-----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, EnWOr5bnylWIuHaygAUuDpQxOUGJIpEeAryUBskdw8VCK81L+J/HGSeBA42tn3Jh 774Piux88hNgn13L73+wwA== 0000764403-00-000003.txt : 20000331 0000764403-00-000003.hdr.sgml : 20000331 ACCESSION NUMBER: 0000764403-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ETOWN CORP CENTRAL INDEX KEY: 0000764403 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: SEC FILE NUMBER: 001-11023 FILM NUMBER: 585437 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 CITY: WESTFIELD STATE: NJ ZIP: 07091 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: SEC FILE NUMBER: 000-00628 FILM NUMBER: 585438 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 BODY OF FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-11023 E'TOWN CORPORATION (Exact name of registrant as specified in its charter) New Jersey 22-2596330 (State of incorporation) (I.R.S. Employer Identification No.) 600 South Avenue Westfield, New Jersey 07090 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (908)654-1234 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, without par value New York Stock Exchange Commission file number 0-628 ELIZABETHTOWN WATER COMPANY (Exact name of registrant as specified in its charter) New Jersey 22-1683171 (State of incorporation) (I.R.S. Employer Identification No.) 600 South Avenue Westfield, New Jersey 07090 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(908)654-1234 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorp- orated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___X___ On December 31, 1999, the aggregate market value of E'town Corporation's voting stock held by non-affiliates was $543,325,968. On December 31, 1999, there were 8,728,128 shares of Common Stock outstanding, exclusive of treasury shares or shares held by subsidiaries of E'town Corporation. Note: All of the Common Stock of Elizabethtown Water Company is owned by E'town Corporation. Parts II and IV incorporate information by reference from the Annual Report to Shareholders of E'town Corporation for the Year Ended December 31, 1999. E'TOWN CORPORATION ELIZABETHTOWN WATER COMPANY 1999 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I Page Item 1. Business 1 Organization 1 Pending Merger 1 Service Area and Customers 2 Water Supply 2 Water Treatment Facilities and Water Quality Regulations 3 Transmission and Distribution 4 Energy Supply 4 Environmental Matters 4 Franchises 5 Employee Relations 5 Rate Matters 5 Real Estate Matters 6 Other Matters 7 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for the Corporation's Common Stock and Related Stockholder Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 PART III Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 17 Item 12. Security Ownership of Certain Beneficial Owners and Management 22 Item 13. Certain Relationships and Related Transactions 23 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 23 SIGNATURES 25 AUDITORS' REPORT & SUPPLEMENTAL SCHEDULE 27 EXHIBIT INDEX 29 APPENDIX I Elizabethtown Water Company and Subsidiary Consolidated Financial Statements for the Years Ended December 31, 1999, 1998 and 1997 and Independent Auditors' Report E'TOWN CORPORATION ELIZABETHTOWN WATER COMPANY Annual Report on Form 10-K For the year ended December 31, 1999 PART I Item 1. Business ORGANIZATION E'town Corporation (E'town or Corporation) was originally incorporated under the laws of the State of New Jersey in 1985 to serve as a holding company for Elizabethtown Water Company (Elizabethtown or Company) and its wholly owned subsidiary, The Mount Holly Water Company (Mount Holly). Elizabethtown and Mount Holly are regulated water utilities which, as a consolidated entity, are referred to herein as Elizabethtown Water Company (Elizabethtown Water Company). Applied Wastewater Management (AWWM) is a regulated wastewater utility acquired in June 1998 and is engaged in the ownership and operation of water and wastewater facilities. Elizabethtown, Mount Holly and AWWM are public utilities and are regulated by the New Jersey Board of Public Utilities (BPU). Elizabethtown, Mount Holly and AWWM comprise the Regulated Utilities segment of the business for financial and management reporting purposes. Liberty Water Company (Liberty) is a wholly owned, non-regulated subsidiary of E'town formed in July 1998 to operate the water system of the City of Elizabeth, New Jersey under a 40-year operating contract. Edison Water Company (Edison) is a wholly owned, non-regulated subsidiary of E'town formed in July 1997 to operate the water system of the Township of Edison, New Jersey under a 20-year operating contract. Edison and Liberty comprise the Contract Operations segment of the business for financial and management reporting purposes. Also acquired in June 1998, Applied Water Management, Inc. (AWM), is engaged in the design and construction of wastewater facilities as well as in the pumping and hauling of wastewater materials. This entity represents the Engineering/Operations and Construction segment of the business for financial and management reporting purposes. E'town Properties, Inc. (Properties) was incorporated in 1987 as a wholly owned and non-regulated subsidiary of E'town to acquire, develop and sell real estate holdings. E'town provides the financing for its non-regulated subsidiaries through issuance of short- and long-term debt as well as through public equity offerings for capital contributions to all subsidiaries. E'town and Properties comprise the Financing and Investment segment of the business for financial and management reporting purposes. PENDING MERGER On November 21, 1999, E'town entered into an agreement (Merger Agreement) with Thames Water Plc (Thames Water) under which Thames Water has agreed, subject to certain conditions, to acquire E'town for $68 per share in cash or approximately $607 million. Thames Water will also assume the debt of E'town. The acquisition will take the form of a merger (Merger) of E'town with a newly formed subsidiary of Thames Water and E'town will be the surviving company. Regulated Utilities Segment Elizabethtown is a New Jersey corporation, one of whose predecessors was first incorporated in 1854. The present corporation was formed in 1961 as a result of a consolidation of Elizabethtown Water Company Consolidated and Plainfield-Union Water Company. Elizabethtown owns all of the common stock of Mount Holly. The assets and operating results of Elizabethtown constitute the predominant portions of E'town's assets and operating results. - -1- SERVICE AREA AND CUSTOMERS At December 31, 1999, Elizabethtown and Mount Holly furnished water service on a retail basis to general customers and to industrial customers totaling 203,711 in 54 municipalities in the counties of Union, Middlesex, Somerset, Mercer, Hunterdon, Ocean, Morris and Burlington in New Jersey. AWWM serves 1,145 wastewater and 166 water customers. Elizabethtown also provides, on a wholesale basis, a portion of the water requirements of seven additional municipalities with their own retail water systems and, of three other investor-owned water companies. Water for fire protection service is provided to various municipalities and also to commercial and industrial establishments. At December 31, 1999, Edison and Liberty served 29,051 customers under their contracts to operate the water systems of the Township of Edison and the City of Elizabeth, both in New Jersey. The operating revenues of E'town by major classification of customer for the twelve months ending December 31, 1999 are as follows: General customers 57.1% Other water systems 13.3% Industrial wholesale customers 4.6% Fire service/miscellaneous 10.5% Contract operations 7.0% Engineering, operations and construction 7.5% ----- Total 100.0% ===== The water systems are substantially all metered except for fire service. Additional operating statistics appear in Item 6. WATER SUPPLY The water supply systems of Elizabethtown and Mount Holly are physically separate. During 1999, Elizabethtown's pumpage averaged 134.8 million gallons per day (MGD) and Mount Holly's pumpage averaged 3.9 MGD. Elizabethtown and Mount Holly believe they have sufficient water supply sources to meet the current and expected future needs of their customers. In 1999, surface water sources supplied approximately 90% of Elizabethtown's supply with wells supplying the remaining 10%. All of Mount Holly's water had been produced from wells until March,1998 at which time it began purchasing 1.0 million gallons per day from another purveyor on a temporary basis. Substantially all of Elizabethtown's surface water is purchased under a long-term contract with the New Jersey Water Supply Authority (NJWSA) which requires Elizabethtown to purchase (i) 32 MGD from the state-owned Delaware and Raritan Canal which transports water from the Delaware River Basin plus (ii) 70 MGD from the Raritan River Basin which includes the state-owned Spruce Run-Round Valley Reservoir System. The safe yield of the Raritan River Basin and the Delaware and Raritan Canal is 225 MGD of which 150 MGD is presently allocated to Elizabethtown and others. The NJWSA has available, and Elizabethtown purchases, water above the Company's minimum purchase obligation on an as-needed basis. In 1998, Mount Holly commenced a construction project, called the Mansfield Project, to comply with New Jersey legislative restrictions to obtain alternative water supplies, thereby reducing its water pumpage from an aquifer, which had been subject to over-pumping by Mount Holly and various local purveyors in a portion of southern New Jersey. A portion of this project was placed into service in the third quarter of 1998 and the remaining portion of the project was placed into service in late December 1999. - -2- WATER TREATMENT FACILITIES AND WATER QUALITY REGULATIONS Elizabethtown owns and operates two treatment plants at the confluence of the Raritan and Millstone Rivers adjacent to the Delaware and Raritan Canal to treat surface water purchased from the NJWSA. The plants can withdraw water from any of the above sources, which is an advantage in the event that one source becomes temporarily unavailable due to poor water quality. The Raritan-Millstone Plant (Plant), Elizabethtown's primary water treatment plant, was placed in service in 1931 and has continually been upgraded since that time. The Plant has a production capacity of 155 MGD. The Canal Road Water Treatment Plant (Canal Road), Elizabethtown's secondary water treatment plant, was placed in service in October 1996 to increase Elizabethtown's sustainable production capacity and provide the ability to continue to meet water quality regulations. Canal Road has an initial rated production capacity of 40 MGD. In September 1999, Tropical Storm Floyd flooded the Plant which required the facility to be withdrawn from service for approximately 3 days. During that time, water demands were met by Canal Road, wells and by purchasing additional water from adjacent water utilities. Elizabethtown also operates smaller treatment facilities to treat groundwater produced by certain wells. Mount Holly operates similar groundwater treatment facilities. Both the United States Environmental Protection Agency (EPA) and the DEP regulate the operation of Elizabethtown's and Mount Holly's water treatment and distribution systems and the quality of the water Elizabethtown and Mount Holly deliver to their customers. Currently, Elizabethtown and Mount Holly believe they are in compliance, in all material respects, with all present federal and state water quality standards, including all regulations promulgated to date by the EPA pursuant to the Federal Safe Drinking Water Act, as amended (SDWA), and by the DEP pursuant to similar state legislation. Elizabethtown has responded in recent years to water quality regulations promulgated by DEP and the EPA by replacing groundwater supplies with increased supplies of surface water. The Company expects this trend to continue because it is preferable from the standpoint of operational efficiency and cost to modify treatment processes and facilities at one or two large plants than to constantly upgrade treatment facilities at multiple well sites. Water Quality Regulations As required by the SDWA, the EPA has established maximum contaminant levels (MCLs) for various substances found in drinking water. As authorized by similar state legislation, the DEP has set MCLs for certain substances which are more restrictive than the MCLs set by the EPA. In certain cases, the EPA and DEP have also mandated that certain treatment procedures be followed in addition to satisfying MCLs established for specific contaminants. The DEP is also the EPA's agent for enforcing the SDWA in New Jersey and, in that capacity, monitors the activities of Elizabethtown and Mount Holly and reviews the results of water quality tests performed by Elizabethtown and Mount Holly for adherence to applicable regulations. Regulations generally applicable to water utilities, including Elizabethtown and Mount Holly, include the Lead and Copper Rule (LCR), the MCLs established for various volatile organic compounds (VOCs), the MCLs proposed for radionuclides and the Surface Water Treatment Rule (SWTR). Lead and Copper Rule The LCR requires Elizabethtown and Mount Holly to test the quantity of lead and copper in drinking water at the customer's tap and, if certain contaminant levels (action levels) are exceeded, to notify customers and initiate a public information campaign advising customers how to minimize exposure to lead and copper. The LCR also requires Elizabethtown to add corrosion inhibitors to water to minimize leaching of lead from piping, faucets and soldered joints into water consumed at the tap. Corrosion inhibitor facilities for Elizabethtown were completed in 1996. The Company is in compliance with LCR requirements. - -3- Volatile Organic Compounds VOCs include various substances (primarily synthetic organic solvents) which have percolated into groundwater aquifers from surface sources. Elizabethtown has found VOCs in excess of the applicable MCLs in certain of its wells and has either suspended the use of such wells or constructed aeration towers which remove such contaminants from the water by venting them into the atmosphere. Because underground water flows are difficult to map, it is difficult to predict when and where contamination may occur. To the extent that contamination in excess of applicable MCLs occurs at wells lacking aeration towers, Elizabethtown will consider building aeration towers, if feasible and cost effective, or consider closing such wells, thereby increasing the Company's reliance on surface water. To date, Mount Holly has not been affected by VOC contamination. Radionuclides Radionuclides are naturally occurring radioactive substances (primarily radon) found in groundwater. Like VOCs, radon can be removed from groundwater using aeration towers. If the MCLs proposed for all radionuclides are finally adopted, Elizabethtown believes that it will abandon wells with aggregate production capacity of approximately 5 MGD, thereby further increasing Elizabethtown's reliance on surface water. Elizabethtown currently owns and operates wells with an aggregate safe daily yield of 19 MGD. In 1999 Elizabethtown removed certain wells from service due to an exceedance of MCLs. The customers of these wells were then connected to the Elizabethtown system. Surface Water Treatment Rule The operations of Elizabethtown's Plant and Canal Road are subject to the SWTR.Improvements to the facilities are made when necessary in order to maintain compliance with the SWTR. TRANSMISSION AND DISTRIBUTION As of December 31, 1999, Elizabethtown Water Company's transmission and distribution system included 2,998 miles of transmission and distribution mains. Mains range in size up to 60 inches, substantially all of which are either ductile iron, cast iron or pre stressed concrete pipe. Elizabethtown conducts an ongoing program to clean and line its older cast iron mains the cost of which is capitalized and has been included in rate base in stipulations settling recent rate cases. On an ongoing basis, Elizabethtown assesses the capacity of its system to maintain adequate pressures and initiates plans to construct pumping, transmission and storage facilities as needed. ENERGY SUPPLY Elizabethtown pumps most of its water with electric power purchased from two major electric utilities. The Company has replaced certain electric pumps with natural gas-fired pumps over the last several years to reduce energy costs. Elizabethtown also has other diesel powered pumping and generating facilities at its major treatment plants and at certain transfer stations to provide basic service during possible electrical shortages. Elizabethtown has not, to date, experienced any shortage of electric energy, natural gas or diesel fuel to operate its pumps and has cooperated with its electric suppliers during their peak periods by operating non-electrical pumping facilities upon request. ENVIRONMENTAL MATTERS Elizabethtown and Mount Holly are also subject to regulation by the DEP with respect to water supply plans and specifications for the construction, improvement, alteration and operation of public water supply systems and with respect to the quality of any residuals from treatment plants. As a normal byproduct of treating surface water, Elizabethtown's existing surface water treatment plants generate silt removed from untreated river water plus residue from chemicals used in the treatment process. Historically, Elizabethtown had disposed of this material in landfills. As a result of revised regulations governing landfills, Elizabethtown has been reusing this material on site for flood protection and is presently removing some material off-site for beneficial reuse. Under New Jersey law, environmental matters are addressed by the DEP before diversion allowances or other water supply projects are authorized. To-date, Elizabethtown has been able to construct all plant facilities and obtain all diversion authorizations necessary to maintain proper service. Mount Holly has also been able to construct all facilities and obtain all necessary diversion authorizations. - -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 A substantial portion of the operating personnel of Elizabethtown and Mount Holly, or less than half of all E'town employees, are covered by union contracts. The contracts between the Company and the Utility Workers Union of America (A.F.L.-C.I.O.) were renegotiated on February 1, 1999 and will expire on January 31, 2003. The contract provides for wage increases of 1.5% on the first of February and August beginning in 1999 through August of 2002. The Company considers relations with both union and nonunion employees to be satisfactory. RATE MATTERS Elizabethtown, Mount Holly and AWWM are subject to regulation by the New Jersey Board of Public Utilities (BPU) with respect to the issuance and sale of securities, rates and service, classification of accounts, mergers, and other matters. Rate relief is sought periodically to cover the cost of increased operating expenses, increases in financing expenses due to additional investments in utility plant and other costs of doing business. Elizabethtown In December 1997 the BPU adopted a Stipulation for rate increases for Elizabethtown and Mount Holly, effective January 1, 1998, for the full recovery of costs associated with SFAS No. 106 "Accounting for Employer's Postretirement Benefits," on an accrual basis less the costs associated with SFAS No. 106 expenses previously recovered in rates. The total increases in annual operating revenues resulting from these Stipulations are $.39 million for Elizabethtown and $.02 million for Mount Holly. In accordance with the terms of the pending Merger Agreement with Thames Water, Elizabethtown will postpone filing for rate relief to recover additional construction and financing costs incurred since base rates were last established in October 1996 until at least August 2000. Mount Holly In 1998, Mount Holly commenced a construction project, called the Mansfield Project, to comply with New Jersey legislative restrictions to obtain alternative water supplies, thereby reducing its water pumpage from an aquifer, which had been subject to over-pumping by Mount Holly and various local purveyors in a portion of southern New Jersey. A portion of this project was placed into service in the third quarter of 1998 and the remaining portion of the project was placed into service in late December 1999. To settle an appeal initiated by another water purveyor in 1995 concerning the diversion rights for the Mansfield Project, Mount Holly signed a Stipulation in 1997 with the purveyor, the DEP and other parties, requiring Mount Holly to purchase one million gallons per day from the other purveyor during the two-year period that the Mansfield Project was being constructed. Purchases began during March of 1998, after completion of an interconnection and ended in January 2000 shortly after the Mansfield Project went into service. In September 1997 Mount Holly filed a petition with the BPU to establish a Purchased Water Adjustment Clause (PWAC) to reflect the cost of water purchased from the other purveyor under the aforementioned Stipulation Agreement. In May 1998, the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.3 million or 38.9%. - -5- Effective January 1, 2000, Mount Holly received an increase in annual rates of $1.9 million. This increase included costs for Mount Holly's Mansfield Project that was placed in service at the end of December 1999. The rate decision also reflected the elimination of the PWAC. After the elimination of the PWAC the net rate increase was $.5 million. This increase also reflects additional construction and financing costs, as well as increases in operating costs, since base rates were last established in January 1996. REAL ESTATE MATTERS Financing and Investment Segment E'town is in the process of selling its remaining parcels of undeveloped land. Several parcels have been sold and the proceeds are being invested into water and wastewater projects. The eventual sale of these parcels is contingent upon the purchaser obtaining various approvals for development. This process could take up to several years. As of December 31, 1999, all the remaining properties are under contract to be sold. Contract Operations Segment In July 1998 E'town, through Liberty, entered into a contract with the City of Elizabeth (Elizabeth), New Jersey to operate its water system under a 40-year contract serving approximately 17,600 customers. Under the contract, Liberty made payments to Elizabeth of $19.7 million in 1998 and $12 million in 1999 and is obligated to make a payment of $19 million in June 2000. Also under the terms of the contract, Liberty will deposit $57.8 million from customer collections over the 40-year contract into a fund administered by Elizabeth (Fund Deposits), of which $52.3 million is due after 2012, to be used by Elizabeth to pay for capital improvements or for other water system purposes. Liberty is responsible for $7.45 million of construction expenditures, primarily for meter replacements, over the life of the contract. Of these total commitments, approximately $2.5 million is expected to be expended in the next three years. Over the life of the contract, E'town will receive all water revenues from billing the customers of the water system in accordance with rate increases set forth in the contract except for the Fund Deposits discussed above. E'town is also responsible for all operating expenses as well as the capital expenditures discussed above. Performance by Liberty of the contract provisions is guaranteed by E'town. In 1997 E'town, through Edison, entered into a contract with the Township of Edison, New Jersey to operate its water system under a 20-year contract serving approximately 11,500 customers. Edison bills and receives all water revenues generated as a result of operating the water system and pays: (i) all operating and maintenance expenses for the water system, (ii) certain annual payments to the Township of Edison and (iii) costs of specific capital improvements. Aggregate annual payments and the estimated costs of capital improvements are expected to be approximately $25 million during the 20-year life of the contract of which $12.5 million has been spent as of December 31, 1999. Of the total, approximately $2.9 million is expected to be expended in the next three years. An initial payment of $5.7 million was made upon the closing in June 1997. Performance by Edison of the contract provisions is guaranteed by E'town. If the Elizabeth or Edison contracts were terminated by either the Township of Edison or the City of Elizabeth, the unamortized balance of the concession fees and amounts paid for additional capital improvements would be refunded to Liberty and Edison in accordance with the contracts. Engineering/ Operations and Construction Segment In June 1998 the Corporation purchased AWM which provides "one-stop shopping" for water and wastewater services to residential and commercial developers. These services include the design, construction and operation of water and wastewater facilities and, in some instances, purchase of such utilities from developers at project build-out by AWWM, thereby adding to E'town's regulated utility customer base. AWM expects to incur capital expenditures of $2.0 million during the next three years. These expenditures consist primarily of vehicles and equipment used in the construction and waste hauling operations. In 1999, AWM acquired a septic services business for $.7 million and a group of small, non-regulated wastewater treatment facilities for $1.0 million. - -6- OTHER MATTERS In August 1999 the Governor of the State of New Jersey declared a "Water Emergency" for the entire state and issued mandatory restrictions on outdoor, nonessential water use. Due to unusually low levels of rainfall during June and July the Governor deemed these measures necessary to preserve the integrity of several of the state's reservoir and well supplies. Customers of Elizabethtown, Mount Holly, Edison and Liberty were subject to these restrictions. The water systems operated by E'town's subsidiaries at all times had, and continue to have, adequate supplies of water to meet the needs of their customers. These restrictions affected the amount of water consumed by a substantial number of the Corporation's customers. The restrictions were lifted in October 1999. In September 1999, Elizabethtown withdrew its primary water treatment plant, the Raritan-Millstone Water Treatment Plant, from service as a result of flooding from Tropical Storm Floyd. For several days, Elizabethtown had difficulty maintaining adequate water pressure in portions of its distribution system because overall system production levels were substantially less than normal. Customers in portions of a few municipalities were without water service for approximately 3 days. Costs incurred to repair and replace equipment damaged by the flood and to respond to inquiries by customers, regulatory bodies and the media have been deferred and are expected to be recoverable through insurance. The Company has incurred $7.0 million of flood-related expenditures and has received an advanced reimbursement of $2.0 million from its insurance carrier. The remaining $5.0 million of flood-related expenditures is reported on the Consolidated Balance Sheets as a deferred charge at December 31, 1999. The loss of revenues due to below normal water consumption is not recoverable through insurance. In June 1999 Mount Holly purchased Homestead Water Utility, Inc. and AWWM purchased Homestead Treatment Utility, Inc. for a combined purchase price of $1.8 million. The entities provide water and wastewater services to approximately 800 customers of the Homestead community in southern New Jersey. Executive Officers of the Corporation and Elizabethtown See Item 10 for disclosure of the executive officers of E'town and Elizabethtown. - -7- Item 2. Properties All principal plants and other materially important units of property of the Corporation are owned in fee. The Corporation considers such property to be in good operating condition. Item 3. Legal Proceedings On September 23, 1999, two parties filed separate class action lawsuits for compensatory damages and related fees on behalf of themselves and similarly situated residential and commercial customers against Elizabethtown Water Company, Edison Water Company and Liberty Water Company. The lawsuit alleges negligence regarding the quantity and quality of water services provided by the Corporation during the period in September 1999 when Elizabethtown's primary water treatment plant was flooded from Tropical Storm Floyd and was withdrawn from service for approximately 3 days. Elizabethtown has notified its insurance carrier of the lawsuit and has filed a motion for summary judgment to dismiss the lawsuit as a class action proceeding prior to answering the allegations. In March 2000, the New Jersey Superior Court (NJSC) ruled that in the event the lawsuit is not dismissed, the case be referred to the BPU for purposes of investigating the matter and reporting its findings to the NJSC. The NJSC, in view of the BPU's findings, will then determine what, if any, damages were suffered by the plaintiffs and what liability, if any, rests with Elizabethtown. E'town Corporation maintains that such allegations are without merit and believes that the plaintiffs' chances of prevailing are not significant. The Corporation, in the ordinary course of business, periodically becomes involved in litigation. There is currently no litigation in progress, other than the items discussed above, regarding environmental or other issues in which an outcome adverse to the Corporation could have a material impact on the financial statements. Item 4. Submission of Matters to a Vote of Security Holders None PART II Item 5. Market for the Corporation's Common Stock and Related Stockholder Matters This information is included in Exhibit 13, filed herewith, and is incorporated herein by reference. All of the common stock of Elizabethtown Water Company is owned by E'town. - -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 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- Utility Plant (Thousands) Utility Plant - net $ 650,771 $ 604,899 $ 572,785 $ 560,024 $ 507,858 Construction Expenditures (excluding AFUDC) 56,635 43,500 24,612 55,125 73,789 Total Assets 741,187 683,328 646,318 640,779 580,808 Capitalization (Thousands) Shareholder's Equity 220,461 208,573 193,354 182,293 176,685 Preferred Stock 12,000 12,000 12,000 12,000 12,000 Debt (1) 296,823 267,178 249,974 250,963 208,952 Total Capitalization $ 529,284 $ 487,751 $ 455,328 $ 445,256 $ 397,637 Capitalization Ratios Common Stock 42% 43% 42% 41% 44% Preferred Stock 2% 2% 3% 3% 3% Debt (1) 56% 55% 55% 56% 53% Earnings to Fixed Charges Ratio 2.94 3.33 2.91 2.40 2.77 Earnings to Fixed Charges and Preferred Dividends 2.73 3.09 2.71 2.22 2.54 Earnings Applicable to Common Stock (Thousands) $ 20,592 $ 23,955 $ 20,092 $ 15,942 $ 16,512 Operating Statistics Revenues (Thousands) General Customers $ 92,111 $ 87,698 $ 85,195 $ 68,797 $ 67,455 Other Water Systems 21,597 22,181 21,900 18,929 18,720 Industrial Wholesale 7,531 8,148 8,451 7,869 7,947 Fire Service/Miscellaneous 17,067 16,820 16,242 14,763 14,276 Total Revenues $ 138,306 $ 134,847 $ 131,788 $ 110,358 $ 108,398 Water Sales - Millions of Gallons (mg) General Customers 25,842 24,609 24,333 22,890 23,999 Other Water Systems 13,806 14,397 14,504 15,049 15,569 Industrial Wholesale 3,270 3,482 3,533 3,567 3,673 System Use and Unaccounted For 7,717 6,933 6,948 6,444 6,402 Total Water Sales 50,635 49,421 49,318 47,950 49,643 System Delivery by Source - mg Surface 44,520 48,067 42,585 41,485 42,646 Wells 5,729 1,072 6,689 6,328 6,764 Purchased 386 282 44 137 233 Total System Delivery 50,635 49,421 49,318 47,950 49,643 Millions of Gallons Pumped: Average Day 139 135 135 131 136 Maximum Day 230 196 205 170 183 General Information Customers 203,711 200,251 197,663 195,482 192,617 Miles of Main 2,998 2,953 2,926 2,899 2,869 Fire Hydrants Served 17,644 16,402 16,228 16,012 15,650 ================================================================================ (1) Includes long-term debt, notes payable and long-term debt-current portion. See Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations and Notes to Consolidated Financial Statements appearing elsewhere in this report. - -9- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS E'town Corporation This information is included in Exhibit 13, filed herewith, and is incorporated by reference. Elizabethtown Water Company and Subsidiary The water utility operations of Elizabethtown Water Company (Elizabethtown) and its subsidiary, The Mount Holly Water Company (Mount Holly), presently constitute the major portion of E'town Corporation (E'town or Corporation), assets and earnings. Elizabethtown and Mount Holly are regulated water companies which, as a consolidated entity are referred to herein as Elizabethtown Water Company (Company). Mount Holly contributed about 4% of the Company's consolidated operating revenues for 1999. The following analysis sets forth significant events affecting the financial condition of Elizabethtown at December 31, 1999, and the results of operations for the years ended December 31, 1999 and 1998. LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures Program Elizabethtown In 1999 net capital expenditures were $55.2 million, primarily for water utility plant. Elizabethtown's three-year capital program includes $62.0 million for routine projects (services, hydrants, system rehabilitation and main extensions not funded by developers) and $73.1 million for transmission system upgrades, a new operations center, expansion of the Canal Road Water Treatment Plant (Canal Road) and other projects. Canal Road will be expanded to provide for enhanced system reliability and to accomodate customer growth. Canal Road was designed as a 40 million gallon per day (MGD) plant, expandable to 200 MGD. Mount Holly During the next three years, Mount Holly expects to spend $4.7 million, of which $3.3 million is for routine projects (services, hydrants and main extensions not funded by developers). In 1998 Mount Holly commenced a construction project, called the Mansfield Project, to comply with New Jersey legislative restrictions to obtain alternative water supplies, thereby reducing its water pumpage from an aquifer, which had been subject to over-pumping by Mount Holly and various local purveyors in a portion of southern New Jersey. A portion of this project was placed into service in the third quarter of 1998 and the remaining portion of the project was placed into service in late December 1999. To settle an appeal initiated by another water purveyor in 1995 concerning the diversion rights for the Mansfield Project, Mount Holly signed a Stipulation in 1997 with the purveyor, the New Jersey Department of Environmental Protection (DEP) and other parties, requiring Mount Holly to purchase one million gallons per day from the other purveyor during the two-year period that the Mansfield Project was being constructed. Purchases began during March of 1998, after completion of an interconnection and ended in January 2000 shortly after the Mansfield Project went into service. In September 1997 Mount Holly filed a petition with the BPU to establish a Purchased Water Adjustment Clause (PWAC) to reflect the cost of water purchased from the other purveyor under the aforementioned Stipulation agreement. In May 1998, the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.3 million or 38.9%. - -10- Effective January 1, 2000, Mount Holly received an increase in annual rates of $1.9 million. This increase included costs for Mount Holly's Mansfield Project that was placed in service at the end of December 1999. The rate decision also reflected the elimination of the PWAC. After the elimination of the PWAC the net rate increase was $.5 million. This increase also reflects additional construction and financing costs, as well as increases in operating costs, since base rates were last established in January 1996. Capital Resources During 1999 Elizabethtown financed 38.2% of its capital expenditures from internally generated funds (after payment of common stock dividends). The balance was financed with a combination of short-term borrowings under lines of credit and proceeds from capital contributions from E'town (funded by issuances of Common Stock under the Corporation's Dividend Reinvestment and Stock Purchase Plan). For the three-year period ending December 31, 2002, Elizabethtown estimates that 52% of its currently projected capital expenditures are expected to be financed with internally generated funds (after payment of common stock dividends). The balance will be financed with a combination of proceeds from the sale of E'town common stock or capital contributions from Thames Water after the pending Merger, long-term debt, proceeds of tax-exempt New Jersey Economic Development Authority (NJEDA) bonds and short-term borrowings. Elizabethtown expects to pursue additional tax-exempt financing to the extent that final allocations are granted by the NJEDA. In November 1998 Mount Holly closed on loan agreements that will make available up to $13.2 million in proceeds from the issuance of unsecured notes through the New Jersey Environmental Infrastructure Trust Financing Program. This program provides financing through two loans. The first loan, in the amount of $7.3 million, is through the New Jersey Environmental Infrastructure Trust (Trust), which issued tax-exempt bonds with average interest rates of 4.7%. The second loan, in the amount of $5.9 million, is from the State of New Jersey, acting through the New Jersey Department of Environmental Protection. The State is participating in the Safe Drinking Water State Revolving Fund authorized by the Safe Drinking Water Act amendments of 1996 whereby the federal government is funding the state loan at no interest cost. The effective interest rate for the combined notes is approximately 2.6%. The proceeds of the loans will be used to repay short-term debt incurred to finance a portion of the Mansfield Project. The Company expects to request these funds from the Trust in the second quarter of 2000. Interest Rate Risk The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Company manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. As of December 31, 1999, a hypothetical single percentage point change in interest rates would result in a $.5 million change in interest costs and earnings before tax related to short-term and variable rate debt. RESULTS OF OPERATIONS Earnings Applicable to Common Stock for 1999 was $20.6 million as compared to $24.0 million for 1998. The 1999 decrease of $3.4 million in net income is comprised of (i) a decrease of $.7 million for lost revenues net of expenses from reduced consumption as a result of New Jersey State-imposed water restrictions in August for