilities 16,197,203 16,826,104 Customers' deposits 300,561 305,349 Municipal and state taxes accrued 13,886,634 13,661,620 Federal income taxes accrued (Note 3) 150,735 Interest accrued 3,482,657 3,268,134 Preferred stock dividends accrued 59,000 59,000 ------------- ------------- Total current liabilities 102,956,055 61,300,942 ------------- ------------- Deferred Credits: Customers' advances for construction 43,636,080 45,460,749 Federal income taxes (Note 3) 75,942,114 66,825,738 State income taxes 184,722 173,365 Unamortized investment tax credits 8,244,937 8,448,811 Accumulated postretirement benefits (Note 12) 3,651,002 2,939,217 ------------- ------------- Total deferred credits 131,658,855 123,847,880 ------------- ------------- Contributions in Aid of Construction 31,598,655 27,253,185 ------------- ------------- Commitments and Contingent Liabilities (Note 11) ------------- ------------- Total $ 655,207,347 $ 595,156,115 ============= ============= See Notes to Consolidated Financial Statements.
E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CAPITALIZATION
December 31, 1996 1995 E'town Corporation: Common Shareholders' Equity (Notes 4 and 5): Common stock without par value, authorized, 15,000,000 shares, issued 1996, 7,807,751 shares; 1995, 7,549,078 shares $ 145,660,545 $ 138,667,930 Paid-in capital 1,315,025 1,315,025 Capital stock expense (5,159,834) (5,159,834) Retained earnings 42,433,905 42,994,743 Less cost of treasury stock; 1996 and 1995, 25,876 shares (737,284) (737,284) ------------- ------------- Total common shareholders' equity 183,512,357 177,080,580 ------------- ------------- 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 11,548,000 11,751,000 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 5.60% Debentures, due 2025 40,000,000 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) 87,500 117,500 ------------- ------------- Total long-term debt 194,635,500 194,868,500 Unamortized discount-net (1,154,075) (1,194,972) ------------- ------------- Total long-term debt-net 193,481,425 193,673,528 ------------- ------------- Total Capitalization $ 388,993,782 $ 382,754,108 ============= ============= See Notes to Consolidated Financial Statements.
E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Year Ended December 31, 1996 1995 1994 Common Stock: Balance at Beginning of Year $ 138,667,930 $ 114,136,195 $ 87,842,657 Public sale of common stock (1995, 660,000 shares; 1994, 690,000 shares) 17,737,500 19,147,500 Common stock issued under Dividend Reinvestment and Stock Purchase Plan (1996, 258,673 shares; 1995, 248,846 shares; 1994, 273,159 shares) 6,992,615 6,388,716 7,146,038 Exercise of stock options (1995, 15,569 shares) 405,519 ------------- ------------ ------------ Balance at End of Year 145,660,545 138,667,930 114,136,195 ------------- ------------ ------------ Paid-in Capital: 1,315,025 1,315,025 1,315,025 ------------- ------------ ------------ Capital Stock Expense: Balance at Beginning of Year (5,159,834) (4,286,194) (3,357,165) Expenses incurred for the issuance and sale of common stock (873,640) (929,029) ------------- ------------ ------------ Balance at End of Year (5,159,834) (5,159,834) (4,286,194) ------------- ------------ ------------ Retained Earnings: Balance at Beginning of Year 42,994,743 42,439,552 43,207,666 Net Income 15,073,268 15,295,533 12,087,743 Dividends on common stock (1996, 1995 and 1994, $2.04) (15,634,106) (14,740,342) (12,855,857) ------------- ------------ ------------ Balance at End of Year 42,433,905 42,994,743 42,439,552 ------------- ------------ ------------ Treasury Stock: Balance at Beginning of Year (737,284) (633,976) (633,976) Cost of shares redeemed to exercise stock options (1995, 3,844 shares) (103,308) ------------- ------------ ------------ Balance at End of Year (737,284) (737,284) (633,976) ------------- ------------ ------------ Total Common Shareholders' Equity $ 183,512,357 $ 177,080,580 $ 152,970,602 ============= ============= See Notes to Consolidated Financial Statements.
