-----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, O5Q7xX6hXsE3DgnQMH842qynt+up3k329gZnTvf08OG6RZ0V47Kn9IPlzLtMaqeh NGXXDmkQvPgKuEX8cSgZjg== 0000764403-98-000003.txt : 19980330 0000764403-98-000003.hdr.sgml : 19980330 ACCESSION NUMBER: 0000764403-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ETOWN CORP CENTRAL INDEX KEY: 0000764403 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 222596330 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11023 FILM NUMBER: 98575165 BUSINESS ADDRESS: STREET 1: 600 SOUTH AVE STREET 2: P O BOX 788 CITY: WESTFIELD STATE: NJ ZIP: 07090 BUSINESS PHONE: 9086541234 MAIL ADDRESS: STREET 1: P O BOX 788 STREET 2: C/O E'TOWN CORP CITY: WESTFIELD STATE: NJ ZIP: 07090 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELIZABETHTOWN WATER CO /NJ/ CENTRAL INDEX KEY: 0000032379 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 221683171 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-00628 FILM NUMBER: 98575166 BUSINESS ADDRESS: STREET 1: 600 SOUTH AVE STREET 2: P O BOX 788 CITY: WESTFIELD STATE: NJ ZIP: 07090 BUSINESS PHONE: 9086541234 MAIL ADDRESS: STREET 1: 600 SOUTH AVE PO BOX 788 STREET 2: 600 SOUTH AVE PO BOX 788 CITY: WESTFIELD STATE: NJ ZIP: 07090 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-11023 E'TOWN CORPORATION (Exact name of registrant as specified in its charter) New Jersey 22-2596330 (State of incorporation) (I.R.S. Employer Identification No.) 600 South Avenue Westfield, New Jersey 07090 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (908) 654-1234 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, without par value New York Stock Exchange Commission file number 0-628 ELIZABETHTOWN WATER COMPANY (Exact name of registrant as specified in its charter) New Jersey 22-1683171 (State of incorporation) (I.R.S. Employer Identification No.) 600 South Avenue Westfield, New Jersey 07090 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (908) 654-1234 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Secrities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __X__ On December 31, 1997, the aggregate market value of E'town Corporation's voting stock held by non-affiliates was $324,901,247. On December 31, 1997, there were 8,022,253 shares of Common Stock outstanding, exclusive of treasury shares or shares held by subsidiaries of E'town Corporation. Note: All of the Common Stock of Elizabethtown Water Company is owned by E'town Corporation. Parts II and IV incorporate information by reference from the Annual Report to Shareholders of E'town Corporation for the Year Ended December 31, 1997. Part III incorporates information by reference from the definitive Proxy Statement in connection with E'town Corporation's Annual Meeting of Shareholders to be held on May 21, 1998. E'TOWN CORPORATION ELIZABETHTOWN WATER COMPANY 1997 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I Page Item 1. Business 1 Organization 1 Service Area and Customers 1 Water Supply 2 Water Treatment Facilities and Water Quality Regulations 3 Transmission and Distribution 4 Energy Supply 4 Environmental Matters 5 Franchises 5 Employee Relations 5 Rate Matters 5 Real Estate Matters 6 Other Developments 6 Executive Officers of the Corporation and Elizabethtown 8 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for the Corporation's Common Stock and Related Stockholder Matters 9 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations 11 Item 8. Financial Statements and Supplementary Data 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16 PART III Item 10.Directors and Executive Officers of the Registrant 16 Item 11.Executive Compensation 16 Item 12.Security Ownership of Certain Beneficial Owners and Management 16 Item 13.Certain Relationships and Related Transactions 16 PART IV Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K 16 SIGNATURES 18 APPENDIX I Elizabethtown Water Company and Subsidiary Consolidated Financial Statements for the Years Ended December 31, 1997, 1996 and 1995 and Independent Auditors' Report E'TOWN CORPORATION ELIZABETHTOWN WATER COMPANY Annual Report on Form 10-K For the year ended December 31, 1997 PART I ITEM 1. Business ORGANIZATION E'town Corporation (E'town or Corporation) was originally incorporated under the laws of the State of New Jersey in 1985 to serve as a holding company for Elizabethtown Water Company (Elizabethtown or Company) and its wholly owned subsidiary, The Mount Holly Water Company (Mount Holly). Elizabethtown and Mount Holly are regulated water utilities which, as a consolidated entity, are referred to herein as Elizabethtown Water Company (Elizabethtown Water Company). E'town Properties, Inc. (Properties) was incorporated in 1987 as a wholly owned and non-regulated subsidiary of E'town to acquire, develop and sell real estate holdings. E'town also owns a 65% interest in Applied Watershed Management, LLC (AWM). AWM is a joint venture formed in 1995 to pursue opportunities in water and wastewater facilities for corporate and municipal clients. Edison Water Company (Edison) is a wholly owned, non-regulated subsidiary of E'town formed in July 1997 to operate the water system of the Township of Edison, New Jersey under a 20-year operating contract. Elizabethtown, Mount Holly and Edison are engaged in the distribution of water for domestic, commercial, industrial and fire protection purposes and for resale by other water companies and public bodies. Elizabethtown and Mount Holly are public utilities and are regulated by the New Jersey Board of Public Utilities (BPU). Elizabethtown is a New Jersey corporation, one of whose predecessors was first incorporated in 1854. The present corporation was formed in 1961 as a result of a consolidation of Elizabethtown Water Company Consolidated and Plainfield-Union Water Company. Elizabethtown owns all of the common stock of Mount Holly, which contributed 3% of the Company's consolidated operating revenues for 1997. SERVICE AREA AND CUSTOMERS At December 31, 1997 Elizabethtown and Mount Holly furnished water service on a retail basis to general customers and to industrial customers served through 200,320 meters in 54 municipalities in the counties of Union, Middlesex, Somerset, Mercer, Hunterdon, Ocean, Morris and Burlington in the central part of New Jersey. Elizabethtown also provides, on a wholesale basis, a portion of the water requirements of eight additional municipalities with their own retail water systems and of three other investor-owned water companies. Water for fire protection service is provided to 53 municipalities and also to commercial and industrial establishments. Edison serves 11,200 customers under its contract to operate the water system of the Township of Edison, New Jersey. The operating revenues of Elizabethtown, Mount Holly and Edison by major classification of customer for the twelve months ending December 31, 1997 are as follows: 1 General customers 65.8% Sales to other systems 15.0% Larger industrial customers 6.3% Fire protection service/miscellaneous 12.9% The water systems are substantially all metered except for fire service. Additional operating statistics appear on page 10. WATER SUPPLY The water supply systems of Elizabethtown and Mount Holly are physically separate. During 1997, Elizabethtown's pumpage averaged 131.4 million gallons per day (MGD) and Mount Holly's pumpage averaged 3.7 MGD. Elizabethtown and Mount Holly believe they have sufficient water supply sources to meet the current needs of their customers. Mount Holly plans to construct additional facilities, as discussed below, to augment its water supplies. In 1997, surface water sources supplied approximately 89% of Elizabethtown's supply with wells supplying the remaining 11%. All of Mount Holly's water is produced from wells although beginning in March 1998, 1.0 million gallons per day is being purchased by Mount Holly from another purveyor on a temporary basis from surface sources (see below). Substantially all of Elizabethtown's surface water is purchased under a long-term contract with the New Jersey Water Supply Authority (NJWSA) which requires Elizabethtown to purchase (i) 32 MGD from the state-owned Delaware and Raritan Canal which transports water from the Delaware River Basin plus (ii) 70 MGD from the Raritan River Basin which includes the state-owned Spruce Run-Round Valley Reservoir System. The safe yield of the Raritan River Basin and the Delaware and Raritan Canal is 225 MGD of which 151 MGD is presently allocated to Elizabethtown and others. The NJWSA has available, and Elizabethtown purchases, water above the Company's minimum purchase obligation on an as-needed basis. Mount Holly has historically obtained all of its water from wells drilled into an aquifer, which has been subject to over-pumping. The State adopted legislation requiring all local purveyors, including Mount Holly, to obtain alternate supplies and reduce their withdrawals from the affected parts of the aquifer. Mount Holly designed a project to obtain water from outside the affected part of the aquifer for delivery into the Mount Holly system. Management believes that this project (the "Mansfield Project") is the most cost effective method for Mount Holly to comply with the State's regulations. By September 1995, Mount Holly had obtained all New Jersey Department of Environmental Protection (DEP) approvals for the Mansfield Project and was ready to start construction when a regional purveyor appealed the granting of Mount Holly's permits for the project. Under an August 1997 settlement among Mount Holly, the DEP and the regional purveyor, Mount Holly will purchase 1 million gallons per day from the regional purveyor for two years while the Mansfield Project is being constructed. Purchases began during March of 1998, after completion of an interconnection. Mount Holly is taking the steps necessary to recover in rates both the costs of purchased water and the costs of the Mansfield Project. First, Mount Holly filed a petition with the Board of Public Utilities (BPU) for a Purchased Water Adjustment Clause (PWAC) to recover the costs of purchased water through rates. The PWAC filing requests an increase in annual operating 2 revenues of approximately $1.34 million or 40.3%. Second, Mount Holly and the parties to Mount Holly's 1995 base rate case are participating before the BPU in a proceeding to clarify the need for, and the cost-effectiveness of, the Mansfield Project as the method for Mount Holly to comply with the states restrictions on diversions from the aquifer. In addition, Mount Holly will file a base rate case during the second quarter of 1998 to recover a portion of the costs of the Mansfield Project, estimated at $7.3 million, as well as $6.0 million in additions to utility plant since Mount Holly's base rates were last adjusted in January 1996. Finally, Mount Holly intends to file a base rate case in 1999 for the remaining costs of the Mansfield Project, estimated to amount to $11.3 million, to coincide with the completion of the project and the expiration of the agreement to purchase water from the other purveyor. WATER TREATMENT FACILITIES AND WATER QUALITY REGULATIONS Elizabethtown owns and operates two treatment plants at the confluence of the Raritan and Millstone Rivers adjacent to the Delaware and Raritan Canal to treat surface water purchased from the NJWSA. The plants can withdraw water from any of the above sources, which is an advantage in the event that one source becomes contaminated. The Raritan-Millstone Plant (RM Plant) was placed in service in 1931 and has continually been upgraded since that time. The RM Plant has a production capacity of 155 MGD. The Canal Road Water Treatment Plant (Plant) was placed in service in October 1996 to increase Elizabethtown's sustainable production capacity and provide the ability to continue to meet water quality regulations. The Plant has an initial rated production capacity of 40 MGD and an installed cost of approximately $102 million, excluding an Allowance For Funds Used During Construction (AFUDC). Elizabethtown also operates smaller treatment facilities to treat groundwater produced by certain wells. Mount Holly operates similar groundwater treatment facilities. Both the United States Environmental Protection Agency (EPA) and the DEP regulate the operation of Elizabethtown's and Mount Holly's water treatment and distribution systems and the quality of the water Elizabethtown and Mount Holly deliver to their customers. Currently, Elizabethtown and Mount Holly believe they are in compliance, in all material respects, with all present federal and state water quality standards, including all regulations promulgated to date by the EPA pursuant to the Federal Safe Drinking Water Act, as amended (SDWA), and by the DEP pursuant to similar state legislation. Elizabethtown has included certain capital projects in its three-year capital expenditure plans which it anticipates will be necessary to comply with regulations that have been proposed by the EPA and DEP. Recovery of the financing and operating costs of such improvements, plus those costs for any additional projects which cannot be foreseen at this time, will be requested in rates. Elizabethtown has responded in recent years to water quality regulations promulgated by DEP and the EPA by replacing groundwater supplies with increased supplies of surface water. The Company expects this trend to continue because it is preferable from the standpoint of operational efficiency and cost to modify treatment processes and facilities at one or two large plants than to constantly upgrade treatment facilities at multiple well sites. Water Quality Regulations As required by the SDWA, the EPA has established maximum contaminant levels (MCLs) for various substances found in drinking water. As authorized by similar state legislation, the DEP has set MCLs for certain substances which are more restrictive than the MCLs set by the EPA. In certain cases, the EPA and DEP have also mandated that certain treatment procedures be followed in addition to satisfying MCLs established for specific contaminants. The DEP is also the USEPA's agent for enforcing the SDWA in New Jersey and, in that capacity, monitors the activities of Elizabethtown and Mount Holly and reviews the results of water quality tests performed by Elizabethtown and Mount Holly for adherence to applicable regulations. Regulations generally applicable to water utilities, including Elizabethtown and Mount Holly, include the Lead and Copper Rule (LCR), the MCLs established for various volatile organic compounds (VOCs), the MCLs proposed for radionuclides and the Surface Water Treatment Rule (SWTR). Lead and Copper Rule The LCR requires Elizabethtown and Mount Holly to test the quantity of lead and copper in drinking water at the customer's tap and, if certain contaminant levels (action levels) are exceeded, to notify customers and initiate a public information campaign advising customers how to minimize exposure to lead and copper. The LCR also requires Elizabethtown to add corrosion inhibitors to water to minimize leaching of lead from piping, faucets and soldered joints into water consumed at the tap. Results from two 3 separate tests completed during 1992 within Elizabethtown and Mount Holly's systems did not indicate lead and copper concentrations above the action levels. Accordingly, public notification and a public information campaign have not been required. Corrosion inhibitor facilities for Elizabethtown were completed in 1996. Volatile Organic Compounds VOCs include various substances (primarily synthetic organic solvents) which have percolated into groundwater aquifers from surface sources. Elizabethtown has found VOCs in excess of the applicable MCLs in certain of its wells and has either suspended the use of such wells or constructed aeration towers which remove such contaminants from the water by venting them into the atmosphere. Because underground water flows are difficult to map, it is difficult to predict when and where contamination will occur in the future. To the extent that contamination in excess of applicable MCLs occurs at wells lacking aeration towers, Elizabethtown will consider building such facilities if feasible and cost effective, or closing such wells, thereby increasing its reliance on surface water. To date, Mount Holly has not been affected by VOC contamination. Radionuclides Radionuclides are naturally occurring radioactive substances (primarily radon) found in groundwater. Like VOCs, radon can be removed from groundwater using aeration towers. If the MCLs proposed for all radionuclides are finally adopted, Elizabethtown believes that it will abandon wells with aggregate production capacity of approximately 5 MGD, thereby further increasing Elizabethtown's reliance on surface water. Elizabethtown currently owns and operates wells with an aggregate safe daily yield of 18 MGD. Surface Water Treatment Rule The operation of Elizabethtown's Raritan-Millstone treatment plant is subject to the SWTR. Elizabethtown has assessed the plant's sustainable production capacity, assuming operation consistent with the requirements of the SWTR, and determined that improvements to the existing plant are necessary. Specifically, Elizabethtown has installed additional pumps to increase capacity and reliability at peak times and has constructed a new building to house offices and lab facilities. Also, Elizabethtown has replaced existing chlorine gas disinfection facilities with liquid sodium hypochlorite to improve community and employee safety and has installed corrosion inhibitor facilities in conformance with the LCR. The Canal Road Water Treatment Plant has been designed and is being operated for compliance with the SWTR. TRANSMISSION AND DISTRIBUTION As of December 31, 1997, Elizabethtown Water Company's transmission and distribution system included 2,926 miles of transmission and distribution mains. Mains range in size up to 60 inches, substantially all of which are either ductile iron, cast iron or prestressed concrete pipe. Elizabethtown conducts an ongoing program to clean and line its older cast iron mains the cost of which is capitalized and has been included in rate base in stipulations settling recent rate cases. On an ongoing basis, Elizabethtown assesses the capacity of its system to maintain adequate pressures and initiates plans to construct pumping, transmission and storage facilities as needed. ENERGY SUPPLY Elizabethtown pumps most of its water with electric power purchased from two major electric utilities. The Company has replaced certain electric pumps with natural gas-fired pumps over the last several years to reduce energy costs. Elizabethtown also has other diesel powered pumping and generating facilities at its major treatment plants and at certain transfer stations to provide basic service during possible electrical shortages. Elizabethtown has not, to date, experienced any shortage of electric energy, natural gas or diesel fuel to operate its pumps and has cooperated with its electric suppliers during their peak periods by operating non-electrical pumping facilities upon request. 4 ENVIRONMENTAL MATTERS Elizabethtown and Mount Holly are also subject to regulation by the DEP with respect to water supply plans and specifications for the construction, improvement, alteration and operation of public water supply systems and with respect to the quality of any residuals from treatment plants. As a normal by-product of treating surface water, Elizabethtown's existing surface water treatment plants generate silt removed from untreated river water plus residue from chemicals used in the treatment process. Historically, Elizabethtown had disposed of this material in landfills. As a result of revised regulations governing landfills, Elizabethtown has been reusing this material on site for flood protection and is presently removing some material off-site for beneficial reuse. Under New Jersey law, environmental matters are addressed by the DEP before diversion allowances or other water supply projects are authorized. To date, Elizabethtown has been able to construct all plant facilities and obtain all diversion authorizations necessary to maintain customer service. Mount Holly has also been able to construct all facilities and obtain all diversion authorizations including the diversion permit for the Mansfield Project discussed previously. FRANCHISES The property and franchises of Elizabethtown and Mount Holly are subject to rights of eminent domain of the State of New Jersey. These rights have been delegated by statutes now in effect to municipalities or groups of municipalities and have been or may be delegated to various public agencies. No such rights of eminent domain have been exercised since 1931. EMPLOYEE RELATIONS As of December 31, 1997, the Corporation had a total of 399 full-time employees, of which approximately half were covered by union contracts. The contracts between the Company and the Utility Workers Union of America (A.F.L.-C.I.O.) were renegotiated on February 1, 1996 and will expire on January 31, 1999. The contract provided for wage increases of 4% on February 1, 1996, 1997 and 1998, respectively. The Company considers relations with both union and non-union employees to be satisfactory. RATE MATTERS Elizabethtown and Mount Holly are subject to regulation by the New Jersey Board of Public Utilities (BPU) with respect to the issuance and sale of securities, rates and service, classification of accounts, mergers, and other matters. Elizabethtown and Mount Holly periodically seek rate relief to cover the cost of increased operating expenses, increases in financing expenses due to additional investments in utility plant, and other costs of doing business. Elizabethtown On October 25, 1996, a rate increase under a stipulation (1996 Stipulation) went into effect for Elizabethtown. This resulted in an increase in annual operating revenues of approximately $21.8 million. The rate increase reflected a full allowance for the estimated capital and operating costs for the Plant and an authorized rate of return on common equity of 11.25%. Elizabethtown, excluding Mount Holly, earned a rate of return on common equity of 11.0% in 1997. Elizabethtown's authorized rate of return on common equity is currently 11.25%. Mount Holly Mount Holly earned a rate of return on common equity of 2.8% in 1997, compared to an authorized rate of return of 11.25%, established in its most recent rate proceeding. Mount Holly contributed $.02 to E'town's consolidated earnings per share in 1997. Management expects Mount Holly to increase its 5 contribution to E'town's earnings per share later in 1998 and into 1999 upon receipt of additional rate relief so that Mount Holly can realize rates of return comparable to authorized levels. See "Water Supply," above for further discussion of Mount Holly's pending rate issues. REAL ESTATE MATTERS E'town Properties and E'town Corporation own various parcels of undeveloped land in New Jersey carried as investments of $12.8 million in Non-Utility Property and Other Investments - Net, in the Consolidated Balance Sheets of E'town at December 31, 1997. E'town and Properties are proceeding with plans to sell such properties and expect to invest the sale proceeds into water and wastewater utility investments that produce a current return. Properties sold one parcel in 1997 for a price of $.4 million. The sale produced a nominal gain. Properties had previously entered into a contract to sell another parcel to a developer. The parties expected that the contract would close prior to December 31, 1996, but the developer was unable to obtain the required municipal approvals. The contract has been extended and all the material issues appear to have been resolved. Properties expects several closings during 1998, including the parcel described above which, if consummated, would result in gains. The carrying value of each parcel includes the original cost plus any real estate taxes, interest and, where applicable, direct costs capitalized while rezoning or governmental approvals are or were being sought. Such costs are capitalized until the property is offered for sale, after which time such costs are expensed. Based on independent appraisals received at various times prior to 1997, the estimated net realizable value of each property exceeds its respective carrying value as of December 31, 1997. OTHER DEVELOPMENTS Effective July 1, 1997, E'town, through its Edison Water Company subsidiary, commenced operation of Edison Township's 11,200 customer water system under a 20-year contract. E'town paid the township $5.7 million at closing and expects to spend $5.4 million over the next three years to upgrade the system, primarily for new meters and main cleaning and lining. Edison Water Company receives all revenues from the township's system (pursuant to a rate schedule set forth in the contract), pays all operating expenses, and retains the balance to amortize its investment and earn a return on its capital. Edison Water Company expects to realize a return on its capital in an amount similar to that currently earned by E'town's regulated operations. Contributions to earnings will be small for the first five years and then will increase as rate increases specified in the contract take effect. E'town continues to pursue opportunities to operate municipal water and wastewater systems under long-term contract, primarily in New Jersey. While each opportunity is unique, such endeavors generally require 'town to make payments to the municipality and to invest capital to upgrade the utility systems within the first several years of the contract. Like Edison, E'town seeks to realize rates of return in these contracts comparable to levels earned by E'town's regulated utility businesses. E'town is negotiating with the city of Elizabeth, New Jersey to operate its water and wastewater systems under 40- and 20-year contracts, respectively. These contracts, if successfully negotiated, would require a $20.0 million payment at closing and expenditures of $26.2 million during the first three years. E'town would contract with a firm experienced in managing large wastewater facilities for the wastewater portion of the services to be provided. On March 6, 1998, E'town exercised an option to acquire Applied Wastewater Group (AWG), its joint venture partner for the past three years, in a $7.0 million stock-for-stock transaction, and is expected to close the transaction in the second quarter of 1998. AWG designs, builds and operates wastewater treatment plants. E'town intends to offer "one-stop shopping" for water and wastewater services to residential and commercial developers. These services 6 include the design, financing, construction and operation of water and wastewater facilities, and, in some instances, purchase of the utilities at project build-out, thereby adding to E'town's regulated utility customer base. Based on AW's results in 1997, E'town expects the acquisition to add modestly to E'town's earnings per share in 1998. On January 1, 1997, AWM commenced a three-year contract to operate the wastewater collection and treatment facilities owned by Environmental Disposal Corporation (EDC), which serves portions of Bedminster, Far Hills, and Peapack-Gladstone. AWM is also providing the billing and customer inquiry services. 7 Executive Officers of the Corporation and Elizabethtown Name Age Positions Held Anne Evans Estabrook 53 Chairman of the Corporation since May 1997. Vice President of the Corporation since September 1987. Owner of the Elberon Development Co., (a real estate holding company) and President of David 0. Evans, Inc.(a construction company). Andrew M. Chapman 42 President of the Corporation since May 1997, Chief Financial Officer of the Corporation from August 1989 until May 1997 and Treasurer of the Corporation from November 1990 to May 1997. President of Elizabethtown since January 1996 and Executive Vice President of Elizabethtown from May 1994 to December 1995. He served as Senior Vice President of Elizabethtown from April 1993 to May 1994, Chief Financial Officer of Elizabethtown from November 1990 to December 1995 and Treasurer of Elizabethtown from August 1989 to May 1994. Walter M. Braswell 48 Secretary of the Corporation, Properties and Elizabethtown since December 1990 and Vice President and General Counsel of Elizabethtown since August 1988. Norbert Wagner 62 Senior Vice President-Operations of Elizabethtown since May 1992. Vice President-Operations since March 1987. Edward F. Cash 62 Vice President - Customer Services of Elizabethtown since 1977. Item 2. Properties All principal plants and other materially important units of property of Elizabethtown and Mount Holly are owned in fee. The Company considers that the properties of Elizabethtown and Mount Holly are in good operating condition. Item 3. Legal Proceedings In the opinion of management, litigation in which the Corporation or its subsidiaries is involved is in the ordinary course of business and will not have a material adverse effect on the consolidated financial condition of the Corporation. Item 4. Submission of Matters to a Vote of Security Holders None 8 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. 9 Item 6. Selected Financial Data E'town Corporation This information is included in Exhibit 13, filed herewith, and is incorporated herein by reference. Elizabethtown Water Company 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------ Utility Plant (Thousands) Utility Plant - net $ 572,785 $560,024 $507,858 $437,456 $373,293 Construction Expenditures (excluding AFUDC) 24,612 55,125 73,789 69,981 32,517 Total Assets 646,318 640,779 580,808 502,848 437,405 Capitalization (Thousands) Shareholder's Equity 193,354 182,293 176,685 151,624 125,765 Preferred Stock 12,000 12,000 12,000 12,000 12,000 Debt (1) 249,974 250,963 208,952 164,951 141,952 Total Capitalization $ 455,328 $445,256 $397,637 $328,575 $279,717 Capitalization Ratios Common Stock 42% 41% 44% 46% 45% Preferred Stock 3% 3% 3% 4% 4% Debt (1) 55% 56% 53% 50% 51% Earnings Applicable to Common Stock (Thousands) $ 20,092 $15,942 $16,512 $13,369 $13,783 Operating Statistics Revenues (Thousands) General Customers $ 85,195 $68,797 $67,455 $62,923 $63,100 Other Water Systems 21,900 18,929 18,720 18,082 17,187 Industrial Wholesale 8,451 7,869 7,947 7,458 6,652 Fire Service/Miscellaneous 16,242 14,763 14,276 13,570 13,057 Total Revenues $ 131,788 $110,358 $108,398 $102,033 $99,996 Water Sales - Millions of Gallons (mg) General Customers 24,333 22,890 23,999 23,551 23,883 Other Water Systems 14,504 15,049 15,569 15,691 15,109 Industrial Wholesale 3,533 3,567 3,673 3,568 3,213 System Use and Unaccounted Fo6,948 6,444 6,402 6,570 5,453 Total Water Sales 49,318 47,950 49,643 49,380 47,658 System Delivery by Source - mg Surface 42,585 41,485 42,646 42,534 40,742 Wells 6,689 6,328 6,764 6,690 6,776 Purchased 44 137 233 156 140 Total System Delivery 49,318 47,950 49,643 49,380 47,658 Millions of Gallons Pumped: Average Day 135 131 136 135 131 Maximum Day 205 170 183 182 191 General Information Meters in Service 200,320 197,791 195,375 191,622 188,677 Miles of Main 2,926 2,899 2,869 2,828 2,800 Fire Hydrants Served 16,228 16,012 15,650 15,291 14,909 ============================================================================== (1) Includes long-term debt, notes payable and long-term debt-current portion. 10 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS E'town Corporation This information is included in Exhibit 13, filed herewith, and is incorporated herein by reference. Elizabethtown Water Company and Subsidiary The water utility operations of Elizabethtown Water Company (Elizabethtown or Company) and its subsidiary, The Mount Holly Water Company (Mount Holly), presently constitute the major portion of E'town Corporation (E'town or Corporation), assets and earnings. Elizabethtown and Mount Holly are regulated water companies which, as a consolidated entity are referred to herein as Elizabethtown Water Company (Elizabethtown Water Company). Mount Holly contributed about 3% of the Company's consolidated operating revenues for 1997. The following analysis sets forth significant events affecting the financial condition of Elizabethtown at December 31, 1997, and the results of operations for the years ended December 31, 1997 and 1996. LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures Program In 1997, capital expenditures were $24.6 million, primarily for water utility plant. For the three years ending December 31, 2000, capital and investment requirements for Elizabethtown are estimated to be $134.6 million, consisting of expenditures for water utility plant ($112.7 million for Elizabethtown and $21.9 million for Mount Holly). Elizabethtown While Elizabethtown's projected capital outlays have dropped from recent years now that the Canal Road Wate Treatment Plant (Plant) is completed, Elizabethtown's facilities will continue to be upgraded and expanded to handle customer growth. Elizabethtown's three-year capital program includes $62.0 million for routine projects (services, hydrants and main extensions not funded by developers) and $50.7 million for transmission system upgrades, a new operations center and other projects. Elizabethtown expects to file for rate relief periodically to ensure that such costs are adequately reflected in rates. (See Economic Outlook.) Mount Holly During the next three years, Mount Holly expects to spend $21.9 million, primarily for an additional supply source to comply with state regulations designed to prevent further depletion of a local aquifer. Mount Holly plans to file for rate relief to recover these costs, as well as to increase the rates of return realized by Mount Holly and, therefore, Mount Holly's contribution to E'town's earnings per share. Mount Holly obtains all of its water from wells drilled into an aquifer, which has been subject to over-pumping. The State adopted legislation requiring all local purveyors, including Mount Holly, to obtain alternate supplies and reduce their withdrawals from the affected parts of the aquifer. Mount Holly designed a project to obtain water from outside the affected part of the aquifer for delivery into the Mount Holly system. Management believes that this project (the "Mansfield Project") is the most cost effective method for Mount Holly to comply with the state's regulations. By September 1995, Mount Holly had obtained all New Jersey Department of Environmental Protection (DEP) approvals for the Mansfield Project and was ready to start construction when a regional purveyor appealed the granting of Mount Holly's permits. Under an August 1997 settlement among Mount Holly, the 11 DEP and the regional purveyor, Mount Holly will purchase 1 million gallons per day from the regional purveyor for two years while the Mansfield Project is being constructed. Purchases began in March of 1998, after completion of an interconnection. Mount Holly is taking the steps necessary to recover in rates both the costs of purchased water and the Mansfield Project. First, Mount Holly filed a petition with the Board of Public Utilities (BPU) for a Purchased Water Adjustment Clause (PWAC) to recover through rates the cost of purchased water. The PWAC filing requests an increase in annual operating revenues of $1.34 million or 40.3%. Second, Mount Holly and the parties to Mount Holly's 1995 base rate case are participating before the BPU in a proceeding to reaffirm that the Mansfield Project is needed and is the most cost effective method for Mount Holly to comply with the states restrictions on diversions from the aquifer. In addition, Mount Holly will file a base rate case during the second quarter of 1998 to recover a portion of the remaining costs of the Mansfield Project, estimated at $7.2 million, as well as $6.0 million in additions to utility plant since Mount Holly's base rates were last adjusted in January 1996. Finally, Mount Holly intends to file a base rate case in 1999 for the remaining costs of the Mansfield Project, estimated to amount to $11.3 million, to coincide with the completion of the project and the expiration of the agreement to purchase water from the other purveyor. Capital Resources During 1997, Elizabethtown Water Company financed 75.2% of its capital expenditures from internally generated funds (after payment of common stock dividends). The balance was financed with a combination of short-term borrowings under a revolving credit agreement, short-term borrowings under lines of credit, proceeds from capital contributions from E'town (funded by issuances of Common Stock under the Corporation's Dividend Reinvestment and Stock Purchase Plan) and long-term New Jersey Economic Development Authority (NJEDA) Bonds. For the three-year period ending December 31, 2000, E'town estimates that 48.6% of its currently projected capital expenditures and investments are expected to be financed with internally generated funds (after payment of common stock dividends). The balance will be financed with a combination of proceeds from the sale of E'town common stock, long-term debt, proceeds of tax-exempt NJEDA bonds, long-term notes and short-term borrowings. The NJEDA has granted preliminary approval for the financing of almost all of Elizabethtown's and Mount Holly's major projects during the next three years and the Mansfield Project. Elizabethtown expects to pursue tax-exempt financing to the extent that final allocations are granted by the NJEDA. Mount Holly has applied to the DEP State Revolving Fund Program for low interest funding (approximately 3% to 3.5%) for the Mansfield Project. Elizabethtown's senior debt is currently rated A3 and A by Moody's Investors Service and Standard & Poor's Ratings Group, respectively. In June 1997, Elizabethtown issued $50.0 million of tax-exempt Variable Rate Demand Notes through the NJEDA. The proceeds of the issue were used to repay amounts outstanding under the Company's revolving credit agreement, which expired in July 1997. RESULTS OF OPERATIONS Net Income for 1997 was $20.1 million as compared to $15.9 million for 1996. The increase in net income and earnings per share is attributable to the $21.8 million rate increase for the new Plant in October 1996, which was offset by the operating and financing costs of the Plant. Net income also increased $1.4 million, primarily due to variations in the weather, specifically the dry summer of 1997, as compared to the wet summer of 1996. Net Income for 1996 was $15.9 million as compared to $16.5 million for 1995. The most significant factor contributing to the decrease in net income was a reduction in revenues due to reduced outdoor water consumption in 1996, compared to 1995. Operating Revenues increased $21.4 million or 19.4% in 1997 over the comparable 1996 amount. The increase is primarily comprised of $17.7 million from a rate increase for Elizabethtown, effective October 1996 and $3.1 million from increased water consumption. The increase in water consumption is primarily due to the dry summer of 1997. 