drought conditions, (ii) a decrease of $.4 million from flooding in September of Elizabethtown's Raritan-Millstone Plant caused by Tropical Storm Floyd (Floyd) (see Other Matters), (iii) a decrease of $2.5 million from additional operating expenses, primarily labor and benefits and (iv) a decrease of $1.6 million from higher interest costs and depreciation. These decreases were partially mitigated by the favorable impact of an increase of $1.8 million in revenues, net of related expenses for higher water consumption related to an extended dry period in the spring and early summer of 1999. -11- Earnings Applicable to Common Stock for 1998 was $24.0 million as compared to $20.1 million for 1997. Net income increased by $3.9 million, primarily comprised of (i) $.6 million due to an extended dry period in the summer of 1998 resulting in higher water consumption than in 1997 (ii) $1.3 million from lower operating expenses due to a combination of a mild winter in 1998, more efficient use of our work force, lower employee benefit costs and success with our ongoing cost control efforts (iii) $.7 million as a result of new customers and (iv) $.5 million related to refinancing short-term debt at lower interest rates. Capitalized construction interest accounted for an increase in net income of $.5 million. Operating Revenues increased $3.5 million or 2.6% in 1999 over the comparable 1998 amount.Revenues increased $4.2 million due to higher water consumption related to an extended dry period in the spring and early summer of 1999. This favorable factor was somewhat offset by $1.6 million of lower water consumption resulting from State-mandated water restrictions in August and by $1.0 million from flooding in September caused by Floyd. New customers and the PWAC rate increase for Mount Holly contributed the remaining $1.9 million to the increase in revenues. Operating Revenues increased $3.1 million or 2.3% in 1998 over the comparable 1997 amount. The increase is primarily comprised of $1.4 million from water service to residential and wholesale customers attributable to increased water consumption as a result of warmer, drier weather in the summer of 1998 than in 1997. New customers accounted for $.7 million of the increase. The PWAC rate increase for Mount Holly accounted for the remainder of the increase. Operation Expenses increased $5.0 million or 11.1% in 1999 over 1998. The increase consists of (i) an increase of $2.7 million in labor, including $.8 million attributable to raises, an increase of $.7 million due to overtime because of the weather conditions, and an increase of $.3 million due to an increased number of employees, (ii) an increase of $.7 million for power, of which $.1 million was attributable to the weather conditions while the remainder was due to adverse operating conditions resulting from flooding by Floyd, (iii) an increase of $.6 million in leasing costs as conversion continues from ownership to leasing of all vehicles, (iv) an increase of $.3 million in purchased water by Mount Holly while the Mansfield Project was being constructed and (iv) an increase of $.7 million from various other operating expenses. Operation Expenses decreased $.2 million or .4% in 1998 from 1997. The Company experienced a decrease of $1.0 million from lower operating costs due to a mild winter, greater work force utilization, ongoing cost control efforts and decreased employee benefit costs. These decreases were partially offset by an increased cost of labor, purchased water for Mount Holly and variable costs for the higher water sales. Maintenance Expenses increased $.6 million or 11.4% in 1999 as compared to 1998 primarily due to additional waste residual removal costs. Maintenance Expenses decreased $.9 million or 13.3% in 1998, as compared to 1997 due to improved procurement procedures and preventative maintenance programs. Depreciation Expense increased $.9 million or 7.4% in 1999 and $.2 million or 1.7% in 1998 due to depreciation on utility plant additions in both years. Revenue Taxes increased $.5 million or 2.9% in 1999 and $.2 million or 1.1% in 1998 due to the taxes on increases in operating revenues discussed above. Real Estate, Payroll and Other Taxes increased $.5 million or 19.4% in 1999 primarily due to increased payroll taxes as a result of payrol taxes on higher labor costs. Real Estate, Payroll and Other Taxes decreased $.5 million or 14.7% in 1998. This overall decrease was comprised of additional payroll taxes due to additional labor costs, which were offset by decreases from lower than anticipated property taxes on the Canal Road Plant. - -12- Federal Income Taxes as a component of operating expenses decreased $1.6 million or 12.3% in 1999 as compared to 1998 and increased $1.7 million or 15.0% in 1998 over 1997 due to changes in the components of taxable operating income discussed herein. Other Income (Expense) increased $.1 million or 8.5% in 1999 compared to 1998. Other Income (Expense) increased $.3 million or 70.5% in 1998 over 1997 due to a $.4 million increase in Allowance for Funds Used During Construction (AFUDC), primarily for Elizabethtown's western operations center. Federal income taxes increased $.1 million for the taxes on the AFUDC. Total Interest Charges increased $.9 million or 5.7% in 1999. The increase consists of $.4 million for Mount Holly's issuance of long-term notes in November 1998 through the New Jersey Environmental Infrastructure Trust Financing Program to finance a portion of the construction of its Mansfield Project and $.5 million for increased short-term borrowings to finance Elizabethtown's construction program. Total Interest Charges decreased $1.0 million or 6.1% in 1998 due primarily to refinancing short-term debt at lower interest rates. In addition, the debt component of AFUDC increased $.3 million, resulting in lower interest expense, as a result of higher construction expenditures, primarily for Elizabethtown's new western operations center. OTHER MATTERS In August 1999 the Governor of the State of New Jersey declared a "Water Emergency" for the entire state and issued mandatory restrictions on outdoor, nonessential water use. Due to unusually low levels of rainfall during June and July the Governor deemed these measures necessary to preserve the integrity of several of the states reservoir and well supplies. Customers of Elizabethtown and Mount Holly were subject to these restrictions. The water systems operated by E'town's subsidiaries had and continue to have adequate supplies of water to meet the needs of their customers. These restrictions affected the amount of water consumed by a substantial number of the Corporation's customers and reduced net income in 1999 by approximately $.68 million. The restrictions were lifted in October 1999. In September 1999 Elizabethtown took its primary water treatment plant, the Raritan-Millstone Water Treatment Plant, out of service as a result of flooding from Floyd. For several days, Elizabethtown had difficulty maintaining adequate water pressure in portions of its distribution system as the Canal Road Plant, Elizabethtown's secondary water treatment plant, was supplying the predominant portion of the water needs of Elizabethtown's customers. Overall system production levels were substantially less than normal. Customers in portions of a few municipalities were without water service for a period of approximately 3 days. Costs incurred to repair and replace equipment damaged by the flood and to respond to inquiries by customers, regulatory bodies and the media are being deferred and are expected to be recoverable through insurance. The loss of revenues due to below normal water consumption is not recoverable through insurance and adversely affected net income by approximately $.39 million for 1999. ECONOMIC OUTLOOK Forward Looking Information Information in this report includes certain forward looking statements within the meaning of the federal securities laws. Any forward looking statements are based upon information currently available and are subject to future events, risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. Such events, risks and uncertainties include, without limitation, actions of regulators, the effects of weather on water consumption, changes in historical patterns of water consumption and demand, including changes through increased use of water-conserving devices, conditions in capital markets, increases in operating expenses due to factors beyond the Company's control, the closing of the pending merger with Thames Water, changes in environmental regulation and associated costs of compliance and other claims or assessments made upon the Company. - -13- Elizabethtown In accordance with the terms of the pending Merger Agreement, Elizabethtown will postpone filing for rate relief needed to recover additional construction and financing costs incurred since base rates were last established in October 1996 until at least August 2000. Therefore, earnings from Elizabethtown will be substantially lower in 2000 than in 1999 due to an assumed return to normal weather conditions and postponement of the rate filing. Mount Holly Mount Holly had a negative rate of return on common equity of 2.6% in 1999, compared to an authorized rate of return of 11.25%, established in its 1996 base rate case. Mount Holly earned significantly below its authorized return in 1999 and 1998 as the Company was precluded from filing for needed rate relief due to recently settled litigation with another purveyor. Management expects Mount Holly to contribute positively to Elizabethtown's net income as a result of a Stipulation Agreement approved by the BPU whereby a rate increase of $1.9 million, or a net increase of $.5 million after elimination of the PWAC, was effective January 1, 2000. New Accounting Pronouncements See Note 3 of Elizabethtown's Notes to Consolidated Financial Statements for a discussion of new accounting standards that were effective in 1999. Year 2000 State of Readiness The Company assessed its significant business systems, as well as non-critical, peripheral support systems for compliance with the Year 2000 computer challenge. The assessment concluded that all significant business systems (i.e. customer billing and service, financial, water treatment operating and control, water quality laboratory information and telemetric data acquisition systems) are Year 2000 compliant. The assessment also included inquiries as to the state of readiness of significant vendors whose services to the Company could have an impact on the Company's ability to deliver service to its customers. Management concluded that the delivery of electric power as well as chemicals used in the water treatment process are two areas of significant importance and received documentation from the vendors who provide these services that indicates their ability to provide service. The assessment had identified certain modifications to peripheral support systems that have since been implemented. The Costs To Address The Corporation's Year 2000 Issues The significant business systems of the Company defined above are Year 2000 compliant and have been operational for up to several years. Therefore, no further costs are expected to be incurred in connection with bringing these systems into compliance. The peripheral support systems required the Company to incur costs of approximately $.4 million to bring them into compliance. At the turn of the century and to-date, the Company experienced no disruption in the services it provides to its customers and processed transactions in its financial, customer billing and customer services systems in the normal course of business. Management is not currently aware of any Year 2000-related problems associated with its internal business systems or software or with the systems or software of its vendors. Item 8. Financial Statements and Supplementary Data The information for E'town is included in Exhibit 13, filed herewith, and is incorporated herein by reference. The information for Elizabethtown Water Company is contained in Appendix I hereto, incorporated by reference herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None - -14- PART III Item 10. Directors and Executive Officers of the Registrant Director Term Name Age Since Expires Position - ------------------------------------------------------------------------------- Gail P. Brady 54 N/A N/A Treasurer; Senior Vice President, Chief Financial Officer and Treasurer of Elizabethtown Walter M. Braswell 50 N/A N/A Secretary; Vice President, General Counsel and Secretary of Elizabethtown Thomas J. Cawley 69 1992 2002 Director Andrew M. Chapman 44 1995 2001 Director,President; President, Elizabethtown Anthony S. Cicatiello 52 1996 2002 Director Edward A. Clerico 45 See Note Below Director; President, Applied Water Management, Inc. Dennis W. Doll 41 N/A N/A Controller; Vice President and Controller of Elizabethtown Anne Evans Estabrook 55 1982 2001 Director, Chairman of the Board, E'town Corporation and Elizabethtown James W. Hughes 56 1997 2000 Director John Kean 70 1957 2002 Director Robert W. Kean, III 52 1989 2001 Director, Vice President Barry T. Parker 67 1983 2001 Director Hugo M. Pfaltz 68 1980 2000 Director Chester A. Ring, 3rd 72 1982 2002 Director Joan Verplanck 53 1997 2000 Director Norbert Wagner 64 N/A N/A Senior Vice President-Operations of Elizabethtown Family Relationships. Robert W. Kean, Jr., (Director Emeritus) is a cousin of John Kean, Director and father of Robert W. Kean, III, Director. Gail P. Brady has been Treasurer of the Corporation since 1997, Senior Vice President, Chief Financial Officer and Treasurer of Elizabethtown since 1998 and Vice President-Finance, Regulatory Affairs and Treasurer of Elizabethtown since 1994. She is a trustee of Ramapo College. She has been with Elizabethtown since 1971. Thomas J. Cawley was Vice Chairman of Elizabethtown until his retirement in December 1996. From August 1992 to January 1996 he served as President of Elizabethtown. He joined Elizabethtown in 1969 and served in a variety of operating positions until elected President in 1992. Andrew M. Chapman has been President of the Corporation since May 1997, Chief Financial Officer of the Corporation from August 1989 until May 1997 and Treasurer of the Corporation from November 1990 until May 1997. He has been President of Elizabethtown since January 1996, Executive Vice President of Elizabethtown from May 1994 to December 1995, Senior Vice President of Elizabethtown from April 1993 to May 1994, Chief Financial Officer of Elizabethtown from November 1990 to December 1995, and Treasurer of Elizabethtown from August 1989 to May 1994. He is a member of the Regional Advisory Board of PNC Bank, N.A., New Jersey and is a member of the Board of Directors of the Damon G.Douglas Company, a general construction company. - -15- Anthony S. Cicatiello is the Chairman of CN Communications International, Inc., a public relations and advertising firm, a firm he founded in 1977. Edward A. Clerico was appointed Director of the Corporation in August 1998. He was not nominated for election as Director in May 1999. In July 1999 he was reappointed as Director of the Corporation and will remain as such until the next election of Directors. He is President of Applied Wastewater Management, Inc. and was the owner and founder since 1984 . The Applied Group of companies was purchased by E'town in June 1998. Dennis W. Doll has been Controller of the Corporation since 1997, Vice President and Controller of Elizabethtown since 1998 and Controller of Elizabethtown since 1994. He joined the company in 1985. Anne Evans Estabrook has been the owner of Elberon Development Co. (a real estate holding company) since 1984 and is President of David O. Evans, Inc. (a construction management company). She is a Director of Summit Bancorp and its subsidiary, Summit Bank. She is a Public Member of the Governing Board, New Jersey Economic Development Authority. She is a Trustee Emeritus of Cornell University. James W. Hughes has been Dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. He has been the Director of the Rutgers Regional Report since 1988, and has been a member of the Rutgers University Faculty since 1971. John Kean is Chairman of the Board and a Director of NUI Corporation. He was President and Chief Executive Officer of NUI Corporation until his retirement in April 1995, and until October 1994, Chairman of the Board and Director of Elizabethtown Gas Company, which was previously a subsidiary of NUI Corporation. He is also an Honorary President of the International Gas Union. Robert W. Kean, III has been Vice President of the Corporation since 1997 and Executive Vice President of Properties since July 1987. Barry T. Parker is of counsel to the law firm of Parker, McCay & Criscuolo, P.C. since December 1997, where he had been a partner since 1967. Hugo M. Pfaltz has been a principal of the law firm of Pfaltz & Woller, P.A. since 1976. Chester A. Ring, 3rd, was President of Elizabethtown until his retirement in August 1992. He served as President of Elizabethtown since June 1987. Joan Verplanck has been President of the New Jersey Chamber of Commerce since 1994. Prior to that she served as President of the Morris County Chamber of Commerce. Norbert Wagner has been Senior Vice President-Operations of Elizabethtown since 1992 and has been with Elizabethtown since 1963. The Directors of E'town also serve as Directors of Elizabethtown. Section 16(a) Beneficial Ownership Reporting Compliance. None. - -16- Item 11. Executive Compensation Summary Compensation Table The following table provides certain summary information concerning the compensation for the past three years of the Chairman of the Board and each of the other four most highly compensated executive officers of the Corporation (the "named executive officers").
Annual Compensation Long-Term Compensation Awards Fiscal Salary Bonus Other Annual Restricted Securities All Other Name & Principal Position Year ($) ($) Compensation Stock Underlying Compensation (1) & (2) Awards (3) Options - ----------------------------------------------------------------------------------------------------------------------------------- Anne Evans Estabrook Chairman of the Board, 1999 $141,727 $ 7,500 0 $0 20,000 $10,354 (4)(5)(6) E'town Corporation and 1998 114,612 0 0 30,000 8,982 (4)(5)(6) Elizabethtown Water Company 1997 75,612 0 0 24,999 25,000 12,430 (4)(5)(6) Andrew M. Chapman 1999 $240,323 $95,000 $0 $0 20,000 $11,544 (4)(5)(6) President, E'town Corporation and 1998 210,996 0 0 73,171 10,944 (4)(5)(6) Elizabethtown Water Company 1997 196,054 0 0 20,953 10,176 (4)(5)(6) Edward A. Clerico (7) 1999 $177,989 $0 $0 $0 $ 8,825 (4)(5)(6) President, Applied Water Management, Inc. 1998 141,522 0 0 0 6,613 (4)(5)(6) Norbert Wagner 1999 $157,458 $24,300 $0 $0 $ 6,872 (4)(5) Senior Vice President, 1998 145,024 10,350 0 10,334 6,329 (4)(5) Elizabethtown Water Company 1997 135,774 0 0 8,997 5,794 (4)(5) Gail P. Brady Treasurer, E'town Corporation Senior Vice President, Chief Financial 1999 $135,658 $26,700 $0 $0 $ 5,844 (4)(5) Officer and Treasurer, 1998 129,443 8,800 0 8,779 5,854 (4)(5) Elizabethtown Water Company 1997 120,239 0 0 5,978 5,452 (4)(5) (1) All salaries are paid by Elizabethtown, the Corporation's principal subsidiary, except for Edward A. Clerico. Salaries are reallocated to the Corporation as appropriate. Edward A. Clerico is paid by Applied Water Management, Inc. (2) Includes pretax contributions to the 401(k) Plan. (3) Represents the value as of grant date of restricted stock awards granted in 1998 and 1997, respectively, under the E'town Corporation 1990 Performance Stock Program. The number of shares of restricted stock awarded to executive officers during 1998 and 1997 and the value of such restricted stock based on the closing price of Common Stock, of $47.375 and $40.19, respectively, as reported on the New York Stock Exchange on December 31, 1998 and 1997 is as follows: A.E. Estabrook 868 shares, $41,122 and 823 shares, $33,076; A.M. Chapman 2,025 shares, $95,934 and 687 shares, $27,611; N. Wagner 299 shares, $14,165 and 295 shares, $11,856 and G.P. Brady 254 shares, $12,033 and 196 shares, $7,877. (4) Includes 401(k) Plan matching contributions by Elizabethtown for 1999, 1998 and 1997, respectively, as follows: A.E. Estabrook $4,810, $3,738, $2,952; A.M. Chapman $6,000, $6,000, $5,700; E.A. Clerico $5,000, $5,000 (for 1999 and 1998-contribution made by AWM); N. Wagner $5,663, $5,215, $4,882 and G.P. Brady $4,500, $4,510, $4,276. (5) Includes premiums for life insurance by Elizabethtown for 1999, 1998 and 1997, respectively, as follows: A.E. Estabrook $1,344, $1,344, $828; A.M. Chapman $1,344, $1,344, $1,176; E.A. Clerico $225, $113 (for 1999 and 1998-paid by AWM); N. Wagner $1,209, $1,114, $912 and G.P. Brady $1,344, $1,344, $1,176. (6) Includes Director's fees for 1999, 1998 and 1997, respectively, as follows: A.E. Estabrook $4,200, $3,900, $8,650; A.M. Chapman $4,200, $3,600, $3,300 and E.A. Clerico $3,600, $1,500 (for 1999 and 1998). (7) The Applied Group, of which E.A. Clerico was the founder and majority owner, was purchased by E'town Corporation on June 12, 1998. The information in the summary compensation table has been provided for the entire year 1998. - -17-
Option/SAR Grants in Last Fiscal Year The following table provides information regarding individual grants of stock options and stock appreciation rights made during 1999 to the persons named in the Summary Compensation Table, above.
Potential Individual Grants Realizable Value at Number of Assumed Annual Shares % of Total Rates of Stock Price Underlying Options/SARs Exercise Appreciation for Options/ Granted to or Base Option Term (2) SARs Employees in Price Expiration Name Granted (1) Fiscal Year ($/Sh) Date 5% 10% - ----------------------------------------------------------------------------------------------------------------------------------- Anne Evans Estabrook 20,000 50% $44.00 04/15/09 $1,364,880 $2,075,040 Andrew M. Chapman 20,000 50% $44.00 04/15/09 $1,364,880 $2,075,040 Edward A. Clerico -- -- -- -- -- -- Norbert Wagner -- -- -- -- -- -- Gail P. Brady -- -- -- -- -- -- (1) The options granted in 1999 are exercisable as of April 15, 2000. To date, no Stock Appreciation Rights were granted under the 1987 Stock Option Plans, which expired in 1997. (2) These values are not predictions of what the Corporation believes the market value of its Common Stock will be in the next 10 years. They are merely assumed values required to be calculated in accordance with SEC rules.
Aggregated Option/SAR Exercises in Last Fiscal Year and Year-End Option/SAR Values The following table provides information regarding the pre-tax value realized from the exercise of options and stock appreciation rights during 1999 and the value of unexercised in-the-money options and stock appreciation rights held at December 31, 1999 by the persons named in the Summary Compensation Table, above.
Value of All Number of Outstanding Shares All Outstanding In-the-Money Acquired Aggregate Options/SARs at Options/SARs at On Value 12/31/99 12/31/99 Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable # ($) (1) (1) (2) ----------------------------------------------------------------------------------------------------- Anne Evans Estabrook 32,500 $947,188 0/20,000 $0/$365,000 Andrew M. Chapman 2,200 $ 54,274 19,500/20,000 $688,350/$365,000 Edward A. Clerico -- -- -- -- Norbert Wagner -- -- 8,000/0 $281,000/0 Gail P. Brady 1,000 $ 27,125 -- --
(1) No Stock Appreciation Rights were granted under the 1987 Stock Option Plan, which expired in 1997. (2) Based on the price of $62.25 per share, the closing price of the Common Stock on the New York Stock Exchange, Inc. on December 31, 1999. - -18- Pensions The following table shows, for the salary levels and years of service indicated, the annual pension benefits payable to employees, including officers, upon retirement at age 65, under Elizabethtown's non-contributory defined benefit retirement plan. The compensation taken into account under a tax-qualified plan is subject to a maximum annual limit under the Internal Revenue Code of 1986, as amended, adjusted annually for cost of living increases ($160,000 in 1997, 1998 and 1999, and $170,000 in 2000). Highest Consecutive Four Year Average Compensation Annual Benefits for Years of Service Indicated - -------------------------------------------------------------------------------- 10 15 20 25 30 35 40 45 years years years years years years years years - -------------------------------------------------------------------------------- $ 75,000 $12,000 $18,000 $24,000 $30,000 $36,000 $42,000 $48,000 $54,000 100,000 16,000 24,000 32,000 40,000 48,000 56,000 64,000 72,000 125,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 150,000 24,000 36,000 48,000 60,000 72,000 84,000 96,000 108,000 175,000 28,000 42,000 56,000 70,000 84,000 98,000 112,000 126,000 200,000 32,000 48,000 64,000 80,000 96,000 112,000 128,000 144,000 225,000 36,000 54,000 72,000 90,000 108,000 126,000 144,000 162,000 250,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 Elizabethtown's non-contributory defined benefit retirement plan provides that a participant will receive an annual retirement benefit equal in amount to 1.6% of the participant's final average compensation for the highest four consecutive calendar years multiplied by the number of years of credited service (up to a maximum of 45). Remuneration covered under the retirement plan includes base wages only. Compensation covered by the plan for Anne Evans Estabrook, Andrew M. Chapman, Norbert Wagner and Gail P. Brady, are approximately equal to the amounts set forth under the caption "Salary" in the Summary Compensation Table above. Edward A. Clerico does not participate in this plan and neither do Directors who are not also officers or employees of the Corporation. The annual benefit amounts shown above are not subject to any deduction for Social Security benefits or other offset amounts. The number of years of service now credited under the retirement plan (and the supplemental plans described below) are as indicated for the following officers: Anne Evans Estabrook, 12 years; Andrew M. Chapman, 10 years; Norbert Wagner, 36 years and Gail P. Brady, 28 years. The named executive officers, with the exception of Anne Evans Estabrook and Edward A. Clerico, are entitled to either a Supplemental Executive Retirement Plan ("SERP") benefit upon the attainment of the normal retirement age of 65, or a 1995 ("1995 SERP") benefit upon the attainment of the age of 62 with a minimum of 20 years service. The benefit payable under each of these plans is an amount equal to the difference between 60% for retirement at age 65 or 55% for retirement at age 62 of the average of annual base salary and incentive compensation payments as shown in the Salary, Bonus and Restricted Stock Awards Columns in the Summary Compensation Table above plus other taxable amounts for the thirty-six months prior to retirement. The SERP provides that in the event of termination due to a change in control, a participant is credited with an additional 10 years of service for purposes of qualifying for the 1995 SERP. The 1995 SERP also provides life insurance equal to two times compensation if death occurs before age 55. The estimated annual benefits payable upon retirement at age 65 for each named executive officer entitled to SERP or 1995 SERP benefits are as follows: Andrew M. Chapman $148,387; Norbert Wagner $17,855, and Gail P. Brady $32,824. - -19- Compensation of Directors (1) Standard Arrangements Directors' Fees. Directors of the Corporation who are not officers of the Corporation are paid by Elizabethtown an annual retainer of $15,000 which is paid in the form of E'town Corporation common stock, and a fee of $600 for each meeting of the Board of Directors of Elizabethtown which they attend. Such Directors also receive the per-meeting attendance fee for each meeting of the Board of the Corporation held on a day when there is not also a meeting of the Board of Elizabethtown. Properties Directors receive a $1,000 annual retainer and a fee of $600 for a Board Meeting held on days not coincident with Board meetings of Elizabethtown. Directors who are officers of the Corporation are paid a fee of $300 for each Board meeting of Elizabethtown they attend. Members of committees who are not officers of the Corporation are paid a fee of $400 for participation at committee meetings on the same day as board meetings and a fee of $600 for committee meetings held on days other than board meetings. No fees are paid to members of the Executive Management Committee for attendance at meetings of that committee. A Director cannot stand for re-election after his or her 72nd birthday. A retired Director with 10 or more years' service on the Board of Directors (of the Corporation or Elizabethtown) becomes eligible at age 72 to receive a pension for life equal to the annual retainer in effect at the date the Director becomes eligible for the pension. A retired Director with 5 to 9 years of service will receive a pension equal to the annual retainer in effect at the date the Director becomes eligible to receive the pension, payable for the same number of years that the Director served on the Board. (2) Other Arrangements Effective May 1997, Robert W. Kean, Jr. was appointed Chairman of the Board - Emeritus and Director Emeritus and Brendan T. Byrne and Henry S. Patterson, II were appointed Directors Emeriti. For the two year period after their appointment, which expired in May 1999, Directors Emeriti received the per-meeting Directors' fee of $600 for each Board meeting which they attended. The Corporation and Elizabethtown have consulting agreements with Robert W. Kean, Jr. whereby he serves as Chairman Emeritus of the Boards of both companies and Chairman of the Executive Management Committee as described above, and renders such other consulting services as the Chairman may reasonably request. Robert W. Kean, Jr. was paid $75,000 in consulting fees in 1999 in addition to his pension. The Corporation also provided Mr. Kean with the use of an automobile for 1999, with a taxable value of $13,750 to Mr. Kean in that year. Employment Agreements E'town and Elizabethtown have each entered into an employment agreement with Anne Evans Estabrook effective May 15, 1997. The agreements continue until the earliest of (i) mutual agreement of termination, (ii) resignation, and (iii) any date on which Mrs. Estabrook no longer stands for re-election as a Director. In addition, the respective companies may terminate Mrs. Estabrook's employment for reasons of disability or cause (each as defined in the agreements). E'town has entered into an employment agreement with Andrew M. Chapman, its current President and the President of Elizabethtown. Upon the consummation of the merger contemplated by the Merger Agreement dated as of November 21, 1999 among the Corporation, Thames Water Plc ("Thames") and Edward Acquisition Corp., as described on Form 8-K dated November 21, 1999, this new employment agreement with Mr. Chapman will become effective and will replace Mr. Chapman's existing change in control agreement with E'town, described below. - -20- Under the terms of the new employment agreement, Mr. Chapman will be employed as President and Chief Executive Officer of both E'town and Elizabethtown after the merger on terms that include the following: (i) term of at least three years with subsequent automatic one-year renewals; (ii) a seat on the boards of E'town, Thames Water North America, Inc. and Elizabethtown, and, if Thames establishes a board of directors for its businesses in the Americas, a seat on that board; (iii) initial annual base salary of $270,000; (iv) annual bonus consisting of: (x) a performance-related bonus equal to at least 10% of Mr. Chapman's salary; (y) a bonus equal to 12 1/2% of Mr. Chapman's salary for each net increase of 7,500 customer metered connections to E'town's base customer level in the prior year; and (z) annual grant of restricted shares of the stock of Thames having a value of up to 20% of Mr. Chapman's salary with each grant vesting over a four-year period upon the attainment of certain performance goals; (v) special retention bonus, payable at the commencement of the employment agreement, equal to 20% of Mr. Chapman's salary; entitlement to participate in all benefit plans made available for senior executive officers; insurance and indemnification by E'town against expenses and liabilities incurred by Mr. Chapman; and certain non-competition and confidentiality provisions. The agreement also provides that Mr. Chapman will receive continued salary and benefits for a period of 24 months if he voluntarily terminates his employment within a six-month period commencing on the earlier of (i) the date the first rate order is received by Elizabethtown from the New Jersey Board of Public Utilities after the merger, and (ii) the date that is 18 months after the merger. Upon termination of employment by Mr. Chapman for good reason (as defined in the agreement) or E'town terminates his employment other than for death, disability or cause (as defined in the agreement), Mr. Chapman will receive salary, incentive compensation and benefits for a period of 30 months; unvested restricted stock and stock options will immediately vest and all restrictions on any restricted stock or stock options held by him will be voided; and all retirement benefits under the SERP will fully vest if he has not attained age 65, he will be granted an additional 15 years of service for purposes of benefit accrual, and he will become entitled to make an early payout election under the SERP if he has completed 25 years of service. If the amounts payable by E'town to Mr. Chapman under the agreement are subject to the excise tax applicable to "parachute payments" under Sections 280G and 4999 of the Internal Revenue Code, E'town will pay Mr. Chapman an additional amount so that, after payment of such excise tax, he receives a sum equal to the original pre-tax severance payment. Change in Control Agreements E'town has entered into a Change in Control Agreement with each of the named executive officers (other than Edward A. Clerico) to ensure continuity in the management of E'town's operations in the event of a change in control (as defined in the agreements). The agreements provide that the named officers are entitled to a severance payment if their employment is terminated: (i) within three years of a change in control for a reason other than death, cause, or, in the case of all named officers other than Andrew M. Chapman, disability; (ii) in the case of Andrew M. Chapman only, voluntarily by Mr. Chapman within one year of a change in control; or (iii) within three years of a change in control following a material change in job duties, significant increase in travel, diminution in status, position or responsibilities, reduction in compensation and benefits or certain job relocations. If his or her employment is terminated under those circumstances, the named officer's severance includes: continued salary, incentive compensation and benefits for a period of 18 to 30 months; payment on the date of termination of an amount equal to the greater of (i) all incentive compensation due prior to the change in control but not yet paid and (ii) all incentive compensation due prior to termination of employment and not yet paid or, in the case of Andrew M. Chapman and Anne Evans Estabrook, the sum of such incentive compensation amounts; immediate vesting of any unvested restricted stock and stock options and the voiding of all restrictions on any restricted stock or stock options held by them; and, with respect to the SERP (other than for Anne Evans Estabrook), full and immediate vesting of all retirement benefits, for any officer younger than 65, the grant of an additional 10 to 15 years of service for purposes of benefit accrual, and early payout elections in certain circumstances. With respect to the named officers other than Andrew M. Chapman and Anne Evans Estabrook, the officers are required to mitigate the amounts they would receive under these agreements by seeking other employment. With respect to Andrew M. Chapman and Anne Evans Estabrook, if the amounts payable by E'town will be subject to the excise tax applicable to "parachute payments" under the federal tax laws, E'town will pay the named officer an additional amount so that, after payment of such excise tax, he or she receives a sum equal to the original pre-tax severance payment. For all other named officers, the amounts payable to them will be reduced, if desired by the officer, to avoid such excise tax. Compensation Committee Interlocks and Insider Participation. None. - -21- Item 12. Security Ownership of Certain Beneficial Owners and Management The following information pertains to the common stock of the Corporation that, to the knowledge of the Corporation, is beneficially owned, directly or indirectly, individually and as a group, by all Directors and Executive Officers of the Corporation and its subsidiaries, Elizabethtown Water Company ("Elizabethtown") and E'town Properties, Inc. ("Properties"), as of March 24, 2000. No shareholder has reported beneficial ownership of 5% or more of the outstanding common stock. Title of Name of Beneficial Owner No. of Percent of Class Shares (1) Class - --------------------------------------------------------------------- Common Stock Gail P. Brady ................... 6,123 0.07 Thomas J. Cawley ................ 11,787 0.13 Andrew M. Chapman ............... 41,977 (2) 0.48 Anthony S. Cicatiello ........... 1,640 0.02 Edward A. Clerico ............... 112,388 1.28 Anne Evans Estabrook ............ 101,963 (3) 1.16 James W. Hughes ................. 1,790 0.02 John Kean ....................... 189,988 (4) 2.17 Robert W. Kean, Jr. ............. 217,148 (5) 2.48 Robert W. Kean, III ............. 1,389 0.02 Barry T. Parker ................. 3,734 0.04 Hugo M. Pfaltz .................. 10,458 (6) 0.12 Chester A. Ring, 3rd ............ 18,552 0.21 Joan Verplanck .................. 1,456 0.02 Norbert Wagner .................. 