-----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, O9qM0lef6DMUKI+VvsMe1qNFOYPzelS1IGrofiFhYgM4gsi5SRk3Um/fne0vlMdy e8Hrhqn+fbupQS41Jz0G3g== 0000764403-99-000002.txt : 19990402 0000764403-99-000002.hdr.sgml : 19990402 ACCESSION NUMBER: 0000764403-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99580129 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: 99580130 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, 1998 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, includ(908)r654-1234 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, includ(908)r654-1234 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___X___ On December 31, 1998, the aggregate market value of E'town Corporation's voting stock held by non-affiliates was $401,393,410. On December 31, 1998, there were 8,471,790 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, 1998 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 20, 1999. E'TOWN CORPORATION ELIZABETHTOWN WATER COMPANY 1998 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 5 Energy Supply 5 Environmental Matters 5 Franchises 5 Employee Relations 5 Rate Matters 5 Real Estate Matters 6 Other Developments 7 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 AUDITORS' REPORT & SUPPLEMENTAL SCHEDULES EXHIBIT INDEX APPENDIX I Elizabethtown Water Company and Subsidiary Consolidated Financial Statements for the Years Ended December 31, 1998, 1997 and 1996 and Independent Auditors' Report E'TOWN CORPORATION ELIZABETHTOWN WATER COMPANY Annual Report on Form 10-K For the year ended December 31, 1998 PART I Item 1. Business ORGANIZATION E'town Corporation (E'town or Corporation) was originally incorporated under the laws of the State of New Jersey in 1985 to serve as a holding company for Elizabethtown Water Company (Elizabethtown or Company) and its wholly owned subsidiary, The Mount Holly Water Company (Mount Holly). Elizabethtown and Mount Holly are regulated water utilities which, as a consolidated entity, are referred to herein as Elizabethtown Water Company (Elizabethtown Water Company). Applied Wastewater Management (AWWM) is a regulated wastewater utility acquired in June 1998 as part of the acquisition of E'town's joint venture partner (discussed below) and is engaged in the ownership and operation of wastewater facilities. Elizabethtown, Mount Holly and AWWM are public utilities and are regulated by the New Jersey Board of Public Utilities (BPU). Elizabethtown, Mount Holly and AWWM comprise the regulated utilities segment of the business for financial and management reporting purposes. Liberty Water Company (Liberty) is a wholly owned, non-regulated subsidiary of E'town formed in July 1998 to operate the water system of the City of Elizabeth, New Jersey under a 40-year operating contract. Edison Water Company (Edison) is a wholly owned, non-regulated subsidiary of E'town formed in July 1997 to operate the water system of the Township of Edison, New Jersey under a 20-year operating contract. Edison and Liberty comprise the contract operations segment of the business for financial and management reporting purposes. 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 and Properties comprise the financing and investing segment of the business for financial and management reporting purposes. E'town provides the financing for its non-regulated subsidiaries through issuance of short- and long-term debt as well as through public equity offerings for capital contributions to all subsidiaries. In June 1998 E'town acquired the operations of Applied Wastewater General Partnership (AWG), E'town's joint venture partner. The newly-acquired companies are now comprised of Applied Water Management, Inc. (AWM) and AWWM. AWM is engaged in the design and construction of wastewater facilities as well as in the pumping and hauling of wastewater materials. This entity represents the Engineering, Operations and Construction segment of the business for financial and management reporting purposes. Elizabethtown is a New Jersey corporation, one of whose predecessors was first incorporated in 1854. The present corporation was formed in 1961 as a result of a consolidation of Elizabethtown Water Company Consolidated and Plainfield-Union Water Company. Elizabethtown owns all of the common stock of Mount Holly. The assets and operating results of Elizabethtown constitute the predominant portions of E'town's assets and operating results. Mount Holly contributed 3% and Liberty, AWM and Edison each contributed 4% of the Corporation's consolidated operating revenues for 1998. Regulated Utilities Segment SERVICE AREA AND CUSTOMERS At December 31, 1998, Elizabethtown and Mount Holly furnished water service on a retail basis to general customers and to industrial customers totaling 200,348 in 54 municipalities in the counties of Union, Middlesex, Somerset, Mercer, Hunterdon, Ocean, Morris and Burlington in New Jersey. AWWM serves 188 wastewater and 97 water customers. 1 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. At December 31, 1998, Edison and Liberty served 37,391 customers under their contracts to operate the water systems of the Township of Edison and the City of Elizabeth, both in New Jersey. The operating revenues of E'town by major classification of customer for the twelve months ending December 31, 1998 are as follows: General customers 60.3% Other water systems 11.0% Industrial wholesale customers 5.6% Fire service/miscellaneous 11.6% Contract operations 7.5% Engineering, operations and construction 4.0% The water systems are substantially all metered except for fire service. AWM provides a variety of services for internal purposes as well as for external customers. Engineering services are provided internally for the construction division of AWM in the design and building of wastewater facilities for developers, as well as for a variety of external customers for various wastewater projects. The operations division of AWM performs a variety of wastewater pumping and hauling services. These services include sludge hauling for commercial, industrial and governmental customers under contract, as well as septic cleaning for residential and other customers. Additional operating statistics appear in Item 6. WATER SUPPLY The water supply systems of Elizabethtown and Mount Holly are physically separate. During 1998, Elizabethtown's pumpage averaged 131.7 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 is constructing additional facilities, as discussed below, to augment its water supplies. In 1998, surface water sources supplied approximately 90% of Elizabethtown's supply with wells supplying the remaining 10%. 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 150 MGD is presently allocated to Elizabethtown and others. The NJWSA has available, and Elizabethtown purchases, water above the Company's minimum purchase obligation on an as-needed basis. 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 has determined that this project (the "Mansfield Project") is the most cost effective method for Mount Holly to comply with the state's regulations. 2 By September 1995, Mount Holly had obtained all New Jersey Department of Environmental Protection (DEP) approvals for the Mansfield Project and was ready to begin construction when New Jersey-American Water Company (NJAM) appealed the granting of Mount Holly's permits for the project. Under an August 1997 settlement among Mount Holly, the DEP and NJAM, Mount Holly will purchase 1 million gallons per day from NJAM for a period to include the later of January 1, 2000 or the date the Mansfield Project is placed into service. Purchases began during March of 1998. Mount Holly has taken steps necessary to recover in rates both the costs of purchased water and the costs of the Mansfield Project (see Rate Matters below). On May 27, 1998 the BPU adopted a Stipulation signed by the parties to a petition filed in September 1997 for a Purchased Water Adjustment Clause (PWAC) for an increase in annual revenues $1.29 million or 38.9%. Mount Holly has deferred the increase in purchased water cost between March 19, 1998 and May 27, 1998 as Other Unamortized Expenses. Recovery of this amount will be addressed in the next PWAC petition expected in 1999. On October 6, 1998, the BPU issued an Order adopting a Stipulation signed by the parties to Mount Holly's proceeding for a review of the prudence of constructing the Mansfield Project. The Stipulation indicated that the project provides the most cost-effective alternative available to Mount Holly customers for meeting the requirements for an alternative source of supply for the Mount Holly system. On January 29, 1999 Mount Holly filed a petition with the BPU for an increase in annual operating revenues of $2.1 million or 40.5%. This request is intended to cover increases in capital expenditures as well as increases in operating expenses since rates were last established in January 1996. The majority of the increase in capital expenditures relates to the construction of the initial phase of the Mansfield Project. WATER TREATMENT FACILITIES AND WATER QUALITY REGULATIONS Elizabethtown owns and operates two treatment plants at the confluence of the Raritan and Millstone Rivers adjacent to the Delaware and Raritan Canal to treat surface water purchased from the NJWSA. The plants can withdraw water from any of the above sources, which is an advantage in the event that one source becomes temporarily 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. 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. 3 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 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. The Company is in compliance with LCR requirements. 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 aeration towers 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 22 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 were 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. 4 TRANSMISSION AND DISTRIBUTION As of December 31, 1998, Elizabethtown Water Company's transmission and distribution system included 2,955 miles of transmission and distribution mains. Mains range in size up to 60 inches, substantially all of which are either ductile iron, cast iron or pre stressed concrete pipe. Elizabethtown conducts an ongoing program to clean and line its older cast iron mains the cost of which is capitalized and has been included in rate base in stipulations settling recent rate cases. On an ongoing basis, Elizabethtown assesses the capacity of its system to maintain adequate pressures and initiates plans to construct pumping, transmission and storage facilities as needed. ENERGY SUPPLY Elizabethtown pumps most of its water with electric power purchased from two major electric utilities. The Company has replaced certain electric pumps with natural gas-fired pumps over the last several years to reduce energy costs. Elizabethtown also has other diesel powered pumping and generating facilities at its major treatment plants and at certain transfer stations to provide basic service during possible electrical shortages. Elizabethtown has not, to date, experienced any shortage of electric energy, natural gas or diesel fuel to operate its pumps and has cooperated with its electric suppliers during their peak periods by operating non-electrical pumping facilities upon request. ENVIRONMENTAL MATTERS Elizabethtown and Mount Holly are also subject to regulation by the DEP with respect to water supply plans and specifications for the construction, improvement, alteration and operation of public water supply systems and with respect to the quality of any residuals from treatment plants. As a normal byproduct of treating surface water, Elizabethtown's existing surface water treatment plants generate silt removed from untreated river water plus residue from chemicals used in the treatment process. Historically, Elizabethtown had disposed of this material in landfills. As a result of revised regulations governing landfills, Elizabethtown has been reusing this material on site for flood protection and is presently removing some material off-site for beneficial reuse. Under New Jersey law, environmental matters are addressed by the DEP before diversion allowances or other water supply projects are authorized. To date, Elizabethtown has been able to construct all plant facilities and obtain all diversion authorizations necessary to maintain 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, 1998, the Corporation had a total of 505 full-time employees, of which 224 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, 1999 and will expire on January 31, 2003. The contract provides for wage increases of 1.5% on the first of February and August beginning in 1999 through August of 2002. The Company considers relations with both union and nonunion employees to be satisfactory. RATE MATTERS Elizabethtown, Mount Holly and AWWM are subject to regulation by the New Jersey Board of Public Utilities (BPU) with respect to the issuance and sale of securities, rates and service, classification of accounts, mergers, and other matters. Rate relief is sought periodically cover the cost of increased operating expenses, increases in financing expenses due to additional investments in utility plant, and other costs of doing business. 5 Elizabethtown In December 1997 the BPU adopted a Stipulation for rate increases for Elizabethtown and Mount Holly, effective January 1, 1998, for the full recovery of costs associated with SFAS No. 106 "Accounting for Employer's Postretirement Benefits," on an accrual basis less the costs associated with SFAS No. 106 expenses previously recovered in rates. The total increases in annual operating revenues resulting from these Stipulations are $.39 million for Elizabethtown and $.02 million for Mount Holly. Elizabethtown expects to file for rate relief later in 1999 to recover additional construction and financing costs since base rates were last established in October 1996. Mount Holly On October 6, 1998, the BPU issued an Order adopting a Stipulation signed by the parties to Mount Holly's proceeding for a review of the prudence of constructing a new well field, treatment plant and pipeline to provide an alternate water source required due to State mandated restrictions. This project is known as the Mansfield Project. The Stipulation indicated that the Mansfield project provides the most cost-effective alternative available to Mount Holly customers for meeting the requirements for an alternative source of supply for the Mount Holly system. Effective in March 1998, Mount Holly began purchasing 1 million gallons per day from NJAM and will continue to purchase this water until the later of January 1, 2000 or the date the Mansfield Project is placed into service. The annual cost of the purchased water is $1.16 million. In September 1997 Mount Holly filed a petition with the BPU to establish a PWAC to reflect the cost of water purchased from NJAM. On May 27, 1998 the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.29 million or 38.9%. Mount Holly has deferred the increase in purchased water cost between March 19 and May 27 as Other Unamortized Expenses. Recovery of this amount has been requested in the rate increase discussed below. As of December 31, 1998, Mount Holly has deferred $.08 million of these costs. On January 29, 1999, Mount Holly filed a petition with the BPU for a $2.09 million or 40% rate increase, which reflects additional construction and financing costs, as well as increases in operating costs since base rates were last established in January 1996. This rate case also includes $8.96 million in costs with a corresponding rate increase of $1.30 million, for the portion of the Mansfield Project that was placed in service in the third quarter of 1998. A decision is expected during the fall of 1999. Mount Holly expects to file an additional rate case later in 1999 for the remaining cost of the Mansfield Project, to coincide with the completion of the project and the expiration of the agreement to purchase water from NJAM and the cancellation of the PWAC. Financing and Investment Segment REAL ESTATE MATTERS E'town Properties and E'town Corporation own various parcels of undeveloped land in New Jersey carried as investments of $11.3 million in Non-Utility Property and Other Investments - Net, in the Consolidated Balance Sheets of E'town at December 31, 1998. 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. One of the real estate parcels was sold in 1997 for $.4 million, resulting in a gain of less than $.1 million. Two other parcels were sold in 1998 for $1.7 million resulting in a gain of less than $.1 million. Cash proceeds of $1.2 million were received in 1998 and the balance was financed with a one-year mortgage at an interest rate of 8%, with full payment due in 1999. In the first quarter of 1999, Properties sold a parcel of land which has been under contract since 1995 in Green Brook, New Jersey for $5.83 million, at a gain of $2.08 million net of taxes or approximately $.25 per share. Cash proceeds of $1.5 million were received in 1999 and the balance was financed with a 7.75% mortgage for the remaining $4.33 million, to be paid over two years. Properties has entered into contracts for sale for all of its remaining parcels. The eventual sale of these parcels is contingent upon the purchaser obtaining various approvals for development. This process could take up to several years. 6 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. Such costs were capitalized until the property was offered for sale, after which time such costs were expensed. Based upon independent appraisals received at various times prior to 1997 and the expected sales prices for properties under contract to be sold, the estimated net realizable value of each property exceeds its respective carrying value as of December 31, 1998. Contract Operations Segment OTHER DEVELOPMENTS Effective July 1, 1998, E'town, through Liberty, has entered into a contract with the City of Elizabeth (Elizabeth), New Jersey to operate its water system under a 40-year contract serving 17,900 customers. Under the contract, Liberty made a payment to Elizabeth of $19.7 million in 1998 and is contractually obligated to make payments to Elizabeth of $12 million in June 1999 and $19 million in June 2000. Also under the terms of the contract, Liberty will deposit $57.8 million from revenues earned over the 40-year contract, of which $52.4 million is due after 2012, into a fund administered by Elizabeth to be used by Elizabeth to pay for capital improvements to the water system. In addition, Liberty is responsible for $7.8 million of construction expenditures, primarily for meter replacements, over the life of the contract. These construction expenditures, as they are incurred, are being amortized on a straight-line basis over the remaining life of the contract. Of these total commitments, approximately $4.0 million is expected to be expended in the next three years. E'town will receive all the revenues from operating the system in accordance with rate increases set forth in the contract. E'town is also responsible for all operating expenses as well as the capital expenditures discussed above. Performance by Liberty of the contract provisions is guaranteed by E'town. E'town also performs the commercial billing operations for the wastewater system of Elizabeth. E'town does not operate the wastewater system. E'town does the wastewater billing for Elizabeth and remits all cash collected to Elizabeth. In 1997 E'town formed a wholly-owned subsidiary, Edison Water Company (Edison), for the purpose of managing the assets and operations of the Edison Township water system under a 20-year contract. Edison serves approximately 11,600 residential, commercial and industrial customers. Edison bills and receives all water revenues generated as a result of operating the water system of the Township of Edison, New Jersey and pays all the expenses under the contract. Edison expects to make expenditures of approximately $25 million during the 20-year life of the contract of which $10.16 million has been spent to-date. Expenditures include capital improvements to the water system as well as contract payments to the Township of Edison. Of the total, approximately $3.6 million is expected to be expended in the next three years of the contract. An initial payment of $5.7 million was made upon the closing in June 1997 and has been included in concession fees on privatization contracts, net of amortization. Performance by Edison of the contract provisions is guaranteed by E'town. Engineering/Operations/Construction Segment In 1995 the Corporation entered into a three-year joint venture agreement with AWG to form a New Jersey limited liability company, Applied Watershed Management, LLC. AWG was a unit of several privately held and affiliated companies providing design, engineering, construction and operating services for water and wastewater facilities. E'town exercised an option to purchase the operations of AWG to provide a full complement of water and wastewater services and consequently closed on the transaction in June 1998. The purchase price was $6.61 million (185,005 restricted common shares) for the three companies that now comprise AWM and $.04 million (1,305 restricted common shares) for AWWM, a regulated wastewater utility, in a stock-for-stock transaction. Of the shares issued, 20% are being held in escrow. The purchase price is subject to a potential downward post-closing adjustment based upon a multiple of earnings for the twelve months ended March 31, 1998. As required by the purchase contract, E'town has undertaken an audit of AWG for such period. Therefore, the amount of any downward post-closing adjustment is not yet determinable. 7 Executive Officers of the Corporation and Elizabethtown Name Age Positions Held Anne Evans Estabrook 54 Chairman of the Corporation since 1997. Vice President of the Corporation since 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 43 President of the Corporation since 1997, Chief Financial Officer of the Corporation from 1989 until 1997 and Treasurer of the Corporation from 1990 to 1997. President of Elizabethtown since 1996 and Executive Vice President of Elizabethtown from 1994 to 1995. He served as Senior Vice President of Elizabethtown from 1993 to 1994, Chief Financial Officer of Elizabethtown from 1990 to 1995 and Treasurer of Elizabethtown from 1989 to 1994. Gail P. Brady 53 Treasurer of the Corporation since 1997, Senior Vice President, Chief Financial Officer and Treasurer of Elizabethtown since 1998 and Vice President - Finance, Regulatory Affairs and Treasurer of Elizabethtown since 1994. Dennis W. Doll 40 Controller of the Corporation since 1997, Vice President and Controller of Elizabethtown since 1998 and Controller of Elizabethtown since 1994. Norbert Wagner 63 Senior Vice President - Operations of Elizabethtown since 1992. 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 Their are environmental matters that are inherent in the production, transmission and distribution of water as well as in the treatment of wastewater. The Corporation is sensitive to these issues and mitigates the environmental impact of these activities to the extent required by the laws and regulations under which these activities are governed and makes efforts to exceed the regulatory requirements where practical. The Corporation, in the ordinary course of business, periodically becomes involved in litigation. There is currently no litigation in progress regarding environmental or other issues in which an outcome adverse to the Corporation would have a material impact on the financial statements. 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 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------ Utility Plant (Thousands) Utility Plant - net $604,899 $572,785 $560,024 $507,858 $437,456 Construction Expenditures (excluding AFUDC) 43,500 24,612 55,125 73,789 69,981 Total Assets 683,328 646,318 640,779 580,808 502,848 Capitalization (Thousands) Shareholder's Equity 208,573 193,354 182,293 176,685 151,624 Preferred Stock 12,000 12,000 12,000 12,000 12,000 Debt (1) 267,178 249,974 250,963 208,952 164,951 Total Capitalization $487,751 $455,328 $445,256 $397,637 $328,575 Capitalization Ratios Common Stock 43% 42% 41% 44% 46% Preferred Stock 2% 3% 3% 3% 4% Debt (1) 55% 55% 56% 53% 50% Earnings Applicable to Common Stock (Thousands) $ 23,955 $ 20,092 $ 15,942 $ 16,512 $ 13,369 Operating Statistics Revenues (Thousands) General Customers $ 87,698 $ 85,195 $ 68,797 $ 67,455 $ 62,923 Other Water Systems 22,181 21,900 18,929 18,720 18,082 Industrial Wholesale 8,148 8,451 7,869 7,947 7,458 Fire Service/Miscellaneous 6,820 16,242 14,763 14,276 13,570 Total Revenues $134,847 $131,788 $110,358 $108,398 $102,033 Water Sales - Millions of Gallons (mg) General Customers 24,609 24,333 22,890 23,999 23,551 Other Water Systems 14,397 14,504 15,049 15,569 15,691 Industrial Wholesale 3,482 3,533 3,567 3,673 3,568 System Use and Unaccounted 6,933 6,948 6,444 6,402 6,570 Total Water Sales 49,421 49,318 47,950 49,643 49,380 System Delivery by Source - mg Surface 48,067 42,585 41,485 42,646 42,534 Wells 1,072 6,689 6,328 6,764 6,690 Purchased 282 44 137 233 156 Total System Delivery 49,421 49,318 47,950 49,643 49,380 Millions of Gallons Pumped: Average Day 135 135 131 136 135 Maximum Day 196 205 170 183 182 General Information Customers 200,251 197,663 195,482 192,617 189,440 Miles of Main 2,953 2,926 2,899 2,869 2,828 Fire Hydrants Served 16,402 16,228 16,012 15,650 15,291 ============================================================================== (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 by reference. Elizabethtown Water Company and Subsidiary The water utility operations of Elizabethtown Water Company (Elizabethtown) and its subsidiary, The Mount Holly Water Company (Mount Holly), presently constitute the major portion of E'town Corporation (E'town or Corporation), assets and earnings. Elizabethtown and Mount Holly are regulated water companies which, as a consolidated entity are referred to herein as Elizabethtown Water Company (Company). Mount Holly contributed about 3% of the Company's consolidated operating revenues for 1998. The following analysis sets forth significant events affecting the financial condition of Elizabethtown at December 31, 1998, and the results of operations for the years ended December 31, 1998 and 1997. LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures Program In 1998, capital expenditures were $43.5 million, primarily for water utility plant. For the three years ending December 31, 2001, capital and investment requirements for Elizabethtown are estimated to be $124.5 million, primarily for water utility plant consisting of $107.5 million for Elizabethtown and $17.0 million for Mount Holly. Elizabethtown While Elizabethtown'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 $50.6 million for routine projects (services, hydrants and main extensions not funded by developers) and $56.9 million for transmission system upgrades, a new operations center and other projects. Elizabethtown expects to file for rate relief later in 1999 and periodically thereafter 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 $17.0 million, primarily for an additional supply source to comply with state regulations designed to prevent further depletion of a local aquifer. Mount Holly currently obtains all of its water from wells drilled into an aquifer, which has been subject to over-pumping by various users in a portion of southern New Jersey. 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. In August 1998, the New Jersey Board of Public Utilities (BPU) adopted a Stipulation among Mount Holly and other parties concluding that this project (the "Mansfield Project") is the most cost effective method for Mount Holly to comply with the state regulations. To settle an appeal initiated by New Jersey-American Water Company (NJAM) concerning the diversion rights for the Mansfield Project, Mount Holly signed a Stipulation with NJAM, the New Jersey Department of Environmental Protection (DEP) and other parties, requiring Mount Holly to purchase one million gallons per day from NJAM during the two-year period that the Mansfield Project is being constructed. Purchases began during March of 1998, after completion of an interconnection. 11 In September 1997, Mount Holly filed a petition with the BPU to establish a Purchased Water Adjustment Clause (PWAC) to reflect the cost of water purchased from NJAM under the agreement discussed above. On May 27, 1998 the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.3 million or 38.9%. Mount Holly has deferred the increase in purchased water cost between March 19 and May 27. Recovery of this amount has been requested in the rate increase discussed below. As of December 31, 1998, Mount Holly has deferred $.1 million of these costs. Mount Holly filed for a rate increase in January 1999 to reflect a portion of the expenditures for the Mansfield Project, as well as to increase the rates of return realized and, therefore, the contribution to E'town's earnings per share. Capital Resources During 1998, Elizabethtown financed 56.3% of its capital expenditures from internally generated funds (after payment of common stock dividends). The balance was financed with a combination of short-term borrowings under lines of credit and proceeds from capital contributions from E'town (funded by issuances of Common Stock under the Corporation's Dividend Reinvestment and Stock Purchase Plan). For the three-year period ending December 31, 2001, Elizabethtown estimates that 67.5% of its currently projected capital expenditures are expected to be financed with internally generated funds (after payment of common stock dividends). The balance will be financed with a combination of proceeds from capital contributions from E'town sales of common stock, proceeds from tax-exempt New Jersey Economic Development Authority (NJEDA) bonds and short-term borrowings. Mount Holly's Mansfield Project will be financed from requisitions from the New Jersey Environmental Infrastructure Trust Financing Program (see below). The NJEDA has granted preliminary approval for the financing of almost all of Elizabethtown's major projects during the next three years. Elizabethtown expects to pursue additional tax-exempt financing to the extent that final allocations are granted by the NJEDA. In November 1998, Mount Holly closed on two loans that will provide up to $13.2 million in 2.60% financing for the Mansfield Project through the New Jersey Environmental Infrastructure Trust Financing Program. The first loan, in the amount of $7.3 million, is through the New Jersey Environmental Infrastructure Trust, which issued tax-exempt bonds with average interest rates of 4.7%. The second loan, in the amount of $5.9 million, is from the State of New Jersey, acting through the New Jersey Department of Environmental Protection funded by federal monies at no interest cost. The effective interest rate for the combined notes is approximately 2.60%. Interest Rate Risk The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Company manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. As of December 31, 1998, a hypothetical single percentage point change in interest rates would result in a $.9 million change in interest costs and earnings before tax related to short-term and variable rate debt. RESULTS OF OPERATIONS Net Income for 1998 was $24.0 million as compared to $20.1 million for 1997. Net income increased by $3.9 million, primarily comprised of (i) $.6 million due to an extended dry period in the summer of 1998 resulting in higher water consumption than in 1997 (ii) $1.3 million from lower operating expenses due to a combination of a mild winter in 1998, more efficient use of our work force, lower employee benefit costs and success with our ongoing cost control efforts (iii) $.7 million as a result of new customers and (iv) $.5 million related to refinancing short-term debt at lower interest rates. Capitalized construction interest accounted for an increase in net income of $.5 million. 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. 12 Operating Revenues increased $3.1 million or 2.3% in 1998 over the comparable 1997 amount. The increase is primarily comprised of $1.4 million from water service to residential and wholesale customers attributable to increased water consumption as a result of warmer, drier weather in the summer of 1998 than in 1997. New customers accounted for $.7 million of the increase. The PWAC rate increase for Mount Holly accounted for the remainder of the increase. 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. Operation Expenses decreased $.2 million or .4% in 1998 from 1997. The Company experienced a decrease of $1.0 million from lower operating costs due to a mild winter, greater work force utilization, ongoing cost control efforts and decreased employee benefit costs. These decreases were partially offset by an increased cost of labor, purchased water for Mount Holly and variable costs for the higher water sales. 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. Maintenance Expenses decreased $.9 million or 13.3% in 1998, as compared to 1997 due to improved procurement procedures and preventative maintenance programs. 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. Depreciation Expense increased $.2 million or 1.7% in 1998 compared to 1997 due to depreciation on utility plant additions. 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. Revenue Taxes increased $.2 million or 1.1% in 1998 and $2.7 million or 19.8% in 1997 due to the taxes on increases in operating revenues discussed above. Real Estate, Payroll and Other Taxes decreased $.5 million or 14.7% in 1998. This overall decrease was comprised of additional payroll taxes due to additional labor costs which were offset by decreases from lower than anticipated property taxes on the Plant. These taxes increased $.2 million or 6.8% in 1997 due to additional labor costs, as well as additional property taxes. Federal Income Taxes as a component of operating expenses increased $1.7 million or 15.0% and $3.7 million or 49.8% as compared to 1997 and 1996, respectively, due to the changes in the components of taxable income for all segments discussed herein. 13 Other Income (Expense) increased $.3 million or 70.5% due to a $.4 million increase in Allowance for Funds Used During Construction (AFUDC), primarily for Elizabethtown's western operations center. Federal income taxes increased $.1 million for the taxes on the AFUDC. 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. Total Interest Charges decreased $1.0 million or 6.1% due primarily to refinancing short-term debt at lower interest rates. In addition, the debt component of AFUDC increased $.3 million, resulting in lower interest expense, as a result of higher construction expenditures, primarily for Elizabethtown's new western operations center. 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. 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. Elizabethtown and Mount Holly Over the next several years, management will seek to increase earnings by maximizing earned returns through expansion efforts to increase sales and through cost control measures. Capital to finance water investments will be raised from external sources and from capital contributions from E'town. Earnings will vary going forward due to the effect of weather on costs and pumpage, timing and adequacy of rate relief, time elapsed since the last rate increase and other factors. For 1999, the Company expects earnings to be somewhat lower than in 1998, based on an assumed return to normal weather patterns after the unusually dry summers in 1998 and 1997. In particular, Elizabethtown's return should be somewhat lower in 1999 given that this year will be the third year since the last rate adjustment. Elizabethtown expects to petition the BPU for an increase in rates in 1999 to reflect the increases in construction, financing and operating costs since base rates were last established in October 1996. Mount Holly earned a rate of return on common equity of 4.7% in 1998, compared to an authorized rate of return of 11.25%, established in its most recent rate proceeding. Mount Holly earned significantly below its authorized return in 1998 and 1997 as the Company was precluded from filing for needed rate relief due to ongoing litigation with NJAM. Management expects Mount Holly to increase its return later in 1999 and into 2000 upon receipt of additional rate relief from the rate increase filed in January 1999, so that Mount Holly can realize rates of return comparable to authorized levels. 14 New Accounting Pronouncements See Note 2 of Elizabethtown's Notes to Consolidated Financial Statements for a discussion of new accounting standards that were effective in 1998. Year 2000 State of Readiness The Company has assessed its significant business systems, as well as non-critical, peripheral support system for compliance with the Year 2000. The assessment concluded that all significant business systems (i.e. customer billing and service, financial, water treatment operating and control, water quality laboratory information and telemetric data acquisition systems) are Year 2000 compliant. The assessment also included inquiries as to the state of readiness of significant vendors whose services to the Company could have an impact on the Company's ability to deliver service to its customers. Management concluded that the delivery of electric power as well as chemicals used in the water treatment process are two areas of significant importance and received documentation from the vendors who provide these services that indicates their ability to provide service. Therefore, the Company expects no disruption in the services it provides to its customers and expects to process transactions in its financial, customer billing and customer services systems. The assessment did identify certain peripheral support systems that need to be addressed. An implementation plan has been developed and is being implemented. The Costs to Address The Company's Year 2000 Issues The significant business systems of the Company defined above are Year 2000 compliant and have been operational for up to several years. Therefore, no further costs are expected to be incurred in connection with bringing these systems into compliance. The peripheral support systems that are being addressed will require the Company to incur costs to bring them into compliance. The present estimates place the total of these costs at less than $.2 million. Risks Associated With The Company's Year 2000 Issues Management believes that all identifiable issues with respect to Year 2000 compliance have been addressed, or will be addressed, in sufficient time and in sufficient detail to preclude any disruption in service or adverse effect on the Company's financial profile. Management therefore believes that risks associated with this issue are minimal with respect to those areas, which are internal to the Company and, over which management exercises complete control. Those areas that are external to the Company i.e., issues associated with our vendors, have been mitigated to the extent possible through inquiry of our vendors, tests of their claims of Year 2000 compliance and development of contingency plans as considered appropriate. Contingency Plan There are operational contingency plans in place on an ongoing basis to address issues, such as natural disasters, that could result in a disruption of service. These procedures would be activated in the event that certain physical facilities were not operable as a result of failures by our vendors associated with Year 2000 issues. In addition, Elizabethtown Water Company has alternative electric, natural gas and diesel generation capacity that could sustain a significant level of pumping capacity for an indefinite period of time. 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 contained in Appendix I hereto, incorporated by reference herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to directors of E'town and Elizabethtown is included in E'town's Proxy Statement for the 1999 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 1999 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 1999 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 1999 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, 1998, 1997 and 1996. Consolidated Balance Sheets as of December 31, 1998 and 1997. Statements of Consolidated Capitalization as of December 31, 1998 and 1997. 16 Statement of Consolidated Shareholder's Equity for the years ended December 31, 1998, 1997 and 1996. Statements of Consolidated Cash Flows for the years ended December 31, 1998, 1997 and 1996. Notes to Consolidated Financial Statements. E'town Corporation A portion of the 1998 Annual Report to Shareholders which includes Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Other Financial and Statistical Data is filed herewith as Exhibit 13 and is herein incorporated by reference. Elizabethtown Water Company The Independent Auditors' Report and Elizabethtown Water Company's consolidated financial statements and notes thereto are contained in Appendix I hereto, incorporated by reference herein. 2. Financial Statement Schedules: E'town Corporation Elizabethtown Water Company Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997 and 1996. Supplemental Schedule of Property, Plant and Equipment at December 31, 1998 and 1997. Other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or the notes accompanying each Company's financial statements. 3. Exhibits (a) Exhibits for E'town and Elizabethtown Water Company are listed in the Exhibit Index, which is incorporated by reference herein. (b) Reports on Form 8-K: 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 31, 1999 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 31, 1999. 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/ Barry T. Parker Director /s/ Hugo M. Pfaltz, Jr. Director /s/ Chester A. Ring III Director /s/ Joan Verplanck Director /s/ Edward A. Clerico Treasurer /s/ Gail P. Brady (Principal Financial Officer) Controller /s/ Dennis W. Doll (Principal Accounting Officer) 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 31, 1999 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 31, 1999. 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/ Barry T. Parker Director /s/ Hugo M. Pfaltz, Jr. Director /s/ Chester A. Ring III Director /s/ Joan Verplanck Director /s/ Edward A. Clerico Vice President - Finance & Treasurer /s/ Gail P. Brady (Principal Financial Officer) Controller /s/ Dennis W. Doll (Principal Accounting Officer) INDEPENDENT AUDITORS' REPORT E'TOWN CORPORATION: We have audited the consolidated financial statements of E'town Corporation and its subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 24, 1999; such consolidated financial statements and report are included in your 1998 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of E'town Corporation and its subsidiaries, listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP February 24, 1999 Parsippany, New Jersey Schedule II E'TOWN CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E Additions Balance at Charged to Balance at Beginning of Costs and Deductions End of Description: Period Expenses (A) Period - ------------------------------------------------------------------- Reserve for Uncollectible Accounts: Year Ended 12/31/98 $612,000 $995,940 (B)$542,940 $1,065,000 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 (A) Write-off of uncollectible accounts, net of recoveries. (B) Includes reserves for Liberty Water Company, ($39,970) and Applied Water Management, Inc., ($344,630), acquired in 1998 and Edison Water Company ($37,400 acquired in 1997). ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E Additions Balance at Charged to Balance at Beginning of Costs and Deductions End of Description: Period Expenses (A) Period - ------------------------------------------------------------------ Reserve for Uncollectible Accounts: Year Ended 12/31/98 $612,000 $573,940 $542,940 $643,000 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 (A) Write-off of uncollectible accounts, net of recoveries. E'town Corporation & Subsidiaries Supplemental Elizabethtown Water Company and Subdidiary Schedule Property, Plant & Equipment As of December 31, 1998 (In Thousands) Elizabethtown Water Company and Subsidiary 1998 1997 - ------------------------------------------ ---- ---- Utility Plant In Service: Intangible Plant $251 $251 Source of Supply Plant 21,688 20,513 Pumping Plant 62,578 57,498 Water Treatment Plant 160,259 156,601 Transmission & Distribution Plant 450,100 422,284 General Plant 18,778 19,994 Leasehold Improvements 15 136 Acquisition Adjustments 632 632 -------- -------- Utility Plant In Service 714,301 677,909 Construction Work In Progress 15,694 9,300 -------- -------- Total Utility Plant 729,995 687,209 ======== ======== Non-Utility Property - Net 7,315 79 -------- -------- Total $737,310 $687,288 ======== ======== E'town Corporation and Subsidiaries - ----------------------------------- Utility Plant (from above) 729,995 687,209 Utility Plant (AWWM) 3,684 Construction Work In Progress (AWWM) 886 -------- -------- Total Utility Plant $734,565 $687,209 Non-utility Property and Other Investments-Net 84,945 20,570 -------- -------- Total $819,510 $707,779 ======== ======== EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk(*), are filed herewith. The exhibits not so designated have heretofore been filed with the Commission and are incorporated herein by reference to the documents indicated in brackets following the description of such exhibits. Exhibits designated with a (1) are management contracts or compensatory plans or arrangements. E'town Corporation Exhibit No. Description 3(a) - Certificate of Incorporation of E'town Corp. [Registration Statement No. 33-42509, Exhibit 4(a)] *3(b) - By-Laws of E'town Corp. 3(c) - Certificate of Incorporation of E'town Properties, Inc. [Registration Statement No. 33-32143, Exhibit 4(j)] 3(d) - By-laws of E'town Properties, Inc. [Registration Statement No. 33-32143, Exhibit 4(n)] 4(a) - Rights Agreement dated as of February 4, 1991 between E'town and the Rights Agent [Registration Statement No. 33-38566, Exhibit 4(n)] 4(b) - Indenture dated as of January 1, 1987 from E'town Corporation to Boatmen's Trust, Trustee, relating to the 6 3/4% Convertible Subordinated Debentures due 2012 [Registration Statement No. 33-32143, Exhibit 4(a)] 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. 333-69549, Dated December 23, 1998] 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 [Form 10-K for the year 1997, Exhibit 10(k)] (1) 10(l) - Change in Control Agreement for Anne Evans Estabrook [Form 10-K for the year 1997, Exhibit 10(k)] (1) 10(m) - Contract with the City of Elizabeth, New Jersey for the Operation by E'town Corporation of the City's Water System [Form 10-Q for the quarter ended September 30, 1998, Exhibit 10(m)] 10(n) - Employment Agreement between Applied Water Management, Inc. and Edward A. Clerico [Form 10-Q for the quarter ended September 30, 1998, Exhibit 10(n)] *10(o) - Change in Control Agreement for certain officers *12 - Computation of Ratio of Earnings to Fixed Charges *13 - Portion of the 1998 Annual Report to Shareholders which includes Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Other Financial and Statistical Data and is herein incorporated by reference. *21 - Subsidiaries of the Corporation *23 - Consent of Deloitte & Touche LLP, Independent Auditors *27 - Financial Data Schedule Elizabethtown Water Company Exhibit No. Description 3(a) - Form of Restated Certificate of Incorporation of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1994, Exhibit 3(a)] *3(b) - By-laws of Elizabethtown Water Company 4(a) - Indenture dated as of November 1, 1994 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 7 1/4% Debentures due 2028 [Form 10-K for year ended December 31, 1994, Exhibit 4(a)] 4(b) - Indenture dated as of September 1, 1992 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 8% Debentures due 2022 [Form 10-K for year ended December 31, 1993, Exhibit 4(a)] 4(c) - Indenture dated as of October 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 8 3/4% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(f)] 4(d) - Indenture dated as of August 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 6.60% Debentures due 2021 [Registration Statement No. 33-46532, Exhibit 4(g)] 4(e) - Indenture dated as of August 1, 1991 from Elizabethtown Water Company to The Bank of New York, Trustee, relating to the 6.70% Debentures due 2021[Registration Statement No. 33-46532, Exhibit 4(h)] 4(f) - Indenture dated as of October 1, 1990 from Elizabethtown Water Company to Citibank, N.A., Trustee, relating to the 7 1/2% Debentures due 2020 [Registration Statement No. 33-38566, Exhibit 4(e)] 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)] *4(k) - Loan Agreement Dated November 1, 1998 Between the State of New Jersey, Acting Through the New Jersey Department of Environmental Protection, and The Mount Holly Water Company Exhibit No. Description *4(l) - Loan Agreement Dated November 1, 1998 Between the New Jersey Environmental Infrastructure Trust and The Mount Holly Water Company 10(a) - Contract for service to Middlesex Water Company. [Registration Statement No. 33-38566, Exhibit 10(a)] 10(b) - Contract for service to Edison Township. [Form 10-Q for the quarter ended June 30, 1997, Exhibit 10(b) 10(c) - Contract for service to New Jersey-American Water Company. [Form 10-K for the year ended December 31, 1993, Exhibit 10(c)] 10(d) - Contract for service to City of Elizabeth. [Form 10-K for the year ended December 31, 1992, Exhibit 10(d)] 10(e) - Contract for service to Franklin Township.[Registration Statement No. 33-46532, Exhibit 10(e)] 10(f) - Contract with the New Jersey Water Supply Authority for the purchase of water from the Raritan Basin. [Registration Statement No. 33-32143, Exhibit 10(e)] 10(g) - Supplemental Executive Retirement Plan of Elizabethtown Water Company [Form 10-K for the year ended December 31, 1992, Exhibit 10(g)] (1) 10(h) - Medical Reimbursement Plan of Elizabethtown Water Company [Form 10-K for the year 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(k) - Employment Contract Between Elizabethtown Water Company and Anne Evans Estabrook [Form 10-K forthe year 1997, Exhibit 10(k)] (1) *10(l) - Amendment to Supplemental Executive Retirement Plan of Elizabethtown Water Company (1) *12(a) - Computation of Ratio of Earnings to Fixed Charges *12(b) - Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends *21 - Subsidiaries of the Company *23 - Consent of Deloitte & Touche LLP, Independent Auditors *27 - Financial Data Schedule. 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, 1998 and 1997, and the related statements of consolidated income, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP February 24, 1999 Parsippany, New Jersey ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED INCOME (In Thousands) Year Ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------- Operating Revenues $ 134,847 $ 131,788 $ 110,358 - ----------------------------------------------------------------------------- Operating Expenses: Operation 45,117 45,301 43,713 Maintenance 5,674 6,548 5,859 Depreciation 12,439 12,233 9,893 Revenue taxes 16,728 16,550 13,820 Real estate, payroll and other taxes 2,613 3,064 2,869 Federal income taxes 12,678 11,026 7,360 - ----------------------------------------------------------------------------- Total operating expenses 95,249 94,722 83,514 - ----------------------------------------------------------------------------- Operating Income 39,598 37,066 26,844 - ----------------------------------------------------------------------------- Other Income (Expense): Allowance for equity funds used during construction 597 215 3,725 Federal income taxes (423) (248) (1,462) Other - net 612 494 452 - ----------------------------------------------------------------------------- Total other income (expense) 786 461 2,715 - ----------------------------------------------------------------------------- Total Operating and Other Income 40,384 37,527 29,559 - ----------------------------------------------------------------------------- Interest Charges: Interest on long-term debt 14,721 14,030 13,011 Other interest expense - net 960 2,382 2,640 Allowance for funds used during construction (456) (166) (3,208) Amortization of debt discount and expense-net 391 376 361 - ----------------------------------------------------------------------------- Total interest charges 15,616 16,622 12,804 - ----------------------------------------------------------------------------- Net Income 24,768 20,905 16,755 Preferred Stock Dividends 813 813 813 - ----------------------------------------------------------------------------- Earnings Applicable To Common Stock $ 23,955 $ 20,092 $ 15,942 ============================================================================= See Notes to Consolidated Financial Statements. ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Assets 1998 1997 - ----------------------------------------------------------------------------- Utility Plant-At Original Cost: Utility plant in service $ 714,301 $ 677,909 Construction work in progress 15,694 9,300 - ----------------------------------------------------------------------------- Total utility plant 729,995 687,209 Less accumulated depreciation and amortization 125,096 114,424 - ----------------------------------------------------------------------------- Utility plant-net 604,899 572,785 - ----------------------------------------------------------------------------- Non-utility Property (Note 4) 7,315 79 - ----------------------------------------------------------------------------- Current Assets: Cash and cash equivalents 3,598 4,226 Customer and other accounts receivable (less reserve: 1998, $670, 1997, $612) 16,952 17,283 Unbilled revenues 10,091 9,663 Infrastructure loan funds receivable (Note 4) 5,895 Materials and supplies-at average cost 2,538 1,966 Prepaid insurance, taxes, other 2,433 3,461 - ----------------------------------------------------------------------------- Total current assets 41,507 36,599 - ----------------------------------------------------------------------------- Deferred Charges: Waste residual management 1,371 936 Unamortized debt and preferred stock expenses 9,368 9,656 Taxes recoverable through future rates (Note 3) 14,226 21,439 Postretirement benefit expense (Note 10) 3,490 3,738 Other unamortized expenses 1,152 1,086 - ----------------------------------------------------------------------------- Total deferred charges 29,607 36,855 - ----------------------------------------------------------------------------- Total $ 683,328 $ 646,318 ============================================================================= See Notes to Consolidated Financial Statements. ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Capitalization and Liabilities 1998 1997 - ----------------------------------------------------------------------------- Capitalization (Note 4): Common shareholder's equity $ 208,573 $ 193,354 Mandatory redeemable cumulative preferred stock 12,000 12,000 Long-term debt - net 245,148 231,944 - ----------------------------------------------------------------------------- Total capitalization 465,721 437,298 - ----------------------------------------------------------------------------- Current Liabilities: Notes payable - banks 22,000 18,000 Long-term debt - current portion 30 30 Accounts payable and other liabilities 12,457 10,626 Customers' deposits 248 272 Municipal and state taxes accrued 16,776 16,817 Interest accrued 3,228 3,120 Preferred stock dividends accrued 59 59 - ----------------------------------------------------------------------------- Total current liabilities 54,798 48,924 - ----------------------------------------------------------------------------- Deferred Credits: Customers' advances for construction 40,874 39,131 Federal income taxes (Note 3) 64,696 67,851 Unamortized investment tax credits 7,839 8,042 Accumulated postretirement benefits (Note 10) 3,947 4,209 - ----------------------------------------------------------------------------- Total deferred credits 117,356 119,233 - ----------------------------------------------------------------------------- Contributions in Aid of Construction 45,453 40,863 - ----------------------------------------------------------------------------- Commitments and Contingent Liabilities (Note 9) - ----------------------------------------------------------------------------- Total $ 683,328 $ 646,318 ============================================================================= See Notes to Consolidated Financial Statements. ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED CAPITALIZATION (In Thousands) December 31, 1998 1997 - ----------------------------------------------------------------------------- Common Shareholder's Equity (Note 4): Common stock without par value, authorized, 15,000,000 shares, issued 1998 and 1997, 1,974,902 $ 15,741 $ 15,741 Paid-in capital 132,753 124,560 Capital stock expense (485) (485) Retained earnings 60,564 53,538 - ----------------------------------------------------------------------------- Total common shareholder's equity 208,573 193,354 - ----------------------------------------------------------------------------- Preferred Shareholders' Equity: Mandatory Redeemable Cumulative Preferred Stock $100 par value, authorized, 200,000 shares; $5.90 series, issued and outstanding, 120,000 shares 12,000 12,000 Cumulative Preferred Stock: $25 par value, authorized, 500,000 shares; none issued - ----------------------------------------------------------------------------- Long-Term Debt: Elizabethtown Water Company: 7.20% Debentures, due 2019 10,000 10,000 7 1/2% Debentures, due 2020 15,000 15,000 6.60% Debentures, due 2021 10,500 10,500 6.70% Debentures, due 2021 15,000 15,000 8 3/4% Debentures, due 2021 27,500 27,500 8% Debentures, due 2022 15,000 15,000 5.60% Debentures, due 2025 40,000 40,000 7 1/4% Debentures, due 2028 50,000 50,000 Variable Rate Debentures, due 2027 50,000 50,000 The Mount Holly Water Company: New Jersey Department of Environmental Protection Notes 5,895 New Jersey Environmental Infrastructure Trust Notes 7,295 Notes Payable (due serially through 2000) 30 57 - ----------------------------------------------------------------------------- Total long-term debt 246,220 233,057 Unamortized discount-net (1,072) (1,113) - ----------------------------------------------------------------------------- Total long-term debt-net 245,148 231,944 - ----------------------------------------------------------------------------- Total Capitalization $ 465,721 $ 437,298 ============================================================================= See Notes to Consolidated Financial Statements. ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In Thousands) Year Ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------- Common Stock: $ 15,741 $ 15,741 $ 15,741 - ----------------------------------------------------------------------------- Paid-in Capital: Balance at Beginning of Period 124,560 117,457 112,157 Capital contributed by parent company 8,193 7,103 5,300 - ----------------------------------------------------------------------------- Balance at End of Period 132,753 124,560 117,457 - ----------------------------------------------------------------------------- Capital Stock Expense (485) (485) (485) - ----------------------------------------------------------------------------- Retained Earnings: Balance at Beginning of Period 53,538 49,580 49,272 Net income 24,768 20,905 16,755 Dividends on common stock (16,929) (16,134) (15,634) Dividends on preferred stock (813) (813) (813) - ----------------------------------------------------------------------------- Balance at End of Period 60,564 53,538 49,580 - ----------------------------------------------------------------------------- Total Common Shareholder's Equity $ 208,573 $ 193,354 $ 182,293 ============================================================================= See Notes to Consolidated Financial Statements. ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY APPENDIX I STATEMENTS OF CONSOLIDATED CASH FLOWS (In Thousands) Year Ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 24,768 $ 20,905 $ 16,755 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,439 12,233 9,893 (Decrease) increase in deferred charges (501) 690 (613) Deferred income taxes and investment tax credits-net 3,855 2,693 4,853 Allowance for funds used during construction (1,053) (381) (6,934) Other operating activities-net 252 362 68 Change in current assets and current liabilities excluding cash, short-term investments and current portion of debt: Customer and other accounts receivable 331 (558) 218 Unbilled revenues (428) (307) (1,912) Accounts payable and other liabilities 1,807 (6,495) 365 Accrued/prepaid interest and taxes 1,095 3,173 (1,955) Other (572) 78 (133) - ----------------------------------------------------------------------------- Net cash provided by operating activities 41,993 32,393 20,605 - ----------------------------------------------------------------------------- Cash Flows Used by Financing Activities: Capital contributed by parent company 7,861 7,103 5,300 Funds held in Trust by others (7,234) Proceeds from issuance of debentures 50,000 Proceeds from issuance of other long-term debt 7,295 Debt and preferred stock issuance and amortization costs 288 (667) 396 Repayment of long-term debt (27) (30) (30) Contributions and advances for construction-net 6,333 4,759 2,521 Net increase (decrease) in notes payable-banks 4,000 (51,000) 42,000 Dividends paid on common stock and preferred stock (17,637) (16,842) (16,342) - ----------------------------------------------------------------------------- Net cash provided (used) by financing activities 879 (6,677) 33,845 - ----------------------------------------------------------------------------- Cash Flows Used for Investing Activities: Utility plant expenditures (excluding allowance for funds used during construction) (43,500) (24,612) (55,125) - ----------------------------------------------------------------------------- Cash used for investing activities (43,500) (24,612) (55,125) - ----------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (628) 1,104 (675) Cash and Cash Equivalents at Beginning of Period 4,226 3,122 3,797 - ----------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 3,598 $ 4,226 $ 3,122 ============================================================================= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 14,459 $ 16,063 $ 8,481 Income taxes $ 7,723 $ 5,981 $ 5,723 Preferred stock dividends $ 708 $ 708 $ 708 See Notes to Consolidated Financial Statements. ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APPENDIX I 1. Organization Elizabethtown Water Company (Elizabethtown or Company) and its wholly owned subsidiary, The Mount Holly Water Company (Mount Holly), is a wholly owned subsidiary of E'town Corporation (E'town or Corporation). Elizabethtown and Mount Holly are regulated water companies in the State of New Jersey. E'town is also the parent of E'town Properties, Inc. (Properties), Edison Water Company (Edison), Liberty Water Company, (Liberty), Applied Water Management, Inc. (AWM) and Applied Wastewater Management, Inc. (AWWM). 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include Elizabethtown and its subsidiariy, 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 all classes of assets. The provision for depreciation, as a percentage of average depreciable property, was 1.81% for 1998, 1.85% for 1997 and 1.73% for 1996. 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 $1.05 million, $.38 million and $6.93 million for 1998, 1997 and 1996, respectively. AFUDC increased in 1996 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 files a consolidated tax return with E'town. Income taxes are allocated to Elizabethtown based upon the Company's taxable income. Deferred income taxes are provided for temporary differences in the recognition of revenues and expenses for tax and financial statement purposes to the extent permitted by the BPU. Elizabethtown and Mount Holly account for prior years' investment tax credits by the deferral method, which amortizes the credits over the lives of the respective assets. Customers' Advances for Construction and Contributions in Aid of Construction Customers' Advances for Construction (CAC) and Contributions in Aid of Construction (CIAC) represent capital provided by developers for main extensions to new real estate developments. Some portion of CAC is refunded based upon the revenues that the new developments generate. CIAC also represents CAC 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. New Accounting Pronouncements In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for fiscal years beginning after December 15, 1997. The pronouncement revises certain disclosure requirements for pension and other postretirement plans but does not change the measurement or recognition of expenses under those plans. The pronouncement standardizes the disclosure requirements for pensions and other postretirement benefit obligations to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates disclosures that are no longer useful. Elizabethtown has adopted these new disclosure requirements for the year ended December 31, 1998 (see Note 10). In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP is effective for fiscal years beginning after December 15, 1998 and establishes criteria for capitalizing certain internal use software costs. Adoption of the SOP will not have an effect on the Company's financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity". This Statement must be adopted by the quarter ended March 31, 2000. The Company does not believe this Statement will have any impact on its financial statements. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December15, 1997. SFAS 130 dictates that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement displayed with the same prominence as other financial statements. It also requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company adopted SFAS 130 effective January 1, 1998. The effects of adoption of SFAS 130 are not material for the Company. 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: 1998 1997 1996 - --------------------------------------------- (Thousands of Dollars) - --------------------------------------------- Tax expense at statutory rate $ 13,255 $ 11,262 $ 8,952 Items for which deferred taxes are not provided: Difference between book and tax depreciation 63 58 132 Other (14) 157 (56) Investment tax credits (203) (203) (205) - ---------------------------------------------- Provision for federal income taxes $ 13,101 $ 11,274 $ 8,823 ============================================== The provision for federal income taxes is composed of the following: Current $ 8,902 $ 7,212 $ 3,764 Tax on (deposits) refunds on main extensions 525 1,369 207 Deferred: Tax depreciation 3,131 2,716 3,379 Capitalized interest 91 19 1,264 Main cleaning and lining 796 612 587 Other 40 (451) (174) Investment tax credits - net (203) (203) (204) Refund from IRS (181) - --------------------------------------------- Total provision $ 13,101 $ 11,274 $ 8,823 ============================================= Elizabethtown and Mount Holly provide deferred taxes at the enacted statutory rate for all temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities irrespective of the treatment for rate-making purposes. Management believes it is probable that the accumulated tax benefits that previously have been treated as a flow-through item to Elizabethtown and Mount Holly's customers will be recovered from utility customers in the future. Accordingly, offsetting regulatory assets were established. At December 31, 1998 Elizabethtown and Mount Holly had deferred tax liabilities of $13.7 million and $.5 million. There were also, at December 31, 1998, offsetting regulatory assets for the same amounts representing the future revenue expected to be recovered through rates based upon established regulatory practices which permit recovery of current taxes payable. These amounts were determined using the enacted Federal income tax rate of 35% and were calculated in accordance with SFAS No. 109. The tax effect of significant temporary differences representing deferred income tax assets and liabilities as of December 31, 1998 and 1997 is as follows: 1998 1997 - --------------------------------------------- (Thousands of Dollars) - --------------------------------------------- Water utility plant-net $(47,538) $(43,611) Taxes recoverable through future rates (14,226) (21,439) Prepaid pension expense (29) 75 Capitalized interest (2,683) (2,591) Waste residuals (480) (322) Other assets 541 415 Other liabilities (281) (378) - --------------------------------------------- Net deferred income tax liabilities $(64,696) $(67,851) ============================================= 4. Capitalization E'town routinely makes equity contributions to Elizabethtown which represent the proceeds of common stock issued under E'town's Dividend Reinvestment and Stock Purchase Plan (DRP). Such equity contributions amounted to $7.86 million, $6.98 million and $5.30 million fir each of the three years ended December 31, 1998, 1997 and 1996, respectively. Preferred Stock Elizabethtown's $5.90 Mandatory Redeemable Cumulative Preferred Stock is not redeemable at the option of the Company. Elizabethtown is required to redeem the entire issue at $100 per share on March 1, 2004. Long-term Debt Elizabethtown's long-term debt indentures restrict the amount of retained earnings available to Elizabethtown to pay cash dividends (which is the primary source of funds available to the Corporation for payment of dividends on its common stock) or acquire Elizabethtown's common stock, all of which is held by E'town. At December 31, 1998, $7.56 million of Elizabethtown's retained earnings were restricted under the most restrictive indenture provision. In November 1998 Mount Holly closed on loan agreements that will make available up to $13.19 million in proceeds from the issuance of unsecured notes through the New Jersey Environmental Infrastructure Trust Financing Program. This program provides financing through two loans. The first loan, in the amount of $7.30 million, is through the New Jersey Environmental Infrastructure Trust (Trust), which issued tax-exempt bonds with average interest rates of 4.7%. Non-utility Property includes $7.2 million of funds held in trust by others relating to this financing. The second loan, in the amount of $5.89 million, is from the State of New Jersey, acting through the New Jersey Department of Environmental Protection. The State is participating in the Drinking Water State Revolving Fund authorized by the Safe Drinking Water Act amendments of 1996 whereby the federal government is funding the state loan at no interest cost. The effective interest rate for the combined notes is approximately 2.60%. The proceeds of the loans will finance the construction of the Mansfield Project (see Note 8). In June 1997 Elizabethtown issued a total of $50 million of 30-year Variable Rate Debentures due December 2027, $25 million of Series A and $25 million of Series B, to evidence a like amount of Variable Rate Notes issued through the New Jersey Economic Development Authority (NJEDA). The proceeds were used to repay $50 million of balances outstanding under Elizabethtown's revolving credit agreement. The NJEDA Notes are remarketed on a weekly basis, at which time the interest rates on each issue are subject to change. The rates in effect as of December 31, 1998, were 3.90% for Series A and 3.85% for Series B. 5. Lines of Credit Elizabethtown has $55 million of uncommitted lines of credit with several banks as of December 31, 1998. These lines, together with internal funds and proceeds of future issuances of debt and preferred stock, and capital contributions from proceeds from sales of common stock by E'town, are expected to be sufficient to finance the Elizabethtown's capital needs. Information relating to bank borrowings for 1998, 1997 and 1996 is as follows: 1998 1997 1996 --------------------------------------------- (Thousands of Dollars) --------------------------------------------- Maximum amount outstanding $22,000 $69,500 $69,000 Average monthly amount outstanding $14,983 $40,886 $45,240 Average interest rate at year end 5.9% 6.0% 5.7% Compensating balances at year end $ -0- $ -0- $ -0- Weighted average interest rate based on average daily balances 5.8% 5.8% 5.8% 6. Financial Instruments The carrying amounts and the estimated fair values, as of December 31, 1998 and 1997, of financial instruments issued or held by the Company are as follows: 1998 1997 - -------------------------------------------- (Thousands of Dollars) - --------------------------------------------- Cumulative preferred stock: Carrying amount $12,000 $12,000 Estimated fair value 13,020 11,760 Long-term debt: Carrying amount $245,148 $231,944 Estimated fair value 255,087 239,585 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: 1998 1997 - ----------------------------------------------- (Thousands of Dollars) - ----------------------------------------------- Waste residual management $ 1,371 $ 936 Unamortized debt and preferred stock expense 9,368 9,656 Taxes recoverable through future rates (Note 3) 14,226 21,439 Postretirement benefit expense (Notes 10 and 12) 3,490 3,738 Safety management expense 245 331 Business process redesign 210 284 Rate case expenses 7 80 PWAC under (over) recovery 305 (8) - ----------------------------------------------- Total $29,222 $36,456 =============================================== Waste Residual Management The costs of disposing of the byproducts generated by Elizabethtown's and Mount Holly's water treatment plants are being amortized and recovered in rates over 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. Purchased Water Adjustment Clause In 1994, Elizabethtown established a Purchased Water Adjustment Clause (PWAC), to reflect the cost of water purchased from the New Jersey Water Supply Authority (NJWSA). The current rate for the PWAC is zero since the costs of purchased water were reflected in the 1996 rate case; however, because of the high pumpage in the summer of 1998, Elizabethtown has under recovered its purchased water costs and therefore, has deferred $.23 million as of December 31, 1998. As of December 31, 1998, Mount Holly has deferred $.08 million of PWAC costs (see Note 8). Rate Case Expenses Rate case expenses are being substantially recovered in rates during two-year periods. There were no regulatory liabilities at December 31, 1998 or 1997. 8. Regulatory Matters Elizabethtown In December 1997 the BPU adopted a Stipulation for rate increases for Elizabethtown and Mount Holly, effective January 1, 1998, for the full recovery of costs associated with SFAS No. 106 "Accounting for Employer's Postretirement Benefits" on an accrual basis less the costs associated with SFAS No. 106 expenses previously recovered in rates. The total increases in annual operating revenues resulting from these Stipulations are $.39 million for Elizabethtown and $.02 million for Mount Holly. Elizabethtown expects to file for rate relief later in 1999 to recover additional construction and financing costs since base rates were last established in October 1996. Mount Holly On October 6, 1998, the BPU issued an Order adopting a Stipulation signed by the parties to Mount Holly's proceeding for a review of the prudency of constructing a new well field, treatment plant and pipeline to provide an alternate water source required due to State mandated restrictions. This project is known as the Mansfield Project. The Stipulation indicated that the Mansfield Project provides the most cost-effective alternative available to Mount Holly customers for meeting the requirements for an alternative source of supply for the Mount Holly system. Effective in March 1998, Mount Holly began purchasing 1 million gallons per day from New Jersey-American Water Company (NJAM) and will continue to purchase this water until the later of January 1, 2000 or the date the Mansfield Project is placed into service. In September 1997, Mount Holly filed a petition with the BPU to establish a PWAC to reflect the cost of water purchased from NJAM under the agreement discussed above. On May 27, 1998 the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.29 million or 38.9%. Mount Holly has deferred the increase in purchased water cost between March 19 and May 27 as Other Unamortized Expenses. Recovery of this amount has been requested in the rate increase discussed below. As of December 31, 1998, Mount Holly has deferred $.08 million of these costs. On January 29, 1999, Mount Holly filed a petition with the BPU for a $2.09 million or 40.55% rate increase, which reflects additional construction and financing costs, as well as increases in operating costs since base rates were last established in January 1996. This rate case also includes $8.96 million in costs with a corresponding rate increase of $1.30 million, for the portion of the Mansfield Project that was placed in service in the third quarter of 1998. A decision is expected during the fall of 1999. Mount Holly expects to file an additional rate case later in 1999 for the remaining cost of the Mansfield Project, to coincide with the completion of the project and the expiration of the agreement to purchase water from NJAM and the cancellation of the PWAC. 9. Commitments and Contingent Liabilities Elizabethtown is obligated, under a contract that expires in 2013, to purchase from the 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 $8.91 million, $8.79 million and $8.70 million for 1998, 1997 and 1996, respectively. Mount Holly is obligated, under a contract, to purchase water from NJAM, at a rate of 1 million gallons per day until the Mansfield Project is completely in service in approximately January 2000. The annual cost of the purchased water is $1.16 million. Capital expenditures of Elizabethtown and Mount Holly are estimated to be $107.54 million and $17.0 million, respectively, through 2001. Expected future minimum rental payments required under noncancelable leases with terms in excess of one year at December 31 of each of the years 1999 through 2003 are: 1999, $.72 million; 2000, $.76 million; 2001 $.79 million; 2002, $.80 million and 2003, $.61 million. Rent expense totaled $.73 million, $.72 million and $.84 million in 1998, 1997 and 1996, respectively. Elizabethtown leases vehicles and certain office equipment. The minimum payments required under noncancelable leases with terms in excess of one year at December 31 of each of the years 1999 through 2003 are: $1.01 million per year. The lease expense for 1998 was $.26 million. There are no lease expenses for 1997 or 1996 as vehicles were not leased during that time period. Environmental, Legal and Other Matters There are environmental matters that are inherent in the production, transmission and distribution of water as well as in the treatment of wastewater. Elizabethtown and Mount Holly are sensitive to these issues and mitigate the environmental impact of these activities to the extent required by the laws and regulations under which these activities are governed and make efforts to exceed the regulatory requirements where practical. The Company, in the ordinary course of business, periodically becomes involved in litigation. There is currently no litigation in progress regarding environmental or other issues in which an outcome adverse to the Company would have a material impact on the financial statements. 10. Pension Plan and Other Postretirement Benefits Pension Plan Elizabethtown has a trusteed, noncontributory retirement plan, which covers most employees. Supplemental Pension Plan 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 Corporation. The unfunded benefit obligation at December 31, 1998 and 1997 was $1.5 million and $1.4 million, respectively. Other Postretirement Benefits The Company provides certain health care and life insurance benefits for substantially all of its retired employees. As a result of a contract negotiated in February 1996 with the Company's bargaining unit, all union and non-union employees retiring after January 1, 1997, pay 25% of future increases in the premiums the Company pays for postretirement medical benefits. Under SFAS No. 106, the costs of postretirement benefits are accrued for each year the employee renders service, based on the expected cost of providing such benefits to the employee and the employee's beneficiaries and covered dependents, rather than expensing these benefits on a pay-as-you-go basis. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1998, and for 1998 was 9%. This rate decreases linearly each successive year until it reaches 3.8% in 2008, after which the rate remains constant. The rate increases effective January 1, 1998 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, 1998, the amounts that have been deferred are $3.35 million and $.13 million for Elizabethtown and Mount Holly, respectively. 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. ---Pension Plans--- Other Postretirement --------Benefits------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------- (Thousands of Dollars) Funded Status Change in benefit obligation during year Benefit obligation at beginning of year $40,172 $37,242 $6,556 $6,049 Service cost 1,391 1,302 387 383 Interest cost 2,836 2,713 482 444 Benefit payments (2,092) (1,866) Actuarial (gain) or loss 3,231 781 452 (321) - -------------------------------------------------------------------------------- Benefit obligation at end of year 45,538 40,172 7,877 6,555 ================================================================================ Change in plan assets during year Fair value of plan assets at beginning of year 46,537 40,016 1,331 764 Employer contributions 174 174 731 375 Benefit payments (2,092) (1,866) Actual return on plan assets 7,225 8,213 109 192 - -------------------------------------------------------------------------------- Fair value of plan assets at end of year 51,844 46,537 2,171 1,331 ================================================================================ Reconciliation of funded status at end of year Funded status 6,306 6,365 (5,706) (5,224) Unrecognized net transition (asset) or obligation (1,358) (1,624) 5,061 5,423 Unrecognized prior service cost 2,391 2,723 Unrecognized net (gain) or loss (7,577) (7,905) (3,064) (3,967) - -------------------------------------------------------------------------------- Accumulated postretirement benefits * (238) (441) (3,709) (3,768) ================================================================================ * Recognized in the Consolidated Balance Sheets ------Pension Plans----- -----Other Postretirement--- ------------Benefits-------- 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------------------------------- (Thousands of Dollars) Net periodic benefit cost recognized for year Service cost $1,391 $1,302 $1,341 $387 $383 $416 Interest cost 2,836 2,713 2,777 482 444 425 Expected return on plan assets (4,101) (3,520) (4,569) (109) (57) (72) Net amortization and deferral (155) 65 1,229 157 138 417 Deferred amount for regulated companies pending recovery (273) (565) - -------------------------------------------------------------------------------- Net periodic benefit cost (29) 560 778 917 635 621 ================================================================================ Weighted-average assumptions for year Discount rate 7.25% 7.50% 7.00% 7.25% 7.50% 7.00% Rate of compensation increases 4.00% 4.00% 4.00% Expected long-term rate of return on plan assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% Weighted-average assumptions at end of year Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50% Rate of compensation increases 4.00% 4.00% 4.00% A single percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1998, and the net postretirement service and interest cost by approximately $.84 million and $.19 million, respectively. 11. Related Party Transactions Utility Billing Services, Inc., a subsidiary of NUI Corporation, of which John Kean, who is an Elizabethtown Director, is Chairman of the Board and a Director, provides data processing and related services to Elizabethtown and Mount Holly. The charges for all services totaled $.72 million, $.67 million and $.65 million for 1998, 1997 and 1996, respectively. The current contract expires December 31, 2000. Elizabethtown had a line of credit in the amount of $10 million with Summit Bank of which Anne Estabrook, who is Chairman of Elizabethtown, is a Director, which expired on June 30, 1998. Total interest charges paid to Summit Bank by Elizabethtown were $.07 million, $.35 million and $.14 million for 1998, 1997 and 1996, respectively. Summit Bank also serves as a bond trustee for Elizabethtown for which Elizabethtown paid fees of less than $.10 million in 1998, 1997 and 1996. 12. Quarterly Financial Data (Unaudited) A summary of financial data for each quarter of 1998 and 1997 follows: Earnings Operating Operating Net Applicable Quarter Revenues Income Income to Common Stock - -------------------------------------------------------- (Thousands of Dollars ExceptPer Share Amounts) - -------------------------------------------------------- 1998 1st $30,507 $ 8,402 $ 4,645 $ 4,442 2nd 32,739 9,334 5,687 5,484 3rd 38,821 12,226 8,689 8,486 4th 32,780 9,636 5,747 5,543 - -------------------------------------------------------- Total $134,847 $39,598 $24,768 $23,955 ======================================================== 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 ======================================================== Water utility revenues are subject to seasonal fluctuation due to normal increased water consumption during the third quarter of each year. EX-3 2 Exhibit 3b BY-LAWS OF E'TOWN CORPORATION ARTICLE I STOCKHOLDERS -1- Section 1. Annual Meeting. A meeting of the stockholders of the company shall be held annually in the State of New Jersey at a location selected by the Chairman and approved by the Board of Directors between the hours of eleven and twelve o'clock in the forenoon, on the first Monday of May in each year, if not a legal holiday, and if a legal holiday, then on the next succeeding Monday not a legal holiday or at such other time and place during regular business hours as may be fixed by the Board of Directors, for the purpose of electing directors and for the transaction of such other business as may be properly brought before the meeting. Written notice of the Annual Meeting, stating the day, hour and place thereof, and the business to be transacted thereat, shall be mailed at least 10 days prior to the meeting to each stockholder of record at his address as the same appears on the stock books of the company. A failure to mail such notice, or any irregularity in such notice, shall not affect the validity of any annual meeting, or of any proceedings at any such meeting. Section 2. Notice of Stockholder Business. (1) At an annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (a) pursuant to the company's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the company who is a stockholder of record at the time of giving of the notice provided for in this By-law, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this By-law. (2) For business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph 1 of this By-law, the stockholder must have given timely notice thereof in writing to the Secretary of the company. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal office of the company not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the meeting is changed by more than 30 days from such anniversary date, notice by the stockholder to be timely must be received no later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the company's books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (c) the class and number of shares of the company which are owned beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf the proposal is made, together with documentary support for any claim of beneficial ownership, and (d) any material interest of such stockholder of record and the beneficial owner, if any, on whose behalf the proposal is made in such business. (3) Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this By-law. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures prescribed by these By-laws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this By-law, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this By-law. Section 3. Special Meetings. Special meetings of the stockholders of the company may be held in the State of New Jersey at a location selected by the Chairman and approved by the Board of Directors, or at such other place as may be fixed by the Board of Directors, whenever called in writing by the Chairman, by a vote of the Board of Directors, or upon written request addressed to the Secretary by stockholders holding at least forty per cent (40%) of the capital stock. Such request shall state the purpose or purposes of the proposed meeting. Written notice of each special meeting, stating the day, hour and place thereof, and the business to be transacted thereat, shall be mailed at least 10 days prior to the meeting to each stockholder of record at his address as the same appears on the stock books of the company. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 4. Quorum. At any meeting of the stockholders the holders of the majority of the capital stock issued and outstanding, present in person or represented by proxy, shall constitute a quorum for all purposes. If the holders of the amount of stock necessary to constitute a quorum shall fail to attend in person or by proxy at the time and place fixed by these By-laws for an annual meeting, or fixed by notice as above provided for a special meeting, a majority in interest of the stockholders present in person or by proxy may adjourn, from time to time, until holders of the amount of stock requisite to constitute a quorum shall attend. Section 5. Voting. At each meeting of the stockholders every stockholder shall be entitled to vote in person, or by proxy appointed by instrument in writing, subscribed by said stockholder or by his duly authorized attorney, and delivered to the inspectors at the meeting; and each stockholder shall have one vote for each share of capital stock having voting powers standing registered in his name, but no share of capital stock shall be voted on at any meeting which has been transferred on the books of the company subsequent to the record date fixed by the Board of Directors. All voting for election of Directors shall be by ballot. At each meeting of the stockholders a full, true and complete list in alphabetical order of all stockholders entitled to vote at such meeting, and indicating the number of shares held by each, certified by the Secretary or by the Treasurer, shall be furnished for the inspection of any stockholder for reasonable periods during the meeting. Only the persons in whose names shares of capital stock stand on the books of the company, as evidenced by the list of the stockholders so furnished, shall be entitled to vote in person or by proxy on the shares so standing in their names. Section 6. Inspectors. At each meeting of the stockholders the polls shall be opened and closed, the proxies and ballots shall be received and taken in charge, and all questions touching the qualifications of voters and the validity of proxies and the acceptance or rejection of a voter, shall be decided upon by one or more inspectors. The inspectors shall be appointed by the Chairman of the meeting and the inspectors shall be sworn to faithfully perform their duties, and shall, in writing, certify the returns showing the result of the election or ballot. The inspectors may or may not be stockholders, but any inspector may not be a candidate for the office of Director. In case of failure to appoint inspectors, the stockholders at any meeting may elect an inspector or inspectors to act at the meeting. The Board of Directors may also appoint one or more inspectors to discharge the duties set forth above in respect of the qualification and tabulation of written consents of stockholders without a meeting. ARTICLE II BOARD OF DIRECTORS Section 1. Management of Company. The property, business, and affairs of the company shall be managed and controlled by its Board of Directors. The Directors shall act only as a board and the individual Directors shall have no power as such. Section 2. Number, Term of Office and Qualifications of Board. The Board of Directors shall consist of not less than eleven (11) persons nor more than fifteen (15) persons, subject to change from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). Directors need not be stockholders. No person who has reached age 72 shall stand for election or re-election as a Director. The term of office of the various Directors shall be as provided in Article Fourth of the Corporation's Certificate of Incorporation. Section 3. Nominations of Directors. (1) Only persons who are nominated in accordance with the procedures set forth in these By-laws shall be eligible to serve as Directors. Nominations of persons for election to the Board of Directors of the company may be made at a meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the company who is a stockholder of record at the time of giving of notice provided for in this By-law, who shall be entitled to vote for the election of Directors at the meeting and who complies with the notice procedures set forth in this By- law. (2) Nominations by stockholders shall be made pursuant to timely notice in writing to the Secretary. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal office of the company (a) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is changed by more than 30 days from such anniversary date, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure was made, and (b) in the case of a special meeting at which Directors are to be elected, not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (b) as to the stockholder giving the notice (i) the name and address, as they appear on the company's books, of such stockholder and (ii) the class and number of shares of the company which are beneficially owned by such stockholder and also which are owned of record by such stockholder; and (c) as to the beneficial owner, if any, on whose behalf the nomination is made, (i) the name and address of such person, (ii) the class and number of shares of the company which are beneficially owned by such person, and (iii) documentary support for such claim of beneficial ownership. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. (3) Except as provided in Section 4 of this Article II, no person shall be eligible to serve as a Director of the company unless nominated in accordance with the procedures set forth in this By-law. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these By-laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this By-law, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this By-law. Section 4. Vacancies. Whenever any vacancy shall occur in the Board, including a vacancy caused by an increase in the number of Directors, it may be filled by a majority of the remaining Directors, even though less than a quorum. Section 5. Place of Meeting. The Directors may hold their meetings, and keep the books of the company at the office of the company in Westfield, New Jersey, or at such other place or places as the Board from time to time may lawfully determine. Section 6. Regular Meetings. Regular meetings of the Board of Directors shall be held monthly on the third Thursday of each month, if not a legal holiday, and if a legal holiday, then on the next succeeding Thursday not a legal holiday (or at such other time as may be fixed by the Board of Directors). No notice shall be required for any such regular meetings of the Board. Section 7. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by the Chairman, President, or by not less than one-third of the Directors for the time being in office. The Secretary shall give notice of each special meeting by mailing the same at least two days before the meeting or by telegraphing the same at least one day before the meeting to each Director, but such notice may be waived by any Director. At any time at which every Director shall be present, even though without notice, any business may be transacted. Section 8. Quorum. A majority of the Board of Directors for the time being in office shall constitute a quorum for the transaction of business, but if at any meeting of the Board there be less than a quorum present a majority of those present may adjourn the meeting from time to time until a quorum shall be present. Section 9. Committees. The Board of Directors may delegate, from time to time, to suitable committees any duties that are required to be executed during the intervals between the meetings of the Board, and such committee shall report to the Board of Directors when and as required. Section 10. Designation of Depositories. The Board of Directors shall designate the trust company, or trust companies, bank or banks in which shall be deposited the money or securities of the company. Section 11. Contracts with Directors, etc. Inasmuch as the Directors of this company are or may be persons of large and diversified business interest, and are likely to be connected with other corporations with which from time to time this company must have business dealings, no material contract or other transaction between this company and any other corporation shall be affected by the fact that Directors of this company are interested in, or are Directors or Officers of, such other corporation. The Board of Directors in its discretion may submit any contract or act for approval or ratification at any annual meeting of the stockholders, or at any meeting of the stockholders called for the purpose of considering any such act or contract; and any contract or act that shall be approved or be ratified by the vote of the holders of a majority of the capital stock of the company which is represented in person or by proxy at such meeting (provided that a lawful quorum of stockholders be there represented in person or by proxy) shall be valid and as binding upon the company and upon all the stockholders as though it had been approved or ratified by every stockholder of the company. Section 12. Compensation of Directors. For attendance at any meeting of the Board of Directors or participation in such meeting as provided in Section 13 hereof, every Director may receive reasonable Director's fees to be fixed by the Board for attendance at each meeting. The Board may provide for the payments to committee members of reasonable fees for attendance at a meeting of a committee. Section 13. Compensation of Officers and Employees. The compensation of all Officers shall be fixed by the Board of Directors and of all employees not mentioned in these By-laws by the Officer or Officers so authorized by the Board of Directors. Section 14. Telephone Meetings. Any regular or special meeting of the Board or any committee may be held entirely or partially by telephone conference call or similar communication equipment provided that all members of the Board or any committee are able to hear each other at one time. ARTICLE III OFFICERS Section 1. Enumeration of, Election, Removal of. The Officers of the company shall be a Chairman, President, Secretary, Treasurer, and such other Officers as shall from time to time be provided for by the Board of Directors. The Chairman and President shall be Directors of the company and any one person may hold any two or more of the offices enumerated above, as the Board of Directors may provide. The Officers of the company shall be appointed at the first meeting of the Board of Directors after the annual election of Director's, which may be on the day of the annual election, and they shall hold office for one year, and until their respective successors shall have been duly appointed and qualified, provided, however, that all Officers, agents and employees of the company shall be subject to removal at any time by the affirmative vote of a majority of the whole Board of Directors. In its discretion, the Board of Directors, by a vote of the majority thereof, may leave unfilled for such period as it may fix by resolution any office. Section 2. Powers and Duties of Chairman. The Chairman shall preside at all meetings of the stockholders and the Board of Directors. He shall have general charge and supervision of the business of the company. He may sign and execute all authorized bonds, debentures, contracts, notes or obligations in the name of the company, and with the Treasurer, and Assistant Treasurer, or Secretary, or Assistant Secretary, may sign all certificates of the share in the capital stock of the company. He shall from time to time make such reports of the affairs of the company as the Board of Directors may require and shall annually present a report of the preceding year's business to the Board of Directors, which report may be read at the annual meeting of the stockholders. He shall do and perform such other duties as may be from time to time assigned to him by the Board of Directors. Section 3. Powers and Duties of President. The President shall possess the powers and may perform the duties of the Chairman in his absence or disability. He shall have charge of the general management of the company under the supervision of the Chairman. He may sign and execute all authorized bonds, debentures, contracts, and with the Treasurer, Assistant Treasurer, Secretary or Assistant Secretary, may sign all certificates of the shares of the capital stock of the company. He shall do and perform such other duties as may be from time to time assigned to him by the Board of Directors. Section 4. Powers and Duties of Secretary. The Secretary shall keep the minutes of all meetings of the stockholders and all meetings of the Board of Directors. He shall attend to the giving and service of all notices of the company; he may sign with the Chairman, President, Executive Vice President or Vice President in the name of the company all contracts authorized by the Board of Directors and when required by the Board of Directors, or permitted by these By-laws he shall affix the seal of the company thereto; he shall have charge of all books and papers as the Board of Directors may direct, all of which shall, at all reasonable times, be open to the examination of any Director, upon application at the office of the company during business hours; he may sign with the Chairman, President, Executive Vice President or a Vice President, all certificates of shares of capital stock; he shall in general perform all of the duties incident to the office of the Secretary, subject to the control of the Board of Directors and shall do and perform such other duties as may from time to time be assigned to him by the Board of Directors. Section 5. Powers and Duties of Treasurer. The Treasurer shall have custody of all funds and securities of the company; when necessary or proper, he shall endorse on behalf of the company for collection, checks, notes and other obligations, and shall deposit the same to the credit of the company in such bank, or banks, or depository as the Board of Directors may designate; he shall execute jointly with such other Officer as may be designated by By-law or by resolution of the Board of Directors, all bills of exchange and promissory notes of the company; he may sign with the Chairman, President, Executive Vice President, or a Vice President, all certificates of shares in capital stock; whenever required by the Board of Directors, he shall render a statement of his cash account; he shall regularly in books of the company to be kept by him for the purpose, keep a full and accurate amount of all moneys received and paid by him on account of the company; he shall, at all reasonable times, exhibit his books and accounts to any Director of the company upon application at the office of the company during business hours; he shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors; and he shall have such other powers and he shall perform such other duties as may be assigned to him by the Board of Directors, from time to time. He shall give bond for the faithful performance of his duties as Treasurer as the Board of Directors may direct. Section 6. Indemnification of Directors and Officers. The company shall indemnify each Director or Officer of the company and any person who, at the request of the company, has served as a Director, Officer, or trustee of another corporation in which the company has a financial interest against reasonable costs, expenses and counsel fees paid or incurred (including any judgments, fines or reasonable settlements exclusive of any amount paid to the company in settlement) in connection with the defense of any action, suit or proceeding in which such person is named as a party by reason of having been such Director, Officer, or trustee or by reason of any action taken or not taken in such capacity unless such Officer, Director or trustee is finally adjudged to have been derelict in the performance of his duties as Director, Officer or trustee. If any action, suit or proceeding is settled or otherwise terminated as against such Director, Officer or trustee without a final determination on the merits and the Board of Directors of the company shall determine that such Director, Officer or trustee has not in any substantial way been derelict in the performance of his duties as charged in such action, suit or proceeding, the company shall indemnify such Director, Officer or trustee as aforesaid. Such rights of indemnification are not exclusive of any rights to which a Director or Officer of the company may have pursuant to statute or otherwise. ARTICLE IV CAPITAL STOCK Section 1. Certificate of Shares. Each holder of capital stock of the company shall be entitled to a stock certificate signed by the Chairman, President, or a Vice President and either the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, certifying the number of shares owned by him in the company. However, when the certificate is signed by the transfer agent, or an assistant transfer agent, or by a transfer clerk on behalf of the company and a registrar, the signature of the Chairman, President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be facsimiles. All certificates shall be consecutively numbered. The name of the person owning the shares represented thereby, with the number of such shares and the date of issue, shall be entered in the company's books. No certificate shall be valid unless it is signed as provided above in this Section 1 of Article IV of the By-laws. All certificates surrendered to the company shall be canceled, and no new certificate shall be issued until the former certificate shall have been surrendered and canceled, or such proof that the certificate has been lost, damaged or destroyed as the Board of Directors may require and in such event a new certificate may be issued, but the Board of Directors may require such security as they deem appropriate. Section 2. Transfer of Shares. Shares in the capital stock of the company shall be transferred on the books of the company by the holder thereof in person, or by his attorney, upon surrender and cancellation of certificates for a like number of shares. Section 3. Rules and Regulations as to Issue, Transfer and Registration of Shares of Stock. The Board of Directors shall have power and authority to make all such rules and regulations as they deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the company. The Board of Directors may appoint a transfer agent and registrar of transfers, and require all stock certificates to bear the signature of such transfer agent and of such registrar of transfers. Section 4. Closing of Transfer Books. The stock transfer books may be closed for the meetings of the stockholders, and for the payment of dividends, during such periods as from time to time may be fixed by the Board of Directors, and during such periods no stock shall be transferrable. Section 5. Fixing Date for Determination of Stockholders' Rights. (1) The Board of Directors is authorized from time to time to fix in advance a date as a record date for the determination of the stockholders entitled to notice of and to vote at any meeting of stockholders, or with regard to any other corporate action or event, as provided in the New Jersey Business Corporation Act, and in such case only stockholders of record on the date so fixed shall be entitled to such notice of and to vote at any such meeting, or to participate in or otherwise be included with respect to any other corporate action or event, and notwithstanding any transfer of any stock on the books of the company after any such record date fixed as aforesaid. Any record date for determining stockholders entitled to give a written consent to any action without a meeting shall be fixed as provided in paragraph (2) of this By-law. (2) The Board of Directors may fix a record date for determining the stockholders entitled to consent to corporate action in writing without a meeting and may also fix a date for tabulation of consents. Such record date shall not be more than 60 days before the date fixed for tabulation of the consents or, if no date has been fixed for tabulation, more than 60 days before the last day on which consents received may be counted as provided by the New Jersey Business Corporation Act. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date and a date for tabulation of consents. If no record date has been fixed by resolution of the Board of Directors within 10 days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the company by delivery to its principal place of business to the attention of the Secretary. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. If no date for the tabulation of consents has been fixed by the Board of Directors within 10 days of the date on which the request described above is received, such tabulation shall be the 55th day after the record date fixed by the Board of Directors (or otherwise established) pursuant to this By-law; provided, however, that if such day falls on a Saturday, Sunday or legal holiday, the tabulation date shall be the next following day which is not a Saturday, Sunday or legal holiday. (3) In the event of the delivery to the company of a written consent or consents purporting to authorize or take corporate action and/or related revocations (each such written consent and related revocation is referred to in this paragraph as a "Consent"), the Secretary shall provide for the safekeeping of such Consent and shall conduct such reasonable investigation as such Officer deems necessary or appropriate for the purpose of ascertaining the validity of such Consent and all matters incident thereto, including, without limitation, whether the holders of shares having the requisite voting power to authorize or take the action specified in the Consent have given consent and whether the corporate action purported to be authorized or taken may legally be taken by the stockholders of the company; provided, however, that if the Board of Directors designates one or more inspectors in connection with such matters as provided in Article I, Section 6 of these By-laws, such inspectors shall discharge the functions of the Secretary under this paragraph. Notwithstanding any tabulation of consents or investigation as described above, the Consent shall not become effective as stockholder action until (i) all requirements for notice to non-consenting stockholders prescribed by the New Jersey Business Corporation Action are met, and (ii) the final termination of any proceedings which may have been commenced in any court of competent jurisdiction for an adjudication of any legal issue incident to determining the validity of the Consent has occurred, unless such court shall have determined that such proceedings are not being pursued expeditiously and in good faith. In conducting the investigation required by this paragraph, the Secretary or the inspectors (as the case may be) may, at the expense of the company, retain special legal counsel and any other necessary or appropriate professional advisors, and such other personnel as they may deem necessary or appropriate, to assist them. ARTICLE V DIVIDENDS Section 1. Dividends. Dividends may be declared by the Board of Directors from time to time as may be permitted by the laws of the State of New Jersey, and shall be payable at such times as the Board may determine. ARTICLE VI CHECKS, NOTES, CONTRACTS, ETC. Section 1. Checks and Notes. Payment shall be made by checks or check voucher, all of which shall be signed by the Chairman, or President and the Treasurer or Assistant Treasurer, or by any two Officers of the company as the Board of Directors may from time to time direct, except that the Board of Directors may provide by resolution for special subsidiary checking accounts and their manner of operation for payroll, dividend and other purposes. Bills receivable, drafts and other evidence of indebtedness to the company, shall be endorsed for the purpose of discount or collection by the Treasurer or Assistant Treasurer, or such other Officer or Officers of the company as the Board of Directors may from time to time by resolution designate. No bills or notes or other evidence of indebtedness shall be executed by or on behalf of the company unless the Board of Directors shall authorize the same. Such authority may be general or confined to specific instances. Section 2. Contracts and Instruments. The Board of Directors may authorize any Officer or Officers, agent or agents, to enter into any contract or execute and deliver any conveyance or instrument in the name of and on behalf of the company, and such authority may be general or confined to specific instances. When the execution of any contract, conveyance or other instrument has been authorized without specification of the executing Officers, the Chairman, President, Secretary or Treasurer may execute the same in the name and behalf of the company and may affix the corporate seal and attest thereto, unless otherwise directed or required by the Board of Directors, or required by law. ARTICLE VII MISCELLANEOUS PROVISIONS Section 1. Fiscal Year. The fiscal year of the company shall begin on the first day of January in each and every year, and all accounts shall be brought up to the close of the year. Section 2. Principal Office. The principal office of this company shall be at 600 South Avenue, Westfield, New Jersey, but the Board of Directors may at any regular or special meeting change the place of such office, upon the adoption of a resolution providing therefor by the votes of at least two-thirds of its members. This company may have other offices at such places as the Board of Directors shall designate and the business of this company may require. Section 3. Officers' Voting Stock. The Chairman, President, or a Vice President, shall have full power and authority on behalf of this company to attend and act, and to vote in person or by proxy at any meeting of stockholders of any corporation in which this corporation may own and hold stock, and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such stock and which, as the owner thereof, the company might have possessed and exercised if present. The Board of Directors, by resolution, from time to time, may confer like powers upon any person or persons. ARTICLE VIII CORPORATE SEAL Section 1. The corporate seal of this company shall be as shown by the following impression: ARTICLE IX AMENDMENT OF BY-LAWS Section 1. These by-laws may be amended, altered or repealed by the Board of Directors. EX-3 3 Exhibit 3(b) INDEX to BY-LAWS ARTICLE I - STOCKHOLDERS Page Section 1.Annual Meeting 1 Section 2.Special Meetings 1 Section 3.Quorum 2 Section 4.Voting 2 Section 5.Inspectors 3 ARTICLE II - BOARD OF DIRECTORS Section 1. Number, Eligibility and Term of Office 4 Section 2. Vacancies 4 Section 3. Place of Meetings 4 Section 4. Regular Meetings 5 Section 5. Special Meetings 5 Section 6. Quorum 5 Section 7. Committees 5 Section 8. Designation of Depositories 6 Section 9. Contracts with Directors, Etc. 6 Section 10. Compensation of Directors 7 Section 11. Compensation of Officers and Employees 7 ARTICLE III - OFFICERS Section 1. Enumeration of, Election, Removal of 7 Section 2. Powers and Duties of Chairman 8 Section 3. Powers and Duties of Vice Chairman 8 Section 4. Powers and Duties of President 8 Section 5. Powers and Duties of Executive 9 Vice President Section 6. Powers and Duties of Vice President 9 Section 7. Powers and Duties of Secretary 9 Section 8. Powers and Duties of Assistant 10 Secretary Section 9. Powers and Duties of Treasurer 10 Section 10. Powers and Duties of Assistant 11 Treasurer ARTICLE IV - CAPITAL STOCK Page Section 1. Certificate of Shares 11 Section 2. Transfer of Shares 12 Section 3. Rules and Regulations as to Issue, 12 Transfer and Registration of Shares of Stock Section 4. Closing Transfer Books 12 Section 5. Fixing Date for Determination of Stockholders' Rights 12 ARTICLE V - DIVIDENDS AND WORKING CAPITAL Section 1. Dividends 13 Section 2. Working Capital 13 ARTICLE VI - CHECKS, NOTES, CONTRACTS, ETC. Section 1. Checks and Notes 14 Section 2. Contracts and Instruments 14 ARTICLE VII - MISCELLANEOUS PROVISIONS Section 1. Fiscal Year 15 Section 2. Principal Office 15 Section 3. Officers' Voting Stock 15 Section 4. Rules of Order for Meetings 15 ARTICLE VIII - CORPORATE SEAL 16 ARTICLE IX - AMENDMENT OF BY-LAWS 16 BY-LAWS OF ELIZABETHTOWN WATER COMPANY ARTICLE I STOCKHOLDERS Section 1. Annual Meeting. A meeting of the stockholders of the company shall be held annually at the principal office of the company in the State of New Jersey, between the hours of eleven and twelve o'clock in the fore-noon, or at such other time during regular business hours as may be stated by the notice of the meeting, on the first Monday of May in each year, if not a legal holiday, and if a legal holiday, then on the next succeeding Monday not a legal holiday for the purpose of electing directors and for the transaction of such other business as may be brought before the meeting. Written notice of the Annual Meeting shall be mailed at least twenty (20) days prior to the meeting to each stockholder of record at his address as the same appears on the stock books of the company. A failure to mail such notice, or any irregularity in such notice, shall not affect the validity of any annual meeting, or of any proceedings at any such meeting. Section 2. Special Meetings. Special meetings of the stockholders of the company may be held at the principal office of the company in the State of New Jersey, whenever called in writing, by a vote of the majority of the Board of Directors, or upon written request by stockholders holding ten per cent (10%) of the capital stock addressed to the Secretary. Written notice of each special meeting, stating the day, hour and place thereof, and in general terms the business to be transacted thereat, shall be mailed at least ten (10) days prior to the meeting to each stockholder of record at his address as the same appears on the stock book of the company. If all the stockholders shall waive notice of a special meeting, no notice of such meeting shall be required; and whenever all the stockholders shall meet in person or by proxy, such meeting shall be valid for all purposes without call or notice, and at such meeting any corporate action may be taken. Section 3. Quorum. At any meeting of the stockholders the holders of the majority of the capital stock issued and outstanding, present in person or represented by proxy, shall constitute a quorum for all purposes. if the holders of the amount of stock necessary to constitute a quorum shall fail to attend in person or by proxy at the time and place fixed by these by-laws for an annual meeting, or fixed by notice as above provided for a special meeting called by the directors or stockholders, a majority in interest of the stockholders present in person or by proxy may adjourn, from time to time, without notice other than by announcement at the meeting, until holders of the amount of stock requisite to constitute a quorum shall attend. At any such adjourned meeting of which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 4. Voting. At each meeting of the stockholders every stockholder shall be entitled to vote in person, or by proxy appointed by instrument in writing, subscribed by said stockholder or by his duly authorized attorney, and delivered to the inspectors at the meeting; and each stockholder shall have one vote for each share of capital stock having voting powers standing registered in his name, but no share of capital stock shall be voted on at any meeting which has been transferred on the books of the corporation subsequent to the record date fixed by the Board of Directors. All voting for election of directors shall be by ballot. At each meeting of the stockholders a full, true and complete list in alphabetical order of all stockholders entitled to vote at such meeting, and indicating the number of shares held by each, certified by the secretary or by the treasurer, shall be furnished. Only the persons in whose names shares of capital stock stand on the books of the company, as evidenced by the list of the stockholders so furnished, shall be entitled to vote in person or by proxy on the shares so standing in their names. Upon demand of any stockholder, the votes upon any question before the meeting, shall be made by ballot. Section 5. Inspectors. At each meeting of the stockholders the polls shall be opened and closed, the proxies and ballots shall be received and taken in charge, and all questions touching the qualifications of voters and the validity of proxies and the acceptance or rejection of a voter, shall be decided upon by two or more inspectors. The inspectors shall be appointed by the presiding officer of the meeting and the inspectors shall be sworn to faithfully perform their duties, and shall, in writing, certify the returns showing the result of the election or ballot. The inspectors may or may not be stockholders, but any inspector may not be a candidate for the office of director. In case of failure to appoint inspectors, the stockholders at any meeting may elect an inspector or inspectors to act at the meeting. ARTICLE II BOARD OF DIRECTORS Section 1. Number, Eligibility and Term of Office. The property, business, and affairs of the company shall be managed and controlled by its Board of Directors. The directors shall act only as a board and the individual directors shall have no power as such. The Board of Directors shall consist of not less than eleven (11) persons nor more than fifteen (15) persons, subject to change from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). Directors need not be stockholders. Section 2. Vacancies. Any vacancy in the board, including a vacancy caused by an increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors, even though less than a quorum of the Board, or by a sole remaining director. Section 3. Place of Meeting. The directors may hold their meetings, and keep the books of the company at the office of the company in the City of Elizabeth, County of Union, State of New Jersey, or at such other place or places as the Board from time to time may lawfully determine. Section 4. Regular Meetings. Regular meetings of the Board of Directors shall be held monthly on the third Thursday of each month, if not a legal holiday, and if a legal holiday, then at the next succeeding Thursday not a legal holiday. No notice shall be required for any such regular meetings of the Board. The Board of Directors may designate some other day for the regular monthly meeting in which case notice of the meeting shall be given as provided for Special Meetings, but such notice may be waived by any director. Section 5. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by the chairman, president or by not less than one-third of the directors for the time being in office. The secretary shall give notice of each special meeting by mailing the same at least two days before the meeting or by telegraphing the same at least one day before the meeting to each director, but such notice may be waived by any director. At any time at which every director shall be present, even though without notice, any business may be transacted. Section 6. Quorum. A majority of the Board of Directors for the time being in office shall constitute a quorum for the transaction of business, but if at any meeting of the Board there be less than a quorum present a majority of these present may adjourn the meeting from time to time until a quorum shall be present. Section 7. Committees. The Board of Directors, by Resolution adopted by a majority of the entire Board may appoint from among its members, an executive committee and one or more other committees. Except as otherwise provided by law, the executive committee shall have and may exercise all the authority of the Board of Directors when the Board is not in session, and each such other committee of the Board shall have and may exercise the authority of the Board to the extent provided in the resolution of appointment. The Chairman and President shall be ex officio members of all committees. The Board of Directors shall be kept informed of the actions taken by any Committee. Section 8. Designation of Depositories. The Board of Directors shall designate the trust company, or trust companies, bank or banks in which shall be deposited the money or securities of the company. Section 9. Contracts and Directors, etc. Inasmuch as the directors of this company are or may be men of large and diversified business interests, and are likely to be connected with other corporations with which from time to time this company must have business dealings, no material contract or other transaction between this company and any other corporation shall be affected by the fact that directors of this company are interested in, or are directors or officers of, such other corporation. The Board of Directors in its discretion may submit any contract or act for approval or ratification at any annual meeting of the stockholders, or at any meeting of the stockholders called for the purpose of considering any such act or contract; and any contract or act that shall be approved or be ratified by the vote of the holders of a majority, of the capital stock of the company which is represented in person or by proxy at such meeting (provided that a lawful quorum of stockholders be there represented in person or by proxy) shall be valid and as binding upon the company and upon all the stockholders as though it had been approved or ratified by every stockholder of the company. Section 10. Compensation of Directors. For his attendance at any meeting of the Board of Directors, or committee every director shall receive reasonable director's fees to be fixed by the Board for attendance at each meeting. Section 11. Compensation of Officers and Employees. The compensation of all officers shall be fixed by the Board of Directors and of all employees not mentioned in these by-laws by the officer or officers so authorized by the Board of Directors. ARTICLE III OFFICERS Section 1. Enumeration of, Election, Removal of. The officers of the company shall be a chairman, president, executive vice president, one or more vice presidents, secretary, an assistant secretary, treasurer, an assistant treasurer, and such other officers as shall from time to time be provided for by the Board of Directors. The chairman and president shall be directors of the company and any one person may hold any two or more of the offices enumerated above, as the Board of Directors may provide. The officers of the company shall be appointed at the first meeting of the Board of Directors after the annual election of directors, which may be on the day of the annual election, and they shall hold office for one year, and until their respective successors shall have been duly appointed and qualified, provided, however, that all officers, agents and employees of the company shall be subject to removal at any time by the affirmative vote of a majority of the whole Board of Directors. In its discretion, the Board of Directors, by a vote of the majority thereof, may leave unfilled for such period as it may fix by resolution any office. Section 2. Powers and Duties of Chairman. The Chairman shall preside at all meetings of the stockholders and the Board of Directors. He shall have general charge and supervision of the business of the company. He may sign and execute all authorized bonds, debentures, contracts, notes or obligations in the name of the company, and with the treasurer, an assistant treasurer, or secretary, or assistant secretary, may sign all certificates of the shares in the capital stock of the company. He shall from time to time make such reports of the affairs of the company as the Board of Directors may require and shall annually present a report of the preceding year's business to the Board of Directors, which report may be read at the annual meeting of the stockholders. He shall do and perform such other duties as may be from time to time assigned to him by the Board of Directors. Section 3. Powers and Duties of Vice Chairman. The Vice chairman shall have all the powers as the Chairman enumerated in Section 2 above in his absence or disability. He shall have such other powers and shall perform such other duties as may from time to time be assigned to him by the Board of Directors. Section 4. Powers and Duties of President. The president shall possess the powers and may perform the duties of the chairman in his absence or disability. He shall have charge of the general management of the company under the supervision of the chairman. He may sign and execute all authorized bonds, debentures, contracts, notes or obligations in the name of the company, and with the treasurer, assistant treasurer, secretary, or assistant secretary, may sign all certificates of the shares of the capital stock of the company. He shall do and perform such other duties as may be from time to time assigned to him by the Board of Directors. Section 5. Powers and Duties of Executive Vice President. The executive vice president shall possess the powers and may perform the duties of the president in his absence or inability. He shall assist the president in the general management of the company. He may sign and execute all authorized bonds, debentures, contracts, notes or obligations in the name of the company, and with the treasurer, assistant treasurer, secretary or assistant secretary, may sign all certificates of the shares of the capital stock of the company. He shall do and perform such other duties as may be from time to time assigned to him by the Board of Directors. Section 6. Powers and Duties of Vice President. A vice president shall have all the powers as the executive vice president enumerated in Section 5 above in his absence or disability. He shall have such other powers and shall perform such other duties as may from time to time be assigned to him by the Board of Directors. Section 7. Powers and Duties of Secretary. The secretary shall keep the minutes of all meetings of the stock holders and all meetings of the Board of Directors. He shall attend to the giving and service of all notices of the company; he may sign with the chairman, president, executive vice president or vice president in the name of the company all contracts authorized by the Board of Directors and when required by the Board of Directors, or permitted by these by-laws he shall affix the seal of the company thereto; he shall have charge of all books and papers as the Board of Directors may direct, all of which shall, at all reasonable times, be open to the examination of any director, upon application at the office of the company during business hours, he may sign with the chairman, president, executive vice president or a vice president, all certificates of shares of capital stock; he shall in general perform all of the duties incident to the office of the secretary, subject to the control of the Board of Directors and shall do and perform such other duties as may from time to time be assigned to him by the Board of Directors. Section 8. Powers and Duties of Assistant Secretary. The assistant secretary shall have the same powers as the secretary in his absence or disability, and he shall have such other powers, and he shall perform such other duties as may be assigned to him from time to time by the Board of Directors. Section 9. Powers and Duties of Treasurer. The treasurer shall have custody of all funds and securities of the company which may have come into his hands; when necessary or proper, he shall endorse on behalf of the company for collection, checks, notes and other obligations, and shall deposit the same to the credit of the company in such bank, or banks, or depository as the Board of Directors may designate; jointly with such other officer as may be designated by by-law or by resolution of the Board of Directors, all bills of exchange and promissory notes of the company; he may sign with the chairman, president, executive vice president, or a vice president, all certificates of shares in the capital stock; whenever required by the Board of Directors, he shall render a statement of his cash account, he shall regularly in books of the company to be kept by him for the purpose, keep a full and accurate amount of all moneys received and paid by him on account of the company; he shall, at all reasonable times, exhibit his books and accounts to any director of the company upon application at the office of the company during business hours; he shall perform all acts incident to the position of treasurer, subject to the control of the Board of Directors; and he shall have such other powers and he shall perform such other duties as may be assigned to him by the Board of Directors, from time to time. He shall give bond for the faithful performance of his duties as treasurer as the Board of Directors may direct. Section 10. Powers and Duties of Assistant Treasurer. The assistant treasurer shall have the same powers as the treasurer in his absence or disability, and he shall have such other powers and he shall perform such other duties as may be assigned to him by the Board of Directors from time to time. He shall give bond for the faithful performance of his duties as assistant treasurer as the Board of Directors may direct. ARTICLE IV CAPITAL STOCK Section 1. Certificate of Shares. Each holder of capital stock of the company shall be entitled to a stock certificate signed by the chairman, president, or a vice president and either the treasurer or an assistant treasurer, or the secretary or an assistant secretary, certifying the number of shares owned by him in the company. However, when the certificate is signed by the transfer agent, or an assistant transfer agent, or by a transfer clerk on behalf of the company and a registrar, the signature of the chairman, president, vice president, treasurer, assistant treasurer, secretary or assistant secretary may be facsimiles. All certificates shall be consecutively numbered. The name of the person owning the shares represented thereby, with the -number of such shares and the date of issue, shall be entered in the company's books. No certificate shall be valid unless it be signed as provided above in this Section I of Article IV of the by-laws. All certificates surrendered to the company shall be cancelled, and no new certificate shall be issued until the former certificate shall have been surrendered and cancelled, or such proof that the certificate has been lost, damaged or destroyed as the Board of Directors may require, and in that event a new certificate may be issued, but the Board of Directors may require such security as they deem appropriate. Section 2. Transfer of Shares. Shares in the capital stock of the company shall be transferred on the books of the company by the holder thereof in person, or by his attorney, upon surrender and cancellation of certificates for a like number of shares. Section 3. Rules and Regulations as to Issue, Transfer and Registration of Shares of Stock. The Board of Directors shall have power and authority to make all such rules and regulations as they deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the company. The Board of Directors may appoint a transfer agent and registrar of transfers, and require all stock certificates to bear the signature of such transfer agent and of such registrar of transfers. Section 4. Closing of Transfer Books. The stock transfer books may be closed for the meetings of the stockholders, and for the payment of dividends, during such periods as from time to time may be fixed by the Board of Directors, and during such periods no stock shall be transferable. Section 5. Fixing Date for Determination of Stockholders' Rights. The Board of Directors is authorized from time to time to fix in advance a date not exceeding sixty (60) nor less than ten (10) days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date of allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the stockholders entitled to notice of and to vote at any such meeting, or any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of capital stock, and in such case only stockholders of record on the date so fixed shall be entitled to such notice of and vote at any such meeting, or to receive payment of such dividend, or allotment of rights, or exercise such rights, as the case may be, and notwithstanding any transfer of any stock on the books of the company after any such record date fixed as aforesaid. ARTICLE V DIVIDENDS AND WORKING CAPITAL Section 1. Dividends. Dividends may be declared by the Board of Directors from time to time out of the surplus or net profits of the company, and shall be payable at such times as the Board may determine. Section 2. Working Capital. Before payment of any dividends or making any distribution of profits, there may be set aside out of the net profits of the company such sum or sums as the Board of Directors may from time to time in their discretion think proper as working capital or as a reserve fund to meet contingencies, and from time to time the Board of Directors may increase, diminish and vary such working capital or such reserve fund in their absolute judgment and discretion. ARTICLE VI CHECKS, NOTES, CONTRACTS, ETC. Section 1. Checks and Notes. Payment shall be made by checks or check voucher, all of which shall be signed by the chairman, or president and the treasurer or assistant treasurer, or by any two officers of the company as the Board of Directors may from time to time direct, except that the Board of Directors may provide by resolution for special subsidiary checking accounts and their manner of operation for payroll, dividend and other purposes. Bills receivable, drafts and other evidence of indebtedness to the company, shall be endorsed for the purpose of discount or collection by the treasurer or assistant treasurer, or such other officer or officers of the company as the Board of Directors may from time to time by resolution designate. No bills or notes or other evidence of indebtedness shall be executed by or on behalf of the company unless the Board of Directors shall authorize the same. Such authority may be general or confined to specific instances. Section 2. Contracts and Instruments. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any conveyance or instrument in the name of and on behalf of the company, and such authority may be general or confined to specific instances. When the execution of any contract, conveyance or other instrument has been authorized without specification of the executing officers, the chairman, president or a vice president and the secretary or assistant secretary, may execute the same in the name and behalf of the company and may affix the corporate seal and attest thereto, unless otherwise directed or required by the Board of Directors. ARTICLE VII MISCELLANEOUS PROVISIONS Section 1. Fiscal Year. The fiscal year of the company shall begin on the first day of January in each and every year, and all accounts shall be brought up to the close of the year. Section 2. Principal Office. The principal office of this company shall be at One Elizabethtown Plaza, City of Elizabeth, County of Union, State of New Jersey, but the Board of Directors may at any regular or special meeting change the place of such office, upon the adoption of a resolution providing therefor by the votes of at least two thirds of its members. This company may have other offices at such places as the Board of Directors shall designate and the business of this company may require. Section 3. Officers' Voting Stock. The chairman, president, or a vice president, shall have full power and authority on behalf of this company to attend and act, and to vote in person or by proxy at any meeting of stockholders of any corporation in which this corporation may own and hold stock, and at any such meeting shall possess and may exercise any and all the rights and powers incident to the ownership of such stock and which, as the owner thereof, the company might have possessed and exercised if present. The Board of Directors, by resolution, from time to time, may confer like powers upon any person or persons. Section 4. Rules of Order for Meetings. Robert's Rules of Order Revised, Seventy-fifth Anniversary Edition, are adopted as rules of order for all meetings of the company where not in conflict with law, the corporate charter and these by-laws, but these rules of order may be suspended by a majority vote of those entitled to vote at the meeting, either in person or by proxy. ARTICLE VIII CORPORATE SEAL Section 1. The corporate seal of this company shall be as shown by the following impression: ARTICLE IX AMENDMENT OF BY-LAWS Section 1. These by-laws may be amended by the Board of Directors as provided in section (a) of Article IV of the Joint Agreement of Consolidation, or as provided by law. EX-4 4 Exhibit 4(k) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- LOAN AGREEMENT NWK3: 352222.02 BY AND BETWEEN NEW JERSEY ENVIRONMENTAL INFRASTRUCTURE TRUST AND THE MOUNT HOLLY WATER COMPANY DATED AS OF NOVEMBER 1, 1998 -ii- TABLE OF CONTENTS Page EXHIBIT A (1) Description of Project and Environmental Infrastructure System A-1-1 (2) Description of Loan A-2-1 EXHIBIT B Basis for Determination of Allowable Project Costs B-1 EXHIBIT C Estimated Disbursement Schedule C-1 EXHIBIT D Specimen Borrower Bond D-1 EXHIBIT E Opinions of Borrower's Bond and General Counsels E-1 EXHIBIT F Additional Covenants and Requirements F-1 EXHIBIT G General Administrative Requirements for the State Environmental Infrastructure Financing ProgramG-1 EXHIBIT H Form of Continuing Disclosure Agreement H-1 -3- NEW JERSEY ENVIRONMENTAL INFRASTRUCTURE TRUST LOAN AGREEMENT THIS LOAN AGREEMENT, made and entered into as of this 1st day of November, 1998, by and between NEW JERSEY ENVIRONMENTAL INFRASTRUCTURE TRUST, a public body corporate and politic with corporate succession, and THE MOUNT HOLLY WATER COMPANY, a corporation duly created and validly existing under the laws of the State of New Jersey (the "State"); WITNESSETH THAT: WHEREAS, the Trust, in accordance with the Act, the Bond Resolution and a financial plan approved by the State Legislature in accordance with Section 23 of the Act, will issue its Trust Bonds on or prior to the Loan Closing for the purpose of making the Loan to the Borrower and the Loans to the Borrowers from the proceeds of the Trust Bonds to finance a portion of the cost of Environmental Infrastructure Facilities (as each of the foregoing terms is defined in Section 1.01 hereof; all capitalized terms used in this Loan Agreement shall have, unless the context otherwise requires, the meanings set forth in said Section 1.01); WHEREAS, the Borrower has, in accordance with the Act and the Regulations, made timely application to the Trust for a Loan to finance a portion of the Cost of the Project; WHEREAS, the State Legislature, in accordance with Section 20 of the Act, has in the form of an appropriations act approved a project priority list that includes the Project and that authorizes an expenditure of proceeds of the Trust Bonds to finance a portion of the Cost of the Project; WHEREAS, the Trust has approved the Borrower's application for a Loan from available proceeds of the Trust Bonds to finance a portion of the Cost of the Project; WHEREAS, in accordance with the "Wastewater Treatment Bond Act of 1985", P.L. 1985, c. 329, as amended, and the Regulations, the Borrower has been awarded a Fund Loan for a portion of the Cost of the Project; and WHEREAS, the Borrower, in accordance with the Act, the Regulations, the Business Corporation Law and all other applicable law, will issue a Borrower Bond to the Trust evidencing said Loan at the Loan Closing. NOW, THEREFORE, for and in consideration of the award of the Loan by the Trust, the Borrower agrees to complete the Project and to perform under this Loan Agreement in accordance with the conditions, covenants and procedures set forth herein and attached hereto as part hereof, as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The following terms as used in this Loan Agreement shall, unless the context clearly requires otherwise, have the following meanings: "Act" means the "New Jersey Environmental Infrastructure Trust Act", constituting Chapter 334 of the Pamphlet Laws of 1985 of the State (codified at N.J.S.A. 58:11B-1 et seq.), as the same may from time to time be amended and supplemented. "Administrative Fee" means that portion of Interest on the Loan or Interest on the Borrower Bond payable hereunder as an annual fee of up to three-tenths of one percent (.30%) of the initial principal amount of the Loan or such lesser amount, if any, as may be authorized by any act of the State Legislature and as the Trust may approve from time to time. "Authorized Officer" means, in the case of the Borrower, any person or persons authorized pursuant to a resolution of the board of directors of the Borrower to perform any act or execute any document relating to the Loan, the Borrower Bond or this Loan Agreement. "Bond Counsel" means a law firm appointed or approved by the Trust, as the case may be, having a reputation in the field of municipal law whose opinions are generally acceptable by purchasers of municipal bonds. "Bond Resolution" means the "Environmental Infrastructure Bond Resolution, Series 1998B", as adopted by the Board of Directors of the Trust on or about September 21, 1998, authorizing the issuance of the Trust Bonds, and all further amendments and supplements thereto adopted in accordance with the provisions thereof. "Borrower" means the corporation that is a party to and is described in the first paragraph of this Loan Agreement, and its successors and assigns. "Borrower Bond" means the general obligation bond, note, debenture or other evidence of indebtedness authorized, executed, attested and delivered by the Borrower to the Trust to evidence the Loan, a specimen of which is attached hereto as Exhibit D and made a part hereof. "Borrowers" means any other Local Government Unit or Private Entity (as such terms are defined in the Regulations) authorized to construct, operate and maintain Environmental Infrastructure Facilities that have entered into Loan Agreements with the Trust pursuant to which the Trust will make Loans to such recipients from moneys on deposit in the Project Fund, excluding the Project Loan Account. "Business Corporation Law" means the "New Jersey Business Corporation Act", constituting Chapter 263 of the Pamphlet Laws of 1968 of the State (codified at N.J.S.A. 14A:1-1 et seq.), as the same may from time to time be amended and supplemented. "Code" means the Internal Revenue Code of 1986, as the same may from time to time be amended and supplemented, including any regulations promulgated thereunder, any successor code thereto and any administrative or judicial interpretations thereof. "Cost" means those costs that are eligible, reasonable, necessary, allocable to the Project and permitted by generally accepted accounting principles, including Allowances and Building Costs (as defined in the Regulations), as shall be determined on a project-specific basis in accordance with the Regulations as set forth in Exhibit B hereto, as the same may be amended by subsequent eligible costs as evidenced by a certificate of an authorized officer of the Trust. "Debt Service Reserve Fund" means the Debt Service Reserve Fund as defined in the Bond Resolution. "Environmental Infrastructure Facilities" means Wastewater Treatment Facilities, Stormwater Management Facilities or Water Supply Facilities (as such terms are defined in the Regulations). "Environmental Infrastructure System" means the Environmental Infrastructure Facilities of the Borrower, including the Project, described in Exhibit A-1 attached hereto and made a part hereof for which the Borrower is borrowing the Loan under this Loan Agreement. "Event of Default" means any occurrence or event specified in Section 5.01 hereof. "Fund Loan" means the loan made to the Borrower by the State, acting by and through the New Jersey Department of Environmental Protection, pursuant to the loan agreement dated as of November 1, 1998 by and between the Borrower and the State, acting by and through the New Jersey Department of Environmental Protection, to finance or refinance a portion of the Cost of the Project. "Guarantor" means Elizabethtown Water Company, a New Jersey corporation. "Interest on the Loan" or "Interest on the Borrower Bond" means the sum of (i) the Interest Portion, (ii) the Administrative Fee, and (iii) any late charges incurred hereunder. "Interest Portion" means that portion of Interest on the Loan or Interest on the Borrower Bond payable hereunder that is necessary to pay the Borrower's proportionate share of interest on the Trust Bonds (i) as set forth in Exhibit A-2 hereof under the column heading entitled "Interest", or (ii) with respect to any prepayment of Trust Bond Loan Repayments in accordance with Section 3.07 or 5.03 hereof, to accrue on any principal amount of Trust Bond Loan Repayments to the date of the optional redemption or acceleration, as the case may be, of the Trust Bonds allocable to such prepaid or accelerated Trust Bond Loan Repayment. "Loan" means the loan made by the Trust to the Borrower to finance or refinance a portion of the Cost of the Project pursuant to this Loan Agreement. For all purposes of this Loan Agreement, the amount of the Loan at any time shall be the initial aggregate principal amount of the Borrower Bond (which amount equals the amount actually deposited in the Project Loan Account at the Loan Closing plus the Borrower's allocable share of (i) certain costs of issuance and underwriter's discount for all Trust Bonds issued to finance the Loan, (ii) capitalized interest during the Project construction period, and (iii) that portion of the Debt Service Reserve Fund attributable to the cost of funding reserve capacity for the Project) less any amount of such principal amount that has been repaid by the Borrower under this Loan Agreement and less any adjustment made pursuant to the provisions of the Bond Resolution, including, without limitation, Section 5.02(4) thereof, N.J.A.C. 7:22-4.26 and the appropriations act of the State Legislature authorizing the expenditure of Trust Bond proceeds to finance a portion of the Cost of the Project. "Loan Agreement" means this Loan Agreement, including the Exhibits attached hereto, as it may be supplemented, modified or amended from time to time in accordance with the terms hereof and of the Bond Resolution. "Loan Agreements" means any other loan agreements entered into by and between the Trust and one or more of the Borrowers pursuant to which the Trust will make Loans to such Borrowers from moneys on deposit in the Project Fund, excluding the Project Loan Account, financed with the proceeds of the Trust Bonds. "Loan Closing" means the date upon which the Trust shall issue and deliver the Trust Bonds and the Borrower shall deliver its Borrower Bond, as previously authorized, executed and attested, to the Trust. "Loan Repayments" means the sum of (i) Trust Bond Loan Repayments, (ii) the Administrative Fee, and (iii) any late charges incurred hereunder. "Loan Servicer" means, initially, First Union National Bank, the loan servicer for the Loan and the Fund Loan, duly appointed and designated as "Loan Servicer" pursuant to the Loan Servicing and Trust Bonds Security Agreement dated as of November 1, 1998 by and among the Trust, the State, acting by and through the Treasurer of the State on behalf of the New Jersey Department of Environmental Protection, and First Union National Bank, and any successors as "Loan Servicer" under such agreement, as the same may be modified, amended or supplemented from time to time in accordance with its terms. "Loan Term" means the term of this Loan Agreement provided in Sections 3.01 and 3.03 hereof and in Exhibit A-2 attached hereto and made a part hereof. "Loans" means the loans made by the Trust to the Borrowers under the Loan Agreements from moneys on deposit in the Project Fund, excluding the Project Loan Account. "Master Program Trust Agreement" means that certain Master Program Trust Agreement dated as of November 1, 1995 by and among the Trust, the State, United States Trust Company of New York, as Master Program Trustee thereunder, The Bank of New York (NJ), in several capacities thereunder, and First Fidelity Bank, N.A. (predecessor to First Union National Bank), in several capacities thereunder, as the same may be amended and supplemented from time to time in accordance with its terms. "Official Statement" means the Official Statement relating to the issuance of the Trust Bonds. "Preliminary Official Statement" means the Preliminary Official Statement relating to the issuance of the Trust Bonds. "Prime Rate" means the prevailing commercial interest rate announced by the Trustee from time to time in the State as its prime lending rate. "Project" means the Environmental Infrastructure Facilities of the Borrower described in Exhibit A-1 attached hereto and made a part hereof, which constitutes a project for which the Trust is permitted to make a loan to the Borrower pursuant to the Act, the Regulations and the Bond Resolution, all or a portion of the Cost of which is financed or refinanced by the Trust through the making of the Loan under this Loan Agreement. "Project Fund" means the Project Fund as defined in the Bond Resolution. "Project Loan Account" means the project loan account established on behalf of the Borrower in the Project Fund in accordance with the Bond Resolution to finance all or a portion of the Cost of the Project. "Regulations" means the rules and regulations, as applicable, now or hereafter promulgated under N.J.A.C. 7:22-3 et seq., 7:22-4 et seq., 7:22-5 et seq., 7:22-6 et seq., 7:22-7 et seq., 7:22-8 et seq., 7:22-9 et seq. and 7:22-10 et seq., as the same may from time to time be amended and supplemented. "State" means the State of New Jersey. "Trust" means the New Jersey Environmental Infrastructure Trust, a public body corporate and politic with corporate succession duly created and validly existing under and by virtue of the Act. "Trust Bond Loan Repayments" means the repayments of the principal amount of the Loan plus the payment of any premium associated with prepaying the principal amount of the Loan in accordance with Section 3.07 hereof plus the Interest Portion. "Trust Bonds" means bonds authorized by Section 2.03 of the Bond Resolution, together with any refunding bonds authenticated and delivered pursuant to Section 2.04 of the Bond Resolution, in each case issued in order to finance (i) the portion of the Loan deposited in the Project Loan Account, (ii) the portion of the Loans deposited in the balance of the Project Fund, (iii) any capitalized interest related to such bonds, (iv) a portion of the costs of issuance related to such bonds, and (v) that portion of the Debt Service Reserve Fund, if any, allocable to the Loan or Loans, as the case may be, a portion of which includes the funding of reserve capacity for the Environmental Infrastructure Facilities of the Borrower or Borrowers, as the case may be, or to refinance any or all of the above. "Trustee" means, initially, First Union National Bank, the Trustee appointed by the Trust and its successors as Trustee under the Bond Resolution, as provided in Article X of the Bond Resolution. Except as otherwise defined herein or where the context otherwise requires, words importing the singular number shall include the plural number and vice versa, and words importing persons shall include firms, associations, corporations, agencies and districts. Words importing one gender shall include the other gender. ARTICLE II REPRESENTATIONS AND COVENANTS OF BORROWER SECTION 2.01. Representations of Borrower. The Borrower represents for the benefit of the Trust, the Trustee and the holders of the Trust Bonds as follows: (a) Organization and Authority. (i) The Borrower is a corporation duly created and validly existing under and pursuant to the Constitution and statutes of the State, including the Business Corporation Law. (ii) The acting officers of the Borrower who are contemporaneously herewith performing or have previously performed any action contemplated in this Loan Agreement either are or, at the time any such action was performed, were the duly appointed or elected officers of such Borrower empowered by applicable State law and, if applicable, authorized by resolution of the Borrower to perform such actions. To the extent any such action was performed by an officer no longer the duly acting officer of such Borrower, all such actions previously taken by such official are still in full force and effect. (iii) The Borrower has full legal right and authority and all necessary licenses and permits required as of the date hereof to own, operate and maintain its Environmental Infrastructure System, to carry on its activities relating thereto, to execute, attest and deliver this Loan Agreement and the Borrower Bond, to sell the Borrower Bond to the Trust, to undertake and complete the Project and to carry out and consummate all transactions contemplated by this Loan Agreement. (iv) The Borrower's board of directors has taken all necessary action to authorize the execution, attestation and delivery of this Loan Agreement and the Borrower Bond, the sale of the Borrower Bond to the Trust and the Borrower's undertaking and completion of the Project. (v) The Borrower has duly authorized, approved and consented to all necessary action to be taken by the Borrower for: (A) the execution, attestation, delivery and performance of this Loan Agreement and the transactions contemplated hereby; (B) the issuance of the Borrower Bond and the sale thereof to the Trust upon the terms set forth herein; (C) the approval of the inclusion, if such inclusion is deemed necessary in the sole discretion of the Trust, in the Preliminary Official Statement and the Official Statement of all statements and information relating to the Borrower set forth in "APPENDIX B" thereto (the "Borrower Appendices") and any amendment thereof or supplement thereto; and (D) the execution, delivery and due performance of any and all other certificates, agreements and instruments that may be required to be executed, delivered and performed by the Borrower in order to carry out, give effect to and consummate the transactions contemplated by this Loan Agreement, including, without limitation, the designation of the Borrower Appendices portion of the Preliminary Official Statement, if any, as "deemed final" for the purposes and within the meaning of Rule 15c2-12 ("Rule 15c2-12") of the Securities and Exchange Commission ("SEC") promulgated under the Securities Exchange Act of 1934, as amended or supplemented, including any successor regulation or statute thereto. (vi) This Loan Agreement and the Borrower Bond have each been duly authorized by the Borrower and duly executed, attested and delivered by Authorized Officers of the Borrower, and the Borrower Bond has been duly sold by the Borrower to the Trust; and assuming that the Trust has all the requisite power and authority to authorize, execute, attest and deliver, and has duly authorized, executed, attested and delivered, this Loan Agreement, and assuming further that this Loan Agreement is the legal, valid and binding obligation of the Trust, enforceable against the Trust in accordance with its terms, each of this Loan Agreement and the Borrower Bond constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its respective terms, except as the enforcement thereof may be affected by bankruptcy, insolvency or other laws or the application by a court of legal or equitable principles affecting creditors' rights; and the information contained under "Description of Loan" in Exhibit A-2 attached hereto and made a part hereof is true and accurate in all respects. (b) Full Disclosure. There is no fact that the Borrower has not disclosed to the Trust in writing on the Borrower's application for the Loan or otherwise that materially adversely affects or (so far as the Borrower can now foresee) that will materially adversely affect the properties, activities, prospects or condition (financial or otherwise) of the Borrower or its Environmental Infrastructure System, or the ability of the Borrower to make all Loan Repayments and any other payments required under this Loan Agreement or otherwise to observe and perform its duties, covenants, obligations and agreements under this Loan Agreement and the Borrower Bond. (c) Pending Litigation. There are no proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower in any court or before any governmental authority or arbitration board or tribunal that, if adversely determined, would materially adversely affect (i) the undertaking or completion of the Project, (ii) the properties, activities, prospects or condition (financial or otherwise) of the Borrower or its Environmental Infrastructure System, (iii) the ability of the Borrower to make all Loan Repayments or any other payments required under this Loan Agreement, (iv) the authorization, execution, attestation or delivery of this Loan Agreement or the Borrower Bond, (v) the issuance of the Borrower Bond and the sale thereof to the Trust, or (vi) the Borrower's ability otherwise to observe and perform its duties, covenants, obligations and agreements under this Loan Agreement and the Borrower Bond, which proceedings have not been previously disclosed in writing to the Trust either in the Borrower's application for the Loan or otherwise. (d) Compliance with Existing Laws and Agreements. (i) The authorization, execution, attestation and delivery of this Loan Agreement and the Borrower Bond by the Borrower, (ii) the sale of the Borrower Bond to the Trust, (iii) the observation and performance by the Borrower of its duties, covenants, obligations and agreements hereunder and thereunder, (iv) the consummation of the transactions provided for in this Loan Agreement and the Borrower Bond, and (v) the undertaking and completion of the Project will not (A) other than the lien, charge or encumbrance created hereby, by the Borrower Bond and by any other outstanding debt obligations of the Borrower that are at parity with the Borrower Bond as to lien on, and source and security for payment thereon from, the revenues of the Borrower's Environmental Infrastructure System, result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Borrower pursuant to, (B) result in any breach of any of the terms, conditions or provisions of, or (C) constitute a default under, any existing resolution, outstanding debt or lease obligation, trust agreement, indenture, mortgage, deed of trust, loan agreement or other instrument to which the Borrower is a party or by which the Borrower, its Environmental Infrastructure System or any of its properties or assets may be bound, nor will such action result in any violation of the provisions of the charter or other document pursuant to which the Borrower was established or any laws, ordinances, injunctions, judgments, decrees, rules, regulations or existing orders of any court or governmental or administrative agency, authority or person to which the Borrower, its Environmental Infrastructure System or its properties or operations is subject. (e) No Defaults. No event has occurred and no condition exists that, upon the authorization, execution, attestation and delivery of this Loan Agreement and the Borrower Bond, the issuance of the Borrower Bond and the sale thereof to the Trust or the receipt of the amount of the Loan, would constitute an Event of Default hereunder. Since December 31, 1975 and as of the date of delivery of this Loan Agreement, the Borrower has not been, and is not now, in default in the payment of the principal of or interest on any of its bonds, notes, lease purchase agreements or other debt obligations. The Borrower is not in violation of, and has not received notice of any claimed violation of, any term of any agreement or other instrument to which it is a party or by which it, its Environmental Infrastructure System or its properties may be bound, which violation would materially adversely affect the properties, activities, prospects or condition (financial or otherwise) of the Borrower or its Environmental Infrastructure System or the ability of the Borrower to make all Loan Repayments, to pay all principal and redemption premiums, if any, of and interest on the Borrower Bond or otherwise to observe and perform its duties, covenants, obligations and agreements under this Loan Agreement and the Borrower Bond. (f) Governmental Consent. The Borrower has obtained all permits and approvals required to date by any governmental body or officer for the authorization, execution, attestation and delivery of this Loan Agreement and the Borrower Bond, for the issuance of the Borrower Bond and the sale thereof to the Trust, for the making, observance and performance by the Borrower of its duties, covenants, obligations and agreements under this Loan Agreement and the Borrower Bond and for the undertaking or completion of the Project and the financing or refinancing thereof, including, but not limited to, the approval by the New Jersey Board of Public Utilities (the "BPU") of the issuance by the Borrower of the Borrower Bond to the Trust, as required by Section 9a of the Act, and any other approvals required therefor by the BPU; and the Borrower has complied with all applicable provisions of law requiring any notification, declaration, filing or registration with any governmental body or officer in connection with the making, observance and performance by the Borrower of its duties, covenants, obligations and agreements under this Loan Agreement and the Borrower Bond or with the undertaking or completion of the Project and the financing or refinancing thereof. No consent, approval or authorization of, or filing, registration or qualification with, any governmental body or officer that has not been obtained is required on the part of the Borrower as a condition to the authorization, execution, attestation and delivery of this Loan Agreement and the Borrower Bond, the issuance of the Borrower Bond and the sale thereof to the Trust, the undertaking or completion of the Project or the consummation of any transaction herein contemplated. (g) Compliance with Law. The Borrower: (i) is in compliance with all laws, ordinances, governmental rules and regulations to which it is subject, the failure to comply with which would materially adversely affect (A) the ability of the Borrower to conduct its activities or to undertake or complete the Project or (B) the condition (financial or otherwise) of the