12 Operating Revenues increased $2.0 million or 1.8% in 1996 over the comparable 1995 amount. The increase in total revenues was comprised of rate increases for Elizabethtown and Mount Holly of $3.9 million and $.5 million, respectively, which were offset by a decrease in water consumption due to unusually cool, wet summer weather in 1996. The reduction in water consumption accounted for a decrease in revenues of $2.4 million. Operation Expenses increased $1.6 million or 3.6% in 1997 over the comparable 1996 amount. Increases resulting from variable costs associated with the increase in water consumption totaled $.3 million. Labor costs increased $.6 million. The remainder of the increase is attributable to various items, including operating costs for the Plant, information technology and other administrative costs. Operation Expenses increased $.6 million or 1.3% in 1996 over the comparable 1995 amount. Operation expenses decreased $.4 million for certain variable expenses asscociated with lower water consumption. The successful implementation of an energy conservation program in the second quarter of 1996 at the Raritan-Millstone Plant reduced energy costs by $.8 million. The success of various safety programs resulted in a decrease in workers' compensation premiums of $.3 million. These decreases were offset by increased labor costs of $1.6 million. Maintenance Expenses increased $.7 million or 11.8% in 1997 over the comparable 1996 amount. This increase is primarily attributable to costs associated with the maintenance of the Plant. The increase also includes $.4 million related to the costs of determining the most cost-effective method for disposing of byproducts (waste residuals) generated from the water treatment process at the Raritan-Millstone Plant. Maintenance Expenses increased $.1 million or .9% in 1996 over the comparable 1995 amount. Elizabethtown had begun to substantially realize the benefits of various preventive maintenance programs and operating efficiencies instituted in 1996 and prior years. Depreciation Expense increased $2.3 million or 23.7% in 1997 compared to 1996. The increase includes $2.1 million for the Plant and $.8 million for other utility plant additions. A decrease of $.6 million resulted from Elizabethtown no longer being required by the BPU to depreciate utility plant acquired through Contributions In Aid of Construction and Customers' Advances for Construction. This change was agreed to by the parties to Elizabethtown's last rate case for which an increase was effective in October 1996. Depreciation Expense increased $1.1 million or 12.3% in 1996, as compared to 1995. The increase is due primarily to a higher level of depreciable plant in service and includes $.5 million of depreciation expense for the Plant for a portion of the year. Revenue Taxes increased $2.7 million or 19.8% in 1997 and $.2 million or 1.7% in 1996 due to the taxes on increases in operating revenues discussed above. Real Estate, Payroll and Other Taxes increased $.2 million or 6.8% in 1997 due to additional labor costs, as well as additional property taxes. These taxes increased $.1 million or 3.5% in 1996 due primarily to increased labor costs. Federal Income Taxes as a component of operating expenses increased $3.7 million or 49.8% over the comparable 1996 amount due to the changes in the components of taxable income discussed herein. Federal Income Taxes as a component of operating expenses decreased $.6 million or 8.0% in 1996 from the comparable 1995 amount due to the changes in the components of taxable income discussed herein. Other Income (Expense) decreased $2.3 million or 83.0% compared to the 1996 amount. A decrease in the equity component of Allowance for Funds Used During Construction (AFUDC) of $3.5 million resulted from no longer capitalizing the financing costs associated with the Plant as the facility was placed in service in October 1996. An increase of $1.2 million for other miscellaneous items, as well as the offsetting federal income taxes associated with the Other Income (Expense), account for the remainder of the decrease. 13 Other Income (Expense) increased $.6 million or 26.1% in 1996 compared to the 1995 amount. An increase in the equity component of AFUDC of $.7 million, primarily from the construction of the Plant accounted for the substancial portion of the overall increase. Total Interest Charges increased $3.8 million or 29.8% in 1997 over the comparable 1996 amount. The increase includes $3.0 million due to a reduction in capitalized interest as a result of the Plant being placed in service in October 1996. Interest expense also increased due to increased borrowings incurred to finance capital expenditures. Total Interest Charges increased $1.7 million or 15.2% in 1996 over the comparable 1995 amount. The increase is due primarily to increased interest on long-term debt, due to the issuance of $40.0 million of NJEDA tax-exempt debentures in December 1995 to refinance balances previously incurred under the revolving credit agreement. A higher level of short-term borrowings under a revolving credit agreement incurred to finance Elizabethtown's capital program on an interim basis also contributed to the overall increase. This increase was offset by an increase in the debt component of AFUDC resulting from Elizabethtown's higher construction work in progress balances in 1996, primarily due to the Plant. ECONOMIC OUTLOOK Forward Looking Information Information in this report includes certain forward looking statements within the meaning of the federal securities laws. Any forward looking statements are based upon information currently available and are subject to future events, risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. Such events, risks and uncertainties include, without limitation, actions of regulators, the effects of weather on water consumption, changes in historical patterns of water consumption and demand, including changes through increased use of water-conserving devices, conditions in capital markets, increases in operating expenses due to factors beyond the Company's control, changes in environmental regulation and associated costs of compliance and other claims or assessments made upon the Company. Consolidated earnings for the Company for the next several years will be determined by management continuing to focus on expansion efforts to increase sales, as well as control costs through productivity improvements so that realized returns remain comparable to authorized levels. Capital to finance investments will be raised from external sources and from capital contributions from E'town from the sale of real estate parcels. The Company expects earnings to be down somewhat in 1998, based on an assumed return to normal weather patterns after the unusually dry summer in 1997 and because Elizabethtown will be completing its second year since its last rate adjustment. Elizabethtown and Mount Holly Elizabethtown expects to petition the BPU for an increase in rates in the latter part of 1998 to reflect the increases in construction, financing and operating costs since base rates were last established in October 1996. On October 25, 1996, a rate increase under a stipulation (1996 Stipulation) went into effect for Elizabethtown. This resulted in an increase in annual operating revenues of approximately $21.8 million. The rate increase reflected a full allowance for the estimated capital and operating costs for the Plant and an authorized rate of return on common equity of 11.25%. Elizabethtown, excluding Mount Holly, earned a rate of return on common equity of 11.0% in 1997. Mount Holly earned a rate of return on common equity of 2.8% in 1997, compared to an authorized rate of return of 11.25%, established in its most recent base rate proceeding. Management expects Mount Holly to increase its contribution to earnings later in 1998 and into 1999 upon receipt of additional rate relief so that Mount Holly can realize rates of return comparable to authorized levels. 14 Year 2000 The Company has assessed its various computer information systems for compliance with the Year 2000. The Company has recently installed a new enterprise financial system (SAP), which is Year 2000 compliant. In addition, the Company uses a third-party provider for its customer billing and information system, which was redesigned in 1997 to provide many enhancements including Year 2000 compliance. Management believes that all integral operating systems are Year 2000 compliant and that there will be no significant additional costs to achieve compliance. 15 Item 8. Financial Statements and Supplementary Data The information for E'town is included in Exhibit 13, filed herewith, and is incorporated herein by reference. The information for Elizabethtown Water Company is on pages 2 through 21 of Appendix I hereto, incorporated by reference herein. Item 9. Changes in and Disagreements with Accountants on Acccounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to directors of E'town and Elizabethtown is included in E'town's Proxy Statement for the 1998 Annual Meeting of Stockholders, and is incorporated herein by reference. Information regarding the executive officers of both E'town and Elizabethtown is included under Item I in Part I of this Form 10-K. Item 11. Executive Compensation This information for E'town and Elizabethtown is included in E'town's Proxy Statement for the 1998 Annual Meeting of Stockholders, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management This information is included in E'town's Proxy Statement for the 1998 Annual Meeting of Stockholders, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions This information for E'town and Elizabethtown is included in E'town's Proxy Statement for the 1998 Annual Meeting of Stockholders, and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K The following documents are filed as part of this report: 1. Financial Statements: Elizabethtown Water Company Statements of Consolidated Income for the years ended December 31, 1997, 1996 and 1995. Consolidated Balance Sheets as of December 31, 1997 and 1996. Statements of Consolidated Capitalization as of December 31, 1997 and 1996. 16 Statement of Consolidated Shareholder's Equity for the years ended December 31, 1997, 1996 and 1995. Statements of Consolidated Cash Flows for the years ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. E'town Corporation A portion of the 1997 Annual Report to Shareholders which includes Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Other Financial and Statistical Data is filed herewith as Exhibit 13 and is herein incorporated by reference. Elizabethtown Water Company Elizabethtown Water Company's consolidated financial statements and notes thereto are included on pages 2 through 21 of Appendix I hereto, incorporated by reference herein. E'town and Elizabethtown Water Company The Independent Auditors' Reports for E'town (as to certain financial statement schedules) and Elizabethtown Water Company appear on page 20 herein and page 1 of Appendix I, respectively. 2. Financial Statement Schedules: All financial schedules required to be filed contain the same data and amounts for both E'town and Elizabethtown Water Company, except for Supplemental Schedule of Property, Plant and Equipment, which includes property, plant and equipment for each company. Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1997, 1996 and 1995. Supplemental Schedule of Property, Plant and Equipment at December 31, 1997 and 1996. Other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or the notes accompanying each company's financial statements. 3. Exhibits (a) Exhibits for E'town and Elizabethtown Water Company are listed in the Exhibit Index, which is incorporated by reference herein. (b) Reports on Form 8-K: None 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. E'TOWN CORPORATION March 27, 1998 By: /s/ Anne Evans Estabrook Chairman and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 1998. Chairman and Director /s/ Anne Evans Estabrook President and Director /s/ Andrew M Chapman Director /s/ Thomas J. Cawley Director /s/ Anthony S. Cicatiello Director /s/ James W. Hughes Director /s/ John Kean Director /s/ Barry T. Parker Director /s/ Hugo M. Pfaltz, Jr. Director /s/ Chester A. Ring III Director /s/ Joan Verplanck Treasurer /s/ Gail P. Brady (Principal Financial Officer) Controller /s/ Dennis W. Doll (Principal Accounting Officer) 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ELIZABETHTOWN WATER COMPANY March 27, 1998 By: /s/ Anne Evans Estabrook Chairman and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 1998. Chairman and Director /s/ Anne Evans Estabrook President and Director /s/ Andrew M. Chapman Director /s/ Thomas J. Cawley Director /s/ Anthony S. Cicatiello Director /s/ James W. Hughes Director /s/ John Kean Director /s/ Barry T. Parker Director /s/ Hugo M. Pfaltz, Jr. Director /s/ Chester A. Ring III Director /s/ Joan Verplanck Vice President - Finance & Treasurer /s/ Gail P. Brady (Principal Financial Officer) Controller /s/ Dennis W. Doll (Principal Accounting Officer) 19 INDEPENDENT AUDITORS' REPORT E'TOWN CORPORATION: We have audited the consolidated financial statements of E'town Corporation and its subsidiaries as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 18, 1998, except for the subsequent event discussed in Note 11, as to which the date is March 6, 1998; such consolidated financial statements and report are included in your 1997 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of E'town Corporation and its subsidiaries, listed in Item 14. These financial statement schedules are the responsibility of the Companys management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche February 18, 1998, except for Note 11 as to which the date is March 6, 1998 Parsippany, New Jersey 20 E'TOWN CORPORATION Schedule II ELIZABETHTOWN WATER COMPANY VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E Additions Balance at Charged to Balance at Beginning of Costs and Deductions End of Description: Period Expenses (A) Period Reserve for Uncollectible Accounts: Year Ended 12/31/97 $566,000 $607,929 $561,929 $612,000 Year Ended 12/31/96 $532,000 $600,242 $566,242 $566,000 Year Ended 12/31/95 $463,000 $600,648 $531,648 $532,000 (A) Write-off of uncollectible accounts, net of recoveries. E'TOWN CORPORATION Supplemental ELIZABETHTOWN WATER COMPANY Schedule PROPERTY, PLANT AND EQUIPMENT AT DECEMBER 31, 1997 AND 1996 ELIZABETHTOWN WATER COMPANY: 1997 1996 UTILITY PLANT IN SERVICE: Intangible Plant $250,766 $250,766 Source of Supply Plant 20,512,918 20,502,583 Pumping Plant 57,498,323 54,666,431 Water Treatment Plant 156,601,131 156,149,004 Transmission & Distribution Plant 422,283,204 404,946,395 General Plant 19,993,728 17,444,418 Leasehold Improvements 135,793 120,548 Acquisition Adjustments 632,388 632,388 ------------- -------------- Utility Plant In Service 677,908,251 654,712,533 Construction Work In Progress 9,300,824 7,994,186 ============= ============== Total Utility Plant 687,209,075 662,706,719 ============= ============== NON-UTILITY PROPERTY - NET 78,774 80,976 ============= ============== TOTAL $687,287,849 $662,787,695 ============= ============== E'TOWN CORPORATION: UTILITY PLANT (from above) 687,209,075 662,706,719 NON-UTILITY PROPERTY - NET 12,787,851 12,769,953 ============= ============== TOTAL $699,996,926 $675,476,672 ============= ============== EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk(*), are filed herewith. The exhibits not so designated have heretofore been filed with the Commission and are incorporated herein by reference to the documents indicated in brackets following the description of such exhibits. Exhibits designated with a (1) are management contracts or compensary plans or arrangements. E'town Corporation Exhibit No. Description 3(a) - Certificate of Incorporation of E'town Corp. [Registration Statement No. 33-42509, Exhibit 4(a)] 3(b) - By-Laws of E'town Corp. [Form 10-K for the year 1996, Exhibit 3(b)] 3(c) - Certificate of Incorporation of E'town Properties, Inc. [Registration Statement No. 33-32143, Exhibit 4(j)] 3(d) - By-Laws of E'town Properties, Inc. [Registration Statement No. 33-32143, Exhibit 4(n)] 4(a) - Rights Agreement dated as of February 4, 1991 between E'town and the Rights Agent [Registration Statement No. 33-38566, Exhibit 4(n)] 4(b) - Indenture dated as of January 1, 1987 from E'town Corporation to Boatmen's Trust, Trustee, relating to the 6 3/4% Convertible Subordinated Debentures due 2012 [Registration Statement No. 33-32143, Exhibit 4(a)] *4(c) - Note Purchase Agreement relating to the 6.79% Senior Notes due December 15, 2007 10(a) - Incentive Stock Option Plan [Registration Statement No. 2-99602, Exhibit 28(a)] (1) 10(b) - Savings and Investment Plan - 401(k) [Form 10-K for the year 1994, Exhibit 10(b)] 10(c) - E'town's 1987 Stock Option Plan [Registration Statement No. 33-42509, Exhibit 28] (1) 10(d) - Management Incentive Plan [Registration Statement No. 33-38566, Exhibit 10(i)] (1) 10(e) - E'town's 1998 Stock Option Plan [Definitive Proxy Statement for 1998 Annual Meeting of Stockholders, filed pursuant to Rule 14a-6(b)] (1) 10(f) - E'town's 1998 Directors Stock Plan [Definitive Proxy Statement for 1998 Annual Meeting of Stockholders, filed pursuant to Rule 14a-6(b)] (1) 10(g) - E'town's 1990 Performance Stock Program [Registration Statement No. 33-46532, Exhibit 10(k)] (1) Exhibit No. Description 10(h) - E'town's Dividend Reinvestment and Stock Purchase Plan [Registration No. 333-16713, Exhibit 4(e)] 10(i) - Change of Control Agreement for Andrew M. Chapman [Form 10-Q for the quarter ended March 31, 1995, Exhibit 10](1) 10(j) - Contract Between Edison Water Company, E'town Corporation and the Township of Edison to Operate the Water System of the Township of Edison, New Jersey dated as of June 25, 1997 [Form 10-Q for the quarter ended June 30, 1997, Exhibit 10(a)] *10(k) - Employment Contract Between E'town Corporation and Anne Evans Estabrook (1) *10(l) - Change in Control Agreement for Anne Evans Estabrook (1) *11 - Statement Regarding Computation of Per Share Earnings *13 - Portion of the 1997 Annual Report to Shareholders which includes Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Other Financial and Statistical Data and is herein incorporated by reference. *21 - Subsidiaries of the Corporation *23 - Consent of Deloitte & Touche, LLP, Independent Auditors *27 - E'town Corporation - Financial Data Schedule Elizabethtown Water Company 3(a) - Form of Restated Certificate of Incorporation of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1994, Exhibit 3(a)] 3(b) - By-Laws of Elizabethtown Water Company [Form 10-K for the year 1996, Exhibit 3(b)] 4(a) - Indenture dated as of November 1, 1994 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 7 1/4% Debentures due 2028 [Form 10-K for year ended December 31, 1994, Exhibit 4(a)] 4(b) - Indenture dated as of September 1, 1992 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 8% Debentures due 2022 [Form 10-K for year ended December 31, 1993, Exhibit 4(a)] 4(c) - Indenture dated as of October 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 8 3/4% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(f)] Exhibit No. Description 4(d) - Indenture dated as of August 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 6.60% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(g)] 4(e) - Indenture dated as of August 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 6.70% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(h)] 4(f) - Indenture dated as of October 1, 1990 from Elizabethtown Water Company to Citibank, N.A., Trustee, relating to the 7 1/2% Debentures due 2020 [Registration Statement No. 33-38566, Exhibit 4(e)] 4(g) - Indenture dated as of December 1, 1989 from Elizabethtown Water Company to Citibank, N.A., Trustee, relating to the 7.20% Debentures due 2019 [Registration Statement No. 33-38566, Exhibit 4(f)] 4(h) - Indenture dated as of December 1, 1995 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 5.60% Debentures due 2025 4(i) - Indenture dated as of June 1, 1997 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to Variable Rate Demand Debentures, due 2027 (Series B) [Form 10-Q for the quarter ended September 30, 1997, Exhibit 4(i)] 4(j) - Indenture dated as of June 1, 1997 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to Variable Rate Demand Debentures, due 2027 (Series A) [Form 10-Q for the quarter ended September 30, 1997, Exhibit 4(j)] 10(a) - Contract for service to Middlesex Water Company. [Registration Statement No. 33-38566, Exhibit 10(a)] 10(b) - Contract for service to Edison Township. [Form 10-Q for the quarter ended June 30, 1997, Exhibit 10(b) 10(c) - Contract for service to New Jersey-American Water Company. [Form 10-K for the year ended December 31, 1993, Exhibit 10(c)] 10(d) - Contract for service to City of Elizabeth. [Form 10-K for the year ended December 31, 1992, Exhibit 10(d)] 10(e) - Contract for service to Franklin Township.[Registration Statement No. 33-46532, Exhibit 10(e)] 10(f) - Contract with the New Jersey Water Supply Authority for the purchase of water from the Raritan Basin. [Registration Statement No. 33-32143, Exhibit 10(e)] 10(g) - Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1992, Exhibit 10(g)] (1) Exhibit No. Description 10(h) - Medical Reimbursement Plan of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1992, Exhibit 10(h)] (1) 10(i) - Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-Q for the year ended September 30, 1995, Exhibit 10] *10(j) - Employment Contract Between Elizabethtown Water Company and Anne Evans Estabrook (1) *12(a) - Computation of Ratio of Earnings to Fixed Charges *12(b) - Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends *21 - Subsidiaries of the Company *23 - Consent of Deloitte & Touche LLP, Independent Auditors *27 - Elizabethtown Water Company - Financial Data Schedule. APPENDIX I INDEPENDENT AUDITORS'REPORT TO THE SHAREHOLDER AND BOARD OF DIRECTORS OF ELIZABETHTOWN WATER COMPANY: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of Elizabethtown Water Company and its subsidiary as of December 31, 1997 and 1996, and the related statements of consolidated income, shareholder' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Elizabethtown Water Company and its subsidiary at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche February 18, 1998 Parsippany, New Jersey -1- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED INCOME (In Thousands) Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Operating Revenues $ 131,788 $ 110,358 $ 108,398 - -------------------------------------------------------------------------------- Operating Expenses: Operation 45,301 43,713 43,132 Maintenance 6,548 5,859 5,806 Depreciation 12,233 9,893 8,808 Revenue taxes 16,550 13,820 13,591 Real estate, payroll and other taxes 3,064 2,869 2,772 Federal income taxes (Note 3) 11,026 7,360 8,002 - -------------------------------------------------------------------------------- Total operating expenses 94,722 83,514 82,111 - -------------------------------------------------------------------------------- Operating Income 37,066 26,844 26,287 - -------------------------------------------------------------------------------- Other Income (Expense): Allowance for equity funds used during construction (Note 2) 215 3,725 2,976 Federal income taxes (Note 3) (248) (1,462) (1,159) Other - net 494 452 336 - -------------------------------------------------------------------------------- Total other income (expense) 461 2,715 2,153 - -------------------------------------------------------------------------------- Total Operating and Other Income 37,527 29,559 28,440 - -------------------------------------------------------------------------------- Interest Charges: Interest on long-term debt 14,030 13,011 10,892 Other interest expense - net 2,382 2,640 2,344 Capitalized interest (Note 2) (166) (3,208) (2,445) Amortization of debt discount and expense-net 376 361 324 - -------------------------------------------------------------------------------- Total interest charges 16,622 12,804 11,115 - -------------------------------------------------------------------------------- Net Income 20,905 16,755 17,325 Preferred Stock Dividends 813 813 813 - -------------------------------------------------------------------------------- EARNINGS APPLICABLE TO COMMON STOCK $ 20,092 $ 15,942 $ 16,512 ================================================================================ See Notes to Consolidated Financial Statements. -2- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Assets 1997 1996 - -------------------------------------------------------------------------------- Utility Plant-At Original Cost: Utility plant in service $ 677,909 $ 654,713 Construction work in progress 9,300 7,994 - -------------------------------------------------------------------------------- Total utility plant 687,209 662,707 Less accumulated depreciation and amortization 114,424 102,683 - -------------------------------------------------------------------------------- Utility plant-net 572,785 560,024 - -------------------------------------------------------------------------------- Non-utility Property 79 81 - -------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents 4,226 3,122 Customer and other accounts receivable (less reserve: 1997, $612, 1996, $566) 17,283 16,725 Unbilled revenues 9,663 9,356 Materials and supplies-at average cost 1,966 2,045 Prepaid insurance, taxes, other 3,461 3,742 - -------------------------------------------------------------------------------- Total current assets 36,599 34,990 - -------------------------------------------------------------------------------- Deferred Charges: Waste residual management 936 1,064 Unamortized debt and preferred stock expenses 9,656 8,989 Taxes recoverable through future rates (Note 3) 21,439 30,435 Postretirement benefit expense (Note 10) 3,738 3,564 Other unamortized expenses 1,086 1,632 - -------------------------------------------------------------------------------- Total deferred charges 36,855 45,684 - -------------------------------------------------------------------------------- Total $ 646,318 $ 640,779 ================================================================================ See Notes to Consolidated Financial Statements. -3- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Capitalization and Liabilities 1997 1996 - -------------------------------------------------------------------------------- Capitalization (Notes 4 and 5): Common shareholder's equity $ 193,354 $ 182,293 Cumulative preferred stock 12,000 12,000 Long-term debt - net 231,944 181,933 - -------------------------------------------------------------------------------- Total capitalization 437,298 376,226 - -------------------------------------------------------------------------------- Current Liabilities: Notes payable - banks (Note 5) 18,000 69,000 Long-term debt - current portion (Note 4) 30 30 Accounts payable and other liabilities 10,626 17,093 Customers' deposits 272 300 Municipal and state taxes accrued 16,817 13,887 Interest accrued 3,120 3,158 Preferred stock dividends accrued 59 59 - -------------------------------------------------------------------------------- Total current liabilities 48,924 103,527 - -------------------------------------------------------------------------------- Deferred Credits: Customers' advances for construction 39,131 43,636 Federal income taxes (Note 3) 67,851 73,950 Unamortized investment tax credits (Note 10) 8,042 8,245 Accumulated postretirement benefits 4,209 3,596 - -------------------------------------------------------------------------------- Total deferred credits 119,233 129,427 - -------------------------------------------------------------------------------- Contributions in Aid of Construction 40,863 31,599 - -------------------------------------------------------------------------------- Commitments and Contingent Liabilities (Note 9) - -------------------------------------------------------------------------------- Total $ 646,318 $ 640,779 ================================================================================ See Notes to Consolidated Financial Statements. -4- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED CAPITALIZATION (In Thousands) December 31, 1997 1996 - -------------------------------------------------------------------------------- Common Shareholder's Equity (Notes 4 and 5): Common stock without par value, authorized, 10,000,000 shares, issued 1997 and 1996, 1,974,902 shares $ 15,741 $ 15,741 Paid-in capital 124,560 117,457 Capital stock expense (485) (485) Retained earnings 53,538 49,580 - -------------------------------------------------------------------------------- Total common shareholder's equity 193,354 182,293 - -------------------------------------------------------------------------------- Cumulative Preferred Stock (Note 4): $100 par value, authorized, 200,000 shares; $5.90 series, issued and outstanding, 120,000 shares 12,000 12,000 Cumulative Preferred Stock: $25 par value, authorized, 500,000 shares; none issued - -------------------------------------------------------------------------------- Long-Term Debt: Elizabethtown Water Company: 7.20% Debentures, due 2019 10,000 10,000 7 1/2% Debentures, due 2020 15,000 15,000 6.60% Debentures, due 2021 10,500 10,500 6.70% Debentures, due 2021 15,000 15,000 8 3/4% Debentures, due 2021 27,500 27,500 8% Debentures, due 2022 15,000 15,000 5.60% Debentures, due 2025 40,000 40,000 Variable Rate Debentures, due 2027 50,000 7 1/4% Debentures, due 2028 50,000 50,000 The Mount Holly Water Company: Notes Payable (due serially through 2000) 57 87 - -------------------------------------------------------------------------------- Total long-term debt 233,057 183,087 Unamortized discount-net (1,113) (1,154) - -------------------------------------------------------------------------------- Total long-term debt-net 231,944 181,933 - -------------------------------------------------------------------------------- Total Capitalization $ 437,298 $ 376,226 ================================================================================ See Notes to Consolidated Financial Statements. -5- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY (In Thousands) Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Common Stock: $ 15,741 $ 15,741 $ 15,741 - -------------------------------------------------------------------------------- Paid-in Capital: Balance at Beginning of Year 117,457 112,157 88,869 Capital contributed by parent company 7,103 5,300 23,288 - -------------------------------------------------------------------------------- Balance at End of Year 124,560 117,457 112,157 - -------------------------------------------------------------------------------- Capital Stock Expense: (485) (485) (485) - -------------------------------------------------------------------------------- Retained Earnings: Balance at Beginning of Year 49,580 49,272 47,500 Net income 20,905 16,755 17,325 Dividends on common stock (16,134) (15,634) (14,740) Dividends on preferred stock (813) (813) (813) - -------------------------------------------------------------------------------- Balance at End of Year 53,538 49,580 49,272 - -------------------------------------------------------------------------------- Total Common Shareholder's Equity $193,354 $ 182,293 $176,685 ================================================================================ See Notes to Consolidated Financial Statements. -6- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED CASH FLOWS (In Thousands) Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 20,905 $ 16,755 $ 17,325 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 12,233 9,893 8,808 Decrease (increase) in deferred charges 690 (613) 328 Deferred income taxes and investment tax credits-net 2,693 4,853 4,487 Allowance for funds used during construction (381) (6,934) (5,421) Other operating activities-net 362 68 (62) Change in current assets and current liabilitie excluding cash, short-term investments and current portion of debt: Customer and other accounts receivable (558) 218 (4,593) Unbilled revenues (307) (1,912) (282) Accounts payable and other liabilities (6,495) 365 (1,415) Accrued/prepaid interest and taxes 3,173 (1,955) 2,353 Other 78 (133) (187) - -------------------------------------------------------------------------------- Net cash provided by operating activities 32,393 20,605 21,341 - -------------------------------------------------------------------------------- Cash Flows (Used) Provided by Financing Activities: Capital contributed by parent company 7,103 5,300 23,289 Proceed from issuance of debentures 50,000 40,000 Debt and preferred stock issuance and amortization costs (667) 396 (483) Repayment of long-term debt (30) (30) (39) Contributions and advances for construction-net 4,759 2,521 3,441 Net(decrease)increase in notes payable-banks (51,000) 42,000 4,000 Dividends paid on common stock and preferred (16,842) (16,342) (15,448) - -------------------------------------------------------------------------------- Net cash (used) provided by financing activities (6,677) 33,845 54,760 - -------------------------------------------------------------------------------- Cash Flows Used for Investing Activities: Utility plant expenditures (excluding allowance for funds used during construction) (24,612) (55,125) (73,789) - -------------------------------------------------------------------------------- Cash used for investing activities (24,612) (55,125) (73,789) - -------------------------------------------------------------------------------- Net (Decrease) in Cash and Cash Equivalents 1,104 (675) 2,312 Cash and Cash Equivalents at Beginning of Year 3,122 3,797 1,485 - -------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 4,226 $ 3,122 $ 3,797 ================================================================================ Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 16,063 $ 8,481 $ 7,833 Income taxes $ 5,981 $ 5,723 $ 4,158 Preferred stock dividends $ 708 $ 708 $ 708 See Notes to Consolidated Financial Statements. -7- ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization Elizabethtown Water Company (Elizabethtown or Company)and its wholly owned subsidiary, The Mount Holly Water Company (Mount Holly) is a wholly owned subsidiary of E'town Corporation (E'town or Corporation). Elizabethtown and Mount Holly are regulated water companies which, as a consolidated entity are referred to herein as Elizabethtown Water Company (Elizabethtown Water Company). E'town, a New Jersey holding company, is the parent company of Elizabethtown Water Company, Edison Water Company, E'town Properties, Inc. and owner of a 65% interest in Applied Watershed Management, LLC (AWM). 