22,298 (7) 0.25 Directors and Officers as a group 785,675 8.96 - --------------- (1) Includes shares held under the Elizabethtown Savings and Investment Plan-401 (k) (the "401(k)Plan") for the Executive Officers and those directors who retired as Executive Officers. (2) Includes 32,000 shares subject to options which were granted to Andrew M. Chapman, of which 20,000 are not presently exercisable, under the Corporation's 1987 and 1997 Stock Option Plan. (3) Includes 20,000 shares subject to options which were granted to Anne Evans Estabrook, and are not presently exercisable, under the Corporation's 1997 Stock Option Plan. (4) Includes 119,532 shares held under two trusts for which John Kean is a co-trustee and John Kean shares voting and investment power with respect to these shares. (5) Mr. Kean is not a voting member of the board of directors. Figure includes 197,567 shares held under a trust for which Robert W. Kean, Jr. is a co-trustee and Robert W. Kean, Jr. shares voting and investment power with respect to these shares. (6) Includes 1,250 shares of Common Stock issuable upon conversion of debentures held by a partnership of which Hugo M. Pfaltz is a general partner. (7) Includes 8,000 shares subject to options which were granted to Norbert Wagner and are presently exercisable under the Corporation's 1987 Stock Option Plan. - -22- Item 13. Certain Relationships and Related Transactions Certain Transactions. Utility Billing Services, Inc., a subsidiary of NUI Corporation, of which John Kean is Chairman of the Board and a Director, provides data processing and related services to Elizabethtown and other subsidiaries of the Corporation. Certain of these services rendered to Elizabethtown are pursuant to a contract which expires December 31, 2000. The charges for all services totaled $1,044,732 for the year ended December 31, 1999. Elizabethtown had a line of credit with Summit Bank, of which Anne Evans Estabrook is a Director, in the amount of $10 million. At December 31, 1999, E'town had $7 million in outstanding loans from Summit Bank. Interest charges paid to Summit Bank totaled $298,611 during 1999. Summit Bank also serves as bond trustee for Elizabethtown for which it was paid fees of $22,000 in 1999. Elizabethtown has a line of credit with PNC Bank, N.A., New Jersey in the amount of $30 million. Andrew M. Chapman serves on the Regional Advisory Board of this bank. At December 31, 1999, there were $30 million in outstanding loans from PNC Bank. Interest charges paid to PNC Bank totaled $1,351,868 during 1999. PNC Bank also serves as trustee and recordkeeper for Elizabethtown's benefit plans for which it was paid fees of $68,515 in 1999. The law firm of Parker, McCay & Criscuolo, P.C., of which Barry T. Parker was a partner and is now of counsel, provided legal services to the Corporation and its subsidiaries which resulted in $35,131 in legal fees being paid to the firm in 1999. The law firm of Lindabury, McCormick & Estabrook, of which the husband of Anne Evans Estabrook is of counsel, provided legal services to the Corporation and its subsidiaries that resulted in $17,617 in legal fees being paid to the firm in 1999. Edward A. Clerico owns land and buildings leased by a subsidiary of E'town. Mr. Clerico received total payments in 1999 of $216,530 under this lease. It is the opinion of management that the amounts charged for these services were as favorable as those that would be charged for such services by comparable unaffiliated sources. Management periodically reviews the terms of these arrangements to ensure that the costs for these services are comparable to those that would be charged in the general market. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K The following documents are filed as part of this report: 1. Financial Statements: Elizabethtown Water Company Statements of Consolidated Income for the years ended December 31, 1999, 1998 and 1997. Consolidated Balance Sheets as of December 31, 1999 and 1998. Statements of Consolidated Capitalization as of December 31, 1999 and 1998. Statement of Consolidated Shareholder's Equity for the years ended December 31, 1999, 1998 and 1997. Statements of Consolidated Cash Flows for the years ended December 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. - -23- E'town Corporation A portion of the 1999 Annual Report to Shareholders which includes Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Other Financial and Statistical Data is filed herewith as Exhibit 13 and is herein incorporated by reference. Elizabethtown Water Company The Independent Auditors' Report and Elizabethtown Water Company's consolidated financial statements and notes thereto are contained in Appendix I hereto, incorporated by reference herein. 2. Financial Statement Schedules: E'town Corporation Elizabethtown Water Company Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1999, 1998 and 1997. Other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or the notes accompanying each Company's financial statements. 3. Exhibits (a) Exhibits for E'town and Elizabethtown Water Company are listed in the Exhibit Index, which is incorporated by reference herein. (b) Reports on Form 8-K: (1) A report on Form 8-K was filed on November 24, 1999 . The report included an Agreement of Merger dated November 21, 1999 among E'town Corporation, Thames Water Plc and Edward Acquisition Corp. (2) A report on Form 8-K was filed on December 17, 1999. The report included an amendment dated November 21, 1999 to the Rights Agreement dated as of February 4, 1991 between E'town Corporation and The Bank of New York as Rights Agent. - -24- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. E'TOWN CORPORATION March 30, 2000 By: /s/ Anne Evans Estabrook Chairman and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 30, 2000. Chairman and Director /s/ Anne Evans Estabrook President and Director /s/ Andrew M Chapman Director /s/ Thomas J. Cawley Director /s/ Anthony S. Cicatiello Director /s/ James W. Hughes Director /s/ John Kean Director /s/ Barry T. Parker Director /s/ Hugo M. Pfaltz, Jr. Director /s/ Chester A. Ring III Director /s/ Joan Verplanck Director /s/ Robert W. Kean III Director /s/ Edward A. Clerico Treasurer /s/ Gail P. Brady (Principal Financial Officer) Controller /s/ Dennis W. Doll (Principal Accounting Officer) - -25- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ELIZABETHTOWN WATER COMPANY March 30, 2000 By: /s/ Anne Evans Estabrook Chairman and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 30, 2000. Chairman and Director /s/ Anne Evans Estabrook President and Director /s/ Andrew M. Chapman Director /s/ Thomas J. Cawley Director /s/ Anthony S. Cicatiello Director /s/ James W. Hughes Director /s/ John Kean Director /s/ Barry T. Parker Director /s/ Hugo M. Pfaltz, Jr. Director /s/ Chester A. Ring III Director /s/ Joan Verplanck Director /s/ Robert W. Kean III Director /s/ Edward A. Clerico Senior Vice President , Chief Financial Officer & Treasurer /s/ Gail P. Brady (Principal Financial Officer) Vice President & Controller /s/ Dennis W. Doll (Principal Accounting Officer) - -26- INDEPENDENT AUDITORS' REPORT E'TOWN CORPORATION: We have audited the consolidated financial statements of E'town Corporation and its subsidiaries as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated March 9, 2000; such consolidated financial statements and report are included in your 1999 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of E'town Corporation and its subsidiaries, listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP March 9, 2000 Parsippany, New Jersey - -27- Schedule II E'TOWN CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E Additions Balance at Charged to Balance at Beginning of Costs and Deductions End of Description: Period Expenses (A) Period Reserve for Uncollectible Accounts: Year Ended 12/31/99 $1,065,000 $823,569 $573,069 $1,315,500 Year Ended 12/31/98 $612,000 $995,940 (B) $542,940 $1,065,000 Year Ended 12/31/97 $566,000 $607,929 $561,929 $612,000 (A) Write-off of uncollectible accounts, net of recoveries. (B) Includes reserves established for Liberty Water Company, ($39,970) and Applied Water Management, Inc., ($344,630), acquired in 1998 and Edison Water Company ($37,400) acquired in 1997. ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E Additions Balance at Charged to Balance at Beginning of Costs and Deductions End of Description: Period Expenses (A) Period Reserve for Uncollectible Accounts: Year Ended 12/31/99 $643,000 $603,939 $573,439 $673,500 Year Ended 12/31/98 $612,000 $573,940 $542,940 $643,000 Year Ended 12/31/97 $566,000 $607,929 $561,929 $612,000 (A) Write-off of uncollectible accounts, net of recoveries. - -28- EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk(*), are filed herewith. The exhibits not so designated have heretofore been filed with the Commission and are incorporated herein by reference to the documents indicated in brackets following the description of such exhibits. Exhibits designated with a (1) are management contracts or compensatory plans or arrangements. E'town Corporation Exhibit No. Description 2 Agreement and Plan of Merger, dated as of November 21, 1999, among E'town Corporation, Thames Water Plc and Edward Acquisition Corp.[Form 8-K, filed November 24, 1999, Exhibit 2.1] 3(a) - Certificate of Incorporation of E'town Corp. [Registration Statement No. 33-42509, Exhibit 4(a)] 3(b) - By-Laws of E'town Corporation [Form 10-K for the year 1998, Exhibit 3(c)] 3(c) - Certificate of Incorporation of E'town Properties, Inc. [Registration Statement No. 33-32143, Exhibit 4(j)] 3(d) - By-laws of E'town Properties, Inc. [Registration Statement No. 33-32143, Exhibit 4(n)] 4(a) - Rights Agreement dated as of February 4, 1991 between E'town and the Rights Agent [Registration Statement No. 33-38566, Exhibit 4(n)] 4(b) - Amendment dated as of November 21, 1999 to the Rights Agreement dated as of February 4, 1991 between E'town Corporation and The Bank of New York, as Rights Agent [Form 8-K, filed December 17, 1999, Exhibit 4] 4(c) - Indenture dated as of January 1, 1987 from E'town Corporation to Boatmen's Trust, Trustee, relating to the 6 3/4% Convertible Subordinated Debentures due 2012 [Registration Statement No. 33-32143, Exhibit 4(a)] 4(d) - Note Purchase Agreement relating to the 6.79% Senior Notes due December 15, 2007 [Form 10-K for the year 1997, Exhibit 4(c)] 10(a) - Incentive Stock Option Plan [Registration Statement No. 2-99602, Exhibit 28(a)] (1) 10(b) - Savings and Investment Plan - 401(k) [Form 10-K for the year 1994, Exhibit 10(b)] 10(c) - E'town's 1987 Stock Option Plan [Registration Statement No. 33-42509, Exhibit 28] (1) 10(d) - Management Incentive Plan [Registration Statement No. 33-38566, Exhibit 10(i)] (1) 10(e) - E'town's 1998 Stock Option Plan [Definitive Proxy Statement for 1998 Annual Meeting of Stockholders, filed pursuant to Rule 14a-6(b)] (1) 10(f) - E'town's 1998 Directors Stock Plan [Definitive Proxy Statement for 1998 Annual Meeting of Stockholders, filed pursuant to Rule 14a-6(b)] (1) - -29- 10(g) - E'town's 1990 Performance Stock Program [Registration Statement No. 33-46532, Exhibit 10(k)] (1) 10(h) - E'town's Dividend Reinvestment and Stock Purchase Plan [Registration No. 333-69549, Dated December 23, 1998] 10(i) - Change in Control Agreement for Andrew M. Chapman [Form 10-Q for the quarter ended March 31, 1995, Exhibit 10] (1) 10(j) - Contract Between Edison Water Company, E'town Corporation and the Township of Edison to Operate the Water System of the Township of Edison, New Jersey dated as of June 25, 1997 [Form 10-Q for the quarter ended June 30, 1997, Exhibit 10(a)] 10(k) - Employment Contract Between E'town Corporation and Anne Evans Estabrook [Form 10-K for the year 1997, Exhibit 10(k)] (1) 10(l) - Change in Control Agreement for Anne Evans Estabrook [Form 10-K for the year 1997, Exhibit 10(k)] (1) 10(m) - Contract with the City of Elizabeth, New Jersey for the Operation by E'town Corporation of the City's Water System [Form 10-Q for the quarter ended September 30, 1998, Exhibit 10(m)] 10(n) - Employment Agreement between Applied Water Management, Inc. And Edward A. Clerico [Form 10-Q for the quarter ended September 30, 1998, Exhibit 10(n)](1) 10(o) - Change in Control Agreement for certain officers [Form 10-K for the year 1998, Exhibit 10(o)](1) 10(p) - E'town Corporation & Subsidiaries - Form of Amended and Restated Change in Control Agreement for certain officers of E'town Corporation and Affiliated Companies [Form 10-Q for the quarter ended March 31, 1999, Exhibit 10(o)](1) 10(q) - E'town Corporation & Subsidiaries - Amendments to Change in Control Agreement For Andrew M. Chapman [Form 10-Q for the quarter ended March 31, 1999, Exhibit 10(p)](1) 10(r) - E'town Corporation & Subsidiaries - Amendments to Change in Control Agreement For Anne E. Estabrook [Form 10-Q for the quarter ended March 31, 1999, Exhibit 10(q)](1) *10(s) - Employment Contract Between E'town Corporation and Andrew M. Chapman dated November 21, 1999 (1) *10(t) - Amended and Restated Change in Control Agreement for Certain Officers of Affiliates of E'town Corporation dated November 20, 1999 (1) *12 - Computation of Ratio of Earnings to Fixed Charges *13 - Portion of the 1999 Annual Report to Shareholders which includes Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Other Financial and Statistical Data and is herein incorporated by reference. *21 - Subsidiaries of the Corporation *23 - Consent of Deloitte & Touche LLP, Independent Auditors *27 - Financial Data Schedule - -30- Elizabethtown Water Company Exhibit No. Description 3(a) - Form of Restated Certificate of Incorporation of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1994, Exhibit 3(a)] 3(b) - By-laws of Elizabethtown Water Company [Form 10-K for the year 1998, Exhibit 3(b)] 4(a) - Indenture dated as of November 1, 1994 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 7 1/4% Debentures due 2028 [Form 10-K for year ended December 31, 1994, Exhibit 4(a)] 4(b) - Indenture dated as of September 1, 1992 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 8% Debentures due 2022 [Form 10-K for year ended December 31, 1993, Exhibit 4(a)] 4(c) - Indenture dated as of October 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 8 3/4% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(f)] 4(d) - Indenture dated as of August 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 6.60% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(g)] 4(e) - Indenture dated as of August 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 6.70% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(h)] 4(f) - Indenture dated as of October 1, 1990 from Elizabethtown Water Company to Citibank, N.A., Trustee, relating to the 7 1/2% Debentures due 2020 [Registration Statement No. 33-38566, Exhibit 4(e)] 4(g) - Indenture dated as of December 1, 1989 from Elizabethtown Water Company to Citibank, N.A., Trustee, relating to the 7.20% Debentures due 2019 [Registration Statement No. 33-38566, Exhibit 4(f)] 4(h) - Indenture dated as of December 1, 1995 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 5.60% Debentures due 2025 [Form 10-K for the year 1995, Exhibit 4(h)] 4(i) - Indenture dated as of June 1, 1997 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to Variable Rate Demand Debentures, due 2027 (Series B) [Form 10-Q for the quarter ended September 30, 1997, Exhibit 4(i)] 4(j) - Indenture dated as of June 1, 1997 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to Variable Rate Demand Debentures, due 2027 (Series A) [Form 10-Q for the quarter ended September 30, 1997, Exhibit 4(j)] 4(k) - Loan Agreement Dated November 1, 1998 Between the State of New Jersey, Acting Through the New Jersey Department of Environmental Protection, and The Mount Holly Water Company [Form 10-K for the year 1998, Exhibit 4(k)] - -31- 4(l) - Loan Agreement Dated November 1, 1998 Between the New Jersey Environmental Infrastructure Trust and The Mount Holly Water Company [Form 10-K for the year 1998, Exhibit 4(l)] 10(a) - Contract for service to Middlesex Water Company.[Registration Statement No. 33-38566, Exhibit 10(a)] 10(b) - Contract for service to Edison Township. [Form 10-Q for the quarter ended June 30, 1997, Exhibit 10(b) 10(c) - Contract for service to New Jersey-American Water Company. [Form 10-K for the year ended December 31, 1993, Exhibit 10(c)] 10(d) - Contract for service to City of Elizabeth. [Form 10-K for the year ended December 31, 1992, Exhibit 10(d)] 10(e) - Contract for service to Franklin Township.[Registration Statement No. 33-46532, Exhibit 10(e)] 10(f) - Contract with the New Jersey Water Supply Authority for the purchase of water from the Raritan Basin. [Registration Statement No. 33-32143, Exhibit 10(e)] 10(g) - Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1992, Exhibit 10(g)] (1) 10(h) - Medical Reimbursement Plan of Elizabethtown Water Company [Form 10-K for the year 1992, Exhibit 10(h)] (1) 10(i) - Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-Q for the quarter ended September 30, 1995, Exhibit 10](1) 10(k) - Employment Contract Between Elizabethtown Water Company and Anne Evans Estabrook [Form 10-K for the year 1997, Exhibit 10(k)] (1) 10(l) - Amendment to Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-K for the year 1998, Exhibit 10(l)](1) *10(m) - Amendment to Supplemental Executive Retirement Plan of Elizabethtown Water Company dated November 1, 1999 (1) *12(a) - Computation of Ratio of Earnings to Fixed Charges *12(b) - Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends *21 - Subsidiaries of the Company *23 - Consent of Deloitte & Touche LLP, Independent Auditors *27 - Financial Data Schedule. - -32- APPENDIX I INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDER AND BOARD OF DIRECTORS OF ELIZABETHTOWN WATER COMPANY: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of Elizabethtown Water Company and its subsidiary as of December 31, 1999 and 1998, and the related statements of consolidated income, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Elizabethtown Water Company and its subsidiary at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP March 9, 2000 Parsippany, New Jersey - -1- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED INCOME (In Thousands) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Operating Revenues $ 138,306 $ 134,847 $ 131,788 - -------------------------------------------------------------------------------- Operating Expenses: Operation 50,135 45,117 45,301 Maintenance 6,321 5,674 6,548 Depreciation 13,354 12,439 12,233 Revenue taxes 17,207 16,728 16,550 Real estate, payroll and other taxes 3,119 2,613 3,064 Federal income taxes (Note 4) 11,116 12,678 11,026 - -------------------------------------------------------------------------------- Total operating expenses 101,252 95,249 94,722 - -------------------------------------------------------------------------------- Operating Income 37,054 39,598 37,066 - -------------------------------------------------------------------------------- Other Income (Expense): Allowance for equity funds used during construction (Note 3) 323 597 215 Other - net 990 612 494 Federal income taxes (Note 4) (460) (423) (248) - -------------------------------------------------------------------------------- Total other income (expense) 853 786 461 - -------------------------------------------------------------------------------- Total Operating and Other Income 37,907 40,384 37,527 - -------------------------------------------------------------------------------- Interest Charges: Interest on long-term debt 14,661 14,721 14,030 Other interest expense - net 1,780 960 2,382 Allowance for funds used during construction (338) (456) (166) Amortization of debt discount and expense-net 399 391 376 - -------------------------------------------------------------------------------- Total interest charges 16,502 15,616 16,622 - -------------------------------------------------------------------------------- Net Income 21,405 24,768 20,905 Preferred Stock Dividends 813 813 813 - -------------------------------------------------------------------------------- Earnings Applicable To Common Stock $ 20,592 $ 23,955 $ 20,092 ================================================================================ See Notes to Consolidated Financial Statements. - -2- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Assets 1999 1998 - -------------------------------------------------------------------------------- Utility Plant-At Original Cost: Utility plant in service $ 770,251 $ 714,301 Construction work in progress 17,495 15,694 - -------------------------------------------------------------------------------- Total utility plant 787,746 729,995 Less accumulated depreciation and amortization 136,975 125,096 - -------------------------------------------------------------------------------- Utility plant-net 650,771 604,899 - -------------------------------------------------------------------------------- Non-utility Property (Note 5) 7,337 7,315 - -------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents 1,342 3,598 Customer and other accounts receivable (less reserve: 1999, $674, 1998, $643) 19,341 16,952 Unbilled revenues 10,578 10,091 Infrastructure loan funds receivable (Note 5) 5,657 5,895 Materials and supplies-at average cost 4,069 2,538 Prepaid federal income taxes 5,807 687 Prepaid insurance, other taxes, other 3,229 1,746 - -------------------------------------------------------------------------------- Total current assets 50,023 41,507 - -------------------------------------------------------------------------------- Deferred Charges: Waste residual management (Note 8) 1,538 1,371 Unamortized debt and preferred stock expenses (Note 8) 8,900 9,368 Taxes recoverable through future rates (Notes 4 and 8) 13,466 14,226 Postretirement benefit expense (Notes 8 and 12 ) 3,145 3,490 Flood expenditures (Note 10) 5,000 Other unamortized expenses (Note 8) 1,007 1,152 - -------------------------------------------------------------------------------- Total deferred charges 33,056 29,607 - -------------------------------------------------------------------------------- Total $ 741,187 $ 683,328 ================================================================================ See Notes to Consolidated Financial Statements. - -3- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Capitalization and Liabilities 1999 1998 - -------------------------------------------------------------------------------- Capitalization (Note 5): Common shareholder's equity $ 220,461 $ 208,573 Mandatory redeemable cumulative preferred stock 12,000 12,000 Long-term debt - net 244,842 245,148 - -------------------------------------------------------------------------------- Total capitalization 477,303 465,721 - -------------------------------------------------------------------------------- Current Liabilities: Notes payable - banks (Note 6) 51,500 22,000 Long-term debt - current portion (Note 5) 481 30 Accounts payable and other liabilities 19,989 12,457 Customers' deposits 197 248 Municipal and state taxes accrued 17,592 16,776 Interest accrued 3,745 3,228 Preferred stock dividends accrued 59 59 - -------------------------------------------------------------------------------- Total current liabilities 93,563 54,798 - -------------------------------------------------------------------------------- Deferred Credits: Customers' advances for construction 40,019 40,874 Federal income taxes (Note 4) 69,570 64,696 Unamortized investment tax credits 7,636 7,839 Accumulated postretirement benefits (Note 12) 3,399 3,947 - -------------------------------------------------------------------------------- Total deferred credits 120,624 117,356 - -------------------------------------------------------------------------------- Contributions in Aid of Construction 49,697 45,453 - -------------------------------------------------------------------------------- Commitments and Contingent Liabilities (Note 11) - -------------------------------------------------------------------------------- Total $ 741,187 $ 683,328 ================================================================================ See Notes to Consolidated Financial Statements. - -4- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED CAPITALIZATION (In Thousands Except Share Amounts) December 31, 1999 1998 - -------------------------------------------------------------------------------- Common Shareholder's Equity (Note 5): Common stock without par value, authorized, 15,000,000 shares, issued 1999 and 1998, 1,974,902 shares $ 15,741 $ 15,741 Paid-in capital 141,575 132,753 Capital stock expense (485) (485) Retained earnings 63,630 60,564 - -------------------------------------------------------------------------------- Total common shareholder's equity 220,461 208,573 - -------------------------------------------------------------------------------- Preferred Shareholders' Equity: (Note 5) Mandatory Redeemable Cumulative Preferred Stock $100 par value, authorized, 200,000 shares; $5.90 series, issued and outstanding, 120,000 shares 12,000 12,000 Cumulative Preferred Stock: $25 par value, authorized, 500,000 shares; none issued - -------------------------------------------------------------------------------- Long-Term Debt (Notes 5 and 7) : Elizabethtown Water Company: 7.20% Debentures, due 2019 10,000 10,000 7 1/2% Debentures, due 2020 15,000 15,000 6.60% Debentures, due 2021 10,500 10,500 6.70% Debentures, due 2021 15,000 15,000 8 3/4% Debentures, due 2021 27,500 27,500 8% Debentures, due 2022 15,000 15,000 5.60% Debentures, due 2025 40,000 40,000 7 1/4% Debentures, due 2028 50,000 50,000 Variable Rate Debentures, due 2027 50,000 50,000 The Mount Holly Water Company: New Jersey Environmental Infrastructure Trust Notes (due serially through 2018) 7,040 7,295 New Jersey Department of Environmental Protection Notes (due serially through 2018) 5,677 5,895 9.65% Mortgage Note Payable (due 2001) 156 Note Payable (due 2000) 30 - -------------------------------------------------------------------------------- Total long-term debt 245,873 246,220 Unamortized discount-net (1,031) (1,072) - -------------------------------------------------------------------------------- Total long-term debt-net 244,842 245,148 - -------------------------------------------------------------------------------- Total Capitalization $ 477,303 $ 465,721 ================================================================================ See Notes to Consolidated Financial Statements. - -5- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In Thousands) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Common Stock: $ 15,741 $ 15,741 $ 15,741 - -------------------------------------------------------------------------------- Paid-in Capital: Balance at Beginning of Period 132,753 124,560 117,457 Capital contributed by parent company from: Common Stock issued under Dividend Reinvestment and Stock Purchase Plan 8,702 7,861 6,980 Issuance of restricted and unrestricted stock stock under compensation programs 120 332 123 - -------------------------------------------------------------------------------- Balance at End of Period 141,575 132,753 124,560 - -------------------------------------------------------------------------------- Capital Stock Expense (485) (485) (485) - -------------------------------------------------------------------------------- Retained Earnings: Balance at Beginning of Period 60,564 53,538 49,580 Net income 21,405 24,768 20,905 Dividends on common stock (17,526) (16,929) (16,134) Dividends on preferred stock (813) (813) (813) - -------------------------------------------------------------------------------- Balance at End of Period 63,630 60,564 53,538 - -------------------------------------------------------------------------------- Total Common Shareholder's Equity $ 220,461 $ 208,573 $ 193,354 ================================================================================ See Notes to Consolidated Financial Statements. - -6- APPENDIX I ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY STATEMENTS OF CONSOLIDATED CASH FLOWS (In Thousands) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 21,405 $ 24,768 $ 20,905 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,354 12,439 12,233 Increase in deferred charges (5,022) (501) 690 Deferred income taxes and investment tax credits-net 4,671 3,855 2,693 Allowance for funds used during construction (661) (1,053) (381) Other operating activities-net 726 252 485 Change in current assets and current liabilities excluding cash, short-term investments and current portion of debt Customer and other accounts receivable (2,086) 331 (558) Unbilled revenues (487) (428) (307) Accounts payable and other liabilities 7,459 1,807 (6,495) Accrued/prepaid interest and taxes (5,287) 1,095 3,173 Other (1,493) (572) 78 - -------------------------------------------------------------------------------- Net cash provided by operating activities 32,579 41,993 32,516 - -------------------------------------------------------------------------------- Cash Flows Provided (Used) by Financing Activities: Capital contributed by parent company 8,702 7,861 6,980 Proceeds from issuance of debentures 50,000 Funds held in Trust by others (30) (7,234) Proceeds from issuances of other long-term debt 7,295 Debt and preferred stock issuance and amortization costs 474 288 (667) Repayment of long-term debt (32) (27) (30) Repayment of current portion of long-term debt (30) Contributions and advances for construction 5,206 10,908 7,275 Refunds of advances for construction (2,896) (4,575) (2,516) Net increase (decrease) in notes payable - banks 29,500 4,000 (51,000) Dividends paid on common stock and preferred stock (18,234) (17,637) (16,842) - -------------------------------------------------------------------------------- Net cash provided (used) by financing activities 22,660 879 (6,800) - -------------------------------------------------------------------------------- Cash Flows Used for Investing Activities: Utility plant expenditures (excluding allowance for funds used during construction) (56,635) (43,500) (24,612) Purchase of company (860) - -------------------------------------------------------------------------------- Cash used for investing activities (57,495) (43,500) (24,612) - -------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (2,256) (628) 1,104 Cash and Cash Equivalents at Beginning of Period 3,598 4,226 3,122 - -------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 1,342 $ 3,598 $ 4,226 ================================================================================ Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 16,377 $ 14,459 $ 16,063 Income taxes $ 9,700 $ 7,723 $ 5,981 Preferred stock dividends $ 708 $ 708 $ 708 Noncash capital contribution by parent company $ 120 $ 332 $ 123 See Notes to Consolidated Financial Statements. - -7- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APPENDIX I 1. Organization Elizabethtown Water Company (Elizabethtown or Company) and its wholly owned subsidiary, The Mount Holly Water Company (Mount Holly), is a wholly owned subsidiary of E'town Corporation (E'town or Corporation). Elizabethtown and Mount Holly are regulated water companies in the State of New Jersey. E'town is also the parent of E'town Properties, Inc. (Properties), Edison Water Company (Edison), Liberty Water Company, (Liberty), Applied Water Management, Inc. (AWM) and Applied Wastewater Management, Inc. (AWWM). 2. Pending Merger On November 21, 1999, E'town entered into an agreement (Merger Agreement) with Thames Water Plc (Thames Water) under which Thames Water has agreed, subject to certain conditions, to acquire E'town for $68 per share in cash or approximately $607 million. Thames Water will also assume the debt of E'town. The acquisition will take the form of a merger (Merger) of E'town with a newly formed subsidiary of Thames Water and E'town will be the surviving company. A special meeting of E'town shareholders is expected to be held during the second quarter of 2000 to seek shareholder approval of the transaction. The acquisition is also subject to approval by the New Jersey Board of Public Utilities (BPU), the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino antitrust Improvement Act of 1976. Certain clearances must also be obtained from the New Jersey environmental regulators. The transaction is expected to close prior to the end of 2000. 3. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include Elizabethtown and its subsidiary, Mount Holly. Significant intercompany accounts and transactions have been eliminated. Elizabethtown and Mount Holly are regulated water utilities and follow the Uniform System of Accounts, as adopted by the BPU. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Utility Plant and Depreciation Income is charged with the cost of labor, materials and other expenses incurred in making repairs and minor replacements, and in maintaining the properties. Utility plant accounts are charged with the cost of improvements and major replacements of property. When depreciable property is retired or otherwise disposed of, the cost thereof, plus the cost of removal net of salvage, is charged to accumulated depreciation. Depreciation is generally computed on a straight-line basis at functional rates for various classes of assets based on the estimated useful lives of the assets. The balances of significant classes of assets and their respective depreciable lives at December 31, 1999 and 1998 are as follows: Annual Depreciation (Thousands of Dollars) 1999 1998 Rate - ------------------------------------------------------------------------------- Asset Class : Transmission and Distribution Mains $ 337,408 $ 318,363 0.99 % Water Treatment Equipment 111,961 106,787 2.35 Services 67,154 62,213 2.77 Structures and Improvements 88,147 75,736 2.08 - 2.74 Pumping Equipment 42,704 41,082 2.59 - 3.38 Meters 27,589 23,415 2.77 Water Storage Tanks 23,658 21,232 1.37 Other 71,630 65,473 0 - 15.73 - ------------------------------------------------------------------------------- Total utility plant in service $ 770,251 $ 714,301 =============================================================================== - -8- The provision for depreciation, as a percentage of average depreciable property, on a composite basis, was 1.82% for 1999, 1.81% for 1998 and 1.85% for 1997. Allowance for Funds Used During Construction Elizabethtown and Mount Holly capitalize, as an appropriate cost of utility plant, an Allowance for Funds Used During Construction (AFUDC), which represents the cost of financing major projects during construction. AFUDC, a non-cash credit on the Statements of Consolidated Income, is added to the construction cost of the project and included in rate base and then recovered through depreciation charges in rates during the assets' useful lives. AFUDC is comprised of a debt component (credited to Interest Charges), and an equity component (credited to Other Income) in the Statements of Consolidated Income. AFUDC totaled $.66 million, $1.05 million and $.38 million for 1999, 1998 and 1997, respectively. Revenues Water revenues are recorded based on the amounts of water delivered to customers through the end of each accounting period. This includes an accrual for unbilled revenues for water delivered from the time meters were last read to the end of the respective accounting periods. Federal Income Taxes Elizabethtown files a consolidated tax return with E'town. Income taxes are allocated to Elizabethtown based upon the Company's taxable income. Deferred income taxes are provided for temporary differences in the recognition of revenues and expenses for tax and financial statement purposes to the extent permitted by the BPU. Elizabethtown and Mount Holly account for prior years' investment tax credits by the deferral method, which amortizes the credits over the lives of the respective assets. Customers' Advances for Construction and Contributions in Aid of Construction Customers' Advances for Construction (CAC) and Contributions in Aid of Construction (CIAC) represent capital provided by developers, under a contract, for main extensions to new real estate developments. CAC is refundable to developers based upon amounts for each type and quantity of unit constructed by the developer when the units are metered. Such contracts have a ten-year life. CIAC represents CAC that, under the terms of individual main extension agreements, are no longer subject to refund. Cash Equivalents Elizabethtown Water Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents. New Accounting Pronouncements In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activity". In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activity - Deferral of the Effective Date of SFAS No. 133" to defer the effective date of SFAS No. 133 for one year. Consequently, SFAS No. 133 will now be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not believe this Statement will have an impact on its financial condition and results of operations. Reclassification Certain prior year amounts have been reclassified to conform to the current year's presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. - -9- 4. Federal Income Taxes The computation of federal income taxes and the reconciliation of the tax provision computed at the federal statutory rate (35%) with the amount reported in the Statements of Consolidated Income follow: (Thousands of Dollars) 1999 1998 1997 - ------------------------------------------------------------------------------- Tax expense at statutory rate $ 11,543 $ 13,255 $ 11,262 Items for which deferred taxes are not provided: Difference between book and tax depreciation 147 63 58 Other 89 (14) 157 Investment tax credits (203) (203) (203) - ------------------------------------------------------------------------------- Provision for federal income taxes $ 11,576 $ 13,101 $ 11,274 =============================================================================== The provision for federal income taxes is comprised of the following: Current $ 5,727 $ 8,902 $ 7,212 Tax on main extension refunds 416 525 1,369 Deferred: Tax depreciation 3,166 3,131 2,716 Capitalized interest 56 91 19 Main cleaning and lining 758 796 612 Flood expenditures 1,750 Other (94) 40 (451) Investment tax credits - net (203) (203) (203) Refund from IRS (181) - ------------------------------------------------------------------------------- Total provision $ 11,576 $ 13,101 $ 11,274 =============================================================================== Elizabethtown and Mount Holly provide deferred taxes at the enacted statutory rate for all temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities irrespective of the treatment for rate-making purposes. Management believes it is probable that the accumulated tax benefits that previously have been treated as a flow-through item to Elizabethtown and Mount Holly's customers will be recovered from utility customers in the future. Accordingly, offsetting regulatory assets were established. At December 31, 1999, Elizabethtown and Mount Holly had deferred tax liabilities of $67.0 million and $2.6 million. There were also, at December 31, 1999, offsetting regulatory assets of $12.7 million and $.8 million for Elizabethtown and Mount Holly, respectively, representing the future revenue expected to be recovered through rates based upon established regulatory practices which permit recovery of current taxes payable. These amounts were determined using the enacted Federal income tax rate of 35% and were calculated in accordance with SFAS No. 109. The tax effect of significant temporary differences representing deferred income tax assets and liabilities as of December 31, 1999 and 1998 is as follows: (Thousands of Dollars) 1999 1998 - ------------------------------------------------------------------------------- Water utility plant - net $ (51,508) $ (47,538) Taxes recoverable through future rates (13,466) (14,226) Prepaid pension expense (123) (29) Capitalized interest (2,739) (2,683) Waste residuals (539) (480) Flood expenditures (1,750) Other assets 720 541 Other liabilities (165) (281) - ------------------------------------------------------------------------------- Net deferred income tax liabilities $ (69,570) $ (64,696) =============================================================================== - -10- 5. Capitalization E'town routinely makes equity contributions to Elizabethtown which represent the proceeds of common stock issued under E'town's Dividend Reinvestment and Stock Purchase Plan (DRP). Such equity contributions amounted to $8.70 million, $7.86 million and $6.98 million for the years ended December 31, 1999, 1998 and 1997, respectively. Preferred Stock Elizabethtown's $5.90 Mandatory Redeemable Cumulative Preferred Stock is not redeemable at the option of the Company. Elizabethtown is required to redeem the entire issue at $100 per share on March 1, 2004. Long-term Debt Elizabethtown's long-term debt indentures restrict the amount of retained earnings available to Elizabethtown to pay cash dividends (which is the primary source of funds available to the Corporation for payment of dividends on its common stock) or acquire Elizabethtown's common stock, all of which is held by E'town. At December 31, 1999, $7.52 million of Elizabethtown's retained earnings were restricted under the most restrictive indenture provision. In November 1998 Mount Holly closed on loan agreements that will make available up to $13.19 million in proceeds from the issuance of unsecured notes through the New Jersey Environmental Infrastructure Trust Financing Program. This program provides financing through two loans. The first loan, in the amount of $7.30 million, is through the New Jersey Environmental Infrastructure Trust (Trust), which issued tax-exempt bonds with average interest rates of 4.7%. Non-utility Property includes $7.2 million of funds held in trust by others relating to this financing. The second loan, in the amount of $5.89 million, is from the State of New Jersey, acting through the New Jersey Department of Environmental Protection. The State is participating in the Drinking Water State Revolving Fund authorized by the Safe Drinking Water Act amendments of 1996 whereby the federal government is funding the state loan at no interest cost. The effective interest rate for the combined notes is approximately 2.59%. The proceeds of the loans will finance a portion of the Mansfield Project (see Note 9). In June 1997 Elizabethtown issued a total of $50 million of 30-year Variable Rate Debentures due December 2027, $25 million of Series A and $25 million of Series B, to evidence a like amount of Variable Rate Notes issued through the New Jersey Economic Development Authority (NJEDA). The proceeds were used to repay $50 million of balances outstanding under Elizabethtown's revolving credit agreement. The NJEDA Notes are remarketed on a weekly basis, at which time the interest rates on each issue are subject to change. The rates in effect as of December 31, 1999, were 5.20% for Series A and 5.10% for Series B. 6. Lines of Credit Elizabethtown has $90 million in lines of credit with several banks as of December 31, 1999. Of this amount, $10 million represents a committed line of credit. These lines, together with internal funds and proceeds of future issuances of debt and preferred stock, and capital contributions from proceeds from sales of common stock by E'town, are expected to be sufficient to finance Elizabethtown's capital needs. Information relating to bank borrowings for 1999, 1998 and 1997 is as follows: (Thousands of Dollars) 1999 1998 1997 - ------------------------------------------------------------------------------- Maximum amount outstanding $ 51,500 $ 22,000 $ 69,500 Average monthly amount outstanding $ 29,955 $ 14,983 $ 40,886 Average interest rate at year end 6.9% 5.9% 6.0% Weighted average interest rate based on average daily balances 5.9% 5.8% 5.8% - ------------------------------------------------------------------------------- There were no compensating balances as of December 31, 1999, 1998 and 1997. - -11- 7. Financial Instruments The carrying amounts and the estimated fair values, as of December 31, 1999 and 1998, of financial instruments issued or held by the Company are as follows: (Thousands of dollars) 1999 1998 - ------------------------------------------------------------------------------- Cumulative preferred stock: Carrying amount $ 12,000 $ 12,000 Estimated fair value 11,850 13,020 Long - term debt Carrying amount $ 244,842 $ 245,148 Estimated fair value 236,431 255,087 - ------------------------------------------------------------------------------- Estimated fair values are based upon quoted market prices for these or similar securities. 