E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31, 1996 1995 1994 Cash Flows from Operating Activities: Net Income $ 15,073,268 $ 15,295,533 $ 12,087,743 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 9,893,391 8,808,169 7,860,180 Write-down of non-utility property and other investments 350,319 481,754 (Increase) decrease in deferred charges (637,690) 248,334 (159,348) Deferred income taxes and investment tax credits-net 4,916,577 4,430,998 3,865,417 Capitalized interest and AFUDC (7,248,958) (5,722,418) (2,425,799) Other operating activities-net 304,730 16,327 19,833 Change in current assets and current liabilities excluding cash, short-term investments and current portion of debt: Customer and other accounts receivable (203,383) (3,637,172) (315,457) Unbilled revenues (1,912,466) (282,173) 86,839 Accounts payable and other liabilities (633,689) (1,397,022) 8,576,745 Accrued/prepaid interest and taxes (1,754,558) 1,323,420 (1,082,193) Other (132,732) (187,046) (101,267) ------------- ------------ ------------ Net cash provided by operating activities 17,664,490 19,247,269 28,894,447 ------------- ------------ ------------ Cash Flows Provided by Financing Activities: Decrease in funds held by Trustee for construction expenditures 382,306 Proceeds from issuance of common stock 6,992,615 23,554,787 25,364,509 Proceed from issuance of debentures 40,000,000 Proceed from issuance of preferred stock 12,000,000 Redemption of preferred stock (12,000,000) Debt and preferred stock issuance/amortization costs 430,599 (447,922) (842,178) Repayment of long-term debt (233,000) (452,800) (374,000) Contributions and advances for construction-net 2,520,801 3,440,942 3,453,604 Net increase in notes payable - banks 42,000,000 4,000,000 23,000,000 Dividends paid on common stock (15,634,106) (14,740,342) (12,855,857) ------------- ------------ ------------ Net cash provided by financing activities 36,076,909 55,354,665 38,128,384 ------------- ------------ ------------ Cash Flows Used for Investing Activities: Utility plant expenditures (excluding allowance for funds used during construction) (55,125,190) (73,789,288) (69,980,619) Development costs of land (excluding capitalized interest) (313,442) (141,954) (163,976) ------------- ------------ ------------ Cash used for investing activities (55,438,632) (73,931,242) (70,144,595) ------------- ------------ ------------ Net (Decrease) Increase in Cash and Cash Equivalents (1,697,233) 670,692 (3,121,764) Cash and Cash Equivalents at Beginning of Year 4,925,400 4,254,708 7,376,472 ------------- ------------ ------------ Cash and Cash Equivalents at End of Year $ 3,228,167 $ 4,925,400 $ 4,254,708 ============= ============= ============= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 8,965,514 $ 8,350,882 $ 10,416,716 Income taxes $ 5,723,350 $ 4,746,176 $ 6,771,254 Preferred stock dividends $ 708,000 $ 708,000 $ 805,475 See Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization E'town Corporation (E'town or Corporation), a New Jersey holding company, is the parent company of Elizabethtown Water Company (Elizabethtown or Company), E'town Properties, Inc. (Properties) and owner of a 65% interest in Applied Watershed Management, LLC (AWM). The Mount Holly Water Company (Mount Holly) is a subsidiary of Elizabethtown. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include E'town and its subsidiaries. Significant intercompany accounts and transactions have been eliminated. Elizabethtown and Mount Holly are regulated water utilities and follow the Uniform System of Accounts, as adopted by the New Jersey Board of Public Utilities (BPU). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Utility Plant and Depreciation Income is charged with the cost of labor, materials and other expenses incurred in making repairs and minor replacements and in maintaining the properties. Utility plant accounts are charged with the cost of improvements and major replacements of property. When depreciable property is retired or otherwise disposed of, the cost thereof, plus the cost of removal net of salvage, is charged to accumulated depreciation. Depreciation is generally computed on a straight-line basis at functional rates for various classes of assets. The provision for depreciation, as a percentage of average depreciable property, was 1.73% for 1996, 1.83% for 1995 and 1.75 % for 1994. Allowance for Funds Used During Construction Elizabethtown capitalizes, as an appropriate cost of utility plant, an Allowance for Funds Used During Construction (AFUDC), which represents the cost of financing major projects during construction. AFUDC, a non-cash credit on the Statements of Consolidated Income, is added to the construction cost of the project and included in rate base and then recovered in rates during the project's useful life. AFUDC is comprised of a debt component (credited to Interest Charges), and an equity