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include Elizabethtown and its subsidiary, Mount Holly. Significant intercompany accounts and transactions have been eliminated. Elizabethtown and Mount Holly are regulated water utilities and follow the Uniform System of Accounts, as adopted by the New Jersey Board of Public Utilities (BPU). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Utility Plant and Depreciation Income is charged with the cost of labor, materials and other expenses incurred in making repairs and minor replacements, and in maintaining the properties. Utility plant accounts are charged with the cost of improvements and major replacements of property. When depreciable property is retired or otherwise disposed of, the cost thereof, plus the cost of removal net of salvage, is charged to accumulated depreciation. Depreciation is generally computed on a straight-line basis at functional rates for various classes of assets. The provision for depreciation, as a percentage of average depreciable property, was 1.85% for 1997, 1.73% for 1996 and 1.83% for 1995. Allowance for Funds Used During Construction Elizabethtown and Mount Holly capitalize, as an appropriate cost of utility plant, an Allowance for Funds Used During Construction (AFUDC), which represents the cost of financing major projects during construction. AFUDC, a non-cash credit on the Statements of Consolidated Income, is added to the construction cost of the project and included in rate base and then recovered through depreciation charges in rates during the assets' useful life. AFUDC is comprised of a debt component (credited to Interest Charges), and an equity component (credited to Other Income) in the Statements of Consolidated Income. AFUDC totaled $.38 million, $6.93 million and $5.42 million for 1997, 1996 and 1995, respectively. AFUDC increased in 1996 and 1995 during the construction of the Canal Road Water Treatment Plant. Revenues Revenues are recorded based on the amounts of water delivered to customers through the end of each accounting period. This includes an accrual for unbilled revenues for water delivered from the time meters were last read to the end of the respective accounting periods. Federal Income Taxes Elizabethtown Water Company files a consolidated tax return with Etown. Deferred income taxes are provided for temporary differences in the recognition of revenues and expenses for tax and financial statement purposes to the extent permitted by the BPU. Elizabethtown and Mount Holly account for prior years investment tax credits by the deferral method, which amortizes the credits over the lives of the respective assets. 8 Customers' Advances for Construction and Contributions in Aid of Construction Customers' Advances for Construction (CAC) and Contributions in Aid of Construction (CIAC) represent capital provided by developers for main extensions to new real estate developments. Some portion of CAC is refunded based upon the revenues that the new developments generate. CIAC is customer advances for construction that, under the terms of individual main extension agreements, are no longer subject to refund. Short-term Investments Short-term investments are stated at cost, which approximates market value. Cash Equivalents Elizabethtown Water Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents. Reclassification Certain prior year amounts have been reclassified to conform to the current year's presentation. 3. Federal Income Taxes The computation of federal income taxes and the reconciliation of the tax provision computed at the federal statutory rate (35%) with the amount reported in the Statements of Consolidated Income follow: 9 1997 1996 1995 --------------------------- (Thousands of Dollars) Tax expense at statutory rate $11,262 $ 8,952 $ 9,270 Items for which deferred taxes are not provided: Difference between book and tax depreciation 58 132 133 Other 157 (56) (37) Investment tax credits (203) (205) (204) --------------------------- Provision for federalincome taxes $11,274 $ 8,823 $ 9,162 =========================== The provision for federal income taxes is composed of the following: Current $ 7,212 $ 3,764 $ 6,409 Tax on (deposits)refunds on main extensions 1,369 207 (1,734) Deferred: Tax depreciation 2,716 3,379 3,492 Capitalized interest 19 1,264 800 Main cleaning and lining 612 587 405 Other (450) (174) (8) Investment taxcredits - net (203) (204) (202) --------------------------- Total provision $11,274 $ 8,823 $ 9,162 =========================== In accordance with SFAS No. 109, deferred tax balances have been reflected at Elizabethtown Water Companys current consolidated federal income tax rate, which is 35%. 10 The tax effect of significant temporary differences representing deferred income tax assets and liabilities as of December 31, 1997 and 1996 is as follows: 1997 1996 ------------------------ (Thousands of Dollars) Water utility plant - net $(43,611) $(40,283) Taxes recoverable through future rates (21,439) (30,435) Prepaid pension expense 75 (35) Capitalized interest (2,591) (2,573) Waste residuals (322) (373) Other assets 415 285 Other liabilities (378) (536) -------------------- Net deferred income tax liabilities $(67,851) $(73,950) ==================== 4. Capitalization E'town periodically makes equity contributions to Elizabethtown from the proceeds of common stock issued under E'town's Dividend Reinvestment and Stock Purchase Plan (DRP). E'town contributed $6.98 million and $5.30 million in 1997 and 1996, respectively, to Elizabethtown, from the proceeds of DRP issuances. Cumulative Preferred Stock Elizabethtown's $5.90 Cumulative Preferred Stock is not redeemable at the option of the Company. Elizabethtown is required to redeem the entire issue at $100 per share on March 1, 2004. 11 Long-term Debt Elizabethtown's long-term debt indentures restrict the amount of retained earnings available to Elizabethtown to pay cash dividends, (which is the primary source of funds available to the Corporation for payment of dividends on its common stock), or acquire Elizabethtown's common stock, all of which is held by E'town. At December 31, 1997, $7.63 million of Elizabethtown's retained earnings were restricted under the most restrictive indenture provision. Therefore, $37.93 million of E'town's consolidated retained earnings were unrestricted. On June 4, 1997, Elizabethtown issued a total of $50 million of 30-year Variable Rate Debentures due December 2027, $25 million of Series A and $25 million of Series B, to evidence a like amount of Variable Rate Notes issued through the New Jersey Economic Development Authority (NJEDA). The proceeds were used to repay $50 million of balances outstanding under the Companys revolving credit agreement. The NJEDA Notes are remarketed on a weekly basis, at which time the interest rates on each issue are subject to change. The rates in effect as of December 31, 1997, were 3.60% for Series A and 3.55% for Series B. 5. Lines of Credit Elizabethtown has $82.5 million of uncommitted lines of credit with several banks. Information relating to bank borrowings for 1997, 1996 and 1995 is as follows: 1997 1996 1995 --------------------------- (Thousands of Dollars) Maximum amount outstanding $69,500 $69,000 $60,000 Average monthly amount outstanding $40,886 $45,240 $39,636 Average interest rate at year end 6.0% 5.7% 5.9% Compensating balances at year end $ 0 $ 0 $ 0 Weighted average interest rate based on average daily balances 5.8% 5.8% 6.2% 12 6. Financial Instruments The carrying amounts and the estimated fair values, as of December 31, 1997 and 1996, of financial instruments issued or held by the Elizabethtown Water Company are as follows: 1997 1996 ------------------------ (Thousands of Dollars) Cumulative preferred stock: Carrying amount $ 12,000 $ 12,000 Estimated fair value 11,760 12,000 Long-term debt: Carrying amount $ 231,944 $ 181,933 Estimated fair value 239,585 185,375 Estimated fair values are based upon quoted market prices for these or similar securities. 7. Regulatory Assets and Liabilities Certain costs incurred by Elizabethtown and Mount Holly, which have been deferred, have been recognized as regulatory assets and are being amortized over various periods, as set forth below: 1997 1996 ----------------------- (Thousands of Dollars) Waste residual management $ 936 $ 1,064 Unamortized debt and preferred stock expense 9,656 8,988 Taxes recoverable through future rates (Note 3) 21,439 30,435 Postretirement benefit expense (Note 10) 3,738 3,465 Safety management expense 331 418 Business process redesign 284 362 Rate case expenses 80 201 -------------------- Total $36,464 $44,933 ==================== 13 Waste Residual Management The costs of disposing of the byproducts generated by Elizabethtowns and Mount Holly's water treatment plants are being amortized and recovered in rates over three and five-year periods, respectively, for ratemaking and financial statement purposes. No return is being earned on the deferred balances related to these programs. Unamortized Debt and Preferred Stock Expenses Costs incurred in connection with the issuance or redemption of long-term debt have been deferred and are being amortized and recovered in rates over the lives of the respective issues for ratemaking and financial statement purposes. Costs incurred in connection with the issuance and redemption of preferred stock have been deferred and are being amortized and recovered in rates over a 10-year period for ratemaking and financial statement purposes. Other Safety management expenses and business process redesign expenses relate to studies undertaken by the Company and are being amortized and recovered in rates over five years. Rate case expenses are being substantially recovered in rates during two-year periods. There were no regulatory liabilities at December 31, 1997 or 1996. 8. Regulatory Matters Rates Elizabethtown On December 17, 1997, the BPU adopted an Order for rate increases for Elizabethtown and Mount Holly, effective January 1, 1998, for the recovery of costs associated with SFAS No. 106 "Employers' Accounting For Postretirement Benefits Other Than Pensions." The resulting rate increases reflect recovery over a 15-year period of amounts previously deferred on the Consolidated Balance Sheets for postretirement benefits since 1993 and prospectively, the difference between the amounts currently recovered in rates and the full SFAS No. 106 expense on an accrual basis. The total increases in annual operating revenues resulting from these petitions are $.39 million for Elizabethtown and $.02 million for Mount Holly. 14 On October 25, 1996, Elizabethtown received a rate increase under a stipulation resulting in an increase in annual revenues of $21.8 million for the construction, financing and operating costs of the Canal Road Water Treatment Plant. Mount Holly In June 1995, Mount Holly petitioned the BPU for an increase in rates, to take place in two phases. The first phase was stipulated for a rate increase effective February 1996 of $.55 million. The second phase would recover the cost of a new water supply, treatment and transmission system necessary to obtain water outside a designated portion of an aquifer currently used by Mount Holly, and to treat and pump the water into the Mount Holly distribution system. Management believes this project is the most cost-effective alternative available to Mount Holly to comply with state legislation that restricts the amount of water that can be withdrawn from an aquifer in certain areas of southern New Jersey. The project is referred to as the Mansfield Project. Mount Holly has expended $3.56 million on the Mansfield Project as of December 31, 1997, excluding AFUDC. The land for the supply and treatment facilities has been purchased and test wells have been drilled and can produce the required supply. In September, the New Jersey Department of Environmental Protection (DEP) granted Mount Holly a water allocation permit for four wells that are to be the water supply for this project. In October 1995, another water purveyor requested of the DEP, and was subsequently granted, an adjudicatory hearing in opposition to the permit. In August 1997, Mount Holly settled this matter by entering into an agreement with the other water purveyor and the DEP. Under the agreement, Mount Holly will purchase 1.0 million gallons per day from the other purveyor for a period to include the later of two years or the date the Mansfield Project is placed into service. Water purchases began in March 1998, after completion of an interconnection. As a result of the settlement agreement, Mount Holly expects to continue with its plan to construct the Mansfield Project. The BPU and the parties to Mount Holly's last rate case are participating in a proceeding connected with the second phase of the 1995 case to clarify the need for and cost-effectiveness of the Mansfield Project. On September 23, 1997, Mount Holly filed a petition with the BPU to establish a Purchased Water Adjustment Clause (PWAC) to reflect the cost of water expected to be purchased from the purveyor under the settlement agreement discussed above. The petition requests an increase in annual operating revenues of approximately $1.34 million or 40.3%. 15 In April 1998, Mount Holly expects to file a petition with the BPU for a rate increase, which will reflect additional construction and financing costs, as well as increases in operating costs since rates were last established in January 1996. This rate case will include approximately $7.27 million of the cost for a portion of the Mansfield Project to serve a section of Mount Holly. This amount was part of the second phase of the 1995 rate case discussed above. The rate case will also reflect $6.0 million in additions to utility plant since Mount Holly's base rates were last adjusted in January 1996. A decision is expected by the end of 1998. Mount Holly expects to file an additional rate case next year for the remaining cost of the Mansfield Project, estimated to be $11.3 million, to coincide with the completion of the project and the expiration of the agreement to purchase water from the other purveyor. 9. Commitments and Contingent Liabilities Elizabethtown is obligated, under a contract that expires in 2013, to purchase from the New Jersey Water Supply Authority (NJWSA) a minimum of 37 billion gallons of water annually. Effective July 1, 1997, the annual cost of water under contract is $7.86 million. The Company purchases additional water from the NJWSA on an as-needed basis. The total cost of water purchased from the NJWSA was $8.79 million, $8.70 million and $9.34 million for 1997, 1996 and 1995, respectively. Capital expenditures of Elizabethtown and Mount Holly are estimated to be $112.66 million and $21.85 million, respectively, through 2000. Expected future minimum rental payments required under noncancelable leases with terms in excess of one year at December 31 of each of the years 1998 through 2002 are: 1998, $.65 million; 1999, $.69 million; 2000, $.72 million; 2001, $.76 million and 2002, $.77 million. Rent expense totaled $.72 million, $.84 million and $.82 million in 1997, 1996 and 1995, respectively. 10. Pension Plan and Other Postretirement Benefits Pension Plan Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan), which covers most employees. Under the Company's funding policy, the Corporation makes contributions that meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The components of the net pension costs for the Retirement Plan are as follows: 16 1997 1996 1995 --------------------------- (Thousands of Dollars) Service cost - benefits earned during the year $ 1,278 $1,322 $ 915 Interest cost on projected benefit obligation 2,618 2,480 2,156 Return on Plan assets (8,150) (4,542) (7,587) Net amortization and deferral 4,551 1,221 4,862 ------------------------- Net pension costs $ 297 $ 481 $ 346 ========================= Plan assets are invested in publicly traded debt and equity securities. The reconciliations of the funded status of the Plan to the amounts recognized in the Consolidated Balance Sheets are presented below. 1997 1996 ----------------------- (Thousands of Dollars) Market value of Plan assets $ 46,537 $ 40,016 -------------------- Actuarial present value of Plan benefits: Vested benefits 31,186 28,492 Non-vested benefits 101 97 ------------------- Accumulated benefit obligation 31,287 28,589 Projected increases in compensation levels 7,458 7,183 ------------------- Projected benefit obligation 38,745 35,772 ------------------- Excess of Plan assets over projected benefit obligation 7,793 4,244 Unrecognized net gain (7,920) (3,978) Unrecognized prior service cost 1,535 1,724 Unrecognized transition asset (1,624) (1,891) ------------------- Prepaid (accrued) pension expense $ (216) $ 99 =================== 17 The assumed rates used in determining the actuarial present value of the projected benefit obligations were as follows: 1997 1996 1995 --------------------------- Discount rate 7.25% 7.50% 7.00% Compensation increase 5.50% 5.50% 5.50% Rate of return on Plan assets 9.00% 9.00% 9.00% The Company also has a supplemental retirement plan for certain management employees that is not funded. Benefit payments under this plan are made directly by the Company. At December 31, 1997, the projected benefit obligation of this supplemental plan was $1.43 million and the net periodic benefit cost was $.27 million and $.25 million for 1997 and 1996, respectively. The plan assumed a discount rate of 7.25% for 1997 and 7.50% for 1996, and a compensation increase of 4% for both 1997 and 1996 for purposes of determining the actuarial present value of the projected benefit obligations. Other Postretirement Benefits Elizabethtown and Mount Holly provide certain health care and life insurance benefits for substantially all of their retired employees. As a result of a contract negotiated in February 1996 with the Company's bargaining unit, all union and non-union employees retiring after January 1, 1997 pay 25% of future increases in the premiums the Company pays for postretirement medical benefits. Under SFAS No. 106, the costs of postretirement benefits are accrued for each year the employee renders service, based on the expected cost of providing such benefits to the employee and the employee's beneficiaries and covered dependents, rather than expensing these benefits on a pay-as-you-go basis. Based upon an independent actuarial study, the transition obligation, calculated under SFAS No. 106, was $7.21 million as of January 1, 1993, the date of adoption of SFAS No. 106. The transition obligation is being amortized over 20 years. 18 The following table details the postretirement benefit obligation at December 31: 1997 1996 ----------------------- (Thousands of Dollars) Retirees $ 1,990 $ 2,015 Fully eligible plan participants 4,566 4,034 -------------------- Accumulated postretirement benefit obligation 6,556 6,049 Plan assets at fair value (1,331) (764) Unrecognized net gain 3,966 3,952 Unrecognized transition obligation (5,423) (5,772) -------------------- Accrued postretirement benefit obligation $ 3,768 $ 3,465 ==================== The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1997, and for the year 1997 was 9%. This rate decreases linearly each successive year until it reaches 3.8% in 2007, after which the rate remains constant. The assumed rates used in determining the actuarial present value of the projected benefit obligations were as follows: 1997 1996 1995 ------------------------- Discount rate 7.25% 7.50% 7.00% Rate of return on plan assets 9.00% 9.00% n/a A single percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, and the net postretirement service and interest cost by approximately $.90 million and $.26 million, respectively. 19 Based upon the independent actuarial study referred to above, the annual postretirement cost calculated under SFAS No. 106 is as follows: 1997 1996 1995 ------------------------- (Thousands of Dollars) Service cost - benefits earned during the year $ 383 $ 416 $ 474 Interest cost on accumulated postretirement benefit obligation 444 425 579 Return on Plan assets (57) (72) Amortization of transition obligation 361 417 360 Amortization of gain (223) ----------------------- Total $ 908 $1,186 $1,413 Deferred amount for regulated companies pending recovery (273) (565) (824) ----------------------- Net postretirement benefit expense $ 635 $ 621 $ 589 ======================= The rate increases effective January 1, 1998 allows for the full recovery of costs associated with the implementation of SFAS No. 106, including an amortization over 15 years of amounts previously deferred which were in excess of amounts previously being recovered in rates. As of December 31, 1997, the amounts that have been deferred are $3.59 million and $.14 million for Elizabethtown and Mount Holly, respectively. 20 11. Quarterly Financial Data (Unaudited) A summary of financial data for each quarter of 1997 and 1996 follows: Earnings Applicable Operating Operating Net To Common Quarter Revenues Income Income Stock - ---------------------------------------------------------- (Thousands of Dollars Except Per Share Amounts) 1997 1st $ 30,013 $ 8,092 $ 3,885 $ 3,682 2nd 32,333 8,981 4,862 4,659 3rd 37,815 11,926 7,982 7,779 4th 31,627 8,067 4,176 3,972 - ---------------------------------------------------------- Total $131,788 $37,066 $20,905 $20,092 ========================================================== 1996 1st $ 25,760 $ 5,651 $ 3,594 $ 3,391 2nd 27,263 6,484 4,365 4,163 3rd 28,173 7,146 4,911 4,708 4th 29,162 7,562 3,885 3,680 - ---------------------------------------------------------- Total $ 110,358 $26,843 $16,755 $15,942 ========================================================== Water utility revenues are subject to seasonal fluctuation due to normal increased water consumption during the third quarter of each year. 21 EX-4 2 ETOWN CORPORATION EXHIBIT 4(C) $12,000,000 6.79% Senior Notes due December15, 2007 - ---------------- NOTE PURCHASE AGREEMENT - ---------------- Dated as of December15, 1997 TABLE OF CONTENTS SECTION HEADING PAGE SECTION1. AUTHORIZATION OF NOTES 1 SECTION2. SALE AND PURCHASE OF NOTES 1 SECTION3. CLOSINGS 1 SECTION4. CONDITIONS TO EACH CLOSING 2 Section4.1. Representations and Warranties 2 Section4.2. Performance; No Default 2 Section4.3. Compliance Certificates 2 Section4.4. Opinions of Counsel 2 Section4.5. Purchase Permitted by Applicable Law, etc 3 Section4.6. Governmental Approvals 3 Section4.7. Payment of Special Counsel Fees 3 Section4.8. Private Placement Number 3 Section4.9. Changes in Corporate Structure 3 Section4.10. Proceedings and Documents 3 SECTION5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 4 Section5.1. Organization; Power and Authority 4 Section5.2. Authorization, etc 4 Section5.3. Disclosure 4 Section5.4. Organization and Ownership of Shares of Subsidiaries 4 Section5.5. Financial Statements 5 Section5.6. Compliance with Laws, Other Instruments, etc 5 Section5.7. Governmental Authorizations, etc 5 Section5.8. Litigation; Observance of Statutes and Orders 5 Section5.9. Taxes 6 Section5.10. Title to Property; Leases 6 Section5.11. Licenses, Permits, etc 6 Section5.12. Compliance with ERISA 6 Section5.13. Private Offering by the Company 7 Section5.14. Use of Proceeds; Margin Regulations 7 Section5.15. Existing Indebtedness 8 Section5.16. Foreign Assets Control Regulations, etc 8 Section5.17. Status under Certain Statutes 8 SECTION6. REPRESENTATIONS OF THE PURCHASER 8 Section6.1. Purchase for Investment 8 Section6.2. Source of Funds 8 SECTION7. INFORMATION AS TO COMPANY 10 Section7.1. Financial and Business Information 10 Section7.2. Officers Certificate 12 Section7.3. Inspection 13 SECTION8. PREPAYMENT OF THE NOTES 13 Section8.1. Prepayments 13 Section8.2. Optional Prepayments with Make-Whole Amount 13 Section8.3. Allocation of Partial Prepayments 14 Section8.4. Maturity; Surrender, etc 14 Section8.5. Purchase of Notes 14 Section8.6. Make-Whole Amount 14 SECTION9. AFFIRMATIVE COVENANTS 16 Section9.1. Compliance with Law 16 Section9.2. Insurance 16 Section9.3. Maintenance of Properties 16 Section9.4. Payment of Taxes 16 Section9.5. Corporate Existence, etc.; Maintenance of Ownership of Elizabethtown Water Company 17 SECTION10. NEGATIVE COVENANTS 17 Section10.1. Transactions with Affiliates 17 Section10.2. Merger, Consolidation, etc 17 Section10.3. Fixed Charges Coverage Ratio 18 Section10.4. Consolidated Common Shareholders Equity 18 Section10.5. Consolidated Debt 18 Section10.6. Liens 18 Section10.7. Sale of Assets of Elizabethtown Water Company and The Mount Holly Water Company 18 Section10.8. Restricted Investments 19 SECTION11. EVENTS OF DEFAULT 19 SECTION12. REMEDIES ON DEFAULT, ETC 21 Section12.1. Acceleration 21 Section12.2. Other Remedies 22 Section12.3. Rescission 22 Section12.4. No Waivers or Election of Remedies, Expenses, etc 22 SECTION13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES 22 Section13.1. Registration of Notes 22 Section13.2. Transfer and Exchange of Notes 23 Section13.3. Replacement of Notes 23 SECTION14. PAYMENTS ON NOTES 24 Section14.1. Place of Payment 24 Section14.2. Home Office Payment 24 SECTION15. EXPENSES, ETC 24 Section15.1. Transaction Expenses 24 Section15.2. Survival 25 SECTION16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT 25 SECTION17. AMENDMENT AND WAIVER 25 Section17.1. Requirements 25 Section17.2. Solicitation of Holders of Notes 25 Section17.3. Binding Effect, etc 26 Section17.4. Notes Held by Company, etc 26 SECTION18. NOTICES 26 SECTION19. REPRODUCTION OF DOCUMENTS 27 SECTION20. CONFIDENTIAL INFORMATION 27 SECTION21. SUBSTITUTION OF PURCHASER 28 SECTION22. MISCELLANEOUS 28 Section22.1. Successors and Assigns 28 Section22.2. Payments Due on Non-Business Days 29 Section22.3. Severability 29 Section22.4. Construction 29 Section22.5. Counterparts 29 Section22.6. Governing Law 29 Signatures 30 SCHEDULEA INFORMATION RELATING TO PURCHASER SCHEDULEB DEFINED TERMS SCHEDULE5.4 Subsidiaries of the Company and Ownership of Subsidiary Stock SCHEDULE5.15 Existing Indebtedness EXHIBIT1 Form of 6.79% Senior Note due December15, 2007 EXHIBIT4.4(a) Form of Opinion of Counsel for the Company EXHIBIT4.4(b) Form of Opinion of Special New York Counsel for the Company EXHIBIT4.4(C) Form of Opinion of Special Counsel for the Purchaser ETOWN CORPORATION 600 South Avenue Westfield, New Jersey 07091-0788 6.79% SENIOR NOTES DUE DECEMBER15, 2007 Dated as of December15, 1997 American General Life Insurance Company c/o American General Corporation P.O. Box 3247 Houston, Texas 77253-3247 Ladies and Gentlemen: ETOWN CORPORATION, a New Jersey corporation (the Company), agrees with you as follows: SECTION1. AUTHORIZATION OF NOTES. The Company will authorize the issue and sale of $12,000,000 aggregate principal amount of its 6.79% Senior Notes due December15, 2007 (the Notes, such term to include any such notes issued in substitution therefor pursuant to Section13 of this Agreement). The Notes shall be substantially in the form set out in Exhibit1, with such changes therefrom, if any, as may be approved by you and the Company. Certain capitalized terms used in this Agreement are defined in ScheduleB; references to a Schedule or an Exhibit are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement. SECTION2. SALE AND PURCHASE OF NOTES. Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and you will purchase from the Company, at each Closing provided for in Section3, Notes in the principal amount specified opposite your name in Schedule A with respect to such Closing at the purchase price of 100% of the principal amount thereof. SECTION3. CLOSINGS. The sale and purchase of the Notes to be purchased by you shall occur at the offices of Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois 60603, at 10:00 A.M. Chicago time, at not more than three closings (each a Closing) which shall take place on December22, 1997, January8, 1998 and May15, 1998 or on such other Business Day or Business Days on or prior to May31, 1998 as may be agreed upon by the Company and you. At each Closing the Company will deliver to you the Notes to be purchased by you on such date in the form of a single Note (or such greater number of Notes in denominations of at least $100,000 as you may request) dated the date of such Closing and registered in your name (or in the name of your nominee), against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 2083605002512 at First Union National Bank, Newark, New Jersey, ABA number 031201467. If at any Closing the Company shall fail to tender such Notes to you as provided above in this Section3, or any of the conditions specified in Section4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment. SECTION4. CONDITIONS TO EACH CLOSING. Your obligation to purchase and pay for the Notes to be sold to you at each Closing is subject to the fulfillment to your satisfaction, prior to or at such Closing, of the following conditions: Section4.1. Representations and Warranties. The representations and warranties of the Company in this Agreement shall be correct when made and at the time of such Closing. Section4.2. Performance; No Default. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at such Closing, and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Section5.14), no Default or Event of Default shall have occurred and be continuing. Section4.3. Compliance Certificates. (a) Officers Certificate. The Company shall have delivered to you an Officers Certificate, dated the date of such Closing, certifying that the conditions specified in Sections4.1, 4.2 and 4.9 have been fulfilled. (b) Secretarys Certificate. (i) The Company shall have delivered to you on or prior to the first Closing a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Notes and this Agreement. (ii) The Company shall have delivered to you on or prior to each subsequent Closing a certificate certifying as to no changes to the authorizing resolutions or any of the other items attached to the Companys certificate delivered in connection with the first Closing. Section4.4. Opinions of Counsel. You shall have received opinions in form and substance satisfactory to you, dated the date of such Closing (a)from Walter M. Braswell, Esq., Secretary of the Company, (b) from Winthrop, Stimson, Putnam & Roberts, special New York counsel for the Company, covering the matters set forth in Exhibits4.4(a) and 4.4(b), respectively, and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinion to you) and (c)from Chapman and Cutler, your special counsel in connection with such transactions, substantially in the form set forth in Exhibit4.4(c) and covering such other matters incident to such transactions as you may reasonably request. Section4.5. Purchase Permitted by Applicable Law, etc. On the date of such Closing your purchase of Notes shall (i)be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (ii)not violate any applicable law or regulation (including, without limitation, Regulation G, T or X of the Board of Governors of the Federal Reserve System) and (iii)not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officers Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted. Section4.6. Governmental Approvals. The Company shall have received all necessary consents, authorizations and approvals from all Governmental Authorities, if any, necessary for the execution, delivery and performance by the Company of this Agreement and the Notes, and any such consent, authorization or approval shall be final and unappealable. Section4.7. Payment of Special Counsel Fees. Without limiting the provisions of Section15.1, the Company shall have paid on or before the first Closing the reasonable fees, charges and disbursements of your special counsel referred to in Section4.4 to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the first Closing. Section4.8. Private Placement Number. A Private Placement number issued by Standard & Poors CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes. Section4.9. Changes in Corporate Structure. The Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements included as part of the Memorandum and on or prior to the date of the first Closing. Section4.10. Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. SECTION5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to you that: Section5.1. Organization; Power and Authority. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Notes and to perform the provisions hereof and thereof. Section5.2. Authorization, etc. This Agreement and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i)applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors rights generally and (ii)general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Section5.3. Disclosure. The Company, through its agent, PNC Capital Markets, Inc., has delivered to you a copy of a Confidential Private Placement Memorandum, dated November, 1997 (the Memorandum), relating to the transactions contemplated hereby. This Agreement, the Memorandum and the financial statements referred to in Section5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Memorandum or in the financial statements referred to in Section5.5, since December31, 1996, there has been no change in the financial condition, operations, business or properties of the Company or any of its Subsidiaries except changes that individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect. Section5.4. Organization and Ownership of Shares of Subsidiaries. (a)Schedule5.4 is (except as noted therein) a complete and correct list of the Companys Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary. (b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule5.4 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule5.4). (c) Each Subsidiary identified in Schedule5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact. Section5.5. Financial Statements. The consolidated financial statements of the Company and its Subsidiaries (i) included as part of the Memorandum, and (ii) to be delivered to you prior to the final Closing pursuant to Section7 (including in each case the related schedules and notes) fairly present or will fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of their respective dates and the consolidated results of their operations and cash flows for their respective periods and have been or will be prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). Section5.6. Compliance with Laws, Other Instruments, etc. The execution, delivery and performance by the Company of this Agreement and the Notes will not (i)contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other Material agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (ii)conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (iii)violate any provision of any statute or other ruleor regulation of any Governmental Authority applicable to the Company or any Subsidiary. Section5.7. Governmental Authorizations, etc. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority (including, without limitation, the New Jersey Board of Public Utilities) is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes. Section5.8. Litigation; Observance of Statutes and Orders. (a)Except as disclosed in the Memorandum, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. (b) Neither the Company nor any Subsidiary is in default under any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. Section5.9. Taxes. The Company and its Subsidiaries have filed all income tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments payable by them, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i)the amount of which is not individually or in the aggregate Material or (ii)the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves (if any) in accordance with GAAP. The Federal income tax liabilities of the Company and its Subsidiaries have been determined by the Internal Revenue Service for all fiscal years up to and including the fiscal year ended December31, 1995. Section5.10. Title to Property; Leases. The Company and its Subsidiaries have good and sufficient title to their respective Material properties, including all such properties reflected in the most recent audited balance sheet referred to in Section5.5 or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), except for those defects in title that, individually or in the aggregate, would not have a Material Adverse Effect. All Material leases are valid and subsisting and are in full force and effect in all material respects. Section5.11. Licenses, Permits, etc. The Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that are Material, without known conflict with the rights of others, except for those conflicts that, individually or in the aggregate, would not have a Material Adverse Effect. Section5.12. Compliance with ERISA. (a)The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to TitleI or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section3 of ERISA), and no event, transaction or condition has occurred or exists that would reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to TitleI or IV of ERISA or to such penalty or excise tax provisions or to Section401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material. (b) The accumulated benefit obligation as determined in accordance with Financial Accounting Standards Board Statement No. 87 under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plans most recently ended plan year is as stated in the Memorandum and in respect of the 1997 Plan Year, as will be stated in the audited financial statements to be provided pursuant to Section7.1(b). (c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. (d) The expected postretirement benefit obligation (determined as of the last day of the Companys most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section4980B of the Code) of the Company and its Subsidiaries is as disclosed in the Memorandum. (e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section406 of ERISA or in connection with which a tax could be imposed pursuant to section4975(c)(1)(A)- (D) of the Code. The representation by the Company in the first sentence of this Section5.12(e) is made in reliance upon and subject to the accuracy of your representation in Section6.2 as to the sources of the funds to be used to pay the purchase price of the Notes to be purchased by you. Section5.13. Private Offering by the Company. Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than you and not more than thirty-eight (38) other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section5 of the Securities Act. Section5.14. Use of Proceeds; Margin Regulations. The Company will apply the proceeds of the sale of the Notes (i) to refinance existing indebtedness and to fund future capital expenditures and (ii) for investments in water and wastewater systems. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of RegulationG of the Board of Governors of the Federal Reserve System (12CFR207), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of RegulationT of said Board (12 CFR 220). The Company does not own or presently intend to carry or purchase any margin stock. As used in this Section, the terms margin stock and purpose of buying or carrying shall have the meanings assigned to them in said RegulationG. Section5.15. Existing Indebtedness. Schedule5.15 sets forth a complete and correct list of all outstanding Indebtedness of the Company and its Subsidiaries as of December15, 1997, since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company or its Subsidiaries. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary the outstanding principal amount of which exceeds $500,000 that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment. Section5.16. Foreign Assets Control Regulations, etc. Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. Section5.17. Status under Certain Statutes. Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the ICC Termination Act of 1995, as amended, or the Federal Power Act, as amended. SECTION6. REPRESENTATIONS OF THE PURCHASER. Section6.1. Purchase for Investment. You represent that you are purchasing the Notes for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of your or their property shall at all times be within your or their control. You understand that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes. Section6.2. Source of Funds. You represent that at least one of the following statements is an accurate representation as to each source of funds (a Source) to be used by you to pay the purchase price of the Notes to be purchased by you hereunder: (a) the Source is an insurance company general account within the meaning of Department of Labor Prohibited Transaction Class Exemption (PTCE) 95-60 (issued July12, 1995) and there is no employee benefit plan, treating as a single plan, all plans maintained by the same employer or employee organization, with respect to which the amount of the general account reserves and liabilities for all contracts held by or on behalf of such plan, exceeds ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the NAIC Annual Statement filed with your state of domicile; or (b) the Source is either (i)an insurance company pooled separate account, within the meaning of PTCE 90-1 (issued January 29, 1990), or (ii)a bank collective investment fund, within the meaning of the PTCE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (c) the Source constitutes assets of an investment fund (within the meaning of Part V(b) of the QPAM Exemption) managed by a qualified professional asset manager or QPAM (within the meaning of PartV(a) of the QPAM Exemption), no employee benefit plans assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of SectionV(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of PartI(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of control in SectionV(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i)the identity of such QPAM and (ii)the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or (d) the Source is a governmental plan; or (e) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); or (f) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA. If a proposed transferee of the Notes identifies a plan pursuant to paragraph (b), (c) or (e) above, the Company shall deliver a certificate on or prior to the date of any transfer of the Notes to such transferee, which certificate shall either state that (i)it is neither a party in interest (as defined in Title I, Section3(14) of ERISA) nor a disqualified person (as defined in Section 4975(e)(2) of the Internal Revenue Code of 1986, as amended), with respect to any plan identified pursuant to paragraphs (b) or (e) above, or (ii)with respect to any plan, identified pursuant to paragraph (c) above, neither it nor any affiliate (as defined in SectionV(c) of the QPAM Exemption) has at this time, and during the immediately preceding one year has exercised the authority to appoint or terminate said QPAM as manager of the assets of any plan identified in writing pursuant to paragraph (c) above or to negotiate the terms of said QPAMs management agreement on behalf of any such identified plans. As used in this Section6.2, the terms employee benefit plan, governmental plan, party in interest and separate account shall have the respective meanings assigned to such terms in Section3 of ERISA. SECTION7. INFORMATION AS TO COMPANY Section7.1. Financial and Business Information. The Company shall deliver to each holder of Notes that is an Institutional Investor: (a) Quarterly Statements promptly, and in any event, within 60 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (ii) consolidated statements of income, changes in shareholders equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments, provided that delivery within the time period specified above of copies of the Companys Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section7.1(a); (b) Annual Statements promptly, and in any event, within 105 days after the end of each fiscal year of the Company, duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and (ii) consolidated statements of income, changes in shareholders equity and cash flows of the Company and its Subsidiaries, for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, provided that the delivery within the time period specified above of the Companys Annual Report on Form 10-K for such fiscal year (together with the Companys annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section7.1(b); (c) SEC and Other Reports promptly upon their becoming available, one copy of (i)each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, (ii)each regular or periodic report, each registration statement that shall have become effective (without exhibits except as expressly requested by such holder), and each final prospectus and all amendments thereto filed by the Company or any Subsidiary with the Securities and Exchange Commission, and (iii)a copy of each Annual Report of each of Elizabethtown Water Company and The Mount Holly Water Company delivered to the New Jersey Board of Public Utilities; (d) Notice of Default or Event of Default promptly following, and in any event within five Business Days after a Responsible Officer becoming aware of, the existence of any Default or Event of Default, a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; (e) ERISA Matters promptly, and in any event within five Business Days after a Responsible Officer becoming aware of, any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (i) with respect to any Plan, any reportable event, as defined in section4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as then in effect on the date hereof; or (ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, would reasonably be expected to have a Material Adverse Effect; and (f) Requested Information with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes. Section7.2. Officers Certificate. Each set of financial statements delivered to a holder of Notes pursuant to Section7.1(a) or Section7.1(b) hereof shall be accompanied by a certificate of a Senior Financial Officer setting forth: (a) Covenant Compliance the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Section10.2 through 10.8 hereof, inclusive, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and (b) Event of Default a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto. Section7.3. Inspection. The Company shall permit the representatives of each holder of Notes that is an Institutional Investor: (a) No Default if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Companys officers, and, with the consent of the Company (which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often (but not more than twice by any such holder within any 12-month period) as may be reasonably requested in writing; and (b) Default if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and (if an officer of the Company is present) their independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. SECTION8. PREPAYMENT OF THE NOTES. Section8.1. Prepayments. The entire outstanding principal amount of the Notes shall be due on December15, 2007. Except as set forth in Section8.2, the Notes may not be prepaid prior to maturity at the option of the Company. Section8.2. Optional Prepayments with Make-Whole Amount. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, and accrued interest thereon to the date of prepayment, plus the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Company will give each holder of Notes written notice of each optional prepayment under this Section8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section8.3), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. Section8.3. Allocation of Partial Prepayments. In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof. Section8.4. Maturity; Surrender, etc. In the case of each prepayment of Notes pursuant to this Section8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. Section8.5. Purchase of Notes. The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except (a)upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes or (b)pursuant to an offer to purchase made by the Company or an Affiliate pro rata to the holders of all Notes at the time outstanding upon the same terms and conditions. Any such offer shall provide each holder with sufficient information to enable it to make an informed decision with respect to such offer, and shall remain open for at least 10 Business Days. If the holders of more than 25% of the principal amount of the Notes then outstanding accept such offer, the Company shall promptly notify the remaining holders of such fact and the expiration date for the acceptance by holders of Notes of such offer shall be extended by the number of days necessary to give each such remaining holder at least 10 Business Days from its receipt of such notice to accept such offer. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes. Section8.6. Make-Whole Amount. The term Make-Whole Amount means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: Called Principal means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section8.2 or has become or is declared to be immediately due and payable pursuant to Section12.1, as the context requires. Discounted Value means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. Reinvestment Yield means, with respect to the Called Principal of any Note, 0.50% over the yield to maturity implied by (i)the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as Page 678 on the Dow Jones Markets, a division of Dow & Jones Company, Telerate Access Service (or such other display as may replace Page 678 on the Telerate Access Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii)if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a)converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b)interpolating linearly between (1)the actively traded U.S. Treasury security with the maturity closest to and greater than the Remaining Average Life and (2)the actively traded U.S. Treasury security with the maturity closest to and less than the Remaining Average Life. Remaining Average Life means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i)such Called Principal into (ii)the sum of the products obtained by multiplying (a)the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b)the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. Remaining Scheduled Payments means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section8.2 or 12.1. Settlement Date means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section8.2 or has become or is declared to be immediately due and payable pursuant to Section12.1, as the context requires. SECTION9. AFFIRMATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: Section9.1. Compliance with Law. The Company will and will cause each of its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect, provided that such compliance with any such law, ordinance, rule or regulation by the Company or any Subsidiary shall not be required to the extent that the applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary and such contest would not reasonably be expected to have a Material Adverse Effect. Section9.2. Insurance. The Company will and will cause each of its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. Section9.3. Maintenance of Properties. The Company will and will cause each of its Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Sectionshall not prevent the Company or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance would not, individually or in the aggregate, have a Material Adverse Effect. Section9.4. Payment of Taxes. The Company will and will cause each of its Subsidiaries to file all income tax or similar tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies payable by any of them, to the extent such taxes and assessments have become due and payable and before they have become delinquent, provided that neither the Company nor any Subsidiary need pay any such tax or assessment if (i)the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii)the nonpayment of all such taxes and assessments in the aggregate would not reasonably be expected to have a Material Adverse Effect. Section9.5. Corporate Existence, etc.; Maintenance of Ownership of Elizabethtown Water Company. (a)Except as permitted by Section10.2, the Company will at all times preserve and keep in full force and effect its corporate existence. Subject to Section 10.7, the Company will at all times preserve and keep in full force and effect the corporate existence of each of its Utility Subsidiaries (unless merged into the Company or a Utility Subsidiary) and all rights and franchises of the Company and its Utility Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise would not, individually or in the aggregate, have a Material Adverse Effect. (b) The Company will at all times own and hold 100% of the shares of the outstanding common stock of Elizabethtown Water Company. SECTION10. NEGATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: Section10.1. Transactions with Affiliates. The Company will not and will not permit any Subsidiary to enter into directly or indirectly any Material transaction or Material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except pursuant to the reasonable requirements of the Companys or such Subsidiarys business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arms-length transaction with a Person not an Affiliate. Section10.2. Merger, Consolidation, etc. The Company shall not consolidate with or merge with any other corporation unless: (a) the successor formed by such consolidation or the survivor of such merger, as the case may be (the Successor Corporation), shall be a solvent corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia; (b) if the Company is not the Successor Corporation, such corporation shall have executed and delivered to each holder of Notes its assumption of the due and punctual performance and observance of each covenant and condition of this Agreement and the Notes; and (c) immediately after giving effect to such transaction: (i) no Default or Event of Default would exist, and (ii) the Successor Corporation would be in compliance with the provisions of Section10.5 hereof if the ratio specified thereunder were calculated as of the date of such transaction and after giving effect thereto. Section10.3. Fixed Charges Coverage Ratio. The Company will not, at the end of any fiscal quarter of the Company, permit the Fixed Charges Coverage Ratio to be less than 1.5 to 1. Section10.4. Consolidated Common Shareholders Equity. The Company will not, at any time, permit Consolidated Common Shareholders Equity to be less than $165,000,000. Section10.5. Consolidated Debt. The Company will not at the end of any calendar year permit the ratio of (a)the sum of (i) Consolidated Debt plus (ii)the aggregate Redeemable Preferred Stock of the Company and its Subsidiaries outstanding on such date, minus $10,000,000, to (b)the sum of (i) Consolidated Debt plus (ii)the aggregate Preferred Stock of the Company and its Subsidiaries outstanding on such date plus (iii)Consolidated Common Shareholders Equity, to exceed 0.65 to 1. Section10.6. Liens. The Company will not directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Consensual Lien on or with respect to any of the common stock of Elizabethtown Water Company, or any income or profits therefrom, or assign or otherwise convey any right to receive such income or profits. Section10.7. Sale of Assets of Elizabethtown Water Company and The Mount Holly Water Company. The Company will not permit Elizabethtown Water Company or its Subsidiary, The Mount Holly Water Company, to make any Asset Disposition unless: (a) in the good faith opinion of the Company, the Asset Disposition is in exchange for consideration having a Fair Market Value at least equal to that of the property exchanged and is in the best interest of the Company, Elizabethtown Water Company or Mount Holly Water Company; and (b) immediately after giving effect to the Asset Disposition, no Default or Event of Default would exist; and (c) immediately after giving effect to the Asset Disposition, the Disposition Value of all property that was the subject of any Asset Disposition occurring on or after the date of the Closing would not exceed 25% of Consolidated Assets of Elizabethtown Water Company as of December31, 1997. If the Net Proceeds Amount for any Transfer is applied to (i) a Debenture Indenture Application, (ii) a Debt Prepayment Application, or (iii) a Property Reinvestment Application, then such Transfer, only for the purpose of determining compliance with subsection (c) of this Section10.7 as of any date, shall be deemed not to be an Asset Disposition. Section10.8. Restricted Investments. (a) Limitation. The Company will not, and will not permit any of its Subsidiaries to, declare, make or authorize any Restricted Investment unless immediately after giving effect to such action: (i) the aggregate value of all Restricted Investments of the Company and its Subsidiaries (valued immediately after such action) would not exceed $30,000,000; and (ii) no Default or Event of Default would exist. (b) Investments of Subsidiaries. Each Person which becomes a Subsidiary of the Company after the date of the Closing will be deemed to have made, on the date such Person becomes a Subsidiary of the Company, all Restricted Investments of such Person in existence on such date. SECTION11. EVENTS OF DEFAULT. An Event of Default shall exist if any of the following conditions or events shall occur and be continuing: (a) the Company defaults in the payment of any principal or Make-Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) the Company defaults in the payment of any interest on any Note for more than five Business Days after the same becomes due and payable; or (c) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in paragraphs (a) and (b) of this Section11) and such default is not remedied within 30 Business Days; or (d) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or (e) either (i)the Company or any Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $5,000,000 beyond any period of grace provided with respect thereto, or (ii)the Company or any Subsidiary is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $5,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared due and payable before its stated maturity or before its regularly scheduled dates of payment; or (f) the Company or any Principal Subsidiary (i)is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii)files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii)makes an assignment for the benefit of its creditors, (iv)consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v)is adjudicated as insolvent or to be liquidated, or (vi)takes corporate action for the purpose of any of the foregoing; or (g) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any Principal Subsidiary, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Principal Subsidiaries, or any such petition shall be filed against the Company or any of its Principal Subsidiaries and such petition shall not be dismissed within 60 days; or (h) a final judgment or judgments for the payment of money aggregating in excess of 5% of Consolidated Total Assets are rendered against one or more of the Company and its Principal Subsidiaries and are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or (i) if (i)any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section412 of the Code, (ii)a notice of intent to terminate any Plan shall have been filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii)the Company or any ERISA Affiliate shall have incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (iv)the Company or any ERISA Affiliate incurs withdrawal liability in connection with the withdrawal from any Multiemployer Plan, or (v)the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; provided, however, none of the events described in clauses(i) through (v) above shall constitute an Event of Default unless any such event or events described in clauses (i) through (v) above, either individually or together with any other such event or events, would reasonably be expected to have a Material Adverse Effect. As used in Section11(i), the terms employee benefit plan and employee welfare benefit plan shall have the respective meanings assigned to such terms in Section3 of ERISA. SECTION12. REMEDIES ON DEFAULT, ETC. Section12.1. Acceleration. (a)If an Event of Default with respect to the Company described in paragraph (f) or (g) of Section11 (other than an Event of Default described in clause (i) of paragraph (f) or described in clause (vi) of paragraph (f) by virtue of the fact that such clause encompasses clause (i) of paragraph (f)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. (b) If any other Event of Default has occurred and is continuing, any holder or holders of at least 51% in principal amount of the Notes at the time outstanding may at any time at its or their option, by written notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable. (c) If any Event of Default described in paragraph (a) or (b) of Section11 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable. Upon any Notes becoming due and payable under this Section12.1, whether automatically or by declaration, such Note will forthwith mature and the entire unpaid principal amount of such Note, plus (x)all accrued and unpaid interest thereon and (y)the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. Section12.2. Other Remedies. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. Section12.3. Rescission. At any time after any Notes have been declared due and payable pursuant to clause (b) of Section12.1, the Required Holders, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a)the Company has paid all overdue interest on the Notes, all principal of and Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b)all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section17, and (c)no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon. Section12.4. No Waivers or Election of Remedies, Expenses, etc. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holders rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section15, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section12, including, without limitation, reasonable attorneys fees, expenses and disbursements. SECTION13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. Section13.1. Registration of Notes. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes. Section13.2. Transfer and Exchange of Notes. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or its attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Companys expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Exhibit 1. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $100,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $100,000. Any transferee of a Note, or purchaser of a participation therein, shall, by its acceptance of such Note be deemed to make the same representations to the Company regarding the Note or participation as you have made pursuant to Section6.2, provided that such entity may (in reliance upon information provided by the Company, which shall not be unreasonably withheld) make a representation to the effect that the purchase by such entity of any Note will not constitute a non-exempt prohibited transaction under Section406(a) of ERISA. Section13.3. Replacement of Notes. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is, or is a nominee for, you or another holder of a Note with a minimum net worth of at least $50,000,000, such Persons own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. SECTION14. PAYMENTS ON NOTES. Section14.1. Place of Payment. Subject to Section14.2, payments of principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in Westfield, New Jersey at the principal office of the Company in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction. Section14.2. Home Office Payment. So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in Section14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule A, or by such other method or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, you shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section14.1. The Company will afford the benefits of this Section14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by you under this Agreement and that has made the same agreement relating to such Note as you have made in this Section14.2. SECTION15. EXPENSES, ETC. Section15.1. Transaction Expenses. Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys fees of a special counsel and, if reasonably required, local or other counsel) incurred by you and each holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a)the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a holder of any Note, and (b)the costs and expenses, including financial advisors fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save you and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you). Section15.2. Survival. The obligations of the Company under this Section15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement. SECTION16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of you or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. SECTION17. AMENDMENT AND WAIVER. Section17.1. Requirements. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a)no amendment or waiver of the notice periods in Section8 hereof, any of the provisions of Section1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to you unless consented to by you in writing, and (b)no such amendment or waiver may, without the written consent of the holder of each Note at the time outstanding affected thereby, (i)subject to the provisions of Section12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes, (ii)change the percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, or (iii)amend any of Sections 8 (other than the notice periods therein), 11(a), 11(b), 12, 17 or 20. Section17.2. Solicitation of Holders of Notes. (a) Solicitation. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section17 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes. (b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes or any waiver or amendment of any of the terms and provisions hereof or of the Notes unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding whether or not such holder consented to such waiver or amendment. Section17.3. Binding Effect, etc. Any amendment or waiver consented to as provided in this Section17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term this Agreement and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. Section17.4. Notes Held by Company, etc. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding. SECTION18. NOTICES. All notices and communications provided for hereunder shall be in writing and sent (a)by telefacsimile if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b)by registered or certified mail with return receipt requested (postage prepaid), or (c)by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent: (i) if to you or your nominee, to you or it at the address specified for such communications in Schedule A, or at such other address as you or it shall have specified to the Company in writing, (ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or (iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of the Treasurer, or at such other address as the Company shall have specified to the holder of each Note in writing. Notices under this Section18 will be deemed given only when actually received. SECTION19. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating thereto, including, without limitation, (a)consents, waivers and modifications that may hereafter be executed, (b)documents received by you at the Closing (except the Notes themselves), and (c)financial statements, certificates and other information previously or hereafter furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. SECTION20. CONFIDENTIAL INFORMATION. For the purposes of this Section20, Confidential Information means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary, provided that such term does not include information that (a)was publicly known or otherwise known to you prior to the time of such disclosure, (b)subsequently becomes publicly known through no act or omission by you or any person acting on your behalf, (c)otherwise becomes known to you other than through disclosure by the Company or any Subsidiary or (d)constitutes financial statements delivered to you under Section7.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to (i)your directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (ii)your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section20, (iii)any other holder of any Note, (iv)any Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section20), (v)any federal or state regulatory authority having jurisdiction over you, (vi)the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio, or (vii)any other Person to which such delivery or disclosure may be necessary or appropriate (w)to effect compliance with any law, rule, regulation or order applicable to you, (x)in response to any subpoena or other legal process, (y)in connection with any litigation involving or related to the Company, this Agreement or the Notes to which you are a party or (z)if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee or any other holder that shall have previously delivered such a confirmation), such holder will confirm in writing that it is bound by the provisions of this Section20. SECTION21. SUBSTITUTION OF PURCHASER. You shall have the right to substitute any one of your Affiliates as the purchaser of the Notes that you have agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both you and such Affiliate, shall contain such Affiliates agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section6. Upon receipt of such notice, wherever the word you is used in this Agreement (other than in this Section21), such word shall be deemed to refer to such Affiliate in lieu of you. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to you all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word you is used in this Agreement (other than in this Section21), such word shall no longer be deemed to refer to such Affiliate, but shall refer to you, and you shall have all the rights of an original holder of the Notes under this Agreement. SECTION22. MISCELLANEOUS. Section22.1. Successors and Assigns. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not. Section22.2. Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or Make-whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. Section22.3. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. Section22.4. Construction. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. Section22.5. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. Section22.6. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. * * * * * If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterpart of this Agreement and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Signatures Very truly yours, ETOWN CORPORATION By [Title] The foregoing is hereby agreed to as of the date thereof. AMERICAN GENERAL LIFE INSURANCE COMPANY By Its INFORMATION RELATING TO PURCHASERS NAME AND ADDRESS OF PURCHASER PRINCIPAL AMOUNT OF NOTES TO BE PURCHASED AMERICAN GENERAL LIFE INSURANCE COMPANY c/o American General Corporation Attention: Investment Research Department, A37-01 P. O. Box 3247 Houston, Texas 77253-3247 December22, 1997 Closing: $4,000,000 January8, 1998 Closing: $6,000,000 May15, 1998 Closing: $2,000,000 Overnight Mailing Address: 2929 Allen Parkway Houston, Texas 77019-2155 Facsimile No. (713) 831-1366 Payments All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as Etown Corporation, 6.79% Senior Notes due 2007, PPN269242 B@1, principal or interest) to: ABA #011000028 State Street Bank and Trust Company Boston, Massachusetts 02101 Re: American General Life Insurance Company AC-0125-880-5 OBI=PPN # and description of payment Fund Number PA 40 Notices All notices of payment on or in respect of the Notes and written confirmation of each such payment to: American General Life Insurance Company and PA 40 c/o State Street Bank and Trust Company Insurance Services Custody (AH2) 1776 Heritage Drive North Quincy, Massachusetts 02171 Attention: Susan Collins, Manager Insurance Services Facsimile Number: (617) 985-4923 Duplicate payment notices and all other correspondences to be addressed as first provided above. Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 25-0598210 DEFINED TERMS GENERAL PROVISIONS Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, the same shall be done in accordance with GAAP, to the extent applicable, except where such principles are inconsistent with the express requirements of this Agreement. DEFINITIONS As used herein, the following terms have the respective meanings set forth below or set forth in the Sectionhereof following such term: Affiliate means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person. As used in this definition, Control means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an Affiliate is a reference to an Affiliate of the Company. Asset Disposition means any Transfer except: (a) any (i) Transfer from a Subsidiary of Elizabethtown Water Company to Elizabethtown Water Company or a Wholly-Owned Subsidiary of Elizabethtown Water Company; (ii) Transfer from Elizabethtown Water Company to a Wholly-Owned Subsidiary of Elizabethtown Water Company; and (iii) Transfer from Elizabethtown Water Company to a Subsidiary of Elizabethtown Water Company (other than a Wholly-Owned Subsidiary of Elizabethtown Water Company) or from a Subsidiary of Elizabethtown Water Company to another Subsidiary of Elizabethtown Water Company (other than a Wholly-Owned Subsidiary of Elizabethtown Water Company), which in either case is for Fair Market Value, so long as immediately before and immediately after the consummation of any such Transfer and after giving effect thereto, no Default or Event of Default exists; and (b) any Transfer made in the ordinary course of business and involving only property that is either (i) inventory held for sale or (ii) pipes and other utility plant assets, equipment, vehicles, fixtures, supplies or materials no longer required in the operation of the business of Elizabethtown Water Company or any Subsidiary of Elizabethtown Water Company or that is worn out, permanently unserviceable or obsolete. Business Day means (a)for the purposes of Section8.6 only, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed, and (b)for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in Newark, New Jersey or New York, New York are required or authorized to be closed. Capital Lease means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. Capital Lease Obligation means, with respect to any Person and a Capital Lease, the amount of the obligation of such Person as the lessee under such Capital Lease which would, in accordance with GAAP, appear as a liability on a balance sheet of such Person. Closing is defined in Section3. Code means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. Company means Etown Corporation, a New Jersey corporation. Confidential Information is defined in Section20. Consensual Lien means any Lien that is voluntarily agreed to or consented to by the Company or that has been granted or created by the Company for the benefit of any other Person. Consolidated Assets means, at any time, the total assets of the Company and its Subsidiaries which would be shown as assets on a consolidated balance sheet of the Company and its Subsidiaries as of such time prepared in accordance with GAAP, after eliminating all amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries. Consolidated Common Shareholders Equity means, at any time, (a) the sum of (i) the par value (or value stated on the books of the corporation) of the common stock of the Company and its Subsidiaries plus (ii) the amount of the paid-in capital and retained earnings of the Company and its Subsidiaries, in each case as such amounts would be shown on a consolidated balance sheet of the Company and its Subsidiaries as of such time prepared in accordance with GAAP, provided that there shall be excluded from this clause(a) treasury stock and common stock subscribed and unissued, minus (b) to the extent included in clause (a), all amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries. Consolidated Debt means, as of any date of determination, the total of all Debt of the Company and its Subsidiaries outstanding on such date, after eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP. Consolidated Income Available for Fixed Charges means, with respect to any period, Consolidated Net Income for such period plus all amounts deducted in the computation thereof on account of (a)Fixed Charges and (b)taxes imposed on or measured by income or excess profits. Consolidated Net Income means, with reference to any period, the income (or loss) of the Company and its Subsidiaries for such period, before Distributions paid during such period by the Company and its Subsidiaries (taken as a cumulative whole excluding Extraordinary Items), as determined in accordance with GAAP, after eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP. Consolidated Operating Revenues means, for any period, the operating revenues of the Company and its Subsidiaries which would be shown as operating revenues on a consolidated statement of income of the Company and its Subsidiaries for such period prepared in accordance with GAAP. Debenture Indenture Application means, with respect to any Transfer of property, the application by Elizabethtown Water Company within 365 days of such Transfer of the Net Proceeds Amount with respect to such Transfer in accordance with Section 5.08 (and the related definitions) of the Indenture dated as of October15, 1988 between Elizabethtown Water Company and Citibank, N.A., as trustee, as amended through the date of the first Closing (or any provision of any other Debenture Indenture which is substantially the same as such Section 5.08 (and the related definitions)). Debenture Indentures means (i)the Indentures pursuant to which the Debentures of Elizabethtown Water Company listed on Schedule 5.15 were issued and are outstanding, and (ii)substantially similar Indentures pursuant to which future series of the Debentures of Elizabethtown Water Company may be issued. Debt means, with respect to any Person, without duplication, (a) its liabilities for borrowed money; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including, without limitation, all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c) its Capital Lease Obligations; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); and (e) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (d) hereof. Debt of any Person shall include all obligations of such Person of the character described in clauses (a) through (e) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. Debt Prepayment Application means, with respect to any Transfer of property, the application within 180days of such Transfer (other than in a Debenture Indenture Application) of cash in an amount equal to the Net Proceeds Amount with respect to such Transfer to pay Debt of the Subsidiary of the Company making such Transfer, Elizabethtown Water Company or any Wholly-Owned Subsidiary (other than Debt owing to the Company, any of its Subsidiaries or any Affiliate and Debt in respect of any revolving credit or similar credit facility providing the Company or any of its Subsidiaries with the right to obtain loans or other extensions of credit from time to time, except to the extent that in connection with such payment of Debt the availability of credit under such credit facility is permanently reduced by an amount not less than the amount of such proceeds applied to the payment of such Debt). Default means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. Default Rate means that rate of interest that is the greater of (i)2% per annum above the rate of interest stated in clause (a) of the first paragraph of the Notes or (ii)2% over the rate of interest publicly announced by The Bank of New York in New York, New York as its base or prime rate. Disposition Value means, at any time, with respect to any property (a) in the case of property that does not constitute Subsidiary Stock, the book value thereof, valued at the time of such disposition in good faith by the Company, and (b) in the case of property that constitutes Subsidiary Stock, an amount equal to that percentage of book value of the assets of the Subsidiary that issued such stock as is equal to the percentage that the book value of such Subsidiary Stock represents of the book value of all of the outstanding capital stock of such Subsidiary (assuming, in making such calculations, that all Securities convertible into such capital stock are so converted and giving full effect to all transactions that would occur or be required in connection with such conversion) determined at the time of the disposition thereof, in good faith by the Company. Distribution means, in respect of any corporation, association or other business entity dividends paid on Preferred Stock of such corporation, association or other business entity (except distributions in such stock or other equity interest). Environmental Laws means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. ERISA Affiliate means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section414 of the Code. Event of Default is defined in Section11. Exchange Act means the Securities Exchange Act of 1934, as amended. Extraordinary Items shall mean extraordinary items as defined and determined in accordance with GAAP. Fair Market Value means, at any time and with respect to any property, the sale value of such property that would be realized in an arms-length sale at such time between an informed and willing buyer and an informed and willing seller (neither being under a compulsion to buy or sell). Fixed Charges means, with respect to any period, the sum of (a)Interest Charges for such period plus (b)Lease Rentals for such period. Fixed Charges Coverage Ratio means, at the end of any fiscal quarter of the Company, the ratio of (a) Consolidated Income Available for Fixed Charges for the period of four consecutive fiscal quarters ending at the end of such fiscal quarter, to (b)the sum of (i)Fixed Charges for such period plus (ii)Distributions paid during such period by the Company and its Subsidiaries. GAAP means generally accepted accounting principles as in effect from time to time in the United States of America. Governmental Authority means (a) the government of (i) the United States of America or any State or other political subdivision thereof, or (ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. Guaranty means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing (whether by reason of being a general partner of a partnership or otherwise) any Indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such Indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of any other Person to make payment of the Indebtedness or obligation; or (d) otherwise to assure the owner of such Indebtedness or obligation against loss in respect thereof. In any computation of the Indebtedness or other liabilities of the obligor under any Guaranty, the Indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. holder means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section13.1. Indebtedness with respect to any Person means, at any time, without duplication, (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily Redeemable Preferred Stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (f) Swaps of such Person; and (g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. Institutional Investor means (a)any original purchaser of a Note, (b)any holder of a Note holding more than 10% of the aggregate principal amount of the Notes then outstanding, and (c)any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer holding Notes other than in trading accounts, or any other similar financial institution or entity, regardless of legal form. Interest Charges means, with respect to any period, the sum (without duplication) of the following (in each case, eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP): (a)all interest in respect of Debt of the Company and its Subsidiaries (including imputed interest on Capital Lease Obligations) to the extent deducted in determining Consolidated Net Income for such period, together with all interest capitalized or deferred during such period and not deducted in determining Consolidated Net Income for such period, and (b)all debt discount and expense amortized or required to be amortized in the determination of Consolidated Net Income for such period. Lease Rentals means, with respect to any period, the sum of the minimum amount of rental and other obligations required to be paid during such period by the Company or any Subsidiary as lessee under all leases of real or personal property (other than (i)any leases with annual rentals that do not exceed $10,000 in the case of any single lease and $100,000 in the aggregate for all such leases excluded pursuant to this clause (i), and (ii) Capital Leases), excluding any amounts required to be paid by the lessee (whether or not therein designated as rental or additional rental) (a)which are on account of maintenance and repairs, insurance, taxes, assessments, water rates and similar charges, or (b)which are based on profits, revenues or sales realized by the lessee from the leased property or otherwise based on the performance of the lessee. Lien means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). Make-Whole Amount is defined in Section8.6. Material means material in relation to the business, operations, affairs, financial condition, assets, or properties of the Company and its Subsidiaries taken as a whole. Material Adverse Effect means a material adverse effect on (a)the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole, or (b)the ability of the Company to perform its obligations under this Agreement and the Notes, or (c)the validity or enforceability of this Agreement or the Notes. Memorandum is defined in Section5.3. Multiemployer Plan means any Plan that is a multiemployer plan (as such term is defined in section4001(a)(3) of ERISA). Net Proceeds Amount means, with respect to any Transfer of any Property by any Person, an amount equal to the difference of (a) the aggregate amount of the consideration (valued at the Fair Market Value of such consideration at the time of the consummation of such Transfer) received by such Person in respect of such Transfer, minus (b) all ordinary and reasonable out-of-pocket costs and expenses actually incurred by such Person in connection with such Transfer. Notes is defined in Section1. Officers Certificate means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate. PBGC means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. Person means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. Plan means an employee benefit plan (as defined in section3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. Preferred Stock means, in respect of any corporation, shares of the capital stock of such corporation that are entitled to preference or priority over any other shares of the capital stock of such corporation in respect of payment of dividends or distribution of assets upon liquidation. Principal Subsidiary means any Subsidiary for which either (i)total assets equal or exceed 30% of Consolidated Assets or (ii)operating revenues for the immediately preceding four fiscal quarters equal or exceed 30% of Consolidated Operating Revenues for such period. property or properties means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate. Property Reinvestment Application means, with respect to any Transfer of property, the satisfaction of each of the following conditions: (a) the application within 180days of such Transfer (other than in a Debenture Indenture Application) of an amount equal to the Net Proceeds Amount with respect to such Transfer to the acquisition by the Subsidiary of the Company making such Transfer, Elizabethtown Water Company or a Wholly-Owned Subsidiary of utility property of such Subsidiary to be used in the ordinary course of business of such Subsidiary and which has a Fair Market Value (after deduction for any Liens attributable thereto) at least equal to the Disposition Value of the property sold; and (b) the Company shall have delivered a certificate of a Responsible Officer of the Company to each holder of a Note referring to Section10.7 and identifying the property that was the subject of such Transfer if such Transfer shall have resulted in a Net Proceeds Amount greater than $500,000, the Disposition Value of such property, and the nature, terms, amount and application of the proceeds from the Transfer. QPAM Exemption means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor. Redeemable means, with respect to the capital stock of any Person, each share of such Persons capital stock that is: (a) redeemable, payable or required to be purchased or otherwise retired or extinguished, or convertible into Debt of such Person (i)at a fixed or determinable date, whether by operation of sinking fund or otherwise, (ii)at the option of any Person other than such Person, or (iii)upon the occurrence of a condition not solely within the control of such Person; or (b) convertible into other Redeemable capital stock. Required Holders means, at any time, the holders of at least 51% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates). Responsible Officer means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this agreement. Restricted Investments means all investments in cash in the common equity interests of Persons which are not primarily engaged in the generation, distribution or sale of electric energy or natural gas or the distribution or sale of water, or the furnishing of communications services, or water treatment and analysis services, or in the treatment of wastewater. Security shall have the same meaning as in Section 2(a)(1) of the Securities Act. Securities Act means the Securities Act of 1933, as amended from time to time. Senior Financial Officer means the chief financial officer, principal accounting officer, treasurer or controller of the Company. Subsidiary means, as to any Person, any corporation, association, limited liability company, or other business entity (a Business Entity) in which such Person and/or one or more of its Subsidiaries own directly or indirectly a majority of (a)the combined voting power of all classes of voting stock having general voting power under ordinary circumstances to elect a majority of the directors of such Business Entity, if it is a corporation, (b)the capital interest or profits interest of such Business Entity, if it is a partnership, joint venture or similar entity or (c)the beneficial interest of such Business Entity, if it is a trust, association or other unincorporated organization. Unless the context otherwise clearly requires, any reference to a Subsidiary is a reference to a Subsidiary of the Company. Subsidiary Stock means, with respect to any Person, the stock (or any options or warrants to purchase stock or other Securities exchangeable for or convertible into stock) of any Subsidiary of such Person. Swaps means, with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. Transfer means, with respect to any Person, any transaction in which such Person sells, conveys, transfers or leases (as lessor) any of its property, including, without limitation, Subsidiary Stock. For purposes of determining the application of the Net Proceeds Amount in respect of any Transfer, the Company may designate any Transfer as one or more separate Transfers each yielding a separate Net Proceeds Amount. In any such case, the Disposition Value of any property subject to each such separate Transfer shall be determined by ratably allocating the aggregate Disposition Value of all property subject to all such separate Transfers to each such separate Transfer on a proportionate basis. Utility Subsidiary means any Subsidiary of the Company that is generally subject to regulation by the New Jersey Board of Public Utilities or any other public service commission, public utility commission or similar regulatory authority in the United States of America or any State or other political subdivision thereof. Wholly-Owned Subsidiary means any Subsidiary of Elizabethtown Water Company all of the equity interests (except directors qualifying shares) and voting interests are owned by any one or more of Elizabethtown Water Company and Elizabethtown Water Companys other Wholly-Owned Subsidiaries. [FORM OF NOTE] THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW, AND MAY NOT BE TRANSFERRED IN VIOLATION THEREOF. ETOWN CORPORATION 6.79% SENIOR NOTE DUE DECEMBER15, 2007 No. R-[_______] [Date] $[__________] PPN 269242 B@1 FOR VALUE RECEIVED, the undersigned, ETOWN CORPORATION (herein called the Company), a corporation organized and existing under the laws of the State of New Jersey, hereby promises to pay to [_____________________] or registered assigns, the principal sum of [______________] DOLLARS on December15, 2007 with interest (computed on the basis of a 360-day year of twelve 30-day months) (a)on the unpaid balance thereof at the rate of 6.79% per annum from the date hereof, payable semiannually, on the fifteenth day of June and December in each year, commencing with the June15 or December15 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b)to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreement referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i)8.79% or (ii)2% over the rate of interest publicly announced by The Bank of New York from time to time in New York, New York as its base or prime rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America in Westfield, New Jersey at the principal office of the Company in such jurisdiction or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Notes (herein called the Notes) issued pursuant to the Note Purchase Agreement, dated as of December15, 1997 (as from time to time amended, the Note Purchase Agreement), between the Company and American General Life Insurance Company and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i)to have agreed to the confidentiality provisions set forth in Section20 of the Note Purchase Agreement and (ii)to have made the representation set forth in Section6.2 of the Note Purchase Agreement, provided that such holder may (in reliance upon information provided by the Company, which shall not be unreasonably withheld) make a representation to the effect that the purchase by such holder of any Note will not constitute a non-exempt prohibited transaction under Section406(a) of ERISA. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holders attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. ETOWN CORPORATION By [Title:] FORM OF OPINION OF COUNSEL TO THE COMPANY Each closing opinion of Walter M. Braswell, Esq., counsel for the Company, which is called for by Section4.4 of the Note Purchase Agreement, shall be dated the date of the respective Closing and addressed to you, shall be satisfactory in scope and form to you and shall be to the effect that: 1. The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of New Jersey, has the corporate power and the corporate authority to execute and perform the Note Purchase Agreement and to issue the Notes and has the full corporate power and the corporate authority to conduct the activities in which it is now engaged and is duly licensed or qualified and is in good standing as a foreign corporation in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business transacted by it makes such licensing or qualification necessary. 2. Each Subsidiary of the Company is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is duly licensed or qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business transacted by it makes such licensing or qualification necessary and all of the issued and outstanding shares of capital stock of each such Subsidiary have been duly issued, are fully paid and nonassessable and are owned by the Company, by one or more Subsidiaries, or by the Company and one or more Subsidiaries. 3. The Note Purchase Agreement has been duly authorized by all necessary corporate action on the part of the Company, has been duly executed and delivered by the Company and constitutes valid contract of the Company. 4. The Notes have been duly authorized by all necessary corporate action on the part of the Company, have been duly executed and delivered by the Company and constitute valid obligations of the Company. 5. No approval, consent or withholding of objection on the part of, or filing, registration or qualification with, any New Jersey governmental body (including, without limitation, the New Jersey Board of Public Utilities), is necessary in connection with the execution, delivery and performance of the Note Purchase Agreement or the Notes. 6. The issuance and sale of the Notes and the execution, delivery and performance by the Company of the Note Purchase Agreement do not conflict with any New Jersey law or any order of any New Jersey court or governmental authority or agency applicable to or binding on the Company, or conflict with or result in any breach of any of the provisions of or constitute a default under or result in the creation or imposition of any Lien upon any of the property of the Company pursuant to the provisions of the Certificate of Incorporation or By-laws of the Company or any agreement or other instrument known to such counsel to which the Company is a party or by which the Company may be bound. 7. There is no litigation pending or, to the best knowledge of such counsel, threatened which in such counsels opinion could reasonably be expected to have a materially adverse effect on the Companys business or assets, or which would question the validity of the Note Purchase Agreement or the Notes or impair the ability of the Company to issue and deliver the Notes or to comply with the provisions of the Note Purchase Agreement. The opinion of Walter M. Braswell, Esq. shall cover such other matters relating to the sale of the Notes as you may reasonably request. With respect to matters of fact on which such opinion is based, such counsel shall be entitled to rely on appropriate certificates of public officials and officers of the Company. FORM OF OPINION OF SPECIAL NEW YORK COUNSEL FOR THE COMPANY Each closing opinion of Winthrop, Stimson, Putnam & Roberts, special New York counsel for the Company, which is called for by Section4.4 of the Note Purchase Agreement, shall be dated the date of the respective Closing and addressed to you, shall be satisfactory in scope and form to you and shall be to the effect that: 1. The Note Purchase Agreement constitutes the legal and binding contract of the Company, enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance or similar laws affecting creditors rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 2. The Notes constitute the legal and binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent conveyance or similar laws affecting creditors rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 3. No approval, consent or withholding of objection on the part of, or filing, registration or qualification with, any governmental body, Federal, state or local (including, without limitation, the New Jersey Board of Public Utilities), is necessary in connection with the execution, delivery and performance of the Note Purchase Agreement or the Notes. 4. The issuance and sale of the Notes and the execution, delivery and performance by the Company of the Note Purchase Agreement do not conflict with any law or any order of any court or governmental authority or agency applicable to or binding on the Company, or conflict with or result in any breach of any of the provisions of or constitute a default under or result in the creation or imposition of any Lien upon any of the property of the Company pursuant to the provisions of the Certificate of Incorporation or By-laws of the Company or any agreement or other instrument known to such counsel to which the Company is a party or by which the Company may be bound. 5. The issuance, sale and delivery of the Notes under the circumstances contemplated by the Note Purchase Agreement do not, under existing law, require the registration of the Notes under the Securities Act of 1933, as amended, or the qualification of an indenture under the Trust Indenture Act of 1939, as amended. 6. The issuance of the Notes and the use of the proceeds of the sale of the Notes in accordance with the provisions of and contemplated by the Note Purchase Agreement do not violate or conflict with Regulations G, T or X of the Board of Governors of the Federal Reserve System. 7. The Company is not an investment company, or a company controlled by an investment company, under the Investment Company Act of 1940, as amended. The opinion of Winthrop, Stimson, Putnam & Roberts shall cover such other matters relating to the sale of the Notes as you may reasonably request. With respect to matters of fact on which such opinion is based, such counsel shall be entitled to rely on appropriate certificates of public officials and officers of the Company. FORM OF OPINION OF SPECIAL COUNSEL TO THE PURCHASERS _________________, 199__ American General Life Insurance Company Houston, Texas Re: $12,000,000 6.79% Senior Notes Due December15, 2007 of ETOWN CORPORATION Ladies and Gentlemen: We have acted as your special counsel in connection with your purchase on the date hereof of $[__________] aggregate principal amount of the 6.79% Senior Notes due December15, 2007 (the Notes) of Etown Corporation, a New Jersey corporation (the Company), issued under and pursuant to the Note Purchase Agreement as of December15, 1997 (the Note Purchase Agreement), between the Company and you. In that connection, we have examined the following: (a) The Note Purchase Agreement; (b) A copy of the Certificate of Incorporation of the Company and all amendments thereto certified by the Secretary of State of the State of New Jersey and the Certificate of the Secretary of State of the State of New Jersey evidencing that the Company is in good standing in such state (the Good Standing Certificate); (c) A copy of the By-laws of the Company, as amended to the date hereof, and a copy of the resolutions adopted by the Board of Directors of the Company with respect to the authorization of the Note Purchase Agreement, the issuance, sale and delivery of the Notes and related matters, each as certified by the Secretary of the Company; (d) The opinion of Walter M. Braswell, Esq., counsel for the Company, dated the date hereof and delivered responsive to Section4.4(a) of the Note Purchase Agreement, and the opinion of Winthrop, Stimson, Putnam & Roberts, special New York counsel to the Company, dated the date hereof and delivered responsive to Section 4.4(b) of the Note Purchase Agreement; (e) The Notes delivered on the date hereof; (f) Such certificates of officers of the Company and of public officials as we have deemed necessary to give the opinions hereinafter expressed; and (g) Such other documents and matters of law as we have deemed necessary to give the opinions hereinafter expressed. We believe that each opinion referred to in clause (d) above is satisfactory in scope and form and that you are justified in relying thereon. Our opinion as to matters referred to in paragraph1 below is based solely upon an examination of the Certificate of Incorporation, the By-laws and the Good Standing Certificate of the Company and the Business Corporation Act of the State of New Jersey. We have also relied, as to certain factual matters, upon appropriate certificates of public officials and officers of the Company and upon representations of the Company and you delivered in connection with the issuance and sale of the Notes. Based upon the foregoing, we are of the opinion that: 1. The Company is a corporation, validly existing and in good standing under the laws of the State of New Jersey and has the corporate power and the corporate authority to execute and deliver the Note Purchase Agreement and to issue the Notes. 2. The Note Purchase Agreement has been duly authorized by all necessary corporate action on the part of the Company, has been duly executed and delivered by the Company and constitutes the legal, valid and binding contract of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 3. The Notes have been duly authorized by all necessary corporate action on the part of the Company, and the Notes being delivered on the date hereof have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 4. The issuance, sale and delivery of the Notes under the circumstances contemplated by the Note Purchase Agreement do not, under existing law, require the registration of the Notes under the Securities Act of 1933, as amended, or the qualification of an indenture under the Trust Indenture Act of 1939, as amended. Our opinion is limited to the laws of the State of New York, the Business Corporation Act of the State of New Jersey and the Federal laws of the United States and we express no opinion on the laws of any other jurisdiction. Respectfully submitted, Model Form No. 1 Version of September13, 1994 Model Form No. 1 Version of September13, 1994 Draft of December 19, 1997 1463181 - -6- - -5- - -2- Etown Corporation Note Purchase Agreement Etown Corporation Note Purchase Agreement - -38- - -39- - -1- - -41- SCHEDULEA (to Note Purchase Agreement) B-54 B-53 SCHEDULEB (to Note Purchase Agreement) E-1-56 E-1-1 EXHIBIT1 (to Note Purchase Agreement) E-4.4(a)-58 E-4.4(a)-1 EXHIBIT4.4(a) (to Note Purchase Agreement) E-4.4(b)-60 E-4.4(b)-1 EXHIBIT4.4(b) (to Note Purchase Agreement) E-4.4(c)-64 E-4.4(c)-63 EXHIBIT4.4(c) (to Note Purchase Agreement) EX-10 3 E'TOWN CORPORATION EXHIBIT 10(K) EMPLOYMENT AGREEMENT Agreement made this 15th day of May, 1997 between E'town Corporation (the "Corporation"), and Anne Evans Estabrook (the "Executive"). WHEREAS, the Corporation desires to employ the Executive as the Chairman of the Corporation's Board of Directors, and the Executive desires to accept employment with the Corporation, but only on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Corporation and the Executive hereby agree as follows: 1. The Corporation shall employ the Executive, and the Executive shall serve the Corporation, for the period beginning May 15, 1997 and ending on the earliest to occur of (i) a date which may be mutually agreed between the Corporation and the Executive, (ii) any date on which the Executive resigns her position, and (iii) any date on which the Executive no longer stands for re-election as a director. 2. The Executive shall serve the Corporation as Chairman of the Company's Board of Directors (the "Board"). During the term of this Agreement, the Executive (a) shall attend and preside at all regular and special meetings of the Board, (b) serve as a non-voting ex-officio member of all committees of the Board, (c) shall serve as a member of the Executive Management Committee of the Corporation, (d) shall advise the President of the Corporation regarding strategic and policy matters facing the Corporation, (e) shall promote the interests of the Corporation with its various external constituencies, such as investors, analysts, and State and community leaders, and (f) shall perform such other duties and exercise such powers as may be from time to time be assigned to or vested in her by the Board. 3. During the term of this agreement, the Executive shall be paid by Elizabethtown Water Company and a portion of her salary will be billed to the Corporation based upon an allocation formula. 4. Unless terminated in accordance with the following provisions of this paragraph 4, the Corporation shall continue to employ the Executive and the Executive shall continue to work for the Corporation, during the term of this Agreement. 1 a. This Agreement shall terminate automatically upon the death of the Executive. b. The Corporation may terminate the Executives employment if the Executive suffers from a physical or mental disability to an extent that renders it impracticable for the Executive to continue performing her duties hereunder. The Executive shall be deemed to be so disabled if (i) a physician selected by the Corporation advises the Corporation that the Executive's physical or mental condition will render the Executive unable to perform her duties for a period exceeding three consecutive months, or (ii) due to a physical or mental condition, the Executive has not substantially performed her duties hereunder for a period of three consecutive months. c. The Corporation may terminate the Executive's employment at any time for cause; cause shall mean (i) a default or other breach by the Executive of her obligations under this Agreement, (ii) failure by the Executive diligently and competently to perform her duties under this Agreement, or (iii) misconduct, dishonesty, or other act by the Executive detrimental to the good will of the Corporation or damaging to the Corporation's relationships with its customers, suppliers or employees. d. Upon termination pursuant to a, b or c above, the Corporation shall pay the Executive or her estate any salary earned and unpaid to the date of termination. 