8. Regulatory Assets and Liabilities Certain costs incurred by Elizabethtown and Mount Holly have been deferred as regulatory assets and are being amortized over various periods, as set forth below: (Thousands of dollars) 1999 1998 - ------------------------------------------------------------------------------- Waste residual management $ 1,538 $ 1,371 Unamortized debt and preferred stock expense 8,900 9,368 Taxes recoverable through future rates (Note 4) 13,466 14,226 Postretirement benefit expense (Notes 9 and 12) 3,145 3,490 Safety management expense 158 245 Business process redesign 136 210 Rate case expenses 23 7 PWAC underrecovery 480 305 - ------------------------------------------------------------------------------- Total $ 27,846 $ 29,222 =============================================================================== Waste Residual Management The costs of disposing of the byproducts generated by Elizabethtown's and Mount Holly's water treatment plants are being amortized and recovered in rates over 3- and 5-year periods, respectively, for ratemaking and financial statement purposes. No return is being earned on the deferred balances related to these programs. Unamortized Debt and Preferred Stock Expenses Costs incurred in connection with the issuance or redemption of long-term debt have been deferred and are being amortized and recovered in rates over the lives of the respective issues for ratemaking and financial statement purposes. Costs incurred in connection with the issuance and redemption of preferred stock have been deferred and are being amortized and recovered in rates over a 10-year period for ratemaking and financial statement purposes. Other Safety management expenses and business process redesign expenses relate to studies undertaken by the Company and are being amortized and recovered in rates over five years. Rate case expenses are being substantially recovered in rates during two-year periods. Purchased Water Adjustment Clause In 1994 Elizabethtown established a Purchased Water Adjustment Clause (PWAC), to reflect the cost of water purchased from the New Jersey Water Supply Authority (NJWSA). The current rate for the PWAC is zero since the costs of purchased water were reflected in the 1996 rate case; however, because of the high pumpage in the summers of 1999 and 1998, Elizabethtown has under-recovered its purchased water costs and therefore, has deferred $.44 million as of December 31, 1999. As of December 31, 1999, Mount Holly has deferred $.04 million of PWAC costs (see Note 9). There were no regulatory liabilities at December 31, 1999 or 1998. - -12- 9. Regulatory Matters Elizabethtown In December 1997 the BPU adopted a Stipulation for rate increases for Elizabethtown and Mount Holly, effective January 1, 1998, for the full recovery of costs associated with SFAS No. 106 "Accounting for Employer's Postretirement Benefits" on an accrual basis less the costs associated with SFAS No. 106 expenses previously recovered in rates. The total increases in annual operating revenues resulting from these Stipulations were $.39 million for Elizabethtown and $.02 million for Mount Holly. In accordance with the terms of the pending Merger Agreement, Elizabethtown will postpone filing for rate relief until at least August 2000. Mount Holly In 1998 Mount Holly commenced a construction project, called the Mansfield Project, to comply with New Jersey legislative restrictions to obtain alternative water supplies, thereby reducing its water pumpage from an aquifer, which had been subject to over-pumping by Mount Holly and various local purveyors in a portion of southern New Jersey. A portion of this project was placed into service in the third quarter of 1998 and the remaining portion of the project was placed into service in late December 1999. To settle an appeal initiated by another water purveyor in 1995 concerning the diversion rights for the Mansfield Project, Mount Holly signed a Stipulation in 1997 with the purveyor, the New Jersey Department of Environmental Protection (DEP) and other parties, requiring Mount Holly to purchase one million gallons per day from the other purveyor during the two-year period that the Mansfield Project was being constructed. Purchases began during March of 1998, after completion of an interconnection and ended in January 2000 shortly after the Mansfield Project went into service. In September 1997 Mount Holly filed a petition with the BPU to establish a Purchased Water Adjustment Clause (PWAC) to reflect the cost of water purchased from the other purveyor under the aforementioned agreement. In May 1998 the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.3 million or 38.9%. Effective January 1, 2000, Mount Holly received an increase in annual rates of $1.88 million. This increase included costs for Mount Holly's Mansfield Project that was placed in service at the end of December 1999. The rate decision also reflected the elimination of the PWAC. After the elimination of the PWAC the net rate increase was $.51 million. This increase also reflects additional construction and financing costs, as well as increases in operating costs since base rates were last established in January 1996. In June 1999 Mount Holly purchased Homestead Water Utility, Inc. for a cash price of $.9 million. The entity provides water services to approximately 800 customers of the Homestead community in southern New Jersey. The transaction was accounted for as a purchase. Had the acquisition been consummated as of January 1, 1997, the pro-forma effect on revenues and net income for the years ended December 31, 1999, 1998 and 1997 would be immaterial. 10. Other Events In August 1999 the Governor of the State of New Jersey declared a "Water Emergency" for the entire state and issued mandatory restrictions on outdoor, nonessential water use. Due to unusually low levels of rainfall during June and July the Governor deemed these measures necessary to preserve the integrity of several of the state's reservoir and well supplies. Customers of Elizabethtown and Mount Holly were subject to these restrictions. The water systems at all times had, and continue to have, adequate supplies of water to meet the needs of their customers. These restrictions affected the amount of water consumed by a substantial number of Elizabethtown's customers and reduced net income by approximately $.68 million. The restrictions were lifted in October 1999. - -13- In September 1999, Elizabethtown withdrew its primary water treatment plant, the Raritan-Millstone Water Treatment Plant (Plant), from service as a result of flooding from Tropical Storm Floyd (Floyd). For several days, Elizabethtown had difficulty maintaining adequate water pressure in portions of its distribution system because overall system production levels were substantially less than normal. Customers in portions of a few municipalities were without water service for a period of up to three days. Costs incurred to repair and replace equipment damaged by the flood and to respond to inquiries by customers, regulatory bodies and the media have been deferred and are expected to be recoverable through insurance. The Company has incurred $7.0 million of flood-related expenditures and has received an advanced reimbursement of $2.0 million from its insurance carrier. The remaining $5.0 million of flood-related expenditures is reported on the Consolidated Balance Sheets as a deferred charge at December 31, 1999. The loss of revenues due to below normal water consumption is not recoverable through insurance (see Note 11 for legal matters related to Floyd). The loss of revenues decreased net income by $.39 million. 11. Commitments and Contingent Liabilities Elizabethtown is obligated, under a contract that expires in 2013, to purchase from the New Jersey Water Supply Authority (NJWSA) a minimum of 37 billion gallons of water annually. Effective July 1, 1999, the annual cost of water under contract is $7.63 million. The Company purchases additional water from the NJWSA on an as-needed basis. The total cost of water purchased from the NJWSA was $9.03 million for 1999. Mount Holly was obligated, under a contract, to purchase water from another purveyor, at a rate of 1 million gallons per day until such time as the Mansfield Project was completely in service. In mid-January 2000, Mount Holly ceased purchasing water from the other purveyor. The annual cost of the purchased water was $1.16 million. Capital expenditures of Elizabethtown and Mount Holly are estimated to be $135.14 million and $4.69 million, respectively, through 2002. Expected future minimum rental payments required under noncancelable leases with terms in excess of one year at December 31 of each of the years 2000 through 2004 are: 2000, $.77 million; 2001, $.81 million; 2002 $.82 million; 2003, $.62 million and 2004, none. Rent expense totaled $.77 million, $.73 million and $.72 million in 1999, 1998 and 1997, respectively. Elizabethtown leases vehicles and certain office equipment. The minimum payments required under noncancelable leases with terms in excess of one year at December 31 of each of the years 2000 through 2004 are: $1.64 million per year. The lease expense was $1.37 million and $.26 million for 1999 and 1998, respectively. There were no lease expenses for 1997 as vehicles were not leased during that year. Environmental, Legal and Other Matters On September 23, 1999, two parties filed separate class action lawsuits for compensatory damages and related fees on behalf of themselves and similarly situated residential and commercial customers against Elizabethtown Water Company and certain other subsidiaries of E'town. The lawsuit alleges negligence regarding the quantity and quality of water services during the period in September 1999 when Elizabethtown's main water treatment plant was flooded from Tropical Storm Floyd and was withdrawn from service for approximately 3 days. Elizabethtown has notified its insurance carrier of the lawsuit and has filed a motion for summary judgment to dismiss the lawsuit as a class action proceeding prior to answering the allegations. In March 2000, the New Jersey Superior Court (NJSC) ruled that in the event the lawsuit is not dismissed, the case be referred to the New Jersey Board of Public Utilities (BPU) for purposes of investigating the matter and reporting its findings to the NJSC. The NJSC, in view of the BPU's findings, will then determine what, if any, damages were suffered by the plaintiffs and what liability, if any, rests with Elizabethtown. The Company maintains that such allegations are without merit and believes that the plaintiffs'chances of prevailing are not significant. There are environmental matters that are inherent in the production, transmission and distribution of water as well as in the treatment of wastewater. Elizabethtown and Mount Holly are sensitive to these issues and mitigate the environmental impact of these activities to the extent required by the laws and regulations under which these activities are governed and make efforts to exceed the regulatory requirements where practical. The Company, in the ordinary course of business, periodically becomes involved in litigation. There is currently no litigation in progress, other than the items discussed above, regarding environmental or other issues in which an outcome adverse to the Company could have a material impact on the financial statements. - -14- 12. Pension Plan and Other Postretirement Benefits Pension Plan Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan), which covers most employees of Elizabethtown and Mount Holly. The Plan provides for annual benefits at retirement equal to 1.6% of the average compensation for the highest four consecutive years, multiplied by the number of years of credited service. Supplemental Pension Plan The Company also has a supplemental retirement plan for certain management employees that is not funded. Eligibility for the designated employees is based upon their completion of twenty years of service. Payments are based upon 60% of the average compensation of an eligible management employee's last three years of service, net of the amount earned under the Plan. Benefits are payable for a period of 15 years and payments are made directly by the Company. In 1999, the supplemental compensation plan was amended to change the definition of compensation to include incentive compensation and other taxable benefits. The unfunded benefit obligation at December 31, 1999 and 1998 was $2.1 million and $1.5 million, respectively. Other Postretirement Benefits The Company provides certain health care and life insurance benefits for substantially all of its retired employees. As a result of a contract negotiated in February 1996 with the Company's bargaining unit, all union and non-union employees retiring after January 1, 1997, pay 25% of future increases in the premiums the Company pays for postretirement medical benefits. Under SFAS No. 106, the costs of postretirement benefits are accrued for each year the employee renders service, based on the expected cost of providing such benefits to the employee and the employee's beneficiaries and covered dependents, rather than expensing these benefits on a pay-as-you-go basis. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1999, and for 1999 was 9%. This rate decreases linearly each successive year until it reaches 3.8% in 2008, after which the rate remains constant. The rate increases effective January 1, 1998 allow for the full recovery of costs associated with the implementation of SFAS No. 106, including an amortization over 15 years of amounts previously deferred which were in excess of amounts previously being recovered in rates. As of December 31, 1999, the unamortized amounts that remain deferred are $3.02 million and $.13 million for Elizabethtown and Mount Holly, respectively. Other Postretirement Pension Plans Benefits (Thousands of Dollars) 1999 1998 1999 1998 - ------------------------------------------------------------------------------- Funded Status Change in benefit obligation during year: Benefit obligation at beginning of year $ 45,538 $ 40,172 $ 7,877 $ 6,556 Service cost 1,653 1,391 238 387 Interest cost 3,083 2,836 426 482 Benefit payments (2,255) (2,092) (238) (247) Actuarial (gain) or loss (5,539) 3,231 (2,345) 699 Plan amendments 650 - ------------------------------------------------------------------------------- Benefit obligation at end of year 43,130 45,538 5,958 7,877 - ------------------------------------------------------------------------------- Change in plan assets during year: Fair value of plan assets at beginning of year 51,844 46,537 2,171 1,331 Employer contributions 161 174 879 978 Benefit payments (2,255) (2,092) (238) (247) Actual return on plan assets 9,751 7,225 286 109 - ------------------------------------------------------------------------------- Fair value of plan assets at end of year 59,501 51,844 3,098 2,171 - ------------------------------------------------------------------------------- Reconciliation of funded status at end of year: Funded status 16,371 6,306 (2,860) (5,706) Unrecognized net transition (asset) or obligation (1,091) (1,358) 4,699 5,061 Unrecognized prior service cost 2,708 2,391 Unrecognized net (gain) or loss (18,227) (7,577) (4,999) (3,064) - ------------------------------------------------------------------------------- Accumulated postretirement benefits* $ (239) $ (238) $ (3,160) $ (3,709) - ------------------------------------------------------------------------------- * Recognized in the Consolidated Balance Sheets - -15-
Other Postretirement Pension Plans Benefits (Thousands of Dollars) 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- Net periodic benefit cost recognized for year Service cost $ 1,653 $ 1,391 $ 1,302 $ 238 $ 387 $ 383 Interest cost 3,083 2,836 2,713 426 482 444 Expected return on plan assets (4,564) (4,101) (3,520) (186) (109) (57) Net amortization and deferral (12) (155) 65 164 157 138 Deferral/amortization of regulated companies 249 247 (273) - ------------------------------------------------------------------------------------------------------- Net periodic benefit cost 160 (29) 560 891 1,164 635 - ------------------------------------------------------------------------------------------------------- Weighted - average assumptions for year Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50% Rate of compensation increases 3.50% 4.00% 4.00% Expected long-term rate of return on plan assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% Weighted - average assumptions at end of year Discount rate 7.75% 6.75% 7.25% 7.75% 6.75% 7.25% Rate of compensation increases 3.50% 4.00% 4.00% - ------------------------------------------------------------------------------------------------------
13. Related Party Transactions Utility Billing Services, Inc., a subsidiary of NUI Corporation, of which a Director of Elizabethtown is Chairman of the Board and a Director, provides data processing and related services to Elizabethtown and Mount Holly. The charges for all services totaled $.86 million, $.72 million, and $.67 million, for 1999, 1998 and 1997, respectively. The current contract expires December 31, 2000. A Director of Elizabethtown is also a Director of Summit Bank. Elizabethtown paid Summit Bank to serve as a bond trustee for Elizabethtown for fees of less than $.10 million in 1999, 1998 and 1997. 14. Quarterly Financial Data (Unaudited) A summary of financial data for each quarter of 1999 and 1998 follows: Earnings Applicable Operating Operating Net to Common Ouarter Revenues Income Income Stock - ------------------------------------------------------------------------------- (Thousands of Dollars) 1999 1st $ 31,066 $ 8,017 $ 4,283 $ 4,080 2nd 35,509 9,967 6,343 6,140 3rd 39,204 11,772 7,880 7,677 4th 32,527 7,298 2,899 2,695 - ------------------------------------------------------------------------------- Total $ 138,306 $ 37,054 $ 21,405 $ 20,592 =============================================================================== 1998 1st $ 30,507 $ 8,402 $ 4,645 $ 4,442 2nd 32,739 9,334 5,687 5,484 3rd 38,821 12,226 8,689 8,486 4th 32,780 9,636 5,747 5,543 - ------------------------------------------------------------------------------- Total $ 134,847 $ 39,598 $ 24,768 $ 23,955 =============================================================================== Water utility revenues are subject to seasonal fluctuation due to normal increased water consumption during the third quarter of each year. Net income in the fourth quarter of 1999 was impacted by certain significant operation costs, including labor and power costs indirectly attributable to a major flood at Elizabethtown's primary water treatment plant. - -16- EX-10 2 MATERIAL CONTRACTS Exhibit 10(m) AMENDMENT TO THE ELIZABETHTOWN WATER COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Effective as of November 1, 1999, pursuant to Section 11.1(b) of the Elizabethtown Water Company Supplemental Executive Retirement Plan (the "Plan"), the Plan is amended, subject to written consent by each Participant as required by Section 11.1(b) of the Plan (which consent may be obtained in counterparts), by adding the following new Section 11.1(c) following Section 11.1(b) of the Plan: "(c) In no event may the Plan be amended, modified, terminated or constructively terminated under Section 11.1(a) unless there is in place, as of the date of such amendment, modification or termination, another plan, fund or program that will provide retirement income benefits comparable or better (specifically and in the aggregate) to the benefits that would have been provided under the terms of this Plan (and the terms of the Employees' Retirement Plan of Elizabethtown Water Company, in the aggregate) without regard to such amendment, modification or termination (and without regard to the amendment, modification or termination of the Employees' Retirement Plan of Elizabethtown Water Company that gave rise to the amendment under Section 11.1(a) ). The preceding sentence will apply only to individuals who were Participants in the Plan as of the date of such Plan amendment, modification or termination, and will continue to apply to such Participants until their employment with the Company ends." Elizabethtown Water Company By: Anne Evans Estabrook Chairman of the Board I hereby consent to the adoption of this Amendment to the Plan: (Notary Seal) _________________________ Participant's Signature Dated: November 1, 1999 The above contract applies to the following individuals: Walter Braswell Beth Gates Edward Mullen Gail Brady Henry Patterson, III James Cowley Joseph Stroin Norbert Wagner Robert W. Kean, III Dennis W. Doll Andrew M. Chapman Exhibit 10(s) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, by and between E'town Corporation, a New Jersey corporation (the "Company"), and Andrew M. Chapman, residing at xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx (the "Executive"), dated as of the 21st day of November, 1999. W I T N E S S E T H: WHEREAS, the Executive has served as President of the Company and Elizabethtown Water Company ("Elizabethtown Water"); WHEREAS, pursuant to the Agreement and Plan of Merger, dated as of the date hereof, among Thames Water plc, a public limited company organized under the laws of England (the "Parent"), Edward Merger Sub, a New Jersey corporation and the Company and its subsidiaries (the "Merger Agreement"), the parties thereto have agreed to enter into the business combination transaction described therein; WHEREAS, the Company and Elizabethtown Water desires that, following the Effective Time (as defined in the Merger Agreement), the Executive serve as its President and Chief Executive Officer, and the Executive desires to so serve, in each case upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Executive hereby agree as follows: Employment. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to be employed by the Company, pursuant to the terms and conditions set forth in this Agreement. Term. Unless the Executive's employment shall sooner terminate pursuant to Section 5, the Company shall employ the Executive for a term commencing on the Effective Time (the "Commencement Date") and ending on the third anniversary thereof (the "Initial Term"). Effective upon the expiration of the Initial Term and of each Additional Term (as defined below), the Executive's employment shall automatically be extended, upon the same terms and conditions, for an additional period of one year (each, an "Additional Term"), in each such case, commencing on the expiration of the Initial Term or the then current Additional Term. The period during which the Executive is employed pursuant to this Agreement is referred to as the "Employment Period." Position and Duties. (a) During the Employment Period, the Executive shall serve as the President and Chief Executive Officer of the Company and Elizabethtown Water and have such duties and responsibilities as are customarily assigned to individuals serving in such positions and such other duties consistent with the Executive's title and position as determined by the Board of Directors of the Company (the "Board"); his duties shall include, without limitation, full profit and loss responsibility for the Company and sponsorship of all growth opportunities for the Company. The Executive shall report to (i) the Managing Director, International Operations of Thames Water International Services Ltd. with respect to all operational matters relating to the Company and its subsidiaries; and (ii) the Board with respect to all other matters. In addition, the Executive shall have a dotted line reporting relationship to the President of Thames Water North America Inc. ("Thames North America") with respect to development and marketing matters of the Company. (b)During the Employment Period, the Company shall cause the Executive to sit on the Board, and Executive shall sit on the Board of Directors of Thames North America ("Thames Board") and Elizabethtown Water. The Executive shall also be deputy chairman of AWM and AWWM. In addition, should the Parent, in the future, establish a board of directors for its businesses in the Americas, then the Executive shall be made a member of such board. During the Employment Period, and excluding any periods of vacation, holiday, personal leave and sick leave to which the Executive is entitled, the Executive shall devote the Executive's full business time, attention and ability to the business and affairs of the Company and shall use the Executive's reasonable best efforts to carry out the Executive's responsibilities faithfully and efficiently in a professional manner. It shall not be considered a violation of the foregoing for the Executive to (i) serve on corporate or civic boards reasonably approved by the Company or on charitable boards or committees, (ii) deliver lectures or fulfill speaking engagements and (iii) manage his or his family's personal investments, in each case so long as such activities do not substantially interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement, do not violate the Company's or the Parent's rules and policies (or present a material conflict of interest with the Company) and do not otherwise constitute a violation of Section 7 of this Agreement. The Executive shall comply with the rules and policies of the Company that are generally applicable to the Company's senior executives. Compensation. Base Salary. During the Employment Period, the Executive shall receive an annual base salary of $270,000, payable pursuant to the Company's normal payroll practices, but no less frequently than monthly ("Salary"). Unless this Agreement has been earlier terminated pursuant to Section 5, on the first anniversary of this Agreement and every anniversary thereafter the Compensation Committee of the Board (the "Compensation Committee") may increase the Executive's Salary from time to time as the Compensation Committee, in its sole and absolute discretion, shall determine. 1 Bonuses. 1Performance Bonus. During the Initial Term, the Company shall pay to the Executive an annual cash bonus (the "Performance Bonus") equal to ten (10) percent of the Executive's Salary, as in effect for such year, if the Executive achieves a specified performance target ("Performance Target") of which ninety percent (90%) shall be based on net profits before taxes based on an agreed annual budget, and ten percent (10%) shall be based on measurable customer service/water quality targets as determined by the Compensation Committee. Such Performance Bonus shall be increased by five percent (5%) of the Executive's Salary for each five percent (5%) increment over the Performance Target achieved by the Executive up to a maximum Performance Bonus of fifty percent (50%) of the Executive's Salary, payable as soon as reasonably practicable after the close of the Company's fiscal year. 2 Customer Bonus. During the Employment Period and on each anniversary of the date of signing of the Merger Agreement, the Company shall pay the Executive a cash bonus (the "Customer Bonus") equal to twelve and one-half percent (12.5%) of the Executive's Salary, as in effect immediately prior to such anniversary date (or in the case of the first anniversary of the date of signing the Merger Agreement, the date of signing the Merger Agreement), for each net increase of 7,500 customer metered connections to the Company's base customer level from such level on the day before the prior anniversary date, payable as soon as reasonably practicable after the determination of the Customer Bonus, if any. Wholesale customer metered connections shall be credited at a rate of fifty percent (50%) of retail customer metered connections. Such net increases shall exclude any customer metered connections of entities or businesses acquired by the Company outside of the State of New Jersey excluding those customer metered connections acquired outside of the State of New Jersey where AWM had disclosed to the Parent (or its affiliates) prior to the date hereof in connection with the due diligence for the Merger Agreement that it had commenced marketing activities outside of the State of New Jersey. Such net increase shall also exclude the acquisition of any privately held water system inside the State of New Jersey where such system has more than 20,000 metered customers. 3 Restricted Stock Bonus. Subject to the terms of the L-Tips Scheme, and during the Employment Period, the Executive shall be eligible to receive an annual grant of restricted shares of the stock of the Parent of up to twenty (20) percent of Salary, as in effect on the date of such grant (with the number of shares rounded down in the case of a fractional share). The fair market value of such shares shall be determined on the date of such grant in accordance with the terms of the L-Tips Scheme and the exchange rate shall be as published in the Wall Street Journal. Each grant shall vest over a four year period upon the attainment of performance goals specified in accordance with the terms of the L-Tips Scheme or attainment of age 65 by the Executive during the Employment Period. Each such grant shall be made as of the Commencement Date and each anniversary thereof during the Employment Period. 4 Special Retention Bonus. In consideration of the Executive's entering into this Agreement, at the Commencement Time, the Company shall pay a cash bonus ("Special Retention Bonus") equal to twenty (20) percent of the Executive's Salary in effect immediately prior to the Commencement Time. 2 Benefit Plans and Perquisites. The Executive shall be entitled to participate in all benefit, pension, savings, welfare, perquisite and other plans or arrangements that the Company may establish from time to time for its senior executive officers, subject to the terms and conditions of such plans or arrangements. Such plans or arrangements shall be no less favorable to the Executive than those provided to the Executive by the Company immediately prior to the Commencement Date. 3 Expenses. During the Employment Period, the Executive shall be entitled to receive reimbursement for all reasonable business expenses incurred by the Executive in carrying out the Executive's duties under this Agreement in accordance with the policies of the Company, provided that the Executive complies with the policies, practices and procedures of the Company for submission of expense reports, receipts, or similar documentation of such expenses. 4 Vacation. During the Employment Period, the Executive shall be entitled to paid vacation of five (5) weeks per year. 5 Indemnification; D&O Insurance. 1 The Company agrees that if, during or after the Employment Period, the Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is the Executive's alleged action in an official capacity while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held harmless by the Company to the fullest extent legally permitted or authorized by the Company's certificate of incorporation or bylaws or resolutions of the Board or, if greater, by the laws of the State of New Jersey, against all cost, expense, liability and loss (including, without limitation, attorney's fees, judgments, fines, Employee Retirement Income Security Act of 1974, as amended ("ERISA") excise taxes or other liabilities or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if he has ceased to be a director, member, employee or agent of the Company or other entity and shall inure to the benefit of the Executive's heirs, executors and administrators. The Company shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 calendar days after receipt by the Company of a written request for such advance. Such request shall include an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that he is not entitled to be indemnified against such costs and expenses. 2 Neither the failure of the Company (including its Board, independent legal counsel or stockholders) to have made a determination prior to the commencement of any proceeding concerning payment of amounts claimed by the Executive under Section 4(f)(i) above that indemnification of the Executive is proper because he has met the applicable standard of conduct, nor a determination by the Company (including its Board, independent legal counsel or stockholders) that the Executive has not met such applicable standard of conduct, shall create a presumption that the Executive has not met the applicable standard of conduct. (iii)The Company agrees to continue and maintain a directors' and officers' liability insurance policy covering the Executive to the extent the Company provides such coverage for its other executive officers. Termination of Employment. 1 Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death or upon a determination by the Board to terminate the Executive's employment as a result of his Disability during the Employment Period. For purposes of this Agreement, "Disability" shall mean the Executive's incapacity due to physical or mental illness such that the Executive shall have become qualified to receive benefits under the Company's long-term disability plans or any equivalent coverage required to be provided to the Executive pursuant to any other plan or agreement, whichever is applicable. 2 By the Company. The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. For purposes of this Agreement, "Cause" shall mean (i) the conviction of, or entering a plea of nolo contendre by, the Executive for a felony, or the willful commission by the Executive of a criminal or other act that in the judgment of the Board causes or will probably cause substantial economic damage to the Company or substantial injury to the business reputation of the Company; (ii) the commission by the Executive or an act of fraud in the performance of such Executive's duties on behalf of the Company that causes or will probably cause economic damage to the Company; or (iii) the continuing willful failure of the Executive to perform the Executive's duties, as such duties were performed by the Executive prior to the day of the Commencement Date (other than any such failure resulting from the Executive's incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the Executive by the Compensation Committee. For purposes of this paragraph 5(b), no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. A termination for Cause shall include a determination by the Board following the termination of the Employment Period that circumstances existed during the Employment Period that would have justified a termination by the Company for Cause. 