component (credited to Other Income) in the Statements of Consolidated Income. AFUDC totaled $6,933,870, $5,421,383 and $2,045,234 for 1996, 1995 and 1994, respectively (see Note 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 1996, 1995 and 1994 totaled $315,088, $301,035 and $380,566, 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'towm 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 (CAC) and Contributions in Aid of Construction (CIAC) represent capital provided by developers for main extensions to new real estate developments. Some portion of CAC is refunded based upon the revenues that the new developments generate. CIAC are customer advances for construction that, under the terms of individual main extension agreements, are no longer subject to refund. As of October 25, 1996, Elizabethtown is no longer recording depreciation on CAC and CIAC property, in accordance with a rate decision effective as of that date (See Note 10). 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 The Corporation has adopted Statement of Financial Accounting Standards (SFAS) 123 "Accounting for Stock-Based Compensation", which was effective in 1996. SFAS 123 includes certain elective provisions as to the method of recording 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," and provide proforma disclosure of the effect of adopting SFAS 123. The effect on E'town of adopting SFAS 123 is immaterial. The Corporation has also adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was effective in 1996. The statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The resultant impairment, if any, would be measured based on the fair value of the asset. The Corporation does not have any impaired assets. Reclassification Certain prior year amounts have been reclassified to conform to the current year's presentation. 3. Federal Income Taxes The computation of federal income taxes and the reconciliation of the tax provision computed at the federal statutory rate (35%) with the amount reported in the Statements of Consolidated Income follow: 1996 1995 1994 (Thousands of Dollars) Tax expense at statutory rate $ 8,486 $ 8,701 $ 6,947 Items for which deferred taxes are not provided: Difference between book and tax depreciation 132 133 92 Investment tax credits (202) (204) (209) Other (55) 123 78 ------- ------- ------- Provision for federal income taxes$ 8,361 $ 8,753 $ 6,908 ======= ======= ======= The provision for federal income taxes is composed of the following: Current $ 3,249 $ 6,068 $ 4,983 Tax on main extensions 207 (1,734) (1,931) Deferred: Tax depreciation 3,333 3,447 3,324 Capitalized interest 1,375 905 517 Main cleaning and lining 587 405 396 Other (186) (136) (179) Investment tax credits - net (204) (202) (202) ------- ------- ------- Total provision $ 8,361 $ 8,753 $ 6,908 ======= ======= ======= In accordance with SFAS 109, deferred tax balances have been reflected at E'town's current consolidated federal income tax rate, which is 35%. The tax effect of significant temporary differences representing deferred income tax assets and liabilities as of December 31, 1996 and 1995 is as follows: 1996 1995 (Thousands of Dollars) Water utility plant - net $(63,474) $(56,956) Non-utility property 41 139 Other investments (878) (1,022) Taxes recoverable through future rates (9,871) (9,250) Investment tax credit 2,627 2,957 Prepaid pension expense (5) (166) Capitalized interest (3,777) (2,402) Waste residuals (373) (340) Other assets 304 654 Other liabilities (536) (440) -------- -------- Net deferred income tax liabilities $(75,942) $(66,826) ======== ======== 4. Capitalization In June 1995, E'town issued 660,000 shares of common stock for net proceeds of $16,863,860. The gross proceeds of $17,737,500 were used to fund equity contributions to Elizabethtown totaling $16,900,000. These equity contributions were used to repay short-term debt that had been issued under Elizabethtown's revolving credit agreement (see below) to partially fund the Company's capital program. The balance of the net proceeds was used to fund working capital requirements of the Corporation. E'town routinely makes equity contributions to Elizabethtown from the proceeds of common stock issued under E'town's Dividend Reinvestment and Stock Purchase Plan (DRP). E'town contributed $5,300,000 and $6,388,716 in 1996 and 1995, respectively, to Elizabethtown from the proceeds of DRP issuances. The Corporation maintains a Shareholders' Rights Plan (Rights Plan). Generally, under the Rights Plan, if a person or group acquires 10% or more of the Corporation's common stock or announces a tender offer for the Corporation's common stock, non-acquiring shareholders may, under certain circumstances, exercise rights (Rights) to allow them to significantly increase their percentage of ownership of the Corporation's common stock. Such Rights may be redeemed by the Board of Directors. Cumulative