Borrower or its Environmental Infrastructure System; and (ii) has obtained all licenses, permits, franchises or other governmental authorizations presently necessary for the ownership of its properties or for the conduct of its activities that, if not obtained, would materially adversely affect (A) the ability of the Borrower to conduct its activities or to undertake or complete the Project or (B) the condition (financial or otherwise) of the Borrower or its Environmental Infrastructure System. (h) Use of Proceeds. The Borrower will apply the proceeds of the Loan from the Trust as described in Exhibit B attached hereto and made a part hereof (i) to finance or refinance a portion of the Cost of the Borrower's Project; and (ii) where applicable, to reimburse the Borrower for a portion of the Cost of the Borrower's Project, which portion was paid or incurred in anticipation of reimbursement by the Trust and is eligible for such reimbursement under and pursuant to the Regulations, the Code and any other applicable law. All of such costs constitute Costs for which the Trust is authorized to make Loans to the Borrower pursuant to the Act and the Regulations. (i) Official Statement. The descriptions and information set forth in the Borrower Appendices, if any, contained in the Official Statement relating to the Borrower, its operations and the transactions contemplated hereby, as of the date of the Official Statement, were and, as of the date of delivery hereof, are true and correct in all material respects, and did not and do not contain any untrue statement of a material fact or omit to state a material fact that is necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. (j) Preliminary Official Statement. As of the date of the Preliminary Official Statement, the descriptions and information set forth in the Borrower Appendices, if any, contained in the Preliminary Official Statement relating to the Borrower, its operations and the transactions contemplated hereby were "deemed final" by the Borrower for the purposes and within the meaning of Rule 15c2-12. SECTION 2.02. Particular Covenants of Borrower. (a) Promise to Pay. The Borrower unconditionally promises to make punctual payment of the principal and redemption premium, if any, of the Loan and the Borrower Bond, the Interest on the Loan, the Interest on the Borrower Bond and all other amounts due under this Loan Agreement and the Borrower Bond according to their respective terms. (b) Performance Under Loan Agreement. The Borrower covenants and agrees (i) to comply with all applicable State and federal laws, rules and regulations in the performance of this Loan Agreement; (ii) to maintain its Environmental Infrastructure System in good repair and operating condition; and (iii) to cooperate with the Trust in the observance and performance of the respective duties, covenants, obligations and agreements of the Borrower and the Trust under this Loan Agreement. (c) Revenue Obligation; No Prior Pledges. The Borrower shall not be required to make payments under this Loan Agreement except from the revenues of its Environmental Infrastructure System and from such other funds of such Environmental Infrastructure System legally available therefor and from any other sources pledged to such payment pursuant to subsection (a) of this Section 2.02. In no event shall the Borrower be required to make payments under this Loan Agreement from any revenues or receipts not derived from its Environmental Infrastructure System or pledged pursuant to subsection (a) of this Section 2.02. Except for (i) loan repayments required with respect to the Fund Loan, (ii) the debt service on any future bonds of the Borrower issued at parity with the Borrower Bond, and (iii) the debt service on any bonds, notes or evidences of indebtedness of the Borrower at parity with the Borrower Bond and currently outstanding or issued on the date hereof, the revenues derived by the Borrower from its Environmental Infrastructure System, after the payment of all costs of operating and maintaining the Environmental Infrastructure System, are and will be free and clear of any pledge, lien, charge or encumbrance thereon or with respect thereto prior to, or of equal rank with, the obligation of the Borrower to make Loan Repayments under this Loan Agreement and the Borrower Bond, and all corporate or other action on the part of the Borrower to that end has been and will be duly and validly taken. (d) Completion of Project and Provision of Moneys Therefor. The Borrower covenants and agrees (i) to exercise its best efforts in accordance with prudent environmental infrastructure utility practice to complete the Project and to accomplish such completion on or before the estimated Project completion date set forth in Exhibit G hereto and made a part hereof; (ii) to comply with the terms and provisions contained in Exhibit G hereto; and (iii) to provide from its own fiscal resources all moneys, in excess of the total amount of loan proceeds it receives under the Loan and Fund Loan, required to complete the Project. (e) Disposition of Environmental Infrastructure System. Neither the Borrower nor the Guarantor shall permit the disposition of all or substantially all of the Borrower's Environmental Infrastructure System, directly or indirectly, including, without limitation, by means of sale, lease, abandonment, sale of stock, statutory merger or otherwise (collectively, a "Disposition"), except on ninety (90) days' prior written notice to the Trust, and, in any event, shall not permit a Disposition unless the following conditions are met: (i) the Borrower shall, in accordance with Section 4.02 hereof, assign this Loan Agreement and the Borrower Bond and its rights and interests hereunder and thereunder to the purchaser or lessee of the Environmental Infrastructure System, and such purchaser or lessee shall assume all duties, covenants, obligations and agreements of the Borrower under this Loan Agreement and the Borrower Bond; and (ii) the Trust shall by appropriate action determine, in its sole discretion, that such sale, lease, abandonment or other disposition will not adversely affect (A) the Trust's ability to meet its duties, covenants, obligations and agreements under the Bond Resolution, (B) the value of this Loan Agreement or the Borrower Bond as security for the payment of Trust Bonds and the interest thereon, or (C) the excludability from gross income for federal income tax purposes of the interest on Trust Bonds then outstanding or that could be issued in the future. (f) Exclusion of Interest from Federal Gross Income and Compliance with Code. (i) The Borrower covenants and agrees that it shall not take any action or omit to take any action that would result in the loss of the exclusion of the interest on any Trust Bonds now or hereinafter issued from gross income for purposes of federal income taxation as that status is governed by Section 103(a) of the Code. (ii) The Borrower shall not directly or indirectly use or permit the use of any proceeds of the Trust Bonds (or amounts replaced with such proceeds) or any other funds or take any action or omit to take any action that would cause the Trust Bonds (assuming solely for this purpose that the proceeds of the Trust Bonds loaned to the Borrower represent all of the proceeds of the Trust Bonds) to be "arbitrage bonds" within the meaning of Section 148(a) of the Code. (iii) The Borrower shall not directly or indirectly use or permit the use of any proceeds of the Trust Bonds to pay the principal of or the interest or redemption premium on or any other amount in connection with the retirement or redemption of any issue of state or local governmental obligations ("refinancing of indebtedness"), unless the Borrower shall (A) establish to the satisfaction of the Trust, prior to the issuance of the Trust Bonds, that such refinancing of indebtedness will not adversely affect the exclusion from gross income for federal income tax purposes of the interest on the Trust Bonds, and (B) provide to the Trust an opinion of Bond Counsel to that effect in form and substance satisfactory to the Trust. (iv) The Borrower shall not directly or indirectly use or permit the use of any proceeds of the Trust Bonds to reimburse the Borrower for an expenditure with respect to a Cost of the Borrower's Project paid by the Borrower prior to the issuance of the Trust Bonds, unless (A) the allocation by the Borrower of the proceeds of the Trust Bonds to reimburse such expenditure complies with the requirements of Treasury Regulations 1.150-2 necessary to enable the reimbursement allocation to be treated as an expenditure of the proceeds of the Trust Bonds for purposes of applying Sections 103 and 141-150, inclusive, of the Code, or (B) such proceeds of the Trust Bonds will be used for refinancing of indebtedness that was used to pay Costs of the Borrower's Project or to reimburse the Borrower for expenditures with respect to Costs of the Borrower's Project paid by the Borrower prior to the issuance of such indebtedness in accordance with a reimbursement allocation for such expenditures that complies with the requirements of Treasury Regulations 1.150-2. (v) The Borrower shall not directly or indirectly use or permit the use of any proceeds of the Trust Bonds to pay any Cost of the Borrower's Project that does not constitute a "capital expenditure" within the meaning of Treasury Regulations 1.150-1. (vi) The Borrower shall not use the proceeds of the Trust Bonds (assuming solely for this purpose that the proceeds of the Trust Bonds loaned to the Borrower represent all of the proceeds of the Trust Bonds) in any manner that would cause the Trust Bonds to be considered "federally guaranteed" within the meaning of Section 149(b) of the Code or "hedge bonds" within the meaning of Section 149(g) of the Code. (vii) Neither the Borrower nor any "related party" (within the meaning of Treasury Regulations 1.150-1) shall purchase Trust Bonds in an amount related to the amount of the Loan. (viii) The Borrower will not issue or permit to be issued obligations that will constitute an "advance refunding" of the Borrower Bond within the meaning of Section 149(d)(5) of the Code without the express written consent of the Trust, which consent may only be delivered by the Trust after the Trust has received notice from the Borrower of such contemplated action no later than sixty (60) days prior to any such contemplated action, and which consent is in the sole discretion of the Trust. (ix) The Borrower will not have a reserve or replacement fund (within the meaning of Section 148(d)(1) of the Code) allocable to the Borrower Bond evidencing the Loan. (x) No "gross proceeds" of the Trust Bonds held by the Borrower (other than amounts in a "bona fide debt service fund") will be held in a "commingled fund" (as such terms are defined in Treasury Regulations 1.148-1(b)). (xi) Based upon all of the objective facts and circumstances in existence on the date of issuance of the Trust Bonds used to finance the Project, (A) within six months of the date of issuance of the Trust Bonds used to finance the Project, the Borrower will incur a substantial binding obligation to a third party to expend on the Project at least five percent (5%) of the "net sale proceeds" (within the meaning of Treasury Regulations 1.148-1) of the Loan used to finance the Project (treating an obligation as not being binding if it is subject to contingencies within the control of the Borrower, the Trust or a "related party" (within the meaning of Treasury Regulations 1.150-1)), (B) completion of the Project and the allocation to expenditures of the "net sale proceeds" of the Loan used to finance the Project will proceed with due diligence, and (C) all of the proceeds of the Loan used to finance the Project (other than amounts deposited into the Debt Service Reserve Fund allocable to that portion of the Loan used to finance reserve capacity, if any) and investment earnings thereon will be spent prior to the period ending three (3) years subsequent to the date of issuance of the Trust Bonds used to finance the Project. Accordingly, the proceeds of the Loan deposited in the Project Loan Account used to finance the Project will be eligible for the 3-year arbitrage temporary period since the expenditure test, time test and due diligence test, as set forth in Treasury Regulations 1.148-2(e)(2), will be satisfied. (xii) The weighted average maturity of the Loan does not exceed 120% of the average reasonably expected economic life of the Project financed or refinanced with the Loan, determined in the same manner as under Section 147(b) of the Code. Accordingly, the term of the Loan will not be longer than is reasonably necessary for the governmental purposes of the Loan within the meaning of Treasury Regulations 1.148-1(c)(4). For purposes of this subsection and subsection (h) of this Section 2.02, quoted terms shall have the meanings given thereto by Section 148 of the Code, including, particularly, Treasury Regulations 1.148-1 through 1.148-11, inclusive, as supplemented or amended, to the extent applicable to the Trust Bonds, and any successor Treasury Regulations applicable to the Trust Bonds. (g) Operation and Maintenance of Environmental Infrastructure System. The Borrower covenants and agrees that it shall, in accordance with prudent environmental infrastructure utility practice, (i) at all times operate the properties of its Environmental Infrastructure System and any business in connection therewith in an efficient manner, (ii) maintain its Environmental Infrastructure System in good repair, working order and operating condition, and (iii) from time to time make all necessary and proper repairs, renewals, replacements, additions, betterments and improvements with respect to its Environmental Infrastructure System so that at all times the business carried on in connection therewith shall be properly and advantageously conducted. (h) Records and Accounts. (i) The Borrower shall keep accurate records and accounts for its Environmental Infrastructure System (the "System Records"). Such System Records shall be part of the annual audit of the general records of the Guarantor. Such System Records and general records of the Guarantor shall be made available for inspection by the Trust at any reasonable time upon prior written notice, and a copy of such annual audit, including all written comments and recommendations, shall be furnished to the Trust within 150 days of the close of the fiscal year being so audited or, with the consent of the Trust, such additional period as may be provided by law. (ii) Unless otherwise advised in writing by the Trust, in furtherance of the covenant of the Borrower contained in subsection (f) of this Section 2.02 not to cause the Trust Bonds to be arbitrage bonds, the Borrower shall keep, or cause to be kept, accurate records of each investment it makes in any "nonpurpose investment" acquired with, or otherwise allocated to, "gross proceeds" of the Trust Bonds not held by the Trustee and each "expenditure" it makes allocated to "gross proceeds" of the Trust Bonds. Such records shall include the purchase price, including any constructive "payments" (or in the case of a "payment" constituting a deemed acquisition of a "nonpurpose investment" (e.g., a "nonpurpose investment" first allocated to "gross proceeds" of the Trust Bonds after it is actually acquired because it is deposited in a sinking fund for the Trust Bonds)), the "fair market value" of the "nonpurpose investment" on the date first allocated to the "gross proceeds" of the Trust Bonds, nominal interest rate, dated date, maturity date, type of property, frequency of periodic payments, period of compounding, yield to maturity, amount actually or constructively received on disposition (or in the case of a "receipt" constituting a deemed disposition of a "nonpurpose investment" (e.g., a "nonpurpose investment" that ceases to be allocated to the "gross proceeds" of the Trust Bonds because it is removed from a sinking fund for the Trust Bonds)), the "fair market value" of the "nonpurpose investment" on the date it ceases to be allocated to the "gross proceeds" of the Trust Bonds, the purchase date and disposition date of the "nonpurpose investment" and evidence of the "fair market value" of such property on the purchase date and disposition date (or deemed purchase or disposition date) for each such "nonpurpose investment". The purchase date, disposition date and the date of determination of "fair market value" shall be the date on which a contract to purchase or sell the "nonpurpose investment" becomes binding, i.e., the trade date rather than the settlement date. For purposes of the calculation of purchase price and disposition price, brokerage or selling commissions, administrative expenses or similar expenses shall not increase the purchase price of an item and shall not reduce the amount actually or constructively received upon disposition of an item, except to the extent such costs constitute "qualified administrative costs". (iii) Within thirty (30) days of the last day of the fifth and each succeeding fifth "bond year" (which, unless otherwise advised by the Trust, shall be the five-year period ending on the date five years subsequent to the date immediately preceding the date of issuance of the Trust Bonds and each succeeding fifth "bond year") and within thirty (30) days of the date the last bond that is part of the Trust Bonds is discharged (or on any other periodic basis requested in writing by the Trust), the Borrower shall (A) calculate, or cause to be calculated, the "rebate amount" as of the "computation date" or "final computation date" attributable to any "nonpurpose investment" (not held by the Trustee) made by the Borrower and (B) remit the following to the Trust: (1) an amount of money that when added to the "future value" as of the "computation date" of any previous payments made to the Trust on account of rebate equals the "rebate amount", (2) the calculations supporting the "rebate amount" attributable to any "nonpurpose investment" made by the Borrower allocated to "gross proceeds" of the Trust Bonds, and (3) any other information requested by the Trust relating to compliance with Section 148 of the Code (e.g., information related to any "nonpurpose investment" of the Borrower for purposes of application of the "universal cap"). (iv) The Borrower covenants and agrees that it will account for "gross proceeds" of the Trust Bonds, investments allocable to the Trust Bonds and expenditures of "gross proceeds" of the Trust Bonds in accordance with Treasury Regulations 1.148-6. All allocations of "gross proceeds" of the Trust Bonds to expenditures will be recorded on the books of the Borrower kept in connection with the Trust Bonds no later than 18 months after the later of the date the particular Cost of the Borrower's Project is paid or the date the portion of the project financed by the Trust Bonds is placed in service. All allocations of proceeds of the Trust Bonds to expenditures will be made no later than the date that is 60 days after the fifth anniversary of the date the Trust Bonds are issued or the date 60 days after the retirement of the Trust Bonds, if earlier. Such records and accounts will include the particular Cost paid, the date of the payment and the party to whom the payment was made. (i) Inspections; Information. The Borrower shall permit the Trust and the Trustee and any party designated by any of such parties, at any and all reasonable times during construction of the Project and thereafter upon prior written notice, to examine, visit and inspect the property, if any, constituting the Project and to inspect and make copies of any accounts, books and records, including (without limitation) its records regarding receipts, disbursements, contracts, investments and any other matters relating thereto and to its financial standing, and shall supply such reports and information as the Trust and the Trustee may reasonably require in connection therewith. (j) Insurance. The Borrower shall maintain or cause to be maintained, in force, insurance policies with responsible insurers or self-insurance programs providing against risk of direct physical loss, damage or destruction of its Environmental Infrastructure System at least to the extent that similar insurance is usually carried by utilities constructing, operating and maintaining Environmental Infrastructure Facilities of the nature of the Borrower's Environmental Infrastructure System, including liability coverage, all to the extent available at reasonable cost but in no case less than will satisfy all applicable regulatory requirements. (k) Cost of Project. The Borrower certifies that the building cost of the Project, as listed in Exhibit B hereto and made a part hereof, is a reasonable and accurate estimation thereof, and it will supply to the Trust a certificate from a licensed professional engineer authorized to practice in the State stating that such building cost is a reasonable and accurate estimation and that the useful life of the Project exceeds twenty (20) years from the expected date of the Loan Closing. (l) Delivery of Documents. Concurrently with the delivery of this Loan Agreement (as previously authorized, executed and attested) at the Loan Closing, the Borrower will cause to be delivered to the Trust and the Trustee each of the following items: (i) an opinion of the Borrower's bond counsel substantially in the form of Exhibit E hereto; provided, however, that the Trust may permit portions of such opinion to be rendered by general counsel to the Borrower and may permit variances in such opinion from the form set forth in Exhibit E if, in the opinion of the Trust, such variances are not to the material detriment of the interests of the holders of the Trust Bonds; (ii) counterparts of this Loan Agreement as previously executed and attested by the parties hereto; (iii) copies of those resolutions finally adopted by the board of directors of the Borrower and requested by the Trust, including, without limitation, resolutions of the Borrower authorizing the execution, attestation and delivery of this Loan Agreement and the execution, attestation, sale and delivery of the Borrower Bond to the Trust, and certified copies of orders of the BPU approving the issuance by the Borrower of the Borrower Bond to the Trust and setting forth any other approvals required therefor by the BPU; (iv) if the Loan is being made to reimburse the Borrower for all or a portion of the Costs of the Borrower's Project or to refinance indebtedness or reimburse the Borrower for the repayment of indebtedness previously incurred by the Borrower to finance all or a portion of the Costs of the Borrower's Project, an opinion of Bond Counsel, in form and substance satisfactory to the Trust, to the effect that such reimbursement or refinancing will not adversely affect the exclusion from gross income for federal income tax purposes of the interest on the Trust Bonds; and (v) the certificates of insurance coverage as required pursuant to the terms of Section 3.06(d) hereof and such other certificates, documents, opinions and information as the Trust may require in Exhibit F hereto, if any. (m) Execution and Delivery of Borrower Bond. Concurrently with the delivery of this Loan Agreement at the Loan Closing, the Borrower shall also deliver to the Trust the Borrower Bond, as previously executed and attested, upon the receipt of a written certification of the Trust that a portion of the net proceeds of the Trust Bonds shall be deposited in the Project Loan Account simultaneously with the delivery of the Borrower Bond. (n) Notice of Material Adverse Change. The Borrower shall promptly notify the Trust of any material adverse change in the properties, activities, prospects or condition (financial or otherwise) of the Borrower or its Environmental Infrastructure System, or in the ability of the Borrower to make all Loan Repayments and otherwise to observe and perform its duties, covenants, obligations and agreements under this Loan Agreement and the Borrower Bond. (o) Continuing Representations. The representations of the Borrower contained herein shall be true at the time of the execution of this Loan Agreement and at all times during the term of this Loan Agreement. (p) Continuing Disclosure Covenant. To the extent that the Trust, in its sole discretion, determines, at any time prior to the termination of the Loan Term, that the Borrower is a material "obligated person", as the term "obligated person" is defined in Rule 15c2-12, with materiality being determined by the Trust pursuant to criteria established, from time to time, by the Trust in its sole discretion and set forth in a bond resolution or official statement of the Trust, the Borrower hereby covenants that it will authorize and provide to the Trust, for inclusion in any preliminary official statement or official statement of the Trust, all statements and information relating to the Borrower deemed material by the Trust for the purpose of satisfying Rule 15c2-12 as well as Rule 10b-5 promulgated pursuant to the Securities Exchange Act of 1934, as amended or supplemented, including any successor regulation or statute thereto ("Rule 10b-5"), including certificates and written representations of the Borrower evidencing its compliance with Rule 15c2-12 and Rule 10b-5; and the Borrower hereby further covenants that, if the Trust determines that the Borrower is a material "obligated person", upon request of the Trust, the Borrower shall execute and deliver the Continuing Disclosure Agreement, in substantially the form attached hereto as Exhibit H, with such revisions thereto prior to execution and delivery thereof as the Trust shall determine to be necessary, desirable or convenient, in its sole discretion, for the purpose of satisfying Rule 15c2-12 and the purposes and intent thereof, as Rule 15c2-12, its purposes and intent may hereafter be interpreted from time to time by the SEC or any court of competent jurisdiction; and pursuant to the terms and provisions of the Continuing Disclosure Agreement, the Borrower shall thereafter provide on-going disclosure with respect to all statements and information relating to the Borrower in satisfaction of the requirements set forth in Rule 15c2-12 and Rule 10b-5, including the provision of certificates and written representations of the Borrower evidencing its compliance with Rule 15c2-12 and Rule 10b-5. (q) Additional Covenants and Requirements. No later than the Loan Closing and, if necessary, in connection with the Trust's issuance of the Trust Bonds or the making of the Loan, additional covenants and requirements have been included in Exhibit F hereto and made a part hereof. Such covenants and requirements may include, but need not be limited to, the maintenance of specified levels of Environmental Infrastructure System rates, the issuance of additional debt of the Borrower, the use by or on behalf of the Borrower of certain proceeds of the Trust Bonds as such use relates to the exclusion from gross income for federal income tax purposes of the interest on any Trust Bonds, the transfer of revenues and receipts from the Borrower's Environmental Infrastructure System, compliance with Rule 15c2-12, Rule 10b-5 and any other applicable federal or State securities laws, and matters in connection with the appointment of the Trustee under the Bond Resolution and any successors thereto. The Borrower agrees to observe and comply with each such additional covenant and requirement, if any, included in Exhibit F hereto. ARTICLE III LOAN TO BORROWER; AMOUNTS PAYABLE; GENERAL AGREEMENTS SECTION 3.01. Loan; Loan Term. The Trust hereby agrees to make the Loan as described in Exhibit A-2 hereof and to disburse proceeds of the Loan to the Borrower in accordance with Section 3.02 and Exhibit C hereof, and the Borrower hereby agrees to borrow and accept the Loan from the Trust upon the terms set forth in Exhibit A-2 attached hereto and made a part hereof; provided, however, that the Trust shall be under no obligation to make the Loan if (a) at the Loan Closing, the Borrower does not deliver to the Trust a Borrower Bond and such other documents required under Section 2.02(l) hereof, or (b) an Event of Default has occurred and is continuing under the Bond Resolution or this Loan Agreement. Although the Trust intends to disburse proceeds of the Loan to the Borrower at the times and up to the amounts set forth in Exhibit C to pay a portion of the Cost of the Project, due to unforeseen circumstances there may not be a sufficient amount on deposit in the Project Fund on any date to make the disbursement in such amount. Nevertheless, the Borrower agrees that the amount actually deposited in the Project Loan Account at the Loan Closing plus the Borrower's allocable share of (i) certain costs of issuance and underwriter's discount for all Trust Bonds issued to finance the Loan, (ii) capitalized interest during the Project construction period, and (iii) that portion of the Debt Service Reserve Fund attributable to the cost of funding reserve capacity for the Project shall constitute the initial principal amount of the Loan (as the same may be adjusted downward in accordance with the definition thereof), and neither the Trust nor the Trustee shall have any obligation thereafter to loan any additional amounts to the Borrower. The Borrower shall use the proceeds of the Loan strictly in accordance with Section 2.01(h) hereof. The payment obligations created under this Loan Agreement and the obligations to pay the principal of the Borrower Bond, Interest on the Borrower Bond and other amounts due under the Borrower Bond are each direct, general, irrevocable and unconditional obligations of the Borrower payable from any source legally available to the Borrower. SECTION 3.02. Disbursement of Loan Proceeds. (a) The Trustee, as the agent of the Trust, shall disburse the amounts on deposit in the Project Loan Account to the Borrower upon receipt of a requisition executed by an Authorized Officer of the Borrower, and approved by the Trust, in a form meeting the requirements of Section 5.02(3) of the Bond Resolution. (b) The Trust and Trustee shall not be required to disburse any Loan proceeds to the Borrower under this Loan Agreement, unless: (i) the proceeds of the Trust Bonds shall be available for disbursement, as determined solely by the Trust; (ii) in accordance with the "Wastewater Treatment Bond Act of 1985", P.L. 1985, c. 329, as amended, and the Regulations, the Borrower shall have timely applied for, shall have been awarded and, prior to or simultaneously with the Loan Closing, shall have closed a Fund Loan for a portion of the Allowable Costs (as defined in such regulations) of the Project in an amount not in excess of the amount of Allowable Costs of the Project covered by the Loan from the Trust; (iii) the Borrower shall have on hand or otherwise available moneys to pay for the greater of (A) that portion of the total cost of the Project that is not eligible to be funded from the Fund Loan or the Loan, or (B) that portion of the total cost of the Project that exceeds the actual amounts of the loan commitments made by the State and the Trust, respectively, for the Fund Loan and the Loan; and (iv) no Event of Default nor any event that, with the passage of time or service of notice or both, would constitute an Event of Default shall have occurred and be continuing hereunder. SECTION 3.03. Amounts Payable. (a) The Borrower shall repay the Loan in installments payable to the Loan Servicer as follows: (i) the principal of the Loan shall be repaid annually on August 1, commencing August 1, 2000, in accordance with the schedule set forth in Exhibit A-2 attached hereto and made a part hereof, as the same may be amended or modified by any credits applicable to the Borrower as set forth in the Bond Resolution; (ii) the Interest Portion described in clause (i) of the definition thereof shall be paid semiannually on February 1 and August 1, commencing August 1, 2000, in accordance with the schedule set forth in Exhibit A-2 attached hereto and made a part hereof, as the same may be amended or modified by any credits applicable to the Borrower as set forth in the Bond Resolution; and (iii) the Interest Portion described in clause (ii) of the definition thereof shall be paid upon the date of optional redemption or acceleration, as the case may be, of the Trust Bonds allocable to any prepaid or accelerated Trust Bond Loan Repayment. The obligations of the Borrower under the Borrower Bond shall be deemed to be amounts payable under this Section 3.03. Each Loan Repayment, whether satisfied through a direct payment by the Borrower to the Loan Servicer or (with respect to the Interest Portion) through the use of Trust Bond proceeds and income thereon on deposit in the Interest Account (as defined in the Bond Resolution) to pay interest on the Trust Bonds, shall be deemed to be a credit against the corresponding obligation of the Borrower under this Section 3.03 and shall fulfill the Borrower's obligation to pay such amount hereunder and under the Borrower Bond. Each payment made to the Loan Servicer pursuant to this Section 3.03 shall be applied first to the Interest Portion then due and payable, second to the principal of the Loan then due and payable, third to the payment of the Administrative Fee, and, finally, to the payment of any late charges hereunder. (b) The Interest on the Loan described in clause (iii) of the definition thereof shall (i) consist of a late charge for any Trust Bond Loan Repayment that is received by the Loan Servicer later than the tenth (10th) day following its due date and (ii) be payable immediately thereafter in an amount equal to the greater of twelve percent (12%) per annum or the Prime Rate plus one half of one percent per annum on such late payment from its due date to the date it is actually paid; provided, however, that the rate of Interest on the Loan, including, without limitation, any late payment charges incurred hereunder, shall not exceed the maximum interest rate permitted by law. (c) The Borrower shall receive, as a credit against its semiannual payment obligations of the Interest Portion, the amounts certified by the Trust pursuant to Section 5.10 of the Bond Resolution. Such amounts shall represent the Borrower's allocable share of the interest earnings on certain funds and accounts established under the Bond Resolution, calculated in accordance with Section 5.10 of the Bond Resolution. (d) In accordance with the provisions of the Bond Resolution, the Borrower shall receive, as a credit against its Trust Bond Loan Repayments, the amounts set forth in the certificate of the Trust filed with the Trustee pursuant to Section 5.02(4) of the Bond Resolution. (e) The Interest on the Loan described in clause (ii) of the definition thereof shall be paid by the Borrower in the amount of one-half of the Administrative Fee, if any, to the Loan Servicer semiannually on each February 1 and August 1, commencing February 1, 1999, during the term of the Loan. SECTION 3.04. Unconditional Obligations. The obligation of the Borrower to make the Loan Repayments and all other payments required hereunder and the obligation to perform and observe the other duties, covenants, obligations and agreements on its part contained herein shall be absolute and unconditional, and shall not be abated, rebated, set-off, reduced, abrogated, terminated, waived, diminished, postponed or otherwise modified in any manner or to any extent whatsoever while any Trust Bonds remain outstanding or any Loan Repayments remain unpaid, for any reason, regardless of any contingency, act of God, event or cause whatsoever, including (without limitation) any acts or circumstances that may constitute failure of consideration, eviction or constructive eviction, the taking by eminent domain or destruction of or damage to the Project or Environmental Infrastructure System, commercial frustration of the purpose, any change in the laws of the United States of America or of the State or any political subdivision of either or in the rules or regulations of any governmental authority, any failure of the Trust or the Trustee to perform and observe any agreement, whether express or implied, or any duty, liability or obligation arising out of or connected with the Project, this Loan Agreement or the Bond Resolution, or any rights of set-off, recoupment, abatement or counterclaim that the Borrower might otherwise have against the Trust, the Trustee, the Loan Servicer or any other party or parties; provided, however, that payments hereunder shall not constitute a waiver of any such rights. The Borrower shall not be obligated to make any payments required to be made by any other Borrowers under separate Loan Agreements or the Bond Resolution. The Borrower acknowledges that payment of the Trust Bonds by the Trust, including payment from moneys drawn by the Trustee from the Debt Service Reserve Fund, does not constitute payment of the amounts due under this Loan Agreement and the Borrower Bond. If at any time the amount in the Debt Service Reserve Fund shall be less than the Debt Service Reserve Requirement as the result of any transfer of moneys from the Debt Service Reserve Fund to the Debt Service Fund (as all such terms are defined in the Bond Resolution) as the result of a failure by the Borrower to make any Trust Bond Loan Repayments required hereunder, the Borrower agrees to replenish (i) such moneys so transferred and (ii) any deficiency arising from losses incurred in making such transfer as the result of the liquidation by the Trust of Investment Securities (as defined in the Bond Resolution) acquired as an investment of moneys in the Debt Service Reserve Fund, by making payments to the Trust in equal monthly installments for the lesser of six (6) months or the remaining term of the Loan at an interest rate to be determined by the Trust necessary to make up any loss caused by such deficiency. The Borrower acknowledges that payment of the Trust Bonds from moneys that were originally received by the Loan Servicer from repayments by the Borrowers of loans made to the Borrowers by the State, acting by and through the New Jersey Department of Environmental Protection, pursuant to loan agreements dated as of November 1, 1998 by and between the Borrowers and the State, acting by and through the New Jersey Department of Environmental Protection, to finance or refinance a portion of the cost of the Environmental Infrastructure Facilities of the Borrowers, and which moneys were upon such receipt by the Loan Servicer deposited in the Trust Bonds Security Account (as defined in the Bond Resolution), does not constitute payment of the amounts due under this Loan Agreement and the Borrower Bond. SECTION 3.05. Loan Agreement to Survive Bond Resolution and Trust Bonds. The Borrower acknowledges that its duties, covenants, obligations and agreements hereunder shall survive the discharge of the Bond Resolution applicable to the Trust Bonds and shall survive the payment of the principal and redemption premium, if any, of and the interest on the Trust Bonds until the Borrower can take no action or fail to take any action that could adversely affect the exclusion from gross income of the interest on the Trust Bonds for purposes of federal income taxation, at which time such duties, covenants, obligations and agreements hereunder shall, except for those set forth in Sections 3.06(a) and (b) hereof, terminate. SECTION 3.06. Disclaimer of Warranties and Indemnification. (a) The Borrower acknowledges and agrees that (i) neither the Trust nor the Trustee makes any warranty or representation, either express or implied, as to the value, design, condition, merchantability or fitness for particular purpose or fitness for any use of the Environmental Infrastructure System or the Project or any portions thereof or any other warranty or representation with respect thereto; (ii) in no event shall the Trust or the Trustee or their respective agents be liable or responsible for any incidental, indirect, special or consequential damages in connection with or arising out of this Loan Agreement or the Project or the existence, furnishing, functioning or use of the Environmental Infrastructure System or the Project or any item or products or services provided for in this Loan Agreement; and (iii) during the term of this Loan Agreement and to the fullest extent permitted by law, the Borrower shall indemnify and hold the Trust and the Trustee harmless against, and the Borrower shall pay any and all, liability, loss, cost, damage, claim, judgment or expense of any and all kinds or nature and however arising and imposed by law, which the Trust and the Trustee may sustain, be subject to or be caused to incur by reason of any claim, suit or action based upon personal injury, death or damage to property, whether real, personal or mixed, or upon or arising out of contracts entered into by the Borrower, the Borrower's ownership of the Environmental Infrastructure System or the Project, or the acquisition, construction or installation of the Project. (b) It is mutually agreed by the Borrower, the Trust and the Trustee that the Trust and its officers, agents, servants or employees shall not be liable for, and shall be indemnified and saved harmless by the Borrower in any event from, any action performed under this Loan Agreement and any claim or suit of whatsoever nature, except in the event of loss or damage resulting from their own negligence or willful misconduct. It is further agreed that the Trustee and its directors, officers, agents, servants or employees shall not be liable for, and shall be indemnified and saved harmless by the Borrower in any event from, any action performed pursuant to this Loan Agreement, except in the event of loss or damage resulting from their own negligence or willful misconduct. (c) The Borrower and the Trust agree that all claims shall be subject to and governed by the provisions of the New Jersey Contractual Liability Act, N.J.S.A. 59:13-1 et seq. (except for N.J.S.A. 59:13-9 thereof), although such Act by its express terms does not apply to claims arising under contract with the Trust. (d) In connection with its obligation to provide the insurance required under Section 2.02(j) hereof: (i) the Borrower shall include, or cause to be included, the Trust and its directors, employees and officers as additional "named insureds" on (A) any certificate of liability insurance procured by the Borrower (or other similar document evidencing the liability insurance coverage procured by the Borrower) and (B) any certificate of liability insurance procured by any contractor or subcontractor for the Project, and from the latter of the date of the Loan Closing or the date of the initiation of construction of the Project until the date the Borrower receives the written certificate of Project completion from the Trust, the Borrower shall maintain said liability insurance covering the Trust and said directors, employees and officers in good standing; and (ii) the Borrower shall include the Trust as an additional "named insured" on any certificate of insurance providing against risk of direct physical loss, damage or destruction of the Environmental Infrastructure System, and during the Loan Term the Borrower shall maintain said insurance covering the Trust in good standing. The Borrower shall provide the Trust with a copy of each of any such original, supplemental, amendatory or reissued certificates of insurance (or other similar documents evidencing the insurance coverage) required pursuant to this Section 3.06(d). SECTION 3.07. Option to Prepay Loan Repayments. The Borrower may prepay the Trust Bond Loan Repayments, in whole or in part (but if in part, in the amount of $100,000 or any integral multiple thereof), upon prior written notice to the Trust and the Trustee not less than ninety (90) days in addition to the number of days' advance notice to the Trustee required for any optional redemption of the Trust Bonds, and upon payment by the Borrower to the Trustee of amounts that, together with investment earnings thereon, will be sufficient to pay the principal amount of the Trust Bond Loan Repayments to be prepaid plus the Interest Portion described in clause (ii) of the definition thereof on any such date of redemption; provided, however, that any such full or partial prepayment may only be made (i) if the Borrower is not then in arrears on its Fund Loan, (ii) if the Borrower is contemporaneously making a full or partial prepayment of the Fund Loan such that, after the prepayment of the Loan and the Fund Loan, the Trust, in its sole discretion, determines that the interests of the owners of the Trust Bonds are not adversely affected by such prepayments, and (iii) upon the prior written approval of the Trust. In addition, if at the time of such prepayment the Trust Bonds may only be redeemed at the option of the Trust upon payment of a premium, the Borrower shall add to its prepayment of Trust Bond Loan Repayments an amount, as determined by the Trust, equal to such premium allocable to the Trust Bonds to be redeemed as a result of the Borrower's prepayment. Prepayments shall be applied first to the Interest Portion that accrues on the portion of the Loan to be prepaid until such prepayment date as described in clause (ii) of the definition thereof and then to principal payments (including premium, if any) on the Loan in inverse order of their maturity. SECTION 3.08. Priority of Loan and Fund Loan. (a) The Borrower hereby agrees that, to the extent allowed by law, any Loan Repayments then due and payable on the Loan shall be satisfied by the Borrower before any loan repayments on the Borrower's Fund Loan shall be satisfied by the Borrower. (b) The Borrower hereby acknowledges that in the event the Borrower fails or is unable to pay promptly to the Trust in full any Trust Bond Loan Repayments under this Loan Agreement when due, then any (i) Administrative Fee paid hereunder, (ii) late charges paid hereunder, and (iii) loan repayments paid by the Borrower on its Fund Loan under the related loan agreement therefor, any of which payments shall be received by the Loan Servicer during the time of any such Trust Bond Loan Repayment deficiency, shall first be applied by the Loan Servicer to satisfy such Trust Bond Loan Repayment deficiency as a credit against the obligations of the Borrower to make payments of the Interest Portion under the Loan and the Borrower Bond, second, to the extent available, to make Trust Bond Loan Repayments of principal hereunder and payments of principal under the Borrower Bond, third, to the extent available, to pay the Administrative Fee, fourth, to the extent available, to pay any late charges hereunder, fifth, to the extent available, to satisfy the repayment of the Borrower's Fund Loan under its related loan agreement therefor, and, finally, to the extent available, to satisfy the repayment of the administrative fee under any such related loan agreement. (c) The Borrower hereby further acknowledges that any loan repayments paid by the Borrower on its Fund Loan under the related loan agreement therefor shall be applied (i) according to Section 3(c) of the Loan Servicing and Trust Bonds Security Agreement (as defined in the definition of Loan Servicer herein) and (ii) according to the provisions of the Master Program Trust Agreement. ARTICLE IV ASSIGNMENT OF LOAN AGREEMENT AND BORROWER BOND SECTION 4.01. Assignment and Transfer by Trust. (a) The Borrower hereby expressly acknowledges that, other than the provisions of Section 2.02(d)(ii) hereof, the Trust's right, title and interest in, to and under this Loan Agreement and the Borrower Bond have been assigned to the Trustee as security for the Trust Bonds as provided in the Bond Resolution, and that if any Event of Default shall occur, the Trustee or any Bond Insurer (as such term may be defined in the Bond Resolution), if applicable, pursuant to the Bond Resolution, shall be entitled to act hereunder in the place and stead of the Trust. The Borrower hereby acknowledges the requirements of the Bond Resolution applicable to the Trust Bonds and consents to such assignment and appointment. This Loan Agreement and the Borrower Bond, including, without limitation, the right to receive payments required to be made by the Borrower hereunder and to compel or otherwise enforce observance and performance by the Borrower of its other duties, covenants, obligations and agreements hereunder, may be further transferred, assigned and reassigned in whole or in part to one or more assignees or subassignees by the Trustee at any time subsequent to their execution without the necessity of obtaining the consent of, but after giving prior written notice to, the Borrower. The Trust shall retain the right to compel or otherwise enforce observance and performance by the Borrower of its duties, covenants, obligations and agreements under Section 2.02(d)(ii) hereof; provided, however, that in no event shall the Trust have the right to accelerate the Borrower Bond in connection with the enforcement of Section 2.02(d)(ii) hereof. (b) The Borrower hereby approves and consents to any assignment or transfer of this Loan Agreement and the Borrower Bond that the Trust deems to be necessary in connection with any refunding of the Trust Bonds or the issuance of additional bonds under the Bond Resolution or otherwise, all in connection with the pooled loan program of the Trust. SECTION 4.02. Assignment by Borrower. Neither this Loan Agreement nor the Borrower Bond may be assigned by the Borrower (except to the Guarantor, which shall occur pursuant to N.J.S.A. 14A:10-5.1 or such successor provision, upon notice to the Trust and the Trustee) for any reason, unless the following conditions shall be satisfied: (i) the Trust and the Trustee shall have approved said assignment in writing; (ii) the assignee shall have expressly assumed in writing the full and faithful observance and performance of the Borrower's duties, covenants, obligations and agreements under this Loan Agreement and, to the extent permitted under applicable law, the Borrower Bond; (iii) immediately after such assignment, the assignee shall not be in default in the observance or performance of any duties, covenants, obligations or agreements of the Borrower under this Loan Agreement or the Borrower Bond; and (iv) the Trust shall have received an opinion of Bond Counsel to the effect that such assignment will not adversely affect the security of the holders of the Trust Bonds or the exclusion of the interest on the Trust Bonds from gross income for purposes of federal income taxation under Section 103(a) of the Code. ARTICLE V EVENTS OF DEFAULT AND REMEDIES SECTION 5.01. Events of Default. If any of the following events occur, it is hereby defined as and declared to be and to constitute an "Event of Default": (a) failure by the Borrower to pay, or cause to be paid, any Trust Bond Loan Repayment required to be paid hereunder when due, which failure shall continue for a period of fifteen (15) days; (b) failure by the Borrower to pay, or cause to be paid, the Administrative Fee or any late charges incurred hereunder or any portion thereof when due or to observe and perform any duty, covenant, obligation or agreement on its part to be observed or performed under this Loan Agreement, other than as referred to in subsection (a) of this Section 5.01 or other than the obligations of the Borrower contained in Section 2.02(d)(ii) hereof and in Exhibit F hereto, which failure shall continue for a period of thirty (30) days after written notice, specifying such failure and requesting that it be remedied, is given to the Borrower by the Trustee, unless the Trustee shall agree in writing to an extension of such time prior to its expiration; provided, however, that if the failure stated in such notice is correctable but cannot be corrected within the applicable period, the Trustee may not unreasonably withhold its consent to an extension of such time up to 120 days from the delivery of the written notice referred to above if corrective action is instituted by the Borrower within the applicable period and diligently pursued until the Event of Default is corrected; (c) any representation made by or on behalf of the Borrower contained in this Loan Agreement, or in any instrument furnished in compliance with or with reference to this Loan Agreement or the Loan, is false or misleading in any material respect; (d) a petition is filed by or against the Borrower under any federal or state bankruptcy or insolvency law or other similar law in effect on the date of this Loan Agreement or thereafter enacted, unless in the case of any such petition filed against the Borrower such petition shall be dismissed within thirty (30) days after such filing and such dismissal shall be final and not subject to appeal; or the Borrower shall become insolvent or bankrupt or shall make an assignment for the benefit of its creditors; or a custodian (including, without limitation, a receiver, liquidator or trustee) of the Borrower or any of its property shall be appointed by court order or take possession of the Borrower or its property or assets if such order remains in effect or such possession continues for more than thirty (30) days; (e) the Borrower shall generally fail to pay its debts as such debts become due; and (f) failure of the Borrower to observe or perform such additional duties, covenants, obligations, agreements or conditions as are required by the Trust and specified in Exhibit F attached hereto and made a part hereof. SECTION 5.02. Notice of Default. The Borrower shall give the Trustee and the Trust prompt telephonic notice of the occurrence of any Event of Default referred to in Section 5.01(d) or (e) hereof and of the occurrence of any other event or condition that constitutes an Event of Default at such time as any senior administrative or financial officer of the Borrower becomes aware of the existence thereof. SECTION 5.03. Remedies on Default. Whenever an Event of Default referred to in Section 5.01 hereof shall have occurred and be continuing, the Borrower acknowledges the rights of the Trustee and of any Bond Insurer to direct any and all remedies in accordance with the terms of the Bond Resolution, and the Borrower also acknowledges that the Trust shall have the right to take, or to direct the Trustee to take, any action permitted or required pursuant to the Bond Resolution and to take whatever other action at law or in equity may appear necessary or desirable to collect the amounts then due and thereafter to become due hereunder or to enforce the observance and performance of any duty, covenant, obligation or agreement of the Borrower hereunder. In addition, if an Event of Default referred to in Section 5.01(a) hereof shall have occurred and be continuing, the Trust shall, to the extent allowed by applicable law and to the extent and in the manner set forth in the Bond Resolution, have the right to declare, or to direct the Trustee to declare, all Loan Repayments and all other amounts due hereunder (including, without limitation, payments under the Borrower Bond) together with the prepayment premium, if any, calculated pursuant to Section 3.07 hereof to be immediately due and payable, and upon notice to the Borrower the same shall become due and payable without further notice or demand. SECTION 5.04. Attorneys' Fees and Other Expenses. The Borrower shall on demand pay to the Trust or the Trustee the reasonable fees and expenses of attorneys and other reasonable expenses (including, without limitation, the reasonably allocated costs of in-house counsel and legal staff) incurred by either of them in the collection of Trust Bond Loan Repayments or any other sum due hereunder or in the enforcement of the observation or performance of any other duties, covenants, obligations or agreements of the Borrower upon an Event of Default. SECTION 5.05. Application of Moneys. Any moneys collected by the Trust or the Trustee pursuant to Section 5.03 hereof shall be applied (a) first, to pay any attorneys' fees or other fees and expenses owed by the Borrower