3 By the Executive. The Executive may terminate employment during the Employment Period with or without Good Reason. For purposes of this Agreement, "Good Reason" means, without the Executive's written consent, and after written notice (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure an alleged failure are given to the Board by the Executive: 1 the assignment by the Company to the Executive of duties which (x) are materially different or require travel significantly more time consuming or extensive than the Executive's duties or business travel obligations immediately prior to the Commencement Date other than travel to either of the Parent's or Thames North America's principal place of business; (y)result in either a significant reduction in the Executive's authority and responsibility as a senior corporate executive of the Company (other than responsibility and authority over AWM and AWWM) or (z) the removal of the Executive from, or any failure to reappoint or reelect the Executive to, his current position with the Company, except in connection with a termination of the Executive's employment by the Company for Cause, by reason of the Executive's death or Disability; i) a change in the reporting obligations of the Executive; ii)a reduction by the Company of the Executive's Salary, or the failure to grant increases in the Executive's Salary pursuant to paragraph 4(a), or on a basis at least substantially comparable to those granted generally to other executives of the Company of comparable title, salary and performance ratings, made in good faith; iii) the relocation of the Company's principal executive offices to a location outside the State of New Jersey, or a requirement by the Company that the Executive relocate (except for required travel on the Company's business) (x) to a location which is outside a radius of fifty (50) miles from the Executive's place of employment with the Company immediately prior to the Commencement Date, or (y) to a location outside the State of New Jersey; or, in the event the Executive expressly consents in writing to any such relocation of the Executive outside such fifty mile radius or the State of New Jersey, the failure by the Company to pay (or reimburse the Executive for) all reasonable moving expenses incurred by the Executive relating to a change of principal residence in connection with such relocation and to indemnify the Executive against any loss realized in the sale of the Executive's principal residence in connection with any such change of residence, all to the effect that the Executive shall incur no loss upon such sale on an after tax basis; iv)the failure by the Company to continue to provide the Executive with substantially the same welfare benefits (which for purposes of this Agreement shall mean benefits under all welfare plans as that term is defined in Section 3(1) of ERISA, and bonus plans and any other plan in which executives of the Company of comparable title and salary or subject to similar performance criteria participate provided for by this Agreement; or v) the failure of the Company to obtain the express written assumption of and agreement to perform this Agreement by any successor as contemplated in paragraph 15(b) hereof. 4Termination Procedures. Any termination of the Executive's employment by the Company or by the Executive shall be communicated by Notice of Termination to the other party hereto given in accordance with this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date. For purposes of this Agreement, "Date of Termination" means (i) if the Executive's employment is terminated by the Company or by the Executive (other than for death or Disability), 90 days following the date of receipt of the Notice of Termination and (ii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or, in the case of Disability, the date of the determination of the Executive's Disability, provided that the Company may pay the Executive (at the rate of his Annual Base Salary as then in effect) in lieu of part or all of such notice period. The Executive shall not be entitled to give Notice of Termination that the Executive is terminating employment with the Company with or without Good Reason if the Executive shall have received a Notice of Termination from the Company on or prior to the date on which the Executive desires to give a Notice of Termination to the Company which Notice of Termination by the Company specifies that the Company has terminated the Executive's employment with the Company for Cause or by reason of the Executive's Disability. Notwithstanding anything contained in this Agreement to the contrary, the Executive shall not be entitled to give Notice of Termination that the Executive is terminating employment with the Company for Good Reason more than six (6) months following the occurrence of the event alleged to constitute Good Reason. 5Effect of Termination. Effective as of any Date of Termination, or, if earlier, as of any date specified by the Company at or following the delivery of a Notice of Termination, the Executive shall resign, in writing, from all Board memberships and other positions then held by him with the Company and its Affiliates. Obligations of the Company upon Termination. 1 General. If, during the Employment Period, the Executive's employment terminates for any reason, the Executive (or his estate, beneficiary or legal representative) shall be entitled to receive (i) any earned or accrued but unpaid Salary through the Date of Termination (including with respect to unused vacation time), (ii) in the case of any termination of employment other than for Cause, any earned but unpaid incentive awards payable pursuant to Section 4(b) with respect to any fiscal year of the Company ending prior to the Date of Termination and (iii) all amounts payable and benefits accrued under any otherwise applicable plan, policy, program or practice of the Company (other than relating to severance) in which Executive was a participant during his employment with Company in accordance with the terms thereof. 2 Termination During the Initial Term. If, during the Initial Term, the Company terminates the Executive's employment, other than for Cause, death or Disability, or the Executive terminates employment for Good Reason, the Company shall, subject to Section 12, in addition to the amounts provided in paragraph (a) above and excluding any amounts provided in paragraphs (c) and (d) below, pay to the Executive (or his estate, beneficiary or legal representative): i) for a period of thirty (30) months following the Date of Termination, as compensation for services rendered by the Executive on or before the Executive's Date of Termination, the Executive's Salary and incentive awards payable under Section 4(b) (subject to any applicable payroll taxes or other taxes required to be withheld computed at the rate for supplemental payments) at the highest rate in effect during the twenty-four (24) month period ending on the Date of Termination; and ii)for a period of thirty (30) months following the Date of Termination, the Company shall provide, at the Company's expense, the Executive and the Executive's spouse and children with full benefits under any employee benefit plan or arrangement in which the Executive participated immediately prior to the Date of Termination, including, without limitation, any hospital, medical and dental insurance with substantially the same coverage and benefits as were provided to the Executive immediately prior to the Date of Termination; and iii) for a period of thirty (30) months following the Date of Termination, the Company shall provide to the Executive, at the Company's expense, the automobile (or a comparable automobile) or automobile allowance, as the case may be, provided by the Company to the Executive immediately prior to the Date of Termination and the Company shall reimburse the Executive any and all expenses incurred by the Executive in connection with the use of such automobile during such thirty month period to the extent that the Company reimburses generally other executives of comparable title and salary or subject to comparable performance criteria; and iv)any restricted stock of the Parent in the Executive's account (including any stock granted under the L-Tips Scheme) as an officer of the Company and any stock options granted to the Executive on or prior to the Date of Termination which are not vested in the Executive as of the Date of Termination shall become immediately vested, and all such restrictions thereon (including, but not limited to, any restrictions on the transferability of such stock), and any restrictions on any other restricted stock or stock options awarded to the Executive through any plan, arrangement or contract of the Company on or before the Date of Termination, shall be null and void and of no further force and effect and the Company agrees to accelerate and make immediately exercisable in full all unmatured installments of all outstanding stock options to acquire stock of the Company which the Executive holds as of the Date of Termination; and v) the Executive's retirement benefits in effect immediately prior to the date on which a Change in Control of the Company occurred under the Company's Supplemental Executive Retirement Plan or any successor plan in effect on the date on which a Change in Control of the Company occurred (the "SERP"), shall become fully vested and nonforfeitable on the Date of Termination and (i) if the Executive has not attained the age of 65 as of the Date of Termination, the Executive shall be deemed to have attained the age of 65 as of the Date of Termination for purposes of the normal retirement provisions of the SERP, and (ii) the Executive shall be deemed to have accumulated fifteen (15) years of continuous service on the Date of Termination for purposes of the benefit accrual provisions of the SERP, in addition to the number of years of service already accumulated by the Executive as of the Date of Termination. In satisfaction of the Company's obligations under this Section 6(b)(v), the Company shall purchase an annuity or similar instrument owned by the Executive and payable to the Executive (or the Executive's beneficiaries, as the case may be) which provides for payment to the Executive of the SERP retirement benefits consistent with the provisions of Article 10 of the SERP which payment shall commence, subject to the Executive's right to make an Early Payout Election (as hereinafter defined), as of a date which is no later than sixty (60) days after the day on which the Executive attains the age 65 ("Retirement Age"). Notwithstanding the foregoing sentence, the Executive shall be entitled to elect to receive such payment of the SERP retirement benefits before the Executive's Retirement Age (an "Early Payout Election") if the Executive has completed on the Date of Termination twenty-five (25) Years of Service, which Years of Service shall include the fifteen (15) years of additional continuous service which the Executive is deemed to have accumulated on the Date of Termination, in addition to the number of years of service already accumulated by the Executive as of the Date of Termination, in accordance with subparagraph (ii) of this Section 6(b)(v). In the event that the Executive makes an Early Payout Election in accordance with this Section 6(b)(v), payment of the Executive's SERP retirement benefits under such annuity or similar instrument purchased by the Company under such annuity or similar instrument purchased by the Company under this Section 6(b)(v) shall commence as of a date which is no later than sixty (60) days after the day on which the Executive attains the age of 62; provided, however, that the SERP retirement benefits payable in accordance with the Early Payout Election by the Executive shall be calculated using the reduced percentage from 60% to 55% consistent with the provisions of Section 6.2 of the SERP. Such annuity or other instrument shall be purchased and delivered to the Executive by the Company within thirty (30) days after the Date of Termination. In the event that the Executive elects to make an Early Payout Election in accordance with this Section 6(b)(v), the Executive shall deliver to the Company a written notice of the Executive's Early Payout Election within ten (10) calendar days after the Date of Termination. 3 Special Termination. If, during the six (6) month period commencing on the earlier of either (i) the date of the first BPU rate order received by the Company's subsidiary, Elizabethtown Water after the Commencement Date; or (ii) eighteen (18) months from the Commencement Date, as the case may be, the Executive terminates employment with the Company and Elizabethtown Water, exercised in his sole discretion without Cause, the Company shall, subject to Section 12, in addition to the amounts provided in paragraph (a) above and excluding any amounts provided in paragraphs (b) and (d) of this section, pay to the Executive (or his estate, beneficiary or legal representative): 1 for a period of twenty-four (24) months following the Date of Termination, as compensation for services rendered by the Executive on or before the Executive's Date of Termination, the Executive's Salary (subject to any applicable payroll taxes or other taxes required to be withheld computed at the rate for supplemental payments) at the highest rate in effect during the twenty-four (24) month period ending on the Date of Termination; and i) for a period of twenty-four (24) months following the Date of Termination, the Company shall provide, at the Company's expense, the Executive and the Executive's spouse and children with full benefits under any employee benefit plan or arrangement in which the Executive participated immediately prior to the Date of Termination, including, without limitation, any hospital, medical and dental insurance with substantially the same coverage and benefits as were provided to the Executive immediately prior to the Date of Termination; and ii)for a period of twenty-four (24) months following the Date of Termination, the Company shall provide to the Executive, at the Company's expense, the automobile (or a comparable automobile) or automobile allowance, as the case may be, provided by the Company to the Executive immediately prior to the Date of Termination and the Company shall reimburse the Executive any and all expenses incurred by the Executive in connection with the use of such automobile during such twenty-four month period to the extent that the Company reimburses generally other executives of comparable title and salary or subject to comparable performance criteria; and iii) any restricted stock of the Parent which is unvested as of the Date of Termination shall become null and void; and iv)the Executive's retirement benefits in effect immediately prior to the Date of Termination under the Company's SERP shall be determined in accordance with the SERP except for the provisions relating to a Change of Control (as such term is defined in the SERP). 4 Termination during the Additional Term. If, during the Additional Term, the Company terminates the Executive's employment, other than for Cause, death or Disability, or the Executive terminates employment for Good Reason, the Company shall, subject to Section 12, in addition to the amounts provided in paragraph (a) above and excluding any amounts provided in paragraphs (b) and (c) above, pay to the Executive (or his estate, beneficiary or legal representative): i) for a period of twelve (12) months following the Date of Termination, as compensation for services rendered by the Executive on or before the Executive's Date of Termination, the Executive's Salary (subject to any applicable payroll taxes or other taxes required to be withheld computed at the rate for supplemental payments) at the highest rate in effect during the twenty-four (24) month period ending on the Date of Termination; and ii)benefits required to be provided by the Company pursuant to section 4980B of the Internal Revenue Code of 1986, as amended (the "Code") ("COBRA"). 1.Covenant Not to Compete. The Executive acknowledges and agrees that the Company has a legitimate interest in being protected from the Executive's being employed in a position of management by an entity that competes with the Company. The Executive and the Company have considered carefully how best to protect the legitimate interests of the Company without unreasonably restricting the economic interests of the Executive, and hereby agree to the following restrictions, in addition to those contained in Section 8, as the most reasonable and equitable under the circumstances. During the Employment Period and for the period during which the Executive receives payments, pursuant to Sections 6(b), (c) or (d) hereof, after the Executive's termination of employment with the Company, but in no event beyond the period with respect to which the Executive is entitled to Salary after termination of employment (the "Restriction Period"), the Executive will not, directly or indirectly (whether as sole proprietor, partner or venturer, stockholder, director, officer, employee or consultant or in any other capacity as principal or agent or through any person, subsidiary or employee acting as nominee or agent): 5 Conduct or engage in or be interested in or associated with any person, firm, association, partnership, corporation or other entity that, within the "Territory" (as defined below), directly competes with any service or product that the Company actually provides to its customers, or that the Company has taken substantial steps to commence providing that is (i) a significant part of the Company's business or (ii) intended to be a significant part of the Company's business in the Company's business plan, in each case determined as of the Date of Termination (the "Business"), provided that the foregoing shall not apply if the Executive's interest or association with such competitor is unrelated to the Business. "Territory" shall mean the geographic area in which services or products are actually provided by the Company, or that the Company has taken substantial steps to commence providing that is (i) a significant part of the Company's business or (ii) intended to be a significant part of the Company's business in the Company's business plan, in each case determined as of the Date of Termination. 6 Take any action, directly or indirectly, to finance, guarantee or provide any other material assistance to any person, firm association, partnership, corporation or other entity which conducts or engages in the Business in the Territory with respect to any activity that competes with the Business; 7 Influence or attempt to influence any person, firm, association, partner-ship, corporation or other entity who is a contracting party with the Company at any time during the Restriction Period to terminate any written agreement with the Company except to the extent the Executive is acting on behalf of the Company in good faith; or 8 Hire or attempt to hire for employment any person who is employed by the Company at the time of hiring or attempted hiring or whose active employment with the Company ceased less than six months prior to such time, or attempt to influence any such person to terminate employment with the Company, except to the extent the Executive is acting on behalf of the Company in good faith; provided, however, that nothing herein shall prohibit the Executive from general advertising for personnel not specifically targeting any employee or other personnel of the Company. 9 The restrictive provisions of this Agreement shall not prohibit the Executive from having as an investment an equity interest in the securities of any corporation engaged in the Business, which securities are listed on a recognized securities exchange or traded in the over-the-counter market to the extent that such interest does not exceed 2% of the value or voting power of such corporation and does not constitute control of such corporation. For purposes of this Section 7 and Sections 8, 9 and 10 of this Agreement, the term "Company" shall include the Company or with respect to the Business or Territory in which the Executive is involved, its affiliates. 2.Confidential Information. The Executive acknowledges and agrees that all material information that is not publicly available or generally known in the industry concerning the Company's business including, without limitation, information relating to its products, customer lists, pricing, trade secrets, patents, business methods, and cost data, business plans and strategies (collectively, the "Confidential Information") is and shall remain the property of the Company. The Executive recognizes and agrees that all of the material Confidential Information, whether developed by the Executive or made available to the Executive, other than information that is not material to the Company or generally known to the public or generally known in the industry, is a unique asset of the business of the company, the disclosure of which would be damaging to the Company. Accordingly, the Executive agrees to hold such material Confidential Information in a fiduciary capacity for the benefit of the Company. The Executive agrees that he will not at any time during or within 10 years after the Executive's employment with the Company for any reason, directly or indirectly, disclose to any person any material Confidential Information the disclosure of which could harm the Company, other than information that is already known to the public or generally known in the industry, except as may be required in the ordinary course of business of the Company or as may be required by law. Promptly upon the termination of this Agreement for any reason, the Executive agrees to return to the Company any and all documents, memoranda, drawings, notes and other papers and items (including all copies thereof, whether electronic or otherwise) embodying any Confidential Information of the Company which are in the possession or control of the Executive. Information concerning the Company's business that becomes public as a result of the Executive's breach of this Section 8 shall be treated as Confidential Information as defined in this Section 8. The Executive shall not be deemed to have breached this Section 8 unless the disclosure of such Confidential Information actually causes harm to the Company or any of its affiliates. 3.Breach of Certain Provisions. The Executive acknowledges that a violation on the Executive's part of any of the covenants contained in Sections 7 or 8 of this Agreement would cause immeasurable and irreparable damage to the Company. The Executive represents that his economic means and circumstances are such that the provisions of this Agreement, including the non-competition, non-solicitation of employees, confidentiality and Company property provisions, will not prevent him from providing for himself and his family on a basis satisfactory to him and them. Accordingly, the Executive agrees that the Company shall be entitled to injunctive relief in any court of competent jurisdiction for any actual or threatened violation of any such covenant in addition to any other remedies it may have. The Executive agrees that in the event that any arbitrator or court of competent jurisdiction shall finally hold that any provision of Sections 7 or 8 hereof is void or constitutes an unreasonable restriction against the Executive, the provisions of such Section shall not be rendered void but shall apply to such extent as such arbitrator or court may determine constitutes a reasonable restriction under the circumstances. Any breach by the Executive of the provisions of Sections 7 or 8 of this Agreement shall relieve the Company of all obligations to any further payments to the Executive pursuant to this Agreement or otherwise under any incentive or equity awards made by the Company. 4.Property of the Company. The Executive acknowledges that from time to time in the course of providing services pursuant to this Employment Agreement, he shall have the opportunity to inspect and use certain property, both tangible and intangible, of the Company, including Confidential Information. The Executive hereby agrees that such property shall remain the exclusive property of the Company and shall be returned to the Company upon the Executive's termination of employment. 5.Litigation; Cooperation. If this Agreement is terminated by the Company other than for Cause or by the Executive for Good Reason, in consideration of the payments to be made to the Executive by the Company pursuant to Section 6(b) of this Agreement, the Executive agrees, during the period that the Company is actually making such payments to the Executive and providing benefits to the extent required pursuant to Section 6(b), to provide to the Company and its affiliates truthful and complete cooperation including, but not limited to, the Executive's appearance at interviews and depositions at reasonable times (taking into account the Executive's then employment and place of residence) in all regulatory and litigation matters relating to the Company and the Executive's employment by the Company, whether or not such matters have been commenced at the time of such termination, and to provide to counsel to the Company and its affiliates, upon request, all documents in the Executive's possession or under his control relating to such regulatory and litigation matters, all at no additional compensation to the Executive; provided, however, that the Company will reimburse the Executive for (a) all reasonable expenses, including travel, lodging, meals and attorneys' fees and (b) any salary forfeited by the Executive or vacation time consumed by him during time spent by the Executive, in connection with the foregoing. 6.Release. In consideration of the payments to be made to the Executive pursuant to Section 6(b), (c) or (d) of this Agreement and as a condition to the payment thereof, the Executive acknowledges that all such payments, if made in accordance with the terms of this Agreement, shall constitute complete satisfaction of all obligations owed by the Company to the Executive hereunder and shall further constitute the Executive's sole remedy against the Company regarding the Executive's employment hereunder. The parties hereby agree that if this Section 12 becomes applicable they will execute a mutually acceptable general release to reflect the provisions of this Section. 7.Certain Additional Payments by the Company. 10Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment award, benefit or distribution by the Company to or for the benefit of the Executive (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 13) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any corresponding provisions of state or local tax laws, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax together with any such interest and penalties, are hereinafter collectively referred to as (the "Excise Tax")), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including, but not limited to, any income taxes, Excise Taxes and any interest or penalties imposed with respect to any such taxes) imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. 11 Subject to the provisions of Section 13(c), all determinations required to be made under this Section 13, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company in good faith in consultation with the Executive and his advisors, which shall provide detailed supporting calculations to the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment (or, if later, within fifteen (15) days of the date it is determined by the Company that the Payment is subject to the Excise Tax). Any Gross-Up Payment, as determined pursuant to this Section 13, shall be paid by the Company to the Executive within five days of the receipt of the Company's determination. As a result of the uncertainty in the application of Section 4999 of the Code, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 13(c) and the Executive thereafter is required to make a payment of any Excise Tax, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of independent counsel agreed upon by the parties that the Excise Tax is less than the amount taken into account under Section 13(a) of this Agreement, the Executive shall repay to the Company within thirty (30) days of the Executive's receipt of notice of such final determination or opinion the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction) plus any interest received by the Executive on the amount of such repayment. 12 The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall appraise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: A(give the Company any information reasonably requested by the Company relating to such claim, B(take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company. C(cooperate with the Company in good faith in order effectively to contest such claim, and D(permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 13(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penal-ties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amounts claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 13 If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 13(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 13(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 13(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 8.Arbitration. Any dispute, controversy, or question arising under, out of, or relating to this Agreement (or the breach thereof) or, Executive's employment with the Company or termination thereof (including, but not limited to, claims of discrimination), shall be referred for arbitration to be held in New Jersey (or such other place as the parties and the arbitrator shall agree) to a neutral arbitrator selected by the Executive and the Company and this shall be the exclusive and sole means for resolving such dispute (other than for injunctive relief under Section 9 of this Agreement). The arbitration shall be conducted in accordance with the Employment Arbitration Rules (the "Rules") of the American Arbitration Association (the "AAA") in effect at the time of the arbitration, except that the arbitrator shall be selected by alternatively striking from a list of five arbitrators supplied by the AAA, and the decision of the arbitrator shall be governed by the rule of law. Such right to submit a dispute arising hereunder to arbitration and the decision of the neutral arbitrator shall be final, conclusive and binding on all parties and interested persons and no action at law or in equity shall be instituted or, if instituted, further prosecuted by either party other than to enforce the award of the neutral arbitrator. The arbitrator shall take submissions and hear testimony, if necessary, and shall render a written decision as promptly as possible. The arbitrator may require discovery for good cause shown. Each party shall bear its own costs and expenses incurred in connection with any such arbitration; provided the Company will initially pay for the fees, time, charges and expenses of the arbitrator and the AAA; provided, further, that the arbitrator shall be entitled to award to the prevailing party reimbursement of its reasonable legal costs and expenses (including with respect to the arbitrator and the AAA). 9.Successors. 14 This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive except by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. 15 This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns, provided that the Company may not assign this Agreement except in connection with the assignment or disposition of all or substantially all of the assets or stock of the Company. In the event of such assignment, a failure by the successor to specifically assume, in a writing reasonably acceptable in form and content to the Executive, and delivered to the Executive, the obligations and liabilities of the Company hereunder shall be deemed a material breach of this Agreement. Except as specifically provided in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 10.Miscellaneous. 16 This Agreement shall be governed by, and construed in accordance with, the laws of the State of New Jersey, without reference to its conflict of law rules. 17 All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Andrew M. Chapman XXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXX (Home Address) If to the Company: Thames Water North America Inc. Two Stamford Plaza - 15th Floor 281 Tresser Boulevard Stamford, CT 06091 Attn: Jeremy Pelczer With a copy to: Thames Water North America Inc. Two Stamford Plaza - 15th Floor 281 Tresser Boulevard Stamford, CT 06091 Attn: Ronald E. Walsh or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 18 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. 19 Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement, and shall pay over to the appropriate authorities in a manner consistent with all applicable requirements, all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. 20 The Executive's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. 21 Except as provided herein, the Executive and the Company acknowledge that this Agreement constitutes the entire agreement between the parties and supersedes any prior agreement between the Executive and the Company concerning the subject matter hereof, including, but not limited to, the change of control agreement between the Executive and Company and any amendment thereto (the "Prior Agreement"). The Executive agrees that the Prior Agreement shall terminate as of the Commencement Date, and the Executive explicitly waives any rights to payments or benefits under the Prior Agreement, other than any earned or accrued base salary, bonus or other amounts payable or benefits owed and unpaid prior to the Commencement Date. The Executive shall not be entitled to participate in any severance plans or programs of the Company during the Employment Period. 22 This Agreement shall be of no force and effect if the Merger (as defined in the Merger Agreement) does not become effective and shall automatically expire if the Merger Agreement is terminated. 23 This Agreement may be executed in several counterparts, each of which be deemed an original, and said counterparts shall constitute but one and the same instrument. 24 The Company and Thames North America will be jointly and severally liable for all obligations and agreements of each of them hereunder. 25 Nothing in this Agreement shall be deemed to entitle the Executive to continued employment with the Company and the rights of the Company to terminate the employment of the Executive shall continue as fully as though this Agreement were not in effect; provided, that, this provision shall not constitute a waiver by the Executive of his rights under this Agreement. 26 The Executive shall not be required to mitigate damages or the amount of any payment or other benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or other benefit provided for in this Agreement then or thereafter due to the Executive be reduced or modified by any compensation or other payment or benefit earned or received by the Executive as the result of or in connection with any employment of the Executive by another employer after the Date of Termination, or otherwise. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. EXECUTIVE /s/ Andrew M. Chapman ____________________________ ANDREW M. CHAPMAN E'TOWN CORPORATION /s/ Anne Evans Estabrook ______________________________ Name: Title: THAMES WATER NORTH AMERICA INC. /s/ Ronald E. Walsh ______________________________ Name: Ronald E. Walsh Title: Vice President Exhibit 10(t) AMENDMENT TO AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT Dated August 20, 1998 by and between Executives named below and E'TOWN CORPORATION This Amendment ("Amendment") to the Amended and Restated Change In Control Agreement, dated as of August 20, 1998 between Executive Named Below (the "Executive") and E'TOWN CORPORATION (the "Company"), is made effective as of this 20th day of November, 1999 by and between the Executive and the Company. WITNESSETH: WHEREAS, the Company has entered into that certain Amended and Restated Change in Control Agreement with the Executive, dated as of August 20, 1998 (the "Agreement"), which sets forth the terms and conditions under which benefits and payments shall be made by the Company or its successor to the Executive upon any termination of the Executive's employment with the Company in the event of a change in control of the Company as defined in the Agreement; and WHEREAS, the parties hereto have agreed to make certain clarifications to the terms and conditions of the Agreement, as are reflected herein; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereto, intending to be legally bound hereby, agree to amend the Agreement as follows: 1. Paragraph 4(f) of the Agreement is amended by replacing paragraph 4(f) in its entirety with the following: "4(f). the Executive's retirement benefits in effect immediately prior to the date on which a Change in Control of the Company occurred under the Company's Supplemental Executive Retirement Plan, or any successor plan in effect on the date on which a Change in Control of the Company occurred (the "SERP"), shall become fully vested and nonforfeitable on the Date of Termination and (i) if the Executive has not attained the age of 65 as of the Date of Termination, the Executive shall be deemed to have attained the age of 65 as of the Date of Termination for purposes of the normal retirement provisions of the SERP, and (ii) the Executive shall be deemed to have accumulated ten (10) years of continuous service on the Date of Termination for purposes of the benefit accrual provisions of the SERP, in addition to the number of years of service already accumulated by the Executive as of the Date of Termination. In satisfaction of the Company's obligations under this paragraph 4(f), the Company shall purchase an annuity or similar instrument owned by the Executive and payable to the Executive (or the Executive's beneficiaries, as the case may be) which provides for payment to the Executive of the SERP retirement benefits consistent with the provisions of Article 10 of the SERP which payment shall commence, subject to the Executive's right to make an Early Payout Election (as hereinafter defined), as of a date which is no later than sixty (60) days after the day on which the Executive attains the age 65 ("Retirement Age"). Notwithstanding the foregoing sentence, the Executive shall be entitled to elect to receive such payment of the SERP retirement benefits before the Executive's Retirement Age (an "Early Payout Election") if the Executive has completed on the Date of Termination twenty-five (25) Years of Service, which Years of Service shall include the ten (10) years of additional continuous service which the Executive is deemed to have accumulated on the Date of Termination, in addition to the number of years of service already accumulated by the Executive as of the Date of Termination, in accordance with subparagraph (ii) of this paragraph 4(f). In the event that the Executive makes an Early Payout Election in accordance with this paragraph 4(f), payment of the Executive's SERP retirement benefits under such annuity or similar instrument purchased by the Company under this paragraph 4(f) shall commence as of a date which is no later than sixty (60) days after the day on which the Executive attains the age of 62; provided, however, that the SERP retirement benefits payable in accordance with the Early Payout Election by the Executive shall be calculated using the reduced percentage from 60% to 55% consistent with the provisions of Section 6.2 of the SERP. Such annuity or other instrument shall be purchased and delivered to the Executive by the Company within thirty (30) days after the Date of Termination. In the event that the Executive elects to make an Early Payout Election in accordance with this paragraph 4(f), the Executive shall deliver to the Company a written notice of the Executive's Early Payout Election within ten (10) calendar days after the Date of Termination; and" 2. If any of the terms and conditions of the Agreement are inconsistent with the terms and conditions of this Amendment, the terms and conditions of this Amendment shall supercede such inconsistent terms and conditions of the Agreement. Except to the extent changed or modified herein, all terms and conditions of the Agreement shall remain unchanged and be in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first written above. EXECUTIVE: /s/ Executive named below E'TOWN CORPORATION By: /s/ Anne Evans Estabrook Anne Evans Estabrook, Chairman of the Board The above contract applies to the following individuals: Walter Braswell Beth Gates Edward Mullen Gail Brady Henry Patterson, III James Cowley Joseph Stroin Norbert Wagner Robert W. Kean, III Dennis W. Doll Andrew M. Chapman EX-12 3 RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 E'TOWN CORPORATION AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges (In Thousands Except Ratios) Year Ended December 31, 1999 1998 1997 1996 1995 ------------------------------------------------------ EARNINGS: Net income $ 20,487 $ 22,330 $ 19,260 $ 15,073 $ 15,296 Federal income taxes 11,488 12,226 10,895 8,361 8,753 Interest charges 19,416 17,826 17,340 13,316 11,698 ------------------------------------------------------ Earnings available to cover fixed charges 51,391 52,382 47,495 36,750 35,747 ------------------------------------------------------ FIXED CHARGES: Interest on long-term debt 16,109 16,217 14,807 13,800 11,696 Other interest 3,256 1,641 2,560 2,645 2,390 Amortization of debt discount - net 446 438 411 395 358 ------------------------------------------------------ Total fixed charges $ 19,811 $ 18,296 $ 17,778 $ 16,840 $ 14,444 ------------------------------------------------------ Ratio of Earnings to Fixed Charges 2.59 2.86 2.67 2.18 2.47 ====================================================== Earnings to Fixed Charges represents the sum of Net Income, Federal income taxes and Interest Charges (which is reduced by Capitalized interest), divided by Fixed Charges. Fixed Charges consist of interest on long and short-term debt (which is not reduced by Capitalized Interest), and Amortization of debt discount. Exhibit 12(a) ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY Computation of Ratio of Earnings to Fixed Charges (In Thousands Except Ratios) Year Ended December 31, 1999 1998 1997 1996 1995 ----------------------------------------------------- EARNINGS: Net income $ 21,405 $ 24,768 $ 20,905 $ 16,755 $ 17,325 Federal income taxes 11,576 13,101 11,274 8,822 9,161 Interest charges 16,502 15,616 16,622 12,804 11,115 ----------------------------------------------------- Earnings available to cover fixed charges 49,483 53,485 48,801 38,381 37,601 ----------------------------------------------------- FIXED CHARGES: Interest on long-term debt 14,661 14,721 14,030 13,011 10,892 Other interest 1,780 960 2,382 2,640 2,344 Amortization of debt discount - net 399 391 376 361 324 ----------------------------------------------------- Total fixed charges $ 16,840 $ 16,072 $ 16,788 16,012 13,560 ----------------------------------------------------- Ratio of Earnings to Fixed Charges 2.94 3.33 2.91 2.40 2.77 ===================================================== Earnings to Fixed Charges represents the sum of Net Income, Dividends, Federal income taxes and Interest Charges (which is reduced by Allowance for Debt Funds Used During Construction), divided by Fixed Charges. Fixed Charges consist of interest on long and short-term debt (which is not reduced by Allowance for Debt Funds Used During Construction), and Amortization of debt discount. Exhibit 12(b) ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends (In Thousands Except Ratios) Year Ended December 31, 1999 1998 1997 1996 1995 ---------------------------------------------------- EARNINGS: Net income $ 21,405 $ 24,768 $ 20,905 $ 16,755 $ 17,325 Federal income taxes 11,576 13,101 11,274 8,822 9,161 Interest charges 16,502 15,616 16,622 12,804 11,115 ----------------------------------------------------- Earnings available to cover fixed charges 49,483 53,485 48,801 38,381 37,601 ----------------------------------------------------- FIXED CHARGES AND PREFERRED DIVIDENDS: Interest on long-term debt 14,661 14,721 14,030 13,011 10,892 Preferred dividend requirement (1) 1,253 1,243 1,251 1,241 1,243 Other interest 1,780 960 2,382 2,640 2,344 Amortization of debt discount - net 399 391 376 361 324 ----------------------------------------------------- Total fixed charges $ 18,093 $ 17,315 $ 18,039 $ 17,253 $ 14,803 ----------------------------------------------------- Ratio of Earnings to Fixed Charges and Preferred Dividends 2.73 3.09 2.71 2.22 2.54 ===================================================== (1) Preferred Dividend Requirement: Preferred dividends 813 813 813 813 813 Effective tax rate 35.10% 34.60% 35.04% 34.49% 34.59% ----------------------------------------------------- Preferred dividend requirement $ 1,253 $ 1,243 $ 1,251 1,241 1,243 ===================================================== Earnings to Fixed Charges and Preferred Dividends represents the sum of Net Income, Federal income taxes and Interest Charges (which is reduced by Allowance for Debt Funds Used During Construction), divided by Fixed Charges. Fixed Charges and Preferred Dividends consist of interest on long and short-term debt (which is not reduced by Allowance for Debt Funds Used During Construction), dividends on Preferred Stock on a pre-tax basis and Amortization of debt discount. EX-13 4 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 Exhibit 13 represents the portion of the 1999 Annual Report to Shareholders which is incorporated by reference in this filing on Form 10-K. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS E'town Corporation (E'town or Corporation), a New Jersey holding company, is the parent company of Elizabethtown Water Company (Elizabethtown or Company), Edison Water Company (Edison), E'town Properties, Inc. (Properties), Liberty Water Company (Liberty), Applied Water Management, Inc. (AWM) and Applied Wastewater Management, Inc. (AWWM). The Mount Holly Water Company (Mount Holly) is a wholly-owned subsidiary of Elizabethtown. The assets and operating results of Elizabethtown constitute the predominant portions of E'town's assets and operating results. Mount Holly , Liberty, AWM and Edison contributed 3.2%, 5.4%, 7.4% and 1.6%, respectively, of the Corporation's consolidated operating revenues for 1999. Elizabethtown, Mount Holly and AWWM comprise the Regulated Utilities segment, Liberty and Edison comprise the Contract Operations segment, AWM is the Engineering/Operations and Construction segment and E'town and Properties comprise the Financing and Investment segment (see Note 16 to E'town's Notes to Consolidated Financial Statements). The following analysis sets forth significant events affecting the financial condition of the various segments at December 31, 1999, and the results of operations for the years ended December 31, 1999 and 1998. PENDING MERGER On November 21, 1999, E'town entered into an agreement (Merger Agreement) with Thames Water Plc (Thames Water) under which Thames Water has agreed, subject to certain conditions, to acquire E'town for $68 per share in cash or approximately $607 million. Thames Water will also assume the debt of E'town. The acquisition will take the form of a merger (Merger) of E'town with a newly formed subsidiary of Thames Water and E'town will be the surviving company. A special meeting of shareholders is expected to be held during the second quarter of 2000 to seek shareholder approval of the transaction. The acquisition is also subject to approval by the New Jersey Board of Public Utilities (BPU), the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvement Act of 1976. Certain clearances must also be obtained from the New Jersey environmental regulators. The transaction is expected to close prior to the end of 2000. - -1- LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures Program Net capital expenditures were $62.3 million in 1999. Included in this total are $57.4 million for additions and improvements to water utility plant and wastewater facilities, $1.8 million for the purchase of a regulated water and wastewater operation by Mount Holly and AWWM and $3.1 million for capital additions under privatization contracts. For the three years ending December 31, 2002, capital and investment requirements for E'town are estimated to be $171.4 million, consisting of (i) expenditures for the Regulated Utilities Segment ($135.1 million for Elizabethtown, $4.7 million for Mount Holly and $5.2 million for AWWM), (ii) investments in the Contract Operations segment for concession payments by Liberty and capital improvements for Liberty and Edison of $24.4 million and (iii) investments in the Engineering/Operations and Construction segment of $2.0 million. See "Economic Outlook" for a discussion of Contract Operations. These estimates do not include any amounts for possible additional acquisitions or privatization activities in the three-year period. REGULATED UTILITIES SEGMENT Elizabethtown Elizabethtown's three-year capital program includes $62.0 million for routine projects (services, hydrants, system rehabilitation and main extensions not funded by developers) and $73.1 million for transmission system upgrades, a new operations center, expansion of the Canal Road Water Treatment Plant (Canal Road) and other projects. Canal Road will be expanded to provide for enhanced system reliability and to accommodate customer growth. Canal Road was designed as a 40 million gallon per day (MGD) plant, expandable to 200 MGD. Mount Holly During the next three years, Mount Holly expects to spend $4.7 million, of which $3.3 million is for routine projects (services, hydrants and main extensions not funded by developers). In 1998 Mount Holly commenced a construction project, called the Mansfield Project, to comply with New Jersey legislative restrictions to obtain alternative water supplies, thereby reducing its water pumpage from an aquifer, which had been subject to over-pumping by Mount Holly and various local purveyors in a portion of southern New Jersey. A portion of this project was placed into service in the third quarter of 1998 and the remaining portion of the project was placed into service in late December 1999. - -2- To settle an appeal initiated by another water purveyor in 1995 concerning the diversion rights for the Mansfield Project, Mount Holly signed a Stipulation in 1997 with the purveyor, the New Jersey Department of Environmental Protection (DEP) and other parties, requiring Mount Holly to purchase one million gallons per day from the other purveyor during the two-year period that the Mansfield Project was being constructed. Purchases began during March of 1998, after completion of an interconnection and ended in January 2000 shortly after the Mansfield Project went into service. In September 1997 Mount Holly filed a petition with the BPU to establish a Purchased Water Adjustment Clause (PWAC) to reflect the cost of water purchased from the other purveyor under the aforementioned Stipulation Agreement. In May 1998 the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.3 million or 38.9%. Effective January 1, 2000, Mount Holly received an increase in annual rates of $1.9 million. This increase included costs for Mount Holly's Mansfield Project that was placed in service at the end of December 1999. The rate decision also reflected the elimination of the PWAC. After the elimination of the PWAC, the net rate increase was $.5 million. This increase also reflects additional construction and financing costs, as well as increases in operating costs, since base rates were last established in January 1996. AWWM In June 1998 the Corporation purchased AWWM, which is a regulated wastewater utility. AWWM owns and operates water and wastewater facilities. In some instances, AWWM purchases the wastewater facilities from developers that were constructed by AWM. These purchases add to E'town's regulated utility customer base. AWWM expects to incur capital expenditures of $5.1 million in the next three years for purchases of wastewater plants from developers. In June 1999 Mount Holly purchased Homestead Water Utility, Inc. and AWWM purchased Homestead Treatment Utility, Inc. for a combined purchase price of $1.8 million. The entities provide water and wastewater services to approximately 800 customers of the Homestead community in southern New Jersey. CONTRACT OPERATIONS SEGMENT LIBERTY In July 1998 E'town, through Liberty, entered into a contract with the city of Elizabeth (Elizabeth), New Jersey to operate its water system under a 40-year contract serving approximately 17,600 customers. Under the contract, Liberty made payments to Elizabeth of $19.7 million in 1998 and $12 million in 1999 and is obligated to make a payment of $19 million in June 2000. Also under the terms of the contract, Liberty will deposit $57.8 million from customer collections during the 40-year contract into a fund administered by Elizabeth (Fund Deposits), of which $52.3 million is due after 2012, to be used by Elizabeth to pay for capital improvements or for other water system purposes. Liberty is responsible for $7.45 million of construction expenditures, primarily for meter replacements, during the life of the contract. Of these total commitments, approximately $2.5 million is expected to be expended in the next three years. During the life of the contract, E'town will receive all water revenues from billing the customers of the water system in accordance with rate increases set forth in the contract except for the Fund Deposits discussed above. E'town is also responsible for all operating expenses as well as the capital expenditures discussed above. Performance by Liberty of the contract provisions is guaranteed by E'town. - -3- EDISION In 1997 E'town, through Edison, entered into a contract with the township of Edison, New Jersey to operate its water system under a 20-year contract serving approximately 11,500 customers. Edison bills and receives all water revenues generated as a result of operating the water system and pays: (i) all operating and maintenance expenses for the water system, (ii) certain annual payments to the township of Edison and (iii) costs of specific capital improvements. Aggregate annual payments and the estimated costs of capital improvements are expected to be approximately $25 million during the 20-year life of the contract, of which $12.5 million has been spent as of December 31, 1999. Of the total, approximately $2.9 million is expected to be expended in the next three years. An initial payment of $5.7 million was made upon the closing in June 1997. Performance by Edison of the contract provisions is guaranteed by E'town. If the Elizabeth or Edison contracts were terminated by either the township of Edison or the city of Elizabeth, the unamortized balance of the concession fees and amounts paid for additional capital improvements would be refunded to Liberty and Edison in accordance with the contracts. ENGINEERING/OPERATIONS AND CONSTRUCTION SEGMENT AWM In June 1998 the Corporation purchased AWM, which provides one-stop shopping for water and wastewater services to residential and commercial developers. These services include the design, construction and operation of water and wastewater facilities and, in some instances, purchase of such utilities from developers at project build-out by AWWM, thereby adding to E'town's regulated utility customer base. AWM expects to incur capital expenditures of $2.0 million during the next three years. These expenditures consist primarily of vehicles and equipment used in the construction and waste hauling operations. In 1999 AWM acquired a septic services business for $.7 million and a group of small non-regulated wastewater treatment facilities for $1.0 million. Capital Resources During 1999 E'town financed 37.0% of its capital expenditures, including capital expenditures for the Regulated Utilities segment and investments in the Contract Operations and Engineering/ Operations and Construction segments, from internally generated funds (after payment of common stock dividends). The balance was financed with a combination of short-term borrowings under lines of credit, proceeds from capital contributions from E'town (funded by issuances of Common Stock under the Corporation's Dividend Reinvestment and Stock Purchase Plan) and proceeds from the sale of real estate. - -4- For the three-year period ending December 31, 2002, E'town estimates that 52% of its currently projected capital expenditures and concession fee obligations for all segments are expected to be financed with internally generated funds (after payment of common stock dividends). The balance will be financed with a combination of proceeds from the sale of E'town common stock or capital contributions from Thames Water after the pending Merger, medium-term notes, long-term debt, proceeds of tax-exempt New Jersey Economic Development Authority (NJEDA) bonds and short-term borrowings. Elizabethtown expects to pursue additional tax-exempt financing to the extent that final allocations are granted by the NJEDA. In February 2000 E'town issued $30 million of 7.69% Senior Notes due 2010 in a private placement. The proceeds were used to repay short-term debt incurred to finance the acquisition of the contract to operate the water system of the city of Elizabeth and capital costs for the non-regulated subsidiaries. In November 1998 Mount Holly closed on loan agreements that will make available up to $13.2 million in proceeds from the issuance of unsecured notes through the New Jersey Environmental Infrastructure Trust Financing Program. This program provides financing through two loans. The first loan, in the amount of $7.3 million, is through the New Jersey Environmental Infrastructure Trust (Trust), which issued tax-exempt bonds with average interest rates of 4.7%. The second loan, in the amount of $5.9 million, is from the state of New Jersey, acting through the DEP. The State is participating in the Safe Drinking Water State Revolving Fund authorized by the Safe Drinking Water Act amendments of 1996 whereby the federal government is funding the state loan at no interest cost. The effective interest rate for the combined notes is approximately 2.6%. The proceeds of the loans will be used to repay short-term debt incurred to finance a portion of the Mansfield Project. The Company expects to request these funds from the Trust in the second quarter of 2000. During 1999 Moody's Investors Services raised E'town's senior debt rating to A3 while keeping the rating of Elizabethtown's senior debt at A2. Subsequent to the signing of the Merger Agreement, Standard & Poor's upgraded the ratings on E'town's senior debt from A- to A and on Elizabethtown's senior debt from A to A+. The rating upgrades reflect E'town's pending Merger with Thames Water. - -5- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS INTEREST RATE RISK The Corporation is subject to the risk of fluctuating interest rates in the normal course of business. The Corporation manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. As of December 31, 1999, a hypothetical single percentage point change in annual interest rates would result in a $1.4 million change in interest costs related to short-term and variable rate debt. RESULTS OF OPERATIONS Net Income for 1999 was $20.5 million or $2.39 per share on a basic basis as compared to $22.3 million or $2.70 per basic share for the same period in 1998. The 1999 decrease of $1.8 million in net income or $.31 in net income per basic share is comprised of (i) a decrease of $1.0 million or $.12 per share for costs incurred for the pending Merger, (ii) a decrease of $.7 million or $.08 per share for lost revenues net of expenses from reduced consumption as a result of New Jersey state-imposed water restrictions in August for drought conditions, (iii) a decrease of $.4 million or $.05 per share from flooding in September of Elizabethtown's Raritan-Millstone Plant caused by Tropical Storm Floyd (Floyd) (see Other Matters), (iv) a decrease of $2.5 million or $.29 per share from additional operating expenses, primarily labor and benefits, (v) a decrease of $1.6 million or $.19 per share from higher interest costs and depreciation and (vi) a decrease of $.4 million or $.05 per share from operations of the Engineering/Operations and Construction segment. These decreases were partially mitigated by the favorable impact of increases of (i) $1.8 million or $.21 per share for higher water consumption related to an extended dry period in the spring and early summer of 1999, (ii) an increase of $ 2.0 million or $.23 per share for the after-tax gain on the sale of a real estate parcel in Green Brook, New Jersey and (iii) an increase of $1.0 million or $.12 per share reflecting the earnings of the Contract Operations segment, which includes operations of Liberty for a full year in 1999. The decrease in earnings per basic share also included a decrease of $.09 for the effect of additional shares issued under the Dividend Reinvestment and Stock Purchase Plan. Net income for 1998 was $22.3 million or $2.70 per share on a basic basis as compared to $19.3 million or $2.44 per basic share for 1997. The 1998 increase of $3.1 million or $.26 per basic share is principally comprised of (i) an increase of $.6 million or $.07 per share due to an extended dry period in the summer of 1998 resulting in higher water consumption than in 1997 (ii) an increase of $ 1.1 million or $.13 per share from lower operating expenses due to a combination of a mild winter in 1998, more efficient use of our work force, lower employee benefit costs and success with our ongoing cost control efforts and (iii) an increase of $.5 million or $.06 per share from the earnings of the Contract Operations and Engineering/Operations and Construction segments, which were new operations in 1998 and (iv) an increase of $.5 million or $.06 per share due to capitalized construction interest. The increase in basic earnings per share was partially offset by an increase in the number of outstanding shares. - -6- Operating Revenues increased $16.7 million or 11.5% in 1999 as compared with the comparable 1998 amount. Revenues from the Regulated Utilities segment increased $4.2 million principally due to higher water consumption related to an extended dry period in the spring and early summer of 1999. These favorable factors were somewhat offset by $1.6 million of lower water consumption resulting from state-mandated water restrictions in August and by $1.0 million from flooding in September caused by Floyd. New customers and the PWAC rate increase for Mount Holly primarily accounted for the remaining $2.3 million increase in the Regulated Utilities segment. The revenues of the Contract Operations segment increased $6.7 million and the revenues of the Engineering/Operations and Construction segment increased $6.1 million from 1998 reflecting a full year of operations in 1999 for Liberty and AWM, respectively. Operating Revenues increased $11.7 million or 8.7% in 1998 as compared with the comparable 1997 amount. The increase from the Regulated Utilities segment is primarily comprised of $1.4 million from water service to residential and wholesale customers attributable to increased water consumption as a result of warmer, drier weather in the summer of 1998 than in 1997. New customers and the PWAC rate increase for Mount Holly primarily accounted for the remainder of an increase in the Regulated Utilities segment of $1.8 million. The revenue increase includes $3.3 million from the Contract Operations segment, comprised of Edison and Liberty. The Engineering/Operations and Construction segment contributed $5.2 million to operating revenues. Operation Expenses increased $17.0 million or 31.6% in 1999 as compared with 1998. The increases in the Regulated Utilities segment consist of (i) an increase of $2.7 million in labor, including $.8 million attributable to raises, an increase of $.7 million due to overtime because of the weather conditions, and an increase of $.3 million due to an increased number of employees, (ii) an increase of $.7 million for power, of which $.1 million was attributable to the weather conditions while the remainder was due to adverse operating conditions resulting from flooding by Floyd, (iii) an increase of $.6 million in leasing costs as conversion continues from ownership to leasing of all vehicles and (iv) an increase of $.9 million from various other operating expenses. The Financing and Investment segment expensed $1.6 million of one-time costs related to the pending Merger with Thames Water. Operation expenses of the Contract Operations segment increased $3.4 million and operation expenses of the Engineering/Operations and Construction segment increased $7.1 million, reflecting a full year of operations in 1999 for Liberty and AWM, respectively. - -7- Operation Expenses increased $5.9 million or 12.2% in 1998 over the comparable 1997 amount. The operation expenses (net of intercompany expenses) of the Contract Operations and Engineering/Operations and Construction segments, which were newly established businesses in 1998, accounted for $7.1 million of the increase. The Regulated Utilities segment experienced decreases of $1.0 million from lower operating costs due to a mild winter, greater work force utilization, ongoing cost control efforts and decreased employee benefit costs. These decreases were partially offset by increased cost of labor, purchased water to Mount Holly and variable costs for the higher water sales. Maintenance Expenses increased $.2 million or 3.5% in 1999 as compared to 1998. The increase occurred primarily in the Regulated Utilities segment for waste residual costs. Maintenance Expenses decreased $.1 million or 1.0% in 1998 as compared with the comparable 1997 amount due to improved procurement procedures and preventive maintenance programs. Depreciation and Amortization Expense increased $2.1 million or 15.5% in 1999 compared to 1998. Of the increase, $1.0 million represents depreciation on additional utility plant in the Regulated Utilities segment. The remainder of the increase represents amortization of the concession fees for Liberty reflecting a full year of operations in 1999 and depreciation on additional wastewater plants acquired by AWM in 1999. Depreciation and Amortization Expense increased $1.3 million or 10.4% in 1998 compared to 1997 of which $.9 million represents amortization of initial concession fees and capital expenditures for the Contract Operations segment. The balance represents depreciation on utility plant additions for the Regulated Utility segment. Revenue Taxes increased $.6 million or 3.3% and $.2 million or 1.2% for the Regulated Utiliies Segment in 1999 and 1998, respectively, as a result of increases in taxable operating revenues discussed above. Real Estate, Payroll and Other Taxes increased $1.0 million or 34.5% in 1999 primarily due to increased payroll taxes as a result of higher labor costs in the Regulated Utilities segment and inclusion of payroll and real estate taxes for AWM for a full year in the Engineering/Operations and Construction segment. Real estate, Payroll and Other Taxes decreased $.1 million or 4.0% in 1998. This overall decrease was comprised of additional payroll taxes due to additional labor costs, which were offset by decreases from lower than anticipated property taxes on the Canal Road Plant. - -8- Federal Income Taxes as a component of operating expenses decreased $1.9 million or 16.0% in 1999 as compared to 1998 and increased $1.2 million or 11.4% in 1998 over 1997 due to changes in taxable operating income for each segment. Other Income (Expense) increased $2.1 million or 209.0% compared to the 1998 amount due to a gain on the sale of real estate of $3.2 million ($2.1 million net of taxes) in the Financing and Investment segment. Other Income (Expense) increased $.2 million or 32.4% in 1998 as compared to 1997 due to a $.4 million increase in Allowance for Funds Used During Construction (AFUDC), primarily related to Elizabethtown's western operations center. Federal income taxes increased $.1 million for the taxes on the AFUDC. Total Interest Charges increased $1.6 million or 8.9% in 1999 of which $.9 million is for the Regulated Utilities segment. The $.9 million increase consists of $.4 million for Mount Holly's issuance of long-term notes in November 1998 through the New Jersey Environmental Infrastructure Trust Financing Program to finance a portion of the construction of its Mansfield Project and $.5 million for increased short-term borrowings to finance the construction program. In the Contract Operations Segment, interest expenses increased $.5 million, reflecting a full year of Liberty's operations and additional short-term borrowing by Liberty in order to finance a scheduled concession payment of $12.0 million in June, 1999 to the city of Elizabeth. The remainder of the increase resulted from short-term borrowings in the Financing and Investment segment to finance capital contributions to the Contract Operations segment. Total interest charges increased $.5 million or 2.8% in 1998 as compared with the comparable 1997 amount due to increased borrowing for utility plant expenditures for the Regulated Utilities segment and for the concession fee for Liberty. The debt component of AFUDC increased $.3 million, resulting in lower interest expense, as a result of higher construction expenditures, primarily for Elizabethtown's new western operations center. This decrease in interest charges was offset by the absence in 1998 of capitalized interest on real estate investments for Properties of $.3 million. OTHER MATTERS In August 1999 the Governor of the State of New Jersey declared a Water Emergency for the entire state and issued mandatory restrictions on outdoor, nonessential water use. Due to unusually low levels of rainfall during June and July the Governor deemed these measures necessary to preserve the integrity of several of the state's reservoir and well supplies. Customers of Elizabethtown, Mount Holly, Edison and Liberty were subject to these restrictions. The water systems operated by E'town's subsidiaries at all times had, and continue to have, adequate supplies of water to meet the needs of their customers. These restrictions affected the amount of water consumed by a substantial number of the Corporation's customers and reduced net income in 1999 by approximately $.68 million. The restrictions were lifted in October 1999. - -9- In September 1999 Elizabethtown withdrew its primary water treatment plant, the Raritan-Millstone Water Treatment Plant, from service as a result of flooding from Floyd. For several days, Elizabethtown had difficulty maintaining adequate water pressure in portions of its distribution system because overall system production levels were substantially less than normal. Customers in portions of a few municipalities were without water service for a period of up to three days. Costs incurred to repair and replace equipment damaged by the flood and to respond to inquiries by customers, regulatory bodies and the media are being deferred and are expected to be recoverable through insurance. The Company has incurred $7.0 million of flood-related expenditures and has received an advanced reimbursement of $2.0 million from its insurance carrier. The remaining $5.0 million of flood-related expenditures has been deferred. The loss of revenues due to below normal water consumption is not recoverable through insurance and adversely affected net income by approximately $.39 million for 1999. ECONOMIC OUTLOOK Forward Looking Information Information in this report includes certain forward looking statements within the meaning of the Federal securities laws regarding future earnings, capital expenditures and anticipated actions of regulators, among other things. Any forward looking statements are based upon information currently available and are subject to future events, risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. Such events, risks and uncertainties include, without limitation, actions of regulators, the effects of weather, changes in historical patterns of water consumption and demand, including changes through increased use of water-conserving devices, conditions in capital and real estate markets, increases in operating expenses due to factors beyond the Corporation's control, the closing of the pending Merger with Thames Water Plc, changes in environmental regulation and associated costs of compliance and additional investments or acquisitions which may be made by the Corporation. E'town Corporation and Subsidiaries Earnings are expected to be lower in 2000 than in 1999 for the following reasons: (i) an assumed return to historical average water consumption patterns as a result of a return to normal weather conditions (ii) additional expenses in 2000 in connection with the Merger and (iii) Elizabethtown will not file for needed rate relief until early in 2001 as a condition of the Merger Agreement. During the next several years, management will seek to increase earnings by (i) maximizing earned returns on the Regulated Utilities segment through expansion efforts to increase sales, cost control measures and obtaining timely and adequate rate relief and (ii) investing in water and wastewater assets including municipal privatization contracts, as well as designing, constructing, operating and purchasing wastewater assets through AWM and AWWM, discussed below. The Corporation intends to continue to sell Properties' real estate holdings during the next several years to fund a portion of the investment planned for the regulated and non-regulated businesses. The balance of such funding will be generated from internal and external sources. - -10- Regulated Utilities Segment In accordance with the terms of the pending Merger Agreement, Elizabethtown will postpone filing for rate relief needed to recover additional construction and financing costs incurred since base rates were last established in October 1996 until at least August 2000. Therefore, earnings from Elizabethtown will be lower in 2000 than in 1999 due to an assumed return to normal weather conditions and postponement of the rate filing. Mount Holly had a negative rate of return on common equity of 2.6% in 1999, compared to an authorized rate of return of 11.25%, established in its 1996 base rate case. Mount Holly earned significantly below its authorized return in 1999 and 1998 because the Company was precluded from filing for needed rate relief due to recently settled litigation with another purveyor. Management expects Mount Holly to contribute positively to E'town's earnings per share in 2000 as a result of a Stipulation Agreement approved by the BPU whereby a rate increase of $1.9 million, or a net increase of $.5 million after elimination of the PWAC, was effective January 1, 2000. AWWM expects to become profitable in the next several years after it expands its customer base. Contract Operations Segment Liberty Liberty is expected to realize a return on its capital in an amount similar to that currently earned by E'town's regulated operations. Edison Contributions to earnings will be small through 2002 and then will increase as rate increases specified in the contract take effect. Beyond 2002 Edison is expected to realize a return on its capital in an amount similar to that currently earned by E'town's regulated operations. E'town continues to pursue opportunities to operate municipal water and wastewater systems under long-term contracts, primarily in New Jersey. E'town will focus on opportunities where it may have an advantage due to location or experience in operation. Engineering/Operations and Construction AWM AWM continues to develop its business model to provide a complete complement of wastewater services to design, build and operate stand-alone wastewater treatment facilities with a focus on the Northeast region of the United States. Acquisition of new business is largely dependent on demographic and economic factors as well as the competitive nature of proposing on such work. These efforts are expected to contribute marginally to earnings in 2000 as the business model continues to be implemented. - -11- Financing and Investment Segment E'town and Properties E'town is in the process of selling its remaining parcels of undeveloped land. Several parcels have been sold and the proceeds are being invested in water and wastewater projects. The eventual sale of these parcels is contingent upon the purchaser obtaining various approvals for development. This process could take up to several years. As of December 31, 1999, all the remaining properties are under contract to be sold. New Accounting Pronouncements See Note 3 of E'town's Notes to Consolidated Financial Statements for a discussion of new accounting standards. Year 2000 State of Readiness The Corporation assessed its significant business systems, as well as non-critical, peripheral support systems for compliance with the Year 2000 computer challenge. The assessment concluded that all significant business systems (i.e. customer billing and service, financial, water treatment operating and control, water quality laboratory information and telemetric data acquisition systems) are Year 2000 compliant. The assessment also included inquiries as to the state of readiness of significant vendors whose services to the Corporation could have an impact on the Corporation's ability to deliver service to its customers. Management concluded that the delivery of electric power as well as chemicals used in the water treatment process were two areas of significant importance and received documentation from the vendors who provide these services that indicated their ability to provide service. The assessment had