Preferred Stock Elizabethtown's $5.90 Cumulative Preferred Stock is not redeemable at the option of the Company. Elizabethtown is required to redeem the entire issue at $100 per share on March 1, 2004. Long-term Debt Elizabethtown's long-term debt indentures restrict the amount of retained earnings available to Elizabethtown to pay cash dividends (which is the primary source of funds available to the Corporation for payment of dividends on its common stock) or acquire Elizabethtown's common stock, all of which is held by E'town. At December 31, 1996, $7,689,840 of Elizabethtown's retained earnings were restricted under the most restrictive indenture provision. Therefore, $34,744,065 of E'town's consolidated retained earnings were unrestricted. In the second quarter of 1997, Elizabethtown expects to issue $50,000,000 of tax-exempt Variable Rate Demand Notes, through the New Jersey Economic Development Authority (NJEDA). The proceeds of the issue are expected tol be used to repay amounts outstanding under a revolving credit agreement (see Note 6). In December 1995, Elizabethtown issued $40,000,000 of 5.60% tax-exempt debentures through the NJEDA. The proceeds of the issue were used to repay amounts outstanding under the revolving credit agreement. E'town's 6 3/4% Convertible Subordinated Debentures are convertible to E'town common stock at $40 per share. At December 31, 1996, 288,700 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 incentive plan under which options to purchase shares of E'town's common stock have been granted to certain officers and other key employees at prices not less than the fair market value at the date of grant. The Stock Option Plan provides that any options 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: Year Options Option Options Outstanding Granted Granted Price 12/31/96 12/31/95 - ------- -------- ------ -------- -------- 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 77,000 1996 4,000 $26.87 4,000 ------ ------ Total 96,000 92,000 ====== ====== 6. Lines of Credit Elizabethtown has a committed revolving credit agreement (Agreement) with an agent bank and five additional banks. The Agreement was executed in 1994 to provide up to $60,000,000 in revolving short-term financing to partially finance Elizabethtown's capital program, the predominant portion of which was the Canal Road Water Treatment Plant (Plant) (see Note 10). The Agreement expires in July 1997 at which time the Company may convert any outstanding balances to a five-year, fully amortizing term loan. After July 1997, the Company expects to meet its short-term financing needs with uncommitted lines of credit. These lines, together with internal funds and proceeds of future issuances of debt and preferred stock by Elizabethtown and capital contributions by E'town, are expected to be sufficient to finance Elizabethtown's and Mount Holly's capital needs, which are estimated to be $125,327,000 through 1999. At December 31, 1996, Elizabethtown had outstanding borrowings of $60,000,000 under the Agreement and $9,000,000 of borrowings under uncommitted lines of credit. The combined borrowings were at interest rates of 5.50% to 5.88%, at a weighted average rate of 5.72%. Of the $60,000,000 outstanding under the Agreement at December 31, 1996, $50,000,000 is expected to be repaid with the proceeds of the Variable Rate Demand Notes to be issued in the second quarter of 1997 as discussed in Note 4. The Agreement further provides that, among other covenants, Elizabethtown must maintain a percentage of common and preferred equity to total capitalization of not less than 35% and a pre-tax interest coverage ratio of at least 1.5 to 1. As of December 31, 1996, the percentage of Elizabethtown's common and preferred equity to total capitalization calculated in accordance with the Agreement, was 44%. For the 12 months ended December 31, 1996, Elizabethtown's pre-tax interest coverage ratio, calculated in accordance with the Agreement, was 2.72 to 1. E'town has $20,000,000 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 1996, 1995 and 1994 is as follows: 1996 1995 1994 (Thousands of Dollars) Maximum amount outstanding $ 69,000 $ 60,000 $ 23,000 Average monthly amount outstanding $ 45,240 $ 39,636 $ 2,958 Average interest rate at year end 5.7% 5.9% 6.1% Compensating balances at year end $ 0 $ 0 $ 0 Weighted average interest rate based on average daily balances 5.8% 6.2% 5.7% 7. Non-Utility Property and Other Investments Included in Non-Utility Property and Other Investments at December 31, 1996 and 1995 is an investment of $1,249,174 and $1,358,016, respectively, ($186,223 and $259,991 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, 1996 and 1995 is $12,769,953 and $12,141,419, 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 1996, the estimated net realizable value of each property exceeds its respective carrying value as of