pursuant to Section 5.04 hereof, (b) second, to the extent available, to pay the Interest Portion then due and payable, (c) third, to the extent available, to pay the principal due and payable on the Loan, (d) fourth, to the extent available, to pay the Administrative Fee, any late charges incurred hereunder or any other amounts due and payable under this Loan Agreement, and (e) fifth, to the extent available, to pay the Interest Portion and the principal on the Loan and other amounts payable hereunder as such amounts become due and payable. SECTION 5.06. No Remedy Exclusive; Waiver; Notice. No remedy herein conferred upon or reserved to the Trust or the Trustee is intended to be exclusive, and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Loan Agreement or now or hereafter existing at law or in equity. No delay or omission to exercise any right, remedy or power accruing upon any Event of Default shall impair any such right, remedy or power or shall be construed to be a waiver thereof, but any such right, remedy or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Trust or the Trustee to exercise any remedy reserved to it in this Article V, it shall not be necessary to give any notice other than such notice as may be required in this Article V. SECTION 5.07. Retention of Trust's Rights. Notwithstanding any assignment or transfer of this Loan Agreement pursuant to the provisions hereof or of the Bond Resolution, or anything else to the contrary contained herein, the Trust shall have the right upon the occurrence of an Event of Default to take any action, including (without limitation) bringing an action against the Borrower at law or in equity, as the Trust may, in its discretion, deem necessary to enforce the obligations of the Borrower to the Trust pursuant to Section 5.03 hereof. ARTICLE VI MISCELLANEOUS SECTION 6.01. Notices. All notices, certificates or other communications hereunder shall be sufficiently given and shall be deemed given when hand delivered or mailed by registered or certified mail, postage prepaid, to the Borrower at the address specified in Exhibit A-1 attached hereto and made a part hereof and to the Trust, the Trustee and the Loan Servicer at the following addresses: (a) Trust: New Jersey Environmental Infrastructure Trust P.O. Box 440 Trenton, New Jersey 08625 Attention: Executive Director (b) Trustee: First Union National Bank 765 Broad Street Newark, New Jersey 07102 Attention: Corporate Trust Department (c) Loan Servicer: First Union National Bank 765 Broad Street Newark, New Jersey 07102 Attention: Corporate Trust Department Any of the foregoing parties may designate any further or different addresses to which subsequent notices, certificates or other communications shall be sent by notice in writing given to the others. SECTION 6.02. Binding Effect. This Loan Agreement shall inure to the benefit of and shall be binding upon the Trust and the Borrower and their respective successors and assigns. SECTION 6.03. Severability. In the event any provision of this Loan Agreement shall be held illegal, invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate, render unenforceable or otherwise affect any other provision hereof. SECTION 6.04. Amendments, Supplements and Modifications. Except as otherwise provided in this Section 6.04, this Loan Agreement may not be amended, supplemented or modified without the prior written consent of the Trust and the Borrower and without the satisfaction of all conditions set forth in Section 11.12 of the Bond Resolution. Notwithstanding the conditions set forth in Section 11.12 of the Bond Resolution, (i) Section 2.02(p) hereof may be amended, supplemented or modified upon the written consent of the Trust and the Borrower and without the consent of the Trustee, any Bond Insurer or any holders of the Trust Bonds, and (ii) Exhibit H hereto may be amended, supplemented or modified prior to the execution and delivery thereof as the Trust, in its sole discretion, shall determine to be necessary, desirable or convenient for the purpose of satisfying Rule 15c2-12 and the purpose and intent thereof as Rule 15c2-12, its purpose and intent may hereafter be interpreted from time to time by the SEC or any court of competent jurisdiction, and such amendment, supplement or modification shall not require the consent of the Borrower, the Trustee, any Bond Insurer or any holders of the Trust Bonds. SECTION 6.05. Execution in Counterparts. This Loan Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. SECTION 6.06. Applicable Law and Regulations. This Loan Agreement shall be governed by and construed in accordance with the laws of the State, including the Act and the Regulations, which Regulations are, by this reference thereto, incorporated herein as part of this Loan Agreement. SECTION 6.07. Consents and Approvals. Whenever the written consent or approval of the Trust shall be required under the provisions of this Loan Agreement, such consent or approval may only be given by the Trust unless otherwise provided by law or by rules, regulations or resolutions of the Trust or unless expressly delegated to the Trustee and except as otherwise provided in Section 6.09 hereof. SECTION 6.08. Captions. The captions or headings in this Loan Agreement are for convenience only and shall not in any way define, limit or describe the scope or intent of any provisions or sections of this Loan Agreement. SECTION 6.09. Benefit of Loan Agreement; Compliance with Bond Resolution. This Loan Agreement is executed, among other reasons, to induce the purchase of the Trust Bonds. Accordingly, all duties, covenants, obligations and agreements of the Borrower herein contained are hereby declared to be for the benefit of and are enforceable by the Trust, the holders of the Trust Bonds and the Trustee. The Borrower covenants and agrees to observe and comply with, and to enable the Trust to observe and comply with, all duties, covenants, obligations and agreements contained in the Bond Resolution. SECTION 6.10. Further Assurances. The Borrower shall, at the request of the Trust, authorize, execute, attest, acknowledge and deliver such further resolutions, conveyances, transfers, assurances, financing statements and other instruments as may be necessary or desirable for better assuring, conveying, granting, assigning and confirming the rights, security interests and agreements granted or intended to be granted by this Loan Agreement and the Borrower Bond. [Signature Page] IN WITNESS WHEREOF, the Trust and the Borrower have caused this Loan Agreement to be executed, sealed and delivered as of the date first above written. NEW JERSEY ENVIRONMENTAL INFRASTRUCTURE TRUST [SEAL] ATTEST: By:_______________________ Barton E. Harrison Vice-Chairman _____________________________ Robert A. Briant, Sr. Secretary THE MOUNT HOLLY WATER COMPANY [SEAL] ATTEST: By:_______________________ Authorized Officer _____________________________ Authorized Officer Approval of New Jersey State Treasurer required pursuant to Section 9a of the Act By:_______________________ James A. DiEleuterio, Jr. New Jersey State Treasurer A-1-36 EXHIBIT A-1 Description of Project and Environmental Infrastructure System A-2-37 EXHIBIT A-2 Description of Loan B-38 EXHIBIT B Basis for Determination of Allowable Project Costs C-39 EXHIBIT C Estimated Disbursement Schedule D-40 EXHIBIT D Specimen Borrower Bond (Except for assignment page, to be supplied by Borrower's bond counsel in substantially the following form) IMPORTANT NOTE: The next three pages set forth the form of the Borrower Bond prepared by the Trust's Bond Counsel for municipal/county Borrowers. Although the Trust recognizes that each corporate Borrower has its own bond form as required pursuant to its Borrower Bond Resolution, please incorporate in the bond form the pertinent information from this municipal/county bond form (e.g., amounts payable under the Borrower Bond set forth in the first paragraph, assignment in the second paragraph, disbursement language in the third paragraph, unconditional obligation in the fourth paragraph, optional prepayment provisions in the fifth paragraph and the date of the Borrower Bond). SEE IMPORTANT NOTE ON PRIOR PAGE FOR VALUE RECEIVED, The Mount Holly Water Company, a corporation duly created and validly existing under the Constitution and laws of the State of New Jersey (the "Borrower"), hereby promises to pay to the order of the New Jersey Environmental Infrastructure Trust (the "Trust") (i) the principal amount of __________________________ Dollars ($__________), or such lesser amount as shall be determined in accordance with Section 3.01 of the Loan Agreement (as hereinafter defined), at the times and in the amounts determined as provided in the Loan Agreement, together with (ii) Interest on the Loan constituting the Interest Portion, the Administrative Fee and any late charges incurred under the Loan Agreement (as such terms are defined in the Loan Agreement) in the amount calculated as provided in the Loan Agreement, payable on the days and in the amounts and as provided in the Loan Agreement, which principal amount and Interest Portion of the Interest on the Loan shall, unless otherwise provided in the Loan Agreement, be payable on the days and in the amounts as also set forth in Exhibit A attached hereto under the column headings respectively entitled "Principal" and "Interest", plus (iii) any other amounts due and owing under the Loan Agreement at the times and in the amounts as provided therein. The Borrower irrevocably pledges its full faith and credit for the punctual payment of the principal of and the Interest on this Borrower Bond (as defined in the Loan Agreement) and for the punctual payment of all other amounts due under this Borrower Bond and the Loan Agreement according to their respective terms. This Borrower Bond is issued pursuant to the Loan Agreement dated as of November 1, 1998 by and between the Trust and the Borrower (the "Loan Agreement"), and is issued in consideration of the loan made thereunder (the "Loan") and to evidence the payment obligations of the Borrower set forth in the Loan Agreement. This Borrower Bond has been assigned to First Union National Bank, as trustee (the "Trustee") under the "Environmental Infrastructure Bond Resolution, Series 1998B", adopted by the Trust on September 21, 1998, as the same may be amended and supplemented in accordance with the terms thereof (the "Bond Resolution"), and payments hereunder shall, except as otherwise provided in the Loan Agreement, be made directly to the Loan Servicer (as defined in the Loan Agreement) for the account of the Trust pursuant to such assignment. Such assignment has been made as security for the payment of the Trust Bonds (as defined in the Loan Agreement) issued to finance or refinance the Loan and as otherwise described in the Loan Agreement. This Borrower Bond is subject to further assignment or endorsement in accordance with the terms of the Bond Resolution and the Loan Agreement. All of the terms, conditions and provisions of the Loan Agreement are, by this reference thereto, incorporated herein as part of this Borrower Bond. Pursuant to the Loan Agreement, disbursements shall be made by the Trustee to the Borrower, in accordance with written instructions of the Trust, upon receipt by the Trust and the Trustee of requisitions from the Borrower executed and delivered in accordance with the requirements set forth in Section 3.02 of the Loan Agreement. This Borrower Bond is entitled to the benefits and is subject to the conditions of the Loan Agreement. The obligations of the Borrower to make the payments required hereunder shall be absolute and unconditional, without any defense or right of set-off, counterclaim or recoupment by reason of any default by the Trust under the Loan Agreement or under any other agreement between the Borrower and the Trust or out of any indebtedness or liability at any time owing to the Borrower by the Trust or for any other reason. This Borrower Bond is subject to optional prepayment under the terms and conditions, and in the amounts, provided in Section 3.07 of the Loan Agreement. To the extent allowed by applicable law, this Borrower Bond may be subject to acceleration under the terms and conditions, and in the amounts, provided in Section 5.03 of the Loan Agreement. IN WITNESS WHEREOF, the Borrower has caused this Borrower Bond to be duly executed, sealed and delivered as of this 15th day of October, 1998. THE MOUNT HOLLY WATER COMPANY [SEAL] By:___________________ ATTEST: _____________ _____________________ By:___________________ _______________ _____________ New Jersey Environmental Infrastructure Trust hereby assigns the foregoing Borrower Bond to First Union National Bank, as Trustee under the "Environmental Infrastructure Bond Resolution, Series 1998B", adopted on September 21, 1998, as amended and supplemented, all as of the date of this Borrower Bond, as security for the Trust Bonds issued or to be issued under the Bond Resolution to finance or refinance the Project Fund (as defined in the Bond Resolution). NEW JERSEY ENVIRONMENTAL INFRASTRUCTURE TRUST [SEAL] ATTEST: By:_______________________ Barton E. Harrison Vice-Chairman _____________________________ Robert A. Briant, Sr. Secretary E-45 EXHIBIT E Opinions of Borrower's Bond and General Counsels See Closing Item No. 11.04 [LETTERHEAD OF COUNSEL TO BORROWER] November 5, 1998 New Jersey Environmental Infrastructure Trust P.O. Box 440 Trenton, New Jersey 08625 First Union National Bank 765 Broad Street Newark, New Jersey 07102 Ladies and Gentlemen: I have acted as counsel to The Mount Holly Water Company, a corporation duly organized and validly existing under the laws of the State of New Jersey (the "Borrower"), which has entered into a Loan Agreement (as hereinafter defined) with the New Jersey Environmental Infrastructure Trust (the "Trust"), and have acted as such in connection with the authorization, execution, attestation and delivery by the Borrower of its Loan Agreement and Borrower Bond (as hereinafter defined) pursuant to the New Jersey Business Corporation Act, P.L. 1968, c. 263, as amended (the "Business Corporation Law"), and resolutions of the Board of Directors of the Borrower adopted on ________, 1998 (the "Resolutions"). All capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Loan Agreement. In so acting, I have examined the Constitution and laws of the State of New Jersey, including, without limitation, the Business Corporation Law, and the certificate of incorporation and by-laws of the Borrower. I have also examined originals, or copies certified or otherwise identified to my satisfaction, of the following: (a) the Trust's "Environmental Infrastructure Bond Resolution, Series 1998B", adopted by the Board of Directors of the Trust on September 21, 1998; (b) the Loan Agreement dated as of November 1, 1998 (the "Loan Agreement") by and between the Trust and the Borrower; (c) the Resolutions and the proceedings of the Board of Directors of the Borrower relating to the undertaking and completion of the Project; (d) the Borrower Bond dated as of October 15, 1998 (the "Borrower Bond") issued by the Borrower to the Trust to evidence the Loan; and (e) the proceedings of the Board of Directors of the Borrower, including, without limitation, the Resolutions, relating to the authorization of the Borrower Bond and the sale, execution, attestation and delivery thereof to the Trust (the Loan Agreement and the Borrower Bond are referred to herein collectively as the "Loan Documents"). I have also examined and relied upon originals, or copies certified or otherwise authenticated to my satisfaction, of such other records, documents, certificates and other instruments, and have made such investigation of law as in my judgment I have deemed necessary or appropriate, to enable me to render the opinions expressed below. I am of the opinion that: 1. The Borrower is a corporation duly created and validly existing under and pursuant to the Constitution and statutes of the State of New Jersey, including the Business Corporation Law, with the legal right to carry on the business of its Environmental Infrastructure System as currently being conducted and as proposed to be conducted. 2. The Borrower has full legal right and authority to execute, attest and deliver the Loan Documents, to sell the Borrower Bond to the Trust, to observe and perform its duties, covenants, obligations and agreements under the Loan Documents and to undertake and complete the Project. 3. The acting officers of the Borrower who are contemporaneously herewith performing or have previously performed any action contemplated in the Loan Agreement are, and at the time any such action was performed were, the duly appointed or elected officers of the Borrower empowered by applicable New Jersey law and authorized by resolution of the Borrower to perform such actions. 4. The proceedings of the Borrower's board of directors (i) approving the Loan Documents, (ii) authorizing their execution, attestation and delivery on behalf of the Borrower, (iii) with respect to the Borrower Bond only, authorizing its sale by the Borrower to the Trust, (iv) authorizing the Borrower to consummate the transactions contemplated by the Loan Documents, (v) authorizing the Borrower to undertake and complete the Project, and (vi) authorizing the execution and delivery of all other certificates, agreements, documents and instruments in connection with the execution, attestation and delivery of the Loan Documents, have each been duly and lawfully adopted and authorized in accordance with applicable law, including, without limitation, the Business Corporation Law. 5. The Loan Documents have been duly authorized, executed, attested and delivered by the Authorized Officers of the Borrower and the Borrower Bond has been duly sold by the Borrower to the Trust; and assuming in the case of the Loan Agreement that the Trust has the requisite power and authority to authorize, execute, attest and deliver, and has duly authorized, executed, attested and delivered, the Loan Agreement, the Loan Documents constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, subject, however, to the effect of, and to restrictions and limitations imposed by or resulting from, bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors' rights generally. No opinion is rendered as to the availability of any particular remedy. 6. The authorization, execution, attestation and delivery of the Loan Documents by the Borrower and, in the case of the Borrower Bond only, the sale thereof to the Trust, the observation and performance by the Borrower of its duties, covenants, obligations and agreements thereunder, the consummation of the transactions contemplated therein, and the undertaking and completion of the Project do not and will not (i) other than the lien, charge or encumbrance created by the Loan Documents and by any other outstanding debt obligations of the Borrower that are at parity with the Borrower Bond as to lien on, and source and security for payment thereon from, the revenues of the Borrower, result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Borrower pursuant to, (ii) result in any breach of any of the terms, conditions or provisions of, or (iii) constitute a default under, any outstanding debt or lease obligation, trust agreement, indenture, mortgage, deed of trust, loan agreement or other instrument to which the Borrower is a party or by which the Borrower, its Environmental Infrastructure System or any of its properties or assets may be bound, nor will such action result in any violation of the provisions of the charter or other document pursuant to which the Borrower was established or any laws, ordinances, injunctions, judgments, decrees, rules, regulations or existing orders of any court or governmental or administrative agency, authority or person to which the Borrower, its Environmental Infrastructure System or its properties or operations is subject. 7. All approvals, consents or authorizations of, or registrations of or filings with, any governmental or public agency, authority or person required to date on the part of the Borrower in connection with the authorization, execution, attestation, delivery and performance of the Loan Documents, the sale of the Borrower Bond and the undertaking and completion of the Project have been obtained or made. 8. There is no litigation or other proceeding pending or, to my knowledge, after due inquiry, threatened in any court or other tribunal of competent jurisdiction (either State or federal) (i) questioning the creation, organization or existence of the Borrower, (ii) questioning the validity, legality or enforceability of the Resolutions, the Loan or the Loan Documents, (iii) questioning the undertaking or completion of the Project, (iv) otherwise challenging the Borrower's ability to consummate the transactions contemplated by the Loan or the Loan Documents, or (v) that, if adversely decided, would have a materially adverse impact on the financial condition of the Borrower. 9. The Borrower has no bonds, notes or other debt obligations outstanding that are superior or senior to the Borrower Bond as to lien on, and source and security for payment thereof from, the revenues of the Borrower. 10. To the best of my knowledge, upon due inquiry, (i) all representations made by the Borrower contained within subsections (f) and (h) of Section 2.02 and, if applicable, Exhibit F of the Loan Agreement are true, accurate and complete, and (ii) all expectations contained therein are reasonable, and I know of no reason why the Borrower would be unable to comply on a continuing basis with the covenants contained within subsections (f) and (h) of Section 2.02 and, if applicable, Exhibit F of the Loan Agreement. 11. Assuming that (i) the Borrower complies on a continuing basis with the covenants contained in subsections (f) and (h) of Section 2.02 and, if applicable, Exhibit F of the Loan Agreement, (ii) interest on the Trust Bonds is otherwise excluded from gross income of the holders thereof for federal income tax purposes under the Internal Revenue Code of 1986, as amended, and (iii) the proceeds of the Trust Bonds loaned to the Borrower represent all of the proceeds of the Trust Bonds, the application of the proceeds of the Loan for their intended purposes will not adversely affect the exclusion from gross income for federal income tax purposes of the interest on the Trust Bonds. I hereby authorize McCarter & English, LLP, acting as bond counsel to the Trust, and the Attorney General of the State of New Jersey, acting as general counsel to the Trust, to rely on this opinion as if I had addressed this opinion to them in addition to you. Very truly yours, F-50 EXHIBIT F Additional Covenants and Requirements Guaranty of Loan: The repayment of the Loan will be guaranteed by the Guarantor pursuant to the terms and conditions as set forth in that certain Guaranty made and delivered as of November 1, 1998 by the Guarantor, a copy of which is attached hereto. G-51 EXHIBIT G General Administrative Requirements for the State Environmental Infrastructure Financing Program H-52 EXHIBIT H Form of Continuing Disclosure Agreement EX-4 5 Exhibit 4L LOAN AGREEMENT NWK3: 352223.02 BY AND BETWEEN THE STATE OF NEW JERSEY, ACTING BY AND THROUGH THE NEW JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION, AND THE MOUNT HOLLY WATER COMPANY DATED AS OF NOVEMBER 1, 1998 -ii- TABLE OF CONTENTS Page EXHIBIT A (1) Description of Project and Environmental Infrastructure System A-1-1 (2) Description of Loan A-2-1 EXHIBIT B Basis for Determination of Allowable Project Costs B-1 EXHIBIT C Estimated Disbursement Schedule C-1 EXHIBIT D Specimen Borrower Bond D-1 EXHIBIT E Opinions of Borrower's Bond and General Counsels E-1 EXHIBIT F Additional Covenants and Requirements F-1 EXHIBIT G General Administrative Requirements for the State Environmental Infrastructure Financing ProgramG-1 -3- NEW JERSEY ENVIRONMENTAL INFRASTRUCTURE FUND LOAN AGREEMENT THIS LOAN AGREEMENT, made and entered into as of this 1st day of November, 1998, by and between THE STATE OF NEW JERSEY, acting by and through the New Jersey Department of Environmental Protection, and THE MOUNT HOLLY WATER COMPANY, a corporation duly created and validly existing under the laws of the State of New Jersey; WITNESSETH THAT: WHEREAS, the Borrower has, in accordance with the Regulations, made timely application to the State for a Loan to finance a portion of the Cost of the Project (as each of the foregoing terms is defined in Section 1.01 hereof; all capitalized terms used in this Loan Agreement shall have, unless the context otherwise requires, the meanings set forth in said Section 1.01); WHEREAS, the State has approved the Borrower's application for a Loan from Federal Funds, if and when received by and available to the State, and moneys from repayments of loans previously made from such Federal Funds, in an amount not to exceed Five Million Eight Hundred Ninety-Four Thousand Nine Hundred Nine Dollars ($5,894,909) to finance a portion of the Cost of the Project; WHEREAS, the New Jersey State Legislature has approved an appropriations act that authorizes an expenditure of said proceeds, Federal Funds or related moneys to finance a portion of the Cost of the Project; WHEREAS, the Borrower, in accordance with the Business Corporation Law and all other applicable law, will issue a Borrower Bond to the State evidencing said Loan at the Loan Closing; and WHEREAS, in accordance with the New Jersey Environmental Infrastructure Trust Act, P.L. 1985, c. 334, as amended, and the Regulations, the Borrower has been awarded a Trust Loan for a portion of the Cost of the Project plus, if applicable to the Borrower, capitalized interest on the Trust Loan, certain costs of issuance and bond insurance premium related thereto. NOW, THEREFORE, for and in consideration of the award of the Loan by the State, the Borrower agrees to complete the Project and to perform under this Loan Agreement in accordance with the conditions, covenants and procedures set forth herein and attached hereto as part hereof, as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The following terms as used in this Loan Agreement shall, unless the context clearly requires otherwise, have the following meanings: "Administrative Fee" means an annual fee of up to one percent (1.0%) of the initial principal amount of the Loan or such lesser amount, if any, as may be authorized by any act of the New Jersey State Legislature and as the State may approve from time to time. "Authorized Officer" means, in the case of the Borrower, any person or persons authorized pursuant to a resolution of the board of directors of the Borrower to perform any act or execute any document relating to the Loan, the Borrower Bond or this Loan Agreement. "Borrower" means the corporation that is a party to and is described in the first paragraph of this Loan Agreement, and its successors and assigns. "Borrower Bond" means the general obligation bond, note, debenture or other evidence of indebtedness authorized, executed, attested and delivered by the Borrower to the State to evidence the Loan, a specimen of which is attached hereto as Exhibit D and made a part hereof. "Borrowers" means any other Local Government Unit or Private Entity (as such terms are defined in the Regulations) authorized to construct, operate and maintain Environmental Infrastructure Facilities that have entered into Loan Agreements with the State pursuant to which the State will make Loans to such recipients from Federal Funds. "Business Corporation Law" means the "New Jersey Business Corporation Act", constituting Chapter 263 of the Pamphlet Laws of 1968 of the State of New Jersey (codified at N.J.S.A. 14A:1-1 et seq.), as the same may from time to time be amended and supplemented. "Code" means the Internal Revenue Code of 1986, as the same may from time to time be amended and supplemented, including any regulations promulgated thereunder, any successor code thereto and any administrative or judicial interpretations thereof. "Cost" means those costs that are eligible, reasonable, necessary, allocable to the Project and permitted by generally accepted accounting principles, including Allowances and Building Costs (as defined in the Regulations), as shall be determined on a project-specific basis in accordance with the Regulations as set forth in Exhibit B hereto, as the same may be amended by subsequent eligible costs as evidenced by a certificate of an authorized officer of the State. "Environmental Infrastructure Facilities" means Water Supply Facilities (as such term is defined in the Regulations). "Environmental Infrastructure System" means the Environmental Infrastructure Facilities of the Borrower, including the Project, described in Exhibit A-1 attached hereto and made a part hereof for which the Borrower is borrowing the Loan under this Loan Agreement. "Event of Default" means any occurrence or event specified in Section 5.01 hereof. "Federal Funds" means those funds awarded to the State pursuant to the Clean Water Act (33 U.S.C. 1251 et seq.) or the Safe Drinking Water Act (42 U.S.C. 300f et seq.), as the same may from time to time be amended and supplemented. "Guarantor" means Elizabethtown Water Company, a New Jersey corporation. "Loan" means the loan made by the State to the Borrower to finance or refinance a portion of the Cost of the Project pursuant to this Loan Agreement. For all purposes of this Loan Agreement, the principal amount of the Loan at any time shall be the amount of the loan commitment set forth in Exhibit A-2 attached hereto and made a part hereof (such amount being also specified as the initial aggregate principal amount of the Borrower Bond) less any amount of such principal amount that has been repaid by the Borrower under this Loan Agreement and less any adjustment made for low bid or final building costs pursuant to the provisions of N.J.A.C. 7:22-3.26 and the appropriations act of the New Jersey State Legislature authorizing the expenditure of moneys to finance a portion of the Cost of the Project. "Loan Agreement" means this Loan Agreement, including the Exhibits attached hereto, as it may be supplemented, modified or amended from time to time in accordance with the terms hereof. "Loan Agreements" means any other loan agreements entered into by and between the State and one or more of the Borrowers pursuant to which the State will make Loans to such Borrowers from Federal Funds. "Loan Closing" means the date upon which the Borrower shall deliver its Borrower Bond, as previously authorized, executed and attested, to the State. "Loan Repayments" means the repayments of the principal amount of the Loan payable by the Borrower pursuant to Section 3.03 of this Loan Agreement, including payments payable under the Borrower Bond, but excluding the Administrative Fee. "Loan Servicer" means, initially, First Union National Bank, the loan servicer for the Loan and the Trust Loan, duly appointed and designated as "Loan Servicer" pursuant to the Loan Servicing and Trust Bonds Security Agreement dated as of November 1, 1998 by and among the Trust, the State of New Jersey, acting by and through the Treasurer of the State of New Jersey on behalf of the New Jersey Department of Environmental Protection, and First Union National Bank, and any successors as "Loan Servicer" under such agreement, as the same may be modified, amended or supplemented from time to time in accordance with its terms. "Loan Term" means the term of this Loan Agreement provided in Sections 3.01 and 3.03 hereof and in Exhibit A-2 attached hereto and made a part hereof. "Loans" means the loans made by the State to the Borrowers under the Loan Agreements from Federal Funds. "Master Program Trust Agreement" means that certain Master Program Trust Agreement dated as of November 1, 1995 by and among the Trust, the State of New Jersey, United States Trust Company of New York, as Master Program Trustee thereunder, The Bank of New York (NJ), in several capacities thereunder, and First Fidelity Bank, N.A. (predecessor to First Union National Bank), in several capacities thereunder, as the same may be amended and supplemented from time to time in accordance with its terms. "Prime Rate" means the prevailing commercial interest rate announced by the Loan Servicer from time to time in the State of New Jersey as its prime lending rate. "Project" means the Environmental Infrastructure Facilities of the Borrower described in Exhibit A-1 attached hereto and made a part hereof, which constitutes a project for which the State is permitted to make a loan to the Borrower pursuant to the Regulations, all or a portion of the Cost of which is financed or refinanced by the State through the making of the Loan under this Loan Agreement. "Regulations" means the rules and regulations, as applicable, now or hereafter promulgated under N.J.A.C. 7:22-3 et seq., 7:22-4 et seq., 7:22-5 et seq., 7:22-9 et seq. and 7:22-10 et seq., as the same may from time to time be amended and supplemented. "State" means the State of New Jersey, acting, unless otherwise specifically indicated, by and through the New Jersey Department of Environmental Protection, and its successors and assigns. "Trust" means the New Jersey Environmental Infrastructure Trust, a public body corporate and politic with corporate succession duly created and validly existing under and by virtue of P.L. 1985, c. 334, as amended (N.J.S.A. 58:11B-1 et seq.). "Trust Loan" means the loan made to the Borrower by the Trust pursuant to the Trust Loan Agreement. "Trust Loan Agreement" means the loan agreement by and between the Borrower and the Trust dated as of November 1, 1998 to finance or refinance a portion of the Cost of the Project. Except as otherwise defined herein or where the context otherwise requires, words importing the singular number shall include the plural number and vice versa, and words importing persons shall include firms, associations, corporations, agencies and districts. Words importing one gender shall include the other gender. ARTICLE II REPRESENTATIONS AND COVENANTS OF BORROWER SECTION 2.01. Representations of Borrower. The Borrower represents for the benefit of the State as follows: (a) Organization and Authority. (i) The Borrower is a corporation duly created and validly existing under and pursuant to the Constitution and statutes of the State of New Jersey, including the Business Corporation Law. (ii) The acting officers of the Borrower who are contemporaneously herewith performing or have previously performed any action contemplated in this Loan Agreement either are or, at the time any such action was performed, were the duly appointed or elected officers of such Borrower empowered by applicable New Jersey law and, if applicable, authorized by resolution of the Borrower to perform such actions. To the extent any such action was performed by an officer no longer the duly acting officer of such Borrower, all such actions previously taken by such official are still in full force and effect. (iii) The Borrower has full legal right and authority and all necessary licenses and permits required as of the date hereof to own, operate and maintain its Environmental Infrastructure System, to carry on its activities relating thereto, to execute, attest and deliver this Loan Agreement and the Borrower Bond, to sell the Borrower Bond to the State, to undertake and complete the Project and to carry out and consummate all transactions contemplated by this Loan Agreement. (iv) The Borrower's board of directors has taken all necessary action to authorize the execution, attestation and delivery of this Loan Agreement and the Borrower Bond, the sale of the Borrower Bond to the State and the Borrower's undertaking and completion of the Project. (v) The Borrower has duly authorized, approved and consented to all necessary action to be taken by the Borrower for: (A) the execution, attestation, delivery and performance of this Loan Agreement and the transactions contemplated hereby; (B) the issuance of the Borrower Bond and the sale thereof to the State upon the terms set forth herein; and (C) the execution, delivery and due performance of any and all other certificates, agreements and instruments that may be required to be executed, delivered and performed by the Borrower in order to carry out, give effect to and consummate the transactions contemplated by this Loan Agreement. (vi) This Loan Agreement and the Borrower Bond have each been duly authorized by the Borrower and duly executed, attested and delivered by Authorized Officers of the Borrower, and the Borrower Bond has been duly sold by the Borrower to the State; and assuming that the State has all the requisite power and authority to authorize, execute, attest and deliver, and has duly authorized, executed, attested and delivered, this Loan Agreement, and assuming further that this Loan Agreement is the legal, valid and binding obligation of the State, enforceable against the State in accordance with its terms, each of this Loan Agreement and the Borrower Bond constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its respective terms, except as the enforcement thereof may be affected by bankruptcy, insolvency or other laws or the application by a court of legal or equitable principles affecting creditors' rights; and the information contained under "Description of Loan" in Exhibit A-2 attached hereto and made a part hereof is true and accurate in all respects. (b) Full Disclosure. There is no fact that the Borrower has not disclosed to the State in writing on the Borrower's application for the Loan or otherwise that materially adversely affects or (so far as the Borrower can now foresee) that will materially adversely affect the properties, activities, prospects or condition (financial or otherwise) of the Borrower or its Environmental Infrastructure System, or the ability of the Borrower to make all Loan Repayments or otherwise to observe and perform its duties, covenants, obligations and agreements under this Loan Agreement and the Borrower Bond. (c) Pending Litigation. There are no proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower in any court or before any governmental authority or arbitration board or tribunal that, if adversely determined, would materially adversely affect (i) the undertaking or completion of the Project, (ii) the properties, activities, prospects or condition (financial or otherwise) of the Borrower or its Environmental Infrastructure System, (iii) the ability of the Borrower to make all Loan Repayments, (iv) the authorization, execution, attestation or delivery of this Loan Agreement or the Borrower Bond, (v) the issuance of the Borrower Bond and the sale thereof to the State, or (vi) the Borrower's ability otherwise to observe and perform its duties, covenants, obligations and agreements under this Loan Agreement and the Borrower Bond, which proceedings have not been previously disclosed in writing to the State either in the Borrower's application for the Loan or otherwise. (d) Compliance with Existing Laws and Agreements. (i) The authorization, execution, attestation and delivery of this Loan Agreement and the Borrower Bond by the Borrower, (ii) the sale of the Borrower Bond to the State, (iii) the observation and performance by the Borrower of its duties, covenants, obligations and agreements hereunder and thereunder, (iv) the consummation of the transactions provided for in this Loan Agreement and the Borrower Bond, and (v) the undertaking and completion of the Project will not (A) other than the lien, charge or encumbrance created hereby, by the Borrower Bond and by any other outstanding debt obligations of the Borrower that are at parity with the Borrower Bond as to lien on, and source and security for payment thereon from, the revenues of the Borrower's Environmental Infrastructure System, result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Borrower pursuant to, (B) result in any breach of any of the terms, conditions or provisions of, or (C) constitute a default under, any existing resolution, outstanding debt or lease obligation, trust agreement, indenture, mortgage, deed of trust, loan agreement or other instrument to which the Borrower is a party or by which the Borrower, its Environmental Infrastructure System or any of its properties or assets may be bound, nor will such action result in any violation of the provisions of the charter or other document pursuant to which the Borrower was established or any laws, ordinances, injunctions, judgments, decrees, rules, regulations or existing orders of any court or governmental or administrative agency, authority or person to which the Borrower, its Environmental Infrastructure System or its properties or operations is subject. (e) No Defaults. No event has occurred and no condition exists that, upon the authorization, execution, attestation and delivery of this Loan Agreement and the Borrower Bond, the issuance of the Borrower Bond and the sale thereof to the State or the receipt of the amount of the Loan, would constitute an Event of Default hereunder. Since December 31, 1975 and as of the date of delivery of this Loan Agreement, the Borrower has not been, and is not now, in default in the payment of the principal of or interest on any of its bonds, notes, lease purchase agreements or other debt obligations. The Borrower is not in violation of, and has not received notice of any claimed violation of, any term of any agreement or other instrument to which it is a party or by which it, its Environmental Infrastructure System or its properties may be bound, which violation would materially adversely affect the properties, activities, prospects or condition (financial or otherwise) of the Borrower or its Environmental Infrastructure System or the ability of the Borrower to make all Loan Repayments, to pay all principal of the Borrower Bond or otherwise to observe and perform its duties, covenants, obligations and agreements under this Loan Agreement and the Borrower Bond. (f) Governmental Consent. The Borrower has obtained all permits and approvals required to date by any governmental body or officer for the authorization, execution, attestation and delivery of this Loan Agreement and the Borrower Bond, for the issuance of the Borrower Bond and the sale thereof to the State, for the making, observance and performance by the Borrower of its duties, covenants, obligations and agreements under this Loan Agreement and the Borrower Bond and for the undertaking or completion of the Project and the financing or refinancing thereof, including, but not limited to, the approval by the New Jersey Board of Public Utilities (the "BPU") of the issuance by the Borrower of the Borrower Bond to the State and any other approvals required therefor by the BPU; and the Borrower has complied with all applicable provisions of law requiring any notification, declaration, filing or registration with any governmental body or officer in connection with the making, observance and performance by the Borrower of its duties, covenants, obligations and agreements under this Loan Agreement and the Borrower Bond or with the undertaking or completion of the Project and the financing or refinancing thereof. No consent, approval or authorization of, or filing, registration or qualification with, any governmental body or officer that has not been obtained is required on the part of the Borrower as a condition to the authorization, execution, attestation and delivery of this Loan Agreement and the Borrower Bond, the issuance of the Borrower Bond and the sale thereof to the State, the undertaking or completion of the Project or the consummation of any transaction herein contemplated. (g) Compliance with Law. The Borrower: (i) is in compliance with all laws, ordinances, governmental rules and regulations to which it is subject, the failure to comply with which would materially adversely affect (A) the ability of the Borrower to conduct its activities or to undertake or complete the Project or (B) the condition (financial or otherwise) of the Borrower or its Environmental Infrastructure System; and (ii) has obtained all licenses, permits, franchises or other governmental authorizations presently necessary for the ownership of its properties or for the conduct of its activities that, if not obtained, would materially adversely affect (A) the ability of the Borrower to conduct its activities or to undertake or complete the Project or (B) the condition (financial or otherwise) of the Borrower or its Environmental Infrastructure System. (h) Use of Proceeds. The Borrower will apply the proceeds of the Loan from the State as described in Exhibit B attached hereto and made a part hereof (i) to finance or refinance a portion of the Cost of the Borrower's Project; and (ii) where applicable, to reimburse the Borrower for a portion of the Cost of the Borrower's Project, which portion was paid or incurred in anticipation of reimbursement by the State and is eligible for such reimbursement under and pursuant to the Regulations, the Code and any other applicable law. All of such costs constitute Costs for which the State is authorized to make Loans to the Borrower pursuant to the Regulations. SECTION 2.02. Particular Covenants of Borrower. (a) Promise to Pay. The Borrower unconditionally promises to make punctual payment of the principal of the Loan and the Borrower Bond and all other amounts due under this Loan Agreement and the Borrower Bond according to their respective terms. (b) Performance Under Loan Agreement. The Borrower covenants and agrees (i) to comply with all applicable State of New Jersey and federal laws, rules and regulations in the performance of this Loan Agreement; (ii) to maintain its Environmental Infrastructure System in good repair and operating condition; and (iii) to cooperate with the State in the observance and performance of the respective duties, covenants, obligations and agreements of the Borrower and the State under this Loan Agreement. (c) Revenue Obligation; No Prior Pledges. The Borrower shall not be required to make payments under this Loan Agreement except from the revenues of its Environmental Infrastructure System and from such other funds of such Environmental Infrastructure System legally available therefor and from any other sources pledged to such payment pursuant to subsection (a) of this Section 2.02. In no event shall the Borrower be required to make payments under this Loan Agreement from any revenues or receipts not derived from its Environmental Infrastructure System or pledged pursuant to subsection (a) of this Section 2.02. Except for (i) loan repayments required with respect to the Trust Loan, (ii) the debt service on any future bonds of the Borrower issued at parity with the Borrower Bond, and (iii) the debt service on any bonds, notes or evidences of indebtedness of the Borrower at parity with the Borrower Bond and currently outstanding or issued on the date hereof, the revenues derived by the Borrower from its Environmental Infrastructure System, after the payment of all costs of operating and maintaining the Environmental Infrastructure System, are and will be free and clear of any pledge, lien, charge or encumbrance thereon or with respect thereto prior to, or of equal rank with, the obligation of the Borrower to make Loan Repayments under this Loan Agreement and the Borrower Bond, and all corporate or other action on the part of the Borrower to that end has been and will be duly and validly taken. (d) Completion of Project and Provision of Moneys Therefor. The Borrower covenants and agrees (i) to exercise its best efforts in accordance with prudent environmental infrastructure utility practice to complete the Project and to accomplish such completion on or before the estimated Project completion date set forth in Exhibit G hereto and made a part hereof; (ii) to comply with the terms and provisions contained in Exhibit G hereto; and (iii) to provide from its own fiscal resources all moneys, in excess of the total amount of loan proceeds it receives under the Loan and Trust Loan, required to complete the Project. (e) Disposition of Environmental Infrastructure System. Neither the Borrower nor the Guarantor shall permit the disposition of all or substantially all of the Borrower's Environmental Infrastructure System, directly or indirectly, including, without limitation, by means of sale, lease, abandonment, sale of stock, statutory merger or otherwise (collectively, a "Disposition"), except on ninety (90) days' prior written notice to the State, and, in any event, shall not permit a Disposition unless the Borrower shall, in accordance with Section 4.02 hereof, assign this Loan Agreement and the Borrower Bond and its rights and interests hereunder and thereunder to the purchaser or lessee of the Environmental Infrastructure System, and such purchaser or lessee shall assume all duties, covenants, obligations and agreements of the Borrower under this Loan Agreement and the Borrower Bond. (f) [Reserved.] (g) Operation and Maintenance of Environmental Infrastructure System. The Borrower covenants and agrees that it shall, in accordance with prudent environmental infrastructure utility practice, (i) at all times operate the properties of its Environmental Infrastructure System and any business in connection therewith in an efficient manner, (ii) maintain its Environmental Infrastructure System in good repair, working order and operating condition, and (iii) from time to time make all necessary and proper repairs, renewals, replacements, additions, betterments and improvements with respect to its Environmental Infrastructure System so that at all times the business carried on in connection therewith shall be properly and advantageously conducted. (h) Records and Accounts. The Borrower shall keep accurate records and accounts for its Environmental Infrastructure System (the "System Records"). Such System Records shall be part of the annual audit of the general records of the Guarantor. Such System Records and general records of the Guarantor shall be made available for inspection by the State at any reasonable time upon prior written notice, and a copy of such annual audit, including all written comments and recommendations, shall be furnished to the State within 150 days of the close of the fiscal year being so audited or, with the consent of the State, such additional period as may be provided by law. (i) Inspections; Information. The Borrower shall permit the State and any party designated by the State, at any and all reasonable times during construction of the Project and thereafter upon prior written notice, to examine, visit and inspect the property, if any, constituting the Project and to inspect and make copies of any accounts, books and records, including (without limitation) its records regarding receipts, disbursements, contracts, investments and any other matters relating thereto and to its financial standing, and shall supply such reports and information as the State may reasonably require in connection therewith. (j) Insurance. The Borrower shall maintain or cause to be maintained, in force, insurance policies with responsible insurers or self-insurance programs providing against risk of direct physical loss, damage or destruction of its Environmental Infrastructure System at least to the extent that similar insurance is usually carried by utilities constructing, operating and maintaining Environmental Infrastructure Facilities of the nature of the Borrower's Environmental Infrastructure System, including liability coverage, all to the extent available at reasonable cost but in no case less than will satisfy all applicable regulatory requirements. (k) Cost of Project. The Borrower certifies that the building cost of the Project, as listed in Exhibit B hereto and made a part hereof, is a reasonable and accurate estimation thereof, and it will supply to the State a certificate from a licensed professional engineer authorized to practice in the State of New Jersey stating that such building cost is a reasonable and accurate estimation and that the useful life of the Project exceeds twenty (20) years from the expected date of the Loan Closing. (l) Delivery of Documents. Concurrently with the delivery of this Loan Agreement (as previously authorized, executed and attested) at the Loan Closing, the Borrower will cause to be delivered to the State each of the following items: (i) an opinion of the Borrower's bond counsel substantially in the form of Exhibit E hereto; provided, however, that the State may permit portions of such opinion to be rendered by general counsel to the Borrower and may permit variances in such opinion from the form set forth in Exhibit E if such variances are acceptable to the State; (ii) counterparts of this Loan Agreement as previously executed and attested by the parties hereto; (iii) copies of those resolutions finally adopted by the board of directors of the Borrower and requested by the State, including, without limitation, resolutions of the Borrower authorizing the execution, attestation and delivery of this Loan Agreement and the execution, attestation, sale and delivery of the Borrower Bond to the State, and certified copies of orders of the BPU approving the issuance by the Borrower of the Borrower Bond to the State and setting forth any other approvals required therefor by the BPU; and (iv) the certificates of insurance coverage as required pursuant to the terms of Section 3.06(c) hereof and such other certificates, documents, opinions and information as the State may require in Exhibit F hereto, if any. (m) Execution and Delivery of Borrower Bond. Concurrently with the delivery of this Loan Agreement at the Loan Closing, the Borrower shall also deliver to the State the Borrower Bond, as previously executed and attested. (n) Notice of Material Adverse Change. The Borrower shall promptly notify the State of any material adverse change in the properties, activities, prospects or condition (financial or otherwise) of the Borrower or its Environmental Infrastructure System, or in the ability of the Borrower to make all Loan Repayments and otherwise to observe and perform its duties, covenants, obligations and agreements under this Loan Agreement and the Borrower Bond. (o) Continuing Representations. The representations of the Borrower contained herein shall be true at the time of the execution of this Loan Agreement and at all times during the term of this Loan Agreement. (p) Additional Covenants and Requirements. No later than the Loan Closing and, if necessary, in connection with the making of the Loan, additional covenants and requirements have been included in Exhibit F hereto and made a part hereof. Such covenants and requirements may include, but need not be limited to, the maintenance of specified levels of Environmental Infrastructure System rates, the issuance of additional debt of the Borrower and the transfer of revenues and receipts from the Borrower's Environmental Infrastructure System. The Borrower agrees to observe and comply with each such additional covenant and requirement, if any, included in Exhibit F hereto. ARTICLE III LOAN TO BORROWER; AMOUNTS PAYABLE; GENERAL AGREEMENTS SECTION 3.01. Loan; Loan Term. The State hereby agrees to make the Loan as described in Exhibit A-2 hereof and to disburse proceeds of the Loan to the Borrower in accordance with Section 3.02 and Exhibit C hereof, and the Borrower hereby agrees to borrow and accept the Loan from the State upon the terms set forth in Exhibit A-2 attached hereto and made a part hereof; provided, however, that the State shall be under no obligation to make the Loan if (a) at the Loan Closing, the Borrower does not deliver to the State a Borrower Bond and such other documents required under Section 2.02(l) hereof, or (b) an Event of Default has occurred and is continuing under this Loan Agreement. Although the State intends to disburse proceeds of the Loan to the Borrower at the times and up to the amounts set forth in Exhibit C to pay a portion of the Cost of the Project, due to unforeseen circumstances there may not be sufficient Federal Funds on deposit on any date to make the disbursement