identified certain modifications to peripheral support systems that have since been implemented. The Costs To Address The Corporation's Year 2000 Issues The significant business systems of the Corporation defined above are Year 2000 compliant and have been operational for up to several years. Therefore, no further costs are expected to be incurred in connection with bringing these systems into compliance. The peripheral support systems required the Corporation to incur costs of approximately $.4 million to bring them into compliance. At the turn of the century, and to-date, the Corporation has experienced no disruption in the services it provides to its customers and processed transactions in its financial, customer billing and customer services systems in the normal course of business. Management is not currently aware of any Year 2000-related problems associated with its internal business systems or software or with the systems or software of its vendors. - -12- E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (In Thousands Except Per Share Amounts) Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- Operating Revenues $ 162,195 $ 145,480 $ 133,826 - ------------------------------------------------------------------------------- Operating Expenses: Operation 70,845 53,844 47,982 Maintenance 6,766 6,539 6,606 Depreciation and amortization 15,796 13,679 12,396 Revenue taxes 17,296 16,743 16,550 Real estate, payroll and other taxes 4,070 3,027 3,152 Federal income taxes (Note 4) 9,814 11,685 10,487 - ------------------------------------------------------------------------------- Total operating expenses 124,587 105,517 97,173 - ------------------------------------------------------------------------------- Operating Income 37,608 39,963 36,653 - ------------------------------------------------------------------------------- Other Income (Expense): Allowance for equity funds used during construction (Note 3) 363 607 215 Gain on sale of land (Note 8) 3,197 135 34 Other - net 1,222 805 919 Federal income taxes (Note 4) (1,674) (541) (408) - ------------------------------------------------------------------------------- Total other income (expense) 3,108 1,006 760 - ------------------------------------------------------------------------------- Total Operating and Other Income 40,716 40,969 37,413 - ------------------------------------------------------------------------------- Interest Charges: Interest on long-term debt 16,109 16,217 14,807 Other interest expense - net 3,256 1,641 2,560 Capitalized interest (Note 3) (395) (470) (438) Amortization of debt discount and expense-net 446 438 411 - ------------------------------------------------------------------------------- Total interest charges 19,416 17,826 17,340 - ------------------------------------------------------------------------------- Income Before Preferred Stock Dividends of Subsidiary 21,300 23,143 20,073 Preferred Stock Dividends 813 813 813 - ------------------------------------------------------------------------------- Net Income $ 20,487 $ 22,330 $ 19,260 =============================================================================== Earnings Per Share of Common Stock (Note 3): - ------------------------------------------------------------------------------- Basic $ 2.39 $ 2.70 $ 2.44 Diluted $ 2.36 $ 2.66 $ 2.41 - ------------------------------------------------------------------------------- Average Number of Shares Outstanding for the Calculation of Earnings Per Share: - ------------------------------------------------------------------------------- Basic 8,572 8,263 7,891 Diluted 8,871 8,567 8,215 - ------------------------------------------------------------------------------- Dividends Paid Per Common Share $ 2.04 $ 2.04 $ 2.04 =============================================================================== See Notes to Consolidated Financial Statements. - -13- E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (In Thousands) Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- Cash Flows Provided by Operating Activities: Net Income $ 20,487 $ 22,330 $ 19,260 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,796 13,679 12,396 Gain on sale of land (3,197) (135) (34) Increase in deferred charges (4,749) (736) 699 Deferred income taxes and investment tax credits-net 4,641 3,592 2,778 Capitalized interest and AFUDC (758) (1,077) (653) Other operating activities-net 4,114 (1,061) 416 Change in current assets and current liabilities excluding cash, short-term investments and current portion of debt: Customer accounts, notes and other receivables (9,571) (7,181) (1,352) Unbilled revenues (774) (1,786) (1,056) Accounts payable and other liabilities 11,861 7,876 (4,656) Accrued/prepaid interest and taxes (4,375) 1,440 3,088 Other (1,017) 138 5 - ------------------------------------------------------------------------------- Net cash provided by operating activities 32,458 37,079 30,891 - ------------------------------------------------------------------------------- Cash Flows Provided by Financing Activities: Proceeds from issuance of common stock 9,779 8,453 7,378 Funds held in Trust by others (30) (7,234) Proceeds from issuance of debentures 54,000 Debt and preferred stock issuance and amortization costs 643 213 (755) Issuance of other long-term debt 15,295 Repayment of current portion of long-term debt (30) Repayment of long-term debt (99) (1,381) (224) Contributions and advances for construction 6,460 11,590 7,275 Refunds of customer advances for construction (3,076) (2,364) (2,516) Net increase (decrease) in notes payable-banks 45,478 21,022 (46,000) Dividends paid on common stock (17,526) (16,929) (16,134) - ------------------------------------------------------------------------------- Net cash flows provided by financing activities 41,599 28,665 3,024 - ------------------------------------------------------------------------------- Cash Flows Used for Investing Activities: Utility plant (excluding allowance for funds used during construction) (60,834) (43,582) (24,612) Purchase of companies (1,800) Investment in privatization contracts (12,000) (19,856) (5,810) Capital expenditures on nonregulated property (3,065) (3,799) (928) Proceeds from sale of land 2,069 1,200 440 - ------------------------------------------------------------------------------- Net cash flows used for investing activities (75,630) (66,037) (30,910) - ------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (1,573) (293) 3,005 Cash and Cash Equivalents at Beginning of Period 5,940 6,233 3,228 - ------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 4,367 $ 5,940 $ 6,233 =============================================================================== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 19,726 $ 16,532 $ 16,719 Income taxes $ 9,700 $ 7,723 $ 6,023 Preferred stock dividends $ 708 $ 708 $ 708 Noncash issuance of common stock $ 1,021 $ 7,709 $ 123 See Notes to Consolidated Financial Statements. - -14- E'TOWN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Assets 1999 1998 - ------------------------------------------------------------------------------- Utility Plant-At Original Cost: Utility plant in service $ 779,485 $ 717,985 Construction work in progress 17,441 16,580 - ------------------------------------------------------------------------------- Total utility plant 796,926 734,565 Less accumulated depreciation and amortization 137,587 125,262 - ------------------------------------------------------------------------------- Utility plant-net 659,339 609,303 - ------------------------------------------------------------------------------- Non-utility Property and Other Investments - Net (Note 8) 85,163 84,945 - ------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents 4,367 5,940 Customer and other accounts receivable (less reserve: 1999, $1,316, 1998, $1,065) 30,129 23,200 Mortgage and other notes receivable (Note 8) 4,600 1,520 Unbilled revenues 12,972 12,198 Infrastructure loan funds receivable (Note 5) 5,657 5,895 Materials and supplies-at average cost 4,069 2,538 Prepaid federal income taxes 4,617 808 Prepaid insurance, taxes, other 3,663 1,676 - ------------------------------------------------------------------------------- Total current assets 70,074 53,775 - ------------------------------------------------------------------------------- Deferred Charges: Waste residual management (Note 10) 1,538 1,371 Unamortized debt and preferred stock expenses (Note 10) 9,419 10,050 Taxes recoverable through future rates (Notes 4 and 10) 13,466 14,226 Postretirement benefit expense (Notes 10 and 14) 3,145 3,490 Flood expenditures (Note 12) 5,000 Other unamortized expenses (Note 10) 1,164 1,582 - ------------------------------------------------------------------------------- Total deferred charges 33,732 30,719 - ------------------------------------------------------------------------------- Total $ 848,308 $ 778,742 =============================================================================== See Notes to Consolidated Financial Statements. - -15- E'TOWN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Capitalization and Liabilities 1999 1998 - ------------------------------------------------------------------------------- Capitalization (Notes 2, 5 and 6): Common shareholders' equity $ 229,233 $ 215,472 Mandatory redeemable cumulative preferred stock 12,000 12,000 Redeemable preferred stock 227 227 Long-term debt - net 266,015 286,908 - ------------------------------------------------------------------------------- Total capitalization 507,475 514,607 - ------------------------------------------------------------------------------- Current Liabilities: Notes payable - banks (Note 7) 89,500 44,022 Long-term debt - current portion (Note 5) 494 30 Accounts payable and other liabilities 31,434 19,469 Contract obligations payable (Note 5) 19,000 12,000 Customers' deposits 263 248 Municipal and state taxes accrued 17,682 16,789 Interest accrued 4,219 3,675 Preferred stock dividends accrued 59 59 - ------------------------------------------------------------------------------- Total current liabilities 162,651 96,292 - ------------------------------------------------------------------------------- Deferred Credits: Customers' advances for construction 41,321 41,102 Federal income taxes (Note 4) 71,236 66,487 State income taxes 302 207 Unamortized investment tax credits 7,636 7,839 Accumulated postretirement benefits (Note 14) 3,571 4,090 - ------------------------------------------------------------------------------- Total deferred credits 124,066 119,725 - ------------------------------------------------------------------------------- Contributions in Aid of Construction 54,116 48,118 - ------------------------------------------------------------------------------- Commitments and Contingent Liabilities (Note 13) - ------------------------------------------------------------------------------- Total $ 848,308 $ 778,742 =============================================================================== See Notes to Consolidated Financial Statements. - -16- E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CAPITALIZATION (In Thousands Except Share Amounts) December 31, 1999 1998 - ------------------------------------------------------------------------------- Common Shareholders' Equity: E'town Corporation: Common stock without par value, authorized, 15,000,000 shares, issued 1999, 8,760,682 shares; 1998, 8,504,344 shares $ 180,124 $ 169,324 Paid-in capital 1,315 1,315 Capital stock expense (5,160) (5,160) Retained earnings 53,922 50,961 Less cost of treasury stock; 1999 and 1998, 32,554 shares (968) (968) - ------------------------------------------------------------------------------- Total common shareholders' equity 229,233 215,472 - ------------------------------------------------------------------------------- Preferred Shareholders' Equity (Note 5) Elizabethtown Water Company: Mandatory Redeemable Cumulative Preferred Stock: $100 par value, authorized, 200,000 shares; $5.90 series, issued and outstanding, 120,000 shares 12,000 12,000 Cumulative Preferred Stock: $25 par value, authorized, 500,000 shares; none issued Applied Wastewater Management, Inc: Redeemable Preferred Stock: No par value, non-cumulative, issued and outstanding, 227 shares 227 227 - ------------------------------------------------------------------------------- Total preferred shareholders' equity 12,227 12,227 - ------------------------------------------------------------------------------- Long-Term Debt (Notes 5, 8 and 9): E'town Corporation: 6 3/4% Convertible Subordinated Debentures, due 2012 8,705 10,499 6.79% Senior Notes, due 2007 12,000 12,000 Liberty Water Company: Contract Obligations Payable 19,000 Applied Wastewater/Applied Water Management: 6% Note Payable (due serially through 2027) 204 261 9.65% Mortgage Note Payable (due 2001) 264 Elizabethtown Water Company: 7.20% Debentures, due 2019 10,000 10,000 7 1/2% Debentures, due 2020 15,000 15,000 6.60% Debentures, due 2021 10,500 10,500 6.70% Debentures, due 2021 15,000 15,000 8 3/4% Debentures, due 2021 27,500 27,500 8% Debentures, due 2022 15,000 15,000 5.60% Debentures, due 2025 40,000 40,000 7 1/4% Debentures, due 2028 50,000 50,000 Variable Rate Debentures, due 2027 50,000 50,000 The Mount Holly Water Company: New Jersey Environmental Infrastructure Trust Notes (due serially through 2018) 7,040 7,295 New Jersey Department of Environmental Protection Notes(due serially through 2018) 5,677 5,895 9.65% Mortgage Note Payable (due 2001) 156 Note payable (due 2000) 30 - ------------------------------------------------------------------------------- Total long-term debt 267,046 287,980 Unamortized (discount) premium-net (1,031) (1,072) - ------------------------------------------------------------------------------- Total long-term debt-net 266,015 286,908 - ------------------------------------------------------------------------------- Total Capitalization $ 507,475 $ 514,607 =============================================================================== See Notes to Consolidated Financial Statements. - -17- E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In Thousands Except Share Amounts) Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- Common Stock: Balance at Beginning of Year $ 169,324 $ 153,162 $ 145,661 Common stock issued under Dividend Reinvestment and Stock Purchase Plan (1999, 197,547 shares; 1998, 213,568 shares; 1997, 227,992 shares) 8,702 7,861 6,980 Redemption of Convertible Debentures (1999, 44,225 shares; 1998, 18,100 shares) 1,769 724 Issuance of restricted and unrestricted stock under compensation programs (1999, 2,822 shares; 1998, 9,590 shares; 1997, 4,033 shares) 119 332 123 (Cancellation) issuance of restricted stock for acquisitions (1999,(25,756) shares; 1998, 186,310 shares)(Note 8) (867) 6,653 Exercise of stock options (1999, 37,500 shares; 1998, 22,315 shares; 1997, 14,685 shares) 1,077 592 398 - ------------------------------------------------------------------------------- Balance at End of Year 180,124 169,324 153,162 - ------------------------------------------------------------------------------- Paid-in Capital 1,315 1,315 1,315 - ------------------------------------------------------------------------------- Capital Stock Expense (5,160) (5,160) (5,160) - ------------------------------------------------------------------------------- Retained Earnings: Balance at Beginning of Year 50,961 45,560 42,434 Net Income 20,487 22,330 19,260 Dividends on common stock (1999, 1998 and 1997, $2.04) (17,526) (16,929) (16,134) - ------------------------------------------------------------------------------- Balance at End of Year 53,922 50,961 45,560 - ------------------------------------------------------------------------------- Treasury Stock: Balance at Beginning of Year (968) (954) (737) Cost of shares redeemed to exercise stock options (1998, 346 shares; 1997, 6,332 shares) (14) (217) - ------------------------------------------------------------------------------- Balance at End of Year (968) (968) (954) - ------------------------------------------------------------------------------- Total Common Shareholders' Equity $ 229,233 $ 215,472 $ 193,923 =============================================================================== See Notes to Consolidated Financial Statements. - -18- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization E'town Corporation (E'town or Corporation), a New Jersey holding company, is the parent company of Elizabethtown Water Company (Elizabethtown or Company), E'town Properties, Inc. (Properties), Edison Water Company (Edison), Liberty Water Company (Liberty), Applied Water Management, Inc. (AWM) and Applied Wastewater Management, Inc. (AWWM). The Mount Holly Water Company (Mount Holly) is a wholly owned subsidiary of Elizabethtown. The assets and operating results of Elizabethtown constitute the predominant portions of E'town's assets and operating results. The regulated utilities, Elizabethtown, Mount Holly and AWWM, comprise the Regulated Utilities segment, Liberty and Edison comprise the Contract Operations segment, AWM is the Engineering/Operations and Construction segment and E'town and Properties comprise the Financing and Investment segment. 2. Pending Merger On November 21, 1999, E'town entered into an agreement (Merger Agreement) with Thames Water Plc (Thames Water) under which Thames Water has agreed, subject to certain conditions, to acquire E'town for $68 per share in cash or approximately $607 million. Thames Water will also assume the debt of E'town. The acquisition will take the form of a merger (Merger) of E'town with a newly formed subsidiary of Thames Water and E'town will be the surviving company. A special meeting of shareholders is expected to be held during the second quarter of 2000 to seek shareholder approval of the transaction. The acquisition is also subject to approval by the New Jersey Board of Public Utilities (BPU), the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvement Act of 1976. Certain clearances must also be obtained from the New Jersey environmental regulators. The transaction is expected to close prior to the end of 2000. 3. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include E'town and its subsidiaries. Significant intercompany accounts and transactions have been eliminated. Elizabethtown and Mount Holly are regulated water utilities. AWWM is a regulated wastewater utility. All three companies follow the Uniform System of Accounts, as adopted by the BPU. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. - -19- Utility Plant and Depreciation Income is charged with the cost of labor, materials and other expenses incurred in making repairs and minor replacements, and in maintaining the properties. Utility plant accounts are charged with the cost of improvements and major replacements of property. When depreciable property is retired or otherwise disposed of, the cost thereof, plus the cost of removal net of salvage, is charged to accumulated depreciation. Depreciation is generally computed on a straight-line basis at functional rates for various classes of assets based on the estimated useful lives of the assets. The balances of significant classes of assets and their respective depreciable lives at December 31, 1999 and 1998 are as follows: Annual Depreciation (THOUSANDS OF DOLLARS) 1999 1998 Rate ============================================================================= Asset Class: Transmission and Distribution Mains $ 337,408 $ 318,363 0.99% Water Treatment Equipment 111,961 106,787 2.35% Services 67,154 62,213 2.77% Structures and Improvements 88,147 75,736 2.08% - 2.74% Pumping Equipment 42,704 41,082 2.59% - 3.38% Meters 27,589 23,415 2.77% Water Storage Tanks 23,658 21,232 1.37% Other 80,864 69,157 0% - 15.73% - ----------------------------------------------------------------------------- Total utility plant in service $ 779,485 $ 717,985 ============================================================================= The provision for depreciation, as a percentage of average depreciable property, on a composite basis, was 1.82% for 1999, 1.81% for 1998 and 1.85% for 1997. Allowance for Funds Used During Construction Elizabethtown, Mount Holly and AWWM capitalize, as an appropriate cost of utility plant, an Allowance for Funds Used During Construction (AFUDC), which represents the cost of financing major projects during construction. AFUDC, a non-cash credit on the Statements of Consolidated Income, is added to the construction cost of the project and included in rate base and then recovered through depreciation charges in rates during the assets' useful lives. AFUDC is comprised of a debt component (credited to Interest Charges), and an equity component (credited to Other Income) in the Statements of Consolidated Income. AFUDC totaled $.76 million, $1.08 million and $.38 million for 1999, 1998 and 1997, respectively. Non-utility Property Ongoing costs associated with real estate parcels are being expensed as incurred. Properties had capitalized direct costs, real estate taxes and interest costs associated with certain real estate parcels as they were being developed. All the parcels were available for sale as of November 1997 and therefore, no interest was capitalized in 1999 or 1998. Revenues Water revenues are recorded based on the amounts of water delivered to customers through the end of each accounting period. This includes an accrual for unbilled revenues for water delivered from the time meters were last read to the end of the respective accounting periods. - -20- The construction division of AWM engages in fixed-price and modified fixed-price contracts for the construction of wastewater facilities. These revenues are recognized on the percentage-of-completion method, measured by the cost-to-cost method. Contract costs, under the percentage-of-completion method, include all direct material and labor costs and those indirect costs related to contract performance such as tools and vehicle costs. Federal Income Taxes E'town files a consolidated federal tax return. Deferred income taxes are provided for temporary differences between the bases of assets and liabilities for tax and financial statement purposes for the non-regulated companies. Deferred income taxes are also provided for each regulated water utility to the extent permitted by the BPU. The regulated water utilities account for prior years' investment tax credits by the deferral method, which amortizes the credits over the lives of the respective assets. Customers' Advances for Construction and Contributions in Aid of Construction Customers' Advances for Construction (CAC) and Contributions in Aid of Construction (CIAC) represent capital provided by developers, under a contract, for main extensions to new real estate developments. CAC is refundable to developers based upon amounts for each type and quantity of unit constructed by the developer when the units are metered. Such contracts have a ten-year life. CIAC represents CAC that, under the terms of individual main extension agreements, are no longer subject to refund. Earnings Per Share of Common Stock Basic earnings per share are computed on the basis of the weighted average number of shares outstanding. Diluted earnings per share assumes both the conversion of the 6 3/4% Convertible Subordinated Debentures and assumes the exercise of all stock options (see Note 6). The calculations of basic and diluted earnings per share for the three years ended December 31, 1999 follow: (THOUSANDS OF DOLLARS) 1999 1998 1997 =============================================================================== Basic: Net Income $ 20,487 $ 22,330 $ 19,260 Average common shares outstanding 8,572 8,263 7,891 - ------------------------------------------------------------------------------- Basic earnings per share $ 2.39 $ 2.70 $ 2.44 =============================================================================== Diluted: Net income $ 20,487 $ 22,330 $ 19,260 After tax interest expense applicable to 6 3/4% Convertible Subordinated Debentures 429 488 500 - ------------------------------------------------------------------------------- Adjusted net income $ 20,916 $ 22,818 $ 19,760 - ------------------------------------------------------------------------------- Average common shares outstanding 8,572 8,263 7,891 Additional shares from assumed exercise of stock options 81 42 40 Additional shares from assumed conversion of 6 3/4% Convertible Subordinated Debentures 218 262 284 - ------------------------------------------------------------------------------- Average common shares outstanding as adjusted 8,871 8,567 8,215 - ------------------------------------------------------------------------------- Diluted earnings per share $ 2.36 $ 2.66 $ 2.41 =============================================================================== - -21- Cash Equivalents The Corporation considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents. New Accounting Pronouncements In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activity". In June 1999 the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activity - Deferral of the Effective Date of SFAS No. 133" to defer the effective date of SFAS No. 133 for one year. Consequently, SFAS No. 133 will now be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Corporation does not believe this Statement will have an impact on its financial condition and results of operations. Reclassification Certain prior year amounts have been reclassified to conform to the current year's presentation. 4. Federal Income Taxes The computation of federal income taxes and the reconciliation of the tax provision computed at the federal statutory rate (35%) with the amounts reported in the Statements of Consolidated Income follow: (THOUSANDS OF DOLLARS) 1999 1998 1997 ======================================================================== Tax expense at statutory rate $ 11,476 $ 12,378 $ 10,843 Items for which deferred taxes are not provided: Difference between book and tax depreciation 147 63 58 Other 68 (12) 197 Investment tax credits (203) (203) (203) - ------------------------------------------------------------------------ Provision for federal income taxes $ 11,488 $ 12,226 $ 10,895 ======================================================================== The provision for federal income taxes is comprised of the following: Current $ 5,766 $ 8,301 $ 6,759 Tax on main extension refunds 416 525 1,369 Deferred: Tax depreciation 3,099 3,086 2,670 Capitalized interest (27) 91 114 Main cleaning and lining 759 796 612 Flood expenditures 1,750 Other (72) (189) (426) Investment tax credits - net (203) (203) (203) Refund from IRS (181) - ------------------------------------------------------------------------ Total provision $ 11,488 $ 12,226 $ 10,895 ======================================================================== - -22- The Regulated Utilities Segment provides deferred taxes at the enacted statutory rate for all temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities irrespective of the treatment for rate making purposes. Management believes it is probable that the accumulated tax benefits that previously have been treated as a flow-through item to the regulated utility customers will be recovered from these customers in the future. Accordingly, offsetting regulatory assets have been established. At December 31, 1999, the regulated utilities had deferred tax liabilities of $13.47 million. There were also, at December 31, 1999, offsetting regulatory assets for the same amounts representing the future revenue expected to be recovered through rates based upon established regulatory practices which permit recovery of current taxes payable. These amounts were determined using the enacted federal income tax rate of 35% and were calculated in accordance with SFAS No. 109. The tax effect of significant temporary differences representing deferred income tax assets and liabilities as of December 31, 1999 and 1998 is as follows: (THOUSANDS OF DOLLARS) 1999 1998 ==================================================================== Water utility plant - net $ (51,534) $ (47,538) Non - utility property 286 251 Other investments (742) (787) Taxes recoverable through future rates (13,466) (14,226) Capitalized interest (3,847) (3,983) Waste residuals (539) (480) Flood expenditures (1,750) Other assets 746 562 Other liabilities (390) (286) - -------------------------------------------------------------------- Net deferred income tax liabilities $ (71,236) $ (66,487) ==================================================================== 5. Capitalization E'town routinely makes equity contributions to Elizabethtown which represent a portion of the proceeds of common stock issued under E'town's Dividend Reinvestment and Stock Purchase Plan (DRP). Such equity contributions amounted to $8.70 million, $7.86 million and $6.98 million for the years ended December 31, 1999, 1998 and 1997, respectively. The Corporation maintains a Shareholders' Rights Plan (Rights Plan). Generally, under the Rights Plan, if a person or group acquires 10% or more of the Corporation's common stock or announces a tender offer for the Corporation's common stock, non-acquiring shareholders may, under certain circumstances, exercise rights (Rights) to allow them to significantly increase their percentage of ownership of the Corporation's common stock. Such Rights may be redeemed by the Board of Directors. Pursuant to the terms of the Merger Agreement with Thames Water, the Corporation has amended its Rights Plan so that the Corporation may proceed to consummate the Merger without triggering the provisions of the Rights Plan and the Rights would expire immediately prior to the effective time of the Merger (see Note 2). - -23- Preferred Stock Elizabethtown's $5.90 Mandatory Redeemable Cumulative Preferred Stock is not redeemable at the option of the Company. Elizabethtown is required to redeem the entire issue at $100 per share on March 1, 2004. AWWM's no par value, non-cumulative preferred stock has no cumulative dividend rights and is redeemable at the option of the Corporation. There are no liquidation preferences specified with respect to this class of preferred stock. Long-term Debt Elizabethtown's long-term debt indentures restrict the amount of retained earnings available to Elizabethtown to pay cash dividends (which is the primary source of funds available to the Corporation for payment of dividends on its common stock) or acquire Elizabethtown's common stock, all of which is held by E'town. At December 31, 1999, $7.52 million of Elizabethtown's retained earnings were restricted under the most restrictive indenture provision. Therefore, $46.40 million of E'town's consolidated retained earnings were unrestricted. In February 2000 E'town issued $30 million of 7.69% Senior Notes due 2010 in a private placement. The proceeds were used to repay short-term debt incurred to finance the acquisition of the contract to operate the water system of the city of Elizabeth and capital costs for the non-regulated subsidiaries. In November 1998 Mount Holly closed on loan agreements that will make available up to $13.19 million in proceeds from the issuance of unsecured notes through the New Jersey Environmental Infrastructure Trust Financing Program. This program provides financing through two loans. The first loan, in the amount of $7.30 million, is through the New Jersey Environmental Infrastructure Trust (Trust), which issued tax-exempt bonds with average interest rates of 4.7%. The second loan, in the amount of $5.89 million, is from the state of New Jersey, acting through the New Jersey Department of Environmental Protection (DEP). The State is participating in the Safe Drinking Water State Revolving Fund authorized by the Safe Drinking Water Act amendments of 1996 whereby the federal government is funding the state loan at no interest cost. The effective interest rate for the combined notes is approximately 2.59%. The proceeds of the loans will be used to repay short-term debt incurred to finance the Mansfield Project (see Note 11). The Company expects to request these funds from the Trust in the second quarter of 2000. E'town has outstanding $12 million of 6.79% Senior Notes due December 15, 2007. E'town issued $4 million of these notes in December 1997, $6 million in January 1998 and $2 million in May 1998. The proceeds were used to finance capital additions for Edison as well as to meet working capital needs. The Note Agreements for E'town's 7.69% and 6.79% Senior Notes require the maintenance of a consolidated fixed charges coverage ratio of at least 1.5 to 1 and a debt to total capitalization ratio not to exceed .65 to 1. As of December 31, 1999, the fixed charges coverage ratio was 2.5 to 1 and the debt to total capitalization ratio was .62 to 1, calculated in accordance with the Note Agreements. - -24- In June 1997, Elizabethtown issued a total of $50 million of 30-year Variable Rate Debentures due December 2027, $25 million of Series A and $25 million of Series B, to evidence a like amount of Variable Rate Notes issued through the New Jersey Economic Development Authority (NJEDA). The proceeds were used to repay $50 million of balances outstanding under Elizabethtown's revolving credit agreement. The NJEDA Notes are remarketed on a weekly basis, at which time the interest rates on each issue are subject to change. The rates in effect as of December 31, 1999 were 5.20% for Series A and 5.10% for Series B. E'town's 6 3/4% Convertible Subordinated Debentures are convertible to E'town common stock at $40 per share. At December 31, 1999, 217,625 shares of common stock were reserved for issuance upon exercise of the conversion rights. Liberty, under its contract with the city of Elizabeth, made an installment payment of $12 million in June 1999 and is obligated to make a payment of $19 million in June 2000, which has been recorded as contract obligations payable in the financial statements (see Note 8). The aggregate maturities of long-term debt (including the portion classified as current and contract obligations payable) for each of the five years succeeding December 31, 1999 are: 2000, $19.49 million; 2001, $1.00 million; 2002, $.59 million; 2003, $.60 million and 2004, $.61 million. 6. Performance Stock Plan and Stock Option Plan The Corporation has a Performance Stock Plan whereby restricted stock is awarded to key employees and is amortized over three years as compensation expense. The Corporation has recognized compensation expense of less than $.1 million for each of the three years ended December 31, 1999. No restricted stock was issued to employees in 1999. The individual share prices of restricted shares issued for 1998 and 1997 were $34.56, and $30.50, respectively. E'town has a Stock Option Plan, a qualified incentive plan under which options to purchase shares of E'town's common stock have been granted to certain officers and other key employees at prices not less than the fair market value at the date of grant. The Stock Option Plan provides that any options may be exercised after one year from date of grant up to an expiration date, not to exceed 10 years from grant date. A summary of the details of stock option grants and outstanding balances is presented below: Year Options Option Options Outstanding Granted Granted Price 12/31/99 12/31/98 12/31/97 - ------------------------------------------------------------------------------ 1989 7,500 $24.67 2,200 7,500 1990 7,500 26.67 7,500 7,500 7,500 1995 77,000 27.12 34,000 44,300 60,315 1996 4,000 26.87 2,000 2,000 4,000 1997 25,000 29.75 25,000 25,000 1998 4,000 41.00 4,000 4,000 1999 40,000 44.00 40,000 - ------------------------------------------------------------------------------ Total 87,500 85,000 104,315 ============================================================================== - -25- Weighted Number Average of Options Option Price - ---------------------------------------------------------------- Options outstanding at 12/31/96 96,000 $26.88 - ---------------------------------------------------------------- Granted * 25,000 29.75 Exercised (14,685) (27.12) Forfeited (2,000) (27.12) - ---------------------------------------------------------------- Options outstanding at 12/31/97 104,315 27.53 - ---------------------------------------------------------------- Granted * 4,000 41.00 Exercised (22,315) (26.52) Forfeited (1,000) (27.12) - ---------------------------------------------------------------- Options outstanding at 12/31/98 85,000 28.44 - ---------------------------------------------------------------- Granted * 40,000 44.00 Exercised (37,500) (28.73) Forfeited 0 0 - ---------------------------------------------------------------- Options outstanding at 12/31/99 87,500 $35.43 ================================================================ * Options are exercisable after one year from date of grant. In connection with the adoption of SFAS No. 123 "Accounting for Stock-Based Compensation," which was effective in 1996, the Corporation elected to continue to account for its Stock Option Plan using the method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and provide proforma disclosure of the effect of adopting SFAS No. 123. The effect of accounting for stock-based compensation under SFAS No. 123 would be to reduce earnings by $.07 million, $.03 million and $.06 million for 1999, 1998 and 1997, respectively, and $.008, $.004 and $.008 per share for 1999, 1998 and 1997, respectively. The fair values of the options granted for 1999, 1998 and 1997 were $2.58, $5.14 and $3.38, respectively. This calculation was based upon the Black-Scholes option pricing model for 1999, 1998 and 1997, respectively as follows: expected volatility 13%, 30% and 30%; dividend yield 4.6%, 4.3% and 6.5%; risk-free interest rate 6.2%, 7% and 7%. The Corporation has a Directors' Stock Plan established in 1998 whereby directors are compensated for their annual retainer in E'town Corporation common stock. The Corporation issued 2,856 and 3,464 shares in 1999 and 1998, respectively, of which the related effect on compensation expense was recorded as an operation expense. The director may elect to receive the common stock as either restricted or unrestricted stock. 7. Lines of Credit E'town has $115 million in lines of credit with several banks, of which up to $55 million is available to E'town for use by the Corporation or its unregulated subsidiaries and of which $90 million is available to Elizabethtown as of December 31, 1999. Of the lines available to Elizabethtown, $10 million represents a committed line of credit. - -26- Information relating to bank borrowings for 1999, 1998 and 1997 is as follows: (THOUSANDS OF DOLLARS) 1999 1998 1997 ===================================================================== Maximum amount outstanding $ 89,500 $ 44,000 $ 69,500 Average monthly amount outstanding $ 60,182 $ 26,238 $ 43,525 Average interest rate at year end 6.8 % 5.9 % 6.2 Weighted average interest rate based on average daily balances 5.8 % 6.0 % 5.8 ===================================================================== There were no compensating balances as of December 31, 1999, 1998 and 1997. 