December 31, 1996. Properties continues to make incremental improvements to its Mansfield, New Jersey property and, accordingly, continues to capitalize various carrying charges. In prior years, the carrying value of the Mansfield property exceeded its estimated net realizable value. This was due to the fact that the Mansfield property was not yet ready for its intended use and various carrying charges were being capitalized while, based upon prior appraisals, the market value of the property had remained constant. Charges of $350,319 and $381,754 for the years ended December 31, 1995 and 1994, respectively, to adjust the carrying value of the Mansfield property, were 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, an appraisal in 1995 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, when appropriate, and its investment in SEGS based upon information provided by SEGS management and through cash flow analyses. In 1995, Properties entered into an agreement to sell a parcel of land to a developer. The agreement intended that the transaction would close prior to December 31, 1996. The developer has been unable to obtain approval from the municipality for an appropriate number of buildable units. It is uncertain as to whether or not a sale will be consummated. 8. Financial Instruments The carrying amounts and the estimated fair values, as of December 31, 1996 and 1995, of financial instruments issued or held by the Corporation are as follows: 1996 1995 (Thousands of Dollars) Short-term investments: Carrying amount $ 31 $ 31 Estimated fair value 45 38 Cumulative preferred stock: Carrying amount $ 12,000 $ 12,000 Estimated fair value 12,000 11,940 Long-term debt: Carrying amount $193,481 $193,674 Estimated fair value 196,288 200,710 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: 1996 1995 (Thousands of Dollars) Waste residual management $ 1,064 $ 970 Unamortzed debt and preferred stock expense 8,988 9,385 Taxes recoverable through future rates (Note3) 30,435 26,428 Postretirement benefit expense (Note 12) 3,465 2,901 Safety management expense 418 302 Business process redesign 362 235 Rate case expenses 201 110 ------- ------- Total $44,933 $40,331 ======= ======= Waste Residual Management The costs of disposing of the waste generated by Elizabethtown's and Mount Holly's water treatment plants are being amortized and recovered in rates over three and five-year periods, respectively, for ratemaking and financial statement purposes. No return is being earned on the deferred balances related to these programs. Unamortized Debt and Preferred Stock Expenses Costs incurred in connection with the issuance or redemption of long-term debt have been deferred and are being amortized and recovered in rates over the lives of the respective issues for ratemaking and financial statement purposes. Costs incurred in connection with the issuance and redemption of preferred stock have been deferred and are being amortized and recovered in rates over a 10-year period for ratemaking and financial statement purposes. Other Safety management expenses and business process redesign expenses were studies undertaken by the Company and are being amortized and recovered in rates over five years. Rate case expenses are being substantially recovered in rates over two-year periods. There were no regulatory liabilities at December 31, 1996 or 1995. 10. Regulatory Matters Rates Elizabethtown On October 25, 1996, Elizabethtown received a rate increase under a stipulation (1996 Stipulation) resulting in an increase in annual revenues of $21,800,000. The rate increase reflects a full allowance for the estimated capital cost of the Plant of $100,000,000 in addition to estimated AFUDC of $12,598,151. The increase also reflects a full allowance for the estimated operating costs of the Plant. The Plant went into service on October 24, 1996. The total cost of the Plant is estimated to be $101,554,469 in addition to AFUDC of $13,499,744. The 1996 Stipulation provides that actual costs in excess of the original estimated cost of $100,000,000 will be considered in future rate cases. The rate increase also reflects an authorized rate of return on common equity of 11.25%. Recovery of depreciation expense on CIAC and CAC is not reflected in the rate increase and the Company is no longer required to record, for financial statement purposes, such depreciation expense of approximately $700,000 annually, for the period that this rate increase is in effect. The 1996 Stipulation also allows the Company to continue to defer the transition obligation and interest associated with postretirement benefits as well as to continue to recover in rates the current service cost portion of the obligation for postretirement benefits. In addition, the 1996 Stipulation reflects $246,292 for the effect of the Purchased Water Adjustment Clause, for which a separate petition was filed in February 1996 