5. This Agreement constitutes the entire agreement between the parties hereto with respect to the Executive's employment by the Corporation, and supersedes and is in full substitution for any and all prior understandings or agreements with respect to the Executive's employment. 6. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. 7. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Corporation (except to an affiliate) or by the Executive. 8. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey. 9. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 2 IN WITNESS WHEREOF, the Corporation and the Executive have executed this Agreement as of the date first written above. E'TOWN CORPORATION By: /s/ Andrew M. Chapman ______________________________ Andrew M. Chapman, President /s/ Anne Evans Estabrook ______________________________ Anne Evans Estabrook 3 ELIZABETHTOWN WATER COMPANY EMPLOYMENT AGREEMENT Agreement made this 15th day of May, 1997 between Elizabethtown Water Company (the "Company"), and Anne Evans Estabrook (the "Executive"). WHEREAS, the Company desires to employ the Executive as the Chairman of the Compan's Board of Directors, and the Executive desires to accept employment with the Company, but only on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereby agree as follows: 1. The Company shall employ the Executive, and the Executive shall serve the Company, for the period beginning May 15, 1997 and ending on the earliest to occur of (i) a date which may be mutually agreed between the Company and the Executive, (ii) any date on which the Executive resigns her position, and (iii) any date on which the Executive no longer stands for re-election as a director. 2. The Executive shall serve the Company as Chairman of the Company's Board of Directors (the "Board"). During the term of this Agreement, the Executive (a) shall attend and preside at all regular and special meetings of the Board, (b) serve as a non-voting ex-officio member of all committees of the Board, (c) shall serve as a member of the Executive Management Committee of the Company, (d) shall advise the President of the Company regarding strategic and policy matters facing the Company, (e) shall promote the interests of the Company with its various external constituencies, such as investors, analysts, and State and community leaders, and (f) shall perform such other duties and exercise such powers as may be from time to time be assigned to or vested in her by the Board. 3. a. During the term of this Agreement, the Company shall pay the Executive a salary that shall be set annually be the Board. The annual salary for the twelve-month period beginning May 15, 1997 shall be $125,000, $25,000 of which shall be payable in Restricted Stock of E'town Corporation (based on the closing price as of May 15, 1997) issued under the E'town Corporation 1990 Performance Stock Program, and the remainder of which shall be payable periodically in accordance with the Company's then prevailing payroll practices. The restriction period for the Restricted Stock payable hereunder shall be three years. b. The Executive shall be entitled to participate in E'town Corporation's 1987 Stock Option Plan and shall be entitled to such expense accounts, perquisites of office, fringe benefits, continued participation in the Company-sponsored plans, recognizing her years of service as an officer of E'town Corporation, and other incidences of employment as the Company generally provides to its employees and officers having rank and seniority at the Company comparable to the Executive, but specifically excluding benefits under the SERP. 1 4. Unless terminated in accordance with the following provisions of this paragraph 4, the Company shall continue to employ the Executive and the Executive shall continue to work for the Company, during the term of this Agreement. a. This Agreement shall terminate automatically upon the death of the Executive. b. The Company may terminate the Executive's employment if the Executive suffers from a physical or mental disability to an extent that renders it impracticable for the Executive to continue performing her duties hereunder. The Executive shall be deemed to be so disabled if (i) a physician selected by the Company advises the Company that the Executive's physical or mental condition will render the Executive unable to perform her duties for a period exceeding three consecutive months, or (ii) due to a physical or mental condition, the Executive has not substantially performed her duties hereunder for a period of three consecutive months. c. The Company may terminate the Executive's employment at any time for cause; cause shall mean (i) a default or other breach by the Executive of her obligations under this Agreement, (ii) failure by the Executive diligently and competently to perform her duties under this Agreement, or (iii) misconduct, dishonesty, or other act by the Executive detrimental to the good will of the Company or damaging to the Company's relationships with its customers, suppliers or employees. d. Upon termination pursuant to a, b or c above, the Company shall pay the Executive or her estate any salary earned and unpaid to the date of termination. 5. This Agreement constitutes the entire agreement between the parties hereto with respect to the Executive's employment by the Company, and supersedes and is in full substitution for any and all prior understandings or agreements with respect to the Executive's employment. 6. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. 7. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Company (except to an affiliate) or by the Executive. 8. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey. 2 9. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. ELIZABETHTOWN WATER COMPANY By: /s/ Andrew M. Chapman ____________________________ Andrew M. Chapman, President /s/ Anne Evans Estabrook ____________________________ Anne Evans Estabrook 3 EX-10 4 CHANGE IN CONTROL AGREEMENT EXHIBIT 10(L) THIS AGREEMENT dated and entered into effective as of the 15th day of May, 1997, by and between E'town Corporation, a New Jersey corporation (together with its affiliated companies, the "Company"), and Anne Evans Estabrook,(the "Executive"). W I T N E S S E T H: WHEREAS, should the Company receive a proposal from or engage in discussions with a third person concerning a possible business combination with or the acquisition of a substantial portion of voting securities of the Company, the Board of Directors of the Company (the "Board") has deemed it imperative that it and the Company be able to rely on the Executive to continue to serve in her position and that the Board and the Company be able to rely upon her advice as being in the best interests of the Company and its shareholders without concern that the Executive might be distracted by the personal uncertainties and risks that such a proposal or discussions might otherwise create; and WHEREAS, the Company desires to reward the Executive for her valuable, dedicated service to the Company should her service be terminated under circumstances hereinafter described; and WHEREAS, the Board therefore considers it in the best interests of the Company and its shareholders for the Company to enter into this Change in Control Agreement with the Executive; NOW, THEREFORE, to assure the Company of the Executive's continued dedication and the availability of her advice and counsel in the event of any such proposal, to induce the Executive to remain in the employ of the Company and to reward the Executive for her valuable, dedicated service to the Company should her service be terminated under circumstances hereinafter described, and for other good and valuable consideration, the receipt and adequacy whereof each party acknowledges, the Company and the Executive agree as follows: 1 1. OPERATION, EFFECTIVE DATE, AND TERM OF AGREEMENT. (a) This Agreement shall commence on the date hereof and continue in effect through December 31, 1997; provided, however, that commencing on January 1, 1998 and each succeeding January 1 thereafter, the term of this Agreement shall be extended automatically for one additional year unless not later than September 30 of the preceding year the Company shall have given notice to the Executive that it does not wish to extend this Agreement. (b) This Agreement is effective and binding on both parties hereto as of the date hereof. Notwithstanding its present effectiveness, the provisions of paragraphs 3 and 4 of this Agreement shall become operative only when, as and if there has been a "Change in Control of the Company" (as hereinafter defined). For purposes of this Agreement, a "Change in Control of the Company" shall be deemed to have occurred if (X) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a person engaging in a transaction of the type described in clause (Z) of this subsection but which does not constitute a change in control under such clause, hereafter becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding securities; or (Y) during any period of twenty-four consecutive months during the term of this Agreement, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clauses (X) or (Z) of this subsection) whose election by the Board, or nomination for election by the Company shareholders, was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Members"), cease for any reason to constitute a majority thereof; or 2 (Z) the shareholders of the Company approve or, if no shareholder approval is required or obtained, the Company completes a merger, consolidation or similar transaction of the Company with or into any other corporation, or a binding share exchange involving the Company's securities, other than any such transaction which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such transaction, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. 2. EMPLOYMENT OF EXECUTIVE. Nothing herein shall affect any right which the Executive or the Company may otherwise have to terminate the Executive's employment by the Company at any time in any lawful manner, subject always to the Company's providing to the Executive the payments and benefits specified in paragraphs 3 and 4 of this Agreement to the extent hereinbelow provided. In the event any person commences a tender or exchange offer, circulates a proxy statement to the Company's shareholders or takes other steps designed to effect a Change in Control of the Company as defined in paragraph 1 of this Agreement, the Executive agrees that she will not voluntarily leave the employ of the Company and will continue to perform her regular duties and to render the services provided by the Executive to the Company until such person has abandoned or terminated her efforts to effect a Change in Control of the Company or until a Change in Control of the Company has occurred. Should the Executive voluntarily terminate her employment before any such effort to effect a Change in Control of the Company has commenced, or after any such effort has been abandoned or terminated without effecting a Change in Control of the Company and no such effort is then in process, this Agreement shall automatically terminate and be of no further force or effect. 3 3. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) If any of the events described in paragraph 1 hereof constituting a Change in Control of the Company shall have occurred, the Executive shall be entitled to the benefits provided in paragraph 4 hereof upon the subsequent termination of her employment within the applicable period set forth in paragraph 4 hereof following such Change in Control of the Company unless such termination is (i) due to the Executive's death; or (ii) by the Company by reason of the Executive's Disability (as hereinafter defined) or for Cause (as hereinafter defined); or (iii) by the Executive other than for Good Reason (as hereinafter defined). (b) If following a Change in Control of the Company the Executive's employment is terminated by reason of her death or Disability, the Executive shall be entitled to death or long-term disability benefits, as the case may be, from the Company no less favorable than the maximum benefits to which she would have been entitled had the death or termination for Disability occurred at any time during the six month period prior to the Change in Control of the Company. If prior to any such termination for Disability, the Executive fails to perform her duties as a result of incapacity due to physical or mental illness, she shall continue to receive her Salary (as hereinafter defined) less any benefits as may be available to her under the Company's disability plans until her employment is terminated for Disability. (c) If the Executive's employment shall be terminated by the Company for Cause or by the Executive other than for Good Reason, the Company shall pay to the Executive her full Salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) For purposes of this Agreement: (i) "Disability" shall mean the Executive's incapacity due to physical or mental illness such that the Executive shall have become qualified to receive benefits under the Company's long-term disability plans or any equivalent coverage required to be provided to the Executive pursuant to any other plan or agreement, whichever is applicable. (ii) "Cause" shall mean: (A) the conviction of the Executive for a felony, or the willful commission by the Executive of a criminal or other act that in the judgment of the Board causes or will probably cause substantial economic damage to the Company or substantial injury to the business reputation of the Company; (B) the commission by the Executive of an act of fraud in the performance of such Executive's duties on behalf of the Company that causes or will probably cause economic damage to the Company; or 4 (C) the continuing willful failure of the Executive to perform her duties, as such duties were performed by the Executive prior to the day of the Change of Control of the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the Executive by the Compensation Committee of the Board. For purposes of this subparagraph (d)(ii), no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by her not in good faith and without reasonable belief that her action or omission was in the best interests of the Company. (iii) "Good Reason" shall mean: (A) The assignment by the Company to the Executive of duties without the Executive's express written consent, which (i) are materially different or require travel significantly more time consuming or extensive than the Executive's duties or business travel obligations immediately prior to the Change in Control of the Company, or (ii) result in either a significant reduction in the Executive's authority and responsibility as a senior corporate executive of the Company when compared to the highest level of authority and responsibility assigned to the Executive at any time during the six (6) month period prior to the Change in Control of the Company, or, (iii) without the Executive's express written consent, the removal of the Executive from, or any failure to reappoint or reelect the Executive to, the highest title held since the date six (6) months before the Change in Control of the Company, except in connection with a termination of the Executive's employment by the Company for Cause, or by reason of the Executive' death or Disability; (B) A reduction by the Company of the Executive's Salary, or the failure to grant increases in the Executive's Salary on a basis at least substantially comparable to those granted to other executives generally of the Company of comparable title, salary and performance ratings, made in good faith; 5 (C) The relocation of the Company's principal executive offices to a location outside the State of New Jersey, or the Company's requiring the Executive to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations immediately prior to the Change in Control of the Company, or in the event of any relocation of the Executive with the Executive's express written consent, the failure by the Company to pay (or reimburse the Executive for) all reasonable moving expenses by the Executive relating to a change of principal residence in connection with such relocation and to indemnify the Executive against any loss realized in the sale of the Executive's principal residence in connection with any such change of residence, all to the effect that the Executive shall incur no loss upon such sale on an after tax basis; (D) The failure by the Company to continue to provide the Executive with substantially the same welfare benefits (which for purposes of this Agreement shall mean benefits under all welfare plans as that term is defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended), and perquisites, including participation on a comparable basis in any plan similar to the plan in which the Executive participated in immediately prior to such Change in Control of the Company, or with a package of welfare benefits and perquisites, that is substantially comparable in all material respects to such welfare benefits and perquisites; or (E) The failure of the Company to obtain the express written assumption of and agreement to perform this Agreement by any successor as contemplated in subparagraph 5(d) hereof. (iv) "Dispute" shall mean (i) in the case of termination of employment of the Executive with the Company by the Company for Disability or Cause, that the Executive challenges the existence of Disability or Cause and (ii) in the case of termination of employment of the Executive with the Company by the Executive for Good Reason, that the Company challenges the existence of Good Reason. 6 (v) "Salary" shall mean the Executive's average annual compensation reported on United States Internal Revenue Service Form W-2 ("Form W-2"). (vi) "Incentive Compensation" in any year shall mean the amount the Executive has elected to defer in such year and the amount accrued, if any, under any plan, arrangement or contract providing for the deferral of compensation between the Company and the Executive which is not reported on Form W-2, including, without limitation, any employer contributions by the Company on behalf of the Executive in accordance with the terms and conditions of any 401(k) plan in which executives of the Company of comparable title and salary participate. (e) Any purported termination of employment by the Company by reason of the Executive's Disability or for Cause, or by the Executive for Good Reason shall be communicated by written Notice of Termination (as hereinafter defined) to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice given by the Executive or the Company, as the case may be, which shall indicate the specific basis for termination and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for determination of any payments due under this Agreement. The Executive shall not be entitled to give a Notice of Termination that the Executive is terminating her employment with the Company for Good Reason more than six (6) months following the occurrence of the event alleged to constitute Good Reason. The Executive's actual employment by the Company shall cease on the Date of Termination (as hereinafter defined) specified in the Notice of Termination, even though such Date of Termination for all other purposes of this Agreement may be extended in the manner contemplated in the second sentence of Paragraph 3(f). (f) For purposes of this Agreement, the "Date of Termination" shall mean the date specified in the Notice of Termination, which shall be not more than ninety (90) days after such Notice of Termination is given, as such date may be modified pursuant to the next sentence. If within thirty (30) days after any Notice of Termination is given, the party who receives such Notice of Termination notifies the other party that a Dispute exists, the Date of Termination shall be the date on which the Dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of 7 Dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such Dispute with reasonable diligence and provided further that pending the resolution of any such Dispute, the Company shall continue to pay the Executive the same Salary and to provide the Executive with the same or substantially comparable welfare benefits and perquisites that the Executive was paid and provided immediately prior to the Change in Control of the Company. Should a Dispute ultimately be determined in favor of the Company, then all sums paid by the Company to the Executive from the date of termination specified in the Notice of Termination until final resolution of the Dispute pursuant to this paragraph shall be repaid promptly by the Executive to the Company, with interest at the average prime rate generally prevailing from time to time among major New York City banks and all options, rights and stock awards granted to the Executive during such period shall be cancelled or returned to the Company. The Executive shall not be obligated to pay to the Company the cost of providing the Executive with welfare benefits and perquisites for such period unless the final judgment, order or decree of a court or other body resolving the Dispute determines that the Executive acted in bad faith in giving a notice of Dispute. Should a Dispute ultimately be determined in favor of the Executive, then the Executive shall be entitled to retain all sums paid to the Executive under this paragraph 3(f) pending resolution of the Dispute and shall be entitled to receive, in addition, the payments and other benefits provided for in paragraph 4 hereof to the extent not previously paid hereunder. 4. PAYMENTS UPON TERMINATION. If within three (3) years after a Change in Control of the Company, the Company shall terminate the Executive's employment other than by reason of the Executive's death, Disability or for Cause or if the Executive shall terminate her employment for Good Reason then, (a) The Company will continue to pay to the Executive, for a period of thirty (30) months following the Date of Termination, as compensation for services rendered by the Executive on or before the Executive's Date of Termination, the Executive's Salary and Incentive Compensation (subject to any applicable payroll taxes or other taxes required to be withheld computed at the rate for supplemental payments) at the highest rate in effect during the twenty-four (24) month period ending on the day on which the Change in Control of the Company occurred; and (b) For a period of thirty (30) months following the Date of Termination, the Company shall provide, at the Company's expense, the Executive and the Executive's spouse and children with full benefits under any employee benefit plan or arrangement in which the Executive participated immediately prior to the day on which the Change in Control of the Company occurred, including, without limitation, any hospital, medical and dental insurance with substantially the same coverage and benefits as were provided to the Executive immediately prior to the day on which the Change in Control of the Company occurred; and 8 (c) The Company will pay on the date of Termination to the Executive as compensation for services rendered on or before the Executive's Date of Termination, in addition to the amounts set forth in paragraph 4(a) above, a sum equal to all Incentive Compensation and other incentive awards due to the Executive immediately prior to the day on which the Change in Control of the Company occurred but not yet paid; and (d) For a period of thirty (30) months following the Date of Termination, the Company shall provide to the Executive, at the Company's expense, the automobile provided by the Company to the Executive immediately prior to the day on which the Change in Control of the Company occurred (or a comparable automobile) and the Company shall reimburse the Executive any and all expense incurred by the Executive in connection with the use of such automobile during such thirty month period to the extent that the Company reimburses generally other executives of comparable title, salary and performance ratings; and (e) Any restricted Stock in the Executive's account as an officer of the Company which is not vested in the Executive as of the Change in Control of the Company shall become vested, and all such restrictions thereon (including, but not limited to, any restrictions on the transferability of such Stock), and any restrictions on any other restricted stock awarded to the Executive through any plan or arrangement of the Company on or before the Change in Control of the Company, shall become null and void and of no further force and effect, immediately upon the Change in Control of the Company; and (f) In event that any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company) (collectively with the payments and benefits hereunder, "Total Payments") would not be deductible in whole or in part by the Company as the result of Section 280G of the Internal Revenue Code of 1986, as amended and the regulations thereunder (the "Code"), the payments and benefits hereunder shall be reduced until no portion of the Total Payments is not deductible by reducing to the extent necessary the payment under paragraph 3(a) hereof. For purposes of this limitation (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the date of payment shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel selected by the Executive and acceptable to the Company's independent auditors, is not likely to constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. 9 5. GENERAL. (a) The Executive shall retain in confidence any proprietary or other confidential information known to her concerning the Company and its business so long as such information is not publicly disclosed and disclosure is not required by an order of any governmental body or court. Notwithstanding anything to the contrary contained herein, this paragraph 5(a) shall survive any expiration or termination of this Agreement for any reason whatsoever. (b) Subject to paragraph 5(f) below, the Company's obligation to pay the Executive the compensation and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against the Executive or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Except as expressly provided herein, the Company waives all rights which it may now have or may hereafter have conferred upon it, by statute or otherwise, to terminate, cancel or rescind this Agreement in whole or in part. Except as provided in paragraph 5(f) herein, each and every payment made hereunder by the Company shall be final and the Company will not seek to recover for any reason all or any part of such payment from the Executive or any person entitled thereto. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by written agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 10 As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this paragraph 5 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (d) This Agreement shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Executive should die while any amounts would still be payable to the Executive hereunder if she had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there be no such designee, to the Executive's estate. The obligations of the Executive hereunder shall not be assignable by the Executive. (e) Nothing in this Agreement shall be deemed to entitle the Executive to continued employment with the Company and the rights of the Company to terminate the employment of the Executive shall continue as fully as though this Agreement were not in effect. (f) The Executive shall be required to mitigate the amount of any payment or other benefit provided for in this Agreement by seeking other employment of similar responsibility, salary and benefits and, upon any such employment of the Executive, all payments or other benefits provided for in this Agreement then or thereafter due to the Executive shall thereupon immediately cease and this Agreement shall be of no further force and effect. 6. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Anne Evans Estabrook xxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxx 11 If to the Company: E'town Corporation 600 South Avenue Westfield, New Jersey 07090 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 7. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing, signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No assurances or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. However, this Agreement is in addition to, and not in lieu of, any other plan providing for payments to or benefits for the Executive or any agreement now existing, or which hereafter may be entered into, between the Company and the Executive. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New Jersey. 12 8. VALIDITY. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. E'TOWN CORPORATION By: /S/ Andrew M. Chapman Name: Andrew M. Chapman Title: President EXECUTIVE /S/Anne Evans Estabrook ANNE EVANS ESTABROOK 13 EX-11 5 E'TOWN CORPORATION AND SUBSIDIARIES Exhibit 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (In Thousands Except Per Share Amounts) Year Ended December 31, 1997 1996 1995 --------------------------------- BASIC EARNINGS Income Before Preferred Stock Dividends of Subsidiary $ 20,073 $ 15,886 $16,109 Deduct: Preferred Stock Dividends (813) (813) (813) ----------------------------------- Net Income Available for Common Stock $ 19,260 $ 15,073 $15,296 =================================== SHARES Weighted Average Common Shares Outstanding 7,891 7,668 7,093 ----------------------------------- Basic Earnings Per Share of Common Stock $ 2.44 $ 1.96 $ 2.16 =================================== DILUTED EARNINGS Income Before Preferred Stock Dividends of Subsidiary $ 20,073 $ 15,886 $16,109 Deduct: Preferred Stock Dividends (813) (813) (813) Add: After Tax Interest Expense Applicable to 6 3/4% Convertible Subordinated Debentures 500 513 524 ----------------------------------- Adjusted Net Income $ 19,760 $ 15,586 $15,820 =================================== SHARES Weighted Average Number of Common Shares Outstanding 7,891 7,668 7,093 Shares Which Could Have Been Purchased With the Proceeds From Exercise of Stock Options 40 6 2 Assuming Conversion Of 6 3/4% Convertible Subordinated Debentures (a) 284 292 299 ----------------------------------- Weighted Average Number of Common Shares Outstanding as Adjusted 8,215 7,966 7,394 ----------------------------------- Diluted Earnings Per Share of Common Stock $ 2.41 $ 1.96 $ 2.14 =================================== (a) Convertible at $40 per share. EX-12 6 ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY Exhibit 12A(a) Computation of Ratio of Earnings to Fixed Charges (In Thousands Except Ratios) Year Ended December 31, 1997 1996 1995 ---------------------------------- EARNINGS: Income before preferred stock dividends $ 20,905 $ 16,755 $17,325 Federal income taxes 11,274 8,822 9,161 Interest charges 16,622 12,804 11,115 ----------------------------------- Earnings available to cover fixed charges 48,801 38,381 37,601 ----------------------------------- FIXED CHARGES: Interest on long-term debt 14,030 13,011 10,892 Other interest 2,382 2,640 2,344 Amortization of debt discount - net 376 361 324 ----------------------------------- Total fixed charges 16,788 16,012 13,560 ----------------------------------- Ratio of Earnings to Fixed Charges 2.91 2.40 2.77 =================================== Earnings to Fixed Charges represents the sum of Income Before Preferred Stock Dividends, Federal income taxes and Interest Charges (which is reduced by Allowance for Debt Funds Used During Construction), divided by Fixed Charges. Fixed Charges consist of interest on long and short-term debt (which is not reduced by Allowance for Debt Funds Used During Construction), and Amortization of debt discount. ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY Exhibit 12(b) Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends (In Thousands Except Ratios) Year Ended December 31, 1997 1996 1995 ---------------------------------- EARNINGS: Income before preferred stock dividends $ 20,905 $ 16,755 $ 17,325 Federal income taxes 11,274 8,822 9,161 Interest charges 16,622 12,804 11,115 ----------------------------------- Earnings available to cover fixed charges 48,801 38,381 37,601 ----------------------------------- FIXED CHARGES AND PREFERRED DIVIDENDS: Interest on long-term debt 14,030 13,011 10,892 Preferred dividend requirement (1) 1,251 1,241 1,243 Other interest 2,382 2,640 2,344 Amortization of debt discount - net 376 361 324 ----------------------------------- Total fixed charges 18,039 17,253 14,803 ----------------------------------- Ratio of Earnings to Fixed Charges and Preferred Dividends 2.71 2.22 2.54 =================================== (1) Preferred Dividend Requirement: Preferred dividends 813 813 813 Effective tax rate 35.04% 34.49% 34.59% ----------------------------------- Preferred dividend requirement $ 1,251 $ 1,241 $ 1,243 =================================== Earnings to Fixed Charges and Preferred Dividends represents the sum of Income Before Preferred Stock Dividends, Federal income taxes and Interest Charges (which is reduced by Allowance for Debt Funds Used During Construction), divided by Fixed Charges. Fixed Charges and Preferred Dividends consist of interest on long and short-term debt (which is not reduced by Allowance for Debt Funds Used During Construction), dividends on Preferred Stock on a pre-tax basis and Amortization of debt discount. EX-13 7 Portion of the 1997 Annual Report to Shareholders for the year ended December 31, 1997 which is incorporated by reference in this filing on Form 10-K. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS E'town Corporation (E'town or Corporation), a New Jersey holding company, is the parent company of Elizabethtown Water Company (Elizabethtown or Company), Edison Water Company (Edison) and E'town Properties, Inc. (Properties) and owner of a 65% interest in Applied Watershed Management, LLC (AWM). The Mount Holly Water Company (Mount Holly) is a wholly-owned subsidiary of Elizabethtown. The assets and operating results of Elizabethtown constitute the predominant portions of E'town's assets and operating results. Mount Holly and Edison each contributed about 3% of the Company's consolidated operating revenues for 1997. The following analysis sets forth significant events affecting the financial condition of E'town and Elizabethtown at December 31, 1997, and the results of operations for the years ended December 31, 1997 and 1996. LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures Program In 1997, capital expenditures were $30.9 million, primarily for water utility plant. For the three years ending December 31, 2000, capital and investment requirements for E'town are estimated to be $142.0 million, consisting of (i) expenditures for water utility plant ($112.7 million for Elizabethtown and $21.9 million for Mount Holly) and, (ii) investments in non-regulated water and wastewater operations including systems operated by E'town or its subsidiaries under privatization contracts ($7.4 million). See "Economic Outlook" for a discussion of privatization activities and the Applied wastewater Group (AWG) acquisition. These estimates do not include any amounts for the proposed Elizabeth contract or possible additional acquisition activities in the three-year period. Elizabethtown While Elizabethtow's projected capital outlays have dropped from recent years now that the Canal Road Water Treatment Plant (Plant) is completed, Elizabethtown's facilities will continue to be upgraded and expanded to handle customer growth. Elizabethtown's three-year capital program includes $62.0 million for routine projects (services, hydrants and main extensions not funded by developers) and $50.7 million for transmission system upgrades, a new operations center and other projects. Elizabethtown expects to file for rate relief periodically to ensure that such costs are adequately reflected in rates. (See Economic Outlook.) Mount Holly During the next three years, Mount Holly expects to spend $21.9 million, primarily for an additional supply source to comply with state regulations designed to prevent further depletion of a local aquifer. Mount Holly plans to file for rate relief to recover these costs, as well as to increase the rates of return realized by Mount Holly and, therefore, Mount Holly's contribution to E'town's earnings per share. 