in such amount. Nevertheless, the Borrower agrees that the aggregate principal amount set forth in Exhibit A-2 hereto shall constitute the initial principal amount of the Loan (as the same may be adjusted downward in accordance with the definition thereof), and the State shall have no obligation thereafter to loan any additional amounts to the Borrower. The Borrower shall have no legal or equitable interest in the Federal Funds received by and available to the State or in moneys from repayments of loans previously made from Federal Funds by the State. The Borrower shall use the proceeds of the Loan strictly in accordance with Section 2.01(h) hereof. The payment obligations created under this Loan Agreement and the obligations to pay the principal of and other amounts due under the Borrower Bond are each direct, general, irrevocable and unconditional obligations of the Borrower payable from any source legally available to the Borrower. SECTION 3.02. Disbursement of Loan Proceeds. (a) The State shall disburse Federal Funds earmarked for the Loan to the Borrower in accordance with the terms hereof. Before each and every disbursement of the proceeds of the Loan by the State to the Borrower, the Borrower shall in accordance with the procedures set forth in the Regulations submit to the State a requisition executed by an Authorized Officer of the Borrower. (b) The State shall not be under any obligation to disburse any Loan proceeds to the Borrower under this Loan Agreement, unless: (i) the Loan Closing shall have occurred on the date established therefor by the State; (ii) there shall be Federal Funds available from time to time to fund the Loan, as determined solely by the State; (iii) in accordance with the "New Jersey Environmental Infrastructure Trust Act", P.L. 1985, c. 334, as amended (N.J.S.A. 58:11B-1 et seq.), and the Regulations, the Borrower shall have timely applied for, shall have been awarded and, prior to or simultaneously with the Loan Closing, shall have closed a Trust Loan for a portion of the Allowable Costs (as defined in such regulations) of the Project in an amount not in excess of the amount of Allowable Costs of the Project covered by the Loan from the State, plus the amount of: (i) capitalized interest during the Project construction period, if any, (ii) the cost of funding reserve capacity for the Project, if any, as well as that portion of the Debt Service Reserve Fund (as defined in the Trust Loan Agreement) attributable to the cost of funding such reserve capacity for the Project, and (iii) certain issuance expenses related thereto, including, if applicable, a municipal bond insurance policy premium; (iv) the Borrower shall have on hand or otherwise available moneys to pay for the greater of (A) that portion of the total cost of the Project that is not eligible to be funded from the Loan or the Trust Loan, or (B) that portion of the total cost of the Project that exceeds the actual amounts of the loan commitments made by the State and the Trust, respectively, for the Loan and the Trust Loan; and (v) no Event of Default nor any event that, with the passage of time or service of notice or both, would constitute an Event of Default shall have occurred and be continuing hereunder. SECTION 3.03. Amounts Payable. (a) The Borrower shall repay the Loan at zero-interest in principal installments payable to the Loan Servicer semiannually on February 1 and August 1, commencing August 1, 2000, in accordance with the schedule set forth in Exhibit A-2 attached hereto and made a part hereof, as the same may be amended or modified by the State, in particular, without limitation, to make any adjustments to the amount of the Loan in accordance with the definition thereof; provided, however, that the amount of any reduction in the principal amount of the Loan pursuant to N.J.A.C. 7:22-3.26 shall be credited to the principal payments set forth in Exhibit A-2 in inverse order of their maturity. The obligations of the Borrower under the Borrower Bond shall be deemed to be amounts payable under this Section 3.03. Each payment made to the Loan Servicer pursuant to the Borrower Bond shall be deemed to be a credit against the corresponding obligation of the Borrower under this Section 3.03, and any such payment made to the Loan Servicer shall fulfill the Borrower's obligation to pay such amount hereunder and under the Borrower Bond. Each payment made to the Loan Servicer pursuant to this Section 3.03 shall be applied to the principal of the Loan. (b) In addition to the principal payments on the Loan required by subsection (a) of this Section 3.03, the Borrower shall pay a late charge for any such payment that is received by the Loan Servicer later than the tenth (10th) day following its due date in an amount equal to the greater of twelve percent (12%) per annum or the Prime Rate plus one half of one percent per annum on such late payment from its due date to the date actually paid; provided, however, that such late charge payable on the Loan shall not be in excess of the maximum interest rate permitted by law. (c) In addition to the Loan Repayments payable under subsections (a) and (b) of this Section 3.03, the Borrower shall pay one-half of the Administrative Fee, if any, to the Loan Servicer semiannually on each February 1 and August 1, commencing February 1, 1999 or such later date as the State authorizes, during the term of the Loan. SECTION 3.04. Unconditional Obligations. The obligation of the Borrower to make the Loan Repayments and all other payments required hereunder and the obligation to perform and observe the other duties, covenants, obligations and agreements on its part contained herein shall be absolute and unconditional, and shall not be abated, rebated, set-off, reduced, abrogated, terminated, waived, diminished, postponed or otherwise modified in any manner or to any extent whatsoever while any Loan Repayments remain unpaid, for any reason, regardless of any contingency, act of God, event or cause whatsoever, including (without limitation) any acts or circumstances that may constitute failure of consideration, eviction or constructive eviction, the taking by eminent domain or destruction of or damage to the Project or Environmental Infrastructure System, commercial frustration of the purpose, any change in the laws of the United States of America or of the State of New Jersey or any political subdivision of either or in the rules or regulations of any governmental authority, any failure of the State to perform and observe any agreement, whether express or implied, or any duty, liability or obligation arising out of or connected with the Project or this Loan Agreement, or any rights of set-off, recoupment, abatement or counterclaim that the Borrower might otherwise have against the State, the Loan Servicer or any other party or parties; provided, however, that payments hereunder shall not constitute a waiver of any such rights. The Borrower shall not be obligated to make any payments required to be made by any other Borrowers under separate Loan Agreements. SECTION 3.05. Loan Agreement to Survive Loan. The Borrower acknowledges that its duties, covenants, obligations and agreements set forth in Sections 3.06(a) and (b) hereof shall survive the payment in full of the Loan. SECTION 3.06. Disclaimer of Warranties and Indemnification. (a) The Borrower acknowledges and agrees that: (i) the State does not make any warranty or representation, either express or implied, as to the value, design, condition, merchantability or fitness for particular purpose or fitness for any use of the Environmental Infrastructure System or the Project or any portions thereof or any other warranty or representation with respect thereto; (ii) in no event shall the State or its agents be liable or responsible for any incidental, indirect, special or consequential damages in connection with or arising out of this Loan Agreement or the Project or the existence, furnishing, functioning or use of the Environmental Infrastructure System or the Project or any item or products or services provided for in this Loan Agreement; and (iii) during the term of this Loan Agreement and to the fullest extent permitted by law, the Borrower shall indemnify and hold the State harmless against, and the Borrower shall pay any and all, liability, loss, cost, damage, claim, judgment or expense of any and all kinds or nature and however arising and imposed by law, which the State may sustain, be subject to or be caused to incur by reason of any claim, suit or action based upon personal injury, death or damage to property, whether real, personal or mixed, or upon or arising out of contracts entered into by the Borrower, the Borrower's ownership of the Environmental Infrastructure System or the Project, or the acquisition, construction or installation of the Project. (b) It is mutually agreed by the Borrower and the State that the State and its commissioners, officers, agents, servants or employees shall not be liable for, and shall be indemnified and saved harmless by the Borrower in any event from, any action performed under this Loan Agreement and any claim or suit of whatsoever nature, except in the event of loss or damage resulting from their own negligence or willful misconduct. (c) In connection with its obligation to provide the insurance required under Section 2.02(j) hereof: (i) the Borrower shall include, or cause to be included, the State and its employees and officers as additional "named insureds" on (A) any certificate of liability insurance procured by the Borrower (or other similar document evidencing the liability insurance coverage procured by the Borrower) and (B) any certificate of liability insurance procured by any contractor or subcontractor for the Project, and from the latter of the date of the Loan Closing or the date of the initiation of construction of the Project until the date the Borrower receives the written certificate of Project completion from the State, the Borrower shall maintain said liability insurance covering the State and said employees and officers in good standing; and (ii) the Borrower shall include the State as an additional "named insured" on any certificate of insurance providing against risk of direct physical loss, damage or destruction of the Environmental Infrastructure System, and during the Loan Term the Borrower shall maintain said insurance covering the State in good standing. The Borrower shall provide the State with a copy of each of any such original, supplemental, amendatory or reissued certificates of insurance (or other similar documents evidencing the insurance coverage) required pursuant to this Section 3.06(c). SECTION 3.07. Option to Prepay Loan Repayments. The Borrower may prepay the Loan Repayments, in whole or in part, upon not less than ninety (90) days' prior written notice to the State; provided, however, that any such full or partial prepayment may only be made (i) if the Borrower is not then in arrears on its Trust Loan, (ii) if the Borrower is contemporaneously making a full or partial prepayment of the Trust Loan such that, after the prepayment of the Loan and the Trust Loan, the Trust gives its consent required under Section 3.07(iii) of the Trust Loan Agreement, and (iii) upon the prior written approval of the State. Prepayments shall be applied to the principal payments on the portion of the Loan to be prepaid in inverse order of their maturity. SECTION 3.08. Priority of Loan and Trust Loan. (a) The Borrower hereby agrees that, to the extent allowed by law, including, without limitation, the appropriations act of the New Jersey State Legislature authorizing the expenditure of Trust bond proceeds to finance a portion of the Cost of the Project, any loan repayments then due and payable on the Borrower's Trust Loan, including, without limitation, any administrative fees and any late payment charges then due and payable under the Trust Loan Agreement, shall be satisfied by the Borrower before any Loan Repayments then due and payable hereunder on the Loan shall be satisfied by the Borrower. (b) The Borrower hereby acknowledges that in the event the Borrower fails or is unable to pay promptly to the Trust in full any loan repayments on the Trust Loan, then any Loan Repayments paid by the Borrower on the Loan under this Loan Agreement and received by the Loan Servicer during the time of any such loan repayment deficiency under the Trust Loan Agreement shall first be applied by the Loan Servicer to satisfy such Trust Loan Agreement loan repayment deficiency as a credit against the obligations of the Borrower to make loan repayments of that portion of interest under the Trust Loan Agreement that is allocable to the interest payable on the Trust Bonds (as defined in the Trust Loan Agreement) and to make payments of that portion of interest under the bond issued by the Borrower to the Trust that is allocable to the interest payable on the Trust Bonds, second, to the extent available, to make loan repayments of principal under the Trust Loan Agreement and payments of principal on the bond issued by the Borrower to the Trust pursuant to the Trust Loan Agreement, third, to the extent available, to the payment of the administrative fee payable under the Trust Loan Agreement and to make payments of that portion of interest under the bond issued by the Borrower to the Trust that is allocable to the administrative fee payable under the Trust Loan Agreement, fourth, to the extent available, to the payment of late charges payable under the Trust Loan Agreement and to make payments of that portion of interest under the bond issued by the Borrower to the Trust that is allocable to the late charges payable under the Trust Loan Agreement, and, finally, to the extent available, to make Loan Repayments on the Loan. (c) The Borrower hereby further acknowledges that any Loan Repayments paid by the Borrower on the Loan under this Loan Agreement shall be applied (i) according to Section 3(c) of the Loan Servicing and Trust Bonds Security Agreement (as defined in the definition of Loan Servicer herein) and (ii) according to the provisions of the Master Program Trust Agreement. ARTICLE IV ASSIGNMENT OF LOAN AGREEMENT AND BORROWER BOND SECTION 4.01. Assignment and Transfer by State. The Borrower hereby approves and consents to any assignment or transfer of this Loan Agreement and the Borrower Bond that the State deems to be necessary in connection with the environmental infrastructure loan program of the State under the Regulations. SECTION 4.02. Assignment by Borrower. Neither this Loan Agreement nor the Borrower Bond may be assigned by the Borrower (except to the Guarantor, which shall occur pursuant to N.J.S.A. 14A:10-5.1 or such successor provision, upon notice to the State) for any reason, unless the following conditions shall be satisfied: (i) the State shall have approved said assignment in writing; (ii) the assignee shall have expressly assumed in writing the full and faithful observance and performance of the Borrower's duties, covenants, obligations and agreements under this Loan Agreement and, to the extent permitted under applicable law, the Borrower Bond; and (iii) immediately after such assignment, the assignee shall not be in default in the observance or performance of any duties, covenants, obligations or agreements of the Borrower under this Loan Agreement or the Borrower Bond. ARTICLE V EVENTS OF DEFAULT AND REMEDIES SECTION 5.01. Events of Default. If any of the following events occur, it is hereby defined as and declared to be and to constitute an "Event of Default": (a) failure by the Borrower to pay, or cause to be paid, any Loan Repayment required to be paid hereunder when due, which failure shall continue for a period of fifteen (15) days; (b) failure by the Borrower to pay, or cause to be paid, any late charges incurred hereunder or any portion thereof when due or to observe and perform any duty, covenant, obligation or agreement on its part to be observed or performed under this Loan Agreement, other than as referred to in subsection (a) of this Section 5.01 or other than the obligations of the Borrower contained in Section 2.02(d)(ii) hereof and in Exhibit F hereto, which failure shall continue for a period of thirty (30) days after written notice, specifying such failure and requesting that it be remedied, is given to the Borrower by the State, unless the State shall agree in writing to an extension of such time prior to its expiration; provided, however, that if the failure stated in such notice is correctable but cannot be corrected within the applicable period, the State may not unreasonably withhold its consent to an extension of such time up to 120 days from the delivery of the written notice referred to above if corrective action is instituted by the Borrower within the applicable period and diligently pursued until the Event of Default is corrected; (c) any representation made by or on behalf of the Borrower contained in this Loan Agreement, or in any instrument furnished in compliance with or with reference to this Loan Agreement or the Loan, is false or misleading in any material respect; (d) a petition is filed by or against the Borrower under any federal or state bankruptcy or insolvency law or other similar law in effect on the date of this Loan Agreement or thereafter enacted, unless in the case of any such petition filed against the Borrower such petition shall be dismissed within thirty (30) days after such filing and such dismissal shall be final and not subject to appeal; or the Borrower shall become insolvent or bankrupt or shall make an assignment for the benefit of its creditors; or a custodian (including, without limitation, a receiver, liquidator or trustee) of the Borrower or any of its property shall be appointed by court order or take possession of the Borrower or its property or assets if such order remains in effect or such possession continues for more than thirty (30) days; (e) the Borrower shall generally fail to pay its debts as such debts become due; and (f) failure of the Borrower to observe or perform such additional duties, covenants, obligations, agreements or conditions as are required by the State and specified in Exhibit F attached hereto and made a part hereof. SECTION 5.02. Notice of Default. The Borrower shall give the State prompt telephonic notice of the occurrence of any Event of Default referred to in Section 5.01(d) or (e) hereof and of the occurrence of any other event or condition that constitutes an Event of Default at such time as any senior administrative or financial officer of the Borrower becomes aware of the existence thereof. SECTION 5.03. Remedies on Default. Whenever an Event of Default referred to in Section 5.01 hereof shall have occurred and be continuing, the State shall have the right to take whatever action at law or in equity may appear necessary or desirable to collect the amounts then due and thereafter to become due hereunder or to enforce the observance and performance of any duty, covenant, obligation or agreement of the Borrower hereunder. In addition, if an Event of Default referred to in Section 5.01(a) hereof shall have occurred and be continuing, the State shall, to the extent allowed by applicable law, have the right to declare all Loan Repayments and all other amounts due hereunder (including, without limitation, payments under the Borrower Bond) to be immediately due and payable, and upon notice to the Borrower the same shall become due and payable without further notice or demand. SECTION 5.04. Attorneys' Fees and Other Expenses. The Borrower shall on demand pay to the State the reasonable fees and expenses of attorneys and other reasonable expenses (including, without limitation, the reasonably allocated costs of in-house counsel and legal staff) incurred by the State in the collection of Loan Repayments or any other sum due hereunder or in the enforcement of the observation or performance of any other duties, covenants, obligations or agreements of the Borrower upon an Event of Default. SECTION 5.05. Application of Moneys. Any moneys collected by the State pursuant to Section 5.03 hereof shall be applied (a) first, to pay any attorneys' fees or other fees and expenses owed by the Borrower pursuant to Section 5.04 hereof, (b) second, to the extent available, to pay principal due and payable on the Loan, (c) third, to the extent available, to pay any other amounts due and payable hereunder, and (d) fourth, to the extent available, to pay principal on the Loan and other amounts payable hereunder as such amounts become due and payable. SECTION 5.06. No Remedy Exclusive; Waiver; Notice. No remedy herein conferred upon or reserved to the State is intended to be exclusive, and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Loan Agreement or now or hereafter existing at law or in equity. No delay or omission to exercise any right, remedy or power accruing upon any Event of Default shall impair any such right, remedy or power or shall be construed to be a waiver thereof, but any such right, remedy or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the State to exercise any remedy reserved to it in this Article V, it shall not be necessary to give any notice other than such notice as may be required in this Article V. SECTION 5.07. Retention of State's Rights. Notwithstanding any assignment or transfer of this Loan Agreement pursuant to the provisions hereof, or anything else to the contrary contained herein, the State shall have the right upon the occurrence of an Event of Default to take any action, including (without limitation) bringing an action against the Borrower at law or in equity, as the State may, in its discretion, deem necessary to enforce the obligations of the Borrower to the State pursuant to Section 5.03 hereof. ARTICLE VI MISCELLANEOUS SECTION 6.01. Notices. All notices, certificates or other communications hereunder shall be sufficiently given and shall be deemed given when hand delivered or mailed by registered or certified mail, postage prepaid, to the Borrower at the address specified in Exhibit A-1 attached hereto and made a part hereof and to the State and the Loan Servicer at the following addresses: (a) State: New Jersey Department of Environmental Protection Municipal Finance and Construction Element 401 East State Street 3rd Floor Trenton, New Jersey 08625-0425 Attention: Assistant Director New Jersey Department of the Treasury Office of Public Finance State Street Square 5th Floor Trenton, New Jersey 08625-0002 Attention: Director (b) Loan Servicer: First Union National Bank 765 Broad Street Newark, New Jersey 07102 Attention: Corporate Trust Department Any of the foregoing parties may designate any further or different addresses to which subsequent notices, certificates or other communications shall be sent by notice in writing given to the others. SECTION 6.02. Binding Effect. This Loan Agreement shall inure to the benefit of and shall be binding upon the State and the Borrower and their respective successors and assigns. SECTION 6.03. Severability. In the event any provision of this Loan Agreement shall be held illegal, invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate, render unenforceable or otherwise affect any other provision hereof. SECTION 6.04. Amendments, Supplements and Modifications. This Loan Agreement may not be amended, supplemented or modified without the prior written consent of the State and the Borrower. SECTION 6.05. Execution in Counterparts. This Loan Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. SECTION 6.06. Applicable Law and Regulations. This Loan Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, including the Regulations, which Regulations are, by this reference thereto, incorporated herein as part of this Loan Agreement. SECTION 6.07. Consents and Approvals. Whenever the written consent or approval of the State shall be required under the provisions of this Loan Agreement, such consent or approval may only be given by the State. SECTION 6.08. Captions. The captions or headings in this Loan Agreement are for convenience only and shall not in any way define, limit or describe the scope or intent of any provisions or sections of this Loan Agreement. SECTION 6.09. Further Assurances. The Borrower shall, at the request of the State, authorize, execute, attest, acknowledge and deliver such further resolutions, conveyances, transfers, assurances, financing statements and other instruments as may be necessary or desirable for better assuring, conveying, granting, assigning and confirming the rights, security interests and agreements granted or intended to be granted by this Loan Agreement and the Borrower Bond. [Signature Page] IN WITNESS WHEREOF, the State and the Borrower have caused this Loan Agreement to be executed, sealed and delivered as of the date first above written. THE STATE OF NEW JERSEY, ACTING BY AND THROUGH THE NEW JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION [SEAL] By:________________________ ATTEST: Robert C. Shinn, Jr. Commissioner, Department of Environmental Protection _____________________________ Nicholas G. Binder, P.E., P.P. Assistant Director, Municipal Finance and Construction Element, Department of Environmental Protection [SEAL] THE MOUNT HOLLY WATER COMPANY ATTEST: By:________________________ Authorized Officer _____________________________ Authorized Officer Approval of New Jersey State Treasurer By:________________________ James A. DiEleuterio, Jr. New Jersey State Treasurer A-1-1 EXHIBIT A-1 Description of Project and Environmental Infrastructure System A-2-1 EXHIBIT A-2 Description of Loan B-1 EXHIBIT B Basis for Determination of Allowable Project Costs C-1 EXHIBIT C Estimated Disbursement Schedule D-31 EXHIBIT D Specimen Borrower Bond (To be supplied by Borrower's bond counsel in substantially the following form) IMPORTANT NOTE: The next two pages set forth the form of the Borrower Bond prepared by the Trust's Bond Counsel for municipal/county Borrowers. Although the Trust recognizes that each corporate Borrower has its own bond form as required pursuant to its Borrower Bond Resolution, please incorporate in the bond form the pertinent information from this municipal/county bond form (e.g., include the concept of principal amount or lesser amount under Section 3.01, reference to payments to the Loan Servicer, disbursement process, unconditional nature, prepayment, security and date). SEE IMPORTANT NOTE ON PRIOR PAGE FOR VALUE RECEIVED, The Mount Holly Water Company, a corporation duly created and validly existing under the Constitution and laws of the State of New Jersey (the "Borrower"), hereby promises to pay to the order of the State of New Jersey (the "State") the principal amount of Five Million Eight Hundred Ninety-Four Thousand Nine Hundred Nine Dollars ($5,894,909), or such lesser amount as shall be determined in accordance with Section 3.01 of the Loan Agreement (as hereinafter defined), at the times and in the amounts determined as provided in the Loan Agreement, plus any other amounts due and owing under the Loan Agreement at the times and in the amounts as provided therein. The Borrower irrevocably pledges its full faith and credit for the punctual payment of the principal of, and all other amounts due under, this Borrower Bond and the Loan Agreement according to their respective terms. This Borrower Bond is issued pursuant to the Loan Agreement dated as of November 1, 1998 by and between the State, acting by and through the New Jersey Department of Environmental Protection, and the Borrower (the "Loan Agreement"), and is issued in consideration of the loan made thereunder (the "Loan") and to evidence the payment obligations of the Borrower set forth in Section 3.03(a) thereof. Payments under this Borrower Bond shall, except as otherwise provided in the Loan Agreement, be made directly to the Loan Servicer (as defined in the Loan Agreement) for the account of the State. This Borrower Bond is subject to assignment or endorsement in accordance with the terms of the Loan Agreement. All of the terms, conditions and provisions of the Loan Agreement are, by this reference thereto, incorporated herein as part of this Borrower Bond. Pursuant to the Loan Agreement, disbursements shall be made by the State to the Borrower upon receipt by the State of requisitions from the Borrower executed and delivered in accordance with the requirements set forth in Section 3.02 of the Loan Agreement. This Borrower Bond is entitled to the benefits and is subject to the conditions of the Loan Agreement. The obligations of the Borrower to make the payments required hereunder shall be absolute and unconditional, without any defense or right of set-off, counterclaim or recoupment by reason of any default by the State under the Loan Agreement or under any other agreement between the Borrower and the State or out of any indebtedness or liability at any time owing to the Borrower by the State or for any other reason. This Borrower Bond is subject to optional prepayment under the terms and conditions, and in the amounts, provided in Section 3.07 of the Loan Agreement. To the extent allowed by applicable law, this Borrower Bond may be subject to acceleration under the terms and conditions, and in the amounts, provided in Section 5.03 of the Loan Agreement. To the extent provided by law, this Borrower Bond is junior and subordinate in all respects to any bonds of the Borrower issued on even date herewith to the New Jersey Environmental Infrastructure Trust as to lien on, and source and security for payment from, the revenues of the Borrower. IN WITNESS WHEREOF, the Borrower has caused this Borrower Bond to be duly executed, sealed and delivered as of this 15th day of October, 1998. THE MOUNT HOLLY WATER COMPANY [SEAL] By:_______________________ ATTEST: _____________ _______________________ By:_______________________ _______________ _____________ E-35 EXHIBIT E Opinions of Borrower's Bond and General Counsels See Closing Item No. 11.04 [LETTERHEAD OF COUNSEL TO BORROWER] November 5, 1998 State of New Jersey Department of Environmental Protection 401 East State Street Trenton, New Jersey 08625 Ladies and Gentlemen: I have acted as counsel to The Mount Holly Water Company, a corporation duly organized and validly existing under the laws of the State of New Jersey (the "Borrower"), which has entered into a Loan Agreement (as hereinafter defined) with the State of New Jersey, acting by and through the New Jersey Department of Environmental Protection (the "State"), and have acted as such in connection with the authorization, execution, attestation and delivery by the Borrower of its Loan Agreement and Borrower Bond (as hereinafter defined) pursuant to the New Jersey Business Corporation Act, P.L. 1968, c. 263, as amended (the "Business Corporation Law"), and resolutions of the Board of Directors of the Borrower adopted on ________, 1998 (the "Resolutions"). All capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Loan Agreement. In so acting, I have examined the Constitution and laws of the State of New Jersey, including, without limitation, the Business Corporation Law, and the certificate of incorporation and by-laws of the Borrower. I have also examined originals, or copies certified or otherwise identified to my satisfaction, of the following: (a) the Loan Agreement dated as of November 1, 1998 (the "Loan Agreement") by and between the State and the Borrower; (b) the Resolutions and the proceedings of the Board of Directors of the Borrower relating to the undertaking and completion of the Project; (c) the Borrower Bond dated as of October 15, 1998 (the "Borrower Bond") issued by the Borrower to the State to evidence the Loan; and (d) the proceedings of the Board of Directors of the Borrower, including, without limitation, the Resolutions, relating to the authorization of the Borrower Bond and the sale, execution, attestation and delivery thereof to the State (the Loan Agreement and the Borrower Bond are referred to herein collectively as the "Loan Documents"). I have also examined and relied upon originals, or copies certified or otherwise authenticated to my satisfaction, of such other records, documents, certificates and other instruments, and have made such investigation of law as in my judgment I have deemed necessary or appropriate, to enable me to render the opinions expressed below. I am of the opinion that: 1. The Borrower is a corporation duly created and validly existing under and pursuant to the Constitution and statutes of the State of New Jersey, including the Business Corporation Law, with the legal right to carry on the business of its Environmental Infrastructure System as currently being conducted and as proposed to be conducted. 2. The Borrower has full legal right and authority to execute, attest and deliver the Loan Documents, to sell the Borrower Bond to the State, to observe and perform its duties, covenants, obligations and agreements under the Loan Documents and to undertake and complete the Project. 3. The acting officers of the Borrower who are contemporaneously herewith performing or have previously performed any action contemplated in the Loan Agreement are, and at the time any such action was performed were, the duly appointed or elected officers of the Borrower empowered by applicable New Jersey law and authorized by resolution of the Borrower to perform such actions. 4. The proceedings of the Borrower's Board of Directors (i) approving the Loan Documents, (ii) authorizing their execution, attestation and delivery on behalf of the Borrower, (iii) with respect to the Borrower Bond only, authorizing its sale by the Borrower to the State, (iv) authorizing the Borrower to consummate the transactions contemplated by the Loan Documents, (v) authorizing the Borrower to undertake and complete the Project, and (vi) authorizing the execution and delivery of all other certificates, agreements, documents and instruments in connection with the execution, attestation and delivery of the Loan Documents, have each been duly and lawfully adopted and authorized in accordance with applicable law, including, without limitation, the Business Corporation Law. 5. The Loan Documents have been duly authorized, executed, attested and delivered by the Authorized Officers of the Borrower and the Borrower Bond has been duly sold by the Borrower to the State; and assuming in the case of the Loan Agreement that the State has the requisite power and authority to authorize, execute, attest and deliver, and has duly authorized, executed, attested and delivered, the Loan Agreement, the Loan Documents constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, subject, however, to the effect of, and to restrictions and limitations imposed by or resulting from, bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors' rights generally. No opinion is rendered as to the availability of any particular remedy. 6. The authorization, execution, attestation and delivery of the Loan Documents by the Borrower and, in the case of the Borrower Bond only, the sale thereof to the State, the observation and performance by the Borrower of its duties, covenants, obligations and agreements thereunder, the consummation of the transactions contemplated therein, and the undertaking and completion of the Project do not and will not (i) other than the lien, charge or encumbrance created by the Loan Documents and by any other outstanding debt obligations of the Borrower that are at parity with the Borrower Bond as to lien on, and source and security for payment thereon from, the revenues of the Borrower, result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Borrower pursuant to, (ii) result in any breach of any of the terms, conditions or provisions of, or (iii) constitute a default under, any outstanding debt or lease obligation, trust agreement, indenture, mortgage, deed of trust, loan agreement or other instrument to which the Borrower is a party or by which the Borrower, its Environmental Infrastructure System or any of its properties or assets may be bound, nor will such action result in any violation of the provisions of the charter or other document pursuant to which the Borrower was established or any laws, ordinances, injunctions, judgments, decrees, rules, regulations or existing orders of any court or governmental or administrative agency, authority or person to which the Borrower, its Environmental Infrastructure System or its properties or operations is subject. 7. All approvals, consents or authorizations of, or registrations of or filings with, any governmental or public agency, authority or person required to date on the part of the Borrower in connection with the authorization, execution, attestation, delivery and performance of the Loan Documents, the sale of the Borrower Bond and the undertaking and completion of the Project have been obtained or made. 8. There is no litigation or other proceeding pending or, to my knowledge, after due inquiry, threatened in any court or other tribunal of competent jurisdiction (either State or federal) (i) questioning the creation, organization or existence of the Borrower, (ii) questioning the validity, legality or enforceability of the Resolutions, the Loan or the Loan Documents, (iii) questioning the undertaking or completion of the Project, (iv) otherwise challenging the Borrower's ability to consummate the transactions contemplated by the Loan or the Loan Documents, or (v) that, if adversely decided, would have a materially adverse impact on the financial condition of the Borrower. 9. Other than its bond dated as of October 15, 1998 issued to the New Jersey Environmental Infrastructure Trust, the Borrower has no bonds, notes or other debt obligations outstanding that are superior or senior to the Borrower Bond as to lien on, and source and security for payment thereof from, the revenues of the Borrower. I hereby authorize McCarter & English, LLP, acting as bond counsel to the State in connection with the Loan, and the Attorney General of the State of New Jersey, acting as general counsel to the State in connection with the Loan, to rely on this opinion as if I had addressed this opinion to them in addition to you. Very truly yours, F-39 EXHIBIT F Additional Covenants and Requirements Guaranty of Loan: The repayment of the Loan will be guaranteed by the Guarantor pursuant to the terms and conditions as set forth in that certain Guaranty made and delivered as of November 1, 1998 by the Guarantor, a copy of which is attached hereto. G-40 EXHIBIT G General Administrative Requirements for the State Environmental Infrastructure Financing Program EX-10 6 Exhibit 10(l) AMENDMENT TO THE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN OF ELIZABETHTOWN WATER COMPANY This ("Amendment") to the Supplemental Executive Retirement Plan ("SERP") of Elizabethtown Water Company ("EWC") is made as of this 20th day of August, 1998 by and among EWC and the individuals whose name and signatures are set forth below (collectively, the "Executives"). WITNESSETH: WHEREAS, each of the boards of directors (collectively, the "Board") of E'Town Corporation ("E'Town" and, collectively with EWC, referred to herein as the "Company") has determined that, should the Company receive a proposal from or engage in discussions with a third person concerning a possible business combination with the Company or the acquisition of a substantial portion of voting securities of the Company, it is imperative that it and the Company be able to rely on certain of the key executives of the Company (collectively, the "Executives") to continue to serve in their respective positions and that the Board and the Company be able to rely upon the Executives' advice as being in the best interests of the Company and its shareholders without concern that the Executives might be distracted by the personal uncertainties and risks that such a proposal or discussions might otherwise create; and WHEREAS, the Board desires to reward the Executives for their valuable, dedicated service to the Company should the services of the Executives be terminated under circumstances described above; and WHEREAS, the Company has entered into agreements (the "Agreements") with each of the Executives which set forth the terms and conditions of benefits and payments to be made by the Company to the Executives upon any such termination of services in the event of a change in control of the Company as defined in the Agreements; and WHEREAS, the Board and the Executives consider it in their respective best interests and the best interests of the shareholders of the Company that certain provisions of the SERP be amended to conform to the terms and conditions of the Agreements; and WHEREAS, the Board also desires to amend the SERP in order to clarify the requirements of the SERP with respect to the designation by the Executive Compensation Committee of the Board (the "Committee") of those executives who are eligible to receive benefits under the SERP, and to amend Schedule A of the SERP to include the names of the executives who have been designated as eligible to receive benefits under the SERP as of the date of this Amendment; NOW,THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereto, intending to be legally bound hereby, agree to amend the SERP as follows: 1. Section 3.5 of the SERP is amended by changing the definition of "Change in Control" to the following: "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) below of this paragraph 3.5 but which does not constitute a change in control under such clause (Z), 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 (24) consecutive months during the term of the Plan, 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 paragraph 3.5) whose election by the Board, or nomination for election by the Company's 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, cease for any reason to constitute a majority thereof; or (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 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such transaction (or such other percentage amount as the Board may approve from time to time with respect to one or more Key Employees), 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. Section 3.16 of the SERP is amended by changing the definition of "Key Employee" to the following: "Key Employee" shall mean a corporate officer of E'Town Corporation or the Company who is employed on a full time basis and who holds the position of Vice President or higher." 3. Section 4.2 of the SERP is amended by adding to the end of subsection (a) thereof the following: "On and after the date of this Amendment, the Committee shall update, from time to time during the term of this Plan, Schedule "A" to reflect the names and titles of those Employees who become Key Employees eligible to participate under the Plan. A Key Employee shall become eligible immediately upon the election or appointment by the Board and commencement of full-time employment of such Employee as a Key Employee. The Committee shall attach of copy of the revised Schedule "A" to this Plan each time any Employee becomes eligible as a Key Employee under this Section 4.2." Section 4.2 of the SERP is further amended by deleting subsections (b) and (c) of Section 4.2 in their entirety. 4. Section 8.2 of the SERP is amended by replacing Section 8.2 in its entirety with the following: "8.2 Upon Other Termination of Employment (a) In the event that a Participant's employment is terminated prior to his or her Normal, Early or Deferred Retirement Date or prior to his or her death, there shall be no Benefits payable under the Plan except as specifically set forth in Article 7 with respect to the death of the Participant, unless any of the events described in Section 3.5 hereof constituting a Change in Control of the Company shall have occurred. If any of the events described in Section 3.5 hereof constituting a Change in Control of the Company shall have occurred, the Participant shall be entitled to the Benefits payable under this Plan upon the subsequent termination of the Participant's employment within the applicable period set forth in Section 8.3 hereof following such Change in Control of the Company unless such termination is (i) due to the Participant's death; or (ii) by the Company by reason of the Participant's Disability (as hereinafter defined) or for Cause (as hereinafter defined); or (iii) by the Participant other than for Good Reason (as hereinafter defined). (b) If, following a Change in Control of the Company, the Participant's employment is terminated by reason of the Participant's death, the Participant shall be entitled to receive Benefits in accordance with the provisions of Article 7 hereof and if, following a Change in Control of the Company, the Participant's employment is terminated by reason of the Participant's Disability or by the Company for Cause or by the Participant other than for Good Reason, the Participant shall not be entitled to receive Benefits. (c) For purposes of this Plan: (i) "Disability" shall mean the Participant's incapacity due to physical or mental illness such that the Participant 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 Participant pursuant to any other plan or agreement, whichever is applicable. (ii) "Cause" shall mean: (A) the conviction of the Participant for a felony, or the willful commission by the Participant 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 Participant of an act of fraud in the performance of such Participant's duties on behalf of the Company that causes or will probably cause economic damage to the Company; or (C) the continuing willful failure of the Participant to perform the Participant's duties, as such duties were performed by the Participant prior to the day of the Change in Control of the Company (other than any such failure resulting from the Participant'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 Participant by the Committee. For purposes of this Section 8.2(c)(ii) , no act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant's action or omission was in the best interests of the Company. (iii)"Good Reason" shall mean: (A) The assignment by the Company to the Participant of duties without the Participant's express written consent, which (i) are materially different or require travel significantly more time consuming or extensive than the Participant'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 Participant'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 Participant at any time during the six (6) month period prior to the Change in Control of the Company, or (iii) the removal of the Participant from, or any failure to reappoint or reelect the Participant 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 Participant's employment by the Company for Cause, or by reason of the Participant's death or Disability; (B) A reduction by the Company of the Participant's Salary (as hereinafter defined), or the failure to grant increases in the Participant's Salary on a basis at least substantially comparable to those granted generally to other executives of the Company of comparable title, salary and performance ratings, made in good faith; (C) The relocation of the Company's principal executive offices to a location outside the State of New Jersey, or a requirement by the Company that the Participant relocate (except for required travel on the Company's business to an extent substantially consistent with the Participant's business travel obligations immediately prior to the Change in Control) (i) to a location which is outside a radius of one hundred (100) miles (or such other distance as may be agreed to by the Company and the Participant) from the Participant's place of employment with the Company immediately prior to the Change in Control, or (ii) to a location outside the State of New Jersey; or, in the event the Participant expressly consents in writing to any such relocation of the Participant outside such one hundred mile radius or the State of New Jersey, the failure by the Company to pay (or reimburse the Participant for) all reasonable moving expenses incurred by the Participant relating to a change of principal residence in connection with such relocation and to indemnify the Participant against any loss realized in the sale of the Participant's principal residence in connection with any such change of residence, all to the effect that the Participant shall incur no loss upon such sale on an after tax basis; (D) The failure by the Company to continue to provide the Participant with substantially the same welfare benefits (which for purposes of this Plan 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 the Company's stock option plan, incentive bonus plan and any other plan in which executives of the Company of comparable title and salary or subject to similar performance criteria participate and as were provided to the Participant immediately prior to such Change in Control of the Company, or with a new package of welfare benefits and perquisites that is substantially comparable in all material respects to the welfare benefits and perquisites as were provided to the Participant immediately prior to such Change in Control; or (E) The failure of the Company to obtain the express written assumption of and agreement to perform the obligations of the Company under any Change in Control Agreement between the Company and the Participant or this Plan by any successor. (iv) "Dispute" shall mean (i) in the case of termination of employment of the Participant with the Company by the Company for Disability or Cause, that the Participant challenges the existence of Disability or Cause and (ii) in the case of the termination of the Participant's employment with the Company by the Participant for Good Reason, that the Company challenges the existence of Good Reason. (v) "Salary" shall mean the Participant's average annual compensation reported on United States Internal Revenue Service Form W-2 ("Form W-2") plus any of the following amounts which are not reported on the Participant's Form W-2: (i) any restricted stock of the Company awarded to the Participant, or which the Participant is entitled to receive under any plan, arrangement or contract of the Company or pursuant to any resolution of the Board, in lieu of base compensation, (ii) any 401(K) compensation, and (iii) any compensation deferred in accordance with Section 125 of the United States Internal Revenue Code of 1986, as amended, and the regulations thereunder (the "Code"). (d) Any purported termination of the Participant's employment by the Company by reason of the Participant's Disability or for Cause, or by the Participant for Good Reason shall be communicated by written Notice of Termination (as hereinafter defined) to the other party hereto. For purposes of this Plan, a "Notice of Termination" shall mean a notice given by the Participant 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 Plan. The Participant shall not be entitled to give a Notice of Termination that the Participant is terminating the Participant's employment with the Company for Good Reason more than six (6) months following the occurrence of the event alleged to constitute Good Reason. The Participant'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 Plan may be extended in the manner contemplated in the second sentence of Section 8.2(e) below. (e) For purposes of this Plan, 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 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 Benefits hereunder shall continue to accrue consistent with the terms and conditions of this Plan in effect 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 Participant from the date of termination specified in the Notice of Termination until final resolution of the Dispute pursuant to this Section 8.2(e) shall be repaid promptly by the Participant to the Company, with interest at the average prime rate generally prevailing from time to time among major New York City banks. The Participant shall not be obligated to pay to the Company the cost of providing the Participant with Benefits for such period unless the final judgment, order or decree of a court or other body resolving the Dispute determines that the Participant acted in bad faith in giving a notice of Dispute. Should a Dispute ultimately be determined in favor of the Participant, then the Participant shall be entitled to retain all sums paid to the Participant under this Plan pending resolution of the Dispute. 8.3 Payments Upon Termination After Change in Control If within three (3) years after a Change in Control of the Company, the Company shall terminate the Participant's employment other than by reason of the Participant's death, Disability or for Cause, or if the Participant shall terminate the Participant's employment for Good Reason, then the Participant's Benefits in effect immediately prior to the date on which a Change in Control of the Company occurs under this Plan, or any successor plan in effect on the date on which a Change in Control of the Company occurred, shall become fully vested and nonforfeitable on the Date of Termination and (i) if the Participant has not attained the age of 65 as of the Date of Termination, the Participant shall be deemed to have attained the age of 65 as of the Date of Termination for purposes of the normal retirement provisions of the SERP, and (ii) the Participant shall be deemed to have accumulated ten (10) years of continuous service on the Date of Termination for purposes of the benefit accrual provisions of this Plan, in addition to the number of years of service already accumulated by the Participant as of the Date of Termination; provided, however, that the President of E'town shall be deemed to have accumulated fifteen (15) years of continuous service on the Date of Termination for purposes of the benefit accrual provisions of this Plan, in addition to the number of years of service already accumulated by the President as of the Date of Termination. In satisfaction of the Company's obligations under this Section 8.3, the Company shall purchase an annuity or similar instrument owned by the Participant and payable to the Participant (or the Participant's beneficiaries, as the case may be) which provides for payment of the Benefits payable to the Participant under this Section 8.3 consistent with the payment provisions of Section 6.1 of the Plan. Such annuity or other instrument shall be purchased and delivered to the Participant by the Company within thirty (30) days after the Date of Termination." 5. Section 9.1 of the SERP is amended by adding to the end of that Section the following language: "except as expressly set forth in Section 8.3 of the Plan." 6. Section 9.2 of the SERP is amended by adding to the end of the first sentence of that Section the following language: "except as expressly set forth in Section 8.3 of the Plan." 7. Section 10.4 is amended by adding to the end of that Section the following subsection: "(e) Notwithstanding the foregoing, with respect to any dispute regarding Benefits payable in connection with a Change in Control, the dispute provisions set forth in Section 8.2 shall apply." 8. Attached hereto is a copy of the revised Schedule "A" which reflects all of the Key Employees who are eligible to participate under the Plan as of the date of this Amendment. 9. If any of the terms and conditions of the SERP are inconsistent with this Amendment, the terms and conditions of this Amendment shall supercede such inconsistent terms and conditions of the SERP. Except to the extent changed or modified herein, all terms and conditions of the SERP shall remain unchanged and be in full force and effect. 10. The Company and the Executives acknowledge that, by execution and delivery of the respective Agreements by each of the Executives, the Executives acknowledged that, on or before the effective date of the Agreements, the Executives received and had an opportunity to read, and the Executives understand, this Amendment and that the amendments, modifications and supplements in and to the SERP set forth in this Amendment are in the best interests of the Executives and are necessary and appropriate to conform the terms and conditions of the SERP to the terms and conditions of the Agreements and the Executives thereby agree to the amendments, modifications and supplements in and to the provisions of the SERP in accordance with the terms and conditions set forth in this Amendment to be effective as of the date of the Agreements in satisfaction of the terms and conditions of the SERP, and that a copy of this Amendment shall be attached as an exhibit to and incorporated by reference into the SERP as of the date of the Agreements. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of this 20th day of August, 1998. E'TOWN CORPORATION By: Anne Evans Estabrook, Chairman of the Board -SCHEDULE A Gail P. Brady Walter M. Braswell Andrew Chapman James Cowley Dennis W. Doll Beth Gates Robert W. Kean III Edward D. Mullen Henry S. Patterson III Joseph E. Stroin, Jr. Norbert Wagner EX-10 7 Exhibit 10(o) AGREEMENT THIS AGREEMENT dated and entered into effective as of the 20th day of August 1998 by and between E'Town Corporation, a New Jersey corporation (together with its affiliated companies, the "Company"), and (see list at end), residing at _______________________ (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 the Company 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 the Executive's position and that the Board and the Company be able to rely upon the Executive's 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 the Executive's valuable, dedicated service to the Company should the Executive's 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 Agreement with the Executive; and WHEREAS, the Board has approved the execution and delivery of this Agreement by the Company by resolution duly adopted by the Board at a meeting of the Board held on August 20, 1998; NOW, THEREFORE, to assure the Company of the Executive's continued dedication and the availability of the Executive's 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 the Executive's valuable, dedicated service to the Company should the Executive's 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. OPERATION, EFFECTIVE DATE, AND TERM OF AGREEMENT. (a) This Agreement shall commence on the date hereof and continue in effect through December 31, 1999; provided, however, that commencing on January 1, 2000 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) below of this paragraph 1(b) but which does not constitute a change in control under such clause (Z), 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 (24) 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 paragraph 1(b)) whose election by the Board, or nomination for election by the Company's 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, cease for any reason to constitute a majority thereof; or (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 50% 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 that 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 the Executive will not voluntarily leave the employ of the Company and will continue to perform the Executive's regular duties and to render the services provided by the Executive to the Company until such person has abandoned or terminated his 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 the Executive's 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. 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 payments and benefits provided in paragraph 4 hereof upon the subsequent termination of the Executive's 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 the Executive's 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 the Executive 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 the Executive's duties as a result of incapacity due to physical or mental illness, the Executive shall continue to receive the Executive's Salary (as hereinafter defined), less any benefits as may be available to the Executive under the Company's disability plans until the Executive's 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 the Executive's 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 (C) the continuing willful failure of the Executive to perform the Executive's duties, as such duties were performed by the Executive prior to the day of the Change in 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 the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. (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) 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's death or Disability; (B) A reduction by the Company of the Executive's Salary (as hereinafter defined), or the failure to grant increases in the Executive's Salary on a basis at least substantially comparable to those granted generally to other executives of the Company of comparable title, salary and performance ratings, made in good faith; (C) The relocation of the Company's principal executive offices to a location outside the State of New Jersey, or a requirement by the Company that the Executive relocate (except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations immediately prior to the Change in Control) (i) to a location which is outside a radius of one hundred (100) miles from the Executive's place of employment with the Company immediately prior to the Change in Control, or (ii) to a location outside the State of New Jersey; or, in the event the Executive expressly consents in writing to any such relocation of the Executive outside such one hundred mile radius or the State of New Jersey, the failure by the Company to pay (or reimburse the Executive for) all reasonable moving expenses incurred by the Executive relating to a change of principal residence in connection with such relocation and to indemnify the Executive against any loss realized in the sale of the Executive's principal residence in connection with any such change of residence, all to the effect that the Executive shall incur no loss upon such sale on an after tax basis; (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 the Company's stock option plan, incentive bonus plan and any other plan in which executives of the Company of comparable title and salary or subject to similar performance criteria participate and as were provided to the Executive immediately prior to such Change in Control of the Company, or with a new package of welfare benefits and perquisites that is substantially comparable in all material respects to the welfare benefits and perquisites as were provided to the Executive immediately prior to such Change in Control; 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 paragraph 5(c) 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 the Executive's termination of employment with the Company by the Executive for Good Reason, that the Company challenges the existence of Good Reason. (v) "Salary" shall mean the Executive's average annual compensation reported on United States Internal Revenue Service Form W-2 ("Form W-2") plus any of the following amounts which are not reported on the Executive's Form W-2 (i) any restricted stock of the Company awarded to the Executive, or which the Executive is entitled to receive under any plan, arrangement or contract of the Company or pursuant to any resolution of the Board, in lieu of base compensation, (ii) any 401(K) compensation, and (iii) any compensation deferred in accordance with Section 125 of the United States Internal Revenue Code of 1986, as amended and the regulations thereunder (the "Code"). (vi) "Incentive Compensation" in any year shall mean the amount accrued, if any, under any plan or arrangement of the Company in which executives of the Company of comparable title and salary or being subject to comparable performance criteria participate, or any under contract between the Company and the Executive, in each case which provides for any cash bonus, restricted stock, stock option, stock award or similar incentive compensation in addition to base salary and which is not reported on Form W-2. (e) Any purported termination of the Executive's 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 the Executive's 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) below. (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 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 Incentive Compensation, and 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 3(f) 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 canceled 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 the Executive's employment for Good Reason, then (a) the Company will continue to pay to the Executive, for a period of eighteen (18) 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 date on which a Change in Control of the Company occurred; and (b) for a period of eighteen (18) months following the Date of Termination, the Company shall provide, at the Company's expense, the Executive and the Executive's spouse and children with full benefits under any employee benefit plan or arrangement in which the Executive participated immediately prior to the date of a Change in Control, including, without limitation, any hospital, medical and dental insurance with substantially the same coverage and benefits as were provided to the Executive immediately prior to the date on which a Change in Control of the Company occurred; and (c) the Company will pay on the Date of Termination of 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 the greater of (i) all Incentive Compensation and other incentive awards due to the Executive immediately prior to the date on which a Change in Control of the Company occurred which are not yet paid and (ii) all Incentive Compensation and other incentive awards due to the Executive immediately prior to the Date of Termination which are not yet paid; and (d) for a period of eighteen (18) months following the Date of Termination, the Company shall provide to the Executive, at the Company's expense, the automobile (or a comparable automobile) or automobile allowance, as the case may be, provided by the Company to the Executive immediately prior to the date on which a Change in Control of the Company occurred and the Company shall reimburse the Executive any and all expenses incurred by the Executive in connection with the use of such automobile during such eighteen month period to the extent that the Company reimburses generally other executives of comparable title and salary or subject to comparable performance criteria; and (e) subject to the limitations set forth herein, any restricted stock of the Company in the Executive's account as an officer of the Company and any stock options granted to the Executive on or prior to the Date of Termination which are not vested in the Executive as of the Date of Termination shall become immediately vested, and all such restrictions thereon (including, but not limited to, any restrictions on the transferability of such stock), and any restrictions on any other restricted stock or stock options awarded to the Executive through any plan, arrangement or contract of the Company on or before the Date of Termination, shall be null and void and of no further force and effect and the Company agrees to accelerate and make immediately exercisable in full all unmatured installments of all outstanding stock options to acquire stock of the Company which the Executive holds as of the Date of Termination; provided, however, that notwithstanding anything to the contrary contained in this Agreement, the Board hereby reserves the right and authority to amend, modify and eliminate the provisions of this Section 4(e), from time to time on or after the date of this Agreement, in whole or in part, including, without limitation, the right to modify, amend or eliminate the acceleration of vesting or exercisability of stock options and the lapsing of any restrictions thereon, in its sole discretion without the approval or consent of the Executive or any other person or entity, for the purposes of obtaining accounting treatment which is favorable or beneficial for, or in the interest of, the Company in connection with any business combination involving the Company or acquisition of any substantial portion of voting securities of the Company and, in the event that the Board determines, in its sole discretion, to so modify, amend or eliminate the provisions of this Section 4(e), the Executive hereby agrees that the Executive shall not, and hereby waives any right to, dispute, challenge or bring any claim, action or proceeding against the Company with respect to any action taken by or on behalf of the Company to so modify, amend or eliminate the provisions of this Section 4(e) and any such modification, amendment, or elimination of the provisions of this Section 4(e) shall not affect the validity or enforceability of any other provisions of this Agreement, which such other provisions shall remain in full force and effect in accordance with the terms thereof; and (f) the Executive's retirement benefits in effect immediately prior to the date on which a Change in Control of the Company occurred under the Company's Supplemental Executive Retirement Plan, or any successor plan in effect on the date on which a Change in Control of the Company occurred (the SERP), shall become fully vested and nonforfeitable on the Date of Termination and (i) if the Executive has not attained the age of 65 as of the Date of Termination, the Executive shall be deemed to have attained the age of 65 as of the Date of Termination for purposes of the normal retirement provisions of the SERP, and (ii) the Executive shall be deemed to have accumulated ten (10) years of continuous service on the Date of Termination for purposes of the benefit accrual provisions of the SERP, in addition to the number of years of service already accumulated by the Executive as of the Date of Termination. In satisfaction of the Company's obligations under this paragraph 4(f), the Company shall purchase an annuity or similar instrument owned by the Executive and payable to the Executive (or the Executive's beneficiaries, as the case may be) which provides for payment of the SERP retirement benefits consistent with the payment provisions of the SERP. Such annuity or other instrument shall be purchased and delivered to the Executive by the Company within thirty (30) days after the Date of Termination; and (g) 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 as employee compensation, in whole or in part, by the Company as the result of Section 280G of the Code, the Company shall pay to the Executive either of the following amounts as directed by the Executive by written notice to the Company (i) an amount equal to the payments and benefits due under this Agreement reduced until no portion of the Total Payments is not deductible, as the result of Section 280G of the Code, by reducing to the extent necessary the payments and benefits due under paragraph 3(a) hereof (the "Reduced Amount"); provided, however, that the Executive shall elect which payment and/or benefits shall be reduced and the amount of such reduction so long as, after such reduction, the aggregate present value of the Total Payments equals the Reduced Amount, or (ii) the payments and benefits due under this Agreement in accordance with the terms and conditions of this Agreement; it being the understanding and agreement of each of the Company and the Executive that, if the Executive makes the election under clause (ii) of this paragraph 4(g), the Executive shall be responsible to pay the amount of any federal, state and local income taxes and any excise tax imposed by Section 4999 of the Code on such payments and benefits due under paragraph 3(a) of this Agreement (the Excise Tax), that the Company shall have no obligation to pay to the Executive any additional payment for such Excise Tax, if any, and that the Executive shall have no liability or responsibility to reimburse the Company for any losses incurred by the Company as a result of the Company's inability to deduct such payment, in whole or in part, as the result of Section 280G of the Code. For purposes of this limitation (A) 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, (B) 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 (C) 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. The Company and the Executive each shall reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for any Excise Tax with respect to the payments and benefits due under this Agreement. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or distribute to or for the benefit of the Executive such payments and benefits as are then due to the Executive under this Agreement and shall promptly pay or distribute to or for the benefit of the Executive in the future such payments and benefits as become due to the Executive under this Agreement. In the event that an underpayment of payments and benefits due to the Executive under this Agreement occurs as a result of a miscalculation of the Total Payments as a "parachute payment" within the meaning of Section 280G of the Code, such underpayment shall be paid promptly by the Company to or for the benefit of the Executive, together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code. The Company shall pay or distribute to or for the benefit of the Executive such payments and benefits as are then due to the Executive under this Agreement even if the Company is unable to deduct any portion of such payment and benefits as the result of Section 280G of the Code. 5. GENERAL. (a) The Executive shall retain in confidence any proprietary or other confidential information known to the Executive 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 compensation and provide the benefits to the Executive 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. 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, devisees and legatees. If the Executive should die while any amounts would still be payable to the Executive hereunder if the Executive 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, the payments and other benefits provided for in this Agreement then or thereafter due to the Executive (other than the payments and benefits provided for in Section 4(f) above) shall be reduced or modified, as applicable, to the extent the Executive receives a similar payment or benefit of equal or greater value in connection with any such other employment. 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: 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. Except as expressly set forth in this Agreement to the contrary, 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. 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. 9. AMENDMENT TO SERP. By execution and delivery of this Agreement, the Executive hereby acknowledges that, on or before the date of this Agreement, the Executive has received and has had an opportunity to read, and that the Executive understands, the Amendment to the SERP (the "Amendment") and that the amendments, modifications and supplements in and to the SERP set forth in the Amendment are in the best interests of the Executive and are necessary and appropriate to conform the terms and conditions of the SERP to the terms and conditions of this Agreement and the Executive hereby agrees to the amendments, modifications and supplements in and to the provisions of the SERP in accordance with the terms and conditions set forth in the Amendment to be effective as of the date of this Agreement and that a copy of the Amendment shall be attached as an exhibit to and incorporated by reference into the SERP as of the date of this Agreement. 10. VARIANCE AMONG AGREEMENTS. The Executive understands that the Company may enter into agreements with other executives of the Company similar to this Agreement that may contain terms different from those contained in this Agreement. Despite any such different terms in such other agreements, the Executive understands and agrees that this Agreement alone sets forth the Executive's rights with respect to the subject matter of this Agreement, and that the Executive is not a third party beneficiary of any such other agreements. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. E'TOWN CORPORATION By: ------------------------------- Name: Title: EXECUTIVE -------------------------------------- Name: Address: Above form of agreement executed for the following executives. Gail P. Brady Henry S. Patterson, III Norbert Wagner Walter M. Braswell James E. Cowley Dennis W. Doll Beth Gates Edward D. Mullen Joseph E. Stroin Jr. Robert W. Kean, III EX-12 8 Exhibit 12 E'TOWN CORPORATION AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges (In Thousands Except Ratios) Year Ended December 31, 1998 1997 1996 EARNINGS: Net Income $ 22,330 $ 19,260 $ 15,073 Federal income taxes 12,226 10,895 8,361 Interest charges 17,826 17,340 13,316 -------------------------------- Earnings available to cover fixed charges 52,382 47,495 36,750 -------------------------------- FIXED CHARGES: Interest on long-term debt 16,217 14,807 13,800 Other interest 1,641 2,560 2,645 Amortization of debt discount - net 438 411 395 -------------------------------- Total fixed charges 18,296 17,778 16,840 -------------------------------- Ratio of Earnings to Fixed Charges 2.86 2.67 2.18 ================================ Earnings to Fixed Charges represents the sum of Net Income, Federal income taxes and Interest Charges (which is reduced by Capitalized interest), divided by Fixed Charges. Fixed Charges consist of interest on long and short-term debt (which is not reduced by Capitalized Interest), and Amortization of debt discount. EX-12 9 ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY Exhibit 12(a) Computation of Ratio of Earnings to Fixed Charges (In Thousands Except Ratios) Year Ended December 31, 1998 1997 1996 EARNINGS: Net Income $ 24,768 $ 20,905 $ 16,755 Federal income taxes 13,101 11,274 8,822 Interest charges 15,616 16,622 12,804 -------------------------------- Earnings available to cover fixed charges 53,485 48,801 38,381 -------------------------------- FIXED CHARGES: Interest on long-term debt 14,721 14,030 13,011 Other interest 960 2,382 2,640 Amortization of debt discount - net 391 376 361 -------------------------------- Total fixed charges 16,072 16,788 16,012 -------------------------------- Ratio of Earnings to Fixed Charges 3.33 2.91 2.40 ================================ Earnings to Fixed Charges represents the sum of Net Income, Federal income taxes and Interest Charges (which is reduced by Allowance for Debt Funds Used During Construction), divided by Fixed Charges. Fixed Charges 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. EX-12 10 Exhibit 12(b) ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends (In Thousands Except Ratios) Year Ended December 31, 1998 1997 1996 EARNINGS: Net Income $ 24,768 $ 20,905 $ 16,755 Federal income taxes 13,101 11,274 8,822 Interest charges 15,616 16,622 12,804 -------------------------------- Earnings available to cover fixed charges 53,485 48,801 38,381 -------------------------------- FIXED CHARGES AND PREFERRED DIVIDENDS: Interest on long-term debt 14,721 14,030 13,011 Preferred dividend requirement (1) 1,243 1,251 1,241 Other interest 960 2,382 2,640 Amortization of debt discount - net 391 376 361 -------------------------------- Total fixed charges 17,315 18,039 17,253 -------------------------------- Ratio of Earnings to Fixed Charges and Preferred Dividends 3.09 2.71 2.22 ================================ (1) Preferred Dividend Requirement: Preferred dividends 813 813 813 Effective tax rate 34.60% 35.04% 34.49% -------------------------------- Preferred dividend requirement $ 1,243 $ 1,251 $ 1,241 ================================ Earnings to Fixed Charges and Preferred Dividends represents the sum of Net Income, Federal income taxes and Interest Charges (which is reduced by Allowance for Debt Funds Used During Construction), divided by Fixed Charges. Fixed Charges and Preferred Dividends consist of interest on long and short-term debt (which is not reduced by Allowance for Debt Funds Used During Construction), dividends on Preferred Stock on a pre-tax basis and Amortization of debt discount. EX-13 11 Portion of the 1998 Annual Report to Shareholders for the year ended December 31, 1998 which is incorporated by reference in this filing on Form 10-K. E'TOWN CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS E'town Corporation (E'town or Corporation), a New Jersey holding company, is the parent company of Elizabethtown Water Company (Elizabethtown or Company), Edison Water Company (Edison), E'town Properties, Inc. (Properties), Liberty Water Company (Liberty), Applied Water Management, Inc. (AWM) and Applied Wastewater Management, Inc. (AWWM). The Mount Holly Water Company (Mount Holly) is a wholly-owned subsidiary of Elizabethtown. The assets and operating results of Elizabethtown constitute the predominant portions of E'town's assets and operating results. Mount Holly contributed about 3% and Liberty, AWM and Edison each contributed 4% of the Corporation's consolidated operating revenues for 1998. The regulated utilities, Elizabethtown, Mount Holly and AWWM, comprise the Regulated Utilities segment, Liberty and Edison comprise the Contract Operations segment, AWM is the Engineering/Operations/ Construction segment and E'town and Properties comprise the Financing and Investment segment (See Notes 2 and 14 to E'town's Notes to Consolidated Financial Statements). The following analysis sets forth significant events affecting the financial condition of the various segments at December 31, 1998, and the results of operations for the years ended December 31, 1998 and 1997. LIQUIDITY AND CAPITAL RESOURCES CAPITAL EXPENDITURES PROGRAM In 1998 capital expenditures, including concession fees in connection with privatization contracts, were $67.2 million, of which $19.9 million was for the Liberty privatization contract (as discussed below), $2.7 million was for construction expenditures for the Edison privatization contract and $44.6 million was for water utility plant. For the three years ending December 31, 2001, capital and investment requirements for E'town are estimated to be $181.4 million, consisting of (i) expenditures for the Regulated Utilities Segment ($107.5 million for Elizabethtown, $17.0 million for Mount Holly and $16.4 million for AWWM), (ii) investments in the Contract Operations segment for concession payments for Liberty, and capital improvements for Liberty and Edison of $39.0 million, and (iii) investments in the Engineering/ Operations/Construction segment of $1.5 million. See "Economic Outlook" for a discussion of Contract Operations and the acquisition of AWM and AWWM. These estimates do not include any amounts for possible additional acquisitions or privatization activities in the three-year period REGULATED UTILITIES SEGMENT 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 $50.6 million for routine projects (services, hydrants and main extensions not funded by developers) and $56.9 million for transmission system upgrades, a new operations center and other projects. Elizabethtown expects to file for rate relief later in 1999 and periodically thereafter 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 $17.0 million, primarily for an additional supply source to comply with state regulations designed to prevent further depletion of a local aquifer. Mount Holly currently obtains all of its water from wells drilled into an aquifer, which has been subject to over- pumping by various users in a portion of southern New Jersey. 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. In August 1998 the New Jersey Board of Public Utilities (BPU) adopted a Stipulation among Mount Holly and other parties concluding that this project (the "Mansfield Project") is the most cost- effective method for Mount Holly to comply with the state regulations. To settle an appeal initiated by New Jersey-American Water Company (NJAM) concerning the diversion rights for the Mansfield Project, Mount Holly signed a Stipulation with NJAM, the New Jersey Department of Environmental Protection (DEP) and other parties, requiring Mount Holly to purchase one million gallons per day from NJAM during the period that the Mansfield Project is being constructed. Purchases began during March of 1998, after completion of an interconnection. In September 1997 Mount Holly filed a petition with the BPU to establish a Purchased Water Adjustment Clause (PWAC) to reflect the cost of water purchased from NJAM under the agreement discussed above. On May 27, 1998, the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.3 million or 38.9%. Mount Holly deferred the increase in purchased water cost between March 19 and May 27 as other unamortized expenses. Recovery of this amount has been requested in the rate increase discussed below. As of December 31, 1998, Mount Holly has deferred $.1 million of these costs. Mount Holly filed for a rate increase in January 1999 to reflect a portion of these expenditures, as well as to increase the rates of return realized and, therefore, the contribution to E'town's earnings per share. AWWM In 1998 E'town exercised an option to acquire the Applied Wastewater Group (AWG), its joint venture partner for the past three years, in a stock-for-stock transaction. E'town established new subsidiaries, AWM and AWWM, which offer "one-stop shopping" for water and wastewater services to residential and commercial developers. These services include the design, construction and operation by AWM of water and wastewater facilities and, in some instances, purchase of such utilities at project build-out by AWWM, thereby adding to E'town's regulated utility customer base. AWWM expects to incur capital expenditures of $16.4 million in the next three years, the predominant portion of which is expected to be spent in 1999 and 2000. These expenditures are primarily for the purchase of wastewater plants from developers upon completion of their construction by AWM. CONTRACT OPERATIONS SEGMENT LIBERTY Effective July 1, 1998, E'town, through Liberty, has entered into a contract with the city of Elizabeth (Elizabeth), New Jersey to operate its water system under a 40-year contract serving 17,900 customers. Under the contract, Liberty made a payment to Elizabeth of $19.7 million in 1998 and is contractually obligated to make payments to Elizabeth of $12 million in June 1999 and $19 million in June 2000, which have been included in non-utility property and other investments as concession fees on privatization contracts, net of amortization. Also, under the terms of the contract, Liberty will deposit $57.8 million from revenues earned during the 40-year contract, of which $52.4 million is due after 2012, into a fund administered by Elizabeth to be used by Elizabeth to pay for capital improvements to the water system. In addition, Liberty is responsible for $7.8 million of construction expenditures, primarily for meter replacements, over the life of the contract. Of the total construction expenditures, approximately $4.0 million is expected to be expended in the next three years. EDISON Effective July 1, 1997, E'town, through its Edison Water Company subsidiary, commenced operation of Edison Township's 11,600-customer water system under a 20-year contract. E'town paid the township $6.3 million at closing in concession fees and expects to spend $3.6 million during the next three years to upgrade the system. ENGINEERING/OPERATIONS/CONSTRUCTION SEGMENT AWM AWM expects to incur capital expenditures of $1.5 million during the next three years. These expenditures consist primarily of vehicles and equipment used in the construction and waste hauling operations. CAPITAL RESOURCES During 1998 E'town financed 35.5% of its capital expenditures, including concession fees for the Regulated Utilities segment and investments in the Contract Operations and Engineering/Operations/Construction segments, from internally generated funds (after payment of common stock dividends). The balance was financed with a combination of short-term borrowings under lines of credit, proceeds from capital contributions from E'town (funded by issuances of Common Stock under the Corporation's Dividend Reinvestment and Stock Purchase Plan) and long-term debt. For the three-year period ending December 31, 2001, E'town estimates that 52.2% of its currently projected capital expenditures and concession fees for all segments are expected to be financed with internally generated funds (after payment of common stock dividends). The balance will be financed with a combination of proceeds from the sale of E'town common stock, medium-term notes, proceeds of tax-exempt New Jersey Economic Development Authority (NJEDA) bonds, and short-term borrowings. Mount Holly's Mansfield Project will be financed by requisitions from the New Jersey Environmental Infrastructure Trust Financing Program. The NJEDA has granted preliminary approval for the financing of almost all of Elizabethtown's major projects during the next three years. Elizabethtown expects to pursue additional tax-exempt financing to the extent that final allocations are granted by the NJEDA. In October 1998 E'town filed a registration statement with the Securities and Exchange Commission (SEC) to issue up to $75 million of unsecured medium-term notes. The SEC is currently reviewing the filing. E'town plans to issue approximately $25 million of these notes in the first half of 1999 to repay short-term debt incurred to finance concession fees for Liberty. In November 1998 Mount Holly closed on two loans that will provide up to $13.2 million in 2.60% financing for the Mansfield Project through the New Jersey Environmental Infrastructure Trust Financing Program. The first loan, in the amount of $7.3 million, is through the New Jersey Environmental Infrastructure Trust (Trust), which issued tax-exempt bonds with average interest rates of 4.7%. The second loan, in the amount of $5.9 million, is from the state of New Jersey, acting through the New Jersey Department of Environmental Protection, funded by federal monies at no interest cost. The effective interest rate for the combined notes is approximately 2.60%. In December 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 in December 1997, $6 million in January 1998 and $2 million in May 1998. The proceeds were used to finance capital additions for Edison as well as to meet working capital needs. E'town's senior debt is currently rated A3 and A- and Elizabethtown's senior debt is currently rated A3 and A by Moody's Investors Service and Standard & Poor's Ratings Group, respectively. INTEREST RATE RISK The Corporation is subject to the risk of fluctuating interest rates in the normal course of business. The Corporation manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. As of December 31, 1998, a hypothetical single percentage point change in interest rates would result in a $.9 million change in interest costs and earnings before tax related to short-term and variable rate debt. RESULTS OF OPERATIONS NET INCOME for 1998 was $22.3 million or $2.70 per share on a basic basis as compared to $19.3 million or $2.44 per share for 1997. Net income increased by $3.1 million or $.26 per share, comprised of (i) $.6 million or $.07 per share due to an extended dry period in the summer of 1998 resulting in higher water consumption than in 1997 (ii) $1.1 million or $.13 per share was from lower operating expenses due to a combination of a mild winter in 1998, more efficient use of our work force, lower employee benefit costs and success with our ongoing cost control efforts and (iii) earnings of $.5 million or $.06 per share from the Contract Operations and Engineering/Operations/Construction segments, which are new operations. Capitalized construction interest accounted for an increase in net income of $.5 million or $.06 per share. These increases in earnings per share were partially offset by an increase in the number of outstanding shares. 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 from the Regulated Utilities segment is attributable to the $21.8 million rate increase for the new Canal Road Water Treatment Plant (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. OPERATING REVENUES increased $11.7 million or 8.7% in 1998 over the comparable 1997 amount. The increase from the Regulated Utilities segment is primarily comprised of $1.4 million from water service to residential and wholesale customers attributable to increased water consumption as a result of warmer, drier weather in the summer of 1998 than in 1997. The revenue increase includes $3.3 million (net of intercompany sales) from the Contract Operations segment, comprised of Edison and Liberty. The Engineering/ Operations/Construction segments, comprised of AWM, contributed $5.2 million to operating revenues. New customers and the PWAC rate increase for Mount Holly account for the remainder of the increase. 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 due to the dry summer of 1997. OPERATION EXPENSES increased $5.9 million or 12.2% in 1998 over 1997. The operating expenses (net of intercompany expenses) of the Contract Operations and Engineering/ Operations/Construction segments, which are newly established businesses, accounted for $7.1 million of the increase. The Regulated Utilities segment experienced decreases of $1.0 million from lower operating costs due to a mild winter, greater work force utilization, ongoing cost control efforts and decreased employee benefit costs. These decreases were partially offset by increased cost of labor, purchased water for Mount Holly and variable costs for the higher water sales. 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 (E'town's joint venture) 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. MAINTENANCE EXPENSES decreased $.1 million or 1.0% in 1998, as compared to 1997 due to improved procurement procedures and preventive maintenance programs. 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 generated from the water treatment process at the Raritan-Millstone Plant. DEPRECIATION AND AMORTIZATION EXPENSE increased $1.3 million or 10.4% in 1998 compared to 1997 of which $.9 million represents amortization of initial concession fees and capital expenditures for the Contract Operation segment. The balance represents depreciation on utility plant additions for the Regulated Utility segment. Depreciation and amortization 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 effective in October 1996. REVENUE TAXES increased $.2 million or 1.2% in 1998 and $2.7 million or 19.8% in 1997 due to the taxes on increases in operating revenues discussed above. REAL ESTATE, PAYROLL AND OTHER TAXES decreased $.1 million or 4.0% in 1998. This overall decrease was comprised of additional payroll taxes due to additional labor costs, which were offset by decreases from lower-than-anticipated property taxes on the Plant. These taxes increased $.2 million or 6.8% in 1997 due to additional labor costs, as well as additional property taxes. FEDERAL INCOME TAXES as a component of operating expenses increased $1.2 million or 11.4% and $3.7 million or 54.4% as compared to 1997 and 1996, respectively, due to the changes in the components of taxable income for all segments discussed herein. OTHER INCOME (EXPENSE) increased $.2 million or 32.4% due to a $.4 million increase in Allowance for Funds Used During Construction (AFUDC), primarily for Elizabethtown's western operations center. Federal income taxes increased $.1 million for the taxes on the AFUDC. Other income decreased $2.2 million or 73.9% compared to the 1996 amount. A decrease in the equity component of 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. TOTAL INTEREST CHARGES increased $.5 million or 2.8% due to increased borrowing for utility plant expenditures for the Regulated Utilities segment and for the concession fee for Liberty. The debt component of AFUDC increased $.3 million, resulting in lower interest expense, as a result of higher construction expenditures, primarily for Elizabethtown's new western operations center. This decrease in interest charges was offset by the absence in 1998 of capitalized interest on real estate investments for Properties of $.3 million. 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. 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 During the next several years, management will seek to increase earnings per share by (i) maximizing earned returns on the Regulated Utilities segment through expansion efforts to increase sales and cost control measures and (ii) investing in water and wastewater assets (including municipal privatization contracts, as well as designing, constructing, operating and purchasing wastewater assets through AWM and AWWM, discussed below) which produce a current return. The Corporation intends to continue to sell Properties' real estate holdings during the next several years to fund a portion of the investments planned for the regulated and non-regulated businesses. The balance of such funding will be generated from internal and external sources. Earnings per share will vary going forward due to the effect of weather on costs and pumpage, timing and adequacy of rate relief, time elapsed since the last rate increase, the nonrecurring effect of real estate sales and other factors. For 1999 E'town expects consolidated earnings per share to be similar to 1998, based on somewhat reduced returns from the regulated operations, assuming a return to normal weather patterns after the unusually dry summers in 1998 and 1997, to be offset by a gain on the sale of a parcel of land located in Green Brook, New Jersey in February 1999 of $2.08 million or approximately $.25 per share. In particular, Elizabethtown's returns should be somewhat lower in 1999 given that this year will be the third year since the last rate adjustment. REGULATED UTILITIES SEGMENT ELIZABETHTOWN, MOUNT HOLLY AND AWWM Elizabethtown expects to petition the BPU for an increase in rates in 1999 to reflect the increases in construction, financing and operating costs since base rates were last established in October 1996. Mount Holly earned a rate of return on common equity of 4.7% in 1998, compared to an authorized rate of return of 11.25%, established in its most recent rate proceeding. Mount Holly contributed $.04 to E'town's consolidated earnings per share in 1998. Management expects Mount Holly to increase its contribution to E'town's earnings per share later in 1999 and into 2000 upon receipt of additional rate relief from the rate increase filed in January 1999, so that Mount Holly can realize rates of return comparable to authorized levels. Mount Holly earned significantly below its authorized return in 1998 and 1997 as the Company was precluded from filing for needed rate relief due to ongoing litigation with NJAM. AWWM expects to realize rates of return comparable to those earned by Elizabethtown on its anticipated investments of $16.4 million in new wastewater facilities during the next several years. CONTRACT OPERATIONS SEGMENT LIBERTY Effective July 1, 1998, E'town, through its Liberty Water Company subsidiary, commenced operation of the water supply system of the city of Elizabeth. Liberty is expected to realize a return on its capital in an amount similar to that currently earned by E'town's regulated operations. EDISON Effective July 1, 1997, E'town, through its Edison Water Company subsidiary, commenced operation of Edison Township's 11,600-customer water system under a 20-year contract. Edison is expected 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 through 2002 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 contracts, primarily in New Jersey. E'town is particularly interested in opportunities where it may have a competitive advantage due to location or experience in operation. ENGINEERING/OPERATIONS/CONSTRUCTION AWM AWM provides "one-stop shopping" for water and wastewater services to residential and commercial developers. These services include the design, construction and operation of water and wastewater facilities and, in some instances, purchase of such utilities at project build-out by AWWM, thereby adding to E'town's regulated utility customer base. E'town expects the acquisition to increase its contribution to E'town's earnings per share in 1999. FINANCING AND INVESTMENT SEGMENT E'TOWN AND PROPERTIES E'town is in the process of selling its various parcels of undeveloped land carried as investments of $11.3 million at December 31, 1998. One of the real estate parcels was sold in 1997 for $.4 million, resulting in a gain of less than $.1 million. Two other parcels were sold in 1998 for $1.7 million resulting in a gain of less than $.1 million. On February 17, 1999, Properties sold a parcel of land, which has been under contract since 1995 in Green Brook, New Jersey for $5.83 million, at a gain of $2.08 million net of taxes or approximately $.25 per share to be reflected in earnings in the first quarter of 1999. Cash proceeds from this sale of $1.5 million were received in 1999 and the remaining $4.33 million will be paid over the next two years. Properties has entered into contracts for the sale of all of its remaining parcels at prices that exceed the carrying cost of such properties. The eventual sale of these parcels is contingent upon the purchaser obtaining various approvals for development and could take several years. E'town expects to invest the sale proceeds from the remaining parcels into water and wastewater utility investments that produce a current return. The Corporation has no plans to make additional investments other than in water and wastewater projects. NEW ACCOUNTING PRONOUNCEMENTS See Note 2 of E'town's Notes to Consolidated Financial Statements for a discussion of new accounting standards that were effective in 1998. YEAR 2000 STATE OF READINESS The Corporation has assessed its significant business systems, as well as non-critical, peripheral support system for compliance with the Year 2000. The assessment concluded that all significant business systems (i.e. customer billing and service, financial, water treatment operating and control, water quality laboratory information and telemetric data acquisition systems) are Year 2000 compliant. The assessment also included inquiries as to the state of readiness of significant vendors whose services to the Corporation could have an impact on the Corporation's ability to deliver service to its customers. Management concluded that the delivery of electric power as well as chemicals used in the water treatment process are two areas of significant importance and received documentation from the vendors who provide these services that indicates their ability to provide service. Therefore, the Corporation expects no disruption in the services it provides to its customers and expects to process transactions in its financial, customer billing and customer services systems. The assessment did identify certain peripheral support systems that need to be addressed. A plan to address these issues has been developed and is being implemented. THE COSTS TO ADDRESS THE CORPORATION'S YEAR 2000 ISSUES The significant business systems of the Corporation defined above are Year 2000 compliant and have been operational for up to several years. Therefore, no further costs are expected to be incurred in connection with bringing these systems into compliance. The peripheral support systems that are being addressed will require the Corporation to incur costs to bring them into compliance. The present estimates place the total of these costs at less than $.2 million. RISKS SSOCIATED WITH THE CORPORATION'S YEAR 2000 ISSUES Management believes that all identifiable issues with respect to Year 2000 compliance have been addressed, or will be addressed, in sufficient time and in sufficient detail to preclude any disruption in service or adverse effect on the Corporation's financial profile. Management, therefore, believes that risks associated with this issue are minimal with respect to those areas, which are internal to the Corporation and, over which management exercises complete control. Those areas that are external to the Corporation i.e., issues associated with our vendors, have been mitigated to the extent possible through inquiry of our vendors, tests of their claims of Year 2000 compliance and development of contingency plans as considered appropriate. CONTINGENCY PLAN There are operational contingency plans in place on an ongoing basis to address issues, such as natural disasters, that could result in a disruption of service. These procedures would be activated in the event that certain physical facilities were not operable as a result of failures by our vendors associated with Year 2000 issues. In addition, Elizabethtown Water Company has alternative electric, natural gas and diesel generation capacity that could sustain a significant level of pumping capacity for an indefinite period of time. E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (In Thousands Except Per Share Amounts) Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ Operating Revenues $ 145,480 $ 133,826 $ 110,409 - ------------------------------------------------------------------------------ Operating Expenses: Operation 53,844 47,982 44,807 Maintenance 6,539 6,606 5,859 Depreciation and amortization 13,679 12,396 9,893 Revenue taxes 16,743 16,550 13,820 Real estate, payroll and other taxes 3,027 3,152 2,952 Federal income taxes (Note 3) 11,685 10,487 6,791 - ------------------------------------------------------------------------------ Total operating expenses 105,517 97,173 84,122 - ------------------------------------------------------------------------------ Operating Income 39,963 36,653 26,287 - ------------------------------------------------------------------------------ Other Income (Expense): Allowance for equity funds used during construction (Note 2) 607 215 3,725 Federal income taxes (Note 3) (541) (408) (1,570) Other - net 940 953 760 - ------------------------------------------------------------------------------ Total other income (expense) 1,006 760 2,915 - ------------------------------------------------------------------------------ Total Operating and Other Income 40,969 37,413 29,202 - ------------------------------------------------------------------------------ Interest Charges: Interest on long-term debt 16,217 14,807 13,800 Other interest expense - net 1,641 2,560 2,645 Capitalized interest (Note 2) (470) (438) (3,524) Amortization of debt discount and expense-net 438 411 395 - ------------------------------------------------------------------------------ Total interest charges 17,826 17,340 13,316 - ------------------------------------------------------------------------------ Income Before Preferred Stock Dividends of Subsidiary 23,143 20,073 15,886 Preferred Stock Dividends 813 813 813 - ------------------------------------------------------------------------------ Net Income $ 22,330 $ 19,260 $ 15,073 ============================================================================== Earnings Per Share of Common Stock (Note 2): - ------------------------------------------------------------------------------ Basic $ 2.70 $ 2.44 $ 1.96 Diluted $ 2.66 $ 2.41 $ 1.96 - ------------------------------------------------------------------------------ Average Number of Shares Outstanding for the Calculation of Earnings Per Share: - ------------------------------------------------------------------------------ Basic 8,263 7,891 7,668 Diluted 8,567 8,215 7,966 - ------------------------------------------------------------------------------ Dividends Paid Per Common Share $ 2.04 $ 2.04 $ 2.04 ============================================================================== See Notes to Consolidated Financial Statements. E'TOWN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Assets 1998 1997 - ------------------------------------------------------------------------------ Utility Plant-At Original Cost: Utility plant in service $ 717,985 $ 677,909 Construction work in progress 16,580 9,300 - ------------------------------------------------------------------------------ Total utility plant 734,565 687,209 Less accumulated depreciation and amortization 125,262 114,424 - ------------------------------------------------------------------------------ Utility plant-net 609,303 572,785 - ------------------------------------------------------------------------------ Non-utility Property and Other Investments - Net (Note 7) 84,945 20,570 - ------------------------------------------------------------------------------ Current Assets: Cash and cash equivalents 5,909 6,233 Short-term investments 31 31 Customer and other accounts receivable (less reserve: 1998, $1,065, 1997, $612) 24,720 17,539 Unbilled revenues 12,198 10,412 Infrastructure loan funds receivable (Note 4) 5,895 Materials and supplies-at average cost 2,538 1,966 Prepaid insurance, taxes, other 2,484 3,733 - ------------------------------------------------------------------------------ Total current assets 53,775 39,914 - ------------------------------------------------------------------------------ Deferred Charges (Note 9): Waste residual management 1,371 936 Unamortized debt and preferred stock expenses 10,050 10,263 Taxes recoverable through future rates (Note 3) 14,226 21,439 Postretirement benefit expense (Note 12) 3,490 3,738 Other unamortized expenses 1,582 1,259 - ------------------------------------------------------------------------------ Total deferred charges 30,719 37,635 - ------------------------------------------------------------------------------ Total $ 778,742 $ 670,904 ============================================================================== See Notes to Consolidated Financial Statements. E'TOWN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, Capitalization and Liabilities 1998 1997 - ------------------------------------------------------------------------------ Capitalization (Notes 4 and 5): Common shareholders' equity $ 215,472 $ 193,923 Mandatory Redeemable Cumulative Preferred Stock 12,000 12,000 Redeemable preferred stock 227 Long-term debt - net 286,908 247,298 - ------------------------------------------------------------------------------ Total capitalization 514,607 453,221 - ------------------------------------------------------------------------------ Current Liabilities: Notes payable - banks (Note 6) 44,022 23,000 Long-term debt - current portion (Note 4) 30 30 Accounts payable and other liabilities 19,469 11,569 Contract obligations payable 12,000 Customers' deposits 248 272 Municipal and state taxes accrued 16,789 16,817 Interest accrued 3,675 3,456 Preferred stock dividends accrued 59 59 - ------------------------------------------------------------------------------ Total current liabilities 96,292 55,203 - ------------------------------------------------------------------------------ Deferred Credits: Customers' advances for construction 41,102 39,131 Federal income taxes (Note 3) 66,487 69,916 State income taxes 207 196 Unamortized investment tax credits 7,839 8,042 Accumulated postretirement benefits (Note 12) 4,090 4,332 - ------------------------------------------------------------------------------ Total deferred credits 119,725 121,617 - ------------------------------------------------------------------------------ Contributions in Aid of Construction 48,118 40,863 - ------------------------------------------------------------------------------ Commitments and Contingent Liabilities (Note 11) - ------------------------------------------------------------------------------ Total $ 778,742 $ 670,904 ============================================================================== See Notes to Consolidated Financial Statements. E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CAPITALIZATION (In Thousands Except Share Amounts) December 31, 1998 1997 - ------------------------------------------------------------------------------ Common Shareholders' Equity: E'town Corporation: Common stock without par value, authorized, 15,000,000 shares, issued 1998, 8,504,344 shares; 1997, 8,054,461 share $ 169,324 $ 153,162 Paid-in capital 1,315 1,315 Capital stock expense (5,160) (5,160) Retained earnings 50,961 45,560 Less cost of treasury stock; 1998, 32,554 shares; 1997, 32,208 shares (968) (954) - ------------------------------------------------------------------------------ Total common shareholders' equity 215,472 193,923 - ------------------------------------------------------------------------------ Preferred Shareholders' Equity (Note 4) Elizabethtown Water Company: Mandatory Redeemable Cumulative Preferred Stock: $100 par value, authorized, 200,000 shares; $5.90 series, issued and outstanding, 120,000 shares 12,000 12,000 Cumulative Preferred Stock: $25 par value, authorized, 500,000 shares; none issued Applied Wastewater Management, Inc: Redeemable Preferred Stock: No par value, non-cumulative, issued and outstanding, 227 shares 227 - ------------------------------------------------------------------------------ Total preferred shareholders' equity 12,227 12,000 - ------------------------------------------------------------------------------ Long-Term Debt (Notes 4 and 8): E'town Corporation: 6 3/4% Convertible Subordinated Debentures, due 2012 10,499 11,354 6.79% Senior Notes, due 2007 12,000 4,000 Liberty Water Company: Contract Obligations Payable 19,000 Applied Wastewater/Applied Water Management: Notes Payable 261 Elizabethtown Water Company: 7.20% Debentures, due 2019 10,000 10,000 7 1/2% Debentures, due 2020 15,000 15,000 6.60% Debentures, due 2021 10,500 10,500 6.70% Debentures, due 2021 15,000 15,000 8 3/4% Debentures, due 2021 27,500 27,500 8% Debentures, due 2022 15,000 15,000 5.60% Debentures, due 2025 40,000 40,000 7 1/4% Debentures, due 2028 50,000 50,000 Variable Rate Debentures, due 2027 50,000 50,000 The Mount Holly Water Company: New Jersey Environmental Infrastructure Trust Notes 7,295 New Jersey Department of Environmental Protection Notes 5,895 Notes Payable (due serially through 2000) 30 57 - ------------------------------------------------------------------------------ Total long-term debt 287,980 248,411 Unamortized (discount) premium-net (1,072) (1,113) - ------------------------------------------------------------------------------ Total long-term debt-net 286,908 247,298 - ------------------------------------------------------------------------------ Total Capitalization $ 514,607 $ 453,221 ============================================================================== See Notes to Consolidated Financial Statements. E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In Thousands Except Share Amounts) Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ Common Stock: Balance at Beginning of Year $ 153,162 $ 145,661 $ 138,668 Common stock issued under Dividend Reinvestment and Stock Purchase Plan (1998, 213,568 shares; 1997, 227,992 shares; 1996, 258,673 shares) 7,861 6,980 6,993 Redemption of Convertible Debentures (1998, 18,100 shares) 724 Issuance of restricted stock under compensation programs (1998, 9,590 shares; 1997, 4,033 shares) 332 123 Issuance of restricted stock for acquisitions (1998, 186,310 shares) (Note 7) 6,653 Exercise of stock options (1998, 22,315 shares; 1997, 14,685 shares) 592 398 - ------------------------------------------------------------------------------ Balance at End of Year 169,324 153,162 145,661 - ------------------------------------------------------------------------------ Paid-in Capital: 1,315 1,315 1,315 - ------------------------------------------------------------------------------ Capital Stock Expense: (5,160) (5,160) (5,160) - ------------------------------------------------------------------------------ Retained Earnings: Balance at Beginning of Year 45,560 42,434 42,995 Net Income 22,330 19,260 15,073 Dividends on common stock (1998, 1997 and 1996, $2.04) (16,929) (16,134) (15,634) - ------------------------------------------------------------------------------ Balance at End of Year 50,961 45,560 42,434 - ------------------------------------------------------------------------------ Treasury Stock: Balance at Beginning of Year (954) (737) (737) Cost of shares redeemed to exercise stock options (1998, 346 shares; 1997, 6,332 shares) (14) (217) - ------------------------------------------------------------------------------ Balance at End of Year (968) (954) (737) - ------------------------------------------------------------------------------ Total Common Shareholders' Equity $ 215,472 $ 193,923 $ 183,513 ============================================================================== See Notes to Consolidated Financial Statements. E'TOWN CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (In Thousands) Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ Cash Flows Provided by Operating Activities: Net Income $ 22,330 $ 19,260 $ 15,073 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,679 12,396 9,893 (Increase) decrease in deferred charges (736) 699 (638) Deferred income taxes and investment tax credits-net 3,592 2,778 4,917 Capitalized interest and AFUDC (1,077) (653) (7,249) Other operating activities-net (1,227) 382 305 Change in current assets and current liabilities excluding cash, short-term investments and current portion of debt: Customer and other accounts receivable (7,181) (1,352) (203) Unbilled revenues (1,786) (1,056) (1,912) Accounts payable and other liabilities 7,876 (4,656) (634) Accrued/prepaid interest and taxes 1,440 3,088 (1,755) Other (572) 99 (133) - ------------------------------------------------------------------------------ Net cash provided by operating activities 36,338 30,985 17,664 - ------------------------------------------------------------------------------ Cash Flows Provided by Financing Activities: Proceeds from issuance of common stock 9,163 7,284 6,993 Funds held in Trust by others (7,234) Proceeds from issuance of debentures 54,000 Debt and preferred stock issuance and amortization costs 213 (755) 430 Issuance of other of long-term debt 15,295 Repayment of long-term debt (1,381) (224) (233) Contributions and advances for construction-net 9,226 4,759 2,521 Net increase (decrease) in notes payable - banks 21,022 (46,000) 42,000 Dividends paid on common stock (16,929) (16,134) (15,634) - ------------------------------------------------------------------------------ Net cash flows provided by financing activities 29,375 2,930 36,077 - ------------------------------------------------------------------------------ Cash Flows Used for Investing Activities: Utility plant and other capital expenditures (excluding allowance for funds used during construction) (44,634) (24,612) (55,125) Purchase of privatization contracts (19,856) (5,810) Capital expenditures on privatization contracts (2,747) (717) Proceeds from sale of land 1,200 440 Development costs of land (excluding capitalized interest) (211) (313) - ------------------------------------------------------------------------------ Net cash flows used for investing activities (66,037) (30,910) (55,438) - ------------------------------------------------------------------------------ Net (Decrease) Increase in Cash and Cash Equivalents (324) 3,005 (1,697) Cash and Cash Equivalents at Beginning of Period 6,233 3,228 4,925 - ------------------------------------------------------------------------------ Cash and Cash Equivalents at End of Period $ 5,909 $ 6,233 $ 3,228 ============================================================================== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 16,532 $ 16,719 $ 8,966 Income taxes $ 7,723 $ 6,023 $ 5,723 Preferred stock dividends $ 708 $ 708 $ 708 - ------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements. 