and subsequently withdrawn due to the inclusion of this item in the 1996 Stipulation. In February 1995, Elizabethtown received a rate increase that yielded $5,300,000 in annual revenues as a result of a stipulation (1995 Stipulation). This Stipulation provided for an authorized rate of return on common equity of 11.5%. The increase also provided for recovery of the cost to finance $62,000,000 of construction projects since rates had last been established in March 1993 as well as increased costs for power, labor and benefits, primarily medical. Mount Holly In June 1995, Mount Holly petitioned the BPU for an increase in rates, to take place in two phases. The first phase was necessary to recover costs that were not reflected in rates last increased in 1986. The second phase would recover the cost of a new water supply, treatment and transmission system necessary to obtain water outside a designated portion of an aquifer currently used by Mount Holly, and to treat and pump the water into the Mount Holly distribution system. Management believes this project is the most cost-effective alternative available to Mount Holly to comply with recent state legislation that restricts the amount of water that can be withdrawn from an aquifer in certain areas of southern New Jersey. The project, referred to as the Mansfield project, is currently estimated to cost $16,500,000, excluding AFUDC. Mount Holly has expended $2,855,587 on the Mansfield Project as of December 31, 1996, excluding AFUDC. The land for the supply and treatment facilities has been purchased and test wells have been drilled and can produce the required supply. On October 5, 1995, the New Jersey Department of Environmental Protection (NJDEP) granted Mount Holly a water allocation diversion permit for four wells that are to be the water supply for this project. On October 20, 1995, another water purveyor requested of the NJDEP, and was subsequently granted, an adjudicatory hearing in opposition to the permit. Hearings on the matter before an administrative law judge are pending. A decision is expected later in 1997. The Company and Mount Holly believe that the permit in question will be upheld, but cannot predict with certainty the outcome of the matter. In the event that the objector is successful and the permit is rescinded, Mount Holly would meet its regulatory obligation to provide an alternate source of water by purchasing water from that purveyor. On January 24, 1996, the BPU approved a stipulation (Mount Holly Stipulation) for an increase in rates of $550,000, effective as of that date. The Mount Holly Stipulation has, effectively, concluded the first phase of the rate proceeding. 11. Commitments Elizabethtown is obligated, under a contract that expires in 2013, to purchase from the New Jersey Water Supply Authority (NJWSA) a minimum of 37 billion gallons of water annually. Effective July 1, 1997, the annual cost of water under contract will be $7,861,486. The Company purchases additional water from the NJWSA on an as-needed basis. The total cost of water purchased from the NJWSA was $8,695,370, $9,344,792 and $8,987,472 for 1996, 1995 and 1994, respectively. The Corporation has committments under long-term leases of $817,264 for 1997 and $12,330 for 1998. Substantially all of these committments expire in November 1997. Rent expense totaled $836,400, $820,481 and $829,562 for 1996, 1995 and 1994, respectively. Capital expenditures through 1999 are estimated to be $126,149,000, of which $125,327,000 is for Elizabethtown's and Mount Holly's utility plant and $822,000 is for non-utility expenditures. Joint Venture 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. 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 Pension Plan Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan), which covers most employees. Under the Company's funding policy, the Corporation makes contributions that meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The components of the net pension costs for the Retirement Plan are as follows: 1996 1995 1994 (Thousands of Dollars) Service cost - benefits earned during the year $ 1,341 $ 929 $ 1,068 Interest cost on projected benefit obligation 2,498 2,170 1,960 Return on Plan assets (4,569) (7,630) 944 Net amortization and deferral 1,229 4,890 (3,881) --------- ------- -------- Net pension costs $ 499 $ 359 $ 91 ========= ======= ======== Plan assets are invested in publicly traded debt and equity securities. The reconciliations of the funded status of the Plan to the amounts recognized in the Consolidated Balance Sheets are presented below: 1996 1995 (Thousands of Dollars) Market value of Plan assets $40,257 $ 37,171 ------- -------- Actuarial present value of Plan benefits: Vested benefits 28,645 26,115 Non-vested benefits 96 101 ------- -------- Accumulated benefit obligation 28,741 26,216 Projected increases in compensation levels 7,297 8,005 ------- -------- Projected benefit obligation 36,038 34,221 ------- -------- Excess of Plan assets over projected benefit obligation 4,219 2,950 Unrecognized net gain (4,049) (636) Unrecognized prior service cost 1,741 365 Unrecognized transition asset (1,898) (2,166) ------- -------- Prepaid pension expense $ 13 $ 513 ======= ======== The Corporation also has a supplemental retirement plan for certain management employees that is not funded. Benefit payments under this plan are made directly by the Corporation. At December 31, 1996, the projected benefit obligation of this supplemental plan was $1,416,802 and the net periodic benefit cost for 1996 was $254,232. The assumed rates used in determining the actuarial present value of the projected benefit obligations were as follows: 1996 1995 1994 Discount rate 7.50% 7.00% 8.00% Compensation increase 5.50% 5.50% 5.50% Rate of return on Plan assets 9.00% 9.00% 8.50% Other Postretirement Benefits The 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. Under SFAS 106, the costs of postretirement benefits are accrued for each year the employee renders service, based on the expected cost of providing such benefits to the employee and the employee's beneficiaries and covered dependents, rather than expensing these benefits on a pay-as-you-go basis. Based upon an independent actuarial study, the transition obligation, calculated under SFAS 106, was $7,255,745 as of January 1, 1993, the date of adoption of SFAS 106. The transition obligation is being amortized over 20 years. The following table details the postretirement benefit obligation at December 31: 1996 1995 (Thousands of Dollars) Retirees $ 2,015 $ 2,404 Fully eligible plan participants 4,107 6,366 -------- -------- Accumulated postretirement benefit obligation 6,122 8,770 Plan assets at fair value (764) (320) Unrecognized net gain 3,964 656 Unrecognized transition obligation (5,804) (6,167) ------- -------- Accrued postretirement benefit obligation $ 3,518 $ 2,939 ======= ======== The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1996 and for 1996 was 9%. This rate decreases linearly each successive year until it reaches 3.8% in 2006, after which the rate remains constant. The assumed rates used in determining the actuarial present value of the projected benefit obligations were as follows: 1996 1995 1994 Discount rate 7.50% 7.00% 8.00% A single percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, and the net postretirement service and interest cost by approximately $1,222,000 and $188,000, respectively. Based upon the independent actuarial study referred to above, the annual postretirement cost calculated under SFAS 106 is as follows: 1996 1995 1994 (Thousands of Dollars) Service cost - benefits earned during the year $ 423 $ 480 $ 376 Interest cost on accumulated postretirement benefit obligation 430 585 596 Return on Plan assets (72) Amortization of transition obligation 419 363 363 -------- -------- ------- Total 1,200 1,428 1,335 Deferred amount for regulated companies pending recovery (564) (824) (1,072) -------- -------- ------- Net postretirement benefit expense $ 636 $ 604 $ 263 ======== ======== ======= The rate increases allowed by the 1996 Stipulation and the Mount Holly Stipulation include as a recoverable expense the pay-as-you-go portion of postretirement benefits as well as the current service cost to the extent such current service cost is funded. Elizabethtown funded $347,151 in 1996 and $318,222 in 1995. Mount Holly funded $25,045 for 1996. These Stipulations allow Elizabethtown and Mount Holly to defer the amount accrued in excess of the portions being recovered in rates for consideration in future rate filings. As of December 31, 1996, the amount that has been deferred is $3,465,272. On January 8, 1997, the BPU issued a generic Order for regulated New Jersey utilities approving a stipulation related to the implementation of SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". The stipulation developed general guidelines for mechanisms which would be available for recovery of costs consistent with SFAS 106. Elizabethtown and Mount Holly will file for a rate increase in 1997, solely related to the recovery of SFAS 106 costs, to be effective by January 1, 1998. 13. Quarterly Financial Data (Unaudited) A summary of financial data for each quarter of 1996 and 1995 follows: Primary Fully Diluted Operating Operating Net Earnings Earnings Quarter Revenues Income Income Per Share Per Share - ------- --------- --------- ------ --------- ------------ (Thousands of Dollars Except Per Share Amounts) 1996 1st $ 25,761 $ 5,568 $ 3,176 $ .42 $ .42 2nd 27,265 6,355 3,918 .51 .51 3rd 28,173 6,977 4,454 .58 .57 4th 29,210 7,387 3,525 .45 .46 -------- --------- --------- ------ ------- Total $110,409 $ 26,287 $ 15,073 $ 1.96 $ 1.96 ======== ========= ========= ====== ======= 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 ========= ======== ========= ====== ====== Water utility revenues are subject to seasonal fluctuation due to normal increased water 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, 1996 and 1995, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Parsippany, New Jersey February 19, 1997