1 Mount Holly obtains all of its water from wells drilled into an aquifer, which has been subject to over-pumping. The State adopted legislation requiring all local purveyors, including Mount Holly, to obtain alternate supplies and reduce their withdrawals from the affected parts of the aquifer. Mount Holly designed a project to obtain water from outside the affected part of the aquifer for delivery into the Mount Holly system. Management believes that this project (the "Mansfield Project") is the most cost effective method for Mount Holly to comply with the state regulations. By September 1995, Mount Holly had obtained all New Jersey Department of Environmental Protection (DEP) approvals for the Mansfield Project and was ready to start construction when a regional purveyor appealed the granting of Mount Holly's permits. Under an August 1997 settlement among Mount Holly, the DEP and the regional purveyor, Mount Holly will purchase 1 million gallons per day from the regional purveyor for two years while the Mansfield Project is being constructed. Purchases began during March of 1998, after completion of an interconnection. Mount Holly is taking the steps necessary to recover in rates both the costs of purchased water and the Mansfield Project. First, Mount Holly filed a petition with the Board of Public Utilities (BPU) for a Purchased Water Adjustment Clause (PWAC) to recover the costs of purchased water through rates. The PWAC filing requests a 40.3% rate increase. Second, Mount Holly and the parties to Mount Holly's 1995 base rate case are participating before the BPU in a proceeding to reaffirm that the Mansfield Project is needed and is the most cost effective method for Mount Holly to comply with the state restrictions on diversions from the aquifer. In addition, Mount Holly will file a base rate case during the second quarter of 1998 to recover a portion of the costs of the Mansfield Project, estimated at $7.2 million, as well as $6.0 million in additions to utility plant since Mount Holly's base rates were last adjusted in January 1996. Finally, Mount Holly intends to file a base rate case in 1999 for the remaining costs of the Mansfield Project, estimated to amount to $11.3 million, to coincide with the completion of the project and the expiration of the agreement to purchase water from the other purveyor. Capital Resources During 1997, 'town financed 71.7% of its capital expenditures for Elizabethtown (including Mount Holly) and investments in the non-regulated operations (Edison and AWM) from internally generated funds (after payment of common stock dividends). The balance was financed with a combination of long-term debt, short-term borrowings under a revolving credit agreement, short-term borrowings under lines of credit, proceeds from capital contributions from 'town (funded by issuances of Common Stock under the Corporation's Dividend Reinvestment and Stock Purchase Plan) and long-term New Jersey Economic Development Authority (NJEDA) Bonds. 2 For the three-year period ending December 31, 2000, E'town estimates that 50.2% of its currently projected capital expenditures and investments are expected to be financed with internally generated funds (after payment of common stock dividends). The balance will be financed with a combination of proceeds from the sale of E'town common stock, long-term debt, proceeds of tax-exempt NJEDA bonds, long-term notes and short-term borrowings. Additional external financing may be required to finance the proposed Elizabeth contract, future acquisitions or investments in the three-year period. The NJEDA has granted preliminary approval for the financing of almost all of Elizabethtown's major projects during the next three years and the Mansfield Project. Elizabethtown expects to pursue tax-exempt financing to the extent that final allocations are granted by the NJEDA. Mount Holly has applied to the DEP State Revolving Fund Program for low interest funding (approximately 3% to 3.5%) for the Mansfield Project. Elizabethtown's senior debt is currently rated A3 and A by Moody's Investors Service and Standard & Poor's Ratings Group, respectively. In June 1997, Elizabethtown issued $50.0 million of tax-exempt Variable Rate Demand Notes through the NJEDA. The proceeds of the issue were used to repay amounts outstanding under the Company's revolving credit agreement, which expired in July 1997. RESULTS OF OPERATIONS Net Income for 1997 was $19.3 million or $2.44 per share on a basic basis as compared to $15.1 million or $1.96 per share for 1996. The increase in net income and earnings per share is attributable to the $21.8 million rate increase for the new Plant in October 1996, which was offset by the operating and financing costs of the Plant. Net income also increased $1.4 million, or $.17 per share, primarily due to variations in the weather, specifically the dry summer of 1997, as compared to the wet summer of 1996. Net Income for 1996 was $15.1 million or $1.96 per share on a basic basis as compared to $15.3 million or $2.16 per share for 1995. The most significant factor contributing to the decrease in net income was a reduction in revenues due to reduced outdoor water consumption in 1996, compared to 1995. In addition, an increase in the average number of shares outstanding contributed to the decrease in earnings per share of common stock. Operating Revenues increased $23.4 million or 21.2% in 1997 over the comparable 1996 amount. The increase is primarily comprised of $17.7 million from a rate increase for Elizabethtown, effective October 1996, $1.5 million from the operation of Edison Water Company (net of water purchased from Elizabethtown) and $3.1 million from increased water consumption. The increase in water consumption is primarily due to the dry summer of 1997. 3 Operating Revenues increased $2.0 million or 1.9% in 1996 over the comparable 1995 amount. The increase in total revenues was comprised of rate increases for Elizabethtown and Mount Holly of $3.9 million and $.5 million, respectively, which were offset by a decrease in water consumption due to unusually cool, wet summer weather in 1996. The reduction in water consumption accounted for a decrease in revenues of $2.4 million. Operation Expenses increased $3.2 million or 7.1% in 1997 over the comparable 1996 amount. An increase of $.9 million resulted from the operations of Edison Water Company, which was formed in July 1997. Increases resulting from variable costs associated with the increase in water consumption totaled $.3 million. Other increases included costs associated with Applied Watershed Management of $.5 million and labor costs of $.6 million. The remainder of the increase is attributable to various items, including operating costs for the Plant, information technology and other administrative costs. Operation Expenses increased $.7 million or 1.5% in 1996 over the comparable 1995 amount. Operation expenses decreased $.4 million for certain variable expenses associated with lower water consumption. The successful implementation of an energy conservation program in the second quarter of 1996 at the Raritan-Millstone Plant reduced energy costs by $.8 million. The success of various safety programs resulted in a decrease in workers' compensation premiums of $.3 million. These decreases were offset by increased labor costs of $1.6 million. Maintenance Expenses increased $.7 million or 12.7% in 1997 over the comparable 1996 amount. This increase is primarily attributable to costs associated with the maintenance of the Plant. The increase also includes $.4 million related to the costs of determining the most cost-effective method for disposing of byproducts (waste residuals) generated from the water treatment process at the Raritan-Millstone Plant. Maintenance Expenses increased $.1 million or .9% in 1996 over the comparable 1995 amount. The Company had begun to substantially realize the benefits of various preventive maintenance programs and operating efficiencies instituted in 1996 and prior years. Depreciation Expense increased $2.5 million or 25.3% in 1997 compared to 1996. The increase includes $2.1 million for the Plant and $.8 million for other utility plant additions. A decrease of $.6 million resulted from Elizabethtown no longer being required by the BPU to depreciate utility plant acquired through Contributions In Aid of Construction and Customers' Advances for Construction. This change was agreed to by the parties to Elizabethtown's last rate case for which an increase was effective in October 1996. 4 Depreciation Expense increased $1.1 million or 12.3% in 1996, as compared to 1995. The increase is due primarily to a higher level of depreciable plant in service and includes $.5 million of depreciation expense for the Plant for a portion of the year. Revenue Taxes increased $2.7 million or 19.8% in 1997 and $.2 million or 1.7% in 1996 due to the taxes on increases in operating revenues discussed above. Real Estate, Payroll and Other Taxes increased $.2 million or 6.8% in 1997 due to additional labor costs, as well as additional property taxes. These taxes increased $.1 million or 3.5% in 1996 due primarily to increased labor costs. Federal Income Taxes as a component of operating expenses increased $3.7 million or 54.4% over the comparable 1996 amount due to the changes in the components of taxable income discussed herein. Federal Income Taxes as a component of operating expenses decreased $.8 million or 10.8% in 1996 from the comparable 1995 amount due to the changes in the components of taxable income discussed herein. Other Income (Expense) decreased $2.2 million or 73.9% compared to the 1996 amount. A decrease in the equity component of Allowance for Funds Used During Construction (AFUDC) of $3.5 million resulted from no longer capitalizing the financing costs associated with the Plant as the facility was placed in service in October 1996. An increase of $.2 million for other miscellaneous items, as well as the offsetting federal income taxes associated with the Other Income (Expense), account for the remainder of the decrease. Other Income (Expense) increased $.7 million or 31.0% in 1996 compared to the 1995 amount. An increase in the equity component of AFUDC of $.7 million, primarily from the construction of the Plant, as well as a decrease from write-downs in 1995 of the carrying value of certain non-utility property, accounted for the overall increase. Total Interest Charges increased $4.0 million or 30.2% in 1997 over the comparable 1996 amount. The increase includes $3.1 million due to a reduction in capitalized interest as a result of the Plant being placed in service in October 1996. Interest expense also increased due to increased borrowings incurred to finance capital expenditures, the Edison contract and working capital needs. Total Interest Charges increased $1.6 million or 13.8% in 1996 over the comparable 1995 amount. The increase is due primarily to increased interest on long-term debt, due to the issuance of $40.0 million of NJEDA tax-exempt debentures in December 1995 to refinance balances previously incurred under the revolving credit agreement. A higher level of short-term borrowings under a revolving credit agreement incurred to finance Elizabethtown's capital program on an interim basis also contributed to the overall increase. This increase was offset by an increase in the debt component of AFUDC resulting from Elizabethtown's higher construction work in progress balances in 1996, primarily due to the Plant. 5 ECONOMIC OUTLOOK Forward Looking Information Information in this report includes certain forward looking statements within the meaning of the federal securities laws. Any forward looking statements are based upon information currently available and are subject to future events, risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. Such events, risks and uncertainties include, without limitation, actions of regulators, the effects of weather on water consumption, changes in historical patterns of water consumption and demand, including changes through increased use of water-conserving devices, conditions in capital and real estate markets, future acquisitions and privatization activities, increases in operating expenses due to factors beyond the Corporation's control, changes in environmental regulation and associated costs of compliance and other claims or assessments made upon the Corporation. E'town Corporation and Subsidiaries Consolidated earnings for E'town for the next several years will be determined by related but different strategies for the regulated and non-regulated businesses. For Elizabethtown and Mount Holly, management will continue to focus on expansion efforts to increase sales, as well as control costs through productivity improvements so that realized returns remain comparable to authorized levels. For the non-regulated businesses, management seeks to invest in water and wastewater assets (including municipal privatization contracts, as well as designing, constructing, operating and purchasing wastewater assets through the proposed AWG acquisition, discussed below) which produce a current return. Capital to finance investments in both the regulated and non-regulated businesses will be raised from external sources and from the sale of real estate parcels owned by E'town and Properties. E'town expects earnings from the regulated operations to be somewhat lower in 1998, based on an assumed return to normal weather patterns after the unusually dry summer in 1997and because Elizabethtown will be completing its second year since its last rate adjustment. However, consistent with E'town's strategy to sell its real estate properties (discussed below) management expects to realize gains from property sales in 1998. Based upon these factors, management expects earnings per share to be similar to those reported for 1997. 6 Elizabethtown and Subsidiary - Regulated Utilities Elizabethtown expects to petition the BPU for an increase in rates in the later part of 1998 to reflect the increases in construction, financing and operating costs since base rates were last established in October 1996. On October 25, 1996, a rate increase under a stipulation (1996 Stipulation) went into effect for Elizabethtown. This resulted in an increase in annual operating revenues of approximately $21.8 million. The rate increase reflected a full allowance for the estimated capital and operating costs for the Plant and an authorized rate of return on common equity of 11.25%. Elizabethtown, excluding Mount Holly, earned a rate of return on common equity of 11.0% in 1997. Elizabethtown's authorized rate of return on common equity is currently 11.25%. Mount Holly earned a rate of return on common equity of 2.8% in 1997, compared to an authorized rate of return of 11.25%, established in its most recent rate proceeding. Mount Holly contributed $.02 to E'town's consolidated earnings per share in 1997. Management expects Mount Holly to increase its contribution to E'town's earnings per share later in 1998 and into 1999 upon receipt of additional rate relief so that Mount Holly can realize rates of return comparable to authorized levels. E'town Non-regulated Operations Edison Water Company Effective July 1, 1997, E'town, through its Edison Water Company subsidiary, commenced operation of Edison Township's 11,200- customer water system under a 20-year contract. E'town paid the township $5.7 million at closing and expects to spend $5.4 million over the next three years to upgrade the system, primarily for new meters and main cleaning and lining. Edison Water Company receives all revenues from the townshi's system (pursuant to a rate schedule set forth in the contract), pays all operating expenses, and retains the balance to amortize its investment and earn a return on its capital. Edison Water Company expects to realize a return on its capital in an amount similar to that currently earned by E'town's regulated operations. Contributions to earnings will be small for the first five years and then will increase as rate increases specified in the contract take effect. Other Privatization Opportunities E'town continues to pursue opportunities to operate municipal water and wastewater systems under long-term contract, primarily in New Jersey. E'town has recently commenced negotiations with the city of Elizabeth, New Jersey to operate its water and wastewater systems under 40- and 20-year contracts, respectively. These contracts, if successfully negotiated, would require a $20.0 million payment at closing and expenditures of $26.2 million during the first three years. E'town would contract with a firm experienced in managing large wastewater facilities for the wastewater portion of the services to be provided. While each opportunity is unique, such endeavors generally require E'town to make payments to the municipality and to invest capital to upgrade the utility systems within the first several years of the contract. Like Edison, E'town seeks to realize rates of return in these contracts comparable to levels earned by E'town's regulated utility businesses. 7 AWG Acquisition On March 6, 1998, E'town exercised an option to acquire Applied Wastewater Group (AWG), its joint venture partner for the past three years, in a $7.0 million stock-for-stock transaction, and is expected to close the transaction in the second quarter of 1998. AWG designs, builds and operates wastewater treatment plants. E'town intends to offer"one-stop shopping" for water and wastewater services to residential and commercial developers. These services include the design, financing, construction and operation of water and wastewater facilities and, in some instances, purchase of such utilities at project build-out, thereby adding to E'town's regulated utility customer base. Based on AWG's results in 1997, E'town expects the acquisition to add modestly to E'town's earnings per share in 1998. Real Estate and Other Investments E'town Properties and E'town Corporation own various parcels of undeveloped land in New Jersey carried as investments of $12.8 million in Non-Utility Property and Other Investments -- Net, in the Consolidated Balance Sheets of E'town at December 31, 1997. E'town and Properties are proceeding with plans to sell such properties and expect to invest the sale proceeds into water and wastewater utility investments that produce a current return. Properties sold one parcel in 1997 for a price of $.4 million. The sale produced a nominal gain. Properties had previously entered into a contract to sell another parcel to a developer. The parties expected that the contract would close prior to December 31, 1996, but the developer was unable to obtain the required municipal approvals. The contract had been extended and all the material issues appear to have been resolved. Properties expects several closings during 1998, including the parcel described above which, if consummated, would result in gains. The carrying value of each parcel includes the original cost plus any real estate taxes, interest and, where applicable, direct costs capitalized while rezoning or governmental approvals are or were being sought. Such costs are capitalized until the property is offered for sale, after which time such costs are expensed. Based on independent appraisals received at various times prior to 1997, the estimated net realizable value of each property exceeds its respective carrying value as of December 31, 1997. Included in Non-Utility Property and Other Investments at December 31, 1997 is an investment of $1.3 million ($.3 million net of related deferred taxes) in a limited partnership that owns Solar Electric Generating System V (SEGS), located in California. SEGS contributed $.02 to E'town's consolidated earnings per share and paid cash dividends to E'town of $.2 million in 1997. 8 E'town will continue to monitor the relationship between the carrying and net realizable values of its properties through updated appraisals, when appropriate, and of its investment in SEGS based on information provided by SEGS management. New Accounting Pronouncements See Note 2 of the Notes to Consolidated Financial Statements for a discussion of two new accounting standards that were effective in 1997. Year 2000 The Company has assessed its various computer information systems for compliance with theYear 2000. The Company has recently installed a new enterprise financial system (SAP), which is Year 2000 compliant. In addition, the Company uses a third-party provider for its customer billing and information system, which was redesigned in 1997 to provide many enhancements including Year 2000 compliance. Management believes that all integral operating systems are Year 2000 compliant and that there will be no significant additional costs to achieve compliance. 9 E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (In Thousands Except Per Share Amounts) Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Operating Revenues $ 133,826 $ 110,409 $ 108,398 - -------------------------------------------------------------------------------- Operating Expenses: Operation 47,982 44,807 44,148 Maintenance 6,606 5,859 5,806 Depreciation 12,396 9,893 8,808 Revenue taxes 16,550 13,820 13,591 Real estate, payroll and other taxes 3,152 2,952 2,853 Federal income taxes (Note 3) 10,487 6,791 7,611 - -------------------------------------------------------------------------------- Total operating expenses 97,173 84,122 82,817 - -------------------------------------------------------------------------------- Operating Income 36,653 26,287 25,581 - -------------------------------------------------------------------------------- Other Income (Expense): Allowance for equity funds used during construction (Note 2) 215 3,725 2,976 Write-down of non-utility property (Note 7) (350) Federal income taxes (Note 3) (408) (1,570) (1,142) Other - net 953 760 742 - -------------------------------------------------------------------------------- Total other income (expense) 760 2,915 2,226 - -------------------------------------------------------------------------------- Total Operating and Other Income 37,413 29,202 27,807 - -------------------------------------------------------------------------------- Interest Charges: Interest on long-term debt 14,807 13,800 11,696 Other interest expense - net 2,560 2,645 2,390 Capitalized interest (Note 2) (438) (3,524) (2,746) Amortization of debt discount and expense-net 411 395 358 - -------------------------------------------------------------------------------- Total interest charges 17,340 13,316 11,698 - -------------------------------------------------------------------------------- Income Before Preferred Stock Dividends of Subsidiary 20,073 15,886 16,109 Preferred Stock Dividends 813 813 813 - -------------------------------------------------------------------------------- Net Income $ 19,260 $ 15,073 $ 15,296 ================================================================================ Earnings Per Share of Common Stock (Note 2): - -------------------------------------------------------------------------------- Basic $ 2.44 $ 1.96 $ 2.16 Diluted $ 2.41 $ 1.96 $ 2.14 - -------------------------------------------------------------------------------- Average Number of Shares Outstanding for the Calculation of Earnings Per Share: - -------------------------------------------------------------------------------- Basic 7,891 7,668 7,093 Diluted 8,215 7,966 7,394 - -------------------------------------------------------------------------------- Dividends Paid Per Common Share $ 2.04 $ 2.04 $ 2.04 ================================================================================ See Notes to Consolidated Financial Statements. 10 E'TOWN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Assets 1997 1996 - -------------------------------------------------------------------------------- Utility Plant-At Original Cost: Utility plant in service $ 678,590 $ 654,713 Construction work in progress 9,336 7,994 - -------------------------------------------------------------------------------- Total utility plant 687,926 662,707 Less accumulated depreciation and amortization 114,587 102,683 - -------------------------------------------------------------------------------- Utility plant-net 573,339 560,024 - -------------------------------------------------------------------------------- Non-utility Property and Other Investments - Net (Note 7) 20,016 14,113 - -------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents 6,233 3,228 Short-term investments 31 31 Customer and other accounts receivable (less reserve: 1997, $612, 1996, $566) 17,539 16,187 Unbilled revenues 10,412 9,356 Materials and supplies-at average cost 1,966 2,045 Prepaid insurance, taxes, other 3,733 3,918 - -------------------------------------------------------------------------------- Total current assets 39,914 34,765 - -------------------------------------------------------------------------------- Deferred Charges: Waste residual management 936 1,064 Unamortized debt and preferred stock expenses 10,263 9,508 Taxes recoverable through future rates (Note 3) 21,439 30,435 Postretirement benefit expense (Note 12) 3,738 3,478 Other unamortized expenses 1,259 1,820 - -------------------------------------------------------------------------------- Total deferred charges 37,635 46,305 - -------------------------------------------------------------------------------- Total $ 670,904 $ 655,207 ================================================================================ See Notes to Consolidated Financial Statements. 11 E'TOWN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Capitalization and Liabilities 1997 1996 - -------------------------------------------------------------------------------- Capitalization (Notes 4 and 5): Common shareholders' equity $ 193,923 $ 183,513 Cumulative preferred stock 12,000 12,000 Long-term debt - net 247,298 193,481 - -------------------------------------------------------------------------------- Total capitalization 453,221 388,994 - -------------------------------------------------------------------------------- Current Liabilities: Notes payable - banks (Note 6) 23,000 69,000 Long-term debt - current portion (Note 4) 30 30 Accounts payable and other liabilities 11,569 16,197 Customers' deposits 272 300 Municipal and state taxes accrued 16,817 13,887 Interest accrued 3,456 3,483 Preferred stock dividends accrued 59 59 - -------------------------------------------------------------------------------- Total current liabilities 55,203 102,956 - -------------------------------------------------------------------------------- Deferred Credits: Customers' advances for construction 39,131 43,636 Federal income taxes (Note 3) 69,916 75,942 State income taxes 196 185 Unamortized investment tax credits 8,042 8,245 Accumulated postretirement benefits (Note 12) 4,332 3,650 - -------------------------------------------------------------------------------- Total deferred credits 121,617 131,658 - -------------------------------------------------------------------------------- Contributions in Aid of Construction 40,863 31,599 - -------------------------------------------------------------------------------- Commitments and Contingent Liabilities (Note 11) - -------------------------------------------------------------------------------- Total $ 670,904 $ 655,207 ================================================================================ See Notes to Consolidated Financial Statements. 12 E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CAPITALIZATION (In Thousands Except Share Amounts) December 31, 1997 1996 - -------------------------------------------------------------------------------- E'town Corporation: Common Shareholders' Equity (Notes 4 and 5): Common stock without par value, authorized, 15,000,000 shares, issued 1997, 8,054,461 shares; 1996, 7,807,751 share $ 153,162 $ 145,661 Paid-in capital 1,315 1,315 Capital stock expense (5,160) (5,160) Retained earnings 45,560 42,434 Less cost of treasury stock; 1997, 32,208 shares; 1996, 25,876 shares (954) (737) - -------------------------------------------------------------------------------- Total common shareholders' equity 193,923 183,513 - -------------------------------------------------------------------------------- Elizabethtown Water Company: Cumulative Preferred Stock (Note 4): $100 par value, authorized, 200,000 shares; $5.90 series, issued and outstanding, 120,000 shares 12,000 12,000 Cumulative Preferred Stock: $25 par value, authorized, 500,000 shares; none issued - -------------------------------------------------------------------------------- Long-Term Debt (Note 4): E'town Corporation: 6 3/4% Convertible Subordinated Debentures, due 2012 11,354 11,548 6.79% Senior Notes, due 2007 4,000 Elizabethtown Water Company: 7.20% Debentures, due 2019 10,000 10,000 7 1/2% Debentures, due 2020 15,000 15,000 6.60% Debentures, due 2021 10,500 10,500 6.70% Debentures, due 2021 15,000 15,000 8 3/4% Debentures, due 2021 27,500 27,500 8% Debentures, due 2022 15,000 15,000 5.60% Debentures, due 2025 40,000 40,000 7 1/4% Debentures, due 2028 50,000 50,000 Variable Rate Debentures, due 2027 50,000 The Mount Holly Water Company: Notes Payable (due serially through 2000) 57 87 - -------------------------------------------------------------------------------- Total long-term debt 248,411 194,635 Unamortized discount-net (1,113) (1,154) - -------------------------------------------------------------------------------- Total long-term debt-net 247,298 193,481 - -------------------------------------------------------------------------------- Total Capitalization $ 453,221 $ 388,994 ================================================================================ See Notes to Consolidated Financial Statements. 13 E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In Thousands Except Share and Per Share Amounts) Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Common Stock: Balance at Beginning of Year $145,661 $138,668 $114,136 Public sale of common stock 17,738 Common stock issued under Dividend Reinvestment and stock Purchase Plan (1997, 227,992 shares, 1996, 258,673 shares, 1995, 248,846 shares) 6,980 6,993 6,389 Issuance of restricted stock (1997, 4,033 shares) 123 Exercise of stock options (1997, 14,685 shares, 1995, 15,569 shares) 398 405 - -------------------------------------------------------------------------------- Balance at End of Year 153,162 145,661 138,668 - -------------------------------------------------------------------------------- Paid-in Capital: 1,315 1,315 1,315 - -------------------------------------------------------------------------------- Capital Stock Expense: Balance at Beginning of Year (5,160) (5,160) (4,286) Expeses incurred to issue common stock (874) - -------------------------------------------------------------------------------- Balance at End of Year (5,160) (5,160) (5,160) - -------------------------------------------------------------------------------- Retained Earnings: Balance at Beginning of Year 42,434 42,995 42,439 Net Income 19,260 15,073 15,296 Dividends on common stock (1997, 1996 and 1995 $2.04) (16,134) (15,634) (14,740) - -------------------------------------------------------------------------------- Balance at End of Year 45,560 42,434 42,995 - -------------------------------------------------------------------------------- Treasury Stock: Balance at Beginning of Year (737) (737) (737) Exercise of stock options (1997, 6,332 shares, 1995, 3,844 shares) (217) (103) - -------------------------------------------------------------------------------- Balance at End of Year (954) (737) (737) - -------------------------------------------------------------------------------- Total Common Shareholders' Equity $193,923 $183,513 $177,955 ================================================================================ See Notes to Consolidated Financial Statements. 14 E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (In Thousands) Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income $ 19,260 $ 15,073 $ 15,296 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 12,396 9,893 8,808 Write-down of non-utility property 350 Decrease (increase) in deferred charges 699 (638) 248 Deferred income taxes and investment tax credits-net 2,778 4,917 4,431 Capitalized interest and AFUDC (653) (7,249) (5,722) Other operating activities-net 382 305 16 Change in current assets and current liabilities excluding cash, short-term investments and current portion of debt: Customer and other accounts receivable (1,352) (203) (3,637) Unbilled revenues (1,056) (1,912) (282) Accounts payable and other liabilities (4,656) (634) (1,397) Accrued/prepaid interest and taxes 3,088 (1,755) 1,323 Other 99 (133) (187) - -------------------------------------------------------------------------------- Net cash provided by operating activities 30,985 17,664 19,247 - -------------------------------------------------------------------------------- Cash Flows Provided by Financing Activities: Proceeds from issuance of common stock 7,284 6,993 23,555 Proceed from issuance of debentures and other long-term debt 54,000 40,000 Debt and preferred stock issuance and amortization costs (755) 430 (448) Repayment of long-term debt (224) (233) (453) Contributions and advances for construction-net 4,759 2,521 3,441 Net (decrease) increase in notes payable - banks (46,000) 42,000 4,000 Dividends paid on common stock (16,134) (15,634) (14,740) - -------------------------------------------------------------------------------- Net cash provided by financing activities 2,930 36,077 55,355 - -------------------------------------------------------------------------------- Cash Flows Used for Investing Activities: Utility plant expenditures (excluding allowance for funds used during construction) (25,329) (55,125) (73,790) Purchase of Edison operating contract (5,810) Proceeds from sale of land 440 Development costs of land (excluding capitalized interest) (211) (313) (142) - -------------------------------------------------------------------------------- Cash used for investing activities (30,910) (55,438) (73,932) - -------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents 3,005 (1,697) 670 Cash and Cash Equivalents at Beginning of Period 3,228 4,925 4,255 - -------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 6,233 $ 3,228 $ 4,925 ================================================================================ Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 16,719 $ 8,966 $ 8,351 Income taxes $ 6,023 $ 5,723 $ 4,746 Preferred stock dividends $ 708 $ 708 $ 708 See Notes to Consolidated Financial Statements. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization E'town Corporation (E'town or Corporation), a New Jersey holding company, is the parent company of Elizabethtown Water Company (Elizabethtown or Company), Edison Water Company (Edison) and E'town Properties, Inc. (Properties) and owner of a 65% interest in Applied Watershed Management, LLC (AWM). The Mount Holly Water Company (Mount Holly) is a wholly-owned subsidiary of Elizabethtown. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include E'town and its subsidiaries. Significant intercompany accounts and transactions have been eliminated. Elizabethtown and Mount Holly are regulated water utilities and follow the Uniform System of Accounts, as adopted by the New Jersey Board of Public Utilities (BPU). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Utility Plant and Depreciation Income is charged with the cost of labor, materials and other expenses incurred in making repairs and minor replacements, and in maintaining the properties. Utility plant accounts are charged with the cost of improvements and major replacements of property. When depreciable property is retired or otherwise disposed of, the cost thereof, plus the cost of removal net of salvage, is charged to accumulated depreciation. Depreciation is generally computed on a straight-line basis at functional rates for various classes of assets. The provision for depreciation, as a percentage of average depreciable property, was 1.85% for 1997, 1.73% for 1996 and 1.83% for 1995. Allowance for Funds Used During Construction Elizabethtown and Mount Holly capitalize, as an appropriate cost of utility plant, an Allowance for Funds Used During Construction (AFUDC), which represents the cost of financing major projects during construction. AFUDC, a non-cash credit on the Statements of Consolidated Income, is added to the construction cost of the project and included in rate base and then recovered through depreciation charges in rates during the assets' useful life. AFUDC is comprised of a debt component (credited to Interest Charges), and an equity component (credited to Other Income) in the Statements of Consolidated Income. AFUDC totaled $.38 million, $6.93 million and $5.42 million for 1997, 1996 and 1995, respectively. AFUDC increased in 1996 and 1995 during the construction of the Canal Road Water Treatment Plant. 