1. ORGANIZATION E'town Corporation (E'town or Corporation), a New Jersey holding company, is the parent company of Elizabethtown Water Company (Elizabethtown or Company), E'town Properties, Inc. (Properties), Edison Water Company (Edison), Liberty Water Company, (Liberty), Applied Water Management, Inc. (AWM) and Applied Wastewater Management, Inc. (AWWM). The Mount Holly Water Company (Mount Holly) is a wholly owned subsidiary of Elizabethtown. 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. AWWM is a regulated wastewater utility. All three companies 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 all classes of assets. The provision for depreciation, as a percentage of average depreciable property, was 1.81% for 1998, 1.85% for 1997 and 1.73% for 1996. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION Elizabethtown, Mount Holly and AWWM capitalize, as an appropriate cost of utility plant, an Allowance for Funds Used During Construction (AFUDC), which represents the cost of financing major projects during construction. AFUDC, a non-cash credit on the Statements of Consolidated Income, is added to the construction cost of the project and included in rate base and then recovered through depreciation charges in rates during the assets' useful lives. AFUDC is comprised of a debt component (credited to Interest Charges) and an equity component (credited to Other Income) in the Statements of Consolidated Income. AFUDC totaled $1.08 million, $.38 million and $6.93 million for 1998, 1997 and 1996, respectively. AFUDC in 1996 was larger than other years due to the construction of Elizabethtown's Canal Road Water Treatment Plant. NON-UTILITY PROPERTY Ongoing costs associated with real estate parcels are being expensed, as incurred. Properties had capitalized direct costs, real estate taxes and interest costs associated with certain real estate parcels as they were being developed. All the parcels were available for sale as of November 1997 and therefore, no interest was capitalized in 1998. The amount of interest capitalized for 1997 and 1996 was $.27 million and $.32 million, respectively (see Note 7). REVENUES Water revenues are recorded based on the amounts of water delivered to customers through the end of each accounting period. This includes an accrual for unbilled revenues for water delivered from the time meters were last read to the end of the respective accounting periods. The construction division of AWM engages in fixed-price and modified fixed-price contracts for the construction of wastewater facilities. These revenues are recognized on the percentage-of-completion method, measured by the cost-to-cost method. Contract costs include all direct material and labor costs and those indirect costs related to contract performance such as tools and vehicle costs. Selling, general and administrative costs are charged to expense as incurred. FEDERAL INCOME TAXES E'town files a consolidated federal tax return. Deferred income taxes are provided for temporary differences between the bases of assets and liabilities for tax and financial statement purposes for the non-regulated companies. Deferred income taxes are also provided for each regulated water utility to the extent permitted by the BPU. The regulated water utilities account for prior years' investment tax credits by the deferral method, which amortizes the credits over the lives of the respective assets. 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 Contribu-tions 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 also represents CAC 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 Note 5). The calculations of basic and diluted earnings per share for the three years ended December 31, 1998 follow: (thousands of dollars) 1998 1997 1996 - -------------------------------------------------------------------------------- Basic: Net Income $ 22,330 $ 19,260 $ 15,073 Average common shares outstanding 8,263 7,891 7,668 - -------------------------------------------------------------------------------- Basic earnings per share $ 2.70 $ 2.44 $ 1.96 ================================================================================ Diluted: Net income $ 22,330 $ 19,260 $ 15,073 After tax interest expense applicable to 6 3/4% Convertible Subordinated Debentures 488 500 513 - -------------------------------------------------------------------------------- Adjusted net income $ 22,818 $ 19,760 $ 15,586 - -------------------------------------------------------------------------------- Average common shares outstanding 8,263 7,891 7,668 Additional shares from assumed exercise of stock options 42 40 6 Additional shares from assumed conversion of 6 3/4% Convertible Subordinated Debentures 262 284 292 - -------------------------------------------------------------------------------- Average common shares outstanding as adjusted 8,567 8,215 7,966 - -------------------------------------------------------------------------------- Diluted earnings per share $ 2.66 $ 2.41 $ 1.96 ================================================================================ CASH EQUIVALENTS The Corporation considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (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. Although the Corporation did not meet the earnings or assets thresholds of SFAS No. 131 in 1998, which would require segment reporting, it is expected the Corporation will be required to report its various segments in 1999. Therefore, the Corporation has reported such segment information in 1998 in anticipation of meeting the requirements (see Note 14). In February 1998 the FASB issued SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for fiscal years beginning after December 15, 1997. The pronouncement revises certain disclosure requirements for pension and other postretirement plans but does not change the measurement or recognition of expenses under those plans. The pronouncement standardizes the disclosure requirements for pensions and other postretirement benefit obligations to the extent practicable; requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis; and eliminates disclosures that are no longer useful. E'town has adopted these new disclosure requirements for the year ended December 31, 1998 (see Note 12). In March 1998 the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP is effective for fiscal years beginning after December 15, 1998, and establishes criteria for capitalizing certain internal use software costs. Adoption of the SOP will not have an effect on the Corporation's financial statements. In April 1998 the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities" which is effective for fiscal years beginning after December 15, 1998, and provides guidance on the expensing of costs of start-up activities as these costs are incurred. E'town adopted this SOP in January 1998 and as a result has recognized an expense of less than $.1 million for such start-up costs in these financial statements. All expenditures for start-up costs during 1998 have been expensed as incurred. In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity." This Statement must be adopted by the quarter ended March 31, 2000. The Corporation does not believe this Statement will have any impact on its financial statements. In June 1997 the FASB issued SFAS 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. SFAS 130 dictates that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement displayed with the same prominence as other financial statements. It also requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. E'town adopted SFAS 130 effective January 1, 1998. The effects of adoption of SFAS 130 are not material for E'town. 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: (thousands of dollars) 1998 1997 1996 - -------------------------------------------------------------------------------- Tax expense at statutory rate $ 12,378 $ 10,843 $ 8,486 Items for which deferred taxes are not provided: Difference between book and tax depreciation 63 58 132 Other (12) 197 (55) Investment tax credits (203) (203) (202) - -------------------------------------------------------------------------------- Provision for federal income taxes $ 12,226 $ 10,895 $ 8,361 ================================================================================ The provision for federal income taxes is comprised of the following: Current $ 8,301 $ 6,759 $ 3,249 Tax on main extension refunds 525 1,369 207 Deferred: Tax depreciation 3,086 2,670 3,333 Capitalized interest 91 114 1,375 Main cleaning and lining 796 612 587 Other (189) (426) (186) Investment tax credits - net (203) (203) (204) Refund from IRS (181) - -------------------------------------------------------------------------------- Total provision $ 12,226 $ 10,895 $ 8,361 ================================================================================ Elizabethtown and Mount Holly provide deferred taxes at the enacted statutory rate for all temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities irrespective of the treatment for rate-making purposes. Management believes it is probable that the accumulated tax benefits that previously have been treated as a flow-through item to Elizabethtown and Mount Holly's customers will be recovered from utility customers in the future. Accordingly, offsetting regulatory assets were established. At December 31, 1998, Elizabethtown and Mount Holly had deferred tax liabilities of $13.7 million and $.5 million, respectively. There were also, at December 31, 1998, offsetting regulatory assets for the same amounts representing the future revenue expected to be recovered through rates based upon established regulatory practices which permit recovery of current taxes payable. These amounts were determined using the enacted federal income tax rate of 35% and were calculated in accordance with SFAS No. 109. The tax effect of significant temporary differences representing deferred income tax assets and liabilities as of December 31, 1998 and 1997 is as follows: (thousands of dollars) 1998 1997 - -------------------------------------------------------------------------------- Water utility plant - net $ (47,538) $ (43,611) Non-utility property 251 25 Other investments (787) (833) Taxes recoverable through future rates (14,226) (21,439) Prepaid pension expense 2 103 Capitalized interest (3,983) (3,891) Waste residuals (480) (322) Other assets 560 429 Other liabilities (286) (377) - -------------------------------------------------------------------------------- Net deferred income tax liabilities $ (66,487) $ (69,916) ================================================================================ 4. CAPITALIZATION E'town routinely makes equity contributions to Elizabethtown, which represent the proceeds of common stock issued under E'town's Dividend Reinvestment and Stock Purchase Plan (DRP). Such equity contributions amounted to $7.86 million for the year ended December 31, 1998. E'town also issued $6.65 million (186,310 shares) of common stock for the purchase of Applied Wastewater General Partnership (AWG) (see Note 7). The Corporation maintains a Shareholder' 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. PREFERRED STOCK Elizabethtown's $5.90 Mandatory Redeemable Cumulative Preferred Stock is not redeemable at the option of the Company. Elizabethtown is required to redeem the entire issue at $100 per share on March 1, 2004. AWWM's no par value, non-cumulative preferred stock is redeemable at the option of the Corporation. 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, 1998, $7.56 million of Elizabethtown's retained earnings were restricted under the most restrictive indenture provision. Therefore, $43.40 million of E'town's consolidated retained earnings were unrestricted. In October 1998 E'town filed a registration statement on Form S-3 with the Securities and Exchange Commission (SEC) to issue up to $75 million of unsecured medium-term notes. The SEC is currently reviewing the filing. E'town plans to issue approximately $25 million of these notes in the first half of 1999 to repay short-term debt incurred to finance the acquisition of the contract to operate the water system of the city of Elizabeth and capital costs for the non-regulated subsidiaries (see Note 7). In November 1998 Mount Holly closed on loan agreements that will make available up to $13.19 million in proceeds from the issuance of unsecured notes through the New Jersey Environmental Infrastructure Trust Financing Program. This program provides financing through two loans. The first loan, in the amount of $7.30 million, is through the New Jersey Environmental Infrastructure Trust (Trust), which issued tax-exempt bonds with average interest rates of 4.7%. The second loan, in the amount of $5.89 million, is from the State of New Jersey, acting through the New Jersey Department of Environmental Protection. The state is participating in the Safe Drinking Water State Revolving Fund, authorized by the Safe Drinking Water Act amendments of 1996, whereby the federal government is funding the state loan at no interest cost. The effective interest rate for the combined notes is approximately 2.60%. The proceeds of the loans will finance the construction of the Mansfield Project (see Note 10). In December 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 in December 1997, $6 million in January 1998 and $2 million in May 1998. The proceeds were used to finance capital additions for Edison as well as to meet working capital needs. The 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, 1998, the fixed charges coverage ratio was 2.8 to 1 and the debt to total capitalization ratio was .63 to 1, calculated in accordance with the agreement. In June 1997 Elizabethtown issued a total of $50 million of 30-year Variable Rate Debentures due December 2027, $25 million of Series A and $25 million of Series B, to evidence a like amount of Variable Rate Notes issued through the New Jersey Economic Development Authority (NJEDA). The proceeds were used to repay $50 million of balances outstanding under Elizabethtown's revolving credit agreement. The NJEDA Notes are remarketed on a weekly basis, at which time the interest rates on each issue are subject to change. The rates in effect as of December 31, 1998, were 3.90% for Series A and 3.85% for Series B. E'town's 6 3/4% Convertible Subordinated Debentures are convertible to E'town common stock at $40 per share. At December 31, 1998, 262,475 shares of common stock were reserved for issuance upon exercise of the conversion rights. Liberty is obligated, under its contract with the city of Elizabeth, to make installment payments of $12 million in June 1999, which has been recorded as Contract Obligations Payable, and $19 million in June 2000, which has been recorded as Long-term Debt in the financial statements (see Note 7). 5. PERFORMANCE STOCK PLAN AND STOCK OPTION PLAN The Corporation has a Performance Stock Plan whereby, restricted stock is awarded to key employees and is amortized over three years as compensation expense. The Corporation recognized compensation expense of less than $.1 million for each of the three years ended December 31, 1998. The individual share prices of restricted shares issued for 1998 and 1997 were $34.56 and $30.50, respectively. No restricted shares were issued in 1996. E'town has a Stock Option Plan, a qualified incentive plan, under which options to purchase shares of E'town's common stock have been granted to key employees at prices not less than the fair market value at the date of grant. The Stock Option Plan provides that options may be exercised at any time after one year up to an expiration date, not to exceed 10 years from the date of grant. There were 22,315 and 14,685 options exercised in 1998 and 1997, respectively, and none in 1996. There were 1,000 and 2,000 options forfeited in 1998 and 1997, respectively, and none in 1996. A summary of the details of stock option grants and outstanding balances is presented below: Year Options Option Options Outstanding Granted Granted Price 12/31/98 12/31/97 12/31/96 ---------------------------------------------------------- 1989 7,500 $24.67 2,200 7,500 7,500 1990 7,500 $26.67 7,500 7,500 7,500 1995 77,000 $27.12 44,300 60,315 77,000 1996 4,000 $26.87 2,000 4,000 4,000 1997 25,000 $29.75 25,000 25,000 1998 4,000 $41.00 4,000 ---------------------------------------------------------- Total 85,000 104,315 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 earnings by $.03 million, $.06 million and less than $.01 million for 1998, 1997 and 1996, respectively, and $.004, $.008 and $.0003 per share for 1998, 1997 and 1996, respectively. The actual fair values of individual options granted for 1998, 1997 and 1996 were $5.14, $3.38 and $1.09, respectively. This calculation was based upon the Black-Scholes option pricing model. The assumptions used in the option pricing model for 1998, 1997 and 1996, respectively were as follows: expected volatility 30%, 30% and 8.3%; dividend yield 4.3%, 6.5% and 7.4%. The risk-free interest rate used for each of the three years was 7%. 6. LINES OF CREDIT E'town has $98 million of uncommitted lines of credit with several banks, of which up to $43 million is available to E'town for use by the Corporation or its unregulated subsidiaries as of December 31, 1998. These lines, together with internal funds and proceeds of future issuances of debt and preferred stock by Elizabethtown, and sales of common stock and issuances of short- and long-term debt by E'town, are expected to be sufficient to finance the Corporation's capital needs. Information relating to bank borrowings for 1998, 1997 and 1996 is as follows: (thousands of dollars) 1998 1997 1996 - -------------------------------------------------------------------------------- Maximum amount outstanding $ 44,000 $ 69,500 $ 69,000 Average monthly amount outstanding $ 26,238 $ 43,525 $ 45,240 Average interest rate at year end 5.9% 6.2% 5.7% Compensating balances at year end $ 0 $ 0 $ 0 Weighted average interest rate based on average daily balances 6.0% 5.8% 5.8% 7. NON-UTILITY PROPERTY AND OTHER INVESTMENTS The detail of amounts included in Non-Utility Property and Other Investments at December 31 is as follows : (thousands of dollars) 1998 1997 - -------------------------------------------------------------------------------- Concession fees on privatization contracts - net of amortization $ 55,505 $ 5,594 Capital assets for privatization contracts - net of amortization 3,341 700 Investments in real estate 11,341 12,788 Funds held in trust by others 7,234 Goodwill on AWM and AWWM acquisitions - net of amortization 5,401 Investment in SEGS 1,214 1,330 Other capital assets 637 Other 272 158 - -------------------------------------------------------------------------------- Total $ 84,945 $ 20,570 ================================================================================ Effective July 1, 1998, E'town, through Liberty, has entered into a contract with the city of Elizabeth (Elizabeth), New Jersey to operate its water system under a 40-year contract serving 17,900 customers. Under the contract, Liberty made a payment to Elizabeth of $19.7 million in 1998 and is contractually obligated to make payments to Elizabeth of $12 million in June 1999 and $19 million in June 2000, which have been included in Concession Fees on Privatization contracts, net of amortization ($31 million representing a non-cash transaction in 1998). These Concession Fees are being amortized on a straight-line basis over the life of the contract. Also under the terms of the contract, Liberty will deposit $57.8 million from revenues earned over the 40-year contract, of which $52.3 million is due after 2012, into a fund administered by Elizabeth to be used by Elizabeth to pay for capital improvements to the water system. In addition, Liberty is responsible for $7.45 million of construction expenditures, primarily for meter replacements, over the life of the contract. These construction expenditures, as they are incurred, are being amortized on a straight-line basis over the remaining life of the contract. Of these total commitments, approximately $4.01 million is expected to be expended in the next three years. E'town will receive all the revenues from operating the system in accordance with rate increases set forth in the contract. E'town is also responsible for all operating expenses as well as the capital expenditures discussed above. Performance by Liberty of the contract provisions is guaranteed by E'town. E'town also performs the commercial billing operations for the wastewater system of Elizabeth. E'town does not operate the wastewater system. E'town does the wastewater billing for Elizabeth and remits all cash collected to Elizabeth. Recorded on the financial statements as Customer and Other Accounts Receivable are the receivables from the customers of Elizabeth for wastewater services in the amount of $3.37 million. An equal amount of liability to Elizabeth is included in Accounts Payable and Other Liabilities which has been established to reflect E'town's obligation to remit these funds to Elizabeth as collected. In 1997 E'town formed a wholly-owned subsidiary, Edison Water Company (Edison), for the purpose of managing the assets and operations of the Edison Township water system under a 20-year contract. Edison serves approximately 11,600 residential, commercial and industrial customers. Edison bills and receives all water revenues generated as a result of operating the water system of the township of Edison, New Jersey and pays all the expenses under the contract. Edison expects to make expenditures of approximately $25 million during the 20-year life of the contract of which $10.16 million has been spent to date. Construction expenditures, as they are incurred, are being amortized on a straight-line basis over the remaining life of the contract. Of the total, approximately $3.61 million is expected to be expended in the next three years of the contract. An initial payment of $5.7 million was made upon the closing in June 1997 and has been included in concession fees on privatization contracts, net of amortization. Performance by Edison of the contract provisions is guaranteed by E'town. Also included in Non-Utility Property and Other Investments at December 31, 1998, and 1997 is $11.34 million and $12.79 million, respectively, of investments in various parcels of undeveloped land in New Jersey. One of the real estate parcels was sold in 1997 for $.4 million, resulting in a gain of less than $.1 million. Two other parcels were sold in 1998 for $1.7 million resulting in a gain of less than $.1 million. Cash proceeds of $1.2 million were received in 1998 and the balance was financed with a one-year mortgage at an interest rate of 8%, with full payment due in 1999. On February 17, 1999, Properties sold a parcel of land which has been under contract since 1995 in Green Brook, New Jersey for $5.83 million, at a gain of $2.08 million net of taxes. Cash proceeds of $1.5 million were received in 1999 and the remaining $4.33 million was financed with a 7.75% mortgage, to be paid over two years. The gain will be reflected in earnings in the first quarter of 1999. The sale proceeds will be invested into water and wastewater investments that produce a current return. Properties has entered into contracts for sale for all of its remaining parcels. The eventual sale of these parcels is contingent upon the purchaser obtaining various approvals for development. This process could take several years. Based upon independent appraisals received at various times prior to 1997 and the expected sales prices for properties under contract to be sold, the estimated net realizable value of each property exceeds its respective carrying value as of December 31, 1998. In 1995 the Corporation entered into a three-year joint venture agreement with the Applied Wastewater Group (AWG) to form a New Jersey limited liability company, Applied Watershed Management, LLC. AWG was a unit of several privately held and affiliated companies providing design, engineering, construction and operating services for water and wastewater facilities. E'town exercised an option to purchase the operations of AWG to provide a full complement of water and wastewater services and consequently closed on the transaction in June 1998. The purchase price, in a non-cash transaction, was $6.6 million (185,005 restricted common shares) for the three companies that now comprise AWM and $.04 million (1,305 restricted common shares) for AWWM, a regulated wastewater utility, in a stock-for-stock transaction accounted for as a purchase. Of the shares issued, 20% are being held in escrow. The goodwill amounted to $5.46 million, which is being amortized over a 40-year period. The purchase price is subject to a potential downward post-closing adjustment based upon a multiple of earnings for the twelve months ended March 31, 1998. As required by the purchase contract, E'town has undertaken an audit of AWG for such period. Therefore, the amount of any post-closing adjustment is not yet determinable. Had the acquisition been consummated as of January 1, 1997, the pro-forma effect on revenues, net income and earnings per share for the years ended December 31, 1998, and 1997 would be immaterial. A calculation of the net assets acquired in the AWG transaction is as follows: (thousands of dollars) - -------------------------------------------------------------------------------- Working capital $ 1,171 Goodwill 5,460 Utility plant in service - net of CIAC 427 Other property and investments 572 Long-term debt (750) Preferred equity (227) - -------------------------------------------------------------------------------- Net assets acquired $ 6,653 ================================================================================ Included in Non-Utility Property and Other Investments at December 31, 1998, and 1997 is an investment of $1.21 million and $1.33 million, respectively, ($.43 million and $.30 million net of related deferred taxes) in a limited partnership that owns Solar Electric Generating System V (SEGS), located in California. The Corporation owns a 3.19% interest in SEGS. The transaction is being accounted for on the equity method. The Corporation will continue to monitor the relationship between the carrying and net realizable values of its investment in SEGS, based upon information provided by SEGS management as well as through cash flow analyses. 8. FINANCIAL INSTRUMENTS The carrying amounts and the estimated fair values, as of December 31, 1998, and 1997, of financial instruments issued or held by the Corporation are as follows: (thousands of dollars) 1998 1997 - -------------------------------------------------------------------------------- Short-term investments: Carrying amount $ 31 $ 31 Estimated fair value 69 59 Cumulative preferred stock: Carrying amount $ 12,227 $ 12,000 Estimated fair value 13,247 11,760 Long-term debt: Carrying amount $ 267,908 $ 247,298 Estimated fair value 280,630 254,599 Estimated fair values are based upon quoted market prices for these or similar securities. 9. REGULATORY ASSETS AND LIABILITIES Certain costs incurred by Elizabethtown and Mount Holly, which have been deferred, have been recognized as regulatory assets and are being amortized over various periods, as set forth below: (thousands of dollars) 1998 1997 - -------------------------------------------------------------------------------- Waste residual management $ 1,371 $ 936 Unamortized debt and preferred stock expense 9,368 9,656 Taxes recoverable through future rates (Note 3) 14,226 21,439 Postretirement benefit expense (Notes 10 and 12) 3,490 3,738 Safety management expense 245 331 Business process redesign 210 284 Rate case expenses 7 80 PWAC under (over) recovery 305 (8) - -------------------------------------------------------------------------------- Total $ 29,222 $ 36,456 ================================================================================ WASTE RESIDUAL MANAGEMENT The costs of disposing of the byproducts generated by Elizabethtown's and Mount Holly's water treatment plants are being amortized and recovered in rates over 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. PURCHASED WATER ADJUSTMENT CLAUSE In 1994 Elizabethtown established a Purchased Water Adjustment Clause (PWAC), to reflect the cost of water purchased from the New Jersey Water Supply Authority (NJWSA). The current rate for the PWAC is zero since the costs of purchased water were reflected in the 1996 rate case; however, because of the high pumpage in the summer of 1998, Elizabethtown has underrecovered its purchased water costs and therefore, has deferred $.23 million as of December 31, 1998. As of December 31, 1998, Mount Holly has deferred $.08 million of PWAC costs (see Note 10). RATE CASE EXPENSES Rate case expenses are being substantially recovered in rates during two-year periods. There were no regulatory liabilities at December 31, 1998, or 1997. 10. REGULATORY MATTERS ELIZABETHTOWN In December 1997 the BPU adopted a Stipulation for rate increases for Elizabethtown and Mount Holly, effective January 1, 1998, for the full recovery of costs associated with SFAS No. 106 "Accounting for Employer's Postretirement Benefits" on an accrual basis less the costs associated with SFAS No. 106 expenses previously recovered in rates. The total increases in annual operating revenues resulting from these Stipulations are $.39 million for Elizabethtown and $.02 million for Mount Holly. Elizabethtown expects to file for rate relief later in 1999 to recover additional construction and financing costs incurred since base rates were last established in October 1996. MOUNT HOLLY On October 6, 1998, the BPU issued an Order adopting a Stipulation signed by the parties to Mount Holly's proceeding for a review of the prudency of constructing a new well field, treatment plant and pipeline to provide an alternate water source required due to state mandated restrictions. This project is known as the Mansfield Project. The Stipulation indicated that the Mansfield Project provides the most cost-effective alternative available to Mount Holly customers for meeting the requirements for an alternative source of supply for the Mount Holly system. Effective in March 1998 Mount Holly began purchasing one million gallons per day from New Jersey-American Water Company (NJAM) and will continue to purchase this water until the later of January 1, 2000, or the date the Mansfield Project is placed into service. In September 1997 Mount Holly filed a petition with the BPU to establish a PWAC to reflect the cost of water purchased from NJAM under the agreement discussed above. On May 27, 1998, the BPU adopted a Stipulation signed by the parties to the PWAC case for an increase in annual revenues under Mount Holly's PWAC of $1.29 million or 38.9%. Mount Holly has deferred the increase in purchased water cost between March 19 and May 27 as Other Unamortized Expenses. Recovery of this amount has been requested in the rate increase discussed below. As of December 31, 1998, Mount Holly has deferred $.08 million of these costs. On January 29, 1999, Mount Holly filed a petition with the BPU for a $2.09 million or 40.55% rate increase, which reflects additional construction and financing costs, as well as increases in operating costs since base rates were last established in January 1996. This rate case also includes $8.96 million in costs with a corresponding rate increase of $1.30 million, for the portion of the Mansfield Project that was placed in service in the third quarter of 1998. A decision is expected during the fall of 1999. Mount Holly expects to file an additional rate case later in 1999 for the remaining cost of the Mansfield Project, to coincide with the completion of the project and the expiration of the agreement to purchase water from NJAM and the cancellation of the PWAC. 11. COMMITMENTS AND CONTINGENT LIABILITIES Elizabethtown is obligated, under a contract that expires in 2013, to purchase from the 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 $8.91 million, $8.79 million and $8.70 million for 1998, 1997 and 1996, respectively. Mount Holly is obligated, under a contract, to purchase water from NJAM, at a rate of one million gallons per day until the Mansfield Project is completely in service in approximately January 2000. The annual cost of the purchased water is $1.16 million. In connection with E'town's agreement to operate the water systems of the township of Edison and the city of Elizabeth, E'town has certain contractual commitments which are set forth in Note 7. Capital expenditures of E'town and its subsidiaries are estimated to be $150.43 million, exclusive of concession fees, through 2001, of which $140.96 million is for Elizabethtown, Mount Holly and AWWM's utility plant and $9.47 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 1999 through 2003 are: 1999, $.97 million; 2000, $.99 million; 2001 $1.03 million; 2002, $.90 million and 2003, $.61 million. Rent expense totaled $.83 million, $.72 million and $.84 million in 1998, 1997 and 1996, respectively. Elizabethtown and AWM lease vehicles and certain office equipment. The minimum payments required under noncancelable leases with terms in excess of one year at December 31 of each of the years 1999 through 2003 are: $1.04 million, $1.04 million, $1.03 million, $1.02 million and $1.02 million. The lease expense for 1998 was $.29 million. There were no lease expenses for 1997 or 1996 as vehicles were not leased during that time period. ENVIRONMENTAL, LEGAL AND OTHER MATTERS There are environmental matters that are inherent in the production, transmission and distribution of water as well as in the treatment of wastewater. The Corporation is sensitive to these issues and mitigates the environmental impact of these activities to the extent required by the laws and regulations under which these activities are governed and makes efforts to exceed the regulatory requirements where practical. The Corporation, in the ordinary course of business, periodically becomes involved in litigation. There is currently no litigation in progress regarding environmental or other issues in which an outcome adverse to the Corporation would have a material impact on the financial statements. 12. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS PENSION PLAN Elizabethtown has a trusteed, noncontributory retirement plan, which covers most employees of Elizabethtown, Mount Holly and Properties. SUPPLEMENTAL PENSION PLAN 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. The unfunded benefit obligation at December 31, 1998, and 1997 was $1.51 million and $1.45 million, respectively. OTHER POSTRETIREMENT BENEFITS The Corporation provides certain health care and life insurance benefits for substantially all of its retired employees. As a result of a contract negotiated in February 1996 with the Company's bargaining unit, all union and non-union employees retiring after January 1, 1997, pay 25% of future increases in the premiums the Company pays for postretirement medical benefits. Under SFAS No. 106, the costs of postretirement benefits are accrued for each year the employee renders service, based on the expected cost of providing such benefits to the employee and the employee's beneficiaries and covered dependents, rather than expensing these benefits on a pay-as-you-go basis. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1998, and for 1998 was 9%. This rate decreases linearly each successive year until it reaches 3.8% in 2008, after which the rate remains constant. The rate increases effective January 1, 1998, allow for the full recovery of costs associated with the implementation of SFAS No. 106, including an amortization over 15 years of amounts previously deferred which were in excess of amounts previously being recovered in rates. As of December 31, 1998, the amounts that have been deferred are $3.36 million and $.13 million for Elizabethtown and Mount Holly, respectively. 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. Other Postretirement Pension Plans Benefits (thousands of dollars) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- FUNDED STATUS Change in benefit obligation during year Benefit obligation at beginning of year $40,447 $37,524 $ 6,604 $ 6,122 Service cost 1,407 1,322 390 389 Interest cost 2,855 2,734 486 449 Benefit payments (2,092) (1,866) Actuarial (gain) or loss 3,263 733 458 (356) - -------------------------------------------------------------------------------- Benefit obligation at end of year 45,880 40,447 7,938 6,604 ================================================================================ Change in plan assets during year Fair value of plan assets at beginning of year 46,803 40,257 1,331 764 Employer contributions 174 174 731 375 Benefit payments (2,092) (1,866) Actual return on plan assets 7,268 8,238 109 192 - ------------------------------------------------------------------------------- Fair value of plan assets at end of year 52,153 46,803 2,171 1,331 ================================================================================ Reconciliation of funded status at end of year Funded status 6,273 6,357 (5,767) (5,273) Unrecognized net transition (asset) or obligation (1,365) (1,631) 5,079 5,442 Unrecognized prior service cost 2,415 2,751 Unrecognized net (gain) or loss (7,662) (8,005) (3,063) (3,973) - -------------------------------------------------------------------------------- Accumulated postretirement benefits* $ (339) $ (528) $ (3,751) $ (3,804) ================================================================================ *Recognized in the Consolidated Balance Sheets Other Postretirement Pension Plans Benefits (thousands of dollars) 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------------------------------- Net periodic benefit cost recognized for year Service cost $ 1,407 $ 1,322 $ 1,341 $ 390 $ 389 $ 423 Interest cost 2,855 2,734 2,771 486 449 430 Expected return on plan assets (4,125) (3,542) (4,569) (109) (57) (72) Net amortization and deferral (153) 66 1,229 158 140 419 Deferred amount for regulated companies pending recovery (273) (564) - -------------------------------------------------------------------------------- Net periodic benefit cost $ (16)$ 580 $ 772 $ 925 $ 648 $ 636 ================================================================================ Weighted-average assumptions for year Discount rate 7.25% 7.50% 7.00% 7.25% 7.50% 7.00% Rate of compensation increases 4.00% 4.00% 4.00% Expected long-term rate of return on plan assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% Weighted-average assumptions at end of year Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50% Rate of compensation increases 4.00% 4.00% 4.00% - -------------------------------------------------------------------------------- A single percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1998, and the net postretirement service and interest cost by approximately $.84 million and $.19 million, respectively. 13. RELATED PARTY TRANSACTIONS Utility Billing Services, Inc., a subsidiary of NUI Corporation, of which John Kean, who is an E'town Director, is Chairman of the Board and a Director, provides data processing and related services to Elizabethtown and other subsidiaries of the Corporation. The charges for all services totaled $.93 million, $.72 million, and $.65 million, for 1998, 1997 and 1996, respectively. The current contract expires December 31, 2000. Elizabethtown had a line of credit in the amount of $10 million with Summit Bank of which Anne Estabrook, who is Chairman of E'town and Elizabethtown, is a Director, which expired on June 30, 1998. The Corporation has a line of credit in the amount of $10 million effective November 1998. At December 31, 1998, E'town had loans outstanding with Summit Bank in the amount of $2.5 million. Total interest charges paid to Summit Bank by Elizabethtown and E'town were $.07 million, $.35 million and $.14 million for 1998, 1997 and 1996, respectively. Summit Bank also serves as a bond trustee for Elizabethtown for which Elizabethtown paid fees of less than $.10 million in 1998, 1997 and 1996. 14. SEGMENT REPORTING SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires that companies disclose segment data based upon how management makes decisions, allocates resources and measures performance. The 1998 segment data is presented as follows: Engineering/ Financing Regulated Contract Operations/ and Elimin- Utilities Operations Construction Investment ations Total - -------------------------------------------------------------------------------- (thousands of dollars) 1998 Revenues $134,943 $ 12,126 $ 5,735 - $ (7,324) $145,480 Operating Expenses 95,432 10,968 5,699 $ 635 (7,217) 105,517 Interest Expense 15,619 843 (6) 1,370 - 17,826 Depreciation and Amortization Expense 12,500 1,035 81 63 - 13,679 Net Income (Loss) 23,871 420 43 (2,192) 188 22,330 Total Assets 688,046 68,539 3,744 44,964 (26,551) 778,742 Total Debt $268,056 $31,000 $ 179 $44,499 $ (774) $342,960 ================================================================================ 1997 Revenues $131,788 $ 3,330 - $ 512 $ (1,804) $133,826 Operating Expenses 94,722 2,997 - 1,299 (1,845) 97,173 Interest Expense 16,622 167 - 551 - 17,340 Depreciation and Amortization Expense 12,233 163 - - - 12,396 Net Income (Loss) 20,092 166 - (723) (275) 19,260 Total Assets 646,318 9,020 - 25,230 (9,664) 670,904 Total Debt $249,974 $ 5,841 - $20,354 $ (5,841) $270,328 ================================================================================ The Regulated Utilities segment provides water and wastewater services through Elizabethtown, Mount Holly and AWWM, acquired in June 1998. This segment is regulated by the BPU. The Contract Operations segment is comprised of Liberty, formed in July 1998, and Edison, formed in July 1997, and provides water services under contract to municipalities. The Engineering/Operations/Construction segment is comprised of AWM, acquired in June 1998, and provides engineering, operating and construction services, primarily in the wastewater field. The Financing and Investment segment is comprised of Properties and E'town. E'town provides the equity financing for all the other segments and debt financing for all segments other than the Regulated Utilities segment. Properties owns real estate parcels. Eliminations are comprised of the accounting entries necessary to eliminate intercompany sales, expenses and investments. 15. QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of financial data for each quarter of 1998 and 1997 follows: (thousands of dollars except per share amounts) Basic Diluted Operating Operating Net Earnings Earnings Quarter Revenues Income Income Per Share Per Share - -------------------------------------------------------------------------------- 1998 1st $ 31,267 $ 8,455 $ 4,163 $ .52 $ .51 2nd 33,609 9,376 5,162 .63 .62 3rd 43,907 12,917 8,555 1.02 1.00 4th 36,697 9,215 4,450 .53 .53 - -------------------------------------------------------------------------------- Total $145,480 $39,963 $22,330 $2.70 $2.66 ================================================================================ 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 ================================================================================ Water utility revenues are subject to seasonal fluctuation due to normal increased water consumption during the third quarter of each year. INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of E'town Corporation: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of E'town Corporation and its subsidiaries as of December 31, 1998 and 1997, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP February 24, 1999 Parsippany, New Jersey E'TOWN CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- OTHER FINANCIAL AND STATISTICAL DATA 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------- UTILITY PLANT (THOUSANDS) Utility Plant - net $609,303 $572,785 $560,024 $507,858 437,456 Construction Expenditures (excluding AFUDC) 47,381 25,329 55,125 73,789 69,981 CAPITALIZATION (THOUSANDS) Shareholders' Equity 215,472 193,923 183,512 177,081 152,971 Preferred Stock 12,227 12,000 12,000 12,000 12,000 Debt (1) 342,960 270,328 262,511 220,703 177,115 Total Capitalization $570,659 $476,251 $458,023 $409,784 $342,086 CAPITALIZATION RATIOS Common Stock 38% 41% 40% 43% 44% Preferred Stock 2% 2% 3% 3% 4% Debt (1) 60% 57% 57% 54% 52% COMMON STOCK DATA Earnings Per Share: Basic $ 2.70 $ 2.44 $ 1.96 $ 2.16 $ 1.95 Diluted 2.66 2.41 1.96 2.14 1.94 Dividends Per Share 2.04 2.04 2.04 2.04 2.04 Book Value Per Share $ 25.43 $ 24.17 $ 23.58 $ 23.54 $ 23.17 Average Shares Outstanding: (Thousands) Basic 8,263 7,891 7,668 7,093 6,210 Diluted 8,567 8,215 7,966 7,394 6,519 Revenues (Thousands) General Customers $ 87,794 $ 85,195 $ 68,797 $ 67,455 $ 62,923 Other Water Systems 22,181 21,900 18,929 18,720 18,082 Industrial Wholesale 8,148 8,451 7,869 7,947 7,458 Fire Service/Miscellaneous 16,820 16,754 14,814 14,276 13,570 Contract Operations 12,126 3,330 Engineering Operations & Consruction 5,735 Elimination of Intercompany Sales (7,324) (1,804) Total Revenues $145,480 $133,826 $110,409 $108,398 $102,033 Net Income $ 22,330 $ 19,260 $ 15,073 $ 15,296 $ 12,088 WATER SALES - MILLIONS OF GALLONS (MG) General Customers 24,614 24,333 22,890 23,999 23,551 Other Water Systems 14,396 14,504 15,049 15,569 15,691 Industrial Wholesale 3,482 3,533 3,567 3,673 3,568 Contract Operations 5,091 1,307 System Use and Unaccounted For 6,934 6,948 6,444 6,402 6,570 Elimination of Intercompany Sales (3,899) (1,163) Total Water Sales 50,618 49,462 47,950 49,643 49,380 SYSTEM DELIVERY BY SOURCE - MG Surface 48,067 42,585 41,485 42,646 42,534 Wells 1,072 6,689 6,328 6,764 6,690 Purchased 5,378 1,351 137 233 156 Elimination of Intercompany Sales (3,899) (1,163) Total System Delivery 50,618 49,462 47,950 49,643 49,380 MILLIONS OF GALLONS PUMPED: Average Day 139 135 131 136 135 Maximum Day 217 205 170 183 182 CUSTOMERS Regulated Utilities 200,536 197,663 195,482 192,617 189,440 Contract Operations 33,908 15,264 Total Customers 234,444 212,927 GENERAL INFORMATION Miles of Main 2,955 2,926 2,899 2,869 2,828 Fire Hydrants Served 16,426 16,228 16,012 15,650 15,291 Total Employees 505 399 400 398 386 =============================================================================== (1) Includes long-term debt, notes payable, long-term debt-current portion and contract obligations payable. Stock Price And Dividend Data - E'town's Common Stock is traded on the New York Stock Exchange under the symbol ETW. 1998 - ------------------------------------------------ Quarter 1st 2nd 3rd 4th Closing Price Low: $34.38 $33.88 $36.44 $40.75 High: $39.69 $38.06 $43.75 $47.38 Dividend Paid $ 0.51 $ 0.51 $ 0.51 $ 0.51 ================================================ 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 ================================================ EX-21 12 Exhibit 21 SUBSIDIARIES OF THE CORPORATION Subsidiaries of E'town Corporation and Elizabethtown Water Company as of December 31, 1998 are as follows: State of Name Incorporation Elizabethtown Water Company New Jersey The Mount Holly Water Company (subsidiariy) New Jersey E'town Properties, Inc. Delaware Edison Water Company New Jersey Liberty Water Company New Jersey Applied Water Management, Inc. New Jersey Applied Wastewater Mangement, Inc. New Jersey EX-23 13 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in E'town Corporation's Registration Statement Nos. 333-69549 and 333-65951 on Forms S-3 and Nos. 33-49812, 33-44210, 33-19600 and 333-56819 on Forms S-8 of our reports dated February 24, 1999 and to the incorporation by reference in Elizabethtown Water Company's Registration Statement Nos. 33-68579 and 33-51917 on Forms S-3 of our report dated February 24, 1999, appearing in or incorporated by reference in this Annual Report on Form 10-K of E'town Corporation and Elizabethtown Water Company for the year ended December 31, 1998. /s/ Deloitte & Touche LLP Parsippany, New Jersey March 30, 1999 EX-27 14
UT 0000764403 E'TOWN CORPORATION YEAR DEC-31-1998 DEC-31-1998 PER-BOOK 603,303 84,945 53,775 30,719 0 778,742 168,356 (3,845) 50,961 215,472 12,000 227 273,427 44,022 13,481 0 30 0 0 0 220,083 778,742 145,480 11,685 93,832 105,517 39,963 1,006 40,969 17,826 23,143 813 22,330 16,929 16,217 36,338 2.70 2.66 All amounts in thousands except per share amounts.
EX-27 15
UT 0000032379 ELIZABETHTOWN WATER CO YEAR DEC-31-1998 DEC-31-1998 PER-BOOK 604,899 7,315 41,507 29,607 0 683,328 15,741 132,268 60,564 208,573 12,000 0 231,928 22,000 13,220 0 30 0 0 0 195,577 683,328 134,847 12,678 82,571 95,249 39,598 786 40,384 15,616 24,768 813 23,955 16,929 14,721 41,993 0 0 All amounts in thousands except per share amounts.
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