E'TOWN CORPORATION AND SUBSIDIARIES OTHER FINANCIAL AND STATISTICAL DATA
1996 1995 1994 1993 1992 Utility Plant (Thousands) Utility Plant - net $ 560,024 $ 507,858 $ 437,456 $ 373,293 $ 347,253 Construction Expenditures (excluding AFUDC) 55,125 73,789 69,981 32,517 33,293 Capitalization (Thousands) Shareholders' Equity 183,512 177,081 152,971 128,374 102,750 Preferred Stock 12,000 12,000 12,000 12,000 12,000 Debt (1) 262,511 220,703 177,115 154,448 161,541 Total Capitalization $ 458,023 $ 409,784 $ 342,086 $ 294,822 $ 276,291 Capitalization Ratios Common Stock 40% 43% 44% 44% 37% Preferred Stock 3% 3% 4% 4% 4% Debt (1) 57% 54% 52% 52% 9% Common Stock Data Earnings Per Share: Primary $ 1.96 $ 2.16 $ 1.95 $ 2.59 $ 2.21 Fully Diluted 1.96 2.14 1.94 2.54 2.18 Dividends Per Share 2.04 2.04 2.04 2.01 2.00 Book Value Per Share $ 23.58 $ 23.54 $ 23.17 $ 22.76 $ 21.14 Average Shares Outstanding: Primary 7,674,400 7,095,183 6,210,409 5,337,939 4,627,814 Fully Diluted 7,966,107 7,393,796 6,519,352 5,651,808 4,950,768 Operating Statistics Revenues (Thousands) General Customers $ 68,797 $ 67,455 $ 62,923 $ 63,100 $ 55,570 Other Water Systems 18,929 18,720 18,082 17,187 15,080 Industrial Wholesale 7,869 7,947 7,458 6,652 6,044 Fire Service/Miscellaneous 14,814 14,276 13,570 13,057 12,473 Total Revenues $ 110,409 $ 108,398 $ 102,033 $ 99,996 $ 89,167 Net Income $ 15,073 $ 15,296 $ 12,088 $ 13,830 $ 10,231 Water Sales - Millions of Gallons (mg) General Customers 22,890 23,999 23,551 23,883 22,062 Other Water Systems 15,049 15,569 15,691 15,109 14,118 Industrial Wholesale 3,567 3,673 3,568 3,213 3,145 System Use and Unaccounted For 6,444 6,402 6,570 5,453 5,843 Total Water Sales 47,950 49,643 49,380 47,658 45,168 System Delivery by Source - mg Surface 41,485 42,646 42,534 40,742 38,558 Wells 6,328 6,764 6,690 6,776 6,480 Purchased 137 233 156 140 130 Total System Delivery 47,950 49,643 49,380 47,658 45,168 Millions of Gallons Pumped: Average Day 131 136 135 131 123 Maximum Day 170 183 182 191 159 General Information Meters in Service 197,791 195,375 191,622 188,677 185,028 Miles of Main 2,899 2,869 2,828 2,800 2,738 Fire Hydrants Served 16,012 15,650 15,291 14,909 14,400 Total Employees 400 398 386 384 379 (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.
Quarter-1996 1st 2nd 3rd 4th Closing Price Low: $ 27.25 $ 26.50 $ 25.62 $ 28.50 High: $ 30.12 $ 29.37 $ 27.00 $ 31.62 Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51 Quarter-1995 Closing Price Low: $ 24.87 $ 25.37 $ 25.62 $ 27.00 High: $ 26.37 $ 27.25 $ 27.00 $ 30.12 Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51
EX-21 8 Exhibit 21 SUBSIDIARIES OF THE CORPORATION All subsidiaries of E'town Corporation as of December 31, 1996 are as follows: State of Name Incorporation Elizabethtown Water Company New Jersey E'town Properties, Inc. Delaware Applied Watershed Management, LLC (1) (1) Joint venture formed as a Limited Liability Company. The company is 65%-owned by E'town Corporation. EX-21 9 Exhibit 21 SUBSIDIARIES OF THE COMPANY All subsidiaries of Elizabethtown Water Company as of December 31, 1996 are as follows: State of Name Incorporation The Mount Holly Water Company New Jersey EX-23 10 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in E'town Corporation's Registration Statement No. 333-16713 on Form S-3 and Nos. 33-49812, 33-44210 and 33-42509 on Forms S-8 of our reports dated February 19, 1997 and to the incorporation by reference in Elizabethtown Water Company's Registration Statement Nos. 33-51917 and 33-68578 on Forms S-3 and No. 33-19600 on Form S-8 of our report dated February 19, 1997, 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, 1996. /s/ Deloitte & Touche LLP Parsippany , NJ March 26, 1997 EX-27 11
UT 0000764403 E'TOWN CORPORATION YEAR DEC-31-1996 DEC-31-1996 PER-BOOK 560,024,147 14,112,969 34,764,783 46,305,448 0 655,207,347 144,923,261 (3,844,809) 42,433,905 183,512,357 0 12,000,000 193,481,425 69,000,000 0 0 30,000 0 0 0 197,183,565 655,207,347 110,409,378 6,790,979 77,331,279 84,122,258 26,287,120 2,915,645 29,202,765 13,316,497 15,886,268 813,000 15,073,268 15,634,106 13,799,531 17,664,490 $1.96 $1.96
EX-27 12
UT 0000032379 ELIZABETHTOWN WATER COMPANY YEAR DEC-31-1996 DEC-31-1996 PER-BOOK 560,024,147 80,976 34,989,771 45,684,108 0 640,779,002 15,740,602 116,972,646 49,579,584 182,292,832 0 12,000,000 181,933,425 69,000,000 0 0 30,000 0 0 0 195,522,745 640,779,002 110,358,349 7,360,461 76,154,447 83,514,908 26,843,441 2,715,285 29,558,726 12,803,562 16,755,164 813,000 15,942,164 16,342,106 13,011,069 20,605,513 0 0
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