16 Non-utility Property Costs associated with real estate parcels are being expensed, as incurred. Properties had capitalized direct costs, real estate taxes and interest costs associated with certain real estate parcels as they were being developed. All the parcels were available for sale as of November 1997. The amount of interest capitalized for 1997, 1996 and 1995 totaled $.27 million, $.32 million and $.30 million, respectively (see Note 7). Revenues Revenues are recorded based on the amounts of water delivered to customers through the end of each accounting period. This includes an accrual for unbilled revenues for water delivered from the time meters were last read to the end of the respective accounting periods. Federal Income Taxes E'town files a consolidated federal tax return. Deferred income taxes are provided for temporary differences between the bases of assets and liabilities for tax and financial statement purposes for E'town and Properties. Deferred income taxes are also provided for each regulated water utility to the extent permitted by the BPU. The regulated water utilities account for prior years' investment tax credits by the deferral method, which amortizes the credits over the lives of the respective assets. The non-regulated companies utilize the flow-through method to account for investment tax credits. This method treats the credits as a reduction of federal income taxes in the year the credits arise. Customers' Advances for Construction and Contributions in Aid of Construction Customers' Advances for Construction (CAC) and Contributions in Aid of Construction (CIAC) represent capital provided by developers for main extensions to new real estate developments. Some portion of CAC is refunded based upon the revenues that the new developments generate. CIAC is customer advances for construction that, under the terms of individual main extension agreements, are no longer subject to refund. Short-term Investments Short-term investments are stated at cost, which approximates market value. Earnings Per Share of Common Stock Basic earnings per share are computed on the basis of the weighted average number of shares outstanding. Diluted earnings per share assumes both the conversion of the 6 3/4% Convertible Subordinated Debentures and common stock equivalents, assuming all stock options are exercised (see below). Cash Equivalents The Corporation considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents. 17 New Accounting Pronouncements The Corporation has adopted Statement of Financial Accounting Standards (SFAS) No. 128,"Earnings Per Share," which is effective for financial statements issued after December 15, 1997. The pronouncement simplifies the calculation of earnings per share in that a calculation of"basic" earnings per share is reported in lieu of primary earnings per share. Basic earnings per share includes only the weighted average number of common shares outstanding for the period and does not consider the dilutive effect of the Corporation's 6 3/4% Convertible Subordinated Debentures or the effect of outstanding stock options. The calculations of basic and diluted earnings per share for the three years ended December 31, 1997 follow: (Thousands of Dollars Except Per Share Amounts) 1997 1996 1995 ----------------------- Basic: Net income $19,260 $15,073 $15,297 Average common shares outstanding 7,891 7,668 7,093 ----------------------- Basic earnings per share $ 2.44 $ 1.96 $ 2.16 ======================= Diluted: Net income $19,260 $15,073 $15,297 After tax interest expense applicable to 6 3/4% Convertible Subordinated Debentures 500 513 524 ----------------------- Adjusted net income $19,760 $15,586 $15,821 ======================= Average common shares outstanding 7,891 7,668 7,093 Additional shares from assumed exercise of stock options 40 6 2 Additional shares from assumed conversion of 6 3/4% Convertible Subordinated Debentures 284 292 299 ----------------------- Average common shares outstanding as adjusted 8,215 7,966 7,394 ----------------------- Diluted earnings per share $ 2.41 $1.96 $2.14 ======================= The Financial Accounting Standards Board has issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. The pronouncement requires disclosure of selected information about operating segments in interim financial reports. Based upon the relative immateriality of the Corporation's business segments, no additional disclosures are required. 18 Reclassification Certain prior year amounts have been reclassified to conform to the current year's presentation. 3. Federal Income Taxes The computation of federal income taxes and the reconciliation of the tax provision computed at the federal statutory rate (35%) with the amount reported in the Statements of Consolidated Income follow: 1997 1996 1995 ------------------------- (Thousands of Dollars) Tax expense at statutory rate $10,843 $8,486 $ 8,701 Items for which deferred taxes are not provided: Difference between book and tax depreciation 58 132 133 Other 197 (55) 123 Investment tax credits (203) (202) (204) ----------------------- Provision for federal income taxes $10,895 $8,361 $8,753 ======================= The provision for federal income taxes is composed of the following: Current $ 6,759 $3,249 $6,068 Tax on (deposits) refunds on main extensions 1,369 207 (1,734) Deferred: Tax depreciation 2,670 3,333 3,447 Capitalized interest 114 1,375 905 Main cleaning and lining 612 587 405 Other (426) (186) (136) Investment tax credits - net (203) (204) (202) Total provision ----------------------- $10,895 $8,361 $8,753 ======================= In accordance with SFAS No. 109, deferred tax balances have been reflected at E'town's current consolidated federal income tax rate, which is 35%. 19 The tax effect of significant temporary differences representing deferred income tax assets and liabilities as of December 31, 1997 and 1996 is as follows: 1997 1996 ---------------------- (Thousands of Dollars) Water utility plant - net $(43,611) $(40,283) Non-utility property 25 41 Other investments (833) (878) Taxes recoverable through future rates (21,439) (30,435) Prepaid pension expense 103 (5) Capitalized interest (3,891) (3,777) Waste residuals (322) (373) Other assets 429 304 Other liabilities (377) (536) ------------------ Net deferred income tax liabilities $(69,916) $(75,942) ================== 4. Capitalization E'town periodically makes equity contributions to Elizabethtown from the proceeds of common stock issued under E'tow's Dividend Reinvestment and Stock Purchase Plan (DRP). E'town contributed $6.98 million and $5.30 million in 1997 and 1996, respectively, to Elizabethtown, from the proceeds of DRP issuances. The Corporation maintains a Shareholders' Rights Plan (Rights Plan). Generally, under the Rights Plan, if a person or group acquires 10% or more of the Corporation's common stock or announces a tender offer for the Corporation's common stock, non-acquiring shareholders may, under certain circumstances, exercise rights (Rights) to allow them to significantly increase their percentage of ownership of the Corporation's common stock. Such Rights may be redeemed by the Board of Directors. Cumulative Preferred Stock Elizabethtown's $5.90 Cumulative Preferred Stock is not redeemable at the option of the Company. Elizabethtown is required to redeem the entire issue at $100 per share on March 1, 2004. Long-term Debt Elizabethtown's long-term debt indentures restrict the amount of retained earnings available to Elizabethtown to pay cash dividends (which is the primary source of funds available to the Corporation for payment of dividends on its common stock) or acquire Elizabethtown's common stock, all of which is held by E'town. At December 31, 1997, $7.63 million of Elizabethtown's retained earnings were restricted under the most restrictive indenture provision. Therefore, $37.93 million of E'town's consolidated retained earnings were unrestricted. On December 22, 1997, E'town signed an agreement to issue $12 million of 6.79% Senior Notes due December 15, 2007. E'town issued $4 million of these notes on December 22, 1997, and the proceeds of the notes were used to make capital contributions to Elizabethtown for purposes of financing its ongoing capital program. E'town issued $6 million of these notes in January 1998 for purposes of repaying E'town's outstanding short-term debt and will issue the remaining notes in May 1998. The Note Agreement requires the maintenance of a consolidated fixed charges coverage ratio of at least 1.5 to 1 and a debt to total capitalization ratio not to exceed .65 to 1. As of December 31, 1997, the fixed charges coverage ratio was 2.6 to 1 and the debt to total capitalization ratio was .59 to 1, calculated in accordance with the Note Agreement. On June 4, 1997, Elizabethtown issued a total of $50 million of 30-year Variable Rate Debentures due December 2027, $25 million of Series A and $25 million of Series B, to evidence a like amount of Variable Rate Notes issued through the New Jersey Economic Development Authority (NJEDA). The proceeds were used to repay $50 million of balances outstanding under the Company's revolving credit agreement. The NJEDA Notes are remarketed on a weekly basis, at which time the interest rates on each issue are subject to change. The rates in effect as of December 31, 1997, were 3.60% for Series A and 3.55% for Series B. 20 E'tow's 6 3/4% Convertible Subordinated Debentures are convertible to E'town common stock at $40 per share. At December 31, 1997, 283,850 shares of common stock were reserved for issuance upon exercise of the conversion rights. 5. Stock Option Plan E'town had a Stock Option Plan, a qualified incentive plan under which options to purchase shares of E'town's common stock have been granted to certain officers and other key employees at prices not less than the fair market value at the date of grant. The Stock Option Plan provided that any options granted may be exercised at any time up to an expiration date, not to exceed 10 years from the date of each grant. The Stock Option Plan expired May 4, 1997. The 1997 options were granted before that date. E'town will seek shareholder approval in 1998 for a new Stock Option Plan. A summary of the details of stock option grants and outstanding balances is presented below: Year Options Option Options Outstanding Granted Granted Price 12/31/97 12/31/96 - ------------------------------------------------ 1989 7,500 $24.67 7,500 7,500 1990 7,500 $26.67 7,500 7,500 1995 77,000 $27.12 60,315 77,000 1996 4,000 $26.87 4,000 4,000 1997 25,000 $29.75 25,000 - ------------------------------------------------ Total 104,315 96,000 ================================================ In connection with the adoption of SFAS 123 "Accounting for Stock-Based Compensation," which was effective in 1996, the Corporation elected to continue to account for its Stock Option Plan using the method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and provide proforma disclosure of the effect of adopting SFAS 123. The effect of accounting for options under SFAS 123 would be to reduce basic earnings per share by $.01 for 1997, less than $.01 for 1996 and by $.01 for 1995. 21 6. Lines of Credit E'town has $87.5 million of uncommitted lines of credit with several banks, of which $82.5 million is available to Elizabethtown. Information relating to bank borrowings for 1997, 1996 and 1995 is as follows: 1997 1996 1995 ---------------------- (Thousands of Dollars) Maximum amount outstanding $69,500 $69,000 $60,000 Average monthly amount outstanding $43,525 $45,240 $39,636 Average interest rate at year end 6.2% 5.7% 5.9% Compensating balances at year end $ 0 $ 0 $ 0 Weighted average interest rate basedon average daily balances 5.8% 5.8% 6.2% 7. Non-Utility Property and Other Investments Included in Non-Utility Property and Other Investments at December 31, 1997 and 1996 is an investment of $1.33 million and $1.25 million, respectively, ($.30 million and $.19 million net of related deferred taxes) in a limited partnership that owns Solar Electric Generating System V (SEGS), located in California. Also included in Non-Utility Property and Other Investments at December 31, 1997 and 1996 is $12.79 million and $12.77 million, respectively, of investments in various parcels of undeveloped land in New Jersey. The carrying value of each parcel includes the original cost plus any real estate taxes, interest and, where applicable, direct costs capitalized while rezoning or governmental approvals were being sought. Based upon independent appraisals received at various times prior to 1997, the estimated net realizable value of each property exceeds its respective carrying value as of December 31, 1997. Properties made incremental improvements to its Mansfield, New Jersey property and, accordingly, capitalized various carrying charges. In prior years, the carrying value of the Mansfield property exceeded its estimated net realizable value. This was due to the fact that the Mansfield property was not yet ready for its intended use and various carrying charges were being capitalized while, based upon prior appraisals, the market value of the property had remained constant. Charges of $.35 million during the first three quarters of 1995, to adjust the carrying value of the Mansfield property, were reflected in the Statements of Consolidated Income and Consolidated Balance Sheets. In October 1995, Properties obtained more favorable zoning treatment for the Mansfield property. As a result of the rezoning, an appraisal in late 1995 had revealed that the market value of the property had increased to the extent that further adjustments to reduce the carrying value are not presently expected. Properties capitalized carrying charges on the Mansfield property through October 1997, when the parcel was deemed ready for its intended use. 22 The Corporation will continue to monitor the relationship between the carrying and net realizable values of its properties through updated appraisals, when appropriate, and its investment in SEGS based upon information provided by SEGS management and through cash flow analyses. In 1995, Properties entered into an agreement to sell a parcel of land to a developer. The agreement intended that the transaction would close prior to December 31, 1996. The developer had been unable to obtain approval from the municipality for an appropriate number of buildable units. All of the material issues have been resolved and a sale is expected to be consummated in 1998. 8. Financial Instruments The carrying amounts and the estimated fair values, as of December 31, 1997 and 1996, of financial instruments issued or held by the Corporation are as follows: 1997 1996 -------------------- (Thousands of Dollars) Short-term investments: Carrying amount $ 31 $ 31 Estimated fair value 59 45 Cumulative preferred stock: Carrying amount $ 12,000 $ 12,000 Estimated fair value 11,760 12,000 Long-term debt: Carrying amount $247,298 $193,481 Estimated fair value 254,599 196,288 Estimated fair values are based upon quoted market prices for these or similar securities. 23 9. Regulatory Assets and Liabilities Certain costs incurred by Elizabethtown and Mount Holly, which have been deferred, have been recognized as regulatory assets and are being amortized over various periods,as set forth below: 1997 1996 ----------------------- (Thousands of Dollars) Waste residual management $ 936 $ 1,064 Unamortized debt and preferred stock expense 9,656 8,988 Taxes recoverable through future rates (Note 3) 21,439 30,435 Postretirement benefit expense (Note 12) 3,738 3,465 Safety management expense 331 418 Business process redesign 284 362 Rate case expenses 80 201 --------------------- Total $36,464 $ 44,933 ===================== Waste Residual Management The costs of disposing of the byproducts generated by Elizabethtown's and Mount Holl's water treatment plants are being amortized and recovered in rates over three- and five-year periods, respectively, for ratemaking and financial statement purposes. No return is being earned on the deferred balances related to these programs. Unamortized Debt and Preferred Stock Expenses Costs incurred in connection with the issuance or redemption of long-term debt have been deferred and are being amortized and recovered in rates over the lives of the respective issues for ratemaking and financial statement purposes. Costs incurred in connection with the issuance and redemption of preferred stock have been deferred and are being amortized and recovered in rates over a 10-year period for ratemaking and financial statement purposes. Other Safety management expenses and business process redesign expenses relate to studies undertaken by the Company and are being amortized and recovered in rates over five years. Rate case expenses are being substantially recovered in rates during two-year periods. There were no regulatory liabilities at December 31, 1997 or 1996. 24 10. Regulatory Matters Rates Elizabethtown On December 17, 1997, the BPU adopted an Order for rate increases for Elizabethtown and Mount Holly, effective January 1, 1998, for the recovery of costs associated with SFAS No. 106 "Employers' Accounting For Postretirement Benefits Other Than Pensions." The resulting rate increases reflect recovery over a 15-year period of amounts previously deferred on the Consolidated Balance Sheets for postretirement benefits since 1993 and prospectively, the difference between the amounts currently recovered in rates and the full SFAS No. 106 expense on an accrual basis. The total increases in annual operating revenues resulting from these petitions are $.39 million for Elizabethtown and $.02 million for Mount Holly. On October 25, 1996, Elizabethtown received a rate increase under a stipulation resulting in an increase in annual revenues of $21.8 million for the construction, financing and operating costs of the Canal Road Water Treatment Plant. Mount Holly In June 1995, Mount Holly petitioned the BPU for an increase in rates, to take place in two phases. The first phase was stipulated for a rate increase effective February 1996 of $.55 million. The second phase would recover the cost of a new water supply, treatment and transmission system necessary to obtain water outside a designated portion of an aquifer currently used by Mount Holly, and to treat and pump the water into the Mount Holly distribution system. Management believes this project is the most cost-effective alternative available to Mount Holly to comply with state legislation that restricts the amount of water that can be withdrawn from an aquifer in certain areas of southern New Jersey. The project is referred to as the Mansfield Project. Mount Holly has expended $3.56 million on the Mansfield Project as of December 31, 1997, excluding AFUDC. The land for the supply and treatment facilities has been purchased and test wells have been drilled and can produce the required supply. In September 1995, the New Jersey Department of Environmental Protection (DEP) granted Mount Holly a water allocation permit for four wells that are to be the water supply for this project. In October 1995, another water purveyor requested of theJDEP, and was subsequently granted, an adjudicatory hearing in opposition to the permit. In August 1997, Mount Holly settled this matter by entering into an agreement with the other water purveyor and the DEP. Under the agreement, Mount Holly will purchase 1.0 million gallons per day from the other purveyor for a period to include the later of two years or the date the Mansfield Project is placed into service. Purchases of water began in March 1998, after completion of an interconnection. As a result of the settlement agreement, Mount Holly expects to continue with its plan to construct the Mansfield Project. The BPU and the parties to Mount Holl's last rate case are participating in a proceeding connected with the second phase of the 1995 case to clarify the need for and cost-effectiveness of the Mansfield Project. 25 On September 23, 1997, Mount Holly filed a petition with the BPU to establish a Purchased Water Adjustment Clause (PWAC) to reflect the cost of water expected to be purchased from the purveyor under the settlement agreement discussed above. The petition requests an increase in annual operating revenues of approximately $1.34 million or 40.3%. In April 1998, Mount Holly expects to file a petition with the BPU for a rate increase, which will reflect additional construction and financing costs, as well as increases in operating costs since rates were last established in January 1996. This rate case will include approximately $7.27 million of the cost for a portion of the Mansfield Project to serve a section of Mount Holly. This amount was part of the second phase of the 1995 rate case discussed above. The rate case will also reflect $6.0 million in additions to utility plant since Mount Holl's base rates were last adjusted in January 1996. A decision is expected by the end of 1998. Mount Holly expects to file an additional rate case next year for the remaining cost of the Mansfield Project, estimated to be $11.3 million, to coincide with the completion of the project and the expiration of the agreement to purchase water from the other purveyor. 11. Commitments and Contingent Liabilities Elizabethtown is obligated, under a contract that expires in 2013, to purchase from the New Jersey Water Supply Authority (NJWSA) a minimum of 37 billion gallons of water annually. Effective July 1, 1997, the annual cost of water under contract is $7.86 million. The Company purchases additional water from the NJWSA on an as-needed basis. The total cost of water purchased from the NJWSA was $8.79 million, $8.70 million and $9.34 million for 1997, 1996 and 1995, respectively. On June 25, 1997, E'town and the Township of Edison, New Jersey, signed an agreement for 'town to operate the water supply system for a portion of the township for a 20-year period. E'town formed a wholly-owned subsidiary, Edison Water Company, for the purpose of managing the assets and operations of the Edison Township system. The Edison system serves approximately 11,200 residential, commercial and industrial customers. Under the terms of the contract, Edison Water Company expects to make expenditures of approximately $25 million during the 20-year period, which include capital improvements to the water system, as well as payments to the township of Edison. Of this total ,approximately $14 million is expected to be expended in the first three years, including the initial payment of $5.70 million, which was made upon closing. E'town has entered into negotiations with the city of Elizabeth, New Jersey to operate its water and wastewater systems under a 40- and 20-year contract, respectively. These contracts, if successfully negotiated, would require a $20.0 million payment at closing and expenditures of $26.2 million during the first three years. E'town would contract with a firm experienced in managing large wastewater facilities for the wastewater portion of the services to be provided. 26 Capital expenditures of E'town and its subsidiaries are estimated to be $141.95 million through 2000, of which $134.51 million is for Elizabethtown's and Mount Holly's utility plant and $7.44 million is for non-utility expenditures. Expected future minimum rental payments required under noncancelable leases with terms in excess of one year at December 31 of each of the years 1998 through 2002 are: 1998, $.65 million; 1999, $.69 million; 2000, $.72 million; 2001, $.76 million and 2002, $.77 million. Rent expense totaled $.72 million, $.84 million and $.82 million in 1997, 1996 and 1995, respectively. Joint Venture In 1995, the Corporation entered into a three-year joint venture agreement with Applied Wastewater Group (AWG) to form a New Jersey limited liability company, Applied Watershed Management, LLC (AWM). AWG is a unit of several privately held and affiliated companies providing design, engineering, construction and operating services for water and wastewater facilities. E'town has determined it is in the Corporation's long-term interest to exercise an option to purchase the operations of AWG to provide a full complement of water and wastewater services and on March 6, 1998, exercised such option. A closing is expected in the second quarter of 1998. The purchase price is expected to be approximately $7 million, payable in E'town Corporation Common Stock, a significant portion of which is expected to be issued with restrictions related to liquidation. 12. Pension Plan and Other Postretirement Benefits Pension Plan Elizabethtown has a trusteed, noncontributory Retirement Plan (Plan), which covers most employees. Under the Company's funding policy, the Corporation makes contributions that meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The components of the net pension costs for the Retirement Plan are as follows: 1997 1996 1995 ---------------------------- (Thousands of Dollars) Service cost - benefits earned during the year $ 1,291 $ 1,341 $ 929 Interest cost on projected benefit obligation 2,635 2,498 2,170 Return on Plan assets (8,196) (4,569) (7,630) Net amortization and deferral 4,579 1,229 4,890 ------------------------- Net pension costs $ 309 $ 499 $ 359 ========================= 27 Plan assets are invested in publicly traded debt and equity securities. The reconciliations of the funded status of the Plan to the amounts recognized in the Consolidated Balance Sheets are presented below. 1997 1996 ----------------------- (Thousands of Dollars) Market value of Plan assets $46,803 $40,257 -------------------- Actuarial present value of Plan benefits: Vested benefits 31,331 28,645 Non-vested benefits 101 96 -------------------- Accumulated benefit obligation 31,432 28,741 Projected increases in compensation levels 7,568 7,297 -------------------- Projected benefit obligation 39,000 36,038 -------------------- Excess of Plan assets over projected benefit obligation 7,803 4,219 Unrecognized net gain (8,016) (4,049) Unrecognized prior service cost 1,549 1,741 Unrecognized transition asset (1,631) (1,898) -------------------- Prepaid (accrued) pension expense $ (295) $ 13 ==================== The assumed rates used in determining the actuarial present value of the projected benefit obligations were as follows: 1997 1996 1995 --------------------------- Discount rate 7.25% 7.50% 7.00% Compensation increase 5.50% 5.50% 5.50% Rate of return on Plan assets 9.00% 9.00% 9.00% 28 The Corporation also has a supplemental retirement plan for certain management employees that is not funded. Benefit payments under this plan are made directly by the Corporation. At December 31, 1997, the projected benefit obligation of this supplemental plan was $1.45 million and the net periodic benefit cost was $.27 million and $.25 million for 1997 and 1996, respectively. The plan assumed a discount rate of 7.25% for 1997 and 7.50% for 1996, and a compensation increase of 4% for both 1997 and 1996 for purposes of determining the actuarial present value of the projected benefit obligations. Other Postretirement Benefits The Corporation provides certain health care and life insurance benefits for substantially all of its retired employees. As a result of a contract negotiated in February 1996 with the Company's bargaining unit, all union and non-union employees retiring after January 1, 1997, pay 25% of future increases in the premiums the Company pays for postretirement medical benefits. Under SFAS No. 106, the costs of postretirement benefits are accrued for each year the employee renders service, based on the expected cost of providing such benefits to the employee and the employee's beneficiaries and covered dependents, rather than expensing these benefits on a pay-as-you-go basis. Based upon an independent actuarial study, the transition obligation, calculated under SFAS No. 106, was $7.26 million as of January 1, 1993, the date of adoption of SFAS No. 106. The transition obligation is being amortized over 20 years. The following table details the postretirement benefit obligation at December 31: 1997 1996 ---------------------- (Thousands of Dollars) Retirees $ 1,990 $ 2,015 Fully eligible plan participants 4,614 4,107 ------------------ Accumulated postretirement benefit obligation 6,604 6,122 Plan assets at fair value (1,331) (764) Unrecognized net gain 3,973 3,964 Unrecognized transition obligation (5,442) (5,804) ------------------ Accrued postretirement benefit obligation $ 3,804 $ 3,518 ================== 29 The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1997, and for the year 1997 was 9%. This rate decreases linearly each successive year until it reaches 3.8% in 2007, after which the rate remains constant. The assumed rates used in determining the actuarial present value of the projected benefit obligations were as follows: 1997 1996 1995 -------------------------- Discount rate 7.25% 7.50% 7.00% Rate of return on plan assets 9.00% 9.00% n/a A single percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, and the net postretirement service and interest cost by approximately $.90 million and $.26 million, respectively. Based upon the independent actuarial study referred to above, the annual postretirement cost calculated under SFAS No. 106 is as follows: 1997 1996 1995 --------------------------- (Thousands of Dollars) Service cost - benefits earned during the year $ 389 $ 423 $ 480 Interest cost on accumulated postretirement benefit obligation 449 430 585 Return on Plan assets (57) (72) Amortization of transition obligation 363 419 363 Amortization of gain (223) ------------------------ Total 921 1,200 1,428 Deferred amount for regulated companies pending recovery (273) (564) (824) ------------------------ Net postretirement benefit expense $ 648 $ 636 $ 604 ======================= The rate increases effective January 1, 1998, allows for the full recovery of costs associated with the implementation of SFAS No. 106, including an amortization over 15 years of amounts previously deferred, which were in excess of amounts previously being recovered in rates. As of December 31, 1997, the amounts that have been deferred are $3.59 million and $.14 million for Elizabethtown and Mount Holly, respectively. 30 13. Quarterly Financial Data (Unaudited) A summary of financial data for each quarter of 1997 and 1996 follows: Basic Diluted Operating Operating Net Earnings Earnings Quarter Revenues Income Income Per Share Per Share (Thousands of Dollars Except Per Share Amounts) - --------------------------------------------------------- 1997 1st $ 30,121 $ 8,011 $ 3,470 $ .44 $ .44 2nd 32,463 8,785 4,405 .56 .55 3rd 38,643 11,776 7,454 .93 .92 4th 32,599 8,081 3,931 .51 .50 - ------------------------------------------------------- Total $133,826 $36,653 $19,260 $2.44 $ 2.41 ======================================================= 1996 1st $ 25,761 $ 5,568 $ 3,176 $ .42 $ .42 2nd 27,265 6,355 3,918 .51 .51 3rd 28,173 6,977 4,454 .58 .57 4th 29,210 7,387 3,525 .45 .46 - ------------------------------------------------------- Total $110,409 $26,287 $15,073 $1.96 $ 1.96 ======================================================= Water utility revenues are subject to seasonal fluctuation due to normal increased water consumption during the third quarter of each year. 31 INDEPENDENT AUDITOR' REPORT To the Shareholders and Board of Directors of E'town Corporation: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of E'town Corporation and its subsidiaries as of December 31, 1997 and 1996, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of E'town Corporation and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche Parsippany, New Jersey February 18, 1998, except for Note 11, as to which the date is March 6, 1998 32 E'TOWN CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- OTHER FINANCIAL AND STATISTICAL DATA 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Utility Plant (Thousands) Utility Plant - net $573,339 $560,024 $507,858 $437,456 $373,293 Construction Expenditures (excluding AFUDC) 25,329 55,125 73,789 69,981 32,517 Capitalization (Thousands) Shareholders' Equity 193,923 183,512 177,081 152,971 128,374 Preferred Stock 12,000 12,000 12,000 12,000 12,000 Debt (1) 270,328 262,511 220,703 177,115 154,448 Total Capitalization $476,251 $458,023 $409,784 $342,086 $294,822 Capitalization Ratios Common Stock 41% 40% 43% 44% 44% Preferred Stock 2% 3% 3% 4% 4% Debt (1) 57% 57% 54% 52% 52% Common Stock Data Earnings Per Share: Basic $ 2.44 $ 1.96 $ 2.16 $ 1.95 $ 2.59 Diluted 2.41 1.96 2.14 1.94 2.54 Dividends Per Share 2.04 2.04 2.04 2.04 2.01 Book Value Per Share $ 24.17 $ 23.58 $ 23.54 $ 23.17 $ 22.76 Average Shares Outstanding: (Thousands) Basic 7,891 7,668 7,093 6,210 5,338 Diluted 8,215 7,966 7,394 6,519 5,652 Operating Statistics Revenues (Thousands) General Customers $ 87,998 $ 68,797 $ 67,455 $ 62,923 $ 63,100 Other Water Systems 20,096 18,929 18,720 18,082 17,187 Industrial Wholesale 8,451 7,869 7,947 7,458 6,652 Fire Service/ Miscellaneous 17,281 14,814 14,276 13,570 13,057 Total Revenues $133,826 $110,409 $108,398 $102,033 $ 99,996 Net Income $ 19,260 $ 15,073 $ 15,296 $ 12,088 $ 13,830 Water Sales - Millions of Gallons (mg) General Customers 25,640 22,890 23,999 23,551 23,883 Other Water Systems 13,341 15,049 15,569 15,691 15,109 Industrial Wholesale 3,533 3,567 3,673 3,568 3,213 System Use and Unaccounted For 6,948 6,444 6,402 6,570 5,453 Total Water Sales 49,462 47,950 49,643 49,380 47,658 System Delivery by Source - mg Surface 42,585 41,485 42,646 42,534 40,742 Wells 6,689 6,328 6,764 6,690 6,776 Purchased 188 137 233 156 140 Total System Delivery 49,462 47,950 49,643 49,380 47,658 Millions of Gallons Pumped: Average Day 135 131 136 135 131 Maximum Day 205 170 183 182 191 General Information Meters in Service 200,320 197,791 194,660 191,622 188,677 Miles of Main 2,926 2,899 2,869 2,828 2,800 Fire Hydrants Served 16,228 16,012 15,650 15,291 14,909 Total Employees 399 400 398 386 384 ================================================================================ (1) Includes long-term debt, notes payable and long-term debt current portion. 33 Stock Price And Dividend Data - E'town's Common Stock is traded on the New York Stock Exchange under the symbol ETW. 1997 - ------------------------------------------------ Quarter 1st 2nd 3rd 4th Closing Price Low: $ 29.12 $ 29.50 $ 30.50 $ 31.87 High: $ 31.75 $ 34.87 $ 34.00 $ 40.50 Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51 ================================================ 1996 - ------------------------------------------------- Quarter 1st 2nd 3rd 4th Closing Price Low: $ 27.25$ $ 26.50 $ 25.62 $ 28.50 High: $ 30.12 $ 29.37 $ 27.00 $ 31.62 Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51 ================================================= 34 EX-21 8 Exhibit 21 SUBSIDIARIES OF THE CORPORATION All subsidiaries of E'town Corporation as of December 31, 1997 are as follows: State of Name Incorporation Elizabethtown Water Company New Jersey E'town Properties, Inc. Delaware Edison Water Company New Jersey Applied Watershed Management, LLC (1) (1) Joint venture formed as a Limited Liability Company. The company is 65%-owned by E'town Corporation. Exhibit 21 SUBSIDIARIES OF THE COMPANY All subsidiaries of Elizabethtown Water Company as of December 31, 1997 are as follows: State of Name Incorporation The Mount Holly Water Company New Jersey EX-23 9 EXHIBIT 23 INDEPENDENT AUDITOR' CONSENT We consent to the incorporation by reference in E'town Corporation's Registration Statement No. 33-316713 on Form S-3 and Nos. 33-49812, 33-44210 and 33-42509 on Forms S-8 of our reports dated February 18, 1998 (except for Note 11 to the financial statements as to which the date is March 6, 1998) and to the incorporation by reference in Elizabethtown Water Company's Registration Statement No. 33-19600 on Form S-8 and Nos. 33-68579 and 33-51917 on Forms S-3 of our report dated February 18, 1998, appearing or incorporated by reference in this Annual Report on Form 10-K of E'town Corporation and Elizabethtown Water Company for the year ended December 31, 1997. /s/ Deloitte & Touche Parsippany, New Jersey March 27, 1998 EX-27 10 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 573,339 20,016 39,914 37,635 0 670,904 152,208 (3,845) 45,560 193,923 0 12,000 247,298 23,000 0 0 30 0 0 0 194,653 670,904 133,826 10,487 86,686 97,173 36,653 760 37,413 17,340 20,073 813 19,260 16,134 14,807 30,985 2.44 2.41 All amounts in thousands of dollars except per share amounts.
EX-27 11 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 572,785 79 35,599 36,855 0 646,318 15,741 124,075 53,538 193,354 0 12,000 231,944 18,000 0 0 30 0 0 0 190,990 646,318 131,788 11,026 83,696 94,722 37,066 461 37,527 16,622 20,905 813 20,092 16,134 14,030 32,393 0 0 All amounts in thousands of dollars except per share amounts.
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