8. Non-Utility Property and Other Investments The detail of amounts included in Non-Utility Property and Other Investments at December 31, 1999 is as follows: (THOUSANDS OF DOLLARS) 1999 1998 ==================================================================== Funds held in trust by others $ 7,264 $ 7,234 Concession fees on privatization contracts - net of amortization 53,946 55,505 Capital assets for privatization contracts - net of amortization 6,165 3,341 Investments in real estate 9,049 11,341 Goodwill - net of amortization 5,036 5,401 Investment in SEGS 1,089 1,214 Other capital assets 2,429 637 Other 185 272 - -------------------------------------------------------------------- Total $ 85,163 $ 84,945 ==================================================================== In July 1998 E'town, through Liberty, entered into a contract with the city of Elizabeth (Elizabeth), New Jersey to operate its water system under a 40-year contract serving approximately 17,600 customers. Under the contract, Liberty made payments to Elizabeth of $19.7 million in 1998 and $12 million in 1999 and is obligated to make a payment of $19 million in June 2000. These amounts have been included in the table above in concession fees on privatization contracts, net of amortization. These concession fees are being amortized on a straight-line basis over the life of the contract. Also under the terms of the contract, Liberty will deposit $57.8 million from customer collections during the 40-year contract into a fund administered by Elizabeth (Fund Deposits), of which $52.3 million is due after 2012, to be used by Elizabeth to pay for capital improvements or for other water system purposes. As these funds will be controlled by Elizabeth, they will be accounted for as a pass-through from customers to Elizabeth and will not be included in revenues or expenses. Liberty is responsible for $7.45 million of construction expenditures, primarily for meter replacements, during the life of the contract. Of these total commitments, approximately $2.45 million is expected to be expended in the next three years. During the life of the contract, E'town will receive all water revenues from billing the customers of the water system in accordance with rate increases set forth in the contract, except for the Fund Deposits discussed above. E'town is also responsible for all operating expenses as well as the capital expenditures discussed above. Performance by Liberty of the contract provisions is guaranteed by E'town. - -27- E'town also performs the commercial billing operations for the wastewater system of Elizabeth. E'town does not operate the wastewater system. E'town does the wastewater billing for Elizabeth and remits all cash collected to Elizabeth. Included in the Consolidated Balance Sheets of E'town as Customer and Other Accounts Receivable at December 31, 1999 and 1998 are the receivables from the customers of Elizabeth for wastewater services in the amount of $5.05 million and $3.37 million, respectively. An equal amount of liability to Elizabeth is included in Accounts Payable and Other Liabilities which has been established to reflect E'town's obligation to remit these funds to Elizabeth as collected. In 1997 E'town, through Edison, entered into a contract with the township of Edison, New Jersey to operate its water system under a 20-year contract serving approximately 11,500 customers. Edison bills and receives all water revenues generated as a result of operating the water system of the township of Edison, New Jersey and pays all the expenses under the contract. Edison expects to make expenditures of approximately $25 million during the 20-year life of the contract of which $12.48 million has been spent as of December 31, 1999. Construction expenditures, as they are incurred, are being amortized on a straight-line basis over the remaining life of the contract. Expenditures include capital improvements to the water system as well as contract payments to the township of Edison. Of the total, approximately $2.94 million is expected to be expended in the next three years of the contract. An initial payment of $5.7 million was made upon the closing in June 1997 and has been included in the table above in concession fees on privatization contracts, net of amortization. Performance by Edison of the contract provisions is guaranteed by E'town. If the Elizabeth or Edison contracts were terminated by either the township of Edison or the city of Elizabeth, the unamortized balance of the concession fees and amounts paid for additional capital improvements would be refunded to Liberty and Edison in accordance with the contracts. Also included in Non-Utility Property and Other Investments at December 31, 1999 and 1998 are $9.05 million and $11.34 million, respectively, of investments in various parcels of undeveloped land in New Jersey. One of the real estate parcels was sold in 1997 for $.4 million, resulting in a gain of less than $.1 million. Two other parcels were sold in 1998 for $1.7 million resulting in a gain of less than $.1 million. Cash proceeds of $1.2 million were received in 1998 for these two parcels and the balance was financed with a one-year mortgage at an interest rate of 8%, which was paid in 1999. In February 1999 Properties sold a parcel of land, which has been under contract since 1995 in Green Brook, New Jersey for $5.83 million, at a gain of $2.00 million net of taxes. Cash proceeds of $1.99 million were received in 1999. The remaining $4.33 million, at time of closing, was financed with a 7.75% mortgage, to be paid over 2 years. The mortgage balance, including accrued interest, of $3.84 million is included in Mortgage and Other Notes Receivable in E'town's Consolidated Balance Sheets. Properties sold a small parcel in Clinton, New Jersey in 1999 for $.6 million at a gain of less than $.1 million net of taxes. The sale proceeds are being invested into water and wastewater projects. Properties has entered into contracts for sale for all of its remaining parcels. The eventual sale of these parcels is contingent upon the purchaser obtaining various approvals for development. This process could take up to several years. As of December 31, 1999, all the remaining properties are under contract to be sold. Based upon the expected sales prices for these properties under the contracts, the estimated net realizable value of each property exceeds its respective carrying value as of December 31, 1999. - -28- E'town purchased the operations of Applied Wastewater General Partnership (AWG) in June 1998 to provide a full complement of water and wastewater services. The original purchase price, in a non-cash transaction, was $6.61 million (185,005 restricted common shares issued) for the three companies that now comprise AWM and $.04 million (1,305 restricted common shares issued) for AWWM, a regulated wastewater utility, in a stock-for-stock transaction accounted for as a purchase. The purchase price was subject to a potential downward post-closing adjustment based upon a multiple of earnings for the twelve months ended March 31, 1998. As required by the purchase contract, E'town had undertaken an audit of AWG for such period. This process resulted in a downward post-closing adjustment of $.9 million (25,756 shares), which has been reflected in E'town's 1999 Consolidated Balance Sheet. The adjusted goodwill amounts to $4.76 million as of December 31, 1999 and is being amortized over a 40-year period. Had the acquisition been consummated as of January 1, 1997, the proforma effect on revenues, net income and earnings per share for the years ended December 31, 1999, 1998 and 1997 would be immaterial. Included in Non-Utility Property and Other Investments at December 31, 1999 and 1998 is an investment of $1.09 million and $1.21 million, respectively, ($.35 million and $.43 million net of related deferred taxes) in a limited partnership that owns Solar Electric Generating System V (SEGS), located in California. The Corporation owns a 3.19% interest in SEGS. The investment is being accounted for on the equity method. The Corporation continues to monitor the relationship between the carrying and net realizable values of its investment in SEGS, based upon information provided by SEGS management as well as through cash flow analyses. During 1999 AWM made certain investments in non-regulated wastewater assets for $1.7 million. Of this amount $1.2 million was recorded as other capital assets and $.5 million was recorded as goodwill. The goodwill is being amortized over 10 years. 9. Financial Instruments The carrying amounts and the estimated fair values, as of December 31, 1999 and 1998, of financial instruments issued by the Corporation are as follows: (THOUSANDS OF DOLLARS) 1999 1998 ============================================================= Cumulative preferred stock: Carrying amount $ 12,227 $ 12,227 Estimated fair value 12,077 13,247 Long - term debt: Carrying amount $ 266,015 $ 286,908 Estimated fair value 261,686 299,630 ============================================================= Estimated fair values for preferred and debt instruments are based upon quoted market prices for these or similar securities. - -29- 10. Regulatory Assets and Liabilities Certain costs incurred by Elizabethtown and Mount Holly have been deferred as regulatory assets and are being amortized over various periods, as set forth below: (THOUSANDS OF DOLLARS) 1999 1998 ========================================================== Waste residual management $ 1,538 $ 1,371 Unamortized debt and preferred stock expense 8,900 9,368 Taxes recoverable through future rates (Note 4) 13,466 14,226 Postretirement benefit expense (Notes 11 and 14) 3,145 3,490 Safety management expense 158 245 Business process redesign 136 210 Rate case expenses 23 7 PWAC underrecovery 480 305 - ---------------------------------------------------------- Total $ 27,846 $ 29,222 ========================================================== Waste Residual Management The costs of disposing of the byproducts generated by Elizabethtown's and Mount Holly's water treatment plants are being amortized and recovered in rates over 3- and 5-year periods, respectively, for ratemaking and financial statement purposes. No return is being earned on the deferred balances related to these programs. Unamortized Debt and Preferred Stock Expenses Costs incurred in connection with the issuance or redemption of long-term debt have been deferred and are being amortized and recovered in rates over the lives of the respective issues for ratemaking and financial statement purposes. Costs incurred in connection with the issuance and redemption of preferred stock have been deferred and are being amortized and recovered in rates over a 10-year period for ratemaking and financial statement purposes. Other Safety management expenses and business process redesign expenses relate to studies undertaken by the Company and are being amortized and recovered in rates over five years. Rate case expenses are being substantially recovered in rates during two-year periods. Purchased Water Adjustment Clause In 1994 Elizabethtown established a Purchased Water Adjustment Clause (PWAC), to reflect the cost of water purchased from the New Jersey Water Supply Authority (NJWSA). The current rate for the PWAC is zero since the costs of purchased water were reflected in the 1996 rate case; however, because of the high pumpage in the summers of 1999 and 1998, Elizabethtown has under-recovered its purchased water costs and therefore, has deferred $.44 million as of December 31, 1999. As of December 31, 1999, Mount Holly has deferred $.04 million of PWAC costs (see Note 11). There were no regulatory liabilities at December 31, 1999 or 1998. - -30- 11. Regulatory Matters Elizabethtown In December 1997 the BPU adopted a Stipulation for rate increases for Elizabethtown and Mount Holly, effective January 1, 1998, for the full recovery of costs associated with SFAS No. 106 "Accounting for Employer's Postretirement Benefits" on an accrual basis less the costs associated with SFAS No. 106 expenses previously recovered in rates. The total increases in annual operating revenues resulting from these Stipulations were $.39 million for Elizabethtown and $.02 million for Mount Holly. In accordance with the terms of the pending Merger Agreement, Elizabethtown will postpone filing for rate relief until the Merger has been consummated. Mount Holly In 1998 Mount Holly commenced a construction project, called the Mansfield Project, to comply with New Jersey legislative restrictions to obtain alternative water supplies, thereby reducing its water pumpage from an aquifer, which had been subject to over-pumping by Mount Holly and various local purveyors in a portion of southern New Jersey. A portion of this project was placed into service in the third quarter of 1998 and the remaining portion of the project was placed into service in late December 1999. To settle an appeal initiated by another water purveyor in 1995 concerning the diversion rights for the Mansfield Project, Mount Holly signed a Stipulation in 1997 with the purveyor, the DEP and other parties, requiring Mount Holly to purchase one million gallons per day from the other purveyor during the two-year period that the Mansfield Project was being constructed. Purchases began during March of 1998, after completion of an interconnection and ended in January 2000 shortly after the Mansfield Project went into service. In September 1997 Mount Holly filed a petition with the BPU to establish a Purchased Water Adjustment Clause (PWAC) to reflect the cost of water purchased from the other purveyor under the aforementioned agreement. In May 1998 the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.3 million or 38.9%. Effective January 1, 2000, Mount Holly received an increase in annual rates of $1.88 million. This increase included costs for Mount Holly's Mansfield Project that was placed in service at the end of December 1999. The rate decision also reflected the elimination of the PWAC. After the elimination of the PWAC the net rate increase was $.51 million. This increase also reflects additional construction and financing costs, as well as increases in operating costs since base rates were last established in January 1996. In June 1999 Mount Holly purchased Homestead Water Utility, Inc. and AWWM purchased Homestead Treatment Utility, Inc. for a combined cash price of $1.8 million. The entities provide water and wastewater services to approximately 800 customers of the Homestead community in southern New Jersey. The transactions were accounted for as purchases. Had the acquisitions been consummated as of January 1, 1997, the proforma effect on revenues, net income and earnings per share for the years ended December 31, 1999, 1998 and 1997 would be immaterial. - -31- 12. Other Events In August 1999 the Governor of the State of New Jersey declared a "Water Emergency" for the entire state and issued mandatory restrictions on outdoor, nonessential water use. Due to unusually low levels of rainfall during June and July the Governor deemed these measures necessary to preserve the integrity of several of the state's reservoir and well supplies. Customers of Elizabethtown, Mount Holly, Edison and Liberty were subject to these restrictions. The water systems operated by E'town's subsidiaries at all times had, and continue to have, adequate supplies of water to meet the needs of their customers. These restrictions affected the amount of water consumed by a substantial number of the Corporation's customers and reduced net income in 1999 by approximately $.68 million. The restrictions were lifted in October 1999. In September 1999 Elizabethtown withdrew its primary water treatment plant, the Raritan-Millstone Water Treatment Plant (Plant), from service as a result of flooding from Tropical Storm Floyd (Floyd). For several days, Elizabethtown had difficulty maintaining adequate water pressure in portions of its distribution system because overall system production levels were substantially less than normal. Customers in portions of a few municipalities were without water service for a period of approximately 3 days. Costs incurred to repair and replace equipment damaged by the flood and to respond to inquiries by customers, regulatory bodies and the media have been deferred and are expected to be recoverable through insurance. The Company has incurred $7.0 million of flood-related expenditures and has received an advanced reimbursement of $2.0 million from its insurance carrier. The remaining $5.0 million of flood-related expenditures is reported on the Consolidated Balance Sheets as a deferred charge at December 31, 1999. The loss of revenues due to below normal water consumption is not recoverable through insurance (see Note 13 for legal matters related to Floyd). The loss of revenues decreased net income in 1999 by approximately $.39 million. 13. Commitments and Contingent Liabilities Elizabethtown is obligated, under a contract that expires in 2013, to purchase from the New Jersey Water Supply Authority (NJWSA) a minimum of 37 billion gallons of water annually. Effective July 1, 1999, the annual cost of water under contract is $7.63 million. The Company purchases additional water from the NJWSA on an as-needed basis. The total cost of water purchased from the NJWSA was $9.03 million in 1999. In connection with E'town's agreement to operate the water systems of the township of Edison and the city of Elizabeth, E'town has certain contractual commitments which are set forth in Note 8. Capital expenditures of E'town and its subsidiaries are estimated to be $152.36 million, exclusive of concession fees, through 2002, of which $144.99 million is for utility expenditures by Elizabethtown, Mount Holly and AWWM and $7.37 million is for non-utility expenditures. Expected future minimum rental payments required under noncancelable leases with terms in excess of one year at December 31 of each of the years 2000 through 2004 are: 2000, $1.04 million; 2001, $1.06 million; 2002 $.92 million; 2003, $.62 million and 2004, none. Rent expense totaled $.99 million, $.83 million and $.72 million in 1999, 1998 and 1997, respectively. Elizabethtown and AWM lease vehicles and certain office equipment. The minimum payments required under noncancelable leases with terms in excess of one year at December 31 of each of the years 2000 through 2004 are: $1.66 million, $1.65 million, $1.64 million, $1.64 million and $1.64 million. The lease expense was $1.39 million and $.29 million for 1999 and 1998, respectively. There was no lease expense for 1997. - -32- In connection with the pending Merger the Corporation retained a financial advisor. The total estimated fee for the financial advisor is $ 4.50 million of which $ 1.09 million was expensed in 1999 in connection with the Merger announcement, $ .66 million is due upon shareholder approval and the remainder is due when the transaction is consummated. Upon the consummation of the pending Merger, the Corporation will become obligated to make a payment of $.4 million to an officer of the Corporation as consideration for efforts to bring the transaction to completion. Also in connection with the pending Merger, subsequent to the consummation of the transaction, the Corporation may become obligated to make payments to officers of Elizabethtown and Properties under change in control agreements presently in effect between the Corporation and the officers. The extent of personnel decisions that could potentially trigger the provisions of these agreements are not presently known and therefore, the amounts of any potential obligations are not presently determinable. Environmental, Legal and Other Matters On September 23, 1999, two parties filed separate class action lawsuits for compensatory damages and related fees on behalf of themselves and similarly situated residential and commercial customers against Elizabethtown Water Company, Edison Water Company and Liberty Water Company. The lawsuit alleges negligence regarding the quantity and quality of water services provided by the Corporation during the period in September 1999 when Elizabethtown's Plant was flooded from Floyd and was withdrawn from service for approximately 3 days. Elizabethtown has notified its insurance carrier of the lawsuit and has filed a motion for summary judgment to dismiss the lawsuit as a class action proceeding prior to answering the allegations. In March 2000 the New Jersey Superior Court (NJSC) ruled that in the event the lawsuit is not dismissed, the case be referred to the BPU for purposes of investigating the matter and reporting its findings to the NJSC. The NJSC, in view of the BPU's findings, will then determine what, if any, damages were suffered by the plaintiffs and what liability, if any, rests with Elizabethtown. E'town Corporation maintains that such allegations are without merit and believes that the plaintiffs' chances of prevailing are not significant. There are environmental matters that are inherent in the production, transmission and distribution of water as well as in the treatment of wastewater. The Corporation is sensitive to these issues and mitigates the environmental impact of these activities to the extent required by the laws and regulations under which these activities are governed and makes efforts to exceed the regulatory requirements where practical. The Corporation, in the ordinary course of business, periodically becomes involved in litigation. There is currently no litigation in progress, other than the items discussed above, regarding environmental or other issues in which an outcome adverse to the Corporation could have a material impact on the financial statements. - -33- 14. Pension Plan and Other Postretirement Benefits Pension Plan Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan), which covers most employees of Elizabethtown, Mount Holly and Properties. The Plan provides for annual benefits at retirement equal to 1.6% of the average compensation for the highest four consecutive years, multiplied by the number of years of credited service. Supplemental Pension Plan The Corporation also has a supplemental retirement plan for certain management employees that is not funded. Eligibility for the designated employees is based upon their completion of twenty years of service. Payments are based upon 60% of the average compensation of an eligible management employee's last three years of service, net of the amount earned under the Plan. Benefits are payable for a period of 15 years and payments are made directly by the Corporation. In 1999 the supplemental compensation plan was amended to change the definition of compensation to include incentive compensation and other taxable benefits. The unfunded benefit obligation at December 31, 1999 and 1998 was $2.13 million and $1.51 million, respectively. Other Postretirement Benefits The Corporation provides certain health care and life insurance benefits for substantially all of its retired employees. As a result of a contract negotiated in February 1996 with the Corporation's bargaining unit, all union and non-union employees retiring after January 1, 1997, pay 25% of future increases in the premiums the Corporation pays for postretirement medical benefits. Under SFAS No. 106, the costs of postretirement benefits are accrued for each year the employee renders service, based on the expected cost of providing such benefits to the employee and the employee's beneficiaries and covered dependents, rather than expensing these benefits on a pay-as-you-go basis. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1999, and for 1999 was 9%. This rate decreases linearly each successive year until it reaches 3.8% in 2008, after which the rate remains constant. The rate increases effective January 1, 1998 allow for the full recovery of costs associated with the implementation of SFAS No. 106, including an amortization over 15 years of amounts previously deferred, which were in excess of amounts previously being recovered in rates. As of December 31, 1999, the unamortized amounts that remain deferred are $3.02 million and $.13 million for Elizabethtown and Mount Holly, respectively. The accompanying tables set forth the funded status of the Company's Plan and other postretirement benefit plans as of December 31 1999 and 1998 and reconciliations of the components of net periodic pension and postretirement benefit costs for the years 1999, 1998 and 1997: - -34- Other Postretirement Pension Plans Benefits (THOUSANDS OF DOLLARS) 1999 1998 1999 1998 =============================================================================== Funded Status Change in benefit obligation during year: Benefit obligation at beginning of year $45,880 $40,447 $ 7,938 $ 6,604 Service cost 1,672 1,407 241 390 Interest cost 3,109 2,855 430 486 Benefit payments (2,256) (2,092) (238) (247) Actuarial (gain) or loss (5,615) 3,263 (2,359) 705 Plan amendments 691 - ------------------------------------------------------------------------------- Benefit obligation at end of year 43,481 45,880 6,012 7,938 =============================================================================== Change in plan assets during year: Fair value of plan assets at beginning of year 52,153 46,803 2,171 1,331 Employer contributions 161 174 879 978 Benefit payments (2,256) (2,092) (238) (247) Actual return on plan assets 9,811 7,268 286 109 - ------------------------------------------------------------------------------- Fair value of plan assets at end of year 59,869 52,153 3,098 2,171 =============================================================================== Reconciliation of funded status at end of year: Funded status 16,389 6,273 (2,914) (5,767) Unrecognized net transition (asset) or obligation (1,097) (1,365) 4,716 5,079 Unrecognized prior service cost 2,771 2,415 Unrecognized net (gain) or loss (18,422) (7,662) (5,014) (3,063) - ------------------------------------------------------------------------------- Accumulated postretirement benefits* $ (359) $ (339)$(3,212) $(3,751) =============================================================================== * Recognized in the Consolidated Balance Sheets
Pension Plans Other Postretirement Benefits (THOUSANDS OF DOLLARS) 1999 1998 1997 1999 1998 1997 ================================================================================================================================== Net periodic benefit cost recognized for year: Service cost $ 1,672 $ 1,407 $ 1,322 $ 241 $ 390 $ 389 Interest cost 3,109 2,855 2,734 430 486 449 Expected return on plan assets (4,592) (4,125) (3,542) (186) (109) (57) Net amortization and deferral (7) (153) 66 165 158 140 Deferral/amortization for regulated companies 249 247 (273) - ---------------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost 182 (16) 580 899 1,172 648 ================================================================================================================================== Weighted - average assumptions for year: Discount rate 6.75 % 7.25 % 7.50 % 6.75 % 7.25 % 7.50% Rate of compensation increases 3.50 % 4.00 % 4.00 % Expected long - term rate of return on plan assets 9.00 % 9.00 % 9.00 % 9.00 % 9.00 % 9.00% Weighted - average assumptions at end of year: Discount rate 7.75 % 6.75 % 7.25 % 7.75 % 6.75 % 7.25% Rate of compensation increases 3.50 % 4.00 % 4.00 % ==================================================================================================================================
- -35- A single percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1999, and the net postretirement service and interest cost by approximately $.81 million and $.11 million, respectively. 15. Related Party Transactions Utility Billing Services, Inc., a subsidiary of NUI Corporation, of which a Director of E'town is Chairman of the Board and a Director, provides data processing and related services to Elizabethtown and other subsidiaries of the Corporation. The charges for all services totaled $1.04 million, $.93 million, and $.72 million, for 1999, 1998 and 1997, respectively. The current contract expires December 31, 2000. The Corporation has a line of credit effective October 1999 in the amount of $10 million with Summit Bank. A Director of E'town and of Elizabethtown is also a Director of Summit Bank. At December 31, 1999, E'town had loans outstanding with Summit Bank in the amount of $7.0 million. Total interest charges paid to Summit Bank by E'town were $.30 million, $.07 million and $.35 million for 1999, 1998 and 1997, respectively. Summit Bank also serves as a bond trustee for Elizabethtown for which Elizabethtown has paid fees of less than $.10 million in 1999, 1998 and 1997. AWM leases office space from a Director of E'town. Total rent payments were $.24 million for 1999 and $.10 million for the portion of 1998 that the Corporation owned AWM. 16. Segment Reporting SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires that companies disclose segment data based upon how management makes decisions, allocates resources and measures performance. The 1999, 1998 and 1997 segment data is presented as follows:
Engineering/ Financing (THOUSANDS OF DOLLARS) Regulated Contract Operations/ and Utilities Operations Construction Investment Eliminations Total ============================================================================================================================== 1999 Revenues $ 138,791 $ 19,363 $ 12,439 $ (8,398) $ 162,195 Operating Expenses 102,017 16,640 12,564 $ 1,679 (8,313) 124,587 Depreciation and Amortization Expense 13,534 1,807 335 120 15,796 Interest Expense 16,574 1,312 63 1,467 19,416 Net Income (Loss) 20,263 1,489 (189) (1,076) 20,487 Total Assets 750,690 72,921 7,506 51,574 (34,383) 848,308 Total Debt (1) 299,398 44,624 2,067 59,660 (30,740) 375,009 ============================================================================================================================== 1998 Revenues $ 134,943 $ 12,126 $ 5,735 $ $ (7,324) $ 145,480 Operating Expenses 95,432 10,968 5,699 635 (7,217) 105,517 Depreciation and Amortization Expense 12,500 1,035 81 63 13,679 Interest Expense 15,619 843 (6) 1,370 17,826 Net Income (Loss) 23,871 420 43 (2,192) 188 22,330 Total Assets 688,046 68,539 3,744 44,964 (26,551) 778,742 Total Debt (1) 268,056 31,000 179 44,499 (774) 342,960 ============================================================================================================================== (1) Includes long-term debt, notes payable, long-term debt - current portion and contract obligations payable.
- -36- The Regulated Utilities segment provides water and wastewater services through Elizabethtown, Mount Holly and AWWM. This segment is regulated by the BPU. The Contract Operations segment is comprised of Liberty and Edison and provides water services under contract to municipalities. The Engineering/Operations/Construction segment is comprised of AWM and provides engineering, operating and construction services, primarily in the wastewater field. The Financing and Investment segment is comprised of Properties and E'town. E'town provides the equity financing for all the other segments and debt financing for all segments other than the Regulated Utilities segment. Properties owns real estate parcels. Eliminations are comprised of the accounting entries necessary to eliminate intercompany sales, expenses and investments. 17. Quarterly Financial Data (Unaudited) A summary of financial data for each quarter of 1999 and 1998 follows: (THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) Basic Diluted Operating Operating Net Earnings Earnings Quarter Revenues Income Income Per Share Per Share ========================================================================== 1999 1st $ 35,476 $ 8,675 $ 6,300 $ 0.74 $ 0.73 2nd 41,611 10,179 5,757 0.67 0.66 3rd 45,593 12,809 7,953 0.92 0.91 4th 39,515 5,945 477 0.06 0.06 - -------------------------------------------------------------------------- Total $162,195 $ 37,608 $ 20,487 $ 2.39 $ 2.36 ========================================================================== 1998 1st $ 31,267 $ 8,455 $ 4,163 $ 0.52 $ 0.51 2nd 33,609 9,376 5,162 0.63 0.62 3rd 43,907 12,917 8,555 1.02 1.00 4th 36,697 9,215 4,450 0.53 0.53 - -------------------------------------------------------------------------- Total $145,480 $ 39,963 $ 22,330 $2.70 $ 2.66 ========================================================================== Water utility revenues are subject to seasonal fluctuation due to normal increased water consumption during the third quarter of each year. Net income in the fourth quarter of 1999 was impacted by certain significant operation costs, including costs associated with the pending Merger and labor and power costs indirectly attributable to a major flood at Elizabethtown's primary water treatment plant. - -37- INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of E'town Corporation: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of E'town Corporation and its subsidiaries as of December 31, 1999 and 1998, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of E'town Corporation and its subsidiaries at December 31, 199 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche March 9, 2000 Parsippany, New Jersey
Other Financial and Statistical Data 1999 1998 1997 1996 1995 ================================================================================================================= UTILITY PLANT (THOUSANDS) Utility Plant - net $ 659,339 $ 609,303 $ 572,785 $ 560,024 $ 507,858 Construction Expenditures (excluding AFUDC) 60,834 43,582 24,612 55,125 73,789 TOTAL ASSETS (THOUSANDS) 848,308 778,742 670,904 655,207 59,156 CAPITALIZATION (THOUSANDS) Shareholders' Equity 229,233 215,472 193,923 183,512 177,081 Preferred Stock 12,227 12,227 12,000 12,000 12,000 Debt (1) $ 375,009 $ 342,960 $ 270,328 $ 262,511 $ 220,703 Total Capitalization $ 616,469 $ 570,659 $ 476,251 $ 458,023 $ 409,784 CAPITALIZATION RATIOS Common Stock 37% 38% 41% 40% 43% Preferred Stock 2% 2% 2% 3% 3% Debt (1) 61% 60% 57% 57% 54% EARNINGS TO FIXED CHARGES RATIO 2.59 2.86 2.67 2.18 2.47 COMMON STOCK DATA Earnings Per Share: Basic $ 2.39 $ 2.70 $ 2.44 $ 1.96 $ 2.16 Diluted 2.36 2.66 2.41 1.96 2.14 Dividends Per Share 2.04 2.04 2.04 2.04 2.04 Book Value Per Share $ 26.26 $ 25.43 $ 24.17 $ 23.58 $ 23.54 Average Shares Outstanding: (Thousands) Basic 8,572 8,263 7,891 7,668 7,093 Diluted 8,871 8,567 8,215 7,966 7,394 REVENUES (THOUSANDS) General Customers $ 92,595 $ 87,794 $ 85,195 $ 68,797 $ 67,455 Other Water Systems 21,597 22,181 21,900 18,929 18,720 Industrial Wholesale 7,531 8,148 8,451 7,869 7,947 Fire Service/Miscellaneous 17,068 16,820 16,754 14,814 14,276 Contract Operations 19,363 12,126 3,330 Engineering Operations & Construction 12,439 5,735 Elimination of Intercompany Sales (8,398) (7,324) (1,804) Total Revenues $ 162,195 $ 145,480 $ 133,826 $ 110,409 $ 108,398 NET INCOME $ 20,487 $ 22,330 $ 19,260 $ 15,073 $ 15,296 WATER SALES - MILLIONS OF GALLONS (MG) General Customers 25,852 24,614 24,333 22,890 23,999 Other Water Systems 13,806 14,396 14,504 15,049 15,569 Industrial Wholesale 3,270 3,482 3,533 3,567 3,673 Contract Operations 8,051 5,091 1,307 System Use and Unaccounted For 7,718 6,934 6,948 6,444 6,402 Elimination of Intercompany Sales (5,165) (3,899) (1,163) Total Water Sales 53,532 50,618 49,462 47,950 49,643 SYSTEM DELIVERY BY SOURCE (MG) Surface 44,520 48,067 42,585 41,485 42,646 Wells 5,740 1,072 6,689 6,328 6,764 Purchased 8,437 5,378 1,351 137 233 Elimination of Intercompany Sales (5,165) (3,899) (1,163) Total System Delivery 53,532 50,618 49,462 47,950 49,643 MILLIONS OF GALLONS PUMPED Average Day 147 139 135 131 136 Maximum Day 241 217 205 170 183 CUSTOMERS Regulated Utilities 205,022 200,536 197,663 195,482 192,617 Contract Operations 29,051 29,471 11,207 Engineering/Operations/Construction 4,605 4,437 4,057 Total Customers 238,678 234,444 212,927 195,482 192,617 GENERAL INFORMATION Miles of Main 3,014 2,955 2,926 2,899 2,869 Fire Hydrants Served 17,668 16,426 16,228 16,012 15,650 ================================================================================================================= (1) Includes long-term debt, notes payable, long-term debt - current portion and contract obligations payable. As of March 29, 2000 there were 5,182 holders of record of E'town's Common Stock. See Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations and Notes to Consolidated Financial Statements appearing elsewhere in this report.
STOCK PRICE AND DIVIDEND DATA: E'TOWN'S COMMON STOCK IS TRADED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL ETW. 1999 1st 2nd 3rd 4th ================================================================ Quarter Closing Price: Low: $ 37.44 $ 39.44 $ 45.56 $ 43.56 High: $ 46.81 $ 46.88 $ 53.13 $ 62.88 Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51 ================================================================ 1998 1st 2nd 3rd 4th ================================================================ Quarter Closing Price: Low: $ 34.38 $ 33.88 $ 36.44 $ 40.75 High: $ 39.69 $ 38.06 $ 43.75 $ 47.38 Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51 ================================================================ EX-21 5 SUBSIDIARIES OF THE CORPORATION SUBSIDIARIES OF THE CORPORATION Subsidiaries of E'town Corporation and Elizabethtown Water Company as of December 31, 1999 are as follows: State of Name Incorporation Elizabethtown Water Company New Jersey The Mount Holly Water Company (subsidiary) New Jersey E'town Properties, Inc. Delaware Edison Water Company New Jersey Liberty Water Company New Jersey Applied Water Management, Inc. New Jersey Applied Wastewater Management, Inc. New Jersey EX-23 6 INDEPENDENT AUDITORS' CONSENT Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-69549 on Form S-3 and Registration Statement Nos. 33-49812, 33-19600 and 333-56819 on Form S-8 of E'town Corporation of our reports dated March 9, 2000 and to the incorporation by reference in Registration Statement Nos. 33-68579 and 33-51917 on Form S-3 of Elizabethtown Water Company of our report dated March 9, 2000, appearing in or incorporated by reference in this Annual Report on Form 10-K of E'town Corporation and Elizabethtown Water Company for the year ended December 31, 1999. /s/ Deloitte & Touche LLP Parsippany, New Jersey March 30, 2000 EX-27 7 FDS
UT 0000764403 E'town Corporation & Subsidiaries YEAR DEC-31-1999 DEC-31-1999 PER-BOOK 659,339 85,163 70,074 33,732 0 848,308 179,156 (3,845) 53,922 229,233 12,000 227 252,674 89,500 13,341 0 494 0 0 0 250,839 848,308 162,195 9,814 114,773 124,587 37,608 3,108 40,716 19,416 21,300 813 20,487 17,526 16,109 32,458 2.39 2.36 All amounts in thousands of dollars except per share amounts.
EX-27 8 FDS
UT 0000032379 Elizabethtown Water Company & Subsidiary YEAR DEC-31-1999 DEC-31-1999 PER-BOOK 650,771 7,337 50,023 33,056 0 741,187 15,741 141,090 63,630 220,461 12,000 0 231,969 51,500 12,873 0 481 0 0 0 211,903 741,187 138,306 11,116 90,136 101,252 37,054 853 37,907 16,502 21,405 813 20,592 17,526 14,661 32,579